Big Banks Won’t Accept California’s IOUs

If things weren’t already bad enough for the Golden State, they just got worse. With a budget in shambles, politicians in gridlock, and the state in severe recession, the Wall Street big banks just kicked the people of California in the ribs when they were down. But will the blow boomerang?

On Tuesday, the Wall Street Journal reported that a group of big banks had decided that they would not accept California’s ious. The decision by Bank of America Corp., Citigroup Inc., Wells Fargo & Co., J.P. Morgan Chase & Co., and others came as a shock after the banks had basked in the positive publicity after initially saying they would work to help out the people of California by letting them exchange their government ious for cash.

State Controller John Chiang said that California will need to issue over $3 billion worth of ious just in July. If a budget isn’t passed by the end of the month, more ious will be issued.

Many Californians were depending on being able to cash the ious at their banks, so that they would be able to pay their bills. Without access to cash, many businesses may have to suspend or halt operations.

Fortunately for Californians, some smaller banks are still accepting the ious.

The decision by the big banks was especially unexpected, since these are the same banks that taxpayers, including Californians, spent hundreds of billions of dollars bailing out.

However, according to economic analyst Mike Shedlock, the big banks may be cutting their own throats. He says that unless the big banks have inside information that the ious will become worthless (which he doubts), the big banks could experience an exodus of customers as Californians look for other places to do business. California’s smaller savings and loans or credit unions could be the beneficiaries.

The big banks’ refusal to accept California’s ious could be a sign that the state’s finances are in worse shape than is generally recognized. On July 6, Fitch ratings agency cut California’s rating two levels to bbb. California’s credit rating is now only two steps above “junk” status. It also has the lowest rating of any state.

It is also possible that the big banks have come under political pressure from Washington to reject the ious so more pressure could be brought to bear on Californian politicians to pass a budget.

Another possible explanation is that the big banks’ own finances could be in far worse shape than is generally recognized. “It is very interesting that the big banks have reversed,” writes Aaron Krowne at ML-Implode. “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.”

Regardless of the explanation, the situation in California is deteriorating by the day. And passing a budget that will still probably contain multibillion-dollar deficits will not fix it.

To see why California’s problems are so much worse than those of any other state, read “Is California Under a Curse?” by Gerald Flurry.