We Buy and Sell California IOUs

By Jeff Harding

This is the power of capitalism. When the big banks announced that they would not accept California’s IOUs as cash deposits, it took about 3 minutes for a market to spring up on eBay and Craigslist for this scrip. Of course many buyers want a discount on the paper.

Then some idiot at the SEC comes up and says this scrip is a security and no one can sell without registering them. So, now a promise to pay is a security because some bureaucrat said so. I don’t think so. I would love to see the SEC try and get away with this. If it was a security, the State of California as the issuer would first have to register the IOUs as a security. Then the people working a secondary market on an already registered security would need a broker-dealer license to trade them. The State Controller insists they aren’t securities, but rather “a form of payment.” And they are correct.

If you need cash, what’s wrong with someone buying an IOU at a discount? Willing buyer and willing seller and all that. And don’t try to argue there’s no risk to this stuff. The State just got downgraded to BBB, pretty close to junk.

The best idea I heard today is that you go out and buy these IOUs at a discount and pay your taxes with them. If you buy at 80% of notional value, you get a 20% tax break. Not bad. (Hat tip to Mike M.)

A bit over the top, but ...



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