Train Wreck

Major public transit agencies around the country — including San Francisco's — may pay billions for risky deals with bankers.

"The belief is that FSA will soon be in that category as well," The Bond Buyer quoted Washington transportation attorney Jeffrey Boothe as saying last week. "As they take more hits, and more and more issues arise, others will follow AIG."

Muni, for its part, sent me the following statement:

"While FSA's ratings are on credit watch for a potential downgrade, we cannot predict if FSA will, in fact, be downgraded. We continue to investigate all options, including potential alternatives to FSA."

Things are much worse at other transit agencies. New Jersey is on the hook for $150 million. Los Angeles is being stuck for $300 million. In total, cities now stand to pay between $1 billion and $4 billion to banks that invested in these deals.

In response, Barbara Boxer and other U.S. senators are now lobbying the U.S. Treasury to bail out these tax shelters, which were declared illegal shams by the IRS in 2003. And House Speaker Nancy Pelosi has reportedly met with BART officials about the need for a possible bailout of these deals (BART, which cut a leaseback deal insured by AIG in 2002, could owe $40 million). But San Francisco won't be helped by a U.S. bailout since its deal is backed by an insurance subsidiary of a Belgium-based bank.

As America enters into a new political era, it's worth taking away a few lessons from these botched tax scams.

One lesson is that when people question bizarre, opaque, high-risk public-private ventures, it's worth listening to them, even if they're known as fringe leftists on the Board of Supervisors, or if they write for an alternative-weekly newspaper.

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