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Follow Up To “Would You Take An IOU From CA?” of 6/25

On June 25th Charles Sizemore wrote about the impending move of CA to issue IOUs instead of paying their bills as of 7/1.  That move has been implemented.  Now, some big banks are answering Charles’ question with an emphatic, “No!”

The WSJ reports this morning that several of the biggest banks, including B of A, Citi, Wells Fargo, and JPM/Chase were among those that declined to accept the notes.  Apparently this dismayed some state officials, as a spokesman for State Controller Chiang said, “We don’t want anybodty to suffer who can’t redeem them when they need cash.”

It’s really hard to get past the hypocrisy of state that refuses to balance its budget and then refuses to pay its bills blaming banks for refusing to accept the funny paper.

The CA IOU notes mature in Oct and pay 3.75% interest.  Or do they?  What assurance does any holder of these IOUs have that the state will actually cough up the cash in Oct?  Didn’t these same holders, being vendors to the state or some other service provider to whom the state owed money, already get led down the primrose path?

Don’t be fooled, this is a bond offering pure and simple.  Except it was done through force, where the state shoved down the throat of service providers CA issued bonds in the form of an IOU.  Why would they do such a thing?  Because the bond market isn’t so keen on CA paper right now.  In fact the same article notes that Fitch downgraded the state to BBB.

Why issue bonds, going through all of the hassle and trouble with the securities market and their pesky regulations, when you can basically foist your troubles onto your vendors?

Problem solved!  Unless of course, you were one of those vendors who is now stuck with something that nobody wanted in the first place - more CA debt.