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A few small institutions (among them Redding Bank of Commerce and Pan American Bank) say they will honor state-issued warrants from their customers, but the major players have not decided how to handle the IOUs. They might be waiting for the state to announce how much of an interest rate they will be paying on the paper (by law the interest rate cannot exceed 5 percent). Agnes Crane, posting at Reuters Blogs, expects some kind of distressed debt market that will scoop up the IOUs from those desperate for cash. For a price.
Just because the IOUs are sent to a specific person, business or local government doesn't mean that they can't be traded in or simply just traded. Whoever ends up holding them by their maturity date can redeem them with the state. And there's certainly enough IOUs coming down the pipeline to make for a nice liquid market. The controller expects to send out $3.36 billion IOUs this month alone, if the state can't fix its finances. And there will be plenty more to come in August and September, when the cash shortfall is projected at $3.7 billion and $6.5 billion, respectively.
The maturity date is Oct. 1, but of course that assumes there is sufficient cash available.
The last time California paid out IOUs in the early 1990s, some banks stepped up to the plate and paid cash for the warrants, profiting from the interest paid by the state when they were redeemed. Beth Mills, spokeswoman for the California Bankers Association, said bankers are still struggling to sort out how they'll protect themselves against possible fraud and the impact of a redemption extension beyond Oct. 1.
Lawmakers and the governor still have the rest of today to figure out a compromise and avoid the IOU scenario. If that doesn't happen, State Controller John Chiang will meet with a state board to determine what interest rate the state will pay.
Mark Lacter created the LA Biz Observed blog in 2006. He posted
until the day before his death on Nov. 13, 2013.