COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary GET COMBO TITLE AND SECURITIZATION ANALYSIS – CLICK HERE



Creative Financing Deals May Cost City $68 Million


An effort by the San Francisco Municipal Transportation Agency to earn money nearly a decade ago through “creative solutions” could end up as a financial debacle that costs the city $68 million or more, a delayed effect of the nationwide subprime mortgage crisis, financial analysts and legal experts said.

The financing deals created in 2002 and 2003 — in which 139 San Francisco light-rail cars were leased to Wells Fargo and three other banks, and then leased back to the city — had clauses requiring the city’s lease payments to be insured by a company with a high credit rating.

According to documents describing the deals, if the insurer’s credit rating dropped below a certain threshold, and San Francisco could not get new coverage, the city would fall into default and be liable for penalties of up to $126 million. (The most recent liquidation value estimate is $68 million.)

The company chosen to insure the lease payments, Assured Guaranty Ltd., is now “on the cusp of falling below the thresholds under the lease,” according to a memo this summer by Debra Johnson, the acting executive director of the transit agency. And in late September Standard & Poor’s gave Assured a “negative outlook,” suggesting that it might be headed for a downgrade.

“This is actually a potential bomb,” said Jesse Markham Jr., a University of San Francisco law professor who reviewed documents related to the transaction for The Bay Citizen.

According to Lee Sheppard, a tax lawyer and a contributing editor for the publication Tax Notes, “San Francisco is looking down the barrel of a horrifying termination payment because that’s what they signed up for.”

San Francisco’s transit agency was among many that seized on an early-2000s boom in public-infrastructure tax shelters, in which banks and other investors gave millions of dollars in cash up front to the agencies in return for the right to claim tax breaks in subsequent years for wear-and-tear on the equipment.

In San Francisco’s case, Michael Burns, then the general manager of the transit agency, announced deals that allowed the 139 light-rail cars to become rolling tax shelters for the banks. An aide said Mr. Burns declined to be interviewed for this article.

In 2004, the Internal Revenue Service declared such transactions to be sham tax shelters and outlawed most of the tax write-offs. Public agencies were not harmed because the contracts did not hold them responsible for the validity of the tax shelters.

The deals received another blow in 2008 with the nationwide mortgage meltdown. Bond insurers including American International Group and the now-bankrupt Ambac were downgraded as their portfolios were hit by the subprime mortgage crisis. This time, ripple effects rocked public infrastructure tax shelters.

The Metropolitan Area Transit Authority in Washington, for example, had entered into a tax-shelter deal with KBC Bank of Belgium, with A.I.G. as insurer. The A.I.G. downgrade meant KBC was entitled to a $43 million termination payment from the transit agency, which eventually reached an undisclosed settlement.

The John Hancock Life Insurance Company entered a lease agreement with the Hoosier Energy Rural Electric Cooperative, an electricity-generating plant in southern Indiana. Rather than pay a $120 million termination fee after Ambac’s downgrade, the cooperative took John Hancock to court, but eventually settled for an undisclosed amount.

Sonali Bose, chief financial officer for the San Francisco transportation agency, said two of the banks that entered tax-shelter deals with the agency had agreed to enter negotiations to possibly end the deals in a way that would not require a termination fee. The others have declined, Ms. Bose said. She would not say which banks were at the table.

Elise Wilkinson, the Wells Fargo spokeswoman, said the bank might be open to discussing a possible lease termination. Comerica, another light-rail-car lessee, declined to comment. The two other lessees, CIBC Capital and Australia New Zealand Banking, did not respond to requests for comment.



10 Responses

  1. I couldn’t agree with you more.Support is the name of the game.Have just been sent a independant review of foreclosure anybody have any info. on this stuff I would be happy to get feedback.First I’ve heard of it.More crap or legit stuff?Any help would be greatly appreciated.

  2. To the United States Banks (Banksters) of America, I dedicate this song to the 99% fighting you: SEE Youtube Cher- one Tin Soldier

    We will have the United states of America BACK! SHAME ON YOUR GREED!

  3. Consistently, anyone who gets in bed with the bankers will sooner or later find it on fire, after their wrists have been bound to the bed post.

    We are seeing the true nature of bankers and banks in these end times…they want it all, and they’ll stop at nothing to get it.

  4. @Pam,

    I’ve said it all along. This coming year will be determining for the outcome.

    I have faith that it will get better. We’ve come a long way in just one year. So long as it remained hidden, nothing could be done. It no longer is, although judges still haven’t a grasp complete enough yet. To read that some of them are becoming irrate and enraged against banks tells me that change is coming. It’s not going to come through government but despite it.

    In the meantime, let’s stick together and help each other.

  5. This is nothing. Just wait for all the Muni defaults to start POURING in.

  6. So now the cities and states are finally getting the idea that just because you try in good faith to act accordingly the banks have once again tryed to delete another public holding and will continue to act like this till they are all out of business.Move your money,stop using your credit cards,quit taking loans and stop to think about why your parents didn’t trust the banks either.We just didn’t pay attention because it was always going to happen to someone else not us!Time to wake up and smell the coffee.America is heading towards another civil revolution and when the people revolt it is going to be absolute carnage.

  7. very innovative trap—–kind of like pulling pins in a breakaway floor panel–as when they hang somebody

    this is exactly why its so very important for investment bankers to retain those great thinkers—need to get a retoactive bonus to the genius that thought up that gimmick—or does it go to the one that broke the insurer? team effort

  8. So:
    1) stop paying your mortage (check)
    2) leave your big bank and open a credit union account (check)
    3) Stop paying your taxes

    If stopping that insanity means starving everyone from cash, banks, state and the feds included, then let’s do it.

    From what I see, I do a lot better with my money than anyone of those. Who needs them?

  9. Who is really getting screwed, again? The taxpayer. There is a pattern here, the same liked mimded group. Whatever is the latest fad, the newest appliance or hottest color. All the while the taxpayer takes it in the shorts.

  10. Citibank’s documented history of deceit:

    MONDAY, NOVEMBER 28, 2011

    KingCast and U.S. District Judge Jed Rakoff say Sam Shaulson’s Citibank is at it again, potentially robbing and cheating and lying and stealing.

    …….Almost every multinational banking scam involves Citibank. I’ve been listing Enron, Ohio, California, Mexico, Russia and some of the others here and at Citibankisracist blog, but now here is yet another case closer to home and ongoing even. I have notified the authors of this 2009 Wall Street Journal story, “Citi, SEC Are in Talks to Settle Asset Probe.” I’ll tell you whose assets are getting probed: Those of the American Public if you catch my drift.

    “Citigroup Inc. is in the early stages of negotiating with the Securities and Exchange Commission to settle an investigation into whether it misled investors by not properly disclosing the amount of troubled mortgage assets it held as the market began to implode in 2007, people familiar with the matter say.

    Among issues being debated inside the SEC is whether, as a recipient of government-rescue funds, Citigroup should pay a large penalty in the case. There is concern at the SEC about the notion of financial firms in effect using taxpayer money to pay penalties, people close to the situation say. Citigroup received $45 billion from the government’s Troubled Asset Relief Program and plans to raise an additional $5.5 billion in capital from private investors.”


    Big Issues coming to Federal Court next week:

    TUESDAY, NOVEMBER 29, 2011

    Kelly Ayotte facing opposition from ACLU, KingCast, OWS and others on her “Battlefield” attempts to crush free speech and free press.

Contribute to the discussion!

%d bloggers like this: