The End Of The MUB Bounce? Republicans To Block Renewal Of Build America Bonds

Tyler Durden's picture

The final nail in the zombified Build America Bond program may be finally approaching, in which case the dead cat bounce in the MUB may be about to end. After late last week Gerald Connolly,
D-Va, proposed an extension to the BAB program through 2012, resulting in yet another risk bounce in the one asset class that has seen a major walloping in early January, not to mention record outflows (and a corresponding inflow into US equities), it seems that the GOP is not very excited about the prospect of further state subsidies. From the WSJ: "Key Republicans signaled they would block renewal of the Build America
Bonds program as the Obama administration prepared to reinstate the
bonds in the 2012 budget plan due Monday. Build America Bonds were originally introduced as part of the $787 stimulus program in 2009 but expired at the end of last year. They allowed states and localities to sell taxable bonds and receive a federal subsidy payment from the Internal Revenue Service equal to 35% of the interest costs on their bonds. But Sen. Orrin Hatch (R., Utah), the ranking Republican on the Senate Finance Committee, said late Friday that BABs were "simply a disguised state bailout." "These bonds rightly expired at the end of 2010 and it is my hope the Obama administration does not try to resurrect such a nonsensical provision in their upcoming budget," he said." Yet that is precisely what the president intends on doing, while somehow pretending that the budget will actually cut $1.1 trillion from the deficit over the next decade. Just how crazy is it to request that at some point America has a president and economic advisors who actually understand at least the most basis mathematical concepts, the key of which is that spending does not equal saving...

From the WSJ:

The Obama administration will propose reintroducing BABs, according to three people outside the administration who were briefed on the matter. They expected the administration to propose a two-year extension at a 28% subsidy rate for the bonds.

A Treasury spokeswoman declined to comment.

Even a 28% subsidy rate wouldn't garner GOP support, according to a Republican Senate aide. The aide said the rate wasn't revenue neutral, meaning it would cost the federal government more in subsidy payments than the government loses in revenue from traditional tax-exempt municipal bonds.

Democrats see these bonds as an effective tool for job creation and funding infrastructure projects. Some were already trying to reinstate them ahead of the budget proposal last week.

On Thursday Rep. Gerald Connolly (D., Va.) introduced a bill that would extend the bonds at subsidy rates of 32% in 2011 and 31% in 2012.

That bill has been referred to the House Ways and Means Committee, which handles tax legislation, but it is unlikely to advance. Ways and Means Chairman Dave Camp (R., Mich.) said last year Build America Bonds were "a highly subsidized spending program." A spokeswoman for Mr. Camp declined to comment Friday.

So while Bill Gross is playing golf at Pebble Beach, he may consider making some reverse inquiries to Larry Meyer and find out just how bad the bill will be if for the first time in history, the Pimco head does not end up getting what he wants. Oh well, time for El-Erian to pen another politically correct yet modestly critical op-ed, promptly followed by another monthly letter by Gross decrying just how bad of a ponzi scam the US financial system is, lead by that satan among satans Bernanke, when those axed alongside the Fed do not get what they want every now and then...

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ZerOhead's picture

 " which case the dead cat bounce in..."


Funny... you never hear me talking trash like... "in which case the dead Tyler bounce..."

(Of course you are a higher value target on the Goldman top ten 'hit list'! :)

snowball777's picture

Orrin Hoover.

Do we really need to help Bernanke establish the need for QE3 that much?

Ned Zeppelin's picture

I agree.  BAB may be pricey, but it may be the only thing propping up some of these states. You are right to see it that way - as things go south, the rationale for QE3 grows. Of course, they'd do it anyway! 

EscapeKey's picture

Build America Bonds were originally introduced as part of the $787 stimulus program in 2009 but expired at the end of last year.

I wonder how much of the allocated capital was used for its implied purpose ("build America").

Pool Shark's picture

Like it or not, state bailouts have to happen (from the perspective of the federal government). If California, Illinois, New Jersey, and New York collapse; so too will federal revenue and their ability to borrow at reasonable rates (bye, bye bond market...)

The feds are in a box; either keep the ponzi rolling or risk the collapse of the entire federal government.

Are we witnessing the collapse of Exter's Pyramid?

Fred Hayek's picture

None of them should get any help until AFTER they've made a lot of very tough choices.  A lot of them.

Pool Shark's picture


But we know those 'tough choices' will never be made...

Bastiat's picture

Look at all the tough choices Wall St had to make to get bailed out . . .

jeff montanye's picture

and that's why it (tbtf) was/is so pernicious: it absolutely undercuts the moral (and ultimately all) authority of government.  with mogadishu as an instructive alternative, it is folly of the worst kind for these sad "elites" to so mismanage that with which they were entrusted. 

Fred Hayek's picture

New Jersey might make some.  Living in Massachusetts, I will predict with confidence that we'll make none.  Charlie Baker ran for governor on the promise that he would do just that.  Pathetic seat warmer Deval Patrick beat him easily (with the help of a 3rd candidate being in the race for reasons that escape anyone sane). 

New York?!  Little Andy claims to have just discovered that NY's budgets are a joke.  What an epiphany for the state's former AG! 

Cali?!  Hahahahaha!

Illinois?!?!  You're killing me!

sethstorm's picture

New Jersey might make some.

The only cuts made will be in the name of political vengeance, not real cuts that need to be done.

topcallingtroll's picture

No state bailouts don't have to happen.  California, Illinois, New Jersey, and New York can cut services and raise taxes.  Anybody thinking that the republicans are going to bail out the states is seriously deluded.

snowball777's picture

Anybody thinking that the republicans are going to raise taxes in CA is deluded too.

WestVillageIdiot's picture

"No state bailouts don't have to happen. California, Illinois, New Jersey, and New York can cut services and raise taxes."

Why do services need to be cut? Technically, they don't. The states could cut labor costs across the board and not have to cut services.

I do agree there are a lot of really non-essential services that should be cut but those are pet projects and least likely to be cut. You know they will cut police and fire, hoping to scare people. The unions will fight pay cuts so less employees will asked to do more.

We are back to big government and public unions screwing these states. Something tells me they aren't done. It is hard to imagine Democrat Cuomo really taking on the unions in this union choked state. Taxes will get raised and services will get cut, like you think.

midtowng's picture

If the states such as California and Illinois fired every single public union worker, it still wouldn't balance their budgets. Although I'm sure you expect the public employees to work for free.

You are going to see cuts in police and fire, not because of some fictional Big Union boogyman, but becuase that is where most higher-paid public workers are.

The public pension numbers are so bad, not because the public pensions are "golden" but because they've been underfunded for decades.

RKDS's picture

Looks like someone who didn't understand the problem junked you...why am I not surprised?  Out in PA, I've read that labor costs are about 3% of the budget.  Meanwhile, education, welfare, and prisons are closer to 2/3.  That's what we've got to trim down, if not because of how much they consume, then for the horrendous math skills of fools who ceaselessly cry about the relatively miniscule burden of public employees.

Fred Hayek's picture

You mention "non-essential services". 

We've had a long siege of a winter here in Massachusetts.  One of the standing jokes is that when a big snow storm is on the way, the governor will announce that all "non-essential" government personnel should stay home.  The automatic rejoinder from us private sector workers is that, of the hacks, "Who doesn't that cover?"

Saxxon's picture

If by 'bailouts' we mean the Fed helping the states to pay their GO bonds, then yes, the states will be bailed out, and each of them.  That's my mantra and I will invest accordingly.

California and the other comatose large states simply cannot be allowed to default.  The Fed will continue to tap the brakes to the front while shoveling coal to the rear to keep the fire burning; gold will be tamped down from time to time; numbers manipulated; the train will continue to roll down the track to its inevitable end which is not going to be deflation because no policitician will permit it . . . because they instantly lose power while doing the right thing.

This is a classic tragic farce where the outcome is obvious and yet each character plays his role to the bitter end.

snowball777's picture

That depends on your disposition to CA state infrastructure projects.

Can I offer you a high-speed rail? ($5.23B...~10% of the issuance)



  • $1.7 billion for the state's taxable general obligation bonds to fund stem cell research and stem cell related projects, various housing programs, and additional needs for High Speed Rail.
  • $5.2 billion from newly authorized Build America Bonds will provide funding to restart the balance of all state projects that had either been stopped and for those that have been proceeding with non-state funding. This includes projects for California State University, the University of California, California Community Colleges, Caltrans and the Department of Water Resources. In addition, this bond sale will fund grants that had been frozen, including school construction projects, environmental and park projects, grant programs to support clean air (engine retrofits and clean port projects, wastewater treatments projects, improvements to drinking water infrastructure, children's hospitals, public safety grants and local library grant projects. Finally, all outstanding bills not previously funded will be paid.



Bastiat's picture

Actually low speed sewer would be a good use of money.

snowball777's picture

We already have a legislature, thanks.

jeff montanye's picture

one hopes all of your persuasion were eloquently and passionately opposed when the federal government began deficit spending in earnest in the early eighties and then kicked it into turbo after 2000.  because that's where the relative inflexibility to deficit spend now, in the famine times, came from.  opposed all the wars right?  excellent.  thanks for the vigilance. 

Terminus C's picture

Monorail... MONOrail... MONORAIL...!

Miles Kendig's picture

All of those projects are collateralized by the buildings, rails or whatever and have limited or no recourse to the tax base beyond the item being developed.  The same does not hold true for general obligation or GO bonds.  In most cases these are explicitly backed, constitutionally, by the capacity of the sovereign to collect the revenues to make these bonds good.  Hence a reason the BAB program did not go to support GO bonds, another being the separation of powers in the federal & state constitutions.  So a bunch of states will default and give bondholders physical delivery of their collateral in lieu of payment.  An even bigger nightmare than a commodities trader having to take physical delivery...

gookempucky's picture

Heres a little help--make your own conclusions.

this will even take you into the local counties

TimmyM's picture

@Eskape Key

The IRS has an active program of significantly auditing the spending of bond proceeds. Issuers rushed to market for the subsidy and many are scrambling to spend it. If they don't spend it in 3 years they lose the subsidy. Bond attorneys thought it was enough of a risk that most of the official statements have extraordinary call provisions written into them that allow the issuer to call the bonds if they fail these IRS spending audits.

Rule of 72's picture

I wonder how much of the allocated capital was used for its implied purpose ("build America").

None.  They are more properly known as "State Government Union Pension Bonds."

It's staggering how many Ponzi schemes are in play.  That's the government's solution, to just make another one.  We may be lucky to kill off this one.  Just wait for the others, including SS and Medicare.

Bernie Madoff should've gotten a job as a White House advisor.

Cleanclog's picture

Right-ee-oh!  State and local municipalities are committing intergenerational theft by borrowing to cover costs of labor already provided via pensions, rather than paying for that (or setting it aside) at the time the labor was utilized.

Watch out for the VRBOs that won't be able to secure new LOCs when their current ones expire.

RKDS's picture

Looks like you got junked by another "I'll pay you on Tuesday for labor performed today" thief.

robobbob's picture

would people please make up their minds

Should the Feds continue to pass out $ we don't have to states who have refused to wake up to the deadly serious situation they are in, and thereby contribute to the destruction of the country,

or, do we cut them off, causing them to default quicker, requiring emergency support and a take over from the Feds, which will thereby contribute to the destruction of the country.

Which is it ZH?

Trimmed Hedge's picture

I'll try behind door #3, please....

Sean7k's picture

Agreed. These are two of many options- including default by the states and a budgeting and tax process that is balanced with savings for "rainey days". If states can't buy bonds, they will be on a cash basis- just like the rest of us. 

bigargon's picture

allow the states the ability to go bankrupt. we just can't go on piss out good money after bad. I some point the states and the federal government have to bit the bullet and cut,cut,cut.

WestVillageIdiot's picture

"I'll try behind door #3, please...."


Isn't that the door that always shows the two goats eating grass, with a hot chick standing next to them?  Come to think of it, that might be the best we can hope for.  Bring on the goats.  We already have enough sheep in this country.

snowball777's picture

Goats are very efficient at clearing brush and you can shear sheep.

You, on the other hand...

Zero Govt's picture

i can't speak for everyone on ZH but personally if California and New York descended into the sewer (where they belong) and a couple of hundred Democrats and their crones were burnt alive at the stake i'd consider it a fair, just and equitable end to State largesse 

lunaticfringe's picture

Some lefty musta junked ya.

Zero Govt's picture

Yes 1 got you too, must take offence at being called "lefties" (touchy tossers aren't they?) though I can see why 2 junked me with the "burnt alive at the stake" comment... just as well i didn't mention posting all 200 pairs of their burnt bollocks thru Barney Franks letterbox as warning of what he's got coming for destroying the US property sector then!

Cleanclog's picture

Cuz the Republicans have no fingerprints on this mess?

Both parties suck.  Self promulgation has gone over the top.

Fred Hayek's picture

Oh, they both suck but there are degrees of even suck.  I mean, look at the states that have the most problems, Cali, Illinois, PA etc.  Heavily weighted toward the blue in their state reps and state senators even if they have some governors of both parties.  Then look at the states that have the least trouble.  Mostly bright red mountain and plains states.  State workers and their lovely gold plated pensions are definitely in the blue column as well.

Sure, both parties deserve blame.  The repubs only talk a decent game and seldom act on it.  But the dems don't even talk a decent game.  Blanket equivalence doesn't tell the real story.


WestVillageIdiot's picture

That is a good rant.  Both parties suck but blaming the Repubs for an equal share in the pension and public union mess is very dishonest.  Now if we want to discuss the MIC we can probably place more blame on the Repubs.  Fair is fair and dishonesty is still dishonest.  They might be equal in their overall suck quotient but they have different areas where their suckiness really excels. 

Miles Kendig's picture

Oh really?  So, there are degrees of acceptability in gang rape these days?

EscapeKey's picture

A few select quotes from Carroll Quigley's "Tragedy & Hope". I can't recommend this book highly enough.

"When the business interests, led by William C. Whitney, pushed through the first installment of civil service reform in 1883, they expected that they would be able to control both political parties... and allow the electorate to believe that they were exercising their own free choice", page 73.

"This (political) struggle... had always been viewed as a struggle between Republicans and Democrats at the ballot box in November. Wall Street, long ago, however, had seen that the real struggle was in the nominating conventions the preceding summer.", pg 1246.

"the National parties and their presidential candidates, with the Eastern Establishment assiduously fostering the process behind the scenes, moved closer together and nearly met in the centre with almost identical candidates and platforms, although the process was concealed, as much as possible, by the revival of obsolescent and meaningless war cries and slogans.", page 1247.

midtowng's picture

I'm guessing that you aren't aware that California and New York pay more federal taxes than they get back. Unlike most southern states.

Fred Hayek's picture

That's kind of a phony statistic because of social security.  On the east coast, I bet a lot of states have officially negative net situations and that Florida has a wildly positive one for that reason. 

One might guess that in Cali, because of the still ridiculously high real estate pricing, a lot of retirees sell and leave and go to perhaps AZ or somewhere else to buy a cheaper condo than they'd find in CA.

The context of the situation is more complex than simply CA and NY paying more taxes than they get back.


Larry Darrell's picture

That's why people love statistics, because you can make them say whatever suits your fancy.

Now I ask you:  what do those states produce?

Sure, New York pays a lot in taxes.  But that's because the financial district takes money from all over the country and redistributes it as it sees fit.  What does New York PRODUCE?  And I mean, what USEFUL PRODUCTS come from the state at large?

The way I see it, all the money they pay in taxes is, by and large, money taken from the rest of the country.

Miles Kendig's picture

Another person who believes the entire state of New York can be found on Manhattan Island.