The Daily Capitalist: We Buy and Sell California IOUs

Buyers are clamoring for discounted scrip, but the SEC tries to put the kibosh on the deal

By Jeff Harding | Published on 07.10.2009

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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.

If you need cash, what’s wrong with someone buying an IOU at a discount? Willing buyer and willing seller and all that. And don’t try to argue there’s no risk to this stuff. The state just got downgraded to BBB, pretty close to junk.

The best idea I heard today is that you go out and buy these IOUs at a discount and pay your taxes with them. If you buy at 80 percent of notional value, you get a 20 percent tax break. Not bad.

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

Comments (9)

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» PJ wrote on 07.11.09 @ 03:44 AM

It’s “notional” value..not notational; and then don’t forget the capital gain you must then declare and pay a tax on so you forgot a few items.

» rtetz wrote on 07.11.09 @ 09:12 AM

To PJ: Picky, picky, picky. So he forgot one item not a “few”. That does not take away from a great idea.

» Patrick wrote on 07.11.09 @ 09:26 AM

Since the SEC has failed at pretty much everything in their purview for the last 20 years or so, it would probably be best if they just butted out of this.

» Jeff Harding wrote on 07.11.09 @ 11:13 AM

PJ, thanks. I appreciate the correction.

» blue wrote on 07.11.09 @ 12:20 PM

no way!!

» Hilary Smith wrote on 07.12.09 @ 03:55 PM

You’re definitely not a moralist are you? Encouraging people to take advantage of the poor saps whose wallets are full of these IOUs. Typical capitalist.

» Jim in SB wrote on 07.12.09 @ 05:28 PM

Hilary,

I think you have it all wrong.  they are not taking advantage, they are helping. 

These poor saps as you call them are getting paid with IPU’s and can’t spend them.  So, they are hurting.  They need the cash.

A couple of years ago someone owed me money.  After I started fighting and paying attorneys for a year, the person finally agreed they owed the money.  Unfortunately, they decided to pay me with a “Note” saying they owed me the money and gave me a 2nd Trust Deed to collateralize the “Note”. 

That didn’t do me much good as no one would accept the Note when had to buy Gas or pay my rent.  So, I sold the Note at a discount to someone like the people you are calling “Typical Capitalist”.

Without that person’s help, I would have had a heck of a time paying bills.

Think about it.

» KingofthePaupers wrote on 07.12.09 @ 06:16 PM

Jct: There’s nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina’s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.
When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See http://youtube.com/kingofthepaupers 
Too bad California IOUs won’t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
If they make IOUs legal tender, I take it all back.

» Mr.XXX wrote on 07.13.09 @ 05:10 AM

Several points: The sellers are not “selling” them.  Rather, they are assigning collection rights as creditor to the debtor-issuer.  Further, the SEC can only chase sellers for fines concerning the sales of unregistered financial products that are required to be registered.  If you can acquire them at 80% of face and have no taxable income (btw: paying tax debt is a great idea but the difference between your tax basis in the ious and the tax debt satisfied is taxable income under the federal income tax code.) To skirt the no sale rules, once your sitting with 1m of ious with a basis of 800k, confess a 1m judgment in the name of the holder (ie abc, inc.) to another party (ie xyz, inc.) and levy on the ious with the judgment based on the judgment (which is substantiated with a non-recourse note between the two entities.  Tax basis is now 1m and no sale occurred under any SEC bs.  The transaction is not taxable either except as to 3% interest CA may pay out, unless your defunct-joke of a state does not default and crash like Orange Co. did once.

 

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