The collapse of insurance behemoth AIG could lead to 31 transit agencies repaying banks and investors $2 billion to $3 billion for financing deals that AIG had guaranteed.
Transit agencies in Los Angeles, San Francisco, Chicago, Atlanta, Philadelphia, San Diego, Washington, D.C., New Jersey, and other cities and states have dozens of such deals with AIG, which nearly went bankrupt last month before the Federal Reserve stepped in with an $85 billion loan.
While calling it a last resort, the Los Angeles County Metropolitan Transportation Authority, the Metro transit agency in Washington and other agencies might have to slash services and postpone projects if they're forced to pay investors early.
"This is certainly going to be a tough pill to swallow for transit agencies," says Rob Healy, vice president for government affairs at the American Public Transportation Association trade group.
At issue are lease-back deals involving the transfer of buildings, buses, trains and other public assets to banks and other investors. The municipalities made cash payments to the investors, and AIG guaranteed those payments. But when AIG's financial troubles led to lower credit ratings, investors began demanding their payments early.
In Southern California, the Los Angeles County Metropolitan Transportation Authority might have to pony up $100 million to $300 million for investors on its eight deals backed by AIG over the past two decades.
MTA spokesman Marc Littman says it has until mid-November to find a replacement for AIG, or the agency will be in default and may have to slash services.
Metro, which serves the District of Columbia, Maryland and Virginia, has 16 AIG deals and may have to make $400 million in early payments to investors, Chief Financial Officer Carol Kissal says. Kissal says that Metro does not have that much cash in reserve to pay investors.
Kissal adds that KBC Group of Belgium has requested $43 million by this week, and that Metro is working with several U.S. banks that are granting 15-day or 30-day waivers on payments.
In the San Francisco Bay area, BART, the Bay Area Rapid Transit agency, might have to pay investors $40 million on an AIG-related deal struck six years ago, the Associated Press says.
The transit industry is lobbying Congress and the Treasury Department, hoping the government will use the authority of the bailout bill to take AIG's role and guarantee the deals.
In a letter sent Friday to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, several Democratic senators warned that "public transit agencies around the nation could become financially crippled, and several banks could enjoy unjustified windfalls" if the government does not act quickly.
AIG continues to face severe financial troubles, saying last week that it has borrowed $72 billion of the Federal Reserve's original $85 billion.
The Fed also has agreed to provide AIG up to $37.8 billion by borrowing investment-grade securities from AIG and giving AIG cash as collateral. AIG said it has received $18 billion in collateral under that agreement.