California IOUs set for trade - Platform launched as budget crisis drags on

California IOUs set for trade - Platform launched as budget crisis drags on
By Nicole Bullock in New York
Copyright The Financial Times Limited 2009
Published: July 15 2009 19:30 | Last updated: July 15 2009 21:50
http://www.ft.com/cms/s/0/07aae6fc-7169-11de-a821-00144feabdc0.html


A market is set to emerge this week in Californian IOUs as the persistence of the state’s budget crisis is making it increasingly difficult to exchange these emergency instruments for cash.

California is printing $3bn of IOUs for businesses, individual taxpayers and local counties in lieu of cash. It has sent more than $450m of them to court-appointed attorneys, county-run health schemes and taxpayers awaiting rebates, among others.

IOUs will continue to be issued until Arnold Schwarzenegger, California governor, and the state legislature agree a deal to close a $26bn budget deficit. The state began issuing the IOUs early this month.

SecondMarket, a New York firm that trades illiquid assets, launched a platform for trading the IOUs on Wednesday. A decision last week by large banks, such as Wells Fargo and Bank of America, to stop accepting the IOUs has paved the way for some initial trading, although volumes are expected to be very thin.

Citigroup, Bank of the West, credit unions and some community banks still are accepting the IOUs for their customers.

“With several major banks no longer redeeming Californian IOUs, and with some citizens, businesses and municipalities needing liquidity, we felt it was important to launch this market promptly,” said Barry Silbert, SecondMarket chief executive.

Buyers and sellers can list their interest, and SecondMarket expects bids to emerge later in the week. It first needs to verify the listed IOUs with the state. Hedge funds and municipal bond investors are among the interested buyers.

Trading in the IOUs is controversial and drew the eye of regulators after offers from opportunistic individuals popped up on websites such as Craigslist.

“The [California] Treasury is concerned about the potential for IOU holders in a vulnerable position being victimised by con artists,” said a spokesman for the state treasurer.

The Securities and Exchange Commission last week ruled the notes were tradeable securities, but only by banks or broker-dealers that comply with recommendations by the Municipal Securities Rulemaking Board. Individuals involved in more than single, one-off private transactions risk violating securities law.

Assuming California can repay the IOUs as promised on or before October 2, their 3.75 per cent annual rate is attractive for a short-term obligation.