At State House rally, groups oppose repaying 38 Studios bonds

May 30--PROVIDENCE, R.I. -- A small but impassioned group of protesters vented their outrage -- and opposition -- to a taxpayer-financed "38 Studios bailout" outside the State House Thursday.

"It's a scam. It's a rip-off. We shouldn't pay it back," said one. "It's unconstitutional to sell bonds without the approval of the voters .... Now Wall Street is telling us we have to pay these bonds? No, we don't," said another.

"This former Red Sox player doesn't think that we, the taxpayers, should be on the hook for the dealings of another former Red Sox player," chimed Mike Stenhouse, CEO of the Republican-led R.I. Center for Freedom & Prosperity.

"By not paying this bond we will send a statement that these insider, special deals will not be tolerated any more in our state," Stenhouse said to applause from the two dozen or so people from the Rhode Island Tea Party, the Green Party, Occupy Providence and other groups who turned out.

Democrat Todd Giroux, a second-time candidate for governor, made an appearance.

But the protest did not draw the big names the organizers had billed as speakers at their protest rally, including "two major-party candidates for governor," House Oversight Committee chairwoman Karen MacBeth and Gary Sasse, one-time administration director for former Gov. Donald Carcieri who now heads the Hassenfeld Institute for Public Leadership at Bryant University.

And the protesters again found themselves on the opposing end of a debate that began Thursday morning, exactly where it left off at budget decision-making time last year, with a top-ranked Rhode Island lawmaker saying the state has no choice.

House Speaker Nicholas Mattiello told the state's business community that the state's failed $75-million investment in Curt Schilling's video-game company "was one of the biggest debacles in the country's history and certainly Rhode Island's."

But Mattiello said, again, that he believes the state needs to pay the investors who bought the state-backed bonds to avoid serious financial consequences, such as a downgrade in Rhode Island's current and future borrowings to "junk bond status."

Hours later, at the protest, Occupy Providence's Randall Rose said "it doesn't matter" if the big national rating agencies cut the state's bond-rating substantially, because "smart investors know the [bond rating] agencies can't be trusted at all."

But Mattiello effectively said the state can't afford the risk.

Ernest Almonte, the former auditor general for the legislature who is running for state treasurer, agreed and suggested the House speaker, Senate president and governor take a serious stab at reaching a "negotiated settlement."

Almonte said the state needs to pay the $89 million in principal and interest due the investors who purchased the "moral obligation bonds."

To suggest otherwise is irresponsible, said Almonte, who is in a three-way Democratic primary race against Seth Magaziner, who supports paying the bonds, and former state General Treasurer Frank Caprio, who does not.

The crux of Caprio's argument: "The 38 Studio bonds were not approved by R.I. voters. The sophisticated investors who made the loan are multi-billion-dollar companies who understood the risks and have bought insurance to protect their investment." But he, too, has recommended the state "begin discussions with the rating agencies and the others who hold and insure the bonds."

Almonte said the state has a short window over the next 30 days, before the passage of the next state budget, to try to negotiate a settlement of the amounts the state owes.

"It is nice to say that," Department of Administration director Richard Licht said Thursday, when asked the likelihood of negotiating a settlement.

He recently told the House Finance Committee he got nowhere in his own efforts to open settlement talks. He said he and Peter Marino, director of the state's office of budget and management, met with the insurer last year and again this year and "they had no interest in negotiating anything prior to a default."

He said he also had "several conversations with USAA, which is the largest bondholder ... and they had no interest in discussing any kind of settlement."

But Almonte said there is no guarantee that rank-and-file lawmakers will approve the payment of the next $12.3 million in tax dollars owed the bond holders, and that uncertainty could give the state an opportunity to forge a settlement between now and the budget vote.

His argument: "The insurance company will pay the bondholders if the state does not. Then they would likely sue the state for repayment, leading to a substantial downgrade of our ratings. This will cost our state -- and likely our municipalities -- more money in interest. That leaves less money for rebuilding our infrastructure like roads, bridges, and school improvements."

"I would bring all of the stakeholders together: the insurance company, defendants, the trustee, a representative for the bondholders, and the state. I would explain that the insurance company received a commission and if the state did not pay they would be on the hook for the full amount due."

In his scenario, everybody would pay something, including the state, which "has some culpability because I believe they did not do their proper due diligence and did not monitor the loan properly ... . Everyone would sign an agreement not to sue ... the payment issue would be over."

In his view, "the bondholders should accept a lower rate of interest in return for full payment of their bonds."

Angry lawmakers approved the first $2.4 million payment last year.

That does not count the additional $843,467 in legal fees the state economic development agency has run up in connection with the failed loan deal as the state wages battle in court against Schilling, the state's former economic development director Keith Stokes, its financial adviser First Southwest and others with a hand in the failed loan deal.

The state's lawsuit alleges fraud, negligence and breach of fiduciary duty.

With reports from staff writer Paul Grimaldi.

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