Cashing In On Cali Crisis

As Guy sang in "New Jack City", "Somebody's gotta win, somebody's got to lose." Banks are already laughing at California's IOUs, and via Digby, it looks like California's payday lending industry is ready to cash in to the tune of billions.

California "IOU" recipients can turn to credit unions and check-cashing storefronts if a state budget deal does not appear by Friday and if three major banks refuse to accepting the notes beyond Friday as planned, analysts said on Tuesday.

The willingness of the smaller institutions to take IOUs from the cash-strapped state should also stop the development of a secondary market for trading them, although individuals could end up paying hefty fees to get their hands on cash.

The state government of California, the world's eighth largest economy, is experiencing a severe revenue slump brought on by recession, rising unemployment and the lengthy housing downturn, forcing it to issue IOUs in lieu of some payments.

The government of the most populous U.S. state began its fiscal year on July 1 with a $26.3 billion budget gap and risks burning through its cash unless Governor Arnold Schwarzenegger and lawmakers quickly balance the state's books. Most U.S. states are not permitted to run budget deficits.

Three major banks are currently accepting the IOUs, but only through Friday. After that recipients may turn to credit unions to cash them or, perhaps, to check-cashing storefronts.

Their cashiers could see more than $3 billion of the IOUs at their windows this month should the state budget crisis persist and big banks hold to their Friday cut-off for processing them.

Check-cashing storefronts are especially well poised to score IOUs, said Daniel Penrod, a senior industry analyst at the California Credit Union League.

"I could see a lot of bank customers turning to a third-party source and losing a lot of their paycheck," Penrod said.

A whole hell of a lot of people will have to. Banks won't take IOUs after tomorrow. But you'd better believe payday lenders will with their 15%+ fees and triple digit interest rates, leaving thousands of Californians with the choice of sitting on an IOU for three months, or losing half of its value by taking it to a check cashing loan shark outfit.

And it'll only get worse as time goes on.