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Fox says considering default on 38 Studio bonds is “an option”

October 22, 2012

Governor Lincoln Chafee has said he won’t even consider defaulting on the bonds for 38 Studios, and state Treasurer Gina Raimondo says the state should honor the bonds.

But House Speaker Gordon Fox has more influence over the budget process than either of them, and he isn’t dismissing the idea of considering defaulting on the 38 Studio bonds. “It’s an option,” Fox said when asked about the subject last week near the end of a debate on WPRI/WNAC-TV’s Newsmakers.

UPDATE: Fox’s legislative opponent, Mark Binder, is questioning whether Fox modified his stance on considering default. According to a news release from Binder’s campaign late Monday:

Binder said Fox told Moody’s Investors service something very different last May.  At that time, Moody’s investment analyst Marcia Van Wagner issued an investment note which stated, “Governor Chafee, Treasurer Raimondo, Senate President Teresa Paiva-Weed and House Speaker Gordon Fox have recently expressed to us directly their support for the moral obligation commitment based on the state’s credit.” . . . .

Binder added, “Gordon Fox owes taxpayers a full explanation as to where he stands on the 38 Studios bonds and whether he thinks taxpayers should be on the hook for $100M in order to pay off the bondholders in this failed company with interest.  Why should they be made whole at the expense of taxpayers?”

Fox’s campaign couldn’t be immediately reached for additional comment. When asked on Newsmakers, Binder said he supports considering defaulting on the bonds for 38 Studios.

Josh Barro has argued emphatically that Rhode Island should default on the bonds, as he wrote in the Boston Globe in May.

Generally, states should perform on their moral obligations. But Rhode Island’s government has more moral obligations than it can possibly service. The state still struggles under a huge unfunded public employee pension obligation, even after a major set of pension reforms last year, which will freeze cost of living adjustments for current retirees for as long as 15 years.

Surely, the state had a moral obligation to pay those pension benefits in full. If it couldn’t afford to meet that obligation, how can it afford to appropriate the nearly $100 million that it will take to pay off the 38 Studios bondholders with interest? A default will surely make it difficult for Rhode Island to issue more moral obligation bonds— but if that means no more 38 Studios-style deals, so much the better.

Those on the other side of the argument believe that default would have a negative effect on Rhode Island.

8 Comments leave one →
  1. Nick Murgo permalink
    October 23, 2012 12:05 am

    Let the Bank of NY Mellon take the hair cut – they are the bond trustees. Who sold the bond holders on this bad idea? The author is right.

  2. Mister Guy permalink
    October 23, 2012 12:43 am

    This is one of the worst ideas that I’ve seen come out of RI pol’s mouth in quite some time. Gordon Fox needs to go!

  3. "people come first before bonds" crusader permalink
    October 23, 2012 1:52 pm

    let the bonds default

  4. Craig permalink
    October 23, 2012 2:12 pm

    I can’t understand why it would be ok for us to break our promises to working people who have served the people of RI, but then not be willing to break our promises to profiteering rich people who hold the bonds.

    As a tax payer, I would much prefer my tax dollars going to good pensions that were promised to retirees than to anyone who thought 38 Studios had a snowballs chance in hell of success. these people knew it was a “moral obligation” bond, and that they might not get paid.

    Let them do their part for the good of the people and suck it up. They can afford it more than pensioners and struggling middle-class families can.

    If we pay out for the bonds after screwing working people, then this government really has gone past some final dividng line between unfair and pure plutoicracy.

    (I have no idea who bought the bonds – so if that is public info, it would be nice to know.)

  5. frank landry permalink
    October 23, 2012 2:27 pm

    We must honor our commitments. We must stand on our principles and our
    Word as elected officials. When our pensions were stolen we can’t say or
    Believe that it is then ok not to pay our moral commitments. One wrong doesn’t justify that we don’t stand for anything. Without honor and integrity we have and are badly broken.

  6. Barry permalink
    October 23, 2012 3:05 pm

    I fail to see why I as a taxpayer have any moral commitment for bonds I didn’t get a chance to vote for. Arlene Violet had a column explaining the bondholders are getting much higher interest than they would have it they had been General Obligation bonds so they knew it was a risk. Moral obligations don’t cut it in the private world (for example the “clean coal” industry feels no moral obligation to clean up their upwind emissions and resists every EPA try to get them to do so) so I see no reason why taxpayers should be different. Fox is right to raise the issue.

    • Mister Guy permalink
      October 23, 2012 6:19 pm

      “I fail to see why I as a taxpayer have any moral commitment for bonds I didn’t get a chance to vote for.”

      We live in a representative democracy, not a direct democracy.

      I don’t like the 38 Studios dealings any more than anyone else does, but not backing bonds that we have pledged to back as a state is never an option, unless one wants to needlessly raise the cost of future state borrowing.


  1. Speaker Fox says he’ll defer to the General Assembly on the possibility of defaulting on the 38 Studios bonds « On Politics

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