"Hard Work" of Selling Build America Bonds Costs $1 Billion

The WSJ has an amusing article about Build America Bonds this morning. The new bonds were introduced in April 2009 under the economic stimulus plan to create jobs building roads, schools and hospitals. Unlike traditional muni-debt, Build America Bonds are taxable and generally carry higher interest rates. The US pays 35% of the interest, which helped the local governments to borrow during the credit crunch while saving money on interest payments.

Naturally, this has been a huge profit center for Wall Street firms, as it has allowed them to collect fees for a new product. Furthermore, the clients have unlimited resources, so why not jack up the fees? Apparently the fees Wall Street is charging are "surprisingly high" according to a Federal Reserve economist and amount to a significant mark-up over traditional muni bonds. The underwriters have netted approximately $1 billion in fees over the past year from $78 billion in sales and will continue raking it in on the more than $150 billion in forthcoming Build America Bond issuance. The banks don't deny charging higher fees, but claim that the fees are justified because they are "wording harder to sell the bonds to investors who wouldn't traditionally buy municipal debt, such as pension funds, insurance companies and foreign investors." Right. Because it's such hard work picking up the phone, calling a bunch of pension funds, insurance companies and foreign investors that are already your clients and saying "hey, I've got some bonds that have high yields, where the interest is subsidized by the federal government."

Yes, selling muni debt is such hard work. The investment banks probably had to pay out a bunch of disability to the sales forces for sprained fingers from dialing too hard. Certainly worth $1 billion in fees. Seriously, does our government ever, even for a second, consider negotiating for better rates from the private sector?