A big business like AIG making big loans and covering big insurance is not always felt directly on “Main Street”, unless “Joe Six-pack” happens to be working for that big business on the other side of the AIG deal.
But Main Street in Los Angeles, if there were such a place, is about to feel the pain directly. The LA Country Metropolitan Transit Authority (MTA) is going to have to start making serious cuts due to AIG deals done a few years back that are coming back to haunt them.
The MTA is aggressively seeking emergency financing, but it looks like the deals with cost the MTA between $100 and $300 million. The low end of that estimate is equal to 10% of the MTA’s bus service business, however they have not yet indicated how the cuts will be made.
Apparently between 1980 and 2003 the MTA engaged in massive lease-back deals, where the company sold its assets off and then leased them back. AIG provided loans for some of these deals and also guaranteed the lease payments. Well, now that AIG’s credit rating has been downgraded, terms of the deal are being triggered that require the MTA to find a new firm to guarantee the deals or otherwise reimburse the investors on their down payments. Either way, the MTA is in trouble.
“In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.
Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government.
The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals or reimburse investors for their down payments and lost tax benefits, a scenario that could cost the transit agency between $100 million and $300 million.”
Los Angeles residents and mass transit riders can expect to hear more on this relatively soon. I know it is believed that everyone in LA drives, especially when you look at how crowded the freeways are. However, roughly 1.5 million LA residents ride the trains and buses each weekday in LA County. This form of mass transit is critical to this cities functionality.
Somehow I feel like the Federal government will have to step in and save the day here again. Soon enough that money will come back out of our pockets to pay for this misstep once again. Until then, get the word out that the MTA is looking for investors and pass the message on to any sovereign wealth fund managers you may know.
*image source: columbia.edu
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Now everyone is talking about the American economy and eclections, nice to read something different. Eugene