Build America Bonds - BABs

During the Great Recession of 2008, the government tried to do whatever it could to get the economy back on track. Unemployment was in the double digits, and millions of homes were being foreclosed. It was difficult for anyone to borrow money from traditional banks.

The U.S. Congress passed the American Recovery and Reinvestment Act in 2009. Included in this were Build America Bonds (BABs). There are two types of BABs which are taxable municipal bonds: those that carry special tax credits, and those that receive federal subsidies.

For the tax credits, the credit went to the issuer, so it was less expensive for state and local governments to borrow money. Investors in pension plans, as well as those looking for high rates of interest, were attracted to the BABs.

States such as California made great use of the federal subsidies. They sold $5.2 billion in BABs at an interest rate of 7.4%. With the federal subsidy they were reimbursed 2.6%, so they only had to pay out 4.8%.

These bond offerings here and in other states were so popular they were often oversubscribed.

The program ended on December 31, 2010...once the economy was considered to be in recovery.