38 Studios: Why Wasn’t the Result of the EDC’s 2010 Risk Assessment Properly Circulated?

A fascinating and eye-opening article by Mike Stanton in yesterday’s Providence Journal describes how, to paraphrase Stanton, the state jumped into the game business.
We learn, for example, that the decision to provide 38 Studios with a $75 million loan guarantee from the taxpayers of the state was definitely a joint one reached by then-Governor Carcieri and legislative leaders,

One week later, the new executive director of Rhode Island’s Economic Development Corporation, Keith Stokes, said that both Carcieri and Fox, the House speaker, told him in separate conversations that he should meet Schilling.
On March 16, Stokes and Fox met Schilling and 38 Studios director Tom Zaccagnino at the downtown Providence law office of Michael Corso, a friend and campaign supporter of Fox’s who was working with 38 Studios, sold tax credits, and had helped rewrite Rhode Island’s historic-preservation tax credit law

and not a solo venture by the Executive Branch. [Note to Pat from Cumberland who called the Helen Glover Show this morning and tried to pin responsibility exclusively on Carcieri and the Republicans: HA! Repubs only WISH they had that kind of power.] We also learn from Stanton that IBM was hired as the third party monitor. But now, IBM

has declined to provide The Journal with any details of the agreement. When the newspaper asked for copies of IBM’s written reports, the EDC said there are no written reports, just verbal updates.

No written reports by the third party monitor: was that to facilitate deniability for our officials should it be needed down the road?
Perhaps the most troubling item that emerges from Stanton’s article, however, is that something went seriously wrong with the communication of the results of EDC’s risk assessment, which did not come back entirely rosy.

Meanwhile, analysts hired by the EDC rushed to assess the viability of 38 Studios, and warned of the high risks of an unproven company in a competitive market. 38 Studios’ attempts to develop a massively multiplayer game, one analyst wrote, “is analogous to an ‘all in’ hand in poker.”

Now the question is, who was aware of these conclusions and why did they remain silent? Certainly the EDC had to be aware. Yet it appears that then-Executive Director Keith Stokes actually implied the opposite.

Responding to criticism from Democratic Rep. Charlene Lima of Cranston, Stokes wrote her that the EDC has gone to “great lengths to safeguard Rhode Island taxpayers.” …
Stokes said the deal had been carefully vetted by the EDC board, which included Rhode Island’s “top business, labor, higher education and civic leaders,” and that a “lengthy and comprehensive due diligence” had concluded that 38 Studios was “a sound company in a high-growth interactive entertainment market projected to reach $124 billion by 2013.”

Was Governor Carcieri aware? Had then-Speaker Fox been apprised of these troubling conclusions about the risk of the loan guarantee to 38 Studios?
How about House Finance Chair Steven Costantino? If he wasn’t aware that a risk assessment had been undertaken or the results, why was he making representations as though he were in the know?

Costantino countered that defaults were rare. The EDC, he said, “has been very, very successful in reducing the risk to the state…. They go through a very intense risk assessment.”

In GoLocalProv today, former Rep John Loughlin describes the 38 Studios loan guarantee as a

pie-in-the-sky, Hail Mary deal

But the EDC’s risk assessment provided specific information at the time that this might be the case. The critical question is, who had this information and failed to disseminate it, thereby preventing a properly informed decision from being made about the $100+ million tax dollars at stake?

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12 years ago

“the EDC said there are no written reports, just verbal updates”
The lack of paper trail should work in both directions. For verbal updates from IBM, the state should in return, give them verbal compensation.
“the EDC has gone to “great lengths to safeguard Rhode Island taxpayers.”
Umm, how? By vetting the deal? How’s vetting a safeguard, Keith?
38 Studios was “a sound company”
How did they know that in 2010, when they were still about 2 years from their first product being released?
Interesting that out of all the politicians’ names here, only one is still in elected office, Gordon Fox. So should he be the fall guy for this? If he has an opponent this fall, this should be the only issue he or she ever talks about.

Warrington Faust
Warrington Faust
12 years ago

Monique, all of your questions are answered quite simply, it is the nature of the people attracted to government work of this sort. They are given authority, other people’s money and no fear of consequences is they fail. (I am thinking of a former Building Inspector in a Massachusetts town where I do some business. He was fired for corruption. When last heard of, he was a “supervisor” for the Massachusetts Water Resources Authority) They are given the chance to be “players”, they can participate in the “glamour” of being a “capitalist” behind a “start up”, there is next to no penalty for failure. This does not promote critical thinking, it fosters the desire to avoid it. This proceeds to what is known in academia as the “fraudulent consensus”, we are all smart, we all agree, ergo, anyone who disagrees must be stupid. After that, all hope is lost.

Sammy in Arizona
Sammy in Arizona
12 years ago

WEST WARWICK, R.I. — Former Gov. Donald L. Carcieri on Friday declined a chance to talk about the troubles of Curt Schilling’s 38 Studios and the $75-million loan guarantee Carcieri backed as governor.
Attending a reunion of his administration at the Cowesett Inn, Carcieri sent word through a spokesman, Tony Bucci, that he would not be commenting about the Schilling situation.
— with reports from Richard C. Dujardin, Journal staff writer

12 years ago

That’s an important point, Warrington. Besides the fundamental inefficiencies of central planning, all of the incentives for members of the EDC were contrary to the public interest. There was no glory in making the hard, responsible, long-run recommendations to ensure that Rhode Island’ economy is healthy a decade from now. All of the incentives were to make high-profile, glamorous bets for the short term with taxpayer money. You can bet that if 38 Studios had worked out, all of the board members and self-proclaimed expert consultants (including a cetertain RIFuture contributor) would have been pointing to it for the rest of their business and political careers as evidence of what investment geniuses and visionaries they are. But since it didn’t work out, they’ll just play it off, leave it off their resumes in the future, and move on to their next venture.
“38 Studios’ attempts to develop a massively multiplayer game, one analyst wrote, “is analogous to an ‘all in’ hand in poker.”
In this case, it was an all-in with a busted hand. Investing the entire company in a bland fantasy-genre MMORPG to compete with World of Warcraft and Star Wars: The Old Republic was madness from the outset. Its chance of success, as Dean Wormer would say, is zero-point-zero. Any avid gamer could have explained the folly of this venture from the outset. That the “expert” board studied the gaming industry from its board room is not a proper substitute from real-world market forces and localized knowledge.

Warrington Faust
Warrington Faust
12 years ago

I have never understood the desire to hop on some parts of the high tech business. Particularly games, there is next to no capital investment (as compared to an auto factory). The “capital” is primarily “intellectual” and can disappear to any low cost country practically overnight. I think we should concentrate on “high wage”, modern manufacturing jobs. Robotics would seem a good field. Contrary to many people’s thinking, our wages are no higher than much of the developed world. True, the Far East may beat us, but that will equalize. It pretty much has in Japan (why do you think they send so much of their manufacturing here?) Why do we import subway cars from Canada? That is not a notoriously low wage country. There was a prevalent rumor in the 70’s -80’s that GM tried to roboticize to lower costs and improve quality. The story goes that the unions stepped in and put a stop to it. An economics best seller of the 80’s related the story of the author’s visit to a GM plant (same author as “The Money Game”). That plant produced the ill fated Chevy Vega. The workers were welding beer cans full of rocks to them in order to produce rattles. I have talked to oldsters who worked at the auto plants in Massachusetts (there were Ford, GM, and I think Chrysler assembly plants there. I think the last one, Framingham, closed in the 70’s. “Assembly Square” in Somerville was a Ford plant. Imagine, people drove to the plant to pick up their new car. They knew “not to buy one built on Monday”). They told me they knew just the point on the line where they could throw up the hood on a car and stop the production line. They thought that was hilarious.… Read more »

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