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Rob Horowitz: Let’s Not Make the Bad 38 Studios Situation Even Worse

Tuesday, May 20, 2014


It is important that we not compound the reckless and ill-advised decision to go forward with the 38 Studios deal with another reckless and non-evidence-based decision to default on the moral obligation bonds issued to the now bankrupt video game company.

Governor Carcieri and the legislative leadership’s decision to place a speculative bet with $75 million of tax money on former Red Sox pitcher Curt Shilling’s video game company--despite the fact that the company was unable to attract a dime of private investment--was more like taking state money to Foxwoods and hoping for the best, than a hard-headed and informed economic decision.

It is understandable that people are angry and frustrated about what was a foreseeable waste of a big chunk of money. There is no excuse, however, for politicians who should know better to attempt to score cheap political points by capitalizing on the anger by advocating that the state should refuse to honor its ‘moral obligation’ and not pay back the loans.

The thin rationale that advocates of default offer is that the bonds issued in the 38 Studios case were moral obligation bonds to which there is no legal requirement of state repayment—as opposed to general obligation bonds backed by the state’s full faith and credit. They also correctly point out that the bond holders get paid a higher rate of return because of the increased risk.

What they fail to mention, even-though it has been painfully obvious since day one and confirmed by any financial expert who has looked at the situation, is that the rating agencies were not going to be reassured by that distinction and just about definitely would downgrade Rhode Island’s credit rating in the case of a default resulting in a costly boost in interest rates.

Even after Standard & Poor’s last week placed Rhode Island’s bonds on a credit watch just because there was an ongoing debate about default and an independent public finance firm retained by Governor Chafee to examine the situation warned that Rhode Island bonds would be lowered to “junk bond” status in the case of default, some default advocates continued to dig in.

The conclusion of SJ Advisors, a highly credible firm, couldn’t have been more definite.: “We expect that the rating agency reaction will be swift and severe, and that there will be a material and adverse effect on both the interest rates that the state pays when it issues debt and the market value of outstanding Rhode Island bonds,” Their form predicted that non-payment of the loans could be far more costly because of the increased interest costs on the rest of Rhode Island debt than paying them back.

The response of House Minority Leader Brian Newberry to give just one example, to this kind of information was not a change in position in light of this new evidence, but a call on the Attorney General to sue the rating agencies. I m not sure whether there was a full moon last week or not.

Some of the same people who say—and with some good evidence-that it is imperative that we improve our state’s business climate and our reputation as a difficult place to grow or start a business—are advocating the state not pay back these bonds. It is hard to see how that step can do anything but set Rhode Island’s reputation further back.

The default advocates in this case call to mind the hard line Tea Party conservatives in the national House of Representatives who brought our nation to the brink of default in 2011, believing that essentially nothing would happen if the national government failed to raise the debt ceiling.

This situation is not that dire. But the last thing Rhode Island needs is a national reputation as a state that does not pay its bills, not to mention dramatically increased borrowing costs for essential major new investments. It is time for responsible politicians to put evidence ahead of politics—and jump off the default bandwagon.

Rob Horowitz is a strategic and communications consultant who provides general consulting, public relations, direct mail services and polling for national and state issue organizations, various non-profits and elected officials and candidates. He is an Adjunct Professor of Political Science at the University of Rhode Island.


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.

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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.”

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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."

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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."

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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.”

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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."

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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.

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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.”

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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.”

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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."

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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."

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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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What drivel.

Rob, what you're advocating for is the status quo, basically saying "let's put our head in the sand and maybe this will all go away with time". And it will, until the next time.

This is so obvious to me. DO NOT PAY THIS BOGUS LOAN!

Who knows? Maybe 38 Studios would have been successful if some of that bond money didn't go to other venues like Corsos bar and who knows how many other places. That's the dig.

Who got the money?

Why isn't Carcieri speaking up?

How does Cosantino fit into this scheme?

Why are prominent dems so adamant about making the taxpayer, who had no say in this whatsoever, pay this ill conceived loan?

It makes no sense at all and that's the way those in the know want it. I want to know WHY they want it that way.

Why aren't we treating this like the insured 'moral' obligation loan it is?

Why is the press, for the most part, putting so much credence on what these 'rating agencies' have to say? They don't set the rules, the market does. If I was an investor, I would look at the non payment of this illegal loan as a plus.

I have nothing but questions about this deal and I want them answered, and that ain't gonna happen if we obediently pay off the loan like our overlords and masters insist and let this ordeal go away with time. They're counting on the sheeple to eventually forget, and we will, if we don't do something NOW!!


Comment #1 by RI Taxpayer on 2014 05 20

Stop borrowing money.

Comment #2 by Jim D on 2014 05 20

As usual Mr. Horowitz writes a column that seeks to accomplish one of two things: 1. propagate left wing talking points regardless of the issue and/or 2. bash Republicans. Facts seem to matter little if at all week in and week out so long as he gets to spout his utterly predictable views on the topic du jour.

For the record, I have not stated any position at all as to what should be done with respect to the 38 Studios bonds this year. Last year I was a vocal critic against repaying them because the then Speaker of the House tried to ram repayment through the legislature without doing one iota of due diligence. For our part the staff in the House GOP office put together the best analysis they could under the circumstances and concluded that not paying them would be cheaper than paying them. We noted that we were open to other views but no one bothered to present any.

Now we have the SJ Advisers report whose conclusions are either A. preposterous on their face or B. blatant evidence of self-interested collusion by the ratings agencies. Notice I am not saying that SJ is "wrong". They may or may not be. But anyone who has read and understood that report can clearly see what is going on here. The bottom line is that, if SJ is to be believed, then S&P, Moody's etc. are threatening RI with ratings downgrades that violate their own published ratings criteria. There are other words for such threats, such as "anti-trust" and "extortion" something a law professor ought to be aware of.

This is a blog comment so I am not going to spend more time detailing the reasons for this conclusion. Anyone interested can watch the House Finance Committee hearing from last week to see what I am talking about. However, this is why I am calling on the Attorney General to take some form of action. He has many options beyond filing suit in dealing with this type of activity. What else is the purpose of an attorney general except to protect the taxpayers against this type of Wall Street sanctioned extortion?

Go Local would be a better product if its columnists actually understood the issues they were talking about and wrote informative articles instead of sarcastic substance free political hit pieces.

Comment #3 by Brian C Newberry on 2014 05 20

Stop borrowing money and it won't matter what our credit rating is.

Comment #4 by Redd Ratt on 2014 05 20

A lot of words, NO substance.

Comment #5 by Roy D on 2014 05 20

What an about-face for Rob Horowitz to be standing up for Wall Street...
and so graciously advocating for me and fellow taxpayers to pay off the investor fat cats.

Why would a progressive ideologue do that? In my opinion, to protect the Democrat insiders who had their hands in the 38 Studios bond money cookie jar -- and who want to keep the jar full with future moral obligation bond money for continued financial opportunity.

Pull the plug on repayment; keep the investigations going strong.

Comment #6 by Art West on 2014 05 20

Another Dem drone marching in lockstep attempting to defend the indefensible.

Comment #7 by Jimmy LaRouche on 2014 05 20

are these the same rating agencies that rated "mortgage" bonds AAA in 2008 and were worthless less than a year later?

billions of dollars in mortgage bonds i might add.

Comment #8 by john paycheck on 2014 05 20

I am assuming that Mr. Horowitz had not yet seen the headline in today's Providence Journal (5-20-14), "State rehires a company being sued over 38 Studios" written by Katherine Gregg. It is puzzling and disconcerting that the Governor and the Treasurer gave a new two-year contract to First Southwest, the state's financial advisor which had a key role in recommending the $75 million state-backed loan to both the EDC and the US bond rating agencies. Although these two individuals strongly opposed this loan before they were in office, both Gov Chafee and Treas. Raimondo were vociferous in their insistence that the state pay the bonds and now, OK the rehiring of the advisors who, at best, were incompetent in their recommendation to support this deal which has caused so much turmoil for the state.
I know that both Gov Chafee and Treas. Raimondo consider themselves financial watchdogs but the question is, whose money are they watching, ours or Wall Street's?

Comment #9 by J M Paras on 2014 05 20

Thank you Mr. Newberry for your post. A person who speaks reason is rare in this state. And right on about the "author" of this post. His goal in all his posts seems to be just as you stated.

Comment #10 by sasc voter on 2014 05 20

forget everything else..the root cause of this state's PROBLEMS is about DEMOCRATIC POLICY! AND BACK ROOM DEALS.

Comment #11 by LENNY BRUCE on 2014 05 20

This article overlooks the fact that the ratings agencies already view RI ratings as near Junk status. They just havent said so yet. It surely has not escaped their attention that RI has a looming pension disaster, ongoing corruption, shinking population, rising taxes, and other things that do not bode well for the state's long term financial health. Not paying the 38 Studios bonds would result in a credit downgrade that is going to happen anyways. So why not save the voters a few dollars and have the insurance company pay the claim. That's what the insurance is for.

Comment #12 by Katy Sloop on 2014 05 20

" SJ Advisors, a highly credible firm." Really? What makes you say that? In fact, what makes you think that anything that happens at the bond rating agencies is "creditable?" As for suing the bond rating agencies- it seems a pretty good alternative if they are violating their own guidelines. Seems rather odd that RI would get low rating since it has NEVER defaulted on general obligation bonds. If they would like to lower the rating on moral obligation bonds, then by all means.

Comment #13 by Bob Quindazzi on 2014 05 20

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