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Obama – Let's Do Another Fannie

 February 22, 2013 10:06 AM


The Treasury Department came out with some proposals today on how to fund infrastructure investments. Nothing new; an infrastructure bank that would borrow money outside of the government using government guarantees, and a newfangled debt instrument called:

America Fast Forward Bonds

I love the name. AFFs will be the Street name. AFFs will be structured like BABS (Build America Bonds). This is a hybrid security that will be issued by a Muni. It will be taxable (unlike regular muni's), it will therefore have a premium yield to non-taxable muni paper. The Federal government will pay (1/3) of the interest due on the bonds. There will be no direct Federal Guarantee on the bonds, but there will be a perception that the Feds are behind the notes.

The Transportation Infrastructure Finance and Innovation Act (TIFIA) will be expanded and it will provide – "loan guarantees, and lines of credit to regionally or nationally significant transportation projects". Loan guarantees and lines of credit are off balance sheet financing. (Note: What is TIFIA? Never heard of it)

The infrastructure bank the President wants is also going to be involved with raising money outside of the Federal budget and debt limits. According to the White House the new bank will – "invest through loans and loan guarantees."

All of the proposed borrowing will be outside of what is defined at the Debt Limit. These new debts will not be included in the calculation of Debt to GDP.  The President's proposals are gimmicks to hide debt. The description provided by the White House on how the infrastructure bank would work tells it all. I think there are at least two lies in this statement:

The Bank will operate as an independent, wholly owned government entity outside of political influence.

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This language is very similar to Fannie Mae and Freddie Mac. F/F were supposed to be independent. They were quasi government entities, but politics dictated what they did.

The liabilities and guarantees of the proposed infrastructure bank, and the AFF bonds will be off of the federal balance sheet – identical to what happened with F/F. Every bond that F/F issued said in bold print on the front page: This Bond is not an Obligation of the USA.

Of course the USA was forced step up and assume all $6 Trillion of F/F debt that was issued before 2008. The outcome for the infrastructure bank will be no different. Who was it that said that repeating the same mistake over and over, and expecting a different outcome each time was the true definition of insanity?

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