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California IOUs selling well in auctions

July 7, 2009 12:00:00 AM PDT
For the first time in nearly 20 years, California is being forced to pay its bills with IOUs. The state may be out of cash and deeper in debt. But those IOUs are selling like hotcakes.California IOUs have become a hot commodity. Just browse through online sites like Craigslist and you'll find people offering cash for them.

Gloria Freeman has a side business auctioning furnishings and other items. She's decided to put IOUs up for bid to help people who can't wait until the October 2 redemption date to get their money.

"They can't wait for another budget impasse with these IOUs," said Freeman. "So they have to have some way to either sell them or to transfer them to someone else to at least get some money out of them."

Freeman is also a vendor who provides temporary staff to the state, and she'll be putting her own IOUs up for auction too.

The downside is that IOU holders have to be willing to accept less than face value for immediate cash. The buyers not only keep the difference, but also the 3.75 percent interest too.

"I've had all kinds of offers, from 75 cents on the dollar on up," said Freeman.

While some major banks have said they'll take IOUs until Friday, they may not cash them for non-customers, and not everyone will have received their IOUs by then.

Selling IOUs is perfectly legal, although the State Treasurer's office is worried about fraud.

"In this environment, there's going to be vultures that come out of their nests to try and take advantage of the situation to exploit and rip people off," said Tom Dresslar, Calif. Treasurer's Office. "We're going to do our best to make sure that doesn't happen."

One safeguard in place is requiring these third-party transactions to have a notarized bill of sale signed by the person whose name is on the IOU. Without it, the person who bought the IOU will not be able to cash it in October.

A state Assembly committee is also trying to ease the pain of IOUs. It passed a bill, 11-0, that would allow Californians to use those registered warrants to pay for state taxes or fees, like registering your car at the DMV.

"Our creditworthiness is not going to be set by Wall Street. It's going to be set by Main Street. And if we're not willing to accept our own credit, then why should anyone else?" said state Assemblyman Joel Anderson (R-El Cajon).

Until a budget fix is in place, more and more IOUs will be issued. Just Tuesday, another 12,000 went out, totaling more than $21 million.

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