ARLENE VIOLET - State leaders buckling under threat from Wall Street masters

ARLENE VIOLET - State leaders buckling under threat from Wall Street masters

So, here's a question for you.

The Rhode Island Constitution limits the amount of money that can be borrowed to just a modest sum unless there is voter consent through a referendum. So, the legislators decide that this process is too cumbersome and they want their pet projects to go forward unabated so they create quasi-public entities like the former Economic Development Corporation (EDC). In setting up these entities the legislative language articulates that the agency is separate and apart from the state and can be sued or sue solely on its own and there is no state back-up since the state is a separate legal entity. As a matter of fact, the 332-page offering documents for such a bond which went to 38 Studios clearly articulates that the state isn't involved and repeatedly says that Rhode Island has no liability for debts and that no full faith and credit is pledged to pay off the bond in case of a default.

Enter Standard and Poor, LLC (S&P), a bond credit rating agency which is threatening to downgrade Rhode Island's bond rating for the state and municipalities unless the state backs up the "moral obligation" bonds of a completely different entity. Mind you, this was the same credit rating group which was warned by then General Treasurer Frank Caprio to forego a top credit rating on this bond issuance which the company chose to ignore.

Consider further, that S&P was sued last year by the U.S. Department of Justice, 16 states, along with some attorney generals and the District of Columbia, for alleged misconduct involving structured finance securities which were at the heart of the nation's financial crisis. The lawsuit states that S&P allowed its analysis to be influenced by its desire to earn lucrative fees from its investment clients and knowingly assigned inflated credit ratings to toxic assets sold and packaged by Wall Street banks. The allegations note that S&P's so-called independent judgment and objectivity were compromised.

Consider still further that then-Connecticut Attorney General, Richard Blumenthal, joined by mayors from across the state, sued S&P and other credit rating agencies for allegedly giving artificially low credit ratings not based on fact that cost taxpayers millions of dollars in unnecessary bond insurance and higher interest rates. In 2011 S&P et al caved in and settled with the State of Connecticut, coughing up a $900,000 credit for future bond ratings along with other remedies for its deceptive and unfair trade practices.

Fast forward to 2014 in Rhode Island. The bonds issued for 38 Studios weren't even state sponsored. Copious warnings in the documents state that Rhode Island has no obligation and that it isn't a state bond. S&P was warned by Caprio about the credit ratings. Now, this credit rating agency is threatening the state with a downgrade of its future bonds for one that the state didn't even issue. S&P is a two time loser, big-time, in court.

So, here's the question, actually two of them: Why are our legislators and leaders cow-towing to S&P which is on a losing side in litigation? Don't the solons see anything ludicrous about being hung on their own petard for creating these quasi-public agencies separate from the state by now making the state taxpayers pay for a bond not of their own creation?

Violet is an attorney and former state attorney general.

Comments

Dear General Violet,

You are spot-on in your assessment of this 38 Studios debacle. To add insult to injury (as you stated last week), the Governor and the Treasurer rehired the same financial advisor, First Southwest, that the state is suing. This is a clear signal that it's "business as usual" in RI, another "black eye" for the state. I hope, if you get the opportunity to interview some of these Democratic candidate hopefuls, that you will ask them these 2 questions, on behalf of the public. Thank you.

Great article. I just wonder who made the most money working the 38 Studios Bond sale. If there is default I just wonder if there is a "Claw Back" arrangement with whomever received fees, commissions, points etc. I would love to see that list.