Excellent, disturbing report by WPRI’s Ted Nesi Tuesday. Buyers of 38 Studios bonds didn’t care about the company’s financial condition because they knew taxpayers were on the hook to repay the bonds – even though they were moral and not general obligation bonds.
The notes from SEC officials’ November 2014 interviews with 38 Studios bondholders show the lenders paid little attention to the underlying financial condition of Curt Schilling’s company, instead seeing the bond offering as a routine round of taxpayer-backed borrowing that posed little risk of nonpayment. …
In his interview with the SEC, [senior executive of USAA Jon] Spear analogized the moral obligation to a parent co-signing a child’s loan, saying he saw a “very, very low” risk that Rhode Island would not pay the bonds and “never assumed that Rhode Island would ever violate the moral obligation.”
Yet at 7.5%, the bonds paid a much higher interest rate – i.e., are costing the taxpayers a lot more – because they were supposedly riskier than general obligation bonds! As has been repeatedly pointed out, bond buyers are sophisticated, well informed people who understand the difference between moral and general obligation bonds. Why are our state officials pretending that bond buyers do NOT understand this difference and giving them (these eeeeeevil Wall Street bankers, remember) the best of all possible worlds – high paying interest plus no risk of default – by needlessly compelling taxpayers to repay these MORAL obligation bonds? How is it in Rhode Island’s best interest to repay these bonds?
It simply is not, though it almost certainly is in the selfish best interest of state officials who would prefer to avoid the boatload of awkward questions, not to mention subpoenas and summonses and (yikes) the need for statements to be made under pains and penalties of perjury that would quickly come in the wake of the state’s default on these MORAL obligation bonds.