Friday, July 03, 2009

California IOUs Have Arrived: TILB's Schwarzie Bid Is 80 Cents On The Dollar

TILB stands prepared to take out any Schwarzie holder at 80 cents on the dollar. Contact us at if you have some for sale and you are prepared hit our 80 cent bid. Price is non-negotiable.

Today is a day that will infamy. The Governator and Controller Chiang issued 28,742 "registered warrants", better known as Schwarzies, in TILB parlance. We believe this is the camel's nose under the state issued currency tent and we could hardly be more excited. In a strange sense, the worse California's fiscal situation is, the more likely Schwarzies are to be successful which means the more likely they are to be imitated by other states. Ideally, this will undermine the entire fiat currency system and lead us back to better days.

Amazingly, Schwarzies have received very little in the way of national press during the lead up to their issuance. But tomorrow morning, the front page of The New York Times will have Arnold's stern mug under the headline "Short of Cash, California Will Start Paying With I.O.U.s". The article alludes to the fact that the state will basically issue $2-3 billion of Schwarzies per month until a manageable budget is passed ($4.8 billion by the end of August). This will all be tacked onto the already massive $24 billion budget deficit.

Here are several highlights from the NY Times article:
So California is now just like a family that spends more than it takes in and holds off on the cable bill while paying the mortgage: its expenses are greater than its revenues. The state, which previously used i.o.u.’s in 1992 and 1933, will issue them rather than checks to those it can get away with not immediately paying.

Most warrants will go to Californians waiting for tax refunds, vendors doing business with the state and local governments, especially in social service areas. Federal and state laws prohibit i.o.u.’s from being issued to state employees, schools or Medicaid recipients.

While it is against federal law for a state to declare bankruptcy, California’s move Thursday will not go unnoticed by Wall Street or escape consequences.

The state’s credit rating is already shaky, and any further downgrades from rating agencies could send interest rates on its bonds soaring, forcing deeper service cuts.

Furthermore, if California comes up short on cash this fall, other creditors will have to wait behind the warrant holders, who would most likely end up in superior credit positions.


“In evaluating potential registered warrant acceptance, banks have been advised by regulatory authorities to consider such issues as credit quality, capital requirements and concentration limits,” the bankers’ association president, Rod Brown, said in a statement. “Given the poor credit rating of California, the worst in the nation, banks may be hesitant to extend credit to the state.”

At the White House, which has seemed flummoxed by California’s woes, President Obama’s spokesman, Robert Gibbs, said Thursday, “We’re going to continue to watch the situation in California and in other states throughout the country.”
Lord willing, this will go on until mid-Fall and beyond. Both sides of the debate have used very strong, unapologetic rhetoric which will make backing down all the more difficult.

It should make for some fun fireworks over this holiday weekend. It harkens back to the revolutionary period debate of state vs. federal rights. Much has trended toward federal over the past few decades; perhaps Schwarzies will unwittingly provide some slowing of that trend.