Sunday, July 12, 2009

Why Nobody Wants CA's IOUs

The big banks are running from the idea of accepting the IOUs the state of California is issuing. Really, who could blame them given the year they have had. I'm not here to make excuses for the banks, but consider this from their standpoint.

In the last year, the banks have been subjected to what can, at a minimum be called arbitrary treatment, at the hands of the Obama administration. I am sure some would even call this treatment harsh.

In the last year the Obama administration has subverted more than century of bankruptcy law, in sticking it to the most senior debt holders in GM & Chrysler to benefit his friends in the UAW.

The banks have to be mortified at the prospect at accepting an unknown and at present, unregulated debt security with more than a passing chance that California could default or need a government funded bailout. It’s not much of a stretch to see the government bailing out California (The worlds 8th largest economy) and its Electoral College high 55 electoral votes that often elect Democratic Presidents. Even if the IOUs were made secured senior debt, it is still likely that Obama's whipping boys on Wall Street could be forced to forego their due in a bailout of California in much the same way as the senior debt holders in GM & Chrysler got dimes on the legally guaranteed dollar.

I have yet to see anyone do a serious analysis of what the long term implications are for corporate debt financing in the wake of the Detroit debacle which is the Chrysler and GM bankruptcies. However, my 6 credits of college economics tell that it is not going to be pretty or inexpensive.

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