AI
Monday, November 28, 2011 5:35:51 AM
The Death of the Fringe Suburb
Victor Kerlow
By CHRISTOPHER B. LEINBERGER
Published: November 25, 2011
Washington
DRIVE through any number of outer-ring suburbs in America, and you’ll see boarded-up and vacant strip malls, surrounded by vast seas of empty parking spaces. These forlorn monuments to the real estate crash are not going to come back to life, even when the economy recovers. And that’s because the demand for the housing that once supported commercial activity in many exurbs isn’t coming back, either.
By now, nearly five years after the housing crash, most Americans understand that a mortgage meltdown was the catalyst for the Great Recession, facilitated by underregulation of finance and reckless risk-taking. Less understood is the divergence between center cities and inner-ring suburbs on one hand, and the suburban fringe on the other.
It was predominantly the collapse of the car-dependent suburban fringe that caused the mortgage collapse.
In the late 1990s, high-end outer suburbs contained most of the expensive housing in the United States, as measured by price per square foot, according to data I analyzed from the Zillow real estate database. Today, the most expensive housing is in the high-density, pedestrian-friendly neighborhoods of the center city and inner suburbs. Some of the most expensive neighborhoods in their metropolitan areas are Capitol Hill in Seattle; Virginia Highland in Atlanta; German Village in Columbus, Ohio, and Logan Circle in Washington. Considered slums as recently as 30 years ago, they have been transformed by gentrification.
Simply put, there has been a profound structural shift — a reversal of what took place in the 1950s, when drivable suburbs boomed and flourished as center cities emptied and withered.
The shift is durable and lasting because of a major demographic event: the convergence of the two largest generations in American history, the baby boomers (born between 1946 and 1964) and the millennials (born between 1979 and 1996), which today represent half of the total population.
Many boomers are now empty nesters and approaching retirement. Generally this means that they will downsize their housing in the near future. Boomers want to live in a walkable urban downtown, a suburban town center or a small town, according to a recent survey by the National Association of Realtors.
The millennials are just now beginning to emerge from the nest — at least those who can afford to live on their own. This coming-of-age cohort also favors urban downtowns and suburban town centers — for lifestyle reasons and the convenience of not having to own cars.
Over all, only 12 percent of future homebuyers want the drivable suburban-fringe houses that are in such oversupply, according to the Realtors survey. This lack of demand all but guarantees continued price declines. Boomers selling their fringe housing will only add to the glut. Nothing the federal government can do will reverse this.
Many drivable-fringe house prices are now below replacement value, meaning the land under the house has no value and the sticks and bricks are worth less than they would cost to replace. This means there is no financial incentive to maintain the house; the next dollar invested will not be recouped upon resale. Many of these houses will be converted to rentals, which are rarely as well maintained as owner-occupied housing. Add the fact that the houses were built with cheap materials and methods to begin with, and you see why many fringe suburbs are turning into slums, with abandoned housing and rising crime.
The good news is that there is great pent-up demand for walkable, centrally located neighborhoods in cities like Portland, Denver, Philadelphia and Chattanooga, Tenn. The transformation of suburbia can be seen in places like Arlington County, Va., Bellevue, Wash., and Pasadena, Calif., where strip malls have been bulldozed and replaced by higher-density mixed-use developments with good transit connections.
Reinvesting in America’s built environment — which makes up a third of the country’s assets — and reviving the construction trades are vital for lifting our economic growth rate. (Disclosure: I am the president of Locus, a coalition of real estate developers and investors and a project of Smart Growth America, which supports walkable neighborhoods and transit-oriented development.)
Some critics will say that investment in the built environment risks repeating the mistake that caused the recession in the first place. That reasoning is as faulty as saying that technology should have been neglected after the dot-com bust, which precipitated the 2001 recession.
The cities and inner-ring suburbs that will be the foundation of the recovery require significant investment at a time of government retrenchment. Bus and light-rail systems, bike lanes and pedestrian improvements — what traffic engineers dismissively call “alternative transportation” — are vital. So is the repair of infrastructure like roads and bridges. Places as diverse as Los Angeles, Phoenix, Salt Lake City, Dallas, Charlotte, Denver and Washington have recently voted to pay for “alternative transportation,” mindful of the dividends to be reaped. As Congress works to reauthorize highway and transit legislation, it must give metropolitan areas greater flexibility for financing transportation, rather than mandating that the vast bulk of the money can be used only for roads.
For too long, we over-invested in the wrong places. Those retail centers and subdivisions will never be worth what they cost to build. We have to stop throwing good money after bad. It is time to instead build what the market wants: mixed-income, walkable cities and suburbs that will support the knowledge economy, promote environmental sustainability and create jobs.
Christopher B. Leinberger [ http://www.cleinberger.com/AdminHome.asp?ArticleID=207 ] is a senior fellow at the Brookings Institution and professor of practice in urban and regional planning at the University of Michigan.
*
Related in Opinion
Op-Ed Contributor: To Rethink Sprawl, Start With Offices (November 26, 2011)
http://www.nytimes.com/2011/11/26/opinion/to-rethink-sprawl-start-with-offices.html
*
© 2011 The New York Times Company
http://www.nytimes.com/2011/11/26/opinion/the-death-of-the-fringe-suburb.html
===
Federal Judge: Credit Ratings Not Always Protected Under First Amendment
by Jonathan Stempel
Reuters
First Posted: 11/26/11 10:36 AM ET Updated: 11/26/11 10:38 AM ET
A federal judge has said credit ratings are not always protected opinion under the First Amendment, a defeat for credit rating agencies in a lawsuit brought by investors who lost money on mortgage-backed securities.
The November 12 decision [at least currently at http://scholar.google.com/scholar_case?case=10301244992599592910&q=Genesee+County+Employees+Retirement+System+v.+Thornburg+Mortgage+Securities+Trust+2006-3&hl=en&as_sdt=2,44&as_vis=1 ] was a little-noticed setback for McGraw-Hill Cos' Standard & Poor's, Moody's Corp's Moody's Investors Service and Fimalac SA's Fitch Ratings, which have long invoked First Amendment free speech protection to defend against lawsuits over their ratings.
These agencies had argued that the Constitution protected them from claims they issued inflated ratings on more than $5 billion of securities issued in 2006 and 2007, and backed by loans from former Thornburg Mortgage Inc and other lenders.
But the judge said the ratings were shared with too small a group of investors to deserve the broad protection sought.
"The court rejects the rating agency defendants' arguments that the First Amendment provides any protection to them under the facts of this case," U.S. District Judge James Browning in Albuquerque, New Mexico, wrote in a 273-page opinion.
Browning nonetheless dismissed claims accusing Moody's and Fitch, but not S&P, of misrepresentations, saying the investors did not adequately allege that the two agencies did not believe their ratings, or knowingly concealed their inaccuracy.
He also said federal law preempts some arguments that the investors used to recover under New Mexico securities law.
The judge said the investors may file an amended complaint, which had sought class-action status. If the state law claims went forward, it could provide an avenue for investors to go after the agencies in other states.
Browning had denied the agencies' motion to dismiss the complaint on September 30, without giving reasons.
S&P, in a statement, called the First Amendment ruling "inconsistent" with other court rulings. Fitch spokesman Daniel Noonan said that agency is pleased that claims against it were dismissed. Moody's and lawyers for the investors declined to comment or had no immediate comment.
Credit Suisse Group AG and Royal Bank of Scotland Group Plc are among the other defendants in the case.
Rating agencies have been widely faulted by investors, regulators and Congress for contributing to the global credit and financial crises that began in 2007 by issuing high ratings on debt that did not deserve it.
Thornburg made "jumbo" home loans, larger than $417,000, to borrowers considered good credit risks, but collapsed after margin calls and a plunge in the value of mortgages it held.
The Santa Fe, New Mexico-based lender filed for bankruptcy on May 1, 2009, and is now called TMST Inc.
LIMITED DISTRIBUTION
Investors led by two pension funds, the Maryland-National Capital Park & Planning Commission Employees' Retirement System, and the Midwest Operating Engineers Pension Trust Fund in Illinois, claimed the agencies issued false and misleading investment-grade ratings for Thornburg securities, and were paid "substantial" sums that compromised their independence.
But Browning said the ratings were distributed only to a "limited group" of investors, not the public at large.
He also said that unlike publicly traded companies, the trusts from which the securities were issued were not "public figures" entitled to more protections.
"The court rejects the rating agency defendants' argument that the First Amendment protections regarding provably false opinions apply to their credit ratings," Browning wrote.
Rating agencies have largely been successful in raising the First Amendment defense.
For example, in September, a federal judge threw out a lawsuit by then-Ohio Attorney General Richard Cordray on behalf of pension funds, and said ratings were "predictive opinions."
In contrast, a Manhattan federal judge, in a 2009 ruling involving Morgan Stanley, said the defense does not apply when ratings were provided to a "select group of investors" in a private placement.
S&P has asked the U.S. Securities and Exchange Commission not to file threatened civil charges over its ratings for a 2007 offering, Delphinus CDO 2007-1.
The case is Genesee County Employees' Retirement System et al v. Thornburg Mortgage Securities Trust 2006-3 et al, U.S. District Court, District of New Mexico, No. 09-00300 [ http://dockets.justia.com/docket/new-mexico/nmdce/1:2009cv00300/181266/ ].
(Reporting by Jonathan Stempel in New York; Editing by Tim Dobbyn)
Copyright 2011 Thomson Reuters
http://www.huffingtonpost.com/2011/11/26/federal-judge-credit-rati_n_1114034.html [with comments]
===
Creative Financing Deals May Cost City $68 Million
By MATT SMITH
The Bay Citizen
Published: November 26, 2011
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 [ http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html ], 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.
msmith@baycitizen.org
*
A nonprofit, nonpartisan news organization providing local coverage of the San Francisco Bay Area for The New York Times. To join the conversation about this article, go to baycitizen.org [ http://www.baycitizen.org/transportation/story/sf-stands-lose-68-million-thanks-muni/ ; http://www.baycitizen.org/ ].
*
© 2011 The New York Times Company
http://www.nytimes.com/2011/11/27/us/creative-financing-deals-may-cost-san-francisco-68-million.html
Victor Kerlow
By CHRISTOPHER B. LEINBERGER
Published: November 25, 2011
Washington
DRIVE through any number of outer-ring suburbs in America, and you’ll see boarded-up and vacant strip malls, surrounded by vast seas of empty parking spaces. These forlorn monuments to the real estate crash are not going to come back to life, even when the economy recovers. And that’s because the demand for the housing that once supported commercial activity in many exurbs isn’t coming back, either.
By now, nearly five years after the housing crash, most Americans understand that a mortgage meltdown was the catalyst for the Great Recession, facilitated by underregulation of finance and reckless risk-taking. Less understood is the divergence between center cities and inner-ring suburbs on one hand, and the suburban fringe on the other.
It was predominantly the collapse of the car-dependent suburban fringe that caused the mortgage collapse.
In the late 1990s, high-end outer suburbs contained most of the expensive housing in the United States, as measured by price per square foot, according to data I analyzed from the Zillow real estate database. Today, the most expensive housing is in the high-density, pedestrian-friendly neighborhoods of the center city and inner suburbs. Some of the most expensive neighborhoods in their metropolitan areas are Capitol Hill in Seattle; Virginia Highland in Atlanta; German Village in Columbus, Ohio, and Logan Circle in Washington. Considered slums as recently as 30 years ago, they have been transformed by gentrification.
Simply put, there has been a profound structural shift — a reversal of what took place in the 1950s, when drivable suburbs boomed and flourished as center cities emptied and withered.
The shift is durable and lasting because of a major demographic event: the convergence of the two largest generations in American history, the baby boomers (born between 1946 and 1964) and the millennials (born between 1979 and 1996), which today represent half of the total population.
Many boomers are now empty nesters and approaching retirement. Generally this means that they will downsize their housing in the near future. Boomers want to live in a walkable urban downtown, a suburban town center or a small town, according to a recent survey by the National Association of Realtors.
The millennials are just now beginning to emerge from the nest — at least those who can afford to live on their own. This coming-of-age cohort also favors urban downtowns and suburban town centers — for lifestyle reasons and the convenience of not having to own cars.
Over all, only 12 percent of future homebuyers want the drivable suburban-fringe houses that are in such oversupply, according to the Realtors survey. This lack of demand all but guarantees continued price declines. Boomers selling their fringe housing will only add to the glut. Nothing the federal government can do will reverse this.
Many drivable-fringe house prices are now below replacement value, meaning the land under the house has no value and the sticks and bricks are worth less than they would cost to replace. This means there is no financial incentive to maintain the house; the next dollar invested will not be recouped upon resale. Many of these houses will be converted to rentals, which are rarely as well maintained as owner-occupied housing. Add the fact that the houses were built with cheap materials and methods to begin with, and you see why many fringe suburbs are turning into slums, with abandoned housing and rising crime.
The good news is that there is great pent-up demand for walkable, centrally located neighborhoods in cities like Portland, Denver, Philadelphia and Chattanooga, Tenn. The transformation of suburbia can be seen in places like Arlington County, Va., Bellevue, Wash., and Pasadena, Calif., where strip malls have been bulldozed and replaced by higher-density mixed-use developments with good transit connections.
Reinvesting in America’s built environment — which makes up a third of the country’s assets — and reviving the construction trades are vital for lifting our economic growth rate. (Disclosure: I am the president of Locus, a coalition of real estate developers and investors and a project of Smart Growth America, which supports walkable neighborhoods and transit-oriented development.)
Some critics will say that investment in the built environment risks repeating the mistake that caused the recession in the first place. That reasoning is as faulty as saying that technology should have been neglected after the dot-com bust, which precipitated the 2001 recession.
The cities and inner-ring suburbs that will be the foundation of the recovery require significant investment at a time of government retrenchment. Bus and light-rail systems, bike lanes and pedestrian improvements — what traffic engineers dismissively call “alternative transportation” — are vital. So is the repair of infrastructure like roads and bridges. Places as diverse as Los Angeles, Phoenix, Salt Lake City, Dallas, Charlotte, Denver and Washington have recently voted to pay for “alternative transportation,” mindful of the dividends to be reaped. As Congress works to reauthorize highway and transit legislation, it must give metropolitan areas greater flexibility for financing transportation, rather than mandating that the vast bulk of the money can be used only for roads.
For too long, we over-invested in the wrong places. Those retail centers and subdivisions will never be worth what they cost to build. We have to stop throwing good money after bad. It is time to instead build what the market wants: mixed-income, walkable cities and suburbs that will support the knowledge economy, promote environmental sustainability and create jobs.
Christopher B. Leinberger [ http://www.cleinberger.com/AdminHome.asp?ArticleID=207 ] is a senior fellow at the Brookings Institution and professor of practice in urban and regional planning at the University of Michigan.
*
Related in Opinion
Op-Ed Contributor: To Rethink Sprawl, Start With Offices (November 26, 2011)
http://www.nytimes.com/2011/11/26/opinion/to-rethink-sprawl-start-with-offices.html
*
© 2011 The New York Times Company
http://www.nytimes.com/2011/11/26/opinion/the-death-of-the-fringe-suburb.html
===
Federal Judge: Credit Ratings Not Always Protected Under First Amendment
by Jonathan Stempel
Reuters
First Posted: 11/26/11 10:36 AM ET Updated: 11/26/11 10:38 AM ET
A federal judge has said credit ratings are not always protected opinion under the First Amendment, a defeat for credit rating agencies in a lawsuit brought by investors who lost money on mortgage-backed securities.
The November 12 decision [at least currently at http://scholar.google.com/scholar_case?case=10301244992599592910&q=Genesee+County+Employees+Retirement+System+v.+Thornburg+Mortgage+Securities+Trust+2006-3&hl=en&as_sdt=2,44&as_vis=1 ] was a little-noticed setback for McGraw-Hill Cos' Standard & Poor's, Moody's Corp's Moody's Investors Service and Fimalac SA's Fitch Ratings, which have long invoked First Amendment free speech protection to defend against lawsuits over their ratings.
These agencies had argued that the Constitution protected them from claims they issued inflated ratings on more than $5 billion of securities issued in 2006 and 2007, and backed by loans from former Thornburg Mortgage Inc and other lenders.
But the judge said the ratings were shared with too small a group of investors to deserve the broad protection sought.
"The court rejects the rating agency defendants' arguments that the First Amendment provides any protection to them under the facts of this case," U.S. District Judge James Browning in Albuquerque, New Mexico, wrote in a 273-page opinion.
Browning nonetheless dismissed claims accusing Moody's and Fitch, but not S&P, of misrepresentations, saying the investors did not adequately allege that the two agencies did not believe their ratings, or knowingly concealed their inaccuracy.
He also said federal law preempts some arguments that the investors used to recover under New Mexico securities law.
The judge said the investors may file an amended complaint, which had sought class-action status. If the state law claims went forward, it could provide an avenue for investors to go after the agencies in other states.
Browning had denied the agencies' motion to dismiss the complaint on September 30, without giving reasons.
S&P, in a statement, called the First Amendment ruling "inconsistent" with other court rulings. Fitch spokesman Daniel Noonan said that agency is pleased that claims against it were dismissed. Moody's and lawyers for the investors declined to comment or had no immediate comment.
Credit Suisse Group AG and Royal Bank of Scotland Group Plc are among the other defendants in the case.
Rating agencies have been widely faulted by investors, regulators and Congress for contributing to the global credit and financial crises that began in 2007 by issuing high ratings on debt that did not deserve it.
Thornburg made "jumbo" home loans, larger than $417,000, to borrowers considered good credit risks, but collapsed after margin calls and a plunge in the value of mortgages it held.
The Santa Fe, New Mexico-based lender filed for bankruptcy on May 1, 2009, and is now called TMST Inc.
LIMITED DISTRIBUTION
Investors led by two pension funds, the Maryland-National Capital Park & Planning Commission Employees' Retirement System, and the Midwest Operating Engineers Pension Trust Fund in Illinois, claimed the agencies issued false and misleading investment-grade ratings for Thornburg securities, and were paid "substantial" sums that compromised their independence.
But Browning said the ratings were distributed only to a "limited group" of investors, not the public at large.
He also said that unlike publicly traded companies, the trusts from which the securities were issued were not "public figures" entitled to more protections.
"The court rejects the rating agency defendants' argument that the First Amendment protections regarding provably false opinions apply to their credit ratings," Browning wrote.
Rating agencies have largely been successful in raising the First Amendment defense.
For example, in September, a federal judge threw out a lawsuit by then-Ohio Attorney General Richard Cordray on behalf of pension funds, and said ratings were "predictive opinions."
In contrast, a Manhattan federal judge, in a 2009 ruling involving Morgan Stanley, said the defense does not apply when ratings were provided to a "select group of investors" in a private placement.
S&P has asked the U.S. Securities and Exchange Commission not to file threatened civil charges over its ratings for a 2007 offering, Delphinus CDO 2007-1.
The case is Genesee County Employees' Retirement System et al v. Thornburg Mortgage Securities Trust 2006-3 et al, U.S. District Court, District of New Mexico, No. 09-00300 [ http://dockets.justia.com/docket/new-mexico/nmdce/1:2009cv00300/181266/ ].
(Reporting by Jonathan Stempel in New York; Editing by Tim Dobbyn)
Copyright 2011 Thomson Reuters
http://www.huffingtonpost.com/2011/11/26/federal-judge-credit-rati_n_1114034.html [with comments]
===
Creative Financing Deals May Cost City $68 Million
By MATT SMITH
The Bay Citizen
Published: November 26, 2011
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 [ http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html ], 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.
msmith@baycitizen.org
*
A nonprofit, nonpartisan news organization providing local coverage of the San Francisco Bay Area for The New York Times. To join the conversation about this article, go to baycitizen.org [ http://www.baycitizen.org/transportation/story/sf-stands-lose-68-million-thanks-muni/ ; http://www.baycitizen.org/ ].
*
© 2011 The New York Times Company
http://www.nytimes.com/2011/11/27/us/creative-financing-deals-may-cost-san-francisco-68-million.html
Greensburg, KS - 5/4/07
"Eternal vigilance is the price of Liberty."
from John Philpot Curran, Speech
upon the Right of Election, 1790
F6
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