ratings agencies – RI Future

June 1, 2014

Almonte: Good at grandstand, but not negotiating

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The third candidate for Treasurer, Ernest Almonte, never replied back to me after repeated attempts of reaching out to him. I therefore can’t say what his position is about standing up to the ratings agencies and their deceptive ratings practices.

During his campaign, Almonte has been critical of exploring all options before making a decision on repaying the 38 Studios loans. Now, after House Speaker Mattiello put on a display of cowardice by pledging that taxpayers will be on the hook to Wall Street for the 38 Studios debacle, Almonte issued a press release urging elected officials to negotiate a settlement.

You can’t walk into a negotiation unless you have leverage. Promising Wall Street (who gamed the 38 Studios deal to begin with) that tax payers will be on the hook for the deal, gives up leverage. All along, Almonte has been giving up leverage by trumpeting the Wall Street talking points about repaying a bogus “moral obligation.” Almonte is doing nothing more than political grandstanding, which is a shame.

The elected leaders of Rhode Island have yet again been bamboozled by Wall Street. Wall Street sold a deal they knew was rotten and got our elected leaders to roll over and parrot the talking points of the 1%. It looks like any chance we had at negotiating a settlement is quickly going down the drain.

May 27, 2014May 27, 2014

Caprio: Ratings agencies hands weren’t clean in 38 Studios deal

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Former Treasurer (and current candidate for Treasurer) Frank Caprio reached out to me concerning my stories about the deceptive ratings practices of the ratings agencies.

According to Caprio, the ratings agencies hands weren’t clean in the 38 Studios deal because they did in fact overrate the bonds. Furthermore, Caprio asserts that if he is re-elected as Treasurer, that he will dig into the ratings agencies.

As Ian Donnis reported in August 2010, Caprio visibly fought to prevent the 38 Studios deal from happening by going directly to the ratings agencies and investors. Unfortunately, his efforts were circumvented by the EDC, who had the discretionary power to issue the bonds. Some people have criticized Caprio for his initial support for 38 Studios and then changing his stance in opposition of the deal. In my opinion, it was courageous for Caprio to change his mind and he demonstrated leadership qualities by standing up for the taxpayers of Rhode Island.

To take action, Caprio said he would follow similar steps that he took in 2009 regarding the mismanagement scandal at the Central Landfill. Although he didn’t have an official oversight role as Treasurer, he pressured the State to take action. The result was that the right outside experts and attorneys were hired and without even having to file a lawsuit, his work led to a recovery against the Central Landfill board’s directors liability insurance of its policy limit of $5 million dollars.

Concerning the misdeeds by the ratings agencies, Caprio believes RI can look to the actions taken by the Obama administration and states such as CT and CA in seeing which law firms could be possible partners to work with RI against the ratings agencies.

Caprio also claims that the State can save substantial money by not voluntarily repaying the 38 Studios bonds. Instead, the State needs to call the bond insurer (Assured Guaranty) and the bond holders (large institutional investors) to the negotiating table to negotiate a settlement. He thinks that under the threat of non-payment by the State the insurer (who faces an $80 million dollar payout) and the bondholders would entertain the following:

Since the bondholders have received over $20 million in payments already and the fact they can agree to a waiver of default per the bonds, the state should get the waiver (holders of 50 percent of aggregate principal of bonds have to agree – which is USAA and Transamerica) and start a deliberate negotiation. Caprio says, “I believe the bondholders will see it in their interest to take a haircut on future payments. The institutional holders of these bonds don’t want the national attention on this minimal investment they have in their multi-billion dollar portfolios.”
The bond insurer should then be asked to be part of the solution with paying the new negotiated reduced amount to the bondholders and in return include them as leading the civil lawsuit currently being litigated against First Southwest, Wells Fargo, executives of EDC, etc. The bond insurer will then be in position to recover any payments it makes as part of this process.

All along this process the rating agencies will be briefed and updated by the State and it’s leaders. No default will happen since we will get time to negotiate per the waiver of default process allowed in the 38 Studio bonds (see page B-46: Waivers of Events of Default).

“I believe the State taxpayers will be relieved of having to make payments now for this failed deal. Remember that the RI taxpayers are not legally obligated to pay this bill per the bond nor by state law,” maintains Caprio.

Caprio has been outspoken on this issue for a while now. Last June, GoLocalProv reported:

Caprio says state, not Wall Street, has leverage

At a minimum, before making a decision on payment, Caprio said the state [needs to] convene a meeting of interested parties—including the bondholders and the insurer on the bonds—to attempt to negotiate a deal using the fact that it is not legally obligated to pay as leverage.

“I’m not going to lead the fight to defend multi-billion [dollar] insurance companies who are sophisticated investors to make sure they are made whole,” Caprio said, adding that the burden of paying back the bonds would fall on the average Rhode Island taxpayer. “If this money was coming out of every legislator’s personal pocket, would they be so quick to pay on debt which they have no legal obligation to pay?”

It seems to me that Caprio has a thorough understanding of the complexities of this issue and I commend him for that. I’ve been frustrated with a lot of other candidates and pundits who have simply been using Wall Street’s own talking points to bully Rhode Islander’s into thinking they have a bogus “moral obligation” to the 1%.

In my next feature, I’ll post candidate for Treasurer Seth Magaziner’s thoughts on how to deal with the ratings agencies.

May 22, 2014May 22, 2014

Will Kilmartin stand up to the ratings agencies?

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In a recent post, I highlighted how the US Department of Justice is suing ratings agency S&P concerning their suspicious ratings practices that essentially fueled the financial crisis. In the same post, I also wrote about how I believe ratings agencies S&P and Moody’s also artificially inflated the 38 Studios bond ratings as investment grade.

Although not impossible, it is difficult for taxpayers to file lawsuits due to what is known as the standing law doctrine. It is therefore the obligation of attorneys general to defend taxpayers when they have been wronged.

Colorado became a recent addition to a list of attorneys general (both Democrats and Republicans) from Arizona, Arkansas, California, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, Washington, and Connecticut that have joined the DOJ in alleging that the ratings agencies violated their respective Unfair Trade Practices Acts:

Colorado Attorney General John Suthers filed a lawsuit ….. against Standard and Poor’s (S&P) in connection with the ratings that it issued on structured finance securities, including residential mortgage backed securities (RMBS) that were issued at the height of the market from 2004-2007. This lawsuit is part of a joint federal-state effort to hold those responsible for their part in the foreclosure and financial crisis. The congressionally-appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis “could not have happened” without ratings agencies such as S&P. Colorado’s lawsuit alleges that S&P put its financial interests above its self-described objectivity and independence.

Connecticut began the process in 2010 (you can read the filing here) and has been urging other states to join them in taking on the ratings agencies:

Inflated ratings of mortgage securities are considered a key cause of the 2008 financial crisis. Critics accused the ratings firms of lowering standards to win business and misleading bond investors to buy debt they thought was safe but turned out to be toxic .

It would seem that the ratings agencies were up to a similar ratings scam with regard to the 38 Studios bonds. ~~Attorney General Kilmartin was the Majority Whip in the State House of Representatives at the time of the 38 Studios deal, so he might have to recuse himself from such a case,~~ (correction: Kilmartin resigned as Whip in February 2010, prior to the 38 Studios vote) but taking no action on such an important matter would be a huge disservice to the citizens of Rhode Island.

Will Attorney General Peter Kilmartin stand up to the ratings agencies and fight for the taxpayers of Rhode Island? Dawson Hodgson, the Republican challenging him, has already staked out a strong position on 38 Studios – which promises to define the election this year up and down the ballot. Why hasn’t RI joined the other states and federal government in taking on the ratings agencies for their role in the financial crisis? Will the AG’s office sue S&P and Moody’s for artificially rating the 38 Studios bonds as investment grade?

May 21, 2014May 24, 2014

Mattiello is meeting with ratings agencies, but what will he learn?

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House Speaker Nick Mattiello is in New York today meeting with representatives of Standard and Poor’s and Moody’s, the two biggest of the credit ratings agencies. (No word on how Fitch feels about the snub.) It’s not perfectly clear what he thinks he’s going to get from this trip. Perhaps he’s going to look into the Moody’s representatives eyes and “get a sense of his soul” the way George W. Bush did with Vladimir Putin? That went well, didn’t it?

So what will Mattiello find when he meets with these guys? I predict he will find earnest, intelligent, kind, and solicitous people. They will make sympathetic noises about the awkward plight of our poor state and the unwise choices made by our previous governor and speaker of the House. They will understand immediately the ramifications of our difficult position. But they will point out all the worst-case scenarios, because they are also people who believe very strongly that the end of western civilization will be nigh if a state is allowed to renege on a commitment they imagine it to have made. Where, I ask you, will their commissions come from if the bond market changes even a tiny bit? They will see their job in these meetings as making Mattiello’s hair stand up even straighter than it usually does, and will probably succeed.

There are times when personal contact is misleading. After all, the earnest, intelligent, kind, and solicitous people he will meet represent agencies that are deeply corrupt, in the pay of the banks whose bonds they rate, constantly trying to curry favor with the very institutions they are supposedly there to police, while abusing the powerless. There have been virtually no changes to their business model since that very business model led our financial markets to the verge of collapse in 2008.

If Mattiello was in search of actual answers to actual questions, he would do far better to spend time interviewing the bond buyers for the insurance companies who hold most of our state’s bonds. Those are the people whose opinion will actually be important, because those are the people who actually give us the money we need to borrow. I’m more interested to know whether they are capable of reading a bond prospectus and understand the difference between a general obligation bond approved by the voters and a bond that says all over it that it is not such a thing.

There is a class of questions out there that cannot be answered by asking them. I learned years ago, for example, that I cannot learn whether today is opposite day by asking my daughter. If it is opposite day, she will say no when I ask, and if it is not, she will also say no. I have to think of another way to answer the question. There’s a lovely discussion of exactly this point in Snow et al’s 1991 book, “Unfulfilled Expectations: Home and School Influences on Literacy“, where the authors speculate about the futility of having well-dressed Harvard education researchers with clipboards ask poor mothers how many times a week they read to their children.

Here are some other questions whose answers cannot be found by asking:

“Hey Mr. Rich Person, will you leave the state if we raise your taxes?”

“Hey Mr. Business Owner, will you bring jobs back to this state if we lower your taxes?”

“Hey Mr. Bond Rater, will you leave our state bond rating alone if we let an independent agency default on its bonds?”

Incalculable damage has been done to our state by people who imagine that the way to answer questions such as these is simply to ask them directly and take the answers at face value. (Typically by people who will then call me naive.)

The public nature of Speaker Mattiello’s trip, and the people he intends to visit and to hear imply that what is going on here is not actually a fact-finding trip, but Kabuki theatre, the beginnings of political cover for making the unpopular decision to give in to the threats and repay the bonds. If true, this is unfortunate. Perhaps we can only hope that somehow weak knees will ward off the tax-cut fever that I hear is infecting the back rooms of the House this past month.