"The potential is pretty horrendous across the industry," said James LaRusch, the chief counsel for the American Public Transportation Assn., a trade group for transit agencies. "It's typically going to impact the largest transit agencies, because they were the ones that had the kind of assets necessary to get into these kind of deals."
LaRusch said about 30 of the largest transit agencies in the nation have some involvement in such deals. "Any time you take money from the agency, you are going to cause a cutback in service," he said.
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.
As a frame of reference, Matsumoto said that $100 million equals about 10% of the MTA's bus service. However, the MTA board has not yet discussed what cuts might be made.
The MTA has not found a replacement for AIG, Matsumoto said. "With the current state of the markets, there are no people who are willing to provide a replacement for AIG at any price," Matsumoto said.
The agency has started talking to some investors in hopes of getting them to accept terms more favorable to the MTA, but Matsumoto said he doesn't know if investors are willing to renegotiate.
Under a worst-case scenario, Matsumoto said, the bill could rise to $1.8 billion, more than half the MTA's annual budget for this year. "There is no practical way we could ever pay that back," he said.
The agency has met with congressional staffers and asked the U.S. Treasury Department for help, hoping to get a piece of the $700-billion bailout package recently approved by Congress. Some of that money is to be used to buy troubled assets.
"They didn't tell us to go fly a kite; that's hopeful," Matsumoto said. "But I don't know how practical it is. We weren't talking to decision-makers."
