Alexander Hamilton's legacy in jeopardy from transit agencies (EDITORIAL)

American transit agency managers are a shabby bunch of shameless scroungers. Used to squeezing money out of everybody but willing customers prepared to pay their way, they are masters of milking the taxpayer via all manner of government handouts and charlatanry.

Their latest ploy is to try to get the courts to bail them out of  'innovative' financing projects gone bad - super-clever schemes that seemed to conjure up billions of dollars for transit cars and buses in slick tax avoidance lease-back deals at favorable interest charges and supposedly negligible default risk - the kinds of clever nonsense that earned Bond Buyer "Deals of the Year" awards in the anything-goes years up to about 2005.

Investors are well aware of the inability of US transit agencies to pay their way by doing honest business with customers and their dependence on earmarks and other imposts on taxpayers and the uncertainty of it all. Unlike tollroads there are no dependable revenue streams from customers to be relied on for security, so they require backing for loans by a AAA-rated firm.

The financing contracts at the center of these deals, which the transit agencies said saved them hundreds of millions of dollars, specified that if they couldn't maintain AAA-rated bond insurance the lenders could call the loans. One or two lenders are calling loans, the one getting the most publicity being a little known bank based in Belgium named KBC. It has called $43m of Washington metro (WMATA) loans no longer backed according to the terms of the loan contract with the collapse of AIG.

WMATA wants to welsh on the deal and is refusing payment. This transit agency which runs buses and trains in the Washington DC metro area is a joint powers agency of the states of Maryland, Virginia and DC. WMATA says it can't possibly make the calls on loans now due and has asked a US District Court judge to issue a restraining order. WMATA's chief financial officer said it has 14 other similar callable contracts it is exposed to for a total of $362m. She complains that paying these calls would require cutting the present year's capital spending program in half, something she says would be "devastating."

So far the judge has refused to adjudicate, ordering the parties to negotiate again.

What's at stake however is much more than the reputation of US transit agencies, obviously already in the pits, but the integrity of US law. If transit agencies can get US courts to overthrow these contracts then the US as an honorable place to invest and do business will take a terrible blow. The transit agencies don't allege any wrongdoing by the lenders. They acknowledge they signed these contracts including the now inconvenient call options with their eyes wide open.

The calls are now awkward so they want the courts' sanction to welsh.

America's first treasury secretary Alexander Hamilton (1756 - 1804) tackled this issue head on in the aftermath of the revolutionary war when there was still no real US Government, just a bunch of financially deadbeat states floating their own bonds and printing money in profligate fashion, many ready to renounce their debts. In his Report on the Public Credit and in his famous dinner deal with James Madison over the location of the federal capital on the Potomac River, Hamilton gained southern support for US Government "assumption" of state debt which passed the House July 26 1790.

The US Government's willingness to stand behind the revolutionary war debt of all the states plus the "contracts clause" of the US Constitution (Article 1, Section 10, Clause 1) laid the basis for the America's high credit rating and attractiveness to international capital ever since. The Constitution's contracts clause prohibits any state government from passing any law "impairing the obligation of contracts."

Scurillous public transit agencies like WMATA threaten this invaluable Hamiltonian heritage just when we need it most - Editor.

TOLLROADSnews 2008-11-13