FDIC Tells Banks California IOU’s Good As Gold

Bank Have Enough Bad Assets

Yesterday, a group of major banks, including Bank of America, Citigroup, JP Morgan and Wells Fargo,  said that they would stop accepting California IOU’s.  The State of California, virtually out of cash, has been issuing IOU’s, 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 IOU’s.  Allowing warrant holders to cash in their IOU’s would effectively transfer the credit risk of the IOU’s 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 IOU’s instead of cash for tax payments due?  Many of California’s citizen 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 IOU’s, why would an average citizen or business want the IOU’s?   The IOU’s 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 IOU’s

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

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 the  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 IOU’s and you can’t spend them, they are effectively worthless today.  Those stuck with California IOU’s may be in for a long wait before they can be cashed in.

Disclosures: None

5 Responses to “FDIC Tells Banks California IOU’s Good As Gold”

  1. California should give taxpayers the same thing it receives for late taxes or under payments.

    “An underpayment penalty will be charged when taxes are not paid by the due date. The penalty is 5 percent of the unpaid tax as of the due date plus 1/2 of 1 percent each month, or part of a month the tax remains unpaid, not to exceed 40 months. The maximum penalty is 25 percent of the total unpaid tax.

    A delinquent penalty will be charged on unpaid taxes if a return is filed late. The penalty is 5 percent of the unpaid tax due for every month that the return is late, up to a maximum penalty of 25 percent of the unpaid tax. The minimum penalty is $100 or 100 percent of the unpaid tax, whichever is less.”

  2. And so it begins…

  3. Also, why the sudden change of heart? I know BofA and Wells Fargo originally said they would accept IOUs, though the Fed issued guidance for consumers that said IOUs accepted by these banks could actually end up as an overdraft burden for the consumer if not honored by the state as promised.

    Wow. This is going to be a blast 😛

  4. Really? If the California government pays you 50% interest on an IOU what would that solve? They will just tax whatever California workers are left with a job to pay it. How absurd. Liberal Democrat voters just don’t get it. Keep voting them in office. You get what you allow your cities to vote for and you have done nothing to stop the plunder. Enjoy your liberal policies, stifling regulations, morally inept cities and all you Californians can reap the fruits of your bankrupt welfare state. Read a book once in a while and stop allowing your elected officials to plunder you. The corrupt two party system is rampant throughout the US so you will soon be joined by other morally bankrupt states whose people have allowed the same plunder. I am very grateful Texas is near the bottom of the bankrupt state list. The Law written by Frederic Bastiat would be a good book to start reading. You can read it for free on the Mises website. Expand your mind, educate your neighbors, and fire all your elected officials. Read the Constitution. Read your State Constitution. Get your state back from those who have entrenched themselves into your lives and plunder your children.

    Good Luck Californians

  5. I am happy to report I returned to San Francisco from the East Coast on Friday and SF has not yet burned down.

    And now Bank of America and Wells Fargo aren’t taking IOUs?

    I’m not really sure what’s going on here. Like I told you before I left, Bill, California is numb. I think we’re still there. It isn’t real yet.

    I’ve been over on your side of town so haven’t really been paying attention either.

    And we have not fallen into the ocean yet either. I’ll let you know when we do.

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