TOM WARD - Don't repay 38 Studios debt

TOM WARD - Don't repay 38 Studios debt

I've decided that I'm on the side of state House Minority Leader Brian Newberry, a Republican of North Smithfield, and Rep. Karen MacBeth, a Democrat of Cumberland. I don't want to pay back the 38 Studios "moral obligation" bonds, and frankly, I don't care if the "Chicken Little" Wall Street bankers tell me Rhode Island will blow up. It won't. They're lying.

As the clock ticks on, it is clear that the bi-partisan 38 Studios fiasco, crafted by Gov. Donald Carcieri and with the support of House leaders including the "likely to be disgraced eventually" Speaker Gordon Fox, desperately tried to buy jobs by casting our $75 million lot with a video game developer. In the case of some - but probably not Carcieri - political insiders made sure they got a sackful of money as they wrote the paperwork.

"We the people" never approved the spending. Most Rhode Island legislators were lied to, and approved the disbursement as part of the 2010 budget. Everyone got hosed.

And now the sharks on Wall Street are telling us that if we don't pay the money back, even though the bonds are insured by a company called Assured Guaranty, the state will suffer a lower bond rating and higher taxes as a result.

Newberry notes that there are moral obligation bonds all across the country, and if we in Rhode Island decide we won't repay ours, it might set off a wave of unpaid bonds across the country.

Click here to read Newberry's views on the topic in a letter that was too long to publish in our print edition.

Writes Newberry: "Personally, because moral obligation bonds are far more common around the country than people realize, I believe the ratings agencies are taking such a strong position because they are afraid that if Rhode Island does not pay these moral obligation bonds, other entities all around the country will follow suit for reasons of their own, causing the entire moral obligation bond industry to collapse. In essence, not to overstate things, but it appears to me as though "Wall Street" has created a financial instrument (which is not entirely without value in the right circumstances), has gotten used to downplaying the risks of this financial instrument over the years and now, faced with the unusual political situation in Rhode Island revolving around the 38 Studios scandal, is terrified that the Emperor will be shown to have no clothes."

Because of my duties here at the paper (Tuesdays are always especially busy), I was not able to go to the Statehouse and at least stand in support of MacBeth's bill being heard in the House Finance Committee. New House Speaker Nicholas Mattiello has allowed the bill to at least come to the committee for a hearing, and I have to give him a hat tip for that. Normally, when the speaker wants a bill to die, he just never lets it see the light of day.

But make no mistake: Mattiello wants us to pay the bonds. This year, and for several more years, a $12.5 million payment from all of us has to be made. In a breakfast meeting of the Northern Rhode Island Chamber of Commerce last week, Speaker Mattiello made it clear to businesspeople that, in his mind, the bonds must be paid, and he asked all of us to go out and lobby for the payments. I will not.

Like Newberry and MacBeth, I will argue just the opposite. While I appreciate the candor and openness of our new speaker, this is where I, as a state taxpayer, say "Enough!" I, and I'll bet many others, are sick of being victims of the invisible hand that lords over us from Smith Hill. I'm sick of the corruption, and sick of paying for the stupidity that passes for governance.

Now Wall Street is threatening all of us, telling us we have to pay the moral obligation bonds, or there will be trouble.

The people must speak now! Our legislators must defend us now! I say to Wall Street, "Bring it on." I'll take my chances, backed by the law. And the law says we don't have to pay.

Ward is publisher of The Valley Breeze newspapers

Comments

Tom , of course you agree with the Mr newberry he has an r next to his name

Tom, I could not agree more with your position. I have been advocating not paying the bonds since last year when I had Rep. MacBeth introduce the legislation that has once again been introduced this session. I’ve been vocal with then-Speaker Fox on the issue as well as current Speaker Mattiello, taking them both to task on their handling of the Oversight Committee. I’ve also called Speaker Mattiello out publicly, requesting that he demonstrate the leadership that Rhode Islanders deserve and expect of a Speaker and voluntarily testify before the Oversight Committee about what he knew and when he knew it. This actually prompted him to respond to my request publicly through the media, though he declined to testify.
For all those politicians that are advocating the State pay the bonds for fear of what the rating agencies might do, I urge that they consider the following points about this “deal” before casting a vote on the budget that includes the $12.3 million payment:
*Prospective bond buyers had to certify that they could withstand a total loss of their investment
*The bond buyers spent nearly $600k to hedge their bet against a loss of their investment
*The bonds carried interest rates of up to 7.75%, clearly reflective of the known risk
*The placement documents stated multiple times, in bold letters, that the debt WAS NOT a legal obligation of the State.
*The voters of Rhode Island did not approve the debt via a referendum, which would have made it a legal general obligation of the State
If the State is considered to be on the hook for this debt then then what “risk” were the bond buyers trying to mitigate by buying the insurance? If the business filing for bankruptcy and unable to make payments does not justify the bondholders submitting a claim under the insurance policy then what conditions must exist? The answer seems to be that there was NEVER any intention of using the insurance.
As this issue reaches the House and Senate floors next week, either through the budget or Rep. MacBeth’s bill, it is important for each and every one of us to reach out to our Cumberland Reps and Senators to urge them to block the payment. Clearly there are those that are beholden to the Speaker and Senate President and will push the “green” button when told to do so. If any do push “green” then they should be targets for removal during the upcoming elections.

Brian Kelly

"grlap"...I have to disagree with you. This issue is not a Republican vs Democrat issue. It is an issue between those that have the fortitude to do what is right and take a stand to not make the payments and those that simply want to cave, make payments, and hope the issue goes away without the truth coming to light. I am currently a "D" but have voted "D", "R" and "I"...based on WHO the person is and NOT what the label is. If more people did that I believe that this State would be in much better shape.

Brian Kelly

Sounds old-fashioned (i know). Put it up for a vote in November.

Dear grlap:
And Karen MacBeth has a "D" by her name. I support the position both of them have taken. I am "conservative," and support prudence with public money. We never OK'd this. Our elected representatives never supported this. And so your point is?

From this I can assume that ad buyers of the Valley Breeze will not have to pay the bill if they don't get the results that were hoped for.

"The results that were hoped for" is that an ad that has been approved by our client appears in the paper. If for some accidental reason an ad doesn't appear in the paper, then no, they are not billed, obviously.
Of course, you mean "When they buy a $200 ad and and don't get $1,000 worth of business, and are heartbroken, then perhaps they should not pay for the ad."
But then, here we are, still going after 18 years. Something must be going well. Smart merchants don't waste money, and I certainly don't want them to.

You cherry pick the bills you deem worthy to pay and decide that the bills you don't agree with we should stiff the people whom we borrowed the money from. I couldn't sleep at night doing that, I guess I was raised differently.

I don't think "Moral Obigation" is a legal term. It is used most often in reference to US Government Agencies. These were high risk bonds with a high risk interest rate and Insurance. The Bond Holders will lose nothing.

These quasi State Authorities were created to bypass Voter approval for borrowing.

We should not have the taxpayers footing this bill. The threat by the Rating Agencies is self serving.

Assembly Watcher states the case!

Dear Frankiin

"We" (voters) did not borrow the money...."They" (the EDC) did....the borrowers had their big boy pants on when they did the deal. They knew the risks and they were being paid handsomely for the risk with the 7.75% rate. Please tell me where you and I can invest our money...at the same zero risk....and get that rate. I will empty all of my accounts and do it today. The annual payment will cost the average family of four $50 each year. That is money they can use to put food on the table , gas in the car to get to work, put back into the economy. If the Senators and Reps feel so strongly in making the payments then let them give up their $14k annual salary we pay them....$28k for Mattiello and Paiva-Weed. That equals equals 280 and 560 families respectively in each of their districts each year to make up the $50. If the original $75 million loan were to have been put on the ballot for our vote how would you have voted? I know how I would have voted. So please don't think that I and everyone else should be on the hook.

Brian Kelly

Franklin....here is a scenario for you to consider...please tell me if you should be personally responsible for the loan:

Your child (the EDC) takes out a mortgage...they also have to pay for Private Mortgage Insuranxe....let's say the mortgage document states that the debt is NOT the legal responsibility of the parents. The child doesn't make the payments and is foreclosed on. The insurance pays the bank...the insurance company wants to recover their funds....they come to you (the parent/taxpayer) and say you have a "moral" obligation to pay. What do you do? See the difference between a "moral" obligation and a "legal" obligation is that you as a parent/taxpayer would have been at the bank when the loan was taken out and you would have actually signed as a "co-signer" on the loan. The taxpayers never "co-signed" the 38 Studios loan...it's not our legal debt. Basic Law 101....the complete terms and conditions of a legally binding contract reside within the four corners of the written document...and changes in terms and conditions also have to be in writing. Fox and Paiva-Weed sitting in a meeting with the EDC and others and verbally stating that they don't see an issue with support of legislators if needed is not binding. They DON'T have that authority. Per the State constitution, the State cannot incur any general obligation debt of more than $50k without voter approval. I am more than happy for you to write a check to pay this debt....please include my family's amount at the same time.

Dear Franklin Gomes:
Please drop the personal insults, and I promise to let you have the final word. My guess is that we are both honorable people who pay our bills – or the ones we agree to pay, anyway.
Suppose I get home from work today and find all new shrubs, flowers and mulch in front of my home, and a landscaper standing there with an invoice.
"You owe me $2,000," he says.
I ask "Who asked you to put in shrubs? I never asked for these, nor did I authorize you to put them in."
The landscaper replies "Don't get so worked, up. You can pay me only $200 each year for 10 years."
A month later, the shrubs are dead, and he still wants his $2,000.
I will not pay him, I'll still sleep well, and I don't expect to be kicked downstairs when I get to the pearly gates.
Yes, Franklin, I pay my bills. And I'm grateful you do, too.
In the 38 Studios case, the bondholders accepted higher risk for their "junk bonds" that paid 7.75%. They lose. When I invest in a junk bond mutual fund at any brokerage, a certain portion of those junk bonds go bust. It happens, and the mutual fund value goes down a bit. If it goes down, I lose a bit of money in exchange for the higher interest rate I'm shooting for and the risk I have accepted. That's all that happened here. Let the bondholders and Assured Guaranty (the insurance company for the bonds) fight it out.
Over and out.

Tom---As you noted...."Now Wall Street is threatening all of us, telling us we have to pay the moral obligation bonds, or there will be trouble". What I'd like to know is WHY didn't the POLITICIANS who were involved in the STUDIO 38 DEAL practice THEIR MORAL OBLIGATION at the time?

Congratulations to House Minority Leader Brian Newberry, a Republican of North Smithfield, and Rep. Karen MacBeth, a Democrat of Cumberland for pursuing this task. It's so encouraging to see a Republican and Democrat working TOGETHER for the benefit of WE, THE PEOPLE.

By the way, I'm an INDEPENDENT.

Great job, Tom.

Cry 'Havoc,' and let slip the dogs of war;
That this foul deed shall smell above the earth

John----Apparently, you have many individuals "stumped" with your comment, as I haven't seen anyone reply to it. Although I'm familiar with some Shakespearean sayings, etc..., I wasn't familiar or didn't remember this one, so I researched it........very interesting "stuff" and sooo true!

The 38 Studios problem is a result of an unelected body of individuals offering a bond without the consent of the people.
To force the taxpayers to pay would be "Taxation Without Representation" as these individuals are not answerable to the electorate. The same is true of the deal the former "Board of Higher Education" made to offer in-state tuition to illegal aliens. The taxpayers should properly be revolted and revolting against these types of "decisions".

In the 38 Studios case, the bond rate offered was very indicative of the risk being taken by the investors. The terms imposed on the buyers also demanded diligence and knowledge. Further, the insurance taken out against loss by the buyers is evidence they knew of the risks and were taking action to defend against. This is how this part of the bond world works. If the investors thought these bonds were backed by the taxpayers of the State, they would not have spent more money for insurance. Let the insurance company make good on their promise to pay. I made NO such promise!