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Investors eye IOUs
Carolyn Said, Chronicle Staff Writer
Tuesday, July 7, 2009
The California IOU has become the prey of so-called vulture investors who hope to profit by buying them on the cheap and redeeming them later.
The idea is that "distressed asset investors" (their nicer name) will pay less than face value to mom-and-pop businesses that receive IOUs but need cash immediately to meet payroll or other expenses. Once the IOUs mature on Oct. 2, the investors will cash them in for their full value plus the 3.75 percent interest the state is offering.
While people legally can sell their IOUs, the state will only redeem ones accompanied by a notarized bill of sale signed by the IOU payee, the California treasurer's office said Monday.
From the first day of issuance Thursday through Monday, the state had distributed $87.2 million in IOUs, mostly tax refunds, according to Garin Casaleggio, a spokesman for state Controller John Chiang. If the situation continues throughout July, Chiang said he would have to issue about $3.36 billion in IOUs.
Those huge dollar amounts quickly triggered an online stampede.
"Will pay cash for California warrants/IOUs" read one ad on Craigslist, surrounded by classifieds seeking the likes of '58 Corvette parts and Duran Duran tickets.
"Sell your government IOU for cash" advised the banner headline at a brand-new Web site, BuyMyIOU.com.
For now, most IOU holders can simply deposit them. Major banks and credit unions including Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Bank of the West will accept IOUs until July 10 for existing customers.
But the banks haven't said if they'll take IOUs after that date.
"If the banks do not extend their offer on Friday and we do not have a budget, it will be a new ballgame," Todd Lee, a San Francisco adviser to high-net-worth clients, wrote in an e-mail.
He's ready to assist IOU holders who want to sell. Lee posted an ad on Craigslist offering to buy IOUs and has registered the URL cash4 warrants.com.
"I think these are a safer investment than California bonds, for example, because you know you can exchange these at face value plus interest at tax time," he said.
New York's SecondMarket, www.secondmarket.com, a company that specializes in creating marketplaces for illiquid assets, is also eyeing IOUs.
"If people start to doubt California's ability to pay them back and the banks put a halt on taking the IOUs, then you would see a lockup of liquidity," said Jeremy Smith, chief strategy officer. In that case, SecondMarket would consider setting up an online trading floor where its 3,200 "accredited investors" - individuals and businesses with large cash reserves - could bid on the IOUs. Those bids would determine whether they go for, say, 85 cents on the dollar or some other amount.
Some IOU holders are taking matters into their own hands.
Gloria Freeman, president of Staff USA in Rocklin (Placer County), said the state owes her in the mid- to high six figures for several months' work recruiting medical professionals, such as phlebotomists, radiologists and nurses, for state departments.
Freeman, who's already laid off five out of her 12 administration staffers because of the state's budget issues, expects to be paid in IOUs - but not until after July 10.
"That's the catch-22," she said. "I'd have to run up lines of credit to support my payroll."
Instead, she plans to sell the IOUs herself, alongside the antiques and memorabilia hawked on her online auction company, Auction Ten.
Brandon Schlichter, 23, an entrepreneur in Ohio, launched the BuyMyIOU site. He said he has between $500,000 and a million dollars to invest and hopes to line up other investors.
"The response has been phenomenal," he said. "I knew the IOU problem could be pretty major; I figured there'd be some people who need cash now."
E-mail Carolyn Said at csaid@sfchronicle.com.
http://sfgate.com/cgi-bin/article.cg...BU3E18JVA9.DTL
Carolyn Said, Chronicle Staff Writer
Tuesday, July 7, 2009
The California IOU has become the prey of so-called vulture investors who hope to profit by buying them on the cheap and redeeming them later.
The idea is that "distressed asset investors" (their nicer name) will pay less than face value to mom-and-pop businesses that receive IOUs but need cash immediately to meet payroll or other expenses. Once the IOUs mature on Oct. 2, the investors will cash them in for their full value plus the 3.75 percent interest the state is offering.
While people legally can sell their IOUs, the state will only redeem ones accompanied by a notarized bill of sale signed by the IOU payee, the California treasurer's office said Monday.
From the first day of issuance Thursday through Monday, the state had distributed $87.2 million in IOUs, mostly tax refunds, according to Garin Casaleggio, a spokesman for state Controller John Chiang. If the situation continues throughout July, Chiang said he would have to issue about $3.36 billion in IOUs.
Those huge dollar amounts quickly triggered an online stampede.
"Will pay cash for California warrants/IOUs" read one ad on Craigslist, surrounded by classifieds seeking the likes of '58 Corvette parts and Duran Duran tickets.
"Sell your government IOU for cash" advised the banner headline at a brand-new Web site, BuyMyIOU.com.
For now, most IOU holders can simply deposit them. Major banks and credit unions including Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Bank of the West will accept IOUs until July 10 for existing customers.
But the banks haven't said if they'll take IOUs after that date.
"If the banks do not extend their offer on Friday and we do not have a budget, it will be a new ballgame," Todd Lee, a San Francisco adviser to high-net-worth clients, wrote in an e-mail.
He's ready to assist IOU holders who want to sell. Lee posted an ad on Craigslist offering to buy IOUs and has registered the URL cash4 warrants.com.
"I think these are a safer investment than California bonds, for example, because you know you can exchange these at face value plus interest at tax time," he said.
New York's SecondMarket, www.secondmarket.com, a company that specializes in creating marketplaces for illiquid assets, is also eyeing IOUs.
"If people start to doubt California's ability to pay them back and the banks put a halt on taking the IOUs, then you would see a lockup of liquidity," said Jeremy Smith, chief strategy officer. In that case, SecondMarket would consider setting up an online trading floor where its 3,200 "accredited investors" - individuals and businesses with large cash reserves - could bid on the IOUs. Those bids would determine whether they go for, say, 85 cents on the dollar or some other amount.
Some IOU holders are taking matters into their own hands.
Gloria Freeman, president of Staff USA in Rocklin (Placer County), said the state owes her in the mid- to high six figures for several months' work recruiting medical professionals, such as phlebotomists, radiologists and nurses, for state departments.
Freeman, who's already laid off five out of her 12 administration staffers because of the state's budget issues, expects to be paid in IOUs - but not until after July 10.
"That's the catch-22," she said. "I'd have to run up lines of credit to support my payroll."
Instead, she plans to sell the IOUs herself, alongside the antiques and memorabilia hawked on her online auction company, Auction Ten.
Brandon Schlichter, 23, an entrepreneur in Ohio, launched the BuyMyIOU site. He said he has between $500,000 and a million dollars to invest and hopes to line up other investors.
"The response has been phenomenal," he said. "I knew the IOU problem could be pretty major; I figured there'd be some people who need cash now."
E-mail Carolyn Said at csaid@sfchronicle.com.
http://sfgate.com/cgi-bin/article.cg...BU3E18JVA9.DTL