Online market opens to trade California IOUs

SecondMarket Inc. today launched its online marketplace for California IOUs, as promised.

The New York firm, which operates a number of markets for illiquid assets, is offering its SecondMarket.com site as a venue where holders of the state’s scrip can sell to investors. The company is registered as a broker/dealer with the Securities and Exchange Commission and therefore is subject to the agency’s trading oversight.

Cash-short California began issuing IOUs this month to pay some of its creditors. The paper, known as registered warrants, will earn an annualized tax-free interest rate of 3.75% until the state redeems it. The scheduled redemption date is Oct. 2, although that could be moved up if Sacramento reaches a budget deal and state Controller John Chiang determines he has the cash needed to pay off the scrip.

It isn’t clear if much of a market for the IOUs will develop, but SecondMarket is giving it a shot. Buyers might include hedge funds and investors who might otherwise buy municipal notes or bonds.

The best news for potential sellers: They’ll be able to see what kind of offers are being made and what other sellers have received. Jeremy Smith, SecondMarket’s chief strategy director in New York, said the firm plans to show online the five most recent bids for IOUs and the five most recent asking prices, as well as the last 10 consummated trades – including their dollar values.

But he said the firm won’t start showing that data until it has "sufficient" trading volume in IOUs, which will be an in-house judgment. Smith said SecondMarket doesn’t want to publicly post trading data that could be misleading because it represents only a thin level of activity.

SecondMarket will charge buyers of the IOUs a transaction fee of 1% or less, but sellers won’t pay any trading fees. To complete a trade, the firm will handle collecting the payment for the seller and sending the IOU to the buyer.

-- Tom Petruno

Comments

[Lawrence Turner]

One would think that the state of California as the eight largest economy in the world would be a better bet than the $13.5 billion in GMAC junk bonds!

[ejhickey]

Actually the Redemption Date of October 2 may extended to later in the year if California does not have enough cash to redeem the IOUs. That decision is up to the Controller. It is not certain the IOUs wil redeemed in October. Maybe Santa will bring the State enough money to make payment by Xmas