The Secondary Market In California IOUs

I suppose it shouldn’t be surprising that a secondary market has already emerged in California IOUs.  A Craigslist search, for example, turns up a number of bidders looking to buy some of the $53m of registered warrants the state issued last week.

For example, this Craigslist post advertises:

WE BUY CALIFORNIA IOU'S!!!!! (SAN DIEGO)

Got shafted by California with an IOU check?

Need cash NOW?

We buy California issued IOUs and give you cash IMMEDIATELY at $0.85 per dollar.

You cannot afford to wait,......CA Congress will continue to spend their candy ass time hopelessly debating how to manage a $24billion deficit...

THAT'S RIGHT...$24BILLION DOLLARS IN DEFICIT...YOU THINK CALIFORNIA IS GOING TO HAVE A BUDGET ANYTIME SOON????? Major banks have announced they will only be cashing in IOUs up to July 11th!!!! You are on your own after July 11th!!!!

While our state might be insolvent, we aren't. If you need CASH now and have a CA issued IOU, please contact us immediately. 

Says another: 

If you are in need of money & you received an IOU from the State of California, I will buy your IOU for a small discount to face value. Please reply to this Ad with your Name, Telephone number, city you live in & $ amount of your IOU. I am only interested in helping people & will pay close to face value.

Even more interesting is that Wall Street appears poised to trade the IOUs in earnest.  According to the Financial Times:

“We have a whole team working on it,” said Barry Silbert, chief executive of Second Market, a company that trades illiquid assets such as bankruptcy claims, private company stock and toxic assets.

Mr Silbert said hedge funds, municipal bond investors and other institutions were interested. Trading volume will depend on how many IOUs the state issues and how long banks accept IOUs for deposit at face value.  

. . . If the budget impasse persists, [California] could issue more than $3bn IOUs by the end of July for payments such as tax refunds, welfare and vendor bills.

The IOUs are due on or before October 2 and pay an annual rate of 3.75 per cent. They are transferable, which means anyone can buy or sell them.

Both Bank of America and Wells Fargo have agreed to accept the IOUs as deposits. From the Wells Fargo Press Release:

Wells Fargo Will Accept Registered Warrants Issues by State of California for Limited Time

SAN FRANCISCO — July 2, 2009

Wells Fargo & Company (NYSE:WFC) said today it will accept registered warrants issued by the State of California from its retail and business customers for a limited time. It will begin accepting the registered warrants for deposit on July 2, 2009 and stop accepting them no later than July 10, 2009.

“We’re very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of its payments to some businesses and individuals,” said Lisa Stevens, head of Community Banking for Wells Fargo in California. “Wells Fargo has a long history of taking extraordinary measures to help our customers and will accept registered warrants from our customers, but only for a limited time, to allow them time to make other arrangements. We are reluctant to take this step, but are doing so to help our customers who are not at fault and with the expectation that the Legislature and Governor will complete the budget within days. We join all Californians in urging our Legislature and our Governor to take the appropriate steps as soon as possible to resolve this budget crisis.”

In the words of Paul Kedrosky, “It is deliriously ironic and surreal that it took California to make screwed-up and irresponsible banks look like mature adults.”

Update: Christine Hurt discusses the suitability and fairness issues associated with the secondary market in California IOUs here.

Update: California IOU Update

Comments

[Jay Caldas]

My Name is Jay Caldas I am with Hartfield Titus & Donnelly LLC. Municipal securities brokers.
We have initiated on our trading system HTDonline.com The ability to trade and make markets in Ca I.O.U.'s effective July 16,2009.
We are a MSRB registered broker who complies with reg ATS
We have 7 offices across the country including one in San Francisco
If you would like to know more about this please contact me.

Thanks,
Jay Caldas
Vice President
Hartfield Titus & Donnelly LLC.
201-217-8080