The 38 Studios Bond Debate and RI’s Rip Van Winkles

In watching the ongoing debate over repaying the controversial 38 Studios bonds, I’m getting more and more disgusted over the efforts to frame this discussion a matter of intellect/common sense vs. emotion/unchecked anger. It’s the kind of insulting and condescending nonsense that got us into trouble in the first place.

After all, when the initial 38 Studios deal was rammed through the legislature, the self-appointed adults in the room (legislative leaders, the Governor, lawyers and financial experts) all argued that the responsible thing to do was make this strong investment in Rhode Island’s economic future, to be bold and visionary and do what was needed to create jobs. Those who dared raise concerns about handing over $75M in loan guarantees to one company, in an industry with a high failure rate being run by a CEO with no business experience, were dismissed as engaging in hysterical political attacks. They were holding our state back because of their unwillingness to trust the state’s political leadership.

You’d think just four years later, we might be a little more careful about trusting the people pushing for repayment of the 38 Studios bonds when their argument can best be boiled down to “trust what the rating agencies are telling us to do.”

I don’t know where these Rip Van Winkles were in late 2008, early 2009 when the global economy was on the brink of a financial meltdown. But those of us who were awake and paying attention can’t help but remember the central role those rating agencies played in that financial crisis. Standard & Poor’s, Moody’s and Fitch all managed to give great ratings to some of the worst financial products the financial marketplace had ever seen. I’m talking about the mortgage-backed securities products–the SIVs, CDOs and other vehicles–which they happily advised state pension funds and other investors to go whole hog on.

Guess what happened? When the housing market collapsed, a range of institutional investors were left holding worthless products because the underlying mortgages weren’t worth the paper they were printed on. Banks were issuing mortgages to anyone with a pulse so they could turn around and feed Wall Street’s demand for more crap mortgages to shovel into bad financial products.

But it was more than just bad judgment. The Big Three rating agencies were also exposed as having cozy relationships with the firms whose products they were rating. They came out of the 2008-2009 debacle bruised, bloodied and having all the credibility of a con artist running a boardwalk Three Card Monte table.

(And let’s not forget, those same rating agencies happily gave their blue ribbon seal of approval to the 38 Studios bonds in 2010, essentially telling their marks to pay no attention to the company’s lack of capital and the fact that 3 out of 4 candidates for Governor in Rhode Island that year were threatening to scrap or revisit the state’s investment.)

Despite their horrific track record, the Big Three are now being treated as the voices of reason by the pro-bond repayment crowd. Rhode Islanders are being told to take their threats seriously and to dutifully shout “How high?” when these guys with red noses and big floppy shoes order our state to jump.

I’ve got some advice for anyone who wants to play “serious thinker” and insist that we must listen to people with a track record of abject failure. Go pick up a copy of Matt Taibbi’s “Griftopia” or watch “Inside Job”. Understand that the rap you are running now was discredited by the reality of the 2008-09 financial crisis. Worshipping at the altar of Wall Street credibility may get politicians some nice campaign contributions and it might give consultants and pundits the chance to act like they are the voice of reason. But those of us who weren’t taking nap during the financial crisis know that you are either being played or are playing us.

And I think Rhode Islanders are tired of being treated like easy marks.