it’s vultures that come home to roost.
The subprime mortgage crisis isn’t over. Neither is the global credit freeze it sparked. The stock market crash that followed hasn’t hit bottom yet either. But the main thing to worry about now, and for a long time to come, is the depression we are rolling and tumbling into.
The media has started reporting on one increasingly visible aspect of the depression: the budget crunch facing states and municipalities, and the resulting cutbacks in public services. News stories have detailed the end of the shuttle program Phoenix, AZ ran to take seniors grocery shopping, Mayor Daley’s elimination of 2250 Chicago city jobs–900 by layoffs, warnings of unsalted roads in rural Wisconsin this winter, and on and on. And it’s early days yet.
The service cuts I want to highlight today are a little different. Let me direct your attention briefly to the Los Angeles County Metropolitan Transportation Authority, which serves 1.5 million rail and bus passengers every day. Yep, even in auto-centric L.A., a lot of folks, especially poor folks, can’t make it without public transportation.
Terry Matsamuto, the MTA’s chief financial officer is predicting massive service cuts soon. It seems that like many local governments around the country, L.A. County went for the okey-doke. They sold much of their system to private investors in “lease-back” deals. Companies like Wells Fargo and Philip Morris bought the rail system, 1000 buses and parking and maintenance facilities. The Tranist Authority gets a one shot injection of needed cash, the financiers get a steady annual cash flow bled out of the system.
The rail cars and locomotives of the Metrolink commuter rail system were also sold, and guess who financed and insured these deals?
American International Group.
Yep, AIG. And when AIG started going into cardiac arrest, their credit ratings were revised downwards before the Fed even applied the paddles.
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.
For one thing, forget about finding a replacement lender–credit is still frozen, static. Second, once other clauses in the deal kick in, the MTA could be on the hook for $1.8 billion this year, more than half its total annual budget.
All those investors have to be made good somehow. So the service cuts commence.
I can’t wait to see what L.A.’s Bus Riders Union does about this…
Cross-posted from Fire on The Mountain.