The recipients of billions of dollars in IOUs being issued by California soon may have a regulated market where they could sell them.
Some of the nation's largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money.
The Securities and Exchange Commission is going to recommend that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. The guidance could come as soon as Thursday, according to two people familiar with the matter who spoke on condition of anonymity because the SEC hasn't yet acted.
A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said.
The SEC oversees rules set by the nongovernment MSRB. SEC spokesman John Nester declined to comment Thursday.
With JPMorgan Chase & Co., Bank of America Corp., Wells Fargo and Citigroup Inc. and some regional banks in the state saying they won't accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.
A regulated market for the IOUs "makes it even more advantageous" for individuals holding them, who could sell them at a fair price, Maco said. The price they receive may be discounted in accordance with the market's perception of the risk of the state repaying the notes, but it would be an orderly market price, he said.
SecondMarket, which creates marketplaces for the trading of illiquid assets, has received "decent interest" from hedge funds, municipal bond and distressed asset investors as potential buyers of the IOUs, Jeremy Smith, the New York-based company's chief strategy officer, said this week.
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