Tuesday, July 07, 2009

Schwarzie Bids Are Flying! California IOUs Begin To Take Hold As A Currency

Last Friday TILB said it was prepared to fulfill all offers of Schwarzies at 80 cents on the dollar. As an existing Bank of America customer (we know, we know), we were eligible to exchange Schwarzies for Bernankes at par. We have been promoting the notion that as the decisions of banks go, the success or failure of Schwarzies goes.

As the bloggers over at Directive 10-289 (perhaps the best named blog in the entire blogosphere) have highlighted, the WSJ is reporting that "big banks don't want California IOUs".
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.


Amid the budget deadlock, Fitch Ratings on Monday dropped California's bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

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.


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."
We are shocked, shocked that California banks, already choking on legions of souring loans, do not want to take billions upon billions of dollars of California's newly issued Schwarzies backed by the state's recently downgraded triple B (with negative watch!) credit risk in return for 3.75% interest. I mean, they already happily take Bernankes offering nil interest no questions asked!

These unpatriotic bastard bankers apparently forgot that as TARP recipients and permanent beneficiaries of government subsidies via the Federal Reserve system and under priced FDIC insurance they are not in charge of making lending decisions, The Administration makes those decisions now. Resistance is futile.

With big banks walking from the Schwarzie market, we hereby lower our bid to 60 cents on the dollar.

It should be noted that states are legally prohibited from filing bankruptcy. We are not sure what the alternative is, but it sure feels a helluva lot like the Feds will have to step in with a guarantee at some point. TILB is sure that somehow Steve Ratner will end up being governor.

In any case, a marketplace for Schwarzies is beginning to take hold. While we believe TILB was one of the first, if not the first, mass bidder for Schwarzies in the country, others have begun to follow suit.

For example, this posting on Craigslist appears to be the Schwarzie equivalent of Cash4Gold (need money fast?!?!) whereas Dealbreaker reports of folks setting up unofficial Schwarzie bidding exchanges.

While optimists may say that each and every day Controller Chiang is improving the Schwarzie system by printing additional liquidity, TILB takes the view that every new batch of minting both adds Schwarzie selling pressure and devalues existing Schwarzies (not unlike our worries about Bernankes). For those that hope our sixty cent bid will improve, do not hold your breath.

I suppose we could leave it unsaid, but we at TILB could not be more pleased with this progression...