Banks Not Buying FDIC Line on California IOUs

Bank Have Enough Bad Assets

Tuesday, a group of major banks, including Bank of America (BAC), Citigroup (C), JP Morgan (JPM) and Wells Fargo (WFC), said that they would stop accepting California IOUs. The State of California, virtually out of cash, has been issuing IOUs, known officially as “individual registered warrants” to creditors in lieu of cash. The State has promised to pay IOU holders 3.75% interest when the warrants mature on October 2.

With Fitch Ratings dropping California’s debt rating to BBB junk status, it is understandable that the banks do not want to cash the IOUs. Allowing warrant holders to cash in their IOU’s would effectively transfer the credit risk of the IOUs to the banks. Most major banks already have a mountain of non performing assets and, understandably, do not wish to add California IOUs to the list.

The reality of the situation is that California has already defaulted since they have reneged on their obligations to creditors. I wonder what the State of California’s reaction will be when their citizens adopt the State’s method of bill payment and start sending in IOUs instead of cash for tax payments due? Many of California’s citizens have been placed in a horrendous financial situation by California’s “spend and borrow until we are bankrupt” policies. If the banks won’t cash in the IOUs, why would an average citizen or business want the IOUs? The IOUs won’t pay for your groceries or rent and they can’t be converted to cash - what does that say about faith in California’s “promises to pay tomorrow what is due today”?

FDIC Issues Statement On California IOUs

The FDIC Wednesday issued the following statement to its member banks regarding the credit worthiness of California’s IOUs.

California Registered Warrants
Interagency Statement

Summary:

The federal financial institution regulatory agencies are jointly issuing the attached supervisory guidance for financial institutions regarding the regulatory capital treatment for registered warrants issued by the State of California as payment for certain obligations.

Highlights:

• The Attorney General of the State of California has opined that the registered warrants that the State is issuing as a form of payment for certain of its obligations are valid and binding obligations of the State.
• The banking agencies’ risk-based capital standards permit a banking organization to risk weight general obligation claims on a state at 20 percent. These warrants, which are general obligations of the State, would, therefore, be eligible for the 20 percent risk weight for risk-based capital purposes.
• Banks should exercise the same prudent judgment and sound risk management practices with respect to the registered warrants as they would with any other obligation of a state.

It would guess that the FDIC’s statement on the soundness of California’s IOU’s was more politically motivated than financially inspired. If this is all the support that California is going to get from the Federal Government, the citizens of California have much to be concerned about.

The FDIC is telling the banks that the risk of California’s warrants is the same as any other state-issued general obligation debt. Nice try, but apparently, the biggest banks in the country, as well as the credit rating agencies, are not buying this line. If the banks won’t cash the IOUs and you can’t spend them, they are effectively worthless today. Those stuck with California IOUs may be in for a long wait before they can be cashed in.

Disclosure: None

Comments

[really:]

The banks are actually doing what there supposed to do, not take unquantifiable risks.

Jul 09 09:00 AM

[Please:]

BBB is NOT junk. How irresponsible!

Jul 09 09:59 AM

[geoff5505:]

California deserves what it gets - in this case, nothing!

Jul 09 10:12 AM

[Mad Hedge F...:]

Why should they? Perhaps it was deliberate that AMC Channel featured an Arnold Schwarzenegger film festival this weekend. Was the gratuitous violence of Terminators, Judgment Day, and the End of the World intended to drive us all to the negotiating table (“speak to the hand”)? We now have a new currency in circulation, Golden State "script", which is thoughtfully being printed in green as I write this. Of course the banks haven’t said they will accept this past July 10, so many spent the July 4th weekend at Big Five Sporting Goods stockpiling ammo and drinking water (everyone here already owns guns), possibly inspired by the Arnold movies. Many schools have already cancelled summer school, so of course, the malls are full of jobless kids lounging around and smoking cigarettes, with nothing to do. Towns are going without fireworks celebrations, and worried citizens are bracing themselves for a complete cessation of state services by the fall. Obama has wisely turned a blind eye to all of this, leaving we non taxing big spenders to stew in our own manure. For more on this see my earlier piece . With everyone of all parties thoroughly disgusted with their leaders, I’m surprised that the grass roots campaign for a state initiative to dump the two thirds majority required to pass a budget hasn’t welled up yet. Does France still have that guillotine thing? Is it available for rent? Will they take California "script"?

Jul 09 10:23 AM

[Mr. Ed, Jr.:]

" I wonder what the State of California’s reaction will be when their citizens adopt the State’s method of bill payment and start sending in IOUs instead of cash for tax payments due? "

Oh....I think we know what the state will do-- they will send an army of prosecutors after anyone who tries this. It is what is known as a "one-way street".

I expect we will have a test-case very soon.

Jul 09 12:32 PM

[whidbey:]

This is an object lesson to all the states who are on the brink. More important it is also a warning the to Fed and Treasury that balance sheets at every level are in poor to terrible condition and will not get well soon.

California needs jobs and lots of home sales to right the fiscal ship. Not going to happen. The slow decay to a stand still, AKA, the big freeze is nearing. Take heed and hold cash because it is about to become irreplaceable when fear rules out most other instruments including gold coins.

Jul 09 12:54 PM

[Fitz919:]

I for one applaud the banks for thumbing their collective noses at the Federal Government. Now we should lock the California legislature in the building, and not let them out untill they come to a budget agreement. If that doesn't work, force them to watch Schwarzzenegar movies....that aught to break them.

Jul 09 11:13 PM

[Old Rick:]

I am a California escapee circa 2003 when (among other things) it became apparent that "The Golden State" was really a "fool's gold state". The liberal democrats of California have had the state on a downward spiral for years. The next step in this evolution is that the "tax and spend" states, NY, NJ, Calif (and a couple others) will go to the Obama administration with hat in hand and ask that the taxpayers of the relatively fiscally responsible states to bail out the democrat owned and operated states.

Jul 10 09:56 AM

[jackooo:]

I live in Ca. The senators are useless. Feinstein and Boxer.
Many a script has been sent to them regarding illegals and the fact that they are not paying taxes. No reply is the standard waltz around without getting a direct answer.
Cut the budget deficit down by firing these two. I truly see no loss.

Jul 10 11:50 AM

[MudEngineer:]

How could you have possibly expected any different results for California's fiscal situation when they again and again elected the likes of Nancy Pelosi, Maxine Waters, Dianne Feinstein and Barbara Boxer to represent them in Washington? I can only imagine that the state representatives are no better!

California got what they asked by by electing and re-electing the above losers and now our entire country has followed suit by swinging so stronly to the Democrats and electing the biggest loser of all--Obama.


On Jul 10 11:50 AM jackooo wrote:

> I live in Ca. The senators are useless. Feinstein and Boxer.
> Many a script has been sent to them regarding illegals and the fact
> that they are not paying taxes. No reply is the standard waltz around
> without getting a direct answer.
> Cut the budget deficit down by firing these two. I truly see no
> loss.

Jul 10 09:32 PM

[Former Liberal:]

I live in California and am seriously considering moving elsewhere. I'm tired of the blame game and the lack of leadership by everyone in Sacramento. We have people who can't get along and don't earn their salary. All they can do it cause a train wreck for our state and its finances. I say we boot them out and install a part-time legislature. The majority vote also would be better on the budget. Also, eliminate the two-house format for California's government. We don't need a Senate and Assembly. Let's streamline government, streamline spending and eliminate useless commissions and boards that do nothing. And as for public unions, you're part of the problem. You've had the pockets of polticians lined for too many years and now we're paying for the excess.
BTW, I'm a former Liberal..now a mad one

Jul 12 07:26 PM

[billddrummer:]

I escaped from CA in 1979 and moved to NV. Until recently, I felt like I made a good choice. Political climate was reasonable, taxes were low, cost of living a fraction of CA, and not at all crowded.

Apparently, lots of people had the same idea.

Now, NV politicians are racked with scandals (why not go to a brothel? They're legal here!), taxes have soared, services cut (furloughs, anyone?) and there's traffic.

Where to, next?

Jul 13 07:52 PM