(no subject)

[randomness]

(Image from http://www.mymoneyblog.com/archives/2009/07/picture-of-california-tax-refund-iou-registered-warrant.html)

From http://www.marketwatch.com/story/ious-could-be-the-future-of-municipal-finance:

It's possible that IOUs could become a way for local and state governments to issue paper direct to the public in creative ways that financial sharpies are only just starting to dream about.

California began issuing what it calls "registered warrants" -- and what the world calls IOUs -- on July 2. The warrants are negotiable -- meaning they can be sold -- and they bear interest (3.75%).

Initially, most financial institutions accepted the warrants and cashed them like checks. The customer got their money, and the bank held the paper, and got any interest due. Last week, however, Wells Fargo, Bank of America and JPMorgan Chase stopped taking the paperwork, and other banks followed suit; while people holding IOUs can still go to most credit unions, this is where the market started getting creative.

Buyers were cropping up on sites like Craigslist offering to buy warrants for 85 cents on the dollar. Holders were looking at putting their warrants up for auction on eBay, hoping to capture at least face value.

This was capitalism and financial markets at their most basic. While no one wants to be extended an IOU instead of cash, a 3.75% interest rate more than doubles the average yield on a one-year certificate of deposit and is far better than the top-yielding money-market funds, which can't even kick out 1%. Yes, there is risk -- California has the lowest credit rating among the states -- but people who see the promise of a quick profit were looking to get the paper from individuals and businesses who never wanted it in the first place.

It was right around that point where the SEC stepped in. First, regulators announced that the warrants are securities and should be treated as such. Then it issued an investor alert about the sale of California paper. The decision means that any individual buying or selling the securities probably should be registered as a broker or municipal securities dealer. The alert was issued because SEC officials were afraid investors would fall for warrant scams and fakes.

Here's where things get really interesting. California's warrants represent low-cost borrowings; the state is able to get financing without necessarily paying the same rates it might owe by issuing standard municipal bonds.

A lot of other states and communities will find that useful.

It's not quite the same as allowing a town or community to issue its own currency -- a power that the Constitution reserves for the federal government -- but it's close.

California's warrants appear to be a "bill of credit," which is a debt obligation that is basically forced on its recipients. Since the banks and credit unions cashed the paper -- at least initially -- one could argue that it's almost like the Golden State had created its own scrip. Make the program voluntary -- where the consumer has the choice to participate in any warrants -- and it would seem to sidestep Constitutional issues.

Comments

[st-rev.livejournal.com]

This would seem to be a direct violation of article I, section 10:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Not like anyone cares though.

[cerebralpaladin.livejournal.com]

Well, I'm not sure that nobody cares. More that this is still at the stage of a bunch of people saying, "hey, is that constitutional?" rather than at the stage of constitutional litigation. (And it's not obvious to me, at first glance, who would be able to litigate a claim on these. Presumably, the person issued a registered warrant would have standing, but they would run smack-dab into 11th Amendment restrictions/sovereign immunity. If CA hasn't waived its sovereign immunity, I'm not sure they'd have a way around it. The federal government might be able to sue, but that would probably take a while to happen, and I'm sure that Treasury is spending a lot of time thinking about the policy side of that, not just the legal side.)

But yeah... it's one of a couple of recent constitutional issues involving clauses of the Constitution that you never study in Constitutional Law courses...

[3diff.livejournal.com]

Maybe by October California will be resorting to the Letters of Marque and Reprisal too...