Washington transit agency at risk in AIG fallout

WASHINGTON Oct 30 (Reuters) - Washington, D.C.'s transit agency won a slight reprieve on Thursday from having to pay millions on a defaulted financing deal, which many fear could escalate and cost U.S. public transportation groups up to $16 billion on exposure to other soured financing.

Belgian KBC Bank (KBC.BR) held a "lease-back" contract with the Washington Metro Area Transit Agency (WMATA) that was guaranteed by troubled American International Group (AIG.N). But when the insurer's ratings were downgraded the contract was considered in default, allowing KBC to collect a penalty payment of $40 million it expected on Oct. 31.

But KBC agreed in court on Thursday not to press ahead with its claim for 10 business days, after the WMATA had asked the U.S. District Court of Washington, D.C. to issue a restraining order. WMATA also filed a preliminary injunction, which will be heard Nov. 12.

WMATA, along with other transit agencies and leaders in the U.S. Congress, are asking the U.S. Treasury and Federal Reserve to open the $700 billion government rescue package to the country's transit agencies.

According to a letter sent by House leaders to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, as many as 30 agencies are at risk of default or collapse due to "lease-back" contracts. The transit sector's total exposure could be up to $16 billion, the letter said.

In "lease-back" arrangements, a city sells its municipal properties to a bank or insurance company and then leases them back. But the practice has raised eyebrows with the Internal Revenue Service, which believes illegal profits are gained in such deals.

Speaker of the House of Representatives Nancy Pelosi, a California Democrat, called Paulson on Thursday to emphasize the seriousness of the problem, Rep. Chris Van Hollen, a Democrat from Maryland, said.

"My understanding was the Secretary agreed to the Speaker's request to immediately review the situation," he told Reuters.

Van Hollen, too, has contacted the Treasury department, and said it was reviewing whether it has the legal authority under the recent economic stabilization legislation to help.

But in the meantime, if WMATA is forced on the payment to KBC Bank, the agency would immediately pay KBC $17 million out of a trust fund. AIG will have to pay a remaining $25 million that it would in turn likely recoup from the agency, said WMATA spokeswoman Candace Smith.

The agency was able to "unwind" similar deals with two other banks at minimal or no cost, but is still dealing with another 11 agreements, Carol Kissal, WMATA's chief financial officer, said.

(additional reporting by Richard Cowan; Editing by Bernard Orr)