Senator Questions Bank Fees on Stimulus Bonds

Business and Finance Career - Senator Charles E. Grassley of Iowa has asked Goldman Sachs to clarify how much it has collected in underwriting fees as states and cities issue so-called Build America Bonds to raise money for infrastructure projects and create jobs.

The senator, the senior Republican on the Finance Committee, said Wednesday in a letter addressed to Chief Executive Lloyd C. Blankfein that he was “concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks, including Goldman Sachs, as a result of the Build America Bonds program.”

The bond program, part of stimulus legislation passed last year, is intended to help local governments raise money by issuing taxable bonds; the federal government subsidizes 35 percent of the interest payments. On Wednesday, the Senate passed a bill that would expand the program and its subsidies.

But the lower interest payments may have given underwriters room to charge more, even as governments still saved money compared to other debt issues.

In November, nine months after the bond program was enacted, data compiled by Bloomberg News showed that local governments were paying underwriters 37 percent more in fees to issue Build America Bonds than they were paying on tax-exempt debt, which local governments usually issue to fund infrastructure projects. The news service calculated that the extra fees amounted to $100 million at the time. In addition to Goldman Sachs, JPMorgan, Bank of America and Citigroup are the top underwriters of Build America Bonds, Bloomberg data showed.

Senator Grassley noted that Matt Fabian, managing director of Municipal Market Advisors, said in the Bloomberg article that “the large subsidy gives them leeway to charge more because the issuer probably cares less about the underwriting fee.”

Senator Grassley’s letter included a series of pointed questions about how much Goldman has earned underwriting the subsidized debt, how it determines it fees, and what it expects to earn under the expanded federal program.

“Are these underwriting fees larger than the underwriting fees that Goldman Sachs has charged on tax-exempt bond issuances?” he asked.

A Goldman Sachs spokesperson was not immediately available for comment Thursday.

On Tuesday, a day before the expanded bond program passed the Senate, Goldman Sachs ran an advertisement in Politico claiming the bank was its “one of the principal underwriters,” the senator noted in his letter.

Goldman has vocally backed the program for months. In a commentary in Forbes in November, Jim Esposito, a managing director at the bank, supported expanding the Build America Bonds, or BABs.

“BABs are a win for taxpayers, for state and local governments, for investors, for job creation, for the economy and, by extension, for America's future,” he wrote. “The benefits to extending and expanding the program would reverberate widely and help sustain the country's economic recovery while investing in our future.”