Niche broker-dealer ready to trade IOUs

July 14, 2009

For those eager to buy or sell California IOUs, SecondMarket, a niche broker dealer that specializes in hard to trade assets, will launch its trading platform for the warrants on Wednesday.

But that doesn’t necessarily mean that trading will start tomorrow.

Buyers such as municipal debt portfolio managers, hedge funds and institutional investors are lining up for the service, according to SecondMarket spokesman Mark Murphy, but sellers not so much.

It’s still early days for the IOUS and there’s no guarantee that it will ever turn into a robust market. California could clean up its budget mess, for one.  And SecondMarket doesn’t have a track record of pushing through large trade volumes. In the last 12 months, SecondMarket transactions have totaled only $1 billion.

But it could signal something bigger if the budget stalemate drags on and other broker dealers join in.  California will issue around $3 billion IOUs this month if the status quo in Sacramento holds.

The downside, of course, is it could take the pressure off the state to come up with a solution to sort out its $26.3 billion budget gap. Voters are less likely to gripe if they can get cash for their IOUs. Many commercial banks have stopped accepting them for this reason, though the LA Times reported Bank of the West has agreed to keep depositing the IOUs indefinitely while Citi said it would exchange them for cash until this Friday.

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