California's IOUs were declared investment securities by the U.S. government Thursday, bringing some order to a potentially chaotic market.
The U.S. Securities and Exchange Commission said anyone brokering deals for the IOUs might have to be registered. The SEC said it could act against anyone caught defrauding buyers or sellers.
The state has issued more than $350 million worth of IOUs since last Thursday and expects to issue $2.5 billion more by the end of July.
Because major banks say they won't honor the IOUs past today, a lively secondary market is expected to emerge for IOU holders wanting to cash their notes in. Investors and speculators, offering to buy the interest-bearing notes at a discount, have begun posting ads on Craigslist and other Web sites. A New York investment house called SecondMarkets said it plans to establish a market.
State officials, who worried about the potential for widespread mayhem, welcomed the SEC's move.
"The SEC's action has the potential to, at least, reduce the shark factor and potential for taxpayers to get defrauded," said Tom Dresslar, spokesman for state Treasurer Bill Lockyer, in a news release.
But he said anyone wanting to sell their IOUs should insist on dealing with registered broker-dealers.
State employees, by law, are continuing to get regular paychecks. But the state is issuing IOUs to vendors, local government agencies that use state dollars to deliver social services, and taxpayers who are owed refunds.
Call The Bee's Dale Kasler, (916) 321-1066. Read his blog on the economy, Home Front, at www.sacbee.com/blogs.
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