California IOUs can be considered securities, SEC says

Market Watch ^ | 07/09/09 | Ronald D. Orol

[TigerLikesRooster]

California IOUs can be considered securities, SEC says

Agency guidance helps create a secondary market for IOUs, helping with prices

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- The Securities and Exchange Commission late Thursday issued guidance identifying the IOUs being issued by California as "securities," rather than just obligations of the economically troubled state.

The Golden State issued the IOUs last week to conserve cash and pay off bondholders.

"The staff of the SEC has expressed its belief that California's recently issued IOUs are 'securities' under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities," the agency said.

The regulator is recommending that the IOUs, which carry an annual interest rate of 3.75%, be regulated as municipal debt, a form of security, by the Municipal Securities Rulemaking Board.

Identifying the IOUs as securities creates a regulated secondary market for them, which make it easier for their holders to sell them at a fair price.

Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer, lauded the SEC's announcement, saying in a statement: "The SEC has sent a pretty clear warning to folks who plan to profit by buying and reselling IOUs: If you're not registered as a municipal securities broker-dealer, you run the risk of violating federal law."

[Vaduz]

Madoff must be thinking and they put me in jail?.

[Brilliant]

Maybe they can get Citigroup to buy these “valuable” securities. If not, then Buffett and Soros will have to pick up the slack.

[broken_arrow1]

United States Constitution Article 1 Section 10: Limits on the States.

The final section of Article One outlines the limits on the powers of the States:

Section 10, Clause 1 (Contracts Clause): No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

[layman]

WOW ! Fantastic ! Where can I buy some of these “securities” ?

[SampleMan]

So the IOUs are really 0% bonds? Interesting. I wonder if they’ve figured out how that is going to effect their already crappy bond rating.

[M Kehoe]

I'll wager these I.O.U. WON'T be treated as municipal bonds. How do I know this? Interest on most munies are tax free. Wait till you fill out your form 1040 sec B, and then get back to me.

5.56mm

[DHC-2]

I wonder how long it will take the SEC to give them a triple AAA rating?

[chainsaw]

California IOUs can be considered worthless securities

[javachip]

CIT as in Citibank.

Citibank is part of Citigroup, ticker symbol C. It's not part of CIT.

[SunkenCiv]

The regulator is recommending that the IOUs, which carry an annual interest rate of 3.75%, be regulated as municipal debt, a form of security, by the Municipal Securities Rulemaking Board. Identifying the IOUs as securities creates a regulated secondary market for them, which make it easier for their holders to sell them at a fair price. Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer, lauded the SEC's announcement, saying in a statement: "The SEC has sent a pretty clear warning to folks who plan to profit by buying and reselling IOUs: If you're not registered as a municipal securities broker-dealer, you run the risk of violating federal law."

Wow, it's almost as if the SEC is helping out some jokers who made campaign contributions to Obama. But what are the odds of that?

[The Great RJ]

California IOUs are about as worthless as Zimbawe’s bank notes..they might make nice wallpaper, but California environmental restrictions probably preclude burning them for heat.

[TigerLikesRooster]

Well, we have to gather them and burn them in Nevada.:-)

[Caipirabob]

Cue Chinese laughter, please...

[CPOSharky]

Pay your CA and fed taxes with the IOUs and see what happens.

[ReleaseTheHounds]

So, is the SEC sanctioning another derivatives market? It’s done some well overseeing the others; then again, California does remind me of AIG.

[jeffers]

I won’t take them. I’d go to jail first, and do not plan to go willingly, if at all.

I’m thinking of opting out of US paper currency as well, joining the “white market” that accepts nothing other than gold or silver for all transactions.

Too much room with fiat currency for predators and parasites to play games, and predators and parasites are all that’s left in Washington.

[combat_boots]

Barter

[SteamShovel]

In the old days that was called defaulting on your debts...

Exactly.....

.....What is a person or company to do knowing they must contractually perform for the state only to be paid in IOU's that will most likely not pay anytime soon?

Kalifornia needs to get it's head out of it's rear end, cut programs, and resume paying it's debts. I CAN be done.....

[Kickass Conservative]

Wimpy to Popeye, I will gladly pay you Tuesday for a hamburger today.

[heleny]

So the IOUs are really 0% bonds?

The IOU's pay 3.75% (annual rate), supposedly tax-exempt. Perhaps that is why some banks are honoring deposits of IOU's -- for in addition to retaining customers, matching the other banks' policies, and not raising the ire of the state government, maybe the banks hope to collect the higher interest rate? If eventually the IOU's bounce, the banks can always take the money back from the customers and possibly charge them NSF/bounced-check fees.

But, unless you're a bank, bonds are better investments, unless one can get a good discount off the face value of the IOU's. Bonds are paid before these IOU's, and given CA's declining credit rating, the bond yields may even be higher.