Recently Bailed-Out Banks Refuse to Take California IOUs

The Wall Street Journal (via Calculated Risk) reports that a group of large banks has announced that it will not accept IOUs issued by the state of California. The group includes the four horsemen of the financial crisis: Citigroup, Bank of America/Merrill/Countrywide, JPMorgan Chase/Bear Stearns/WaMu, and Wells Fargo/Wachovia.

Write your own ironic commentary.

By James Kwak

32 thoughts on “Recently Bailed-Out Banks Refuse to Take California IOUs

  1. They’re just pursuing their own self-interest. That’s their job, after all.

  2. That’s why we had to bail them out, taking too much risk. What is the value of a $1,000 warrant from the State of California? Today, next week, next month, a year from now, 5 years from now. When will it be paid? Will it ever be paid? How many billions of dollars will they issue this year, next year?

    Actually, that is how my mother came to have at least some affection for my father back during the depression. He was one of the few people who would give her something for the warrants she was paid with for teaching school. I don’t think banks would touch them.

  3. James,

    I felt exactly the same way when I read the CR post earlier today.

    Here’s the good news: ultimately, there will be no irony. We still have a way to go, but these big financial institutions are slowly but surely slitting their own throats.

    At any given time, I am reading on the order of thirty books on various topics, and one of the books I just finished was Bruner et al.’s “The Panic of 1907,” which makes J.P. “Bailout” Morgan out to be quite the hero. Morgan and his ilk understood that their wealth depended on ensuring continued confidence in their stewardship of the economy, and Morgan made things happen at his own expense to shore up that confidence. Nobody of his class is taking that kind of responsibility today, and it will be their undoing, and not the economy’s, thankfully to the institutions that were put in place in the early 20th century (including the Federal Reserve, as much as I hate to admit it).

    As an aside and on a more personal note, I hope you continue to enjoy the legal education. As a technologist who entered work-life as a lawyer and ended up an entrepeneur, I think you’ll find your vector just as edifying.

  4. There’s nothing at all to be surprised about here. It’s business as usual.

    It certainly displays how, in spite of the lies of the political and pundit class (and the schools), we are most definitely NOT “all in this together”.

    Rather, that’s not how the banks (and big corporations in general) see it. That we constantly have occasion to marvel over the sociopathy of entities the public has been indentured to bail out (by a government which has long since ceased from representing the people, but rather is by now an alien predatory occupier) just proves how to corporations society and the work of the people is simply a mine from which to extract resources.

    They openly claim, as a matter of principle, that they owe nothing in return.

    And since in America feudal rent-seeking has come to be enshrined as legitimate “capitalist” activity, to the profit-seeker “innovation” in lobbying, legally enabled looting, and even out and out lawbreaking is no different in kind from true productive activity.

    None of this will change so long as we have:

    1. Promiscuous incorporation, with corporations as “legal persons”, and those corporations being allowed to enshrine sociopathy (maximizing shareholder profit) as their founding principle.

    2. A winner-take-all electoral system based on private contributions.

  5. I thought Citi/BofA/Merrill/Countrywide/Morgan/Chase/Bear/WaMu/Wells/Wachovia was one bank.

  6. No problem. Californians in mass should move their accounts to the banks that do take the warrants. Businesses that depend on Californians should move their accounts to banks that take the warrants. Businesses that do business with California Businesses that depend on Californians… You get the idea.

    Of course, if the California IOU’s end up being worthless will the federal government be forced to bail out the banks that took the IOU’s? A bit of a Dicy Question.

  7. Would you want to loan money at 3.75% APR to a BBB entity with a decent likelihood of fraud at the point of document exchange?

    If the banks had shown this level of prudence in rejecting mortgages from individual Californians, perhaps we might have avoided this disaster in the first place.

  8. I don’t find it ironic at all that the same state formerly governed by Ronald Reagan is issuing IOUs now. Reagan’s great contribution to economics was—

    DON’T TAX AND WASTE!!! BORROW AND WASTE!!!, while publicity whores like Milton Friedman and William Buckley cheered him from the sidelines.
    Maybe this verse from the Bible is appropriate for the banks.

    Matthew 6:12
    And forgive us our debts,
    As we forgive our debtors.

  9. let’s say they do take them. a bank regulator shows up the next day and asks about their cash reserves. “we don’t have sufficient cash reserves,” the bank says. “we have these cali IOUs though.”

  10. What is a muni but another borrower? Can I issue IOUs to my bank for my mortgage? Until governments learn that there is a limit to deficit spending…there will never be an end to government debt and every currency will fail. It should be a constitutional law that governments cannot run deficits…fault the private sector all you want, but in the end, over-leveraged companies go bankrupt, and hence face the consequences of too much debt. There’s no similar consequence for governments…hence there’s no discipline. Fine…its ironic that these wards of the US government are holding a state government for ransom. But I’m more pissed off at my government (I’m a californian), than any of these banks.

  11. “A winner-take-all electoral system based on private contributions.”

    I will submit to you that the corruption of the self-serving filth that run our political system is so utter that this outcome will never be achieved through parliamentary means. Would you expect the House of Representatives to pass a pro-Iranian resolution any time soon?

  12. Easy solution — take California’s IOUs and wrap them in a security. Now they’re PPIP-eligible, and the Fed takes the risk. Problem solved.

  13. I don’t think any problem is ever going to be solved or reform carried out within the bounds of this system. It is the most calcified feudal entrenchment ever.

  14. Russ,

    I think that people are finally beginning to wake up to the fact that we are living in a fascist corporate state that, despite outward appearances, does everything that you might expect a fascist corporate state to do: Collude with industrial and financial interests as did Schacht with Tyson and Krupp in Germany the early years of the National Socialist dictatorship; torture detainees and launch wars of aggression against foreign states who have offered it no provocation; invade the privacy and violate the rights of both foreign subjects and its own citizens and, be materially complicit in ethnic cleasing. It took a little time but so did the yeast of a virulent anti-semitism take time to infest German culture sufficiently to assist with the success of the so called “National Revolution” in 1933. Today it is simply the function of the so-called “opposition party” to funnel public outrage into a blackhole. We’re there, its not something merely in prospect any longer.

  15. Let’s see: if CA gives you an IOU and you try to cash it and can’t, what is its value? If it has no value then you simply have been stiffed. And isn’t an entity that emits, say, stuff like bad checks that can’t be cashed liable to be prosecuted? Can IOUers who have gotten these bum checks sue CA for giving them out?

  16. It’s as simple as it is hard. We need 3,4 or 5 million of us to head for Washington prepared to camp out and possibly go to jail. We don’t let them leave there offices until they surface with wide ranging reform on Campaign finance Banking/Finance and Healthcare(singlepayer)in their paws. Anything short if this is just flat out dreaming at this stage of the game. You guys just keep feeding us the details and continue as spokesmen. We’ll continue walking out on their townhalls when ignored.I hope we all meet one day on the steps. God bless you all.

  17. It makes sense. Why would these banks want to add more toxic assets? The California IOU is the ultimate example of the write-off waiting to happen. California is going to default on everything. Maybe a really big earthquake would solve their problems, then they could just assign insurance proceeds to their creditors:) How many other states will soon be asking banks to accept IOU’s. Many, if my hearing is right!!

  18. I can accept that. I think the sucker here is the federal government, which gave them unlimited assistance for as long as the banks needed it, yet failed to secure any leverage that would enable them to get anything in return.

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