Tuesday, October 28, 2008

John Lott's "free market" capitalism at work.

Earlier today I blogged about how greedy bankers who "need" to call in debts will further destroy our economy. A few minutes ago I found a perfect example: bankers loaned money they didn't have (fractional reserve banking, remember?) to the Metro and other mass transit systems, and now insists on immediate up front payments of actual cash (real money) to pay off the "loan" of the fake money they never had.

Credit Crisis May Force Metro to Pay Millions
By Lena H. Sun and Binyamin Appelbaum
Washington Post Staff Writers
Friday, October 24, 2008; Page A01

Metro and 30 other transit agencies across the country may have to pay billions of dollars to large banks as years-old financing deals unravel, potentially hurting service for millions of bus and train riders, transit officials said yesterday.

The problems are an unexpected consequence of the credit crisis, triggered indirectly by the collapse of American International Group, the insurance giant that U.S. taxpayers recently rescued from bankruptcy, officials said.

AIG had guaranteed deals between transit agencies and banks under which the banks made upfront payments that the agencies agreed to repay 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.

In Metro's case, the regional transit agency could face up to $400 million in payments, the system's chief financial officer, Carol Kissal, said in an interview yesterday. One bank, KBC Group of Belgium, has told Metro that it needs to pay $43 million by next week. Metro officials confirmed the details but declined to name the bank...

The "bank" never had any real money to loan, so they certainly shouldn't be allowed to insist they are paid back with real funds when what they loaned was imaginary.

Not that the Metro is blameless - it got involved in exotic tax-avoidance and financial deals.

...The deals in question are vestiges of an elaborate tax-avoidance plan that the IRS has since ended. It involves government agencies, such as Metro, helping private companies to avoid federal taxes.

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. Metro said it used the money for capital improvements, including buying rail cars.

Metro made 16 such deals, primarily with U.S. banks, between 1997 and 2003, selling 600 rail cars worth more than $1.6 billion and making $100 million.

All of the deals were approved by the Federal Transit Administration. Transit officials say they were encouraged by the government to pursue the tax deals.

Government did this to avoid having to make the necessary capital investments in mass transit, since they were (and still are) wasting billions of dollars on road improvements for private automobiles instead of letting private developers worry about private automobiles. Government should have been focusing on it's job - mass transit that serves the masses of people.

...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...

Notice the banks are NOT insisting that Metro's actual ability to repay the loans as agreed is at question. It is not. They are simply using this excuse of "lower credit rating" to collect money the banks aren't owed yet to try and keep themselves - the banks, that is - afloat. Instead, the bank should be allowed to fail and the "loans" to pass into the oblivion from which they sprang. The banks clearly don't give a rats rear end about the fact that people need the transit system. Their greedy bloodsucking CEOs are in a pickle and they don't care what important US industries and services they destroy trying to keep themselves in business. They're scum, and the government is still culpable, too, because it keeps on interfering.

...The banks are motivated in part because the IRS has offered amnesty to any company that gives up its tax shelters by the end of the year.

Kissal said federal intervention would ease the crisis. "We would be able to satisfy the technicality so the banks would not be looking to take their greed out unnecessarily on public transit," she said.

Officials said that at the same time the Treasury Department is working to prop up large banks with taxpayer support, some of the same banks are trying to profit on the backs of public transit agencies.

On us, they mean, the poor saps who need the transit system to stay employed and function in the urban economy.

...Rob Healy, vice president for government affairs at the American Public Transportation Association, an industry group, said that investors, mostly banks, "are coming after the transit agencies" and that the affected agencies might face "a couple billion dollars of exposure." Some transit agencies are being forced to cut service or raise fares to pay for the increased cost of fuel, he said.

Metro says it is making its regular lease payments and therefore should not have to make payments to the banks. The agency said it is working with banks to get waivers and extensions until another solution can be found. SunTrust, an Atlanta-based bank, has agreed to terminate one of the deals without demanding further payment from Metro...

Just what I said - they had no good reason to call the loans, which were not in any danger of default on Metro's side. The greedy slimeballs just wanted the money for their own salvation and thought government could be extorted in one way or another to cough it up so mass transit wouldn't be damaged. We should all drop SunTrust a line thanking them for their forebearance toward Metro, and a line to the other banks that were involved in the flaky deals shaming them for failing to emulate SunTrust for the public good.

..."If everyone acted like SunTrust, we might be able to work our way through this," Metro's Kissal said. A spokesman for SunTrust declined to comment.

KBC, by contrast, notified Metro that it expects payment by next week, and the agency fears other banks will make similar demands.

KBC did not return a call to its New York offices or an e-mail to its corporate headquarters in Brussels.

The company is one of the largest retail banks in Belgium and has a large presence in central and eastern European countries, including Poland. The company had avoided major losses during the credit crisis until last week, when it told investors that it would lose $1.2 billion in the third quarter, in part because some of its U.S. investments were wiped out. Banks worldwide are responding to similar losses by squeezing customers and scraping for available savings.

Exactly - it's pure greed, spurred on by desperation. They need to cover their posteriors and don't care who they hurt doing it. This is John Lott's free market capitalism at work - immoral, unethical, and wrong.

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