So, here’s a question for you.
The Rhode Island Constitution limits the amount of money that can be borrowed to just a modest sum unless there is voter consent through a referendum. So, the legislators decide that this process is too cumbersome and they want their pet projects to go forward unabated, so they create quasi-public entities like the Economic Development Corporation (EDC). In setting up these entities the legislative language articulates that the agency is separate and apart from the state and can be sued or sue SOLELY on its own and there is no state back-up since the state is another legal entity. As a matter of fact, the332 page offering documents for such a bond which went to 38 Studios clearly articulates that the state isn’t involved and repeatedly says that Rhode Island has no liability for debts and that no full faith and credit is pledged to pay off the bond in case of a default.
Enter Standard and Poor,LLC (S&P), a bond credit rating agency which is threatening to downgrade Rhode Island’s bond rating for the state and municipalities unless the State backs up the “moral obligation” bonds of a completely different entity. Mind you, this was the same credit rating group who was warned by then General Treasurer Frank Caprio to forego a top credit rating on this bond issuance which the company chose to ignore.
Consider further, that S&P was sued last year by the U.S. Department of Justice, 16 states with some Attorney Generals and the District of Columbia for alleged misconduct involving structured finance securities which were at the heart of the nation’s financial crisis. The lawsuit states that S&P allowed its analysis to be influenced by its desire to earn lucrative fees from its investment clients and knowingly assigned inflated credit ratings to toxic assets sold and packaged by Wall Street banks. The allegations note that S&P’s so-called independent judgment and objectivity were compromised.
Consider still further that then-Connecticut Attorney General, Richard Blumenthal, joined by mayors from across the state, sued S&P and other credit rating agencies for allegedly giving artificially low credit ratings that cost taxpayers millions of dollars in unnecessary bond insurance and higher interest rates. Mr. Blumenthal asserted that S&P was, in effect, implementing a secret tax on Main Street for the benefit of Wall Street. In 2011 S&P et al caved in and settled with the State of Connecticut coughing up a $900,000 credit for future bond ratings along with other remedies for its deceptive and unfair trade practices.
Fast forward to 2014 in Rhode Island. The bonds issued for 38 Studios weren’t even state-sponsored. Copious warnings in the documents state that Rhode Island has no obligation and that it isn’t a state bond. S&P was warned by Treasurer Frank Caprio about the credit ratings. Now, this credit rating agency is threatening the state with a downgrade of its future bonds for one that the state didn’t even issue. S&P is a two-time loser, big-time, in court.
So, here’s the question, actually two of them: Why are our legislators and leaders kowtowing to S&P, which is on a losing side in litigation? Don’t the solons see anything ludicrous about being hung by their own petard for creating these quasi-public agencies, by making taxpayers pay for a bond not of their own creation?
So, here’s a question for you.