Sub-prime Redux? Wall Street Banksters to Trade California IOUs

AlterNet. Posted July 6, 2009.

The Financial Times:

Amid the vacation rentals and used cars for sale, browsers of the website Craigslist will now find a unique offer: for California IOUs.

“If you are receiving a Cali­fornia IOU and you need cash immediately, please contact me. I may be of assistance,” reads one posting.

Wall Street, quick to spot an opportunity, is also gearing up to trade the payment promises.

“We have a whole team working on it,” said Barry Silbert, chief executive of Second­Market, a company that trades illiquid assets such as bankruptcy claims, private company stock and toxic assets.

Mr Silbert said hedge funds, municipal bond investors and other institutions were interested. Trading volume will depend on how many IOUs the state issues and how long banks accept IOUs for deposit at face value.

A stalemate over how to close a $24bn (£14.7 bn) budget gap has left California short of cash. The state last week issued $53m of registered warrants, or old-fashioned IOUs. If the budget impasse persists, it could issue more than $3bn IOUs by the end of July for payments such as tax refunds, welfare and vendor bills.

Read the entire article here.

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