Big banks stop cashing California IOUs

Residents have fewer places to cash in IOUs after large banks stop redeeming them. SEC warns potential buyers and sellers of possible scams.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Tami Luhby, senior writer

Where does your state rank?
Americans everywhere are feeling the recession's pain some more than others.

NEW YORK ( -- Californians have fewer places to redeem IOUs issued by the cash-strapped state.

At least three major banks, Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500), stopped accepting the IOUs after Friday.

More than 60 credit unions, however, continue to accept the paper.

State Controller John Chiang started issuing the IOUs on July 2 to conserve cash, while lawmakers and Gov. Arnold Schwarzenegger tussle over closing a $26 billion budget gap. Friday also marked the start of a mandatory third furlough day for most state employees.

The state, the world's eighth largest economy, has issued more than 90,000 IOUs worth nearly $355 million. Also called registered warrants, the IOUs pay an interest rate of 3.75% and can be redeemed on Oct. 2 or earlier if divided state officials reach a budget deal.

Recipients will include state contractors, social service agencies and those owed income tax refunds.

Banks will work with customers on an individual basis to assist them, perhaps offering them home equity lines or short-term loans, said Beth Mills, spokeswoman for the California Bankers Association. But the institutions are also hoping to send a message to Sacramento.

"What's ultimately in the best interest of everyone will be for the state to act quickly and resolve the budget impasse," she said.

Bank of America's decision stems from its experience in 1992, the last time the state issued IOUs amid a financial crisis. The bank, along with Wells Fargo, were among the first to stop accepting the IOUs. A budget was signed about a month later.

"The longer the registered warrants were accepted, the longer it took the legislature to resolve the matter," said Britney Sheehan, a Bank of America spokeswoman. "We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible."

Customers at participating credit unions can continue to redeem the IOUs. The institutions are bracing for a crush of people looking to turn the warrants into cash.

"There are options," said Daniel Penrod, senior industry analyst at the California Credit Union League. "If people look for those options, they'll realize they are not stuck past the July 10 deadline."

IOUs to be regulated

Some people actually want to get their hands on the registered warrants, posting ads on online marketplaces such as Craigslist. Several postings offer to buy the paper for 85 cents on the dollar, while another listing is looking to sell the IOUs for 95 cents.

This practice, however, has heightened fears that desperate IOU holders might be taken advantage of and that counterfeiters might make copies of the warrants.

State Treasurer Bill Lockyer last week said that warrant buyers must obtain a notarized bill of sale from the recipient when purchasing the IOUs. This will help ensure that the person redeeming the IOUs is the legitimate owner, said Bill Dresslar, Lockyer's spokesman.

The Securities and Exchange Commission on Thursday said that the IOUs are securities and are subject to federal anti-fraud provisions. The agency also issued an investor alert warning both buyers and sellers to be careful when trading the warrants.

"If you hold an IOU and wish to sell it prior to maturity you should consider whether you think you are getting a fair price," the alert said. Investors who wish to buy IOUs should also understand who the seller is. If you are buying from a third party, ask if the person is registered to do this business.

The SEC's action has both positive and negative impacts on IOU recipients, experts said.

It should cut down on scams because the warrants would have to be traded through registered brokers, said Joseph Fichera, who heads Saber Partners, a financial consulting firm for governments and corporations. Sellers would have to provide disclosure and make sure they are marketing the products properly.

This, however, would also make it harder to offload the IOUs, which could frustrate recipients in need of cash.

"The SEC is trying to provide some sort of framework for investor protection in the middle of uncharted territory," Fichera said.

How have California's IOUs affected your life? Have you received one? Are you trying to get your hands on one? We want to hear your experiences. E-mail your story to and you could be part of an upcoming article. For the Comment Policy, click here. To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.