SACRAMENTO, Calif. – The recipients of billions of dollars in IOUs being issued by California soon may be able to sell them on a regulated market, benefitting both recipients and credit unions and banks that accept them.
The action comes after as many as 60 credit unions have said they will continue to accept the IOUs, even as the state’s biggest banks say they will stop accepting them today.
The Securities and Exchange Commission recommended Thursday that the IOUs, which carry an annual interest rate of 3.75%, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, as the banks are pulling back from the program. The SEC said in an announcement that its staff "has expressed its belief that California's recently issued IOUs are 'securities' under federal securities law."
With Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and some regional banks in the state having said they won't accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.
As California legislators continue to wrestle over how to close a $26.3 billion budget deficit, the state is expected to send out $3.3 billion in IOUs this month to tens of thousands of individuals, small businesses and local governments. The state had issued more than 91,000 IOUs totalling $354 million as of Wednesday night.
Credit union executives insisted they will continue to accept the IOUs to serve their members, not to gain market share from banks. "I can’t say why banks are making their decisions not to accept the warrants," said Robin McKenzie, vice president of marketing for Redwood CU. "Of course, given the state’s financial situation there is no guarantee, but we feel this is a very important member service offering and we are prepared to assist our members."
"We analyzed our membership and decided we wanted to put our members’ minds at ease," Joe Lara, vice president at SchoolsFirst FCU, told The Credit Union Journal.
"We are doing it because we want to be there for our members," said Ricki McManuis, spokesman for Altura CU. "We are not doing it to generate more members, as people must be members to cash the warrants."
