Another unexpected consequence of having a knotted up financial network that's in the process of unraveling. The LAT and
Washington Post report that AIG had guaranteed deals between transit agencies and banks under which banks put up money that was repaid over time. But AIG's financial problems have invalidated the company's guarantees, putting the deals in technical default and allowing the banks to ask for all their money at once. MTA and around 30 other transit agencies could be impacted. Washington has been asked to help by either backing the deals, instead of AIG, or change tax policy to help the banks. This is all part of a complicated tax-avoidance scheme involving private companies. From the Post:
Profit-making businesses are allowed to shelter income from taxes based on the declining value -- or depreciation -- of such equipment as rail cars. But transit agencies don't pay federal taxes, so they sold their rail cars and other equipment to banks, allowing the banks to shelter income while "their" rail cars depreciated. Then the transit agencies leased the cars back from the banks at a discount that effectively split the value of the tax break with the bank.
In most cases, the transactions were guaranteed by a third party. In many of those, the third party was AIG. But as AIG's financial health deteriorated in recent months, its credit rating was downgraded, reflecting the increased risk that the company could not meet its obligations. The terms of the transit deals required AIG to maintain a high credit rating. Because of that, the banks now say the deals are in default, allowing them to force the agencies to pay millions of dollars in termination fees immediately.
A few days back the Times reported that the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals. "I've lost a lot of sleep over this," Terry Matsumoto, the MTA's CFO, told the Times. He said it was "absolutely" certain the agency would have to cut service if the problem isn't remedied.
Expect this sort of thing to be coming up more and more. Actually, state and local governments, along with public agencies like MTA, face all kinds of shortfalls, some of which we're only beginning to be understood. The NYT's Floyd Norris got a hold of the latest report from the Jerome Levy Forecasting Center at Bard College - and it's not for weak stomachs. As related to government finances:
The public is starting to discover the seriousness of the state and local fiscal position, but the magnitude and fallout of the developing nonfederal government crisis will prove shocking.