– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Let the trading begin.

California will be mailing out its first batch of IOUs today after the state’s stalemate over how to close the more than $24 billion hole in the budget leaves it with insufficient funds.

The IOU market could swell to $3.36 billion by the end of the month if lawmakers and the governor still can’t find a middle ground.

Big banks, which stepped into the breach 17 years ago when the state last issued IOUs, appear to be reluctant to do the same this time around. Wells Fargo & Co, Chase and Bank of America have so far said they will accept the IOUs from their customers as they would any other check, but only for a very limited period of time. All three banks say they’ll stop accepting them after a week.

For the more entrepreneurial investor, California’s newly introduced debt could be the opportunity of a lifetime, or at least of the summer.

The IOUs are registered warrants with an interest rate of 3.75 percent and a maturity date of October 2. But for the purposes of marketing, let’s just call them Terminators.

They have the potential to become what Wall Street likes to call a liquid market — a large amount of securities with similar characteristics that investors can buy or sell quickly. And given the uncertain legislative landscape, there would be an opportunity to make a buck or two.

First, the Terminators are slated to go out in batches rather than all at once, meaning that those sold in the beginning are likely to be worth more since the interest will be paid over a longer period of time. All the warrants will carry a maturity date of October 2 no matter when they’re sent out. Arbitrage anyone?

Second, the more liquid the market, the easier it is to trade. The longer the budget stalemate endures, the more Terminators will be issued. If you thought the deficit projections for July were big, take a look at August and September.

The controller projects cash shortfalls of $3.7 billion and $6.5 billion in those respective months and “double-digit freefall” after that. That means traders could swap Terminators on a daily basis, with prices fluctuating according to prevailing views on how long the crisis goes on.

That may just mean days. Or it could be for substantially longer. For the October 2 maturity date comes with a big caveat: California will redeem the securities only if it has the cash. If it doesn’t, presumably it will have to issue even more Terminators.

If the crisis does go on and there is a great big pool of these IOUs sloshing around California, what’s to stop someone from collecting, say, $500 million worth and slicing and dicing them into an asset-backed security?

Add general obligation bonds (which the state is required to service with cash) to the mix, and the bond’s triple-A slice should be adequately protected in case the cash doesn’t start flowing on October 2. On a fixed-income desk somewhere on Wall Street, someone is most likely crunching the numbers.

There is also an opportunity to claim altruistic motives. Some of the state’s most vulnerable people are at risk of having key services cut if the IOUs can’t be sold for cash.

The controller estimates that the Department of Social Services is slated to receive roughly $1.2 billion in Terminators during July alone if the impasse continues, while other social service agencies that help people with developmental disabilities and mental health issues will receive more than $400 million in warrants. By buying up these notes, investors can ensure cash will continue to flow to the underserved.

Of course, this market wouldn’t be for the faint-hearted. After all California could emerge quickly from the budget crisis, as the IOUs promise to shame lawmakers to hammer out the compromise. Then investors would most likely be stuck with the notes until October 2, and who would want that?  Certainly not Californians.

(Editing by Martin Langfield)