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Arthur Schaper: Game Over on 38 Studios

Friday, May 16, 2014

 

Crime and corruption in Rhode Island are nothing new, but the 38 Studios debt is no game either, believes Arthur Schaper.

38 Studios was never a good idea. Any time that a government offers a loan to a private firm, expect nothing but trouble. The government does not have wealth of its own. Everything from the state house to city hall comes out of the coffers and wallets of small businesses and private citizens.

So, any time that the state wants to push a loan for anything, one party lends another party’s money to a third party. Not much for the third party, since they get stuck with the bill.

I was saddened that Republicans as well as Democrats supported granting a loan to any company. In desperate times, desperate measures are the last thing that lawmakers and leaders should be looking for.

At any rate, the game began, has come to an end, and the Rhode Island taxpayers are stuck with “Game Over”.

Or are they?

Local media invited the six Rhode Island gubernatorial candidates to state their plans for 38 Studios (“To Pay or Not to Pay”?). Putting aside the press releases, I contacted local leaders already in power. US Senators Jack Reed and Sheldon Whitehouse’s offices had no statement on 38 Studios. Whitehouse worries too much about climate change, and Reed must be working on that next trip to Afghanistan. Potential US Senate challenger Raymond McKay said “no” to loan payback.

Congressman Jim Langevin’s office had no release when I called them, but staff agreed to return my calls. When I contacted Rep. David Cicilline’s office about 38 Studios, his staff responded that he had not issued a statement on the deal.

Besides “It’s not my fault”, Cicilline had nothing to say about Providence’s financial straits. Why would he have anything to say about 38 Studios?

Republican candidates for governor, Allan Fung and Ken Block, both oppose paying the bonds.

Providence mayor and gubernatorial candidate Angel Taveras’s campaign did not return any calls. One staffer for Treasurer Gina Raimondo’s gubernatorial campaign office referred to a recently published statement, in which she affirmed her opposition to the loan from the beginning, yet at the same time argued that the state has to pay back the bonds or face worse consequences.

Clay Pell’s office issued this statement:

Clay does not believe Rhode Island should default on its moral obligation bonds when they come due. 38 Studios was a terrible mistake - and another example of why we need to change the culture of politics in Rhode Island.

Pell the Democrat (the same party ruining the state) wants to change the politics. Really?

Clay is running for Governor to help Rhode Island seize the future, and the first step is restoring faith in state government. That's why he's pledged not to accept contributions from PACs and state lobbyists, why he released an unprecedented five years of his tax returns, and why he's rolling out a policy platform focused on long-term planning for a prosperous future.

Been there, heard that. Not more faith in government, but less government is the way to go.

In the meantime, Clay believes the state must strongly pursue recovery of its original investment to the fullest extent of the law.

Fair enough, but at what cost?

Cormick Lynch returned no comments by press time. Stan Tran, also running to replace Congressman David Cicilline, shared his thoughts on the Video Game Company gone bad:

The politicians clearly screwed up on in this case. Not just negligence but perhaps criminally - people are speculating that this is one of the focus of the FBI probe.

There are consequences when we screw up.

Excuse me? Who’s “we”? Not the taxpayers, certainly.

Either we take money away from needed services to pay back the loan, or default and have our credit rating tank, which will hurt us in the long run with being able to borrow money to build infrastructure. The financial cost of having a non-investment grade rating, aka "junk" rating, is much more than paying back the loans. Therefore I support repaying the loans, and voting these legislators out of office. It's the smart thing to do.

Rep. Mike Chippendale (R-Foster) differed extensively with this analysis:

There is no way we should be paying these bonds. We are not legally obligated to, we certainly are not "morally" obligated to, and we are being stonewalled by the Chafee administration regarding payment and I do not yet know why.

The moral obligation, by the way, rests on the fact that Rhode Island voters never supported them. Chippendale has investigated the waste and fraud associated with the state health care exchange. After indicting officials who only announced what Governor Chafee wanted to hear, Chippendale added:

I am currently in the middle of putting together a complete analysis of the bid... this has now reached Watergate proportions relative to the severity of the crime compared to the massive coverup surrounding it....

Crime and corruption in Rhode Island are nothing new, but the 38 Studios debt is no damn game, either. Democrats want to pay (with other people’s money). Republicans say “No way”. That division should signal who to vote for in 2014 (hint: the people who think that you, Rhode Islanders, should not pay for the state's bad loans).

 

Arthur Christopher Schaper is a teacher-turned-writer on topics both timeless and timely; political, cultural, and eternal. A life-long Southern California resident, Arthur currently lives in Torrance. Follow him on Twitter @ArthurCSchaper, reach him at [email protected], and read more at Schaper's Corner and As He Is, So Are We Ministries.

 

Related Slideshow: Who Wants to Pay and Who Wants to Default on the 38 Studios’ Bonds

GoLocalProv showcases which Rhode Island politicians and organizations want to pay or default on the 38 Studios' Bonds.

Prev Next

CON

Allan Fung

Republican candidate for Governor

“I am repeating my opposition to the 38 Studios loan guaranty and to the use of taxpayer dollars to repay those moral obligation bonds.”

Prev Next

CON

Ken Block

Republican candidate for Governor

“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better...As long as there are serious legal questions still to be decided, we need to stop the repayment process."

Prev Next

PRO

RIPEC

John Simmons, executive director of the Rhode Island Public Expenditure Council

“We’re not going to punish anybody but ourselves if we don’t pay."

Prev Next

PRO

Greater Providence Chamber of Commerce

Laurie White, President of Chamber of Commerce

“I think it’s important that action occur quickly. Our view is that economic development in Rhode Island has to be the main event. … We need a very dramatic, aggressive effort to change the path that we’re on.”

Prev Next

PRO

Gina Raimondo

Democratic candidate for Governor

“Despite my frustration with everything surrounding this transaction, I believe it is in the best long-term interest of the state and all taxpayers to repay these bonds."

Prev Next

PRO

Clay Pell

Democratic candidate for Governor

“Clay does not believe Rhode Island should default on its moral obligation bonds when they come due. 38 Studios was a terrible mistake — and another example of why we need to change the culture of politics in Rhode Island"-Devin Driscol.

Prev Next

PRO

Angel Taveras

Democratic candidate for Governor

“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain. We cannot afford to default on our obligations.”

Prev Next

PRO

Lincoln Chafee

Governor of Rhode Island

“The candidates who can’t understand these two obvious truths are unfit to be Governor. The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to ‘junk bond’ status. We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island. In addition, failure to honor our obligations could have harmful effects on the pending lawsuit.”

Prev Next

CON

Mike Stenhouse, CEO of RI Center for Freedom and Prosperity

"It's not just about not paying off bondholders.  Bondholders are adults, they knew the risk.  It's not just a question of the credit agencies.  It's a question of what would payment crowd out, what reforms could we achieve with that money, such as sales tax reform, which would enable us to create jobs."

Prev Next

CON

Mike Riley

2012 Republican candidate for the 2nd Congressional District of Rhode Island.

"If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies."

Prev Next

PRO

Professor Ed Mazze

Professor of business at University of Rhode Island

"Even though this is a moral obligation in terms of the way the financial deal is set up I still feel the state has an obligation to the bondholders, to make good on their payments."

 
 

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Comments:

Democrats want to pay (with other people’s money). Republicans say “No way”. That division should signal who to vote for in 2014

Spot on.

Comment #1 by Jimmy LaRouche on 2014 05 16

Yes, and when the state's credit rating goes into "junk" status and it costs the state millions or billions more over the next decade in interest because of that, I suppose you'll keep your mouth shut about that? I doubt it. As nice as it sounds to just default on this loan, in the long run it will hurt the state more. Since you don't live here, maybe you should try minding your own business when it comes to financial matters Arthur. You're a gadfly pure and simple. You buzz around with articles like this egging everyone on and getting people worked up, while you sit in California where you won't be affected in any way. You hail the Republicans as the saviors here because that's who you always shill for. I have one question for you though. Why do you care? Honestly. What do you have to gain? Your bio states you're a life long resident of California, yet you spend your time writing about RI and what's wrong here. So, a legitimate question is, what's in it for you? Why do you get involved in the politics of a state 3000 miles away from you. Maybe if we know why you write these columns about things that don't affect you, we'll get a glimpse into your real agenda.

Comment #2 by Phil Paulson on 2014 05 16

A state with a population of 1 million and a budget of $8.2 billion would do well to stop borrowing money in the first place. If we can't get by on $8.2 billion, then something is seriously wrong.

If the huffing and puffing Standard & Poor's wants to downgrade our credit rating, so what? It might help get us off the borrowing addiction and restore some fiscal sanity. Of course, that could lessen the influx of cash that the government insiders could pilfer and divert to their cronies.

Comment #3 by Art West on 2014 05 16

Art, Exactly

Phil, disagree with the writer, but don't try to silence those with views other than your own. I don't think there will be a material affect on our borrowing (hell even Detroit is borrowing again) but if we stop borrowing good. Lets live within our means. If we can't afford it with today's revenues we shouldn't be borrowing.

Comment #4 by Redd Ratt on 2014 05 16

I commend the RIEDC Board for its EXTENSIVE DUE DILIGENCE and for taking this significant step to bring jobs to Rhode Island," Don Carcieri said the night the agency approved the loan to Carcieri's fellow small government conservative Republican Curt Schilling.

EXTENSIVE DUE DILIGENCE ! ...LOL

Rhode Island's director of revenue said she "was not in favor" of the 38 Studios deal and and expressed those concerns DIRECTLY to then-Gov. Don Carcieri.
Gov. Carcieri still won't face taxpayers despite the stunning implosion of the $75 million loan guarantee he got them to give Curt Schilling's video game company,

Comment #5 by Sammy Arizona on 2014 05 16

A question for Mr Schaper, many folks here in Rhode Island would like to know at what school were you a teacher ? What subjects could you possibly be qualified to teach? Why did you leave such a noble profession? And what were the circumstances of your leaving-termination ?
Inquiring minds would like to know.

Comment #6 by Sammy Arizona on 2014 05 16

UPDATE:

Republican Congressional candidate Cormick Lynch released the following statement on 38 Studios:

"It is to no surprise Governor Lincoln Chafee expects the tax payer to burden the cost of the government funded failure that was 38 Studios, as he expects them to absorb the cost of every other government failure. He is the Chief Executive of a State that has the highest unemployment rate in the country, a state in which people are fleeing at such an alarming rate we will lose one of our two seats in the US House of Representatives by the time the 2020 census is released. We have the highest corporate tax rate in the country, we are a well known deterrent for private sector investment because of the outrageous costs of doing business here and all of a sudden Governor Chafee is concerned about our long term reputation and our business climate? He has been an enemy to our credibility since the day he took office and he is the last person that should be critical of Mayor Fung and Ken Block as they both take a stance to guard the Rhode Island tax payer, a noble position that is long overdue in this state.


"The fact of the matter is the tax payer has already been misrepresented, disrespected and mislead by the way this debt was issued, via a moral obligation bond, which circumvented the approval of the people into funding a risky venture that went bankrupt. Furthermore, the bondholders knew full well this debt was not backed by the full faith and trust of the State of Rhode Island and our ability to levy taxes and those conditions should have been priced into the rate of the bond at issuance. The tax payers did not consent to this investment in the first place because the government evaded a public approval they new they could not get by utilizing a moral obligation bond as the investment vehicle. Why should the tax payer now be forced to pay the cost of that failed investment when they did not agree to funding it in the first place? My position is they should not."

Comment #7 by Arthur Schaper on 2014 05 16

UPDATE:

Mayor Allan Fung's campaign released the following press release regarding 38 Studios:

FOR IMMEDIATE RELEASE
May 13, 2014
Contact: Patrick Sweeney 401.935.6108

FUNG RESPONDS: CHAFEE UNFIT TO SPEAK FOR RI TAXPAYERS
Support from Governor Chafee and His 38 Studios Allies Would Add to Burden on RI Families

Cranston -- Mayor Allan Fung today responded to a partisan attack launched by Governor Lincoln Chafee questioning Fung’s ability to understand the arguments offered by Chafee to justify repayment of the 38 Studios bonds. Fung has consistently opposed repayment of the bonds, given the tremendous cost to taxpayers, the absence of a legal obligation to make the payments, and a lack of evidence that failure to repay would substantially limit the State’s ability to issue any general obligation bonds in the future.

“The lack of understanding begins with Governor Chafee,” asserted Fung, “whose commitment to the institutional bondholders and other financial elites far outweighs his concern for the average Rhode Island taxpayer. While the Governor claims repayment is necessary to continue Rhode Island’s ‘economic recovery’ he doesn’t seem to understand that we still have the highest unemployment rate and one of the highest overall tax burdens of any state in the nation. Taxpayers simply cannot afford this added burden. Elected officials in Rhode Island must put a stop to the insider deals and out of control spending if we are ever to restore our economy and get the state back on track.”

“As Mayor, I have focused on cutting the cost of government and keeping taxes as low as possible,” continued Fung. “We have had three consecutive years without a tax increase, brought more than 1,000 new jobs to the city and today, Cranston has an ‘A’ bond rating with all three credit rating agencies.”

"The Chafee administration commissioned a report that offered a number of alarmist conclusions, which Fung has labeled as speculative and not based in sound research. “The most important information is missing from this discussion, which is the reaction of those who purchase our state’s general obligation bonds,” continued Fung. “I will not risk millions of dollars of taxpayer money on sensational speculation and I simply do not understand Governor Chafee’s disregard for taxpayers,” concluded Fung.

###

Comment #8 by Arthur Schaper on 2014 05 16

UPDATE:

A contact with the Ken Block campaign directed me to his website, where the latest information regarding 38 Studios reads:

http://www.blockforgovernor.com/

Press Release: Ken Block: 38 Studios-style MOBs will end under my administration / Bond deal demonstrates rigged Wall Street game






Warwick, RI - Republican candidate for Governor Ken Block issued a statement today regarding 38 Studios and the broader use of moral obligation bonds.


“The use of moral obligation bonds will cease to exist when I am elected Governor,” said Block. “These types of bonds make no sense: Rhode Island is paying a higher rate of interest for no good reason at all. On top of that, moral obligation bonds allow politicians to bypass voters and loan public money to projects that would never gain public approval.”

Moral obligation bonds are different from general obligation bonds because the voters of Rhode Island do not approve them and there is no legal requirement to pay them. They are also subject to higher interest rates.

“The rating agencies are claiming that there is no difference between repaying general obligation bonds and moral obligation bonds in terms of the impact on the state’s credit rating,” said Block. “This begs the crucial question: if there is no risk of default, as is the case for general obligation bonds, then how come Rhode Island was not able to borrow at a lower rate of interest, as is the case for general obligation bonds? There is no reasonable answer: this system simply makes no sense.”

Even S&J Advisors, authors of an alarmist report in favor of repayment, acknowledged that “the rates on the 38 Studios Bonds seem quite high (especially for bonds rated AA+ by S&P and Aa3 by Moody’s due to the insurance policy by Assured Guaranty).”

Block said that repaying the 38 Studios Bonds is an issue that stretches beyond Rhode Island.

“This issue concerns the borrowing practices of municipalities, counties, and states across the country,” Block said. “We are all playing a rigged game where taxpayers pay higher rates of interest for no justifiable reason. Wall Street has created a system where excessive interest rates are charged and the rating agencies are used to prop up this scam.”

Block also pointed to deeply corrupt practices at the big three rating agencies during the lead up to the financial crisis, as reported by CBS, the New York Times, Business Insider, Huffington Post, and Rolling Stone Magazine.

“It’s very difficult to understand how the rating agencies have retained any credibility in light of their awful performance during the recession,” said Block.

In recent interviews, rating agencies have struggled to explain their rationale around the 38 Studios issue.

“Career politicians like using moral obligation bonds because they can spend money on whatever they want without any check or balance by the taxpayers.” Block said. “The corruption around 38 Studios shows exactly why political insiders need moral obligation bonds, because Rhode Island voters would never have approved general obligation bonds for this project. Wall Street insiders use moral obligation bonds to line their pockets at the expense of taxpayers across the country. They charge higher interest on these bonds than on taxpayer approved bonds, and then blackmail governments into treating them exactly the same.”

Comment #9 by Arthur Schaper on 2014 05 16

This email just came in, and it was highly opinionated and unsubstantiated in its criticism:

"I read your highly opinionated and unsubstantiated rant about 38 Studios. While I agree that it was a dumb idea, how on earth did you come to the conclusion it was the Democrats' policy? Didn't Governor Carcieri come up with the idea, and aren't he and Curt Schilling Republicans?

"No wonder the rest of your essay makes no sense. Having a good grasp of reality is first step in making sense."

Unfortunately, this individual did not read this part:

"I was saddened that Republicans as well as Democrats supported granting a loan to any company. In desperate times, desperate measures are the last thing that lawmakers and leaders should be looking for."

Both parties voted for this deal. Rhode Islanders had reminded me of this.

In a prior piece, I faulted Carcieri first and foremost:

http://www.golocalprov.com/politics/arthur-schaper-the-politics-of-38-studios-junk/

"Who pressed the start button on this dumb idea? Sharing his side of the story on WPRI news with Tim White on September 2012, former Republican Governor Donald Carcieri, who had championed the deal, shared: “We all felt, we were all excited.” Yes, the powers that were had a good feeling that a high-risk venture in video gaming would save Rhode Island."

As I have written in the past, I will do so again:

"Please read before you screed."

Thanks again!

Comment #10 by Arthur Schaper on 2014 05 16

"I was saddened that Republicans as well as Democrats supported granting a loan to any company". yes you did say that, but you also state that, "Democrats want to pay (with other people’s money). Republicans say “No way”. That division should signal who to vote for in 2014 (hint: the people who think that you, Rhode Islanders, should not pay for the state's bad loans)."

So, both parties are to blame, but only the Republicans are fit to fix this? These guys claim they will not pay for this if elected? Well, I guess if they say something when they're running that's a guarantee that they will do it if elected. Please. Give me a break.

So Arthur, can you answer the questions I posed earlier? Why do you care so much about what happens in RI, and why should we care about your opinion since you have no dog in this fight? You have nothing to lose if the wrong decision is made here. Why do you care what happens in a small state 3000 miles away from you. As a Republican, isn't there enough for you to complain about in your own Democratic state of California? What is your agenda here? Why continue to complain about things in RI when you've never lived here? Why this state? Why not complain about Oregon?

Comment #11 by Phil Paulson on 2014 05 16

Again....
A question for Mr Schaper, many folks here in Rhode Island would like to know at what school were you a teacher ? What subjects could you possibly be qualified to teach? Why did you leave such a noble profession? And what were the circumstances of your leaving-termination ?
Inquiring minds would like to know.

Comment #12 by Sammy Arizona on 2014 05 17

I'd liked to know, Sammy-boy what makes you think YOU have a mind?

Comment #13 by G Godot on 2014 05 17

Don't expect any answers. We've seen this pattern before. He won't answer my questions either.

Comment #14 by Phil Paulson on 2014 05 17




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