By Lena H. Sun and Binyamin Appelbaum
Washington Post Staff Writers
Friday, October 24, 2008
Metro and 30 other transit agencies across the country may have to pay billions of dollars to large banks as years-old financing deals unravel, potentially hurting service for millions of bus and train riders, transit officials said yesterday.
The problems are an unexpected consequence of the credit crisis, triggered indirectly by the collapse of American International Group, the insurance giant that U.S. taxpayers recently rescued from bankruptcy, officials said.
AIG had guaranteed deals between transit agencies and banks under which the banks made upfront payments that the agencies agreed to repay over time. But AIG's financial problems have invalidated the company's guarantees, putting the deals in technical default and allowing the banks to ask for all their money at once.
In Metro's case, the regional transit agency could face up to $400 million in payments, the system's chief financial officer, Carol Kissal, said in an interview yesterday. One bank, KBC Group of Belgium, has told Metro that it needs to pay $43 million by next week. Metro officials confirmed the details but declined to name the bank.
Transit agencies have met with the Treasury Department to request federal help. The government could back the deals instead of AIG, or it could change tax policy to help the banks and keep them from demanding payments.
Treasury spokesman Jennifer Zuccarelli declined to comment, except to say, "Treasury is aware of this situation."
Metro officials said they are prepared to fight the demands in court, forestalling an immediate effect. But they say suing one bank could impair the agency's ability to borrow money from other banks for much-needed capital improvements. Metro has said it needs more than $11 billion over 10 years to maintain, expand and improve train, bus and paratransit service. In the Washington region, more than 1.2 million trips are taken on Metrorail and Metrobus on an average weekday.
In addition to Metro, affected agencies include transit systems in Los Angeles, San Francisco, Atlanta and Chicago.
The deals in question are vestiges of an elaborate tax-avoidance plan that the IRS has since ended. It involves government agencies, such as Metro, helping private companies to avoid federal taxes.
Profit-making businesses are allowed to shelter income from taxes based on the declining value -- or depreciation -- of such equipment as rail cars. But transit agencies don't pay federal taxes, so they sold their rail cars and other equipment to banks, allowing the banks to shelter income while "their" rail cars depreciated. Then the transit agencies leased the cars back from the banks at a discount that effectively split the value of the tax break with the bank. Metro said it used the money for capital improvements, including buying rail cars.
Metro made 16 such deals, primarily with U.S. banks, between 1997 and 2003, selling 600 rail cars worth more than $1.6 billion and making $100 million.
All of the deals were approved by the Federal Transit Administration. Transit officials say they were encouraged by the government to pursue the tax deals.
In most cases, the transactions were guaranteed by a third party. In many of those, the third party was AIG. But as AIG's financial health deteriorated in recent months, its credit rating was downgraded, reflecting the increased risk that the company could not meet its obligations. The terms of the transit deals required AIG to maintain a high credit rating. Because of that, the banks now say the deals are in default, allowing them to force the agencies to pay millions of dollars in termination fees immediately.
The banks are motivated in part because the IRS has offered amnesty to any company that gives up its tax shelters by the end of the year.
Kissal said federal intervention would ease the crisis. "We would be able to satisfy the technicality so the banks would not be looking to take their greed out unnecessarily on public transit," she said.
Officials said that at the same time the Treasury Department is working to prop up large banks with taxpayer support, some of the same banks are trying to profit on the backs of public transit agencies.
Rob Healy, vice president for government affairs at the American Public Transportation Association, an industry group, said that investors, mostly banks, "are coming after the transit agencies" and that the affected agencies might face "a couple billion dollars of exposure." Some transit agencies are being forced to cut service or raise fares to pay for the increased cost of fuel, he said.
Metro says it is making its regular lease payments and therefore should not have to make payments to the banks. The agency said it is working with banks to get waivers and extensions until another solution can be found. SunTrust, an Atlanta-based bank, has agreed to terminate one of the deals without demanding further payment from Metro.
"If everyone acted like SunTrust, we might be able to work our way through this," Metro's Kissal said. A spokesman for SunTrust declined to comment.
KBC, by contrast, notified Metro that it expects payment by next week, and the agency fears other banks will make similar demands.
KBC did not return a call to its New York offices or an e-mail to its corporate headquarters in Brussels.
The company is one of the largest retail banks in Belgium and has a large presence in central and eastern European countries, including Poland. The company had avoided major losses during the credit crisis until last week, when it told investors that it would lose $1.2 billion in the third quarter, in part because some of its U.S. investments were wiped out. Banks worldwide are responding to similar losses by squeezing customers and scraping for available savings.
Other transit agencies are bracing for similar problems. In Los Angeles, "the worst-case scenario is that we could end up having to come up with $100 million to $300 million overnight," said Marc Littman, spokesman for the Los Angeles County Metropolitan Transportation Authority. "That would be a tough nut to swallow." Cutting service would be an option, he said, but a last resort. "Our board is looking at different options right now."
The Los Angeles authority participated in 10 deals, eight of which were insured by AIG, he said.
Staff writer David Cho contributed to this report.