washingtonpost.com
Metro Fighting Bank's Deadline
AIG Collapse Led To $43 Million Payment Demand

By Lena H. Sun
Washington Post Staff Writer
Thursday, October 30, 2008

Metro officials asked a federal judge yesterday to issue a temporary restraining order against a Belgian bank that is demanding $43 million from the agency by tomorrow.

The payment demand stems from a long-term financing deal between Metro and the bank, KBC Group. The bank is demanding the money because of the collapse of American International Group, which had guaranteed Metro's financial deals with the bank. The insurance giant's financial problems have invalidated the company's guarantees, putting the deals in technical default and allowing the bank to ask for all of its money at once.

Meanwhile, members of the Washington region's congressional delegation and transit officials have been in talks with the Treasury Department to seek its help in resolving the issue under the federal agency's authority in the $700 billion bailout of the financial industry. But sources familiar with the talks said they detected "no sense of urgency" from Treasury officials.

At least 30 other major transit agencies across the country are also affected. The financing deals also include sewage plants, water treatment facilities, government buildings and other assets, according to the region's congressional delegation, which sent a letter Monday to Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Board Chairman Ben S. Bernanke.

"The resolution of the [Metro] situation will be critical for a potential surge of a latent flood of technical defaults which could be forthcoming," the letter said.

If the court does not grant the temporary restraining order, Metro could find itself in default and be forced to pay KBC.

That could result in a shortfall in Metro's capital budget, officials said, and would mean the agency would have less money for much-needed improvements, such as overhauling escalators, fixing tunnel leaks, upgrading train communication equipment and buying buses.

Treasury officials have said they are aware of the matter, but the agency has given no indication that help might come before tomorrow's deadline.

In a statement yesterday, Metro General Manager John B. Catoe Jr. said he was confident "the federal government and Treasury Department will look at this issue and take action to ensure transit agencies across the country are not stripped of their ability to provide essential service."

In Metro's case, the regional transit agency could face more than $400 million in payments if all the deals in question go into default, officials have said. Metro made 16 such deals between 1997 and 2003, involving 600 rail cars worth more than $1.6 billion and earning $100 million for Metro.

In the case of KBC Group, the bank would reclaim $17 million from a trust account that is used to make lease payments, leaving Metro on the hook for more than $25 million, officials said.

Congressional pressure has been growing. In a letter to Paulson and Bernanke yesterday, House Transportation Committee Chairman James L. Oberstar (D-Minn.) said the public transit sector's total exposure from these deals could be as much as $16 billion from 87 projects in 25 metropolitan areas. According to individual transit agency estimates, $1.5 billion to $4 billion "of these deals are immediately at risk," Oberstar wrote.

If the defaults occur, they could cost transit agencies hundreds of millions of dollars and "result in immediate termination of transit services in the nation's largest urban areas," the letter said.

In committee testimony yesterday on an economic recovery plan, a top executive of the American Public Transportation Association, a transit industry group, likened the demands to "ransom notes."

"It's just a matter of pure greed," said Beverly Scott, the association's chairman.

Such deals were a once-common practice that the IRS has ended. They were struck years ago as a way for government entities, such as Metro, to raise needed revenue, and for private companies, many of them banks, to avoid federal taxes.

Transit agencies, which don't pay federal taxes, would sell their rail cars and other equipment to banks and receive large sums of money up front to pay for capital improvements. The banks would shelter their income while "their" rail cars depreciated. The transit agencies would lease the rail cars back from the banks.

In most cases, the transactions were guaranteed by a third party, AIG.

Noting the federal government's role in bailing out AIG, Del. Eleanor Homes Norton (D-D.C.), who serves on the House Transportation Committee, said: "We're interested in bailing out more than the AIGs. Treasury better educate itself very quickly."

Staff writer David Cho contributed to this report.

View all comments that have been posted about this article.

© 2008 The Washington Post Company