Metro, Bank Make A Deal
Catoe Proclaims Victory; Capital Budget Protected

By Lena H. Sun
Washington Post Staff Writer
Saturday, November 15, 2008

Metro and a Belgian bank seeking to collect $43 million from the transit agency reached a settlement yesterday that agency officials hailed as a victory and that might deter other banks from seeking similar payments from transit agencies in the United States and Europe as a result of fallout from the global credit crisis.

U.S. District Judge Rosemary M. Collyer, who played a key role in three days of negotiations between the two sides, barred them from disclosing details. But based on court testimony and comments earlier in the week, it is likely that KBC Group collected less than the full amount.

Metro General Manager John B. Catoe Jr. said the resolution was a victory for Metro and other transit agencies.

Metro had offered to pay the bank more than $17 million, money the agency set aside years ago. KBC had been seeking an additional $25 million, which would have forced cuts in Metro's $613 million capital budget and hurt its credit rating.

Catoe said there is no longer a threat to either. The message to other banks, he said, is clear: "You can't just walk in and bully a public agency.

"This is a win for the riders of our system and the taxpayers of this region," Catoe said. "Taxpayers have been saved tens of millions of dollars."

Catoe said the settlement "sends a strong message to other banks that they cannot make a financial windfall at the expense of transit riders." He was referring to comments Collyer made in court Wednesday that allowing KBC to collect the full payment would be "an absolute windfall" for the bank. A financial adviser testifying for Metro said that the $43 million sought by KBC would amount to an 11 percent annualized return on the bank's initial investment of $23 million six years ago.

Catoe said the settlement will set a precedent to help Metro resolve 14 similar financing deals with other banks over the next two months. "I'm very optimistic," he said.

Should those agreements go into default, Metro could be forced to pay the banks more than $300 million.

Craig Kline, who represented KBC Group, said the bank was pleased with the outcome, but he would not comment further.

The case was being closely followed by financial institutions and other transit agencies that have received similar bank demands. The deals, once common but prohibited by the Internal Revenue Service in 2004, are known as lease-back transactions and were widespread among transit agencies, water and sewer authorities and other public entities. The agencies received much-needed upfront cash for capital improvements; the private investors, often banks, received a tax shelter.

Metro and other transit agencies "sold" their rail cars or other equipment in paper transactions to banks and then leased them back. Many of the deals were approved by the Federal Transit Administration. The deals allowed the banks to receive billions in tax breaks by claiming depreciation on the equipment. Metro made 16 deals involving 600 rail cars and netted $100 million.

The agreements hinged on the credit rating of a third party that guaranteed the deals. In most cases, that party was struggling insurance giant American International Group. When AIG's credit rating was downgraded, the banks had the authority to declare the deals in default and seek the money all at once.

Most banks have been in talks with transit agencies and given them extensions; KBC also gave extensions but is the only bank that sought immediate payment, officials and industry sources said, and Metro went to court to stop the action.

Despite yesterday's decision, general managers of transit agencies in Los Angeles, Sacramento, Santa Clara, Calif., Atlanta and Chicago are coming to Washington next week to appeal to Congress. Transit industry attorneys say that 25 transit agencies in 18 states could have to make $2 billion to $4 billion in payments if their deals go into default, forcing cuts in services.

The officials want Congress to pressure the U.S. Treasury and the Federal Reserve to step in as guarantor for the deals, which they say would cost the federal government little. "We're not asking for a bailout," Catoe said.

Treasury officials are reluctant to step in because they do not want to be seen as rewarding tax shelters for banks and other private investors, who have obtained millions in tax benefits from these deals, sources familiar with Treasury's thinking have said.

The judge suggested a settlement this week that would have given KBC more than $17 million from a trust account Metro has for lease payments.

The IRS has reached agreements with dozens of banks, allowing them to keep 20 percent of their tax benefits and refund the rest if they agree to settle by year's end. Collyer suggested this week that KBC was motivated to collect payment from Metro to recoup some of its lost tax breaks. Of the $43 million that KBC was seeking, $25 million represents the value of its expected tax benefit, which the bank would no longer be entitled to receive if it settles with the IRS.

KBC has also suffered tremendous losses on its portfolio, records show, and a payment from Metro would cover some of those losses.

Staff researcher Meg Smith contributed to this report.