In-depth analysis on Credit Writedowns Pro.

Banks to stop accepting California’s IOUs

This can’t be good.

A group of the biggest U.S. banks said they would stop accepting California’s IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

The development is the latest twist in California’s struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs — or "individual registered warrants" — to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July’s end.

But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2, or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.

- Big Banks Don’t Want California’s IOUs, WSJ

Maybe the big banks are afraid they are undercapitalized and don’t want California’s IOUs because they think they are worthless.  Fitch has downgraded California to near-junk status.

Note: I should point out an error from a previous post.  I said that California IOUs would pay 5% interest.  Unfortunately, they will pay only 3.75%…that is if they are paid.

Video of the whole we-bailout-receiving-big-banks-wont-take-IOUs affair is below.

 

 

Oh, and if you are wondering, who gets IOUs and who doesn’t, then Felix Salmon has the answer.  News from 1930 shows that on July 7th, 1930:

At least 45 Florida towns and cities in default on bonds; committee recommends austerity, state sales tax on nonessentials.

Sound familiar?

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

3 Comments

  1. pebird says:

    Well Enron did it in 2000, now the banks are doing it in 2009. Arnie is learning the hard way.