As Expected, We (the taxpayers) Had Our Eyes Ripped Out Again

Last week I wrote about our addiction to debt and how we as taxpayers are getting ripped off as bankers supply that debt to state issuers.  The main topic was that in our quest to borrow more, no matter how bad our financial position, we are willing to aid in the highway robbery being perpetrated by banks.  Citi was the lead banker on a municipal offering Build America Bonds that are taxable and 35% of the interest is subsidized by the federal govt (taxpayers).  That is idiotic, but it is not the theft.  The theft comes in when bankers, who provide NOTHING of value in this transaction, deliberately underprice the issue so that when it trades in the secondary (meaning after the bankers have had time to place the bonds with their favorite clients or their own inventory) the bonds show up at a premium.

The ink isn’t even dry on the Illinois $900 deal from last week, as the dated date shows 7/21, and yet the bonds that are due in 2035 with a 7.35% interest rate amazingly are showing up at a 7.00% yield, or a 105 dollar price.  Wow.  What a deal.  Hold a bond for two days and make 5%.  That’s not annualized, that is 5%! 

Gee, and bankers talk about their “trading profits” in fixed income.  They need a line entry on their P&L that reads “booty,” it would be much closer to the truth. 

Unfortunately it’s the citizens of Illinois that should be thoroughly outraged about this and calling down their director of capital markets.  Why do they let this stuff go on?

Bringing bonds at too high of an interest rate ONLY helps the initial buyers of the bonds.  In this case, it’s the banks themselves and their clients to whom they gave the bonds on the initial offering.  Did I mention that a chunk of this issue went to foreign buyers?  Gee, we gave them immediate gains.

Read the original story at H. S. Dent