Fallout: The Financial Crisis

Market springs up for California IOUs

Marketplace Staff Jul 9, 2009
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Fallout: The Financial Crisis

Market springs up for California IOUs

Marketplace Staff Jul 9, 2009
HTML EMBED:
COPY

TEXT OF STORY

Kai Ryssdal: No rain here in San Diego today. Lovely as always. But the budget clouds are still thick and dark up in Sacramento, where California lawmakers can’t agree on a budget and the state is running out of cash. And the IOUs they’re issuing instead of legal tender to pay are about to fall out of favor. A lot of big banks that have been honoring those warrants have said they’ll stop tomorrow, which has left taxpayers, small businesses and local governments looking for ways to cash out. From KPCC in Los Angeles, Julie Small has more.


JULIE SMALL: Printers at the California controller’s office in Sacramento have been churning out billions in IOUs. And they’ll keep churning them out until state lawmakers agree on a budget. Major banks decided to stop accepting IOUs to pressure lawmakers to end the bickering. Jeremy Smith sees opportunity there.

Jeremy Smith: At SecondMarket.com what you’ll see is a pop-up that essentially says we’ve now opened our marketplace for the California IOUs. Click here if you’re interested in buying, click here if you’re interested in selling.

Smith’s company, Second Market, trades assets that can’t quickly be turned into cash. It plans to open trading of California’s IOUs next week, matching sellers with buyers. Smith thinks sellers will do well. Even if a buyer pays nearly full value for the IOU, they can still realize a return by the October redemption date and collect 3.75 percent interest that isn’t subject to federal taxes.

Smith: And frankly, investors especially . . . we have 3,000 investors over Second Market, and they are always looking for unique investment opportunities.

Second Market is regulated by the Securities and Exchange Commission. But IOU holders have also been turning to Craigslist, eBay, and other unregulated sites. Brandon Schlichter, an Ohio entrepreneur, launched BuyMyIOU.com last week. Schlichter says his Web site’s getting 100 hits an hour. But how will sellers know they’ll actually get their money?

BRANDON Schlichter: They don’t. I haven’t found a system yet. I’m trying to get some individuals on the ground in California to go out and meet these buyers.

The SEC said today it will recommend that IOU trades be regulated. Beth Mills with the California Bankers Association says IOU sellers should stick to banks, if they can.

Beth Mills: I’ve seen on some of the Craigslist that they’re offering 50 or 65 cents on the dollar for these IOUs. So I certainly would encourage people to go in and talk to their bank first.

Mills says banks that won’t take the IOUs will still help customers find other ways to weather California’s fiscal crisis.

I’m Julie Small for Marketplace.

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