Investing in California IOU's ...An Investor Opportunity?

[MJ DeMarco]

Investing in California IOUs Warrants

Anyone considering purchasing a California IOU?

I imagine buying one would be similar to buying a discounted note and involve present/future value calculations.

Investing in California IOUS

They are going to be selling on Ebay and Craigslist.

I might consider buying them depending on terms.

 

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[Rawr]

Really? Do you think there is a chance you will see your money when/if more states dive into the hole? What terms would you buy these at?

 

[bflash98]

It will be interesting to see what kind of discounts people will be willing to receive to cash in their IOU. From what I have read it sounds like most credit unions and major banks(until Friday for the major banks) are going to treat the IOUs as cash but there are a lot of people out there who don't have bank accounts so there could be a lot of sellers of IOUs.

The 3.75% return on face value is not to bad. If you could by the note at a 5% discount that would give you a pretty good return for a relatively safe investment.

 

[CashFlowDepot]

If I purchased the CA IOU's, I'd want a huge discount - at least 50% There's a big chance that CA will go bankrupt and if that happens you'd never see a dime.

Plus like all governments, they can change the rules in the middle of the game to make it illegal for a 3rd party to cash them in or say they will only pay out 50% of the face value. If that happens, you'd own worthless paper.

A better strategy to help the CA people get the cash they need and earn yourself a nice profit -- would be to buy an option for an equity position in someone's personal residence. Make sure the option is secured by a recorded mortgage.

You can hang on to the option for future profits or resell the option quickly for a nice quick turn profit.

You could add a provision that the home owners could buyout your option in 3 years for $X so your profit is built in and the home owner gets the house. If they didn't buy you out they'd need to sell the house to generate the profit. Or you could buy them out.

If they don't have a house, what else can you buy cheap and resell besides the IOU's that will generate a profit for you and cash for the cash-strapped CA people?

When there's a problem, there is always opportunity. The bigger the problem the bigger the opportunities.

 

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[randallg99]

Anyone considering purchasing a California IOU?

I imagine buying one would be similar to buying a discounted note and involve present/future value calculations.

MarketWatch.com Story

They are going to be selling on Ebay and Craigslist.

I might consider buying them depending on terms.

dude, it's a real gamble. play with just lunch money, IMO.

>>>A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.<<<

and

>>>State Controller John Chiang said that without IOUs, California would run out of cash by July's end.<<<


Big Banks Don't Want California's IOUs - WSJ.com

 

[yveskleinsky]

>>>State Controller John Chiang said that without IOUs, California would run out of cash by July's end.<<<

So what would happen? What would running out of cash look like for a whole state?

 

[MJ DeMarco]

So what would happen? What would running out of cash look like for a whole state?

Services would stop running. Parks closed, state offices closed, state funded *services* stop

 

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[yveskleinsky]

Services would stop running. Parks closed, state offices closed, state funded *services* stop

Okay...so then there would be a mass exodus out, or potential martial law? ...Am I understanding this correctly?

 

[RealOG]

If I purchased the CA IOU's, I'd want a huge discount - at least 50% There's a big chance that CA will go bankrupt and if that happens you'd never see a dime.

Plus like all governments, they can change the rules in the middle of the game to make it illegal for a 3rd party to cash them in or say they will only pay out 50% of the face value. If that happens, you'd own worthless paper.

I have to disagree. I don't know all the laws, but if bankruptcy of a state is like any other entity, then they would have to sell off all their assets (of which CA has lots). I havent done any research, but the amount of coastal property owned by CA is huge - I would imagine all that would have to be sold off to pay debts. This doesn't include all the other state owned buildings, vehicles, toll roads, tax liens, etc.

I see this as a rather prudent investment, but the return is too low and not my specific "trick" (one trick pony and all that). I am in the "get rich" business, but if I were in the "stay rich" business I would highly consider these - especially if they could be purchased at a discount.

 

[Runum]

So what would happen? What would running out of cash look like for a whole state?

Schools wouldn't open in the fall. Parents wouldn't have anywhere to send there kids during the day.

 

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[Edge]

Interesting piece on the California IOU situation on Mish's blog.

Mish's Global Economic Trend Analysis: Tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to Go to Hell

Couple of key points that I took out of it that I would think about before investing:
1 - No mechanism for states to declare bankruptcy.
2 - If they are safe, why aren't the big (recently bailed out) banks accepting them?
3 - Do the banks have inside info of upcoming changes for states to declare bankruptcy?
4 - Are these IOUs so illiquid that they will amplify the cash problems of banks with marginal balance sheets?

Bear in mind there is no mechanism for states to declare bankruptcy. They must balance the budget somehow and therefore they will. This means the banks will get paid for the IOUs.

It is very interesting that the big banks have reversed. This confirms my suspicion that, despite the bailouts, the banks are intensely in pain for cash to meet their obligations, and cannot make themselves further illiquid by accepting IOUs.

Big banks are cutting their throats by not accepting IOUs, unless of course they have an inside information that the IOUs will go worthless

 

[randallg99]

:smx3::fastlane::smxB:fftopic::sleep::nono::smxF::chatter:issed::hl::banana::yourock::great::smxD::smxD::smx2:little birdie tells me you can get them at 85% of face value already.... people are already in need of cashing them.

Edge - where have you been? are banks afraid that CA just won't make good on the IOUs?

I couldn't have said it better myself... and I should have realized that a state just doesn't declare bankruptcy! I read somewhere every state has their obligation among the top 3 of their constitution to meet their fudiciary responsibility (budget)

that said, I don't know anything about IOUs.... The big kahuna is what if Obama pulls the trump card like he did with Chrysler and bypasses the obligations to first-in-line?

just an alternative and less risky bet might be the bonds- CA bonds are looking mighty juicy with huge returns... already in mid teen yields and there's absolutely no way Obama will screw muni bondholders the way Chrysler bond holders were.... of course, my opinion is worth what it's worth.


:shruggie::smx4:
>>>

"A state is not going to just shut down," said Elizabeth McNichol, a state budget
specialist at the Center on Budget and Policy Priorities, a nonpartisan Washington, D.C.,
think tank.
"As bad as things are, no state is going to have zero revenue coming in," McNichol said.
"It's really just a matter of choices."
So, rather than having a court restructure its finances as in a bankruptcy filing, a state​

would have to reorganize its spending and debt on its own.<<<
http://www.uis.edu/newsbureau/inthenews/20090209-DailyHerald-Statebills.pdf
:fryingpan:

:iagree::smx6::fastlane:
my daughter loves these smilies

 

[hatterasguy]

Unless the ROI is at least 25%-50% its not worth it.

The risk seems silly high.

 

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[bflash98]

People on craigslist (Los Angeles) are advertising to purchase them from .70 cents to .85 cents on the dollar. I wonder if anyone is cashing in their IOUs besides at the bank.

 

[CashFlowDepot]

RealOg

You're thinking about the OLD rules for bankruptcy

The new rules are like the auto makers who filed bankruptcy - the government just said give the keys to the Unions. All bankrupcy laws were thrown out the window.

My guess, there will be a government bailout if CA when (not if) it runs out of money. There are a lot of voters there.

 

[MJ DeMarco]

Does anyone know when the IOU's are payable? If they are short term, a discount of 70 cents on the dollar would be a good ROI. It looks like the note buyers are full speed ahead by the looks of ads on Craigslist.

 

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[yveskleinsky]

Got this from DK's site--makes for some interesting reading!: California IOUs Sought by Souvenir Hunters, Investors (Update1) - Bloomberg.com

 

[Rawr]

If you live in California, and don't care about credit history - start selling personal IOU's backed by Cali for .65 cents on the dollar. Sell a mil worth, and if anything happens, hey that was the par for the current crisis.

Ah, jokes

 

[MJ DeMarco]

Wow, payable in just a few months. A discount of 20% would yield quite an impressive ROI. Don't have the calculator in front of me, but I imagine an annualized yield near 80%. I imagine the market will put the value of the discount near the 5-10% range.

 

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[MJ DeMarco]

Woo hoo ... guess what is #1 in the search results for California IOU investment?

 

[CashFlowDepot]

Better check with the SEC before you try to make a business out of investing in Ca IOU's

see this LA TIMES ARTICLE

 

[MJ DeMarco]

SecondMarket to offer CA IOUs?
MarketWatch.com Story

 

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[MJ DeMarco]

On SecondMarket, they are limiting IOU buyers to "accredited investors" only which is good news as it excludes a lot of potential buyers and should make the discounts better. "Accredited investors" are folks with $1M net worth (Accredited Investors) and some others.

 

[randallg99]

On SecondMarket, they are limiting IOU buyers to "accredited investors" only which is good news as it excludes a lot of potential buyers and should make the discounts better. "Accredited investors" are folks with $1M net worth (Accredited Investors) and some others.

the IOU system is becoming a problem in itself instead of being the band aid to solve the other problem... CA politics are really missing the boat by apparently unrealizing long term consequences of printing money (IOU) that are deemed less the very moment it hits circulation.

I just don't trust the political arena. USA might set yet another precedence if they step in and "bail out" california and I don't think Obama is ready to do that now that 15 states have >10% unemployment. (tax revenues are dropping by the millisecond) Gov't already changed contractual law when Chrysler bond holders got screwed and I won't put anything past them especially now that CA is selling bonds at well above market rate.

just being the devil's advocate here.... if the fed was not involved, we would have a better handle on how to play all of these markets. good luck.