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Online market for California IOUs may launch Wednesday

July 14, 2009 | 12:47 pm

SecondMarket, which connects buyers and sellers of illiquid assets, says it expects to have an online trading venue operating for California IOUs beginning on Wednesday.

But the firm still isn’t sure whether prices will be transparent -- i.e., whether anyone signing onto the website will be able to see what buyers are paying sellers for their IOUs to cash them out.

Jeremy Smith, SecondMarket’s chief strategy director in New York, noted that federal rules forbid making prices of certain asset transactions public, in cases where regulators deem that the information could be considered a "solicitation" to investors for whom the assets wouldn’t be appropriate.

Caliou But by asserting last week that it has jurisdiction over trading of IOUs, the Securities and Exchange Commission ostensibly was trying to protect IOU recipients from ripoff artists. If that’s the goal, SecondMarket – and the SEC -- ought to support public price disclosure, so that anyone who wants to sell the state’s scrip can see what kind of discounts buyers are offering for the paper.

The only reason to sell at a discount to an investor, of course, is if an IOU recipient can’t find a bank or credit union to cash the thing for full value. IOU holders’ options became more limited this week as major banks stopped accepting them.

One decision SecondMarket already has made: Owners of IOUs won’t pay any fees to sell them on SecondMarket; buyers will pay a transaction fee of 1% or less.

The state has said it will redeem the IOUs for cash on Oct. 2. The paper is earning a 3.75% annualized tax-free interest rate until then.

-- Tom Petruno

Photo credit: Rich Pedroncelli / Associated Press