Are IOUs securities?

July 9, 2009

That’s the question lots of folks are asking as they try to figure out how to potentially make money from the billions of dollars in IOUs being sent out by California this month.

If the Securities and Exchange Commission says yes, then two other regulators will be pulled in: the Municipal Securities Rulemaking Board, or MSRB, which would monitor the situation to make sure everyone is playing by the rules, and the Financial Industry Regulatory Authority, or FINRA, which would knock heads if there’s any wrongdoing.

It would also mean that only certified financial professionals could act as the intermediary between buyers and sellers.

If the budget crisis drags on, I imagine the professionals will be clamoring for the SEC to say yes to securities.

Separately, it looks like at least one of the big banks, Bank of America, has no plans to extend its July 10 deadline.

Spokeswoman Britney Sheehan reiterates that based on the bank’s 1992 experience with IOUs, such an extension would be counter productive.

We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible,” she said.

If other big banks stick to their guns, the issue of IOUs as securities will surely become a hotter issue for those wanting a piece of the action.

One comment

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There is no regulation or statute that provide the SEC the legal authority to regulate IOU’s. That is utter nonsense. To say the SEC regulates IOU’s is to say the SEC regulates third party checks. A muni bond is a contractual obligation to repay money lent. An IOU is a way to delay payment of a debt for products/services rendered. Furthermore, the largest banks in the nation, with all their power, money and financial expertise are refusing to accept them. Bear in mind the State of California has had financial distress for several years, and negotiations have been going on for several months, there is no guarantee these IOU’s will be redeemable at all. Therefore, receiving ten cents of the dollar for your IOU may in fact be very reasonable.

Posted by David Grant | Report as abusive