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Russ Moore: Ignore the Rating Agency’s 38 Studios Extortion

Monday, May 19, 2014

 

If the financial industry has taught us anything over the last decade--it's that we shouldn't trust the major rating agencies.

With that premise in mind, the state legislature should answer the ratings agencies threats to downgrade the state's credit rating by channeling it's inner Clint Eastwood. The state should look them in the eye, and say "go ahead, make my day".

That's because there's no logical reason, legally, morally, or financially, to force Rhode Island taxpayers to pay a debt they don't legally owe, and never supported to begin with.

Stooge agencies

The ratings agencies have proven themselves to be conflicted, highly ineffective, and lacking credibility.

The main job of the ratings agencies, to rate the credit worthiness of institutions and companies, and they've been horrific at it. They were the jet fuel that powered the Great Recession.

Standard and Poor's, Moody's, and Fitch Group, the three stooges of ratings agencies, rated the subprime housing bonds investment grade--in some cases giving them the highest rating possible. That gave investors the confidence to go big time into those housing bonds that were worth less than a financial instrument sold by Charles Ponzi himself.

Conflicted

Secondly, the ratings agencies are conflicted. They're nothing more than glorified consultants. When a company or institituion is going to sell bonds, they hire the ratings agencies to rate them. Remember the secret of consultants: they tell their employers what they want to hear.

Let's not forget, the rating's agencies will be the very first people to tell you that their ratings are nothing more than an opinion. Just ask them if they should be held accountable for their malfeasance in ratings the housing bonds investment grade and they'll tell you their ratings are merely a subjective opinion faster than Fat Albert goes to the buffet a second time.

If the ratings agencies are merely subjective opinion spewers, no better than an editorial board at a newspaper--why're Rhode Island politicians and leaders giving them so much credence. I'd argue its because they have ulterior motives. Namely, they don't want to see a real investigation into the shenanigans that surrounded this ill-fated deal.

Unreliable ratings agencies

Here's another point to keep remember--large investment firms don't rely on them to make informed investment decisions. Instead, they have their own research professionals.

There's also this notion out there that Rhode Island should go talk to the ratings agencies. That's borderline laughable. What're we going to talk to them about? I don't know about other folks, but when someone tries to extort me, I don't waste time talking to them.

It's also sickening to hear people who should know better, like Governor Lincoln Chafee, for instance, talking about the ratings agencies as if they're this monolithic, authority type institutions. They're not.

Trust the market, not the agencies

In the end, it's the market that sets the bond ratings. Ultimately, investors decide how much interest they're willing to accept in exchange for loaning money. That's all a bond is. Here's another fact to remember, since the ratings agencies have lowered the 38 studios bonds to junk status, we'd expect that they're being unloaded at fire sale prices. But they're not.

They're current commanding the same interest prices on the bond market---as they haven't been sold in significant quantities that would lower their rates.

Real cause for concern

None of this is to say that there aren't valid reasons to worry about our bond interest rates rising, but none of it has anything to do with 38 studio's bonds. For instance, the pension settlement lawsuit, should the state fail in the case, will add $4 billion to the state's debt obligations. Further, the state has ridiculously high unemployment, municipalities (I'm thinking of Providence) have huge unfunded liabilities, and lottery revenues are dropping (not to mention casino competition arriving around the corner in Massachusetts.

If we're going to talk about reasons to fear for our credit worthiness--those are the things we should be talking about.

Kudos to Frank Caprio, one of the few statewide candidates who has shown real leadership on this issue, for pointing out on twitter last week, that when the ratings agencies downgraded the United States credit rating, President Barack Obama fought back and challenged them. The result: the United States citizens got better interest rates in exchange for borrowing money. That's right--despite having its credit rate dropped, the nation's government got lower interest rates for borrowing money.

How to handle bullies

In the same respect, Connecticut recently sued the agencies saying they were under-rating their bonds. In other words, they were being bullied. The ratings agencies settled the lawsuit by paying the state hundreds of thousands of dollars. That's how you handle bullies.

Unfortunately, we're not getting that leadership from our current governor. Instead of standing up to bullies, Chafee cowers before them.
There could have been no better credit to gubernatorial candidates Allan Fung and Ken Block than when Chafee called them unfit to lead because they oppose paying back the 38 studios bonds that Rhode Islanders don't legally owe. Contrary to Chafee's view, Block and Fung have shown tremendous leadership on this issue by opposing paying back these bonds. (On the other hand, if there's someone who knows what it's like being unfit for office, it'd be Chafee.)

That's because there's only one way to handle someone who is trying to bully you into doing something against their own interest--fight back. That's what Obama did in 2011, and its what we should be doing now. The truth is that anyone who would cower to people who would bully the good people of Rhode Island isn't fit to hold office. 

A native Rhode Islander, Russell J. Moore is a graduate of Providence College and St. Raphael Academy. He worked as a news reporter for 7 years (2004-2010), 5 of which with The Warwick Beacon, focusing on government. He continues to keep a close eye on the inner workings of Rhode Islands state and local governments.
 

 

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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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.”

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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."

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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."

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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.”

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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."

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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.

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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.”

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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.”

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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."

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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."

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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:

"...why're Rhode Island politicians and leaders giving them [ratings agencies] so much credence....Namely, they don't want to see a real investigation into the shenanigans that surrounded this ill-fated deal."

BINGO!! Exactly why we SHOULDN'T pay for this pie in the sky. Bring on the real investigation.

Comment #1 by RI Taxpayer on 2014 05 19

They hide behind a lie.. A moral obligation for a bunch of immoral people AKA Chafee,Richard Licht, Fox, Corso and many more who abused the taxpayers of this state. It's like a hit and run..Thank goodness we have insurance..LOL, (but let's not use it.)

Comment #2 by LENNY BRUCE on 2014 05 19

Russell, thanks for this column. You've distilled key points very well.

As for the politicians, well, Chafee is the Gump. I don't expect much from him.

Raimondo, on the other hand, as the financial expert with Wall Street savvy, should be taking a leadership position to say no to paying the debt. Instead, she's just falling in line to protect her party's insiders from being exposed as thieves who've been pilfering a bunch of that yummy bond money. She's lost a lot of credibility.

Comment #3 by Art West on 2014 05 19

well said " markets set interest rates" not Chafees threats or Moody's.

A stronger Governor would have made the case to the Agencies that this bond is a "one off" still mired in investigations and clearly not an Obligation of Rhode Island taxpayers. A strong governor and Treasurer would have been outraged at suggestions of a junk bond rating below Puerto Rico rather than cheer-leading such a ridiculous analysis.

Comment #4 by michael riley on 2014 05 19

Did you hear the Governor's recent rantings that RI cannot default and must continue to pay all payments or RI could never sue for damages? He says we all must be gravely damaged so that we can later sue for damages, in the slim hope of winning. Sort of like jumping from the window of hotel so you can later sue the hotel for your injuries. Duh. How did he get into Brown? I thought students there had large brains.

Comment #5 by Katy Sloop on 2014 05 19

As Don Carcieri said:
""I commend the RIEDC Board for its EXTENSIVE DUE DILIGENCE and for taking this significant step to bring jobs to Rhode Island," 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 #6 by Sammy Arizona on 2014 05 19




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