Saturday, July 11, 2009

California IOU Is Now A Security, Says SEC

California's IOUs are now "securities", just because the government says so. (If the government says the sun goes around the earth, I am sure the sun will go around the earth like good old times.)

The Daily Capitalist: We Buy and Sell California IOUs
(7/10/09 Noozhawk)

"This is the power of capitalism. When the big banks announced that they would not accept California’s IOUs as cash deposits, it took about three minutes for a market to spring up on eBay and Craigslist for this scrip. Of course, many buyers want a discount on the paper.

"Then some idiot at the Securities and Exchange Commission comes up and says the scrip is a security and no one can sell without registering them.

"So, now a promise to pay is a security because some bureaucrat said so. I don’t think so. I would love to see the SEC try to get away with this. If it was a security, the state of California as the issuer would first have to register the IOUs as a security. Then the people working a secondary market on an already registered security would need a broker-dealer license to trade them. The state controller insists they aren’t securities, but rather “a form of payment.” And they are correct."

However, according to Market Watch, the spokesman for the California State Treasurer has this to say:

"Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer, lauded the SEC's announcement, saying in a statement: "The SEC has sent a pretty clear warning to folks who plan to profit by buying and reselling IOUs: If you're not registered as a municipal securities broker-dealer, you run the risk of violating federal law." "

So they are now happy that their IOUs are regulated "securities" after the fact, even though they didn't issue them as securities and the recipients didn't receive as securities and didn't agree to receive as securities. Fraud, anyone? Lawsuits, anyone?

When I first heard the news that banks would refuse to cash CA IOUs after Friday July 10, I immediately went to eBay to check if anyone was offering to cash them. There was. One eBay seller was offering to exchange $100 IOU plus $70 that the IOU holder needs to send to the seller, with $140 visa gift card. So the IOU holder would mail in total $170 ($100 IOU and cash), and receive $140 cash equivalent. It would represent a 17.6% discount. I doubted if anyone needed to cash IOU badly enough to take a steep discount like that, but I was sure as competition heated up the discount rate would be less - probably between 8% and 15%.

Now that SEC is here, and sellers like the one I found on eBay have disappeared. And it looks like jobs will start to disappear at those businesses in California unfortunate enough to have received IOUs.

At some point, you have to wonder. What does the federal government want? Major banks who had said they would accept California IOUs reversed very quickly, possibly under the guidance from the government. When the free market started to take care of the problem by offering to cash them at discount, SEC stepped in to make it impossible for the free market risk takers to offer cashing.

Bankrupt the 10th largest economy in the world, suck the remaining juice out and beat the carcass to pulp so that it never recovers is what they want. My question is why. I am already hearing an answer from far away... "Because We Can!"


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