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TARP Banks Begin To Accept California IOU's

It appears that the question of whether the federal government is going to bail out the state of California has been rendered moot. Two large banks have announced that they will accept the IOU's issued from the State of California to its customers beginning today. Wells Fargo announced this afternoon that the bank would be accepting the monopoly money for a period of one week.

Wells Fargo & Company (NYSE:WFC) said today it will accept registered warrants issued by the State of California from its retail and business customers for a limited time. It will begin accepting the registered warrants for deposit on July 2, 2009 and stop accepting them no later than July 10, 2009.

Chase also made a similar announcement:

SAN FRANCISCO (MarketWatch) -- Chase, the banking unit of J.P. Morgan Chase , said Thursday it will accept registered warrants issued by the state of California through July 10. "We will accept the registered warrants from our customers to help them through this challenging time," said Pablo Sanchez, head of Chase's branches in the Western region.

Now that the camel has its nose under the tent who thinks this scheme will be just temporary? The fact that the banks mentioned are TARP banks, beholden to Washington for their very existence, suggests that the U S taxpayer bailout of California has begun.

Update: According to Seeking Alpha, it's looking a lot more like currency:

Watch out Ben Bernanke, the Federal Reserve now has competition in the currency game. California is planning to create its own money in the form of IOUs, just like the Fed. What is the California IOU - currency or an interest bearing note?

Officially the IUOs will be called "registered warrants". State Controller John Chiang planned to issue $3.4 billion, maturing on Oct. 1 to replace state payments. The interest rate is set to be determined on Thursday, but cannot exceed the statutory limit of 5%.

California's ingenuity poses an interesting dilemma for the Fed. The IOUs would be structured as short-term tax-free bills, but trade like cash. Banks are being asked to accept the IOUs and advance customers interest. Should the Fed sanction alternate forms of money?

This is all very surreal.


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Comments (11)

The urge to point and laugh... (Below threshold)
Gmac:

The urge to point and laugh hysterically is almost to great to resist. Our tax dollars used to bail out the banks are now going to be 'loaned' out to cover CA's fiat money. So, I'm betting that when the chit is called as due CA is going to say "Sorry Sammy, no can do." and guess who is left holding the empty bank bag.

At the very least the person that directed those loans be made should have to answer for them, personally, and not saying "I was just following orders" is going to allow them to skate.

How long will it take for t... (Below threshold)
GarandFan:

How long will it take for the California legislature to figure out that it can continue issuing 'warrants' until someone calls them on it? Know what's really funny? If you get an IOU from the state, and you owe them money, you can't send the IOU back to them in payment.

True GarandFan:The... (Below threshold)
hermie:

True GarandFan:

There is nothing to back up the IOUs, just a 'promise' to pay. No collateral loans for millions of dollars. The kind of 'risky' lending that got banks in hot water last year.

I'm mildly surprised that t... (Below threshold)
James H:

I'm mildly surprised that the banks aren't offering to buy the warrants at a discount.

As GarandFan says,... (Below threshold)
914:

As GarandFan says,

If You owe the State cash and send a response back saying "I will pay You back someday when My finances look rosier." Sure they will wait...For about 2 hours before they issue judgements, fines and send the ATF to Your residence. Cause heaven knows, messing with the States our Federal gov's God (money) is a sin worse then murder.

Unless a dictator does it.

Oh get a grip!Cali... (Below threshold)
MunDane:

Oh get a grip!

California has done this "registered warrant" thing in the past, I can recall at least two other times, and there are probably more.

For pity's sake, grow up and do a little research...1983, 1992, and 2003 all came and passed with registered warrants and the world did not come to an end.

For those of you cheering this on, I would like to remind you, this is a nice country we got here, be a real shame if something happened to it. Schadenfreude may make you popular with your tinfoil hatted buddies but it isn't really a viable discourse.

Illinois might be the next ... (Below threshold)
bobdog:

Illinois might be the next state to issue these things.

Then Michigan, New York, Taxachusetts...

Since Washington is permitting this scrip, I will begin issuing them as soon as I get home from the holiday. I've got a property tax bill coming up, payroll taxes due, and it's just a matter of time before my income tax is going up. They will be backed by the full faith and credit of...me. I think I have a better credit rating than California, come to think of it.

MunDane -The diffe... (Below threshold)
JLawson:

MunDane -

The difference between then and now is that before there was the possibility of enough income to redeem the notes.

Now? It's a whole lot more iffy. I'm not at all sure they're going to be redeemable at face value.

But - ain't my problem, it's California's and whoever takes the bait.

JLawson,With a str... (Below threshold)
MunDane:

JLawson,

With a stroke of a pen, The Governator can enable an emergency spending measure that converts them to cash, immediately. This is a ploy to force the legislature to actually do something, rather than continue to screw around with cow tail amputations.

Seems to me like there actu... (Below threshold)
JLawson:

Seems to me like there actually has to be cash to pay for them, however - and apparently that's in kind of short supply for CA in the foreseeable future...

California is basically pri... (Below threshold)
Steve:

California is basically printing their own currency now. Soon (if not already) there will be a trading market for this currency and if it continues long enough there will be counterfiet issues as well. And sooner rather than later if will have an impact on inflation...because printing money out of thin air ALWAYS contributes to inflation.




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