RI lawmakers considering defaulting on 38 Studios debt

House Finance Committee reviewing bills that would prevent state from making payments related to controversial 2010 $75 million loan.

Rhode Island lawmakers are considering defaulting on the money owed related to the state's investment in former Red Sox pitcher Curt Schilling's failed game outfit, 38 Studios.

Image credit: Steven Senne, AP.

The Associated Press reports that Rhode Island's House Finance Committee this week reviewed a number of bills that would block the state or its Economic Development Corp. (EDC) from making any payments related to the controversial $75 million loan that brought 38 Studios to Rhode Island in 2010.

The publication believes these proposals are unlikely to gain any traction in Rhode Island's General Assembly. On top of this, the bills face an uphill battle against Governor Lincoln Chafee, who has been clear that he will do everything in his power to protect tax-payer money.

When 38 Studios filed for bankruptcy last summer, it left Rhode Island on the hook for around $100 million. The state has since sued Schilling and other architects of the loan.

According to the Associated Press, supporters of the default plan say taxpayers should not be forced to pay for the 38 Studios situation. Representative and sponsor of one of the bills Karen MacBeth (D-Cumberland) told the publication that insurance on the loan will cover the costs.

"The state of Rhode Island cannot afford to put this burden on the backs of the taxpayers," MacBeth said. "Have the insurance company pay the bill. This is why we have insurance. The insurance company understood the risk. Now let them pay."

On the other side of the argument, EDC Chief of Staff John Pagliarini cautioned lawmakers that defaulting on the loan could make it more difficult to finance future projects and negatively impact the state's bond ratings overall.

Written By

Eddie Makuch is a news editor at GameSpot, and would like to see the Whalers return to Hartford.

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Discussion

82 comments
91210user
91210user

Some of the stories that comes out of Florada makes me laugh.

King_Wii
King_Wii

This situation is entirely disgusting in a sense. I feel for the people of RI, their state has been taken advantage of. The reason the state is defaulting is mainly because they need their money back and lets face it, 38 Studios doesn't have a dime in assets to auction of in reality. Amalur was an interesting game to say the least, I enjoyed it but the truth is it didn't live up to expectations and no one wants to buy a B(+ish) IP and nor would the buy it for 100 million dollars (ok wait Dr. Evil might if only he thought he could brain wash gamers into doing his bidding).


I hope that Curt and other Studio 38 big wigs go to jail for the failure they have committed and the massive loss both to the state and the insurance company.

tim1935
tim1935

38 Studios was just like Square Enix "We didn't sell 5 jillion copies so it's a complete and utter failure"  LOL   The game actually didn't do that bad in sales I think they broke out the hatchet way too fast.

SeAzhrei
SeAzhrei

"The insurance company understood the risk. Now let them pay."

*coughcoughSAYSALOTcough*

PlatinumPaladin
PlatinumPaladin

Why would you continue to pay money to a failed company? Surely a condition of the loan would have been if the company fails, then the loan no longer has to be paid out. And why, if Chafee is trying to protect taxpayer money, would he object to defaulting on the loan? Pouring money into a dead-end company doesn't strike me as a good use of anyone's money.

I've got to be missing something here, or is the business world really that retarded?

Lamachina
Lamachina

Kingdoms of LOSERMALUR: FAILING

KingKnight1337
KingKnight1337

I'm just curious but this is a gaming site....How does this "news" relate to gaming in any way? Someone clear that up or me.

JimmeyBurrows
JimmeyBurrows

If the insurance will cover it, then why don't they just go ahead and claim, banks are as stupid as polititions they both invest in all the wrong things (seriously they're like old women getting a letter about winning the Nigerian lottery, always gonna end badly.) But at least that way they don't make an even bigger mess out of legal fees... and well, no one wants lawyers to end up winning.

styymy
styymy

Looks like he's gonna walk either way.They'll never collect a dime. Doubt anyone posting on this site would be so fortunate.

beuneus12
beuneus12

imagine what else RI could have done with 75 million

CommodoreRaslin
CommodoreRaslin

Someone is trying to get reelected.

But at the end of the day Rhode Island is going to pay.

TheCyborgNinja
TheCyborgNinja

I realized something: Schilling looks like the love child of Rodney Dangerfield and John Goodman.

deth420
deth420

wow, just wow. this is why no one takes the govment serious. they make terrible decisions  usually based of greed, and the just pass the buck.

beautiful system we have...

blackothh
blackothh

I love how its legal for government and large companys to steal.

Schucknasty
Schucknasty

Here is how this works, folks.  The State of RI agrees to issue bonds representing a promise by the state to repay the face amount of the bonds plus a specified interest rate on the bonds at some point in the future.  These bonds are then sold to various investors (usually big pension or other investment funds) for the face amount of the bonds (in this case around $100M).  The investors view this as a good thing because (a) state governments in this country are usually fairly reliable when it comes to repaying their obligations, (b) most states have decent credit ratings they are able to get bond insurance (i.e., a policy that is specifically designed to repay the bond purchasers in the event the government defaults and doesn't pay) which gives the bond purchasers some comfort that they will get paid one way or another, and (c) government-issued bonds have some tax advantages for the purchasers.  The amounts paid by the investors to the state for the bonds are then loaned to an economic enterprise (in this case 38 Studios) with a promise by the enterprise to repay the state an amount equal to the bond proceeds that are loaned to it plus the interest that the state ultimately will have to pay to the investors.  In this case, 38 Studios would have repaid this loan over time out of amounts made from the sale of its games.  When KoA did poorly, 38 Studios was unable to make its scheduled payments on the debt and defaulted, ultimately declaring bankruptcy.  As a result, the state now has no source of funds to repay the investors when the bond payments are to be made, other than either (a) the general revenues of the state (which come from Mr. and Mrs. John Q. Taxpayer, or (b) proceeds from the bond insurance policy.  As someone below suggested, electing to force the investors to resort to the proceeds of the bond insurance policy will hurt RI's credit rating and make it difficult for RI to issue bonds for other types of economic development in the future, because bond insurer's will be reluctant to issue a policy that they think might be "called" for payment.  As a result, the bond insurers will require a significant premium in order to issue a policy, which effectively raises RI's cost of borrowing. Since these borrowing costs are ultimately paid using taxpayer funds, the taxpayer gets screwed either way. 


Sorry for the long explanation.  I heard KOA was actually a pretty good game, so sorry to see the studio go under.  Tough choice for the RI taxpayer's elected representatives.

eric_neo3
eric_neo3

Schilling funded the studio and had vision, but it was up to the top brass to manage the company, so he shouldn't be at fault for their crimes.

I have but one question..

Why is 38 studios' CFO and top brass who effectively robbed the taxpayers of 75 million  still not in prison?

Takeno456
Takeno456

Another government ass saving maneuver. The RI government should have checked out the client before issuing a loan. Its called risk assessment. I don't understand why the government thinks its ok if they default on loans. Its a wonder that our economy is not worse with these kinds of attitudes in office.

zeorhymer123321
zeorhymer123321

"...Governor Lincoln Chafee, who has been clear that he will do everything in his power to protect tax-payer money."

So why did they give out a loan to a brand new studio with no history and a former baseball player with no prior experience in making a game?  I guess the governor already failed in protecting the tax-payer's money.

Stiler
Stiler

It's the governments palce to pay the money, not the people nor the company that went kaput. 

RI made the loan to them WITh the tax payers money, the company folded and went belly up, thus RI is the one on the hook, they already spent the tax payers money on it. 


So the "burden" shouldn't be on the taxpayers, but on the government of RI who made the loan.

JBo796
JBo796

@King_Wii You really need to understand more about what happened with this entire deal before wishing people be thrown in jail.  The game, really wasn't a failure and would have made all the money back.  The part that screwed 38 studios, Schilling & Rhode Island, was the cut that EA was taking for publishing the game.  It was ridiculously high.  EA took advantage of them, plain and simple.

laethyn1
laethyn1

@tim1935 

They never released the game, so the rest of your comment is invalid.

Reckoning was put out by BigHugeGames, funded by EA. 38 studios was hundreds of miles away, working on Copernicus.

King_Wii
King_Wii

@tim1935 38 Studios didn't sell enough copies to pay their loan back. The game didn't perform well enough to clear the loan so they then would have to make a second game to pay the loan back, however to make a second game they would need another loan. So if you look at it like that 38 Studios got caught in a borrow and spend black hole. There was no way out for them and in some instances the founders and managers knew it was coming but continued to push forward. In some ways Amalur just wasn't meant to happen.

Mistavarno
Mistavarno

@PlatinumPaladin They're not talking about continuing to pay the now defunct 38 Studios. 38 declared bankruptcy and is now out of the picture (though the state is going after the founders of the studio) This article is talking about the RI agency that "borrowed" the money to give to 38. Since 38 can't make the payments (not existing and all) the EDC is now on the hook for the bill. Think of it like you're renting a house out to pay the mortgage and the tenant leaves; now you don't have the money to pay the loan so you have to chose between defaulting on the house loan (and taking a hit on your credit rating) or liquidating assets somewhere else to cover what you owe the bank.

JBo796
JBo796

@KingKnight1337 Compared to IGN, Gamespot is like CNN whereas IGN would be like TMZ.

You have no idea how much worse it could be.

Riddick123
Riddick123

@KingKnight1337 Kingdoms of Amalur is a game...no?  Hence the company that made game would be considered part of gaming news.  Read the article.  Or if you did, read a couple of more times until it sinks in.


russelloh
russelloh

@KingKnight1337 What part of a game company going out of business does not relate to gaming? Are we reading the same article?

SIDEFX1
SIDEFX1

@KingKnight1337 How does this not relate to gaming?.

TruthTellers
TruthTellers

@beuneus12  

They probably would have spent it to give themselves bigger salaries. See people, this is why government should NOT get involved with private business, those in the government are not smart enough to understand business and the taxpayer's will be put on the hook because I'm sure the insurance company will take this claim by the state of RI to court and guess who's paying for the lawyers to represent RI: the sucka's that live in RI, that's who.

PlatinumPaladin
PlatinumPaladin

@deth420 And now they're going to make the insurance company look like the bad guys when they argue why they shouldn't cover the loan.

laethyn1
laethyn1

@Schucknasty 

Well, since Reckoning wasn't made by 38 studios, and was paid for by different funding from EA, and all proceeds were going back to EA in exchange for the funding, that's really not how it works.

KoA: Reckoning, was made by Big Huge Games. They had been working on the game long before 38 studios came along. Once they did though, the setting was moved from what they were working on to fit in the larger "Amalur" world.

But otherwise, yeah. It was not a loan, it was a loan guarantee.

The problem I see is Chaffee had it out for 38 studios from the beginning. The moment he was elected governor, 38S was screwed.

Also, RI went to 38S, not the other way around. It was a "hey, we'll back things, in exchange, move your company here and help boost our economy". Same thing many states do.

ggregd
ggregd

@Schucknasty That's not what happened.  The state didn't directly loan money to 38 Studios, they gave them loan guarantees, meaning that if 38 Studios couldn't pay back it's loans to other parties then the state would, making 38 a much better lending risk.  They wanted 38 to move there when they thought they were going to release a successful MMO (not just KoA).  Now that 38 is gone and the state has to back up it's guarantees, it's reneging.  

Yuusha09
Yuusha09

@eric_neo3 Because he didn't rob anyone of anything.  Rhode Island made a poor investment that bit them in the ass, nothing more.

laethyn1
laethyn1

@zeorhymer123321 

They didn't. It wasn't a loan. Not the way people think.

That said, Chaffee was against the guarantee from the beginning. The moment he was elected, 38S was screwed and everyone knew it.

ranbla
ranbla

@Stiler I guess you don't understand government. Every dime the government "earns" or spends is tax-payer money. If the government pays, the people are the ones actually paying.

laethyn1
laethyn1

@JBo796 @King_Wii 

EA was "taking a cut" because they had paid the bills to get Reckoning made.

Reckoning had very little to do with 38 studios, which was focused on Copernicus.

Big Huge Games had been working on the game long before 38 studios stepped in and saved them from bankruptcy. Once they did, the setting was changed to fit with what was going on with Copernicus.

It also amazes me how many people blame Schilling et al for RI going to him and offering him money in exchange for moving this company.

DESTROYRS_F8
DESTROYRS_F8

@Gamer-Geek @Lamachina I think he meant  COMPANIES OF AMALOSER: THE FAILING.

ranbla
ranbla

@PlatinumPaladin @deth420 Insurance companies are bad guys IMO. Insurance is the greediest concept  ever invented, right after taxes.

eric_neo3
eric_neo3

@Yuusha09@eric_neo3You and the guys who liked your comment my lord, seriously?


1) fraudulent accounting, fraudulent loan application look them up.  For creative Accounting I recommend watching ENRON.

In order to get 75 million in a loan they had to prove with falsified account records that they could pay the full amount back with interest, the one in charge of that was the CFO.


2) In the move to Rhode Island employees were promised by the execs that company would sell their houses on their behalf. This never happened and many only found out about it after being let go.


3) The execs at the top brass stopped paying employees weeks before letting them go, and they never got to see that income. The execs meanwhile kept taking their cuts.


Claiming these bastards did no wrong and didn't rob anyone of anything is disgusting.

Stiler
Stiler

@ranbla @Stiler Yes, but it sounds like here they are trying to double dip. 

 They loaned  38 studios the money (the tax payers money) and 38 went belly up, now they want to stick it to the insurance and default on the loan (and thus impact the potential for RI to loan in the future because of defaulting on this loan.


JBo796
JBo796

Well...apparently im the one that needs to understand the situation better :-P

eric_neo3
eric_neo3

@laethyn1@eric_neo3@Yuusha09 

Learn to read please:

In order to get 75 million in a loan they had to prove with falsified account records that they could pay the full amount back with interest, the one in charge of that was the CFO.

laethyn1
laethyn1

@Stiler @ranbla 

They did not loan 38 studios money. The put up the money as loan guarantees.

There is a difference.

RI told the people lending 38s money "hey no worries. if something happens, we'll pay you back". They did this in exchange for 38 moving to RI. Now that they have to do exactly what they agreed to do, they are bawking. If 38S was successful, the state would have never spent a dime.

That's what a loan guarantee is.