German Local Authorities Blame Wall Street For Potential Losses

by Ulrika Lomas, Tax-News.com, Brussels

23 March 2009

The unraveling of scores of complex financial transactions involving, by some reports, up to 800 local authorities in Germany is threatening to provide not only huge wealth to the lawyers, but also a wealth of ammunition for political opponents of the governing bodies responsible for embroiling local authority finances in the international credit crisis. Several German newspapers project financial losses of hundreds of millions of euros for cities such as Berlin, Leipzig, Nuremberg and Wuppertal. Many of these transactions were guaranteed by US insurer AIG and other failing US financial institutions.

The financings involved are so-called Cross Border Leases (CBLs), whereby local authorities sold and leased back public assets such as drains, sewage plants and other waterworks, waste incineration plants and public transport rolling stock. This was supposed to provide exceptionally cheap financing, since the purchasers in the USA used their 'investment' as an expense to offset against their income tax liabilities.

As early as 2004 the US IRS banned all future financings of this kind, deciding that these were ineligible quasi-investments, designed purely to avoid tax, and that the benefits and liabilities of ownership remained in all but name with the German local authorities. This culminated in a lawsuit brought by AWG Leasing Trust against the IRS to regain their tax concessions on a CBL of a waste incineration plant in Wuppertal. In May 2008, the US courts upheld the IRS view and the IRS proceeded to demand that all such CBLs should be wound up by the end of 2008. It is however thought that, because of the international credit crisis, actually winding them up will take much longer.

The financings involved legal documentation in some cases of more than 1000 pages in English and the local treasurers and politicians are now accused of accepting sumptuous hospitality in the USA whilst signing documents they barely understood and possibly had not even read. They are thought to involve numerous penalty clauses that impose the costs of unraveling the CBLs on the German cities. This situation has become even more critical because the US investors are thought to have the right to demand of the German lessees that they make good any loss for security if a guarantor's credit standing were to lose AAA rating. This is of course the case with AIG and many other US institutions that stood in as guarantor. One German City, Nuremberg, has already felt it necessary to put up USD68m cash collateral, in the form of federal bonds, in response to the onerous legal clauses.

German newspapers cite this as a further example of the failure of the anglo-saxon free trade economic model and claim that the simple German taxpayer must now not only foot the bill for 'toxic assets', but also for 'toxic lenders'.

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