Banking On The Golden State

The megabanks aren't going to be stuck with California's increasingly worthless IOUs, apparently.

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

The development is the latest twist in California's struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs -- or "individual registered warrants" -- to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July's end.

But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2, or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.

You can bet your bottom dollar that the banks aren't going to be left holding the bag for sitting on these IOUs, they going to make sure that California's people suffer, having to hold onto to checks they basically can't cash for three months. How nice of the banks supposedly making record profits to pitch in to help their customers in California! Why, I'm sure that will help the economy, right?

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

Ms. Mills of the CBA said some banks were concerned that there aren't processes in place to accept IOUs, and also worried about fraud issues. She noted that not all banks have set a July 10 deadline, and that dozens of credit unions in the state will keep accepting IOUs.

Wells Fargo's head of community banking, Lisa Stevens, said: "We're very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of payments to some businesses and individuals."

State officials said they were disappointed by the banks' decision. Garin Casaleggio, a spokesman for Mr. Chiang, said: "We don't want anybody to suffer who can't redeem them when they need cash."

The banks are disappointed in the state, the state is disappointed in the banks, and the people holding the IOUs are stuck with nothing. Hopefully this will cause a major outflux from the megabanks to credit unions, who still seems to care about their customers.

California is in trouble. they did bring a lot of this mess on themselves. But after the same megabanks that got bailed out by our taxpayer money turn around and pull this stunt, Obama needs to make it clear that this is not acceptable when it becomes their turn to help out those in need.

[UPDATE 1:12 PM] Atrios suggests the Feds should guarantee California's IOUs so that at least the banks will cash them. Not a bad idea in the interim.