Friday, November 27, 2009

The new 'Bilk America Bonds' : Investment banks get taxpayer subsidies for BABs, then charge even higher fees to Govt. Agencies issuing the debt.

'Build America Bond' Issuers Pay $100 Million Extra in Bank Fees

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By Jeremy R. Cooke
Copyright 2009

States and municipalities paid an average 37 percent more to investment banks for underwriting Build America Bonds than for handling tax-exempt sales since offerings of the subsidized taxable debt began in April.

Municipal issuers compensated underwriters at an average $7.39 per $1,000 for sales involving Build America Bonds and $5.40 for tax-exempt deals, based on data compiled by Bloomberg from a sampling of $40 billion of each type. Across the $55 billion in so-called BABs sold so far, the difference translates to more than $100 million in added costs. Both fee rates exceed this year’s $4.91 corporate average.

Local government officials accepted higher fees from banks marketing the new product, which provides a 35 percent federal interest subsidy under President Barack Obama administration’s stimulus initiative. Issuers obtained lower net borrowing costs than from traditional tax-exempt financing, and the program’s advent helped reduce yields in the broader municipal market.

The large subsidy gives them leeway to charge more because the issuer probably cares less about the underwriting fee,” said Matt Fabian, managing director and senior analyst at Concord, Massachusetts-based independent research firm Municipal Market Advisors. “They shouldn’t care because federal taxpayers will cover the difference. As a federal taxpayer, I’m highly concerned.

Nine Football Fields

The $100 million in added fees would be enough to build about 500,000 square feet (46,451 square meters) of high school space, based on average construction costs for New York City cited by Reed Construction Data in September. The area equals almost nine football fields.

The American Recovery and Reinvestment Act, enacted in February, allows state and local governments to raise money for infrastructure projects that would otherwise be deemed tax- exempt by selling an unlimited amount of federally subsidized, taxable bonds through 2010. Refinancing existing long-term, tax- exempt bonds with Build America deals isn’t allowed.

This year’s record flows of cash into tax-exempt bond mutual funds at a time when public agencies have an incentive to instead sell taxable debt helped drive down yields on benchmark 20-year general obligation securities to 4.33 percent on Nov. 24 from 4.92 percent April 9, a Bond Buyer index shows.

The price of tax-exempt state and local government bonds rose more than their higher-yielding taxable counterparts from May 1 through Nov. 24, pushing the BofA Merrill Lynch Municipal Master Index to a 6.2 percent return, while the firm’s Build America Bond Index gained 6.04 percent in the same period.

Corporate Comparison

Build America Bond yields averaged almost 20 basis points, or 0.2 percentage point, more than similarly rated corporate debt, JPMorgan Chase & Co. analysts said in a research note Nov. 25.
To sell the new type of taxable bonds, governments and banks sought out investors who typically hold corporate debt, including pension funds and overseas buyers, and who may need to be educated about credit profiles of municipalities.

“The way they’ve defended it to us is there’s a huge amount of international travel because the marketing is heavily toward international investors that drives up the price,” Fabian said. “Our argument has been it doesn’t matter even if the banker is making less on the bond, net-net, it’s still a higher fee to the issuer.”

Michael DuVally, a spokesman for Goldman Sachs Group Inc., declined to comment. Brian Marchiony of JPMorgan, Kerrie McHugh from Bank of America Corp. and Jeanette Volpi of Citigroup Inc. also didn’t comment. Bank of America, which bought Merrill Lynch & Co., is based in Charlotte, North Carolina. The rest are based in New York.
Municipal Taxables

Before this year, municipal issuers didn’t sell taxable obligations unless the law dictated it for the intended use, usually a project benefiting private interests. Sales of fixed- rate taxable municipal bonds rose more than fivefold this year through Nov. 20 to $70.3 billion compared with the comparable 2008 period, Bloomberg data show.

Bond dealers have made arrangements to handle the increased flow of taxable munis, which are typically quoted based on the spread, or amount of yield, above Treasuries, unlike tax- exempts.
The Pennsylvania Turnpike Commission, operator of the toll- road system that stretches across the sixth most-populous U.S. state, sold tax-exempt debt and Build America Bonds this year.
‘Significant Benefit’

“The 35 percent subsidy is the primary thing that we’re looking at versus financing with traditional tax-exempts,” said Nikolaus Grieshaber, chief financial officer of the commission. “That’s a significant benefit.”

The commission’s all-in borrowing cost for the $275 million, 30-year Build America Bond sale in June was less than 4 percent, after accounting for the interest rebate from the U.S. Treasury, Grieshaber said.

Tax-exempt transportation revenue bonds with similar maturities and ratings were yielding 5.12 percent at the time, according to a Bloomberg Fair Value index. The advantage is less than the gap indicates because the turnpike’s Build America Bonds can’t be called at par, or bought back at face value, in 10 years as issuers can on most municipal debt with longer maturities.

Fees on the tax-exempt issues were $6 per $1,000 of bonds backed by a senior lien on turnpike revenue sold in July and $6.24 on an October issue of subordinate-lien debt. In deals including Build America Bonds, the turnpike agency paid $8.30 for a June issue under the senior revenue credit and $7.78 in October for securities backed by wholesale gasoline taxes.

“We would’ve done BABs even with higher underwriting fees,” Grieshaber said. “To the extent the program remains out there through 2010, we would look to do some more.”

Underwriters’ Discounts

Underwriters’ discounts, which are disclosed in the official statements that outline details of each bond sale, equal the initial prices offered to the investing public minus what the underwriters pay to the issuer for the bonds. In some cases when Build America and tax-exempt bonds are sold at the same time, there is only one overall discount listed.

The median tax-exempt bond sale in those surveyed by Bloomberg News was $313.7 million, and the median Build America deal was $298.2 million.

Municipal issuers selling both types of debt have been paying more to underwriting firms on average than U.S. companies did this year. The average fee on $1.23 trillion of corporate issues was 0.491 percent, or $4.91 per $1,000 of bonds, according to data compiled by Bloomberg. Sales of fixed-rate municipal bonds totaled $342 billion through Nov. 20, Bloomberg figures show.

“Any time you have a niche industry, people are going to pay more,” Fabian said.

U.S. bond markets will close early today at 2 p.m. New York time, according to recommendations from the Securities Industry and Financial Markets Association.

To contact the reporter on this story: Jeremy R. Cooke in New York at
Last Updated: November 27, 2009 00:00 EST

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Thursday, November 26, 2009

Campaign donors, taxpayers foot the bill for Perry's family road trips

Gov. Rick Perry’s trip to Vegas includes bachelor party for his son


The Dallas Morning News
Copyright 2009

AUSTIN – They say that what happens in Las Vegas stays there, but for Rick Perry, not all of it has.

The governor’s Oct. 24 political trip to Las Vegas to meet with Brian Sandoval, a Republican candidate for Nevada governor, included a bachelor party for Perry’s son, Griffin, spokesman Mark Miner conceded Thursday.

He initially declined to call it a bachelor’s party, saying he would describe it more as a dinner. He confirmed, though, that it was a celebration of Griffin Perry’s upcoming nuptials joined by a number of his male friends.

Miner said he didn’t know how many people attended the dinner and couldn’t provide details about any other festivity, saying he wasn’t there.

The governor used a combination of money from his political donors and the Republican Governors Association to pay for his Vegas trip. It’s illegal to use campaign funds for personal travel, but Perry has a history of combining business with pleasure trips so that political entities will pick up the tab.

He did it in February 2004 when he and his wife were joined by a handful of campaign supporters and anti-tax advocates on a trip to the Bahamas to discuss public school finance. That summer, he also went on a trade mission to Italy joined by his wife and daughter.

This year, he and his wife went to Israel to talk trade.

Taxpayers do not pay for such travel by the governor or his family, but his security detail is funded by the state. Department of Public Safety officials would not say Wednesday how much that cost.

The Las Vegas meeting with Sandoval might not have been that pressing, as it turned out. The former U.S. district judge and Nevada attorney general came to Austin a little more than three weeks later to attend a Republican Governors Association meeting hosted by Perry.

Perry has been a leader of the RGA, which raises millions of dollars to boost the campaigns of Republican governor candidates.

On the Saturday of the Vegas trip, Perry stayed at the ritzy Palazzo casino and resort where the cheapest rooms go for $239.

He flew to New York the next day to tour Wall Street with Texas business leaders.

© 2009 Dallas Morning News:

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Governor Rick Perry's Thanksgiving Day Twitter

land gobbler

Monday, November 23, 2009

TxDOT uses legal "loophole" to push more private toll roads in North Texas

TxDOT has new plan to fund toll roads


The Dallas Morning News
Copyright 2009

AUSTIN – Lawmakers might have left the Capitol earlier this year without getting much done when it comes to transportation. But they were clear on one point: They wanted the Texas Department of Transportation out of the business of building privately financed toll roads.

The Texas Legislature beat back attempts to extend the authority for so-called comprehensive development agreements – 50-year contracts with private companies that agree to build roads in return for toll revenue – and the department's ability to enter into the contracts expired Aug. 31.

But less than six months later, state highway bosses may have found a loophole. And the Dallas area, already home to more toll roads than anywhere in Texas, probably is the place where they will try it first.

Last week in Austin, Texas Transportation Commission members told staff to submit plans by January for how to fast-track a roughly $4 billion expansion of Interstate 35E between Dallas and Denton. Officials say the project is a prime candidate for a new kind of financing that they concede looks a lot like the private toll deals ruled out by the Legislature.

"We've got to use all of these innovative ways of building highways or we won't be building," said commission member Ted Houghton of El Paso in an interview Friday. "It's a fact of life. If you want us to build roads, then we are going to move forward using these kinds of tools."

The tool in question is called pass-through toll financing, and is different, though not very, from the private toll deals lawmakers have put on ice.

Here's how it works: A private company, usually backed by a group of banks and other investors, agrees to use its own money to build a state road, usually with the help of at least some tax dollars. In return for the new road, Texas promises to make payments to the firm based on the level of traffic it attracts. The more vehicles that "pass through," the bigger the payment the private company will receive.

Officials say such deals involving big toll roads could last 30 years or more. So far, though, pass-through financing has only been a way for Texas to pay for a handful of smaller free roads. The per-vehicle payments simply pay back the investment by the private company, or in some cases a local government, and are not passed on to drivers in the form of tolls.

But that's set to change, as highway officials eye using pass-through financing to deliver big toll projects in North Texas and elsewhere. Doing so will require some changes in the department's rules, but is entirely within the department's authority, said John Barton, assistant executive director of the Department of Transportation.

First up? Most likely the expansion of I-35E into a mixed road with both tolled lanes and free lanes, much like the LBJ Freeway will be once the Spanish firm Cintra rebuilds it over the next five or six years.

Option to delay

The department had planned to rebuild I-35E as a privately financed toll road using a comprehensive development agreement until the Legislature failed to extend the law that made that possible. Now it sees its choices as either delaying the work for a decade or more, or using the pass-through financing to get construction started in as soon as two to three years.

Though the deals are structured differently – in a pass-through deal, private firms take on less risk, and state payments are subject to a cap set by contract – they will come across as very similar to drivers, and to many others who opposed the deals known as comprehensive development agreements, or CDAs.

"These deals look very much like a CDA, and I want to make sure you understand that," executive director Amadeo Saenz of the Transportation Department told a Senate hearing in El Paso this month. "We're getting a lot of push from Denton and Dallas County [to complete more projects there]. I want to be forthright and maybe say, 'Be careful what you are asking for.' If you look at a private pass-through model project, it is very similar to a CDA. You are using a private firm to bring equity to the project."

Sen. John Carona, R-Dallas, took that in stride, conceding that the agency had been woefully underfunded by the Legislature in recent years, and had to explore all of its options. But he lashed out at Houghton when he said the department also would be willing to shop a major Tarrant County toll project to private investors, if only the North Texas Tollway Authority first would relinquish its rights to the road.

"The community is not at all excited about you coming in and building toll roads," Carona said. "NTTA builds our toll roads. ... We don't want you running toll operations in North Texas. The Legislature has been very clear."

Houghton said Friday, "That's fine. That's a choice they can make." The trouble, he said, is that NTTA doesn't have the money to build the $1.8 billion toll project, known as the Southwest Parkway/Chisholm Trail project.

NTTA has confirmed it could need $1 billion in tax dollars or other help to keep its promise to build that road.

If that's the case, Houghton said, why not let the state take it on, and see what kind of deal it could strike with a private firm that would compete for the opportunity?


"Competition does amazing things," Houghton said. "It really causes the people across the table to sharpen their pencils."

Instead, Carona wants TxDOT to guarantee NTTA's loans to help it lower its costs, something the department has already offered to do on another area toll road, State Highway 161.

"I get the impression that you don't want to work with NTTA," Carona told Houghton in El Paso.

Houghton replied that his agency wants NTTA to flourish, but that guaranteeing both loans could cost the state as much as $40 million a year for many years to come.

On Friday, he said the department will not backstop the loans on both projects.

"NTTA has some decisions to make," he said. If it wants the credit enhancement on Southwest Parkway, then it can't have it on State Highway 161, he said. In the end, if NTTA can't afford to do Southwest Parkway, then it should let it go, he said.

Transportation Commissioner Bill Meadows of Fort Worth, a powerful advocate for the Southwest Parkway project, said Friday that negotiations over how to structure the credit enhancement have resumed in earnest, and could be headed for a breakthrough.

If the negotiations fall through and NTTA can't build the Southwest Parkway, then TxDOT will consider using pass-through financing to find a private partner who can, but only with NTTA's permission, he said. "We'll have to put every option on the table. This isn't easy. It's a billion-dollar hole they are trying to fill."

No matter what happens with the long-running talks with NTTA, Saenz said his agency is determined to seek new solutions for Interstate 35E. And he is meeting with lawmakers to give advance warning that the department is proceeding with a new way of building privately financed toll roads

"I brought this up in El Paso and said it last month in Fort Worth. I don't want to get beat up on this, but I am getting a lot of pressure ... to move this project forward," Saenz said. "I am a problem solver, and we do have a way to get these projects done."

© 2009 The Dallas Morning News:

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Greedspeak: Bailout banksters seek euphemisms for record bonuses

The disappearing Wall St "bonus," but in name only


By Karey Wutkowski and Steve Eder - Analysis
Copyright 2009

WASHINGTON - "Bonus" has become a dirty word on Wall Street, prompting image consultants to advise the biggest financial firms to use euphemisms that carry less stigma as the season of lavish payouts approaches.

A look at Goldman Sachs' (GS.N) quarterly filings with regulators reveals that the term "discretionary bonuses" has been replaced with "discretionary compensation" in the past nine months.

In fact, the most recent quarterly filing had no references to "bonus" at all, despite the fact that the Wall Street giant is on pace to pay out more than $20 billion in year-end bonuses and other compensation, a record level.

Alan Johnson, a compensation consultant with his own New York-based firm, said the change in language is no coincidence. He has been advising his clients, which include the largest investment and commercial banks, to banish the word "bonus" and use "incentives" instead.

"We try to avoid the term wherever we can because it is a flash point," Johnson said. "We're going back to using what it really is, it's an incentive."

Johnson said for the top earners on Wall Street, their bonuses can be anywhere from 50 to 90 percent of their annual compensation, and is a built-in part of compensation, not an extra.

He said that can be hard for the general public to understand or relate to.

The financial crisis has been littered with flare-ups over bonuses, perhaps most notably in March, when lawmakers balked at $165 million in bonuses being paid to employees at the AIG unit largely responsible for the firm getting just over $180 billion in government pledges of assistance.

The issue sparked calls for the resignation of Treasury Secretary Timothy Geithner and prompted left-leaning groups to organize bus tours to visit the homes of AIG employees.

The financial industry is now approaching another land mine as they gear up to disclose in the coming weeks the amount of year-end bonuses.

The disclosures will likely reveal bonus boosts of up to 50 percent over last year, as Wall Street earnings have come back strong, even though unemployment is at a 26-1/2-year high.

"I think everybody's holding their breath," Johnson said about potential fallout from the disclosures.

A Goldman Sachs spokesman did not immediately respond to a request for comment.


Jesse Derris, a crisis communications consultant with Sunshine, Sachs & Associates, said it will take an industrywide push and public relations initiative to reduce the use of the term "bonus" and replace it with another term, or at least make it better explained.

"You are at a point now where the visual that people get is awful," said Derris, who represents Wall Street executives including former Merrill Lynch Chief Executive John Thain.

The public anger over pay and concerns that excessive pay helped fuel the financial crisis has led to a government-driven attempt to better police compensation.

The Obama administration appointed a "pay czar" in June to dictate pay at seven firms that received "exceptional" taxpayer bailouts, including Bank of America (BAC.N), Citigroup (C.N) and AIG (AIG.N).

The Federal Reserve has embarked on a deeper review of pay at the biggest financial firms, and the Securities and Exchange Commission is trying to empower shareholders with more control over executive compensation.

The goal is to encourage compensation structures that align the pay of Wall Street workers with the long-term success of the company instead of rewarding short-term gains.

In the meantime, financial giants are trying to quiet some of the furor through cosmetic means.

Brad Hintz, an analyst with Sanford C. Bernstein in New York and a former Wall Street executive, said he is hearing plenty of talk that firms are trying to use language like "total compensation" and "annual earnings" instead of "bonuses."

But some skeptics say any efforts to change the use of the word "bonuses" would come across as window-dressing on the real problem of excessive pay.

"Call it what you want -- right now it is somewhat broken," said Todd Gershkowitz, a compensation consultant with Farient Advisors in New York. "The real issue is how much do you actually make."

© 2009 Reuters:

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