Banks Reject California's IOUs
By Andrew Jeffery Jul 07, 2009 2:45 pm
State faces new problems as creditors turn down promises to pay.
Last week, after state leaders failed to find a solution to an ongoing budget crisis, California began issuing IOUs to banks and other creditors. Now, despite initially agreeing to accept the IOUs in lieu of actual payments, some of the country's biggest banks are refusing to honor the promises to pay past Friday, July 10.
According to the Wall Street Journal, among the newly defiant banks are Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). Along with an announcement yesterday by Fitch Ratings that it had dropped California's credit rating to BBB -- just a few notches above "speculative" levels, this shift in sentiment puts immense pressure on Sacramento to find a lasting solution to the state's woes.
California plans to send out $3 billion in IOUs in July alone. The IOUs mature on October 2, and promise to pay recipients 3.75% in annualized interest -- presumably, in addition to the principal. The state has said that without the IOUs it would run out of cash by the end of July.
Other 49 States Could Go the Way of California
The fear -- although there's no reason to assume this yet -- is that California's other disgruntled creditors will jump on the banks' non-acceptance bandwagon in a show of defiance. This would be a crushing blow to Governor Arnold Schwarzenegger and California state legislators, potentially forcing them to go hat in hand to Washington for a bailout.
Since 2 of the banks refusing to honor the IOUs are controlled by the federal government (and since the remaining 2 are essentially being run by Washington insiders), the Obama administration's hands-off posture suggests it may be taking one of 2 possible stances.
Obama may be taking the hard line -- sending California the message that the state's political wrangling has to cease given what's at stake. After all, if the nation's most populous state were to run out of cash, the impact on its more than 30 million residents -- not to mention the US economy as a whole -- would likely be severe.On the other hand, Obama may have a more disturbing goal in mind. It's possible that the administration is considering making a power grab of epic proportions. After all, it's had little compunction about seizing embattled automakers General Motors (GPM) and Chrysler, and hasn't shied away from becoming deeply involved in the day-to-day management of the nation's banks.
Perhaps President Obama's true motive is to wrest control of California away from its languishing leadership, sending the other 49 states a stern message: Get your fiscal houses in order, or get absorbed by the massive bureaucratic machine that is the US government.
Naturally, this latter possibility is pure speculation on my part. But given the President's actions since taking office, and given his apparent desire to expand the reach of the federal government to an extent previously unimaginable, it's not inconceivable.
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2009-07-07 14:20:31
CA vs Fed IOUs
Very sharp observation. My interpretation of the greater fool theory is that out of two opponents the greater fool is the one who considers the other one to be less smart.
With obvious understanding of US dollar weakness and with the ability to finish it off at their will Chinese are trying not to allow it happens until they spend most of dollars they have to takeover US economy. My guess they will achieve that goal by 2015.
With obvious understanding of US dollar weakness and with the ability to finish it off at their will Chinese are trying not to allow it happens until they spend most of dollars they have to takeover US economy. My guess they will achieve that goal by 2015.
2009-07-07 15:47:45
educated guess
Correction: the banks cited are neither "newly defiant" nor "refusing to honor promises to pay." All of them stated at the time CA announced its upcoming IOUs that they would accept the IOUs until July 10. Nothing has changed, they have merely reiterated that they will not accept the IOUs after that.
As to speculation that Obamao is attempting to use the banks (and any other levers he can lay his hands on) in an unprecedented power grab... I would characterize that as "informed speculation" with His actions and stated intentions a solid base from which to extrapolate.
As to speculation that Obamao is attempting to use the banks (and any other levers he can lay his hands on) in an unprecedented power grab... I would characterize that as "informed speculation" with His actions and stated intentions a solid base from which to extrapolate.
2009-07-07 16:00:32
Was it really a power grab?
This reply surprises me greatly. The administration acquired those companies because of the unions - and we see this in how the BK was handled. It was a political move - a case of the politician making a political decision to gain a political benefit. Barney Frank has done it for a bank and a distribution center for his constituency and Obama has done it for his. The pace of this type of activity is accelerating in the current environment.
BK is what happens when a company fails. It is happening a lot. It is the way our system works (or used to).
Joseph Schumpeter? Ever heard of him?
BK is what happens when a company fails. It is happening a lot. It is the way our system works (or used to).
Joseph Schumpeter? Ever heard of him?
2009-07-07 16:26:00
CA vs Fed IOUs
Well, the Dollar bill is nothing more than an IOU that somebody must accept and pass on.
Both depend on the greater fool theory. After running out of domestic fools we now hope that China's larger population will supply the fools while we supply the Dollars.
Both depend on the greater fool theory. After running out of domestic fools we now hope that China's larger population will supply the fools while we supply the Dollars.
2009-07-07 18:40:53
The crisis in CA is kind of surreal. Where is the panic? It hardly makes the news out here, and yet, it seems to me to be really big. This may be the trojan horse of the phony bank/stimulus Federal scheme. I'm probably getting much too deep here. Probably just another little blip on the road to ruin.
2009-07-07 18:44:29
Interesting speculation
If I were the Feds I would much prefer to seize a small state government to send a message rather than the largest.
Keep in mind that seizure entails liabilities and assets. That would have the Feds taking over the taxing authority. If that does not put the fear of Gov. into the State legislature I don't know what will.
Rumors persist of a California State Constitutional Convention to correct the peculiarities of California's budget making process which for years have lead to their annual game of brinkmanship.
At its core California's growth has paid off its deficit for decades to the point that it has come to rely on that as a primary funding source. So when growth is sub-standard or, in this case, actual contraction occurs the state budget really hits the fan.
By any standard, California is going to be a rich state at the end of the day. Their inability to reconcile their own budget has always been resolved by simply growing their way out of their current problem. They were banking on growth back in 2003 when then Governor Gray Davis first proposed bonding their fiscal problems away and Arnold took over and made that his own plan. They would be doing the same thing now if the credit window had not been slammed in their face.
Looks like we'll all be getting a lesson in government financial reform this time around.
Keep in mind that seizure entails liabilities and assets. That would have the Feds taking over the taxing authority. If that does not put the fear of Gov. into the State legislature I don't know what will.
Rumors persist of a California State Constitutional Convention to correct the peculiarities of California's budget making process which for years have lead to their annual game of brinkmanship.
At its core California's growth has paid off its deficit for decades to the point that it has come to rely on that as a primary funding source. So when growth is sub-standard or, in this case, actual contraction occurs the state budget really hits the fan.
By any standard, California is going to be a rich state at the end of the day. Their inability to reconcile their own budget has always been resolved by simply growing their way out of their current problem. They were banking on growth back in 2003 when then Governor Gray Davis first proposed bonding their fiscal problems away and Arnold took over and made that his own plan. They would be doing the same thing now if the credit window had not been slammed in their face.
Looks like we'll all be getting a lesson in government financial reform this time around.
2009-07-07 19:01:40
Was it really a power grab?
Did Obama really want to own the banks and GM? Last I checked GM would have been nothing without government intervention and the banking system was on the brink of caving in on itself.
My interpretation is that there were two options, government intervention or failure.
My interpretation is that there were two options, government intervention or failure.
2009-07-07 19:02:57
Washington to take over California?? Way cool
I love that theory; since OOO has the keys to the printing office, why not? It will quicken the pace.
2009-07-07 23:50:14
Kurt -- its amazing, exactly as you say, people don't even seem to care. Life just keeps rolling on. I think part of it is that we have been hearing about this "budget crisis" for so long that we are numb to it. Most people can't really conceptualize what it means for a state to issue IOUs because its almost out of cash!
Californians (myself included) are a strange bunch, and there is just a huge percentage of them that feel like they were granted some sort of immunity from bad things happening. And despite all the pain the state has gone through, its still effecting people who are not "in charge" so there is just no sense of urgency with anything.
Californians (myself included) are a strange bunch, and there is just a huge percentage of them that feel like they were granted some sort of immunity from bad things happening. And despite all the pain the state has gone through, its still effecting people who are not "in charge" so there is just no sense of urgency with anything.
2009-07-07 23:53:12
Interesting speculation
Robert -- I guess the question is where will the next phase of growth come from? Technology? done. Dot com? done. Housing? done. Maybe its renewable energy, but with so many in this state blaming out problems on immigrants, if that mindset takes hold, we will be shooting ourselves in the proverbial foot in the name of ignorance.
Times cloudy, they are.
Times cloudy, they are.
2009-07-07 23:53:34
Washington to take over California?? Way cool
...the ultimate LBO....
2009-07-08 01:12:32
What happens on July 11th ...
market making 101
opening spread will be 13/16 x 15/16 , if you have size you get 7/8's .
opening spread will be 13/16 x 15/16 , if you have size you get 7/8's .
2009-07-08 01:18:20
Interesting speculation
Andrew I think you have struck on some important points. Immigrants are an easy target when the economic outlook is bleak. One needs look no further than their treatment during the gold rush or Chinese immigrants in the late 1900's. If history is any gage the process will repeat itself again but I can only imagine what the market for real estate in California will become if all those who use English as a second language become convinced that the Golden State is not the end of the rainbow. I don't think implosion would be too strong an adjective to describe the result.
The question of ; Where the growth will come from? also is well placed. Personally, I think that question has two parts. The first is what the cost structure for someone attempting to live and do business in the State will be in the future. If deflation hits California harder than other places its relative attractiveness improves (pay me now or pay me later).
The second part may be even harder to quantify. That is; What is the quality of life relative to other places? In other words can California attract the kind of people who will choose to build their dreams there.
That is harder to quantify because who can say what shape those dreams will take. All one can say for certain is that they will never help California to grow if they are planted somewhere else.
The question of ; Where the growth will come from? also is well placed. Personally, I think that question has two parts. The first is what the cost structure for someone attempting to live and do business in the State will be in the future. If deflation hits California harder than other places its relative attractiveness improves (pay me now or pay me later).
The second part may be even harder to quantify. That is; What is the quality of life relative to other places? In other words can California attract the kind of people who will choose to build their dreams there.
That is harder to quantify because who can say what shape those dreams will take. All one can say for certain is that they will never help California to grow if they are planted somewhere else.
2009-07-08 01:38:31
Just a thought
Do you remember Jim Jones and the Guyana massacre?
He had his disciples drink kool aid laced with cyanide. But before the actual act he had them practice drinking regular kool aid many time in the years leading up to the actual event so that they would be conditioned to blindly follow.
The few survivors of that event used the adjective "surreal" to describe the lead up to the actual suicide.
Do you think that California's chronic budget issues have conditioned the people of the State to assume everything will be all right this time as well?
He had his disciples drink kool aid laced with cyanide. But before the actual act he had them practice drinking regular kool aid many time in the years leading up to the actual event so that they would be conditioned to blindly follow.
The few survivors of that event used the adjective "surreal" to describe the lead up to the actual suicide.
Do you think that California's chronic budget issues have conditioned the people of the State to assume everything will be all right this time as well?
2009-07-08 05:17:20
IOUs to pay taxes with?
Jct: There's nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina's government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
Too bad California IOUs won't be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
See http://youtube.com/kingofthepaupers
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
Too bad California IOUs won't be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
See http://youtube.com/kingofthepaupers
2009-07-08 10:07:57
CA vs Fed IOUs
I think you are right... spend or invest dollars in non-dollar denominated businesses.
2009-07-08 11:50:54
CA vs Fed IOUs
Many people are missing distinction between COUNTRY itself (USA, in our case) and the People/System/Government (PSG) ruling the subject country at any particular moment.
Our country will never loose its innumerable treasures - land, natural resources, real estate, infrastructure, energy production facilities, harbors, etc - even if its PSG ran its Currency/Economy into the ground. Hence, like it always happens, new owners - PSG - will replace those who mindlessly wasted their INHERITANCE. The richest country in the world will not get poor but just change hands.
Such change of ownership is both natural and fair. In the meantime we can keep discussing potential value of IOU. It's laughable, in my opinion.
Our country will never loose its innumerable treasures - land, natural resources, real estate, infrastructure, energy production facilities, harbors, etc - even if its PSG ran its Currency/Economy into the ground. Hence, like it always happens, new owners - PSG - will replace those who mindlessly wasted their INHERITANCE. The richest country in the world will not get poor but just change hands.
Such change of ownership is both natural and fair. In the meantime we can keep discussing potential value of IOU. It's laughable, in my opinion.
2009-07-08 11:56:54
Was it really a power grab?
David, I agree with your interpretation.
And which option in your opinion was better for our country?
And which option in your opinion was better for our country?
2009-07-13 01:59:51
Make California IOUs legal tender to save the state
Jct: There's nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina's government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See http://youtube.com/kingofthepaupers
Too bad California IOUs won't be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
If they make IOUs legal tender, I take it all back.
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See http://youtube.com/kingofthepaupers
Too bad California IOUs won't be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
If they make IOUs legal tender, I take it all back.
2009-11-24 22:47:02
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