Big Banks Don't Want California's IOUs

Confederate dollars.

“Big Banks Don’t Want California’s IOUs”

I believe the old-time phrase is: Not worth a continental.

I read something this morning. The banks are running away from the IOUs because the investment banks or somebody wants to make a market in the IOUs and trade them as securities.

The banks getting stuck with the IOUs know that once they start trading - the IOUs will drop in value and may become worthless.

Don’t forget illegal aliens. Endless freebies for illegals.

Might be fun. Consider these points sent to me by a friend who is an insurance underwriter:

(1) By issuing the IOU’s, tens of thousands of California companies will be forced to extend further credit terms of 90 days at a 3.75% return.

(2) California’s credit rating is now a BBB. The big push, a few months ago, for California to get a “loan” from the Feds, was that it could not afford to borrow money to cover their deficit if their credit rating dropped.

(3) So, in effect, California is forcing what is likely mostly small business to “lend” them money for 90 days at terms the small businesses would otherwise never accept, and which California cannot get on their own from the banks!

(4) These same companies have got to pay their suppliers, or they get cut off, and then they are out of business.

(5) But the question is, are these companies, that are forced to swallow the IOU’s, in a financial position to float that kind of cash on their own? The alternative is to borrow money, at unfavorable terms, in the hopes that California will actually allow the redemption of the IOU’s on 10/2. Either way, they are screwed.

(6) If the amount of business the companies are doing with California is relatively small, then maybe they can suck it up for 90 days. But what if it is a larger percentage of your business, and your ability to continue as a going concern is dependant on maintaining your biggest customer. Talk about being forced to make a deal with the devil.

(7) What do you do if California is your biggest customer? Now your bank is looking at your balance sheet, and your receivables are way up. Remember, in the article, the big banks are not going to redeem the IOU’s as payment. So you now have a huge pincher movement. (a) you suddenly have what amounts to a large and uncollectible receivable on your books b) you are going to have to find cash somewhere to continue your business and c) you may have to extend further credit to the State of California, or make a decision to cut them off and reduce the size of your business substantially.

(8) Now follow me here. What will this do to the economy in CA?? It does not take an economics major to follow this through.

(9) First, the revenue stream that the State of California has now will further dry up. A lot of the businesses will fold up their tents and shut down or leave the state. When they do, sales tax and business tax revenues dry up. Second, further losses in revenue for the State, without the same amount of reductions in expenditures, will exacerbate the States IOU problem. Either the State will have to issue more IOU’s and/or will have to extend the redemption date of the present IOU’s. Remember, the State of California can do anything they want…at least in the short term. I would be interested in knowing, if CA went to an austerity budget, and only provided essential services, would they be able to balance their budget, or has it gone beyond that already.

(10)Question. Does Obama’s crack team of financial and economic advisers have a plan for this? Can they let California continue to slide further, and extend or worsen the overall economic downturn of the National Economy? Or will they have to come up with a bailout for CA and other states (there are many states in a similar situation. Ca is just the first to have to issue IOU’s).

(11)Remember, the “Stimulus” plan did two things, when you boiled it down to the essence (1) It expanded Federal and State Government and (2) It propped up ailing state and local governments with what is a one time subsidy. It was designed to help get them through the past and the current fiscal terms (most governments are on a 7/1 to 6/30 fiscal year).

(12)Well it did not work. So, as unemployment continues to rise Nationwide, and CA leads the way in higher and higher unemployment, what does Obama do?

(13)He is currently trying to rush through two outrageously huge spending bills: (1) Cap and Trade and (2) Health Care.

(14)Cap and Trade squeaked through the house, after very liberal doses of pork were applied to get the last few votes on board.

(15)Will the Obama administration be forced to give up on the Cap and Trade and Health Care, and focus on the various States going bankrupt? Could this outbreak in CA be the immoveable object that obstructs the finite force of the Obama coalition in Congress? Will the Obama bus run out of gas, and stranded on the side of the road six months into his term?

Grab some beer and popcorn pull up a seat and watch the trainwreck. It's gonna be spectacular.

Even if you could book them at par, you’d need to write them down when the due date came and they didn’t pay off, unless the regulators were directed to cut you some slack. And what is the value of a nonnegotiable instrument which is in default. Even with ‘mark to model’ instead of ‘mark to market’ you’d have a hard time making those look good.

If the paper does not have a maturity date and you cannot redeem it on demand - what is it really worth? Zero?

My mistake - it supposedly is redeemable in 90 days. I would not touch em.