Major banks say they will no longer accept California IOUs

Updated 1d 4h ago
Comments 306


By Rich Pedroncelli, AP

"The IOUs are one more reason to make sure we get the budget done as quickly as possible because then we don't need the IOUs," California governor Arnold Schwarzenegger talks said at the Capitol in Sacramento, Calif. on Friday.


By Don Thompson, The Associated Press

SACRAMENTO — Thousands of vendors who do billions of dollars of business with the state of California are scrambling as major banks say they will no longer honor the state's IOUs.

Despite pressure from the state treasurer, JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. and other major banks planned to stick to their plans and not honor California's warrants after Friday. State Treasurer Bill Lockyer announced Citigroup Inc. agreed to a one-week extension through July 17.

The bankers are trying to pressure legislators into closing the state's $26.3 billion budget shortfall. Whether that pressure was being felt inside the Capitol is unclear, but on Friday the first signs of progress began to emerge after days of partisan infighting.

BUDGET SHORTFALL: California government continues to dole out IOUs http://www.usatoday.com/news/nation/200 ... -iou_N.htm

Gov. Arnold Schwarzenegger met with Democratic and Republican leaders of both legislative chambers. During a break, lawmakers of both parties expressed optimism about the direction of the talks.

"It was the most productive negotiation we have had in weeks," said Senate leader Darrell Steinberg, a Democrat from Sacramento. "We still have a ways to go."

Schwarzenegger said he and lawmakers realized the need to move with a sense of urgency.

"The IOUs are one more reason to make sure we get the budget done as quickly as possible because then we don't need the IOUs," he said. "The key thing is to have a responsible budget and to have a budget where we can move forward and stimulate the economy as quickly as possible."

Some businesses say they may find it difficult to survive or hold onto their employees if they can't find a way to redeem their IOUs quickly.

Until there is a budget agreement, many state contractors, including an industrial supply warehouse south of Sacramento and group homes for the developmentally disabled in San Diego, are hoping bank loans will see them through.

Gloria Freeman isn't counting on her bank, Bank of America, and is approaching other lenders.

Freeman is president of Staff USA Inc., a Rocklin-based temporary-employment agency that has provided medical professionals to state prisons, rehabilitation and mental health departments for 30 years. She said 80% of her business comes from the state.

She laid off five of her 55 employees June 26, when she heard the state was planning to send her hundreds of thousands of dollars worth of IOUs that she can't cash.

"Every time they have a budget impasse, they don't pay the vendors for six or seven months," Freeman said. "I'm trying to do everything I can do just to get through it."

Freeman plans to sell her IOUs through a second business she owns, Auction Ten. The notes have a 3.75% interest rate and can be redeemed Oct. 2.

"There were a surprising number of people interested in buying the IOUs. Probably a dozen or so, talking from 10 cents to like 90 cents on the dollar," she said. "The banks were saying they weren't going to take them. Now it turns out there are other people who are interested in taking them."

Produce distributor Christian Bartels of Ceres has built a 10-year relationship with Bank of Stockton. He's counting on the regional lender to honor the IOUs or give him a loan to see him through the state's cash shortage.

"If it was a perfect storm and they just cut me off, then I wouldn't last very long," said Bartels. "I've been in talking with them fairly frequently and they've got my back so far. If I was with one of the big banks I'd be scared right now."

Bartels' CB Enterprises provides 35 state prisons, hospitals and schools with nearly $12 million worth of apples, carrots, corn and other produce and dry goods each year.

This week, for the first time, state buyers began pressuring Bartels — and more than 2,000 other vendors — to cut back on winning bids for state contracts that pay him just pennies of profit.

"We're already as tight as can be. We cut it really close and try to do enough volume to make a living," Bartels said.

So far, he hasn't had to lay off any of his five employees from the firm 80 miles south of the capital.

"I can't really predict what's going to happen," Bartels said. "I'm holding my breath a little bit."

Lockyer pressured the major banks to keep accepting the IOUs after Friday's deadline. Besides Citigroup, Bank of the West would continue accepting IOUs indefinitely, according to Lockyer's office. The state has printed more than 91,000 IOUs worth more than $350 million so far, and plans to issue nearly $2.9 billion to pay its July bills.

"To the extent the banks remain in the game, the potential hardship on IOU recipients is reduced and the potential for taxpayers to get ripped off by con artists also goes down," said spokesman Tom Dresslar.

The U.S. Treasury and Federal Reserve were not asking banks to change their decisions.

"We're not encouraging banks one way or the other," said Federal Reserve spokeswoman Barbara Hagenbaugh.

Many of the state's credit unions plan to keep cashing the IOUs. But California Bankers Association spokeswoman Beth Mills said the major banks aren't budging.

"They're still willing to help their customers on an individual basis," Mills said. "There might be an ability to issue short-term loans while they're not getting paid by the state."

Bank of America spokeswoman Julie Westermann said her bank was not extending its deadline beyond Friday.

The California Chamber of Commerce and state chapter of the National Federation of Independent Businesses were not offering their members any advice on how to survive if the banks stop accepting the state warrants.

Businesses around the state Capitol were unusually quiet Friday, the first of three monthly "furlough Fridays" imposed on many state employees by Schwarzenegger to save the state about $1.7 billion.

State prisons, hospitals, police and firefighters were operating, and parks and jobless centers remained open. But most other agencies, including the Department of Motor Vehicles, were closed.

The extended furloughs prompted a threatened job action by California's largest state employee union.

Officials with Service Employees International Union Local 1000 said they would ask their members to vote on whether they wanted to strike or take some other action.

In response to the union's threat, Schwarzenegger acknowledged the cuts to state government were difficult on everyone, from general taxpayers to state workers.

"The key thing is to recognize that we have a shortfall of $26 billion," he said. "It's a huge drop in revenues. It's historic. We've never seen this before in California."

http://www.usatoday.com/news/nation/200 ... -iou_N.htm