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There was a surprising amount of skepticism expressed about repaying the bonds.
John Chung started off by endorsing neither paying nor defaulting, but calling for more research to understand exactly what the downside of default would be, a point echoed by Sasse and Higgins. No one was willing to endorse the idea of simply repaying the bonds without knowing more about the downside, which was much farther down the road to skipping the bailout than I’d anticipated.
Bob Cusack then pointed out that the research would actually be pretty easy. He suggested just calling the three bond rating agencies and asking their opinion, and then calling the five biggest buyers of our bonds and asking them whether they’d still buy our bonds. When you call it “research” or “analysis” it sounds forbidding, but when you call it “make a few phone calls” it doesn’t sound so hard. Cusack said he’s hard put to understand why analysis so easy seems not to have been done.
One of my favorite moments came when Bill Rappleye asked whether a compromise could be possible, that might get the cost of this bailout down to a more manageable $50 million. Elaine Heebner pointed out that the rental subsidy program on which she depends (she’s disabled) only costs $1.6 million per year and is threatened by budget cuts. As Everett Dirksen used to say, “A billion here, a billion there, and pretty soon you’re talking about real money.” Our state’s budget is not so flush that we can contemplate any kind of expense in isolation.
But considering it in isolation is precisely what people who say this is an obligation want us to do. This language of “obligation” or even “moral obligation” elevates this expense to make it seem more important than any other state expense. But that’s silly. The legislature’s role is to balance expenses and set priorities. Everyone will rank them differently, no doubt, but discretion is discretion.
When my turn to speak came, I began with a spirited defense of finger-pointing. The people who say we can’t play the “blame game” and should just move on are usually the ones at fault. Finger-pointing and assessing responsibility is how we learn from mistakes. If someone isn’t trustworthy, I want to know that before I trust them again. Some of the most bleakly funny writing I’ve read in the past year is in the complaint Governor Chafee filed against 38 Studio executives, EDC staff members, and several members of the downtown legal establishment. Go read it, and enjoy a laugh about how people we paid a lot of money for their expertise didn’t apply it and just waved this deal through.
Among all the discussion of how defaulting will hurt the bond rating of EDC and possibly of the state, one point hasn’t been made: the damage may have already been done. Any bond investors analyzing some future EDC deal will be aware that in 2010, they really messed up. In other words, knowing what you know now, without knowing whether the state will actually pay these bonds or not, would you buy some future EDC bond? I wouldn’t, and if I can construct an argument that someone shouldn’t, that likely means there has already been a hit to the agency’s bond rating.
The worst part of the whole fiasco was the abuse of a useful lending program. The fact is that the loans EDC was making to other businesses were to address a real failure of the private credit market. Bank credit is too tight now, and perfectly viable businesses cannot find the credit they need to keep afloat. This has been documented in many ways, and the bill that allowed the 38 Studios deal was intended to make operational what had been a successful pilot lending program. This would have been a valuable aid to the state’s economy, but was ruined by people who cared more about headlines than about policy.
So yes, please let’s not waste this money. EDC’s reputation is ruined, but it won’t have been done by defaulting on dumb bonds, but by the “serious people” who thought that trusting a baseball player for his video game expertise was a good idea.
]]>“Although no taxpayer money has been spent on 38 Studios so far, investors did make a loan of $75 million to the RI Economic Development Corporation (EDC) which was used to finance 38 Studios,” said a press release sent out this morning. “The $75 million loan was guaranteed by a private insurance company, which is obligated to make sure that lenders get paid. Now that 38 Studios is bankrupt and can’t repay the loan, Governor Chafee and other politicians want to use taxpayer money to bail out the wealthy lenders to 38 Studios.”
Not repaying the moral obligation bond (Editor’s note: in the parlance of high finance “moral obligation” means you don’t have to do it!) is an idea that has gained momentum on both the left and the right. It’s still unclear who purchased these bonds and how not paying them would affect the state’s ability to borrow money in the future.
On a recent episode of WPRI’s Newsmakers, Rep. Patty O’Neill said the bonds were purchased by the 1 percent of the 1 percent and the state should consider default as a financial strategy. The General Assembly has been very kind to Wall Street in recent years. It passed a law two years ago that demands bondholders be repaid before other creditors when a local municipality can’t afford its bills.
Governor Chafee and General Treasurer Gina Raimondo, in a rare recent example of agreement, have both advocated for paying the bond owners, even though it is unclear if either knows exactly who purchased the bonds or how default would affect our credit rating.
Raimondo has come under fire recently for protecting a “moral obligation” to Wall street but advocating against a “moral obligation” to public sector retirees.
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