Entrepreneurs pop up to exploit California’s financial woes

From Hebrew lessons to personal biographers, anything can be bought and sold at online classified websites like Craigslist and eBay – including state-issued IOUs that the government has been distributing since last week.

Officially known as registered warrants, these IOUs are a partial, short-term solution to the cash-flow crunch resulting from the state’s $27 billion deficit. With a 3.75 percent annualized interest rate, vendors, taxpayers and creditors can expect to redeem their IOUs to the treasury’s office on Oct. 2.

But for those who cannot wait that long, a number of informal buyers have been cropping up online to buy IOUs immediately, in hopes of making a profit by the time the state deadline rolls around. It is the second time since the Great Depression that California has issued IOUs to cover its bills.

“If what you need is cash, not a piece of paper, contact us,” reads a Craigslist post from Palo Alto. Other online purchasers range from a private investor who will buy IOUs at .70 cents to the dollar, to a buyer from San Francisco willing to pay twice the face value. “I am interested in purchasing a ‘State of California IOU’ as a souvenir,” read the ad. “I figure it would be an interesting thing to have around when my grandchildren are fighting over my stuff after I’m dead and gone.”

Tom Dresslar, the spokesperson for state Treasurer Bill Lockyer, said this unauthorized demand that is stemming from the state’s expected $3.4 billion supply of IOUs, comes as no surprise.

“There has been speculation that this might happen before we issued the registered warrants, and lo and behold, it happened,” Dresslar said.

To ensure the legitimacy of IOUs to taxpayers and avoid fraud, the state treasurer’s office issued ground rules for third-party purchases of registered warrants that require a notarized bill of sale signed by the individual whose name officially appears on the warrant.

Both Craigslist and eBay have been notified of this policy and have been asked to inform their customers.

“What we’re trying to prevent is the situation where a person comes into our office to redeem an IOU and is trying to scam the state, whether by the IOU is not valid or they are not the legitimate owner,” said Dresslar.

This bill of sale policy is not required of credit unions, brokerage firms and other financial institutions, however. Banks such as Wells Fargo, Chase and Bank of America, who have decided to honor California IOUs up until July 10, are also excluded from this requirement.  

In respect to IOUs, relations with these banks are crucial.

Jacob Roper, a spokesperson for state Controller John Chiang, who tracks state money and signs the state’s checks, said that Chiang has been in discussion with the banks for months. “He’s continuing to look to them to help these customers out during this cash crisis.”

Why the online buying and selling of IOUs is regarded as legitimate altogether is due to a matter of compromise between the government, banks and taxpayers. After banks stop accepting the registered warrants on Friday, the market to buy them will expand significantly, according to Dresslar. Policy officials do not want to obstruct recipients who seek other alternatives to redeem their IOUs. Some credit unions, such as Golden 1, plan to accept the IOUs.  

“It’s kind of a balancing act we wanted to perform,” said Dresslar. “Let’s say we get past July 10. Customers are still getting IOUs, and what are they going to do? They’re going to be scrambling to find money for the IOUs in order to feed their families… A good way is to allow recipients to get cash for registered warrants when the banks don’t accept them anymore.”

Issuing the IOUs also costs the state directly. The first round of IOUs totals about $3.4 billion. At 3.75 percent, that means the state will have to pay about $127 million for the privilege of issuing the promissory notes.

As for how long this grey market for IOUs will last, it all depends on how long these IOUs will be distributed.

“IOUs will keep printing until the legislator and the governor adopt a budget that has cash solutions in it,” said Roper. “If the state does not have enough money by Oct. 2, a later date will be set. There is no guarantee.”