California IOU’s soon to be DOA

August 19, 2009

As J.P. Morgan Chase has seemingly been the only rock in the financial storm, it is not surprising that the bank is now helping California, lending it $1.5 billion. The money will enable the state to stop issuing IOU’s a month earlier than planned (on Sept. 4). The loan is essentially a bridge until the state sells $10.5 billion in short-term notes next month. Here’s Reuters’ story.

The Los Angeles Times says:

The risk to JPMorgan is virtually nil: The loan will be repaid by late September, when the state plans to sell $10.5 billion of so-called revenue anticipation notes, or RANs — securities that will mature next spring. Individual investors are expected to flock to the RAN offering as a place to stash cash, because the notes should offer much more lucrative returns than money market funds and other short-term accounts paying next to nothing.

Some muni bond analysts expect the annualized interest yield on the RANs to be between 2% and 3%. For California residents, that interest would be exempt from state and federal income tax.

The loan is something of a about-face: J.P. Morgan was among the banks that refused to accept the state IOU’s after their first week.

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