But, be even more careful buying them.
Last week California essentially went bankrupt. No –its is not a formal or complete bankruptcy, but when you can’t pay your bills and you are $25 billion underwater I would call that bankrupt in my book. When California couldn’t meet its obligations, it began issuing IOUs instead of payments to citizens and contractors.
Within hours, people who received the IOUs were listing them on Craigslist, eBay and other venues. They didn’t last long on eBay. eBay cancelled most of the listings and is still doing so. Their reasoning is that an IOU is basically a security and therefore falls under the scope of The Securities and Exchange Commission (SEC). I strongly agree with eBay. These things are securities and you should not buy them without the oversight the SEC provides. The potential for fraud, abuse and outright scams in this area is enormous and eBay did the right thing.
However, as I write this they are still selling on Craigslist, although I expect the SEC to move against Craigslist soon to stop the selling. Technically Craigslist isn’t violating any regulations that I know of –they are simply providing an advertising platform. But the sellers are violating all sorts of regulations. So I am not sure how the SEC will proceed, but I am sure that they will.
Most sellers are offering the IOU certificates at a 15% discount to their face value and the certificates themselves pay an interest rate of around 3%. Even if it was legal to buy one of these things they are not a very safe investment. The potential of a 15% return is nowhere near the risk of losing all your money. The troubles in California are still deepening. Residents are fleeing the state in droves and moving to Colorado and Arizona. Taxes are increasing and services are deteriorating and the business climate simply stinks. Small business owners are being hit the worst.
The only event that could make these certificates a safe investment is if the US Government steps in and bails out the state. That is a possibility but the deck is stacked against that happening. Americans are weary of any more bailouts and public opinion on this one is hugely negative, so any congressman or senator who voted for this will be remembered at the polls in November of next year. The current shortfall of around 25 Billion is just the beginning. I have seen reports by analysts that I respect that California’s deficits could hit $40 billion before this is all over. What would those IOUs be worth then?
One of my readers, Nathan, just had a good comment on this topic:
You can sell it on ebay and craigslist if the IOU is voided. Selling it as a souvenir is a good idea, if the value of the IOU is low. http://iouinfo.com/2009/07/10/ious-as-souvenirs/
Also, IOUs can be used for personal tax liability to the state. A good investment would be to purchase it at a 15 percent discount and immediately send it off to the State.
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