Hey, Let's Bail Out Some Broke States!

Hey, Let's Bail Out Some Broke States!

I know I said yesterday the new House would be chilly to proposals for a California bailout, but my husband points out we're already on the hook for some of that. The Spendulus Bill that contributed so heavily to the wave of voter revulsion on Tuesday left us with a little gift that's still giving: the "Build America Bonds Program." ("Build" is being used here in its technical progressive sense of "throwing tax revenues at cronies who demonstrate some tenuous connection to economic activity as long as it involves unions.") The bonds are not tax-exempt, like most munis. The Obama administration is said to disfavor tax-exempt munis, which mostly benefit high-bracket investors for whom tax deductions are more valuable. But as unpopular as tax-exempt munis may be with the current administration's financial team, they felt compelled to address the credit-crunch-induced 17% drop in muni sales between 2007 and 2008. They chose to address it with a program that directly subsidized the interest burden on taxable debt issued for capital projects:

Since its introduction last year, the Build America program has come to account for about 26 percent of the muni-bond market, and October was its biggest month yet.

One reason: Issuers were scrambling to take advantage of the program's benefits — which include the federal government footing the bill for 35 percent of the bonds' interest costs. Of course, demand for the bonds, now a significant cornerstone of the $2.8 trillion muni market, has also been strong.

The program expires at the end of 2010. Will the lame-duck Congress extend it? Worse, will the new House extend it? In the meantime, program participants are issuing federally guaranteed bonds like crazy in the time they have left. But they're finding that the spreads are growing. Does this reflect an increasing unease over whether the issuers will be expected to foot the bill for their own interest obligations in the near future, or just a recognition that the market is about to be flooded with issuances by users trying to get in under the wire? Bloomberg reports:

Build America Bonds, the fastest- growing part of the $2.8 trillion municipal debt market, are poised for the biggest monthly loss in 2010 as an increased supply of the taxable debt drives up yields.

States and municipalities have sold about $4.9 billion of the federally subsidized securities this week, the most since the five-day trading period ended April 24, 2009, according to data compiled by Bloomberg. Issuers have placed 49 offerings for sale, the highest number since the program’s creation by the economic stimulus package in February 2009, Bloomberg data show.

President Obama announced on Monday of this week a proposal to expand the Build America Bonds program to include refinancing some existing debt and covering "short-term governmental operating costs." In other news, the Fed is going ahead with a $600 billion purchase of treasuries in order to prop those prices up, too. What could go wrong? When we finish bailing out the states and everyone else we can think of, someone surely will bail out the U.S. I'm sure they'll be nice enough not to impose any onerous conditions.