38 Studios sucks, but we need to pay the bill

Let me ad some very insightful commentary on the whole 38 Studios saga: it sucks.

It sucks that much of the legislature feels they were conned into providing the cash for the deal. It sucks that Don Carcieri would recruit Schilling to bring his company here. It sucks that anyone in the then-EDC would believe it was a worthwhile deal. It sucks that we’d invest so much money in a long-shot product. It sucks that 38 Studios collapsed, mainly due to sucky management. It sucks that there was little oversight from the state on 38 Studios, despite being a major investor. It sucks that we’re repaying the investors who were already insured in case of 38 Studios’ failure. It sucks that the state used a “moral obligation” bond rather than a “general obligation” bond to provide the money, and to circumvent voters. It sucks that all of Rhode Island’s credit is being threatened by ratings agencies if the General Assembly chooses to default on the repayment. It sucks that the ratings agencies are ignoring the law that’s very clear that we don’t have to repay.

But with all that out of the way, let me tell you that it doesn’t matter how much it sucks. What matters is that it’s happened. Commentators and politicians can cry and moan about the unreasonableness of this all; about how the ratings agencies are being unnecessarily punitive, about how the bond yields took into account the chance of default, about how the investors will get all their money back through insurance, etc., etc. All of that is crying over spilt milk. Now it’s up to us to act like adults and clean it up.

In the complaints against repayment, you can see a lot of how people wish things were. Unfortunately, Rhode Island doesn’t exist in a land of make believe. It exists in the here and now. At the end of the day S&P, Moody’s, and Fitch (the big three credit ratings agencies) don’t play by the rules Rhode Island sets. These are the same agencies that were vital in enabling the existence of toxic assets that fueled the Great Recession and got away scott free. These are agencies that determine the borrowing ability of sovereign nations. Rhode Island, which lacks many of the tools sovereign nations have to blunt the damage from traumatic downgrades of our bonds, cannot go up against them and win.

Were we perhaps the state of New York, and could make life miserable for the ratings agencies, I would be more bullish about our chances of taking them on. If RI was the United States of America, which is impervious to ratings agencies at the moment, I would say go ahead and ignore them.

But we’re not. The very same people calling for us to default are the same people who go around decrying our flaws. They’re the ones ignoring that the ratings agencies can make or break us. It’s awful that we have to kowtow to the whims of these idiots, and the idiot investors who put money into the 38 Studios bonds. But these are the idiots that set the rules for Rhode Island, not the other way around.

To those of you looking to right this injury, I say “forget it, Rhode Island. It’s Wall Street.” The best we can do is bow to circumstance, lick our wounds, and ensure that this can never, ever, happen again.