By Lena H. Sun
Washington Post Staff Writer
Friday, October 31, 2008
A Belgian bank agreed to give Metro a reprieve yesterday in the bank's efforts to collect $43 million from the cash-strapped agency after a federal judge said she would be willing to issue an emergency order that would do the same thing.
The bank agreed not to seek payment for 10 days. Both sides will appear in court Nov. 12 to argue whether the bank should be barred from collecting the money until the case involving the long-term financing agreement between the bank and Metro is decided.
Without the extra time, Metro could have found itself in default by today, allowing KBC Group of Belgium to immediately collect $17 million from the agency Monday, according to an attorney for KBC in court yesterday.
U.S. District Judge Rosemary M. Collyer said she agreed with Metro's contention that if KBC prevailed, other banks might be prompted to demand millions in payments in similarly troubled financing deals at Metro and other transit agencies across the country, posing "very real" harm to riders. Although there is public interest in enforcing contracts, Collyer said, there is also public interest "in not putting at terrible risk the transit system."
"I cannot find that WMATA's concerns are speculative or foolish," she said at yesterday's hearing. "I do think there is significant or irreparable harm if, in fact, the first stone is pulled from the wall."
Metro officials said they were pleased with the decision but urged the Treasury Department to help by acting as guarantor for the deals.
"Metro could still find itself in default and on the hook for millions of dollars in the next two weeks," Metro Chief Financial Officer Carol Kissal said. "We urgently need the Treasury Department to step in. It won't cost them to back the insurer's credit rating, but not doing so will cost Metro and other transit agencies hundreds of millions of dollars."
KBC's demand was triggered by the collapse of American International Group, the insurance giant that U.S. taxpayers recently rescued from bankruptcy. AIG had guaranteed Metro's financial deals with the bank, but AIG's financial problems, specifically the downgrading of its credit rating, invalidated the company's guarantees, putting the deals in technical default and allowing the bank to ask for all its money at once.
In voluntarily agreeing to give Metro more time, the bank specified that if AIG's credit rating is downgraded further, the bank can request that the court let the default proceed.
Metro has 14 other financing deals with banks that could go into default. Officials said it would cost $50 million to $100 million to purchase the additional insurance to replace AIG as guarantor.
Transit officials and members of Congress are asking for Treasury's help. They note that while Treasury is working to prop up large banks with taxpayer money, some of those banks are trying to profit on the backs of public transit agencies. Bank of America and Wells Fargo were involved in similar deals with Los Angeles's transit system.
Rep. Chris Van Hollen (D-Md.) said House Speaker Nancy Pelosi spoke with Treasury Secretary Henry Paulson yesterday to urge quick government action. "I think it would be difficult to explain to people why [Treasury officials] were so quick to ride to the rescue of AIG and private firms but would allow public transit agencies to hang out to dry when they're being held up by foreign banks trying to exploit the situation," Van Hollen said.
But it seems unlikely Treasury would step in. Treasury officials are reluctant to provide a backstop because they would be bailing out a tax-avoidance strategy, which is at the heart of the lease-back arrangements at Metro and 30 other transit agencies, according to sources familiar with Treasury's thinking.
Metro officials sought to purchase additional insurance for the KBC deal with a unit of Berkshire-Hathaway at a cost of $1.35 million. But KBC Group rejected the offer, saying it would not cover the life of the deal, according to Craig Kline, who was representing the bank and its entities in court.
If Metro loses its case Nov. 12, the agency could be forced to immediately slash more than $25 million from its capital budget. That would mean less money for much-needed capital projects, including overhauling escalators, fixing tunnel leaks, upgrading train communication equipment and buying buses.
Metro estimates that it could pay as much as $435 million to banks if its other agreements go into default.
Members of Congress say the potential for damage is even broader. The more than two dozen other transit agencies that have similar financing agreements stand to lose $1.5 billion to $4 billion.
Metro says it has been making its regular lease payments to KBC and therefore should not have to make the additional payment. Two banks have agreed to terminate the deals with either no payment or minimal payment from Metro.
Such deals were a once-common practice that the IRS has ended. They were struck years ago as a way for public entities to raise needed revenue and for private companies 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 amounts of money upfront for capital improvements. The banks were able to shelter their income while "their" rail cars depreciated. The transit agencies leased back the cars from the banks at a discount that split the value of the tax break with the bank.
In many cases, the transactions were guaranteed by a third party, AIG. In the case of KBC Group, the bank could reclaim $17 million from a trust account used to make lease payments, leaving Metro on the hook for more than $25 million.
Staff writers David Cho and Lori Montgomery and researcher Meg Smith contributed to this report.