If the state does not make this payment ....
June 17, 2014
Operation Clean Government

With little fanfare, new House Speaker Nicholas Mattielo has included $12.3 million in proposed budget to pay the next installment on the 38 Studios bonds.

OCG joins Rep. Karen MacBeth, D ­Cumberland, chairwoman of the House Oversight Committee in asking, "What's the rush?"

This payment is not due until November, and we can hope that wiser heads will prevail between now and then. (Even though the money is in the budget, there is no reason why the funds can't be escrowed pending the full investigation that MacBeth and other voices of reason demand.)

If the state does not make this payment, it will trigger a default. That default would cause the bondholders to file an insurance claim (yes, the bondholders are protected by insurance as well as the state's "moral obligation".)

And as sure as the sun will rise tomorrow, the insurance companies will deny the claim--and the next step would be a lawsuit. And that lawsuit, ladies and gentlemen, is exactly what the most powerful people in this state are trying to avoid.

In a lawsuit, all the key players would have to testify under oath, and that's the only way the taxpayers of Rhode Island are ever going to learn exactly what happened.

Too many of these key decision makers had the opportunity to make too much money by slipping this deal past the unwary taxpayers who are now on the hook. Furthermore, many believe that the politicians pushed it through so their friends and associates could also make money.

No, we don't think there was an intent to cause harm--just a chance at some easy money which went badly awry.

Our political leadership has been wildly inconsistent when it comes to 38 Studios lawsuits.  On the one hand, the State has sued some of the bit players in this drama personally: individuals such as EDC attorney Rob Stoltzman, former EDC Executive director Keith Stokes, and all the EDC board members who voted for the deal.

Why is the State doing that? These defendants don't have anywhere near the personal wealth necessary to make the taxpayers whole. No, the State is suing them to get to their insurance carriers. Attorneys like Stoltzman have malpractice coverage, and the EDC officers and directors are covered by the Errors and Omissions clause of their Directors and Officers insurance policies.

Sadly, the current lawsuits against EDC board members will likely settle and we will never hear the details. (Several years ago Governor Carcieri sued Resource Recovery Corporation board members for fraud, theft and negligence relating to the operation of the landfill. However, insurance companies paid tens of millions of dollars, and the case never went to trial.)

But there is a major difference with a potential bond default lawsuit--there are third party bondholders, who are not about to walk away with half a loaf.

If our leaders were consistent, they would welcome the chance to trigger the bond insurance coverage and potential court case that would follow. But they aren't moving in that direction, and therein lies the rub.

They hide behind the "moral obligation" argument, piously spouting platitudes fronted by the bogeyman of potentially downgraded bond ratings.

But the financial community is not that stupid, Those who purchase future General Obligation bonds, which DO carry the full repayment guarantee by the state) should not be fazed by Rhode Island's efforts to correct an internal wrong.

And future "moral obligation" bonds? Sure, they would probably carry a higher interest rate. But OCG argues they should not exist at all--they are just a sham to escape the approval of the taxpayers, an end run to avoid allowing voters to approve them.

When viewed from this perspective, it makes all the sense in the world to hold off on paying the next installment--unless, of course, you have something to hide.

... it makes all the sense in the world to hold off ...


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