Moore: Unlike RI, Puerto Rico Takes on Ratings Agencies

Monday, January 11, 2016


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The big reason Rhode Islanders are given for the fact that they have to pay for the potentially fraudulent 38 studios bonds, is that failing to do so could hurt the state’s bond rating.

Both Governor Gina Raimondo and House Speaker Nicholas Mattiello have attempted to argue, not without success, that if the state of Rhode Island were to decline to pay the 38 Studios bonds, which it is not even legally obligated to do, the state would be punished by the mighty ratings agencies. That would, in turn, cost Rhode Island more in the long run, due to increased borrowing costs.

But if you buy that reasoning, you should consider yourself gullible. The logic is based on the premise that the ratings agencies, chiefly Moody’s and Standard & Poor’s, are these highly respected institutions that bond buyers rely upon. The premise couldn’t be further from the truth.

Savvy lenders understand that the opinions of the major ratings agencies are to be taken with a grain of salt, and instead employ their own researchers. Even if the ratings agencies were to try and bully Rhode Island, the state would still get decent borrowing rates from lenders. And does anyone really think the Governor actually cares about our bond rating given the fact that she is poised to add another billion in debt to the state?

Bad Reputations

While the ratings agencies already have poor reputations, this last week, in particular, was a particularly bad week in the national press for the ratings agencies. First, the New York Times came out with a scathing article, which asserted that the ratings agencies haven’t made significant reforms to stem the problems that led to their role in the financial crisis of 2008.

 Who can forget the fact that the major ratings agencies rated the mortgage backed securities, which really weren’t worth the paper they were printed on, very highly? The New York Times article, written by Gretchen Morgensen, points out that according to a new SEC report, the ratings agencies are taking part in many of the same practices that helped cause The Great Recession.

“Eight years after these companies were found to have put profits ahead of principle when they assigned high grades to low-quality debt securities, some of the same dubious practices continue to infect their operations,” the article states.

Same Issues Remain

As the article explains, the bond issuers pay the ratings agencies to rate their bonds. In typical fashion, it’s almost always a case of consultants telling their clients what they want to hear. If that’s not a conflict of interest, than there is no such thing as a conflict of interest.

And when things go wrong, the rating agencies, in their own defense, state that their ratings are just opinions—no different than the editorial pages of a newspaper. To an extent, they’re right. It’s the market, what people are willing to charge the states and companies in order to loan them money, which sets the actual bond rates.

But to listen to Raimondo or Mattiello, one would think that the ratings agencies are all powerful. Due to their might, they said, we had to pay the 38 studios bonds even though we don’t actually owe the money.

Political Spin

Not all politicians spin things that way. Instead of bowing down to the agencies, like Raimondo does, Alejandro Garcia Padilla, The Governor of Puerto Rico, took aim at the ratings agencies, according to an article published in the Spanish Language publication, by Nydia Bauza. (Now, the major ratings agencies are seeking to inflict pain on Puerto Rico, which is struggling under a massive debt crisis.) 

"Where were they when Puerto Rico took the money without being able to pay? Where was Moody's?  Where was Standard & Poor's and Fitch…? They were in the attitude that led to the bankruptcy of Enron, fraud Lehman Brothers: looking away and now want to be rude to Puerto Rico, when all these bond issues, which were made…” (Translated to English)

Where’s the Courage?

The same type of malfeasance was done to Rhode Island in order to make the 38 Studios Fiasco a reality. The bond ratings agencies rated the 38 Studios bonds highly, likely in an attempt to make them attractive to investors. It worked.

The rest is history. Of course the ratings agencies didn’t want to see the bonds not get paid. All that would do would be to draw attention to another colossal mistake by the agencies.

If Rhode Islanders were well served, the bonds wouldn’t have been paid just to cower to the ratings agencies, or to satisfy wealthy Wall Street types, or to prevent a real investigation into what actually happened.

The time has come for Rhode Islanders to demand real answers as to what brought forth the 38 studios nightmare, and stop accepting half baked explanations as to why we need to pay the debt.

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Russell Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Send him email at [email protected] Follow him on twitter @russmoore713.


Related Slideshow: Who Should Be Subpoenaed in 38 Studios Hearings

See the seven that should be subpoenaed to testify on 38 Studios.

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Chief of Staff to the Speaker, Frank Anzeveno

The former legislator was the go-to staff member who coordinated the Speaker’s office and was deeply involved with the management of legislation.

As GoLocal described him in 2012, “Nothing gets done in the House without a nod from Speaker Fox’s Chief of Staff, who has to play a prominent role in deciding which legislation even makes it to the Speaker’s desk and also which legislators need to be punished for not kissing the ring of leadership. He’s been successful so far. Anzeveno has helped Fox avoid much conflict with his chamber, even when he had a lot of unhappy members during controversial debates over pension reform and same-sex marriage last year."

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Ruth Desmarais, formerly Fox’s Personal Secretary

Desmarais was Fox’s personal secretary in the Speaker’s office and his scheduler.  “If you wanted to see Fox you had to go through Ruthie” was the saying in the State House.

When the Feds were looking for key Fox documents, they first went to Desmarais’ home in East Providence seeking key documents.

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Steven Costantino, Presently Commissioner of the Department of Vermont Health Access

The former Chair of the House Finance Committee was politically adjoined at the hip with Speaker Gordon Fox.

In the recent documents released in the state's 38 Studios lawsuit, an email from EDC legal council Robert Stolzman in April 2010  -- before the legislation was introduced to create the job creation program that enabled 38 Studios - shows that "at the suggestion of [Chairman] Costantino]" the program's size was increased from $50 million to $125 million. 

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Curt Schilling, Founder of 38 Studios

The former Red Sox great can outline the timeline of the meetings with Fox, Mike Corso and former Speaker Bill Murphy -- but to date, has not.

Schilling knows the timeline, the promises, and at a minimum, some of the details of the deal within the deal.

It is clear that Schilling may have been the second largest financial loser in the collapse of 38 Studios (to the State of Rhode Island). 

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Tom Zaccagnino, Financier

Zaccagnino, a Massachusetts financier, along with the ultimate Rhode Island insider Mike Corso were meeting and working on a deal to bring 38 Studios to Rhode Island at its earliest stages.

Communications between Zaccagnino and Corso started in the summer of 2009, months before the inception of the deal were publicly reported. Zaccagnino, a former Yale lacrosse great, was the deal-maker in bringing together 38 Studios and his ability to get Rhode Island to create a $75 million loan fund.  By working with Corso, Zaccagnino had access directly to Speaker of the House Gordon Fox. 

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Michael Corso, Lawyer and Tax Credit Broker

Corso was the architect of the 38 Studios deal and made millions putting the deal together. 

In his deposition in the State’s lawsuit, he pled the 5th hundreds of times to questions ranging from the timeframe of the deal, his role, and his personal relationship with Fox.

Corso over the past two decades has been able to use his relationships and political connections to make millions in fees from historic tax credits, payments on the 38 Studios deal, and movie tax credits -- all taxpayer sponsored programs. His success in part was fueled by his close relationship with Gordon Fox, the former Speaker of the House and now an inmate in federal prison. 

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Gordon Fox, Former Speaker, Now Inmate in Federal Prison

Presently, the former Speaker is serving his three year sentence at Canaan Federal Penitentiary in PA. Like Corso, Fox refused to answer any questions during the course of his deposition in the State’s lawsuit.

Fox evoked the 5th Amendment approximately 800 times.

The former Speaker says he is a good person who made mistakes. He could begin the reform process by appearing before his former Chamber and explaining what happened in the deal creation for 38 Studios.


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