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| SEC Tries To Get Federal Control Over State Issued Scrip Currencies |
| 2009-07-12 |
| The recipients of billions of dollars in IOUs being issued by California soon may be able to sell them on a regulated market, following action taken Thursday by federal regulators. Some of the nation's largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money. Therefore, the Securities and Exchange Commission recommended Thursday that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. As of Wednesday, the state had issued more than 90,000 IOUs worth $354 million. A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said. The SEC oversees rules set by the nongovernment MSRB, which polices the municipal securities markets for fair pricing, disclosure and adherence to the requirement that the securities sold be suitable for the buyer. The SEC said in an announcement that its staff "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 SEC said. In addition, it said, those acting as intermediaries between buyers and sellers of the IOUs may need to register with regulators as brokers, dealers or municipal securities dealers. With Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and some regional banks in the state having said they won't accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes. A spokesman for JPMorgan Chase & Co. left open the possibility Thursday of a change in that bank's policy, but spokesmen for Bank of America and Wells Fargo said those banks still planned to cease honoring the notes. Citigroup had no immediate comment. The office of California State Treasurer Bill Lockyer will be contacting the banks' officials to urge them to extend the deadline, Lockyer spokesman Tom Dresslar said Thursday. According to the California Credit Union League, more than 60 credit unions in the state will continue to accept the IOUs after Friday. The Federal Reserve, meanwhile, advised bank customers with an IOU that they should first check with their bank to make sure it will be accepted for deposit and whether any fees could be incurred. A regulated market for the IOUs "makes it even more advantageous" for individuals holding them, who could sell them at a fair price, said Paul Maco, an attorney at Vinson & Elkins in Washington who was a director of the SEC's Office of Municipal Securities. The price they receive may be discounted in accordance with the market's perception of the risk of the state repaying the notes, but it would be an orderly market price, he said. The SEC advised investors that it hasn't approved or disapproved of the IOUs, which also are referred to as registered warrants. If you hold an IOU and wish to sell it prior to the Oct. 2 redemption date, you should consider whether you think you're getting a fair price for it, the SEC said. Those selling their IOUs at less than face value will forfeit the difference in price and any interest that would have accrued. As with any new securities, the robustness of the trading market that will develop "cannot be predicted with certainty," the agency said. Investors looking to buy IOUs should understand who the seller is and should ask if the person is registered for that sort of transaction when buying from a third party, it said. Registered brokerage firms and their employees are listed on a database at http://www.finra.org. The SEC move "has the potential to, at least a bit, reduce the shark factor and potential for taxpayers to get defrauded," Dresslar said in a statement. SecondMarket, which creates marketplaces for the trading of illiquid assets, has received "decent interest" from hedge funds, municipal bond and distressed asset investors as potential buyers of the IOUs, Jeremy Smith, the New York-based company's chief strategy officer, said this week. As California legislators haggle over how to close a $26.3 billion budget deficit, the state is expected to send out $3.3 billion in IOUs this month to an array of individuals, small businesses and local governments. It marks the first time since 1992, and only the second time since the Great Depression, that California has sent out notes promising repayment at a later date instead of paying its bills on time. Most California state government offices will be closed on Friday, the first of three monthly furlough days intended to save the state money. The shutdowns are part of Gov. Arnold Schwarzenegger's order to give state employees three days off a month without pay, effectively cutting their income by about 14 percent. California Attorney General Jerry Brown has said the IOUs are valid and binding obligations of the state, a characterization that experts say qualifies them as municipal securities. Federal bank regulators, including the Federal Reserve and the Federal Deposit Insurance Corp., told banks in guidance issued Wednesday that they should exercise "the same prudent judgment and sound risk management practices" regarding the IOUs as they would with any other state debt securities. "The California registered warrants have the hallmarks of securities, and if they are securities, they are pretty clearly municipal securities," MSRB General Counsel Ernesto Lanza said. "To the extent that municipal securities dealers are involved in the sale and trading of the warrants, our rules would apply. We would be especially concerned about dealers' obligations to customers with respect to fair pricing." |
| Posted by:Anonymoose |
| #12 I don't question the value of scrip, in general, nor do I care. My point is that CA IOUs - or scrip if it comes to that - have a pernicious effect in that they are part of the dwindling pathetic bag of tricks being used to put off the reckoning in CA. Frank G restates my point here: until there is a REAL sense of crisis, nothing will happen. Look at the fiscal train-wreck that is CA - it developed over many years, and very few parts of this debacle were not explicitly discussed and warned of, many times, along the way. The selfishness and incompetence of the political class and the irresponsibility of the electorate will not be cured or likely even affected by a budget showdown, but it has to happen. Anything that delays if, or softens it (i.e., hides it or defers it) is pernicious. Not that it matters. |
| Posted by: Verlaine 2009-07-12 23:42 |
| #11 These IOUs are in effect interest bearing currency. Now, given a choice between holding a currency that produces interest and one that doesn't, which would you chose? Therein lies the Feds problem, because currently they can issue vast quantities of zero interest debt in the form of USD currency. |
| Posted by: Phil_B 2009-07-12 19:26 |
| #10 I'd prefer they don't honor them. Might up the "sense of crisis" against the Donks, who are refusing to cut spending |
| Posted by: Frank G 2009-07-12 19:02 |
| #9 In a very real sense, bank checks ARE iou's. Likewise Credit/Debit cards, There's your "Alternate Currency" right there in circulation today. Checks are increasingly useful because they're NOT subject to the Government's artificial "Limits" (By refusing to corculate any bill greater than a one hundred) You're NOT limited to issuing ten checks for a thousand bucks bill. |
| Posted by: Redneck Jim 2009-07-12 18:56 |
| #8 You're welcome rwv. We are here to help, and to add imagery to otherwise boring type fonts, heh. But the analogy holds truer than one can fathom. |
| Posted by: Alaska Paul 2009-07-12 15:39 |
| #7 Thanks, AP, your "scatological equivalent of King Midas" comment is the best analysis I have seen for the Obama administration. It made me laugh out loud. |
| Posted by: rwv 2009-07-12 14:27 |
| #6 How many California IOU's can I get for a GM bond? |
| Posted by: DMFD 2009-07-12 14:21 |
| #5 Verlaine: at the local level, scrip is a godsend. It permits local government and markets to function when the dollar is either scarce or fluctuating wildly. This is because it is a very controlled, debt free currency. It doesn't as much replace the dollar as complement it. IOUs are a primitive and partial form of scrip. The full blown stuff is very popular when used. |
| Posted by: Anonymoose 2009-07-12 13:56 |
| #4 Right now the Federal Govt is in the scatological equivalent of King Midas. Everything they touch turns to sh*t. The SEC was marvelously successful in protecting investors so far. California is issuing scrip with the hope that that they can pull a rabbit out of the govt's a$$ when the scrip is due. They will not cut, which is the painful action they need to do to fiscally survive. California has as much or better chance of getting out of this financial bind than the Federal govt. |
| Posted by: Alaska Paul 2009-07-12 13:19 |
| #3 ...The problem here - IMHO - is that if the states can deal with their problem (or at least keep it under control) by issuing scrip, then that means the don't need Federal assistance. And that is the LAST thing the current administration wants. Everything they've done so far seems to be intended to keep people and organizations (including states) dependent on the Federal government. Mike |
| Posted by: Mike Kozlowski 2009-07-12 12:48 |
| #2 Dunno, 'moose. I don't question your analysis, but would the death of scrip - which seems to be merely one more infantile effort to bypass/defer responsible fiscal behavior - be such a bad thing? Aside from that, it's nice to have the SEC confirm that Ahnold has violated the CA constitution, which forbids issuance of debt (in effect, bonds) to cover operational costs/without direct approval of voters. Gray Davis got in trouble for trying this, and it was considered audacious (I know, that was a few years ago in an America that is hard to even imagine any more). Where are the lawsuits to invalidate the IOUs as unconstitutional debt issuance without an election? Oh, right. That would smack of common sense and the rule of law. Not gonna happen. Would this stupid state just collapse already? I don't expect any epiphanies or turn-arounds any more, I just want to savor the anguish of the idiots who've brought this on themselves and the rest of us. |
| Posted by: Verlaine 2009-07-12 11:49 |
| #1 This would be a huge seizure of federal power from the States, counties, cities and private organizations, in effect the federal government taking over regulatory control of all *alternatives* to the dollar. This opens the door to a massive power grab. During the Great Depression, there were over 450 instances of mostly cities issuing scrip, which strongly helped the local community. By federalizing this, it would ruin the usefulness of scrip. |
| Posted by: Anonymoose 2009-07-12 11:04 |