Defaults threaten public transit systems

Thursday, October 30, 2008

DC's Metro transit system could default on a complicated deal and wind up owing foreign bankers $43 million. AIG guaranteed the deal and others like it, leaving at least 31 public services facing defaults too. Steve Henn reports.

Metro train in Washington, D.C. (wmata.com)

More on The Economy, America's Financial Crisis

TEXT OF STORY

Kai Ryssdal: You want to know how big a deal AIG nearly going under was? At mid-night tonight Washington DC's public transit system could find itself owing foreign bankers $43 million. AIG guaranteed the DC Metro's deal and hundreds of other like it around the country. And at least 31 public utilities and transit systems from Atlanta to LA might face similar defaults without ever missing a debt payment. Marketplace's Steve Henn reports.

Steve Henn: You never know how in the midst of this financial crisis complicated deals can come back and bite. Just take Washington Metro's decision to sell off more than a billion dollars in trains to banks and finance companies over the last decade.

Hedrick Smith: And the whole purpose of it was to get a tax write-off for the finance company or the bank.

Author and producer Hedrick Smith says back in the 1990s banks around the world started buying up trains and sewers from cities and then leasing them back.

Smith: The city that was leasing its facilities got paid a fee -- but it was all a financial gimmick.

Washington's Metro made a quick $100 million.

But to make these deals fly -- banks needed insurance that lease payments would be made on time. And that's where AIG came in. Carol Kessel is Washington Metro's CFO.

Carol Kessel: AIG was the primary guarantor for these transactions.

When AIG almost collapsed in September, the banks demanded years of lease payments all at once. Robert Healy, at the American Public Transit Association says the effects are national.

Robert Healy: We think that 31 transit systems will be hit around the country.

DC's Metro system may have to cough up $43 million by midnight -- but it's on the hook for hundreds of millions in similar deals.

Atlanta's metro could lose $400 million. Los Angeles's system could lose $300 million. And riders like John Cofrancesco wish that money could be used for something else.

John Cofrancesco: How about new carriages so they're not disgusting. And how about they run on time and don't break down every single stop.

Well, we can all dream.

In Washington, I'm Steve Henn for Marketplace.

Comments

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By K GH

From SF, CA, 10/30/2008

Very Interesting story. I have two comments 1.> If you wanted an example of what is wrong with capitalism as it is practiced currently I doubt you could come up with a better example. 2.> You ABSOLUTELY should have NAMED the banks that were demanding payment in FULL. THEN YOU SHOULD have contacted each one OF THEM and asked them to EXPLAIN on the RECORD to the AMERICAN PUBLIC why they felt ENTITLED to BANKRUPT most of the metropolitan MASS TRANSIT systems in the US at the same time they were lining UP for TAXPAYER subsidized HANDOUTS rom the U.S. / various foreign governments!! To say the least, you guys really dropped the ball on this story. Stop being Apologists for (incompetent) SCUMBAGS!!! Irate in CA
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