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Defaults threaten public transit systems
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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.
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.