As banks and credit unions stop accepting California IOUs, a market for the securities has sprung up on eBay and Craigslist.

Not so fast… California Sets Terms on IOUs as Questions Arise.

As California continues to issue “IOUs”, more controversy is brewing over their use.

On one side, IOU recipients are beginning to trade them like currency, forcing the California state treasurer’s office to issue guidelines if they are sold through eBay (EBAY), Craigslist or other means.

California’s treasurer is telling recipients of the IOUs that if they sell them to third parties, they will be redeemed by the state treasurer’s office only if accompanied by a notarized bill of sale signed by their listed payee.

“We are in the process of contacting officials of eBay and Craigslist to post a notice of the policy on their sites,” the statement said.

Speculation is rising over whether California’s tax-exempt IOUs, technically registered warrants, can be bought, sold and traded.

The Securities and Exchange Commission must first determine if the IOUs are securities to regulate them, said Ernesto Lanza, general counsel to the Municipal Securities Rulemaking Board, adding that the board was not working directly with the commis—sion on that decision.

“It looks like it has all the hallmarks of a security,” Lanza told Reuters. “If they are securities, I think they’re pretty clearly municipal securities.”

At least one website aims to offer a platform for selling the registered warrants. Obed Dorceus, owner of ioumarket.com, said he sees a potential secondary market for the IOUs — and potentially other government promises to pay.

The Wall Street Journal is reporting Big Banks Don’t Want California’s IOUs

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 group of banks included Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and J.P. Morgan Chase & Co. (JPM), among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

Ms. Mills of the CBA said some banks were concerned that there aren’t processes in place to accept IOUs, and also worried about fraud issues. She noted that not all banks have set a July 10 deadline, and that dozens of credit unions in the state will keep accepting IOUs.

Wells Fargo’s head of community banking, Lisa Stevens, said: “We’re very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of payments to some businesses and individuals.”

State officials said they were disappointed by the banks’ decision. Garin Casaleggio, a spokesman for Mr. Chiang, said: “We don’t want anybody to suffer who can’t redeem them when they need cash.”

Big Banks Cutting Own Throats

Big banks are cutting their throats by not accepting IOUs, unless of course they have an inside information that the IOUs will go worthless, something I highly doubt Obama would let happen.

Recipients of IOUs will be looking for some place to deposit the securities and small savings and loans or credit unions that will cash them will get the business.

Every one of those blood sucking banks was bailed out by taxpayers (California taxpayers too) and now will not take an IOU from the State of California for the citizens of California. This is disgusting.

If you have an IOU that the big banks will not cash, I recommend closing your accounts and putting them someplace that will. Please tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to go to hell.

Addendum

Bear in mind I am not supporting California’s Issuance of these IOUs. California needs to balance its budget so it can pay its bills. I have talked about that a dozen times at least. The two actions are separate and distinct.

However, I am willing to put myself in the shoes of a contractor with employees who needs to cash to pay his employees and subcontractors. There is going to be one massive domino effect of defaults and business closures if people are not paid.

Bear in mind there is no mechanism for states to declare bankruptcy. They must balance the budget somehow and therefore they will. This means the banks will get paid for the IOUs.

It is the California legislature, primarily Democrats, who simply refuse to balance the budget. Contractors and state employees are legitimately owed that money for services rendered. I am all in favor of axing jobs, whatever it takes to balance the budget. I am not in favor of holding businesses and consumers hostage for services already rendered while it is done.

To the extent that banks’ refusal to cash IOUs pressures the legislature to act, the refusal may appear to be a good thing. However, two wrongs do not make a right, and if I had a bank account at any of those places and they refused to honor IOUs from the state I would move my account to someplace who would. So should any thinking person.

Addendum II

Aaron Krowne at ML-Implode writes:

It is very interesting that the big banks have reversed. This confirms my suspicion that, despite the bailouts, the banks are intensely in pain for cash to meet their obligations, and cannot make themselves further illiquid by accepting IOUs.

As far as secondary markets, this whole situation reminds me a lot of Continentals.

However you feel about this situation, one thing is for sure. This is a gigantic mess that is getting worse by the day.

Mike “Mish” Shedlock
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