SEC's Dangerous California Interference

Well now they've gone and done it:

"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.

That was a mistake.

Here's why.

If you performed work or were otherwise owed money by the State of California (e.g. you are owed a tax refund) you're owed money, not a bond.

What the SEC has just done is equivalent to declaring that you were not paid at all.

You did not agree to accept payment-in-kind, therefore, absent agreement you cannot be compelled to accept this bargain.

Therefore, if you are owed a tax refund, you still are.

If you invoiced the state, it remains outstanding.

I predict that the line in front of the courthouse is going to get very long, very fast, and furthermore, if you're a vendor to California, you better quit shipping - now - before you wind up taking a forced haircut.

3.75% is nowhere near a reasonable interest rate for an insolvent institution, nor are you likely to appreciate the discount if you try to sell these "securities" for immediate cash.

Comments

[dixie:]

Typical government thinking, as if somehow isolated from the reality of common sense.

How do the rest of us get a 3.75% apr on our credit cards??? Arren't we all at drift together in the same economic boat???

Jul 10 11:27 AM

[whidbey:]

The designation of" security" by the SEC of the IOUs was to indicate the due diligence required of the already clogged bank holdings of bad debt, and did not create a bond by any stretch of the imagination. But! if it did the acceptance of the IOU by the creditor would be payment legally, it just would not be freely transferable between parties (not legal tender).

If you want to vent on someone, leave the SEC out of it and pour the pitch on the legislature and attorney general of California which are, all things considered, singularly incompetent and should be removed from office. This should demonstrate why it is risky to live and operate a business in that state. I know, small matter.

Jul 10 01:54 PM

[Thinkr:]

From the standpoint of an attorney whose specialty is securities (me), this article is non-sensical. The IOU's issued by California have all the criteria for the legal definition of a security, and such classification affords any secondary purchasers of the IOUs the protections of the anti-fraud provisions of the Securities Act of 1933 and the Exchange Act of 1934. Failure to classify it as such would have invited fraud in the nascent multi-billion dollar market for these IOUs. The alternative of leaving these instruments in legal limbo would result in multiple massive schemes to defraud. This is clearly not preferable.

And although the following does not constitute legal advice and should not be relied upon accordingly, I am virtually certain that these IOUs will not change the legal status of debts between private parties and/or the government.

Jul 10 03:52 PM

[BlackyBlack:]

You attys aren't getting what he's saying. He's saying the ious ain't money, ain't legal tender. They is glass beads. In other words, nobody gots to accept them as payment.

Basically it means people (creditors) can demand payment in legal tender, don't have to accept the ious, and can force California to default.

Jul 10 06:12 PM

[a. palmer jr.:]

California has some of the richest people in the world...I wonder why Arnold can't figure a way to wring some money out of them. His budget crisis would be solved by doing one thing...run all the illegals back home and the best way to do that is to require e-verify for not just job hiring but for hospital treatment and even buying groceries. They didn't get it; the easy way didn't work, time to get tough!

Jul 11 09:23 AM

[msgtb:]

The SEC has been letting GS and JPM use program trading to manipulate the stock market. Is that a reason to get on the SEC, the main reason that they are in existence is supposed to stop that kind of manipulation. It is clear that the government and the SEC are behind the phantom rally since March. The reason was to let the banks prey on the steeple in the market. It is one gigantic pump and dump to inflate the large banks.

Or how about JPM leasing a oil tanker to receive physical oil and holding until GS ran the price of oil up in the futures market.

Put that in your pipe and smoke-it, Mister don't pick on the SEC.

Dave

Jul 11 10:45 AM

[Karl Denninger:]

DING DING DING DING.

Exactly.

Here's the problem: The Constitution prohibits California from issuing anything that IS legal tender (or a bill of exchange.) The SEC's ruling makes sense in that context, in that I smelled this sort of challenge coming.

But the alternative from a standpoint of the state may be even worse.


On Jul 10 06:12 PM BlackyBlack wrote:

> You attys aren't getting what he's saying. He's saying the ious ain't
> money, ain't legal tender. They is glass beads. In other words, nobody
> gots to accept them as payment.
>
> Basically it means people (creditors) can demand payment in legal
> tender, don't have to accept the ious, and can force California to
> default.

Jul 11 12:04 PM

[Northstar10000:]

What's bad about a default in good old california? Get used to them, they will be coming for at least 3 more states and multiple cities and counties. We will save the best for last when your good old hope and change show goes on the road. SDS anyone !!

Jul 11 06:48 PM

[Mark Anthony:]

Karl:

Ha! Of course the IOUs are not constitutional money or legal tender. But who says the dollar bills every one use, the Federal Reserve Notes, are constititonal money? The FRNs are IOUs themselves. They are not even issued by the government, since the FED is technically not a government agency. So it is OK to break the constitution at the federal level but not at the state level?

At least the constitution does not prevent bartering. The California IOUs can be used as a bartering currency and that should be legal.

On the big debat of inflation/deflation, Karl Denninger you are wrong. China is the only reason the inflation has not hit us yet. But it will come, with a fierce force, and with a suddenness that will catch every one in surprise:

stockology.blogspot.co...

Presuming you can just print as much paper money as you want, and it could actually be worth more, is logically absurd. You have to check your head if you draw a conclusion that seems logically absurd. The dollar will collapse. There is no question about it. Go to commodities. That is the only safe haven.

On Jul 11 12:04 PM Karl Denninger wrote:

> DING DING DING DING.
>
> Exactly.
>
> Here's the problem: The Constitution prohibits California from issuing
> anything that IS legal tender (or a bill of exchange.) The SEC's
> ruling makes sense in that context, in that I smelled this sort of
> challenge coming.

Jul 12 08:04 PM