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JakilaTheHun (99.94)

Who Will Accept California IOUs? Not Big Banks.

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July 07, 2009 – Comments (10) | RELATED TICKERS: C , BAC , WFC

In my blog last week on "The Rise and Fall of California", I posed the question, 'who would be willing to accept California IOUs' and at what price?  According to the Wall Street Journal, the answer is not the big banks.  Bank of America, Citigroup, Wells Fargo, and JP Morgan Chase do not appear to be willing to accept the IOUs. 

What's almost laughable about this is that the state of California is paying a 3.75% interest rate on the IOUs!!!  Gee, does anyone think that interest rate is anywhere near the market interest rate given the level of risk and uncertainty surrounding California's public debt?  I have no clue what the market believes to be an appropriate interest rate, but I'd personally consider CA public debt to be in junk bond territory and don't believe it should carry an interest rate lower than 10%.  

 

10 Comments – Post Your Own

#1) On July 07, 2009 at 9:21 AM, bigcat1969 (93.10) wrote:

But soon you can accept them!  It looks like a new securities market is springing up as folks look to buy these IOUs.  I wonder what the valuation on these will be in a month or two, maybe 25 cents on the dollar?  It will be fun to watch this one.

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#2) On July 07, 2009 at 10:01 AM, Tastylunch (29.35) wrote:

The people who have leverage and options won't excpet IOUs, the ones w/o leverage and options will have to.

 Just another way the little guy gets screwed :(

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#3) On July 07, 2009 at 10:13 AM, jatt22 (49.01) wrote:

i have a  q  can  some body cash these  IOUs on check cashing  place or  buy  groccery wth  it  .

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#4) On July 07, 2009 at 10:43 AM, Entrepreneur58 (37.23) wrote:

State IOU's, in theory,  should be a safe investment, because, as I understand it, States can not declare bankruptcy.  This means that if the State does not pay you back, you can take legal action against the State and seize it's assets as payment and there is nothing the State can do to protect itself (other than paying you back what you are owed).  Of course, the Federal Government could step in and change the rules overnight like they did with the auto makers and stick it to the creditors.  This is another big mess in the making.

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#5) On July 07, 2009 at 1:27 PM, tonylogan1 (28.23) wrote:

Question: why hold a state IOU at 3.75% when you could hold a state MUNI bond at higher interest, with identical risk profile?

Answer: Customer satisfaction. This lasted for one week. Now banks are back to business.

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#6) On July 07, 2009 at 11:06 PM, bostoncelitcs (47.46) wrote:

Maybe Gray Davis will??

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#7) On July 08, 2009 at 9:10 AM, bigcat1969 (93.10) wrote:

No you can't buy things with them.  They basically are like very small state bonds.  Some check cashing places might take them for a fee, most major banks are saying that they won't be taking them or will only take them up to Friday possibly.

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#8) On July 09, 2009 at 1:21 AM, shanelevy (< 20) wrote:

The fed needs to guarantee california's debt. The interest california is going to have to pay with its current credit rating on any bonds it issues is going to be murderous for california taxpayers. A simple guarantee, like AIG and many banks received, would make a huge difference with cali's cost of borrowing.

 

Oh, and we need a second stimulus.

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#9) On July 09, 2009 at 2:08 AM, tonylogan1 (28.23) wrote:

not so simple shane... if the Fed does that, who would buy US Treasuries when you could just buy CA Muni debt?

Interest rates would fly up on US Treasuries, lifting mortgage costs,you know where all that goes.

US Govt needs to tell CA to drop dead. If they don't CA will just keep spending like a drunk sailor, but on the whole US's dime instead of just ou own.

The race to the bottom will start as all states realize they should just spend ASAP before the stimulous well runs dry.

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#10) On July 09, 2009 at 3:20 AM, JakilaTheHun (99.94) wrote:

I completely agree TonyLogan.  If the US doesn't tell CA to "drop dead", then there are about a dozen other states that are immediately going to reach their hands out.  We can't punish responsibility and reward recklessness.  (Unfortunately, I think we did that with the bailouts, but I'd like to avoid that mistake this go around.)

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