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