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I'm Confused (California Edition)

posted by Stephen Lubben

On the day that California's credit rating has dropped through the floor, the FT has an article noting that traders are looking to buy the IOUs that California has been issuing to pay daily obligations, quoting one buyer who "would like" to purchase the IOUs for 50% of face.  But the same article goes on to note that key banks in California are accepting the IOUs as deposits -- so if I can sell my IOU to Wells Fargo for 100, why exactly would I sell it to the random trader in Ohio for 50? 

Another example of the "float a wacky idea to get in the paper" phenomenon, I suspect. 

UPDATE:  Or perhaps not.  The banks are apparently reconsidering.


Because people are lazy and unwilling to put in the effort to become unsophisticated. Some people, such as those applying for a mortgage, find it so inconvenient and costly to gather tax returns for the prior 3 years when applying for a mortgage. The implied cost, embedded in the resultant mortgage, indicates the massive burden gathering those tax returns would be to that individual.

For some people, taking a trip to the bank to deposit that IOU is just too much time taken out of their prime time television viewing.

There's a mistake in there but I'm too lazy and unwilling to change it

Why can't the IOUs become a form of currency within California? Is there a law that says a state cannot create its own currency valid solely within its own borders? They could pay their teachers in California IOUs and the teachers could take them to the local markets and buy them and the markets could give them to the landlords and so on. Obviously at some point they would have to be converted into US dollars for buying goods and services out of state and paying federal taxes but that is just a value issue not a legal bar on the use of IOUs for intrastate transactions per se.


Big banks to stop cashing California IOUs

Residents will have fewer places to cash in IOUs after large banks stop redeeming them Friday. SEC warns potential buyers and sellers of possible scams.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: July 9, 2009: 6:58 PM ET

NEW YORK (CNNMoney.com) -- Californians will have fewer places to redeem IOUs issued by the cash-strapped state after Friday.

At least two major banks, Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500), will stop accepting the IOUs, while JPMorgan Chase (JPM, Fortune 500) has not yet decided whether it will extend its original July 10 deadline.

More than 60 credit unions, however, will continue to accept the paper.

State Controller John Chiang started issuing the IOUs on July 2 to conserve cash, while lawmakers and Gov. Arnold Schwarzenegger tussle over closing a $26 billion budget gap. The state, the world's eighth largest economy, this month is facing a nearly $3 billion cash shortfall, which will balloon to $16.7 billion in October.

More than 91,200 IOUs worth $354.4 million were issued through Wednesday. Also called registered warrants, the IOUs pay an interest rate of 3.75% and are redeemable at the State Treasurer's Office on Oct. 2 or earlier if divided state officials reach a budget deal. Recipients will include state contractors, social service agencies and those owed income tax refunds.

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