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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerWould you buy a California IOU? First of all you must ask yourself: "What in the world is a California IOU"?
If you've read about the budget deadlock in California, you know that California has run out of money. At issue is the stalemate of how to raise $24 billion to cover their budget shortfall.
During this deadlock, California is issuing IOUs. It could issue upwards of $3 billion in IOUs to pay for such items as tax refunds, welfare, and vendor bills.
The IOUs pay an interest rate of 3.75% and are due on October 2. Some banks, such as Bank of America (NYSE BAC) and Wells Fargo & Co. (NYSE WFC), will accept them at face value as deposits. Government officials claim that the IOUs are rock solid.
Nevertheless, some firms are gearing up to start buying and selling the IOUs just as you would any other asset. Barry Siebert, of Second Market will start trading in this market. Siebert is known on the Street for trading in illiquid securities and sees an opportunity to make a profit if the firm can buy the IOUs at a discount.
Some other entrepreneurs like Brandon Schlichter, are advertising on Craigslist and setting up websites to broker the IOUs and charging a 5% to 10% commission.
In this world of buyers and sellers, it seems like everything has some value, even the California IOUs. However, if Bank of America and Wells Fargo will accept the IOUs at face value as deposits, it seems risky, at best, to trade these questionable assets.
Would you buy a California IOU?
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