Dec. 10 (Bloomberg) -- Montana Democratic Senator Max Baucus said a provision in the $15 billion bailout for U.S. automakers that helps transit agencies must be removed from the legislation.

Baucus, chairman of the Finance Committee, echoed Iowa Senator Charles Grassley’s criticisms of a provision intended to help state and municipal transit agencies that have been left owing billions to banks that leased rail cars, buses and other equipment as part of a now-illegal tax shelter.

The legislation currently contains a provision that would allow the Treasury Department to guarantee the deals, originally backed by insurers such as American International Group Inc. and Ambac Financial Group Inc.

Grassley yesterday called the provision “offensive” and said it would have the “perverse” effect of having the federal government ultimately pay off the users of the tax shelter, known as a sale-in-lease-out, or SILO.

“Senator Grassley and I shut down their tax loophole, and now the banks want to sue the transit agencies to make their money anyway,” Baucus said today. “That’s wrong -- but paying the banks off with federal dollars is not the right way to respond. Congress must not let these banks game the system further and siphon more cash off taxpayers.”

“This provision must be stripped from the auto bill,” he said.

Baucus’s vote on the bailout bill is important because Senate Democrats need every vote they can find. He didn’t say whether his objection to the provision meant he would oppose the broader bill if the provision isn’t removed.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

Last Updated: December 10, 2008 11:14 EST