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Subway Madness
SUBWAY MADNESS....Apparently AIG, over the years, has guaranteed several elaborate tax avoidance schemes that allowed local transit authorities to make some extra money via sale-leaseback agreements with banks. Now that AIG is kaput, the schemes are falling apart and the transit agencies may suddenly get billed for tens of millions of dollars. Transit fan Matt Yglesias is pissed:
WTF is happening here? Can't we, in exchange for all the money we're giving AIG, force the company to keep guaranteeing deals that are vital to keeping our public services running? Something about the implementation of this bailout is very troubling and it doesn't inspire a ton of confidence in the future of TARP.
Unfortunately, that doesn't seem to be the issue. AIG is still guaranteeing the deals. The problem is that the contracts with the banks terminate automatically if AIG doesn't maintain a high credit rating. Which, needless to say, they haven't. So now the banks are demanding payment.
Which just goes to show how all this stuff trickles down not just to Main Street, but to the subways underneath Main Street too. However, a Treasury Department spokesman says, "Treasury is aware of this situation." That should make us all feel better, right?
Of course no one could have foreseen.....
But being backed by the US government should give it a AAA rating. Perhaps this implies that the Agencies are questioning the US AAA rating. I know they aren't but it would be a disaster.
I read that some German Towns used the same deal for making money in a scheme involving American capital and american tax avoidance, and are now bleeding...
When will our politicos stop believing that private is cheaper more/efficient???
Stop drinking the Kool-aid of finance con-men, understand that the private capital needs 2-3% real remuneration, and start thinking how to manage the public services properly: with no more than 1% of the capital cost inefficiency over the private you come already ahead!!
Not too darn difficult with the advantage of long-term planning!!!
The LA Times did an article about this earlier in the week. The MTA is one of the agencies effected and they said they were foreseeing having to cut back on bus service (which is already quite overstressed).
And note that, while the transit agencies did get some money from these deals, the primary purpose was to help private companies avoid paying federal taxes.
It's worth repeating...these GOVERNMENT agencies were involved in a complex scheme to help PRIVATE companies avoid paying federal taxes.
Organizational rules that forbid doing business with any but the highest-rated institutions have been an accelerator in this mess. They are an example of local risk-reducing measures that are destabilizing at the systemic level. In game-theoretic terms, they have the structure of a Prisoner's Dilemma, which has been widely acknowledged as a situation in which regulation can be a Good Thing.
One patch for this bug would be to forbid (or invalidate) corporate rules that mandate dropping existing business relationships based on a rating demotion. Could a regulation (by some agency or other) override internal corporate rules to permit the resumption of previous business relationships, despite changed ratings, in this one-off instance? Even if it were challenged later, such a regulation would provide CYA for decision makers in companies today, potentially overcoming internal rule-changing inertia in crucial cases.
Thank you for saying what I wasn't going to attempt to say. Although most SILOs I'm aware of involved foreign assets. So it was more of a beggar thy neighbor scheme. Serves them right. They should put every public official complicit in these schemes in jail for doing this to the public. Or up against a wall with a ciggy and blindfold....
Kevin, there's no subway under Main Street, New York City which is on Roosevelt Island. Jimmy Hoffa is buried there.
The potential foreclosures of transit systems is the latest debacle in the morass created by the get-rich-quick financial charlatans. The finance-lease back deals seem not unlike the whole subprime house of cards.
Funny how the banks are considering demanding payment now. Maybe, despite the taxpayer bailout, AIG is sinking fast.