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State will get $1.5-billion loan from JPMorgan Chase

August 18, 2009 |  5:00 am

Major banks snubbed California last month when the state asked them to continue cashing its IOUs.

Now, one of the banks is riding in to help the state end the IOU program a month earlier than expected.

Treasurer Bill Lockyer says JPMorgan Chase & Co. has agreed to lend California $1.5 billion as part of Controller John Chiang’s plan to begin redeeming IOUs on Sept. 4.

Chaseflag The IOUs, which the cash-strapped state began issuing July 2 to pay many of its business vendors and other creditors, were supposed to mature on Oct. 2. But Chiang last week said the budget passed by the Legislature produced enough savings to allow for earlier redemption of the scrip -- provided the state could get a $1.5 billion short-term loan by Aug. 28.

When Lockyer began talking to big Wall Street banks in recent weeks about a loan, "JPMorgan was the first to come back with a proposal worth considering," said Tom Dresslar, Lockyer’s spokesman.

Just what JPMorgan will earn on the loan hasn’t been determined, Dresslar said. "The terms are still being worked out," he said. Lockyer will have to be able to make the case that the private placement of the debt with JPMorgan is as good or better a deal than the state could get with other banks.

The risk to JPMorgan is virtually nil: It will be repaid by late September, when the state plans to sell $10.5 billion of so-called revenue anticipation notes, or RANs -- securities that will mature next spring. As I wrote in my Times column last weekend, individual investors are expected to flock to the RAN offering as a place to stash cash, because the notes should offer much more lucrative returns than money market funds and other short-term accounts that pay next to nothing.

The annualized interest yield on the RANs won’t be determined until the sale, but some muni bond analysts expect it to be between 2% and 3%. That return would be exempt from both state and federal income tax for California residents.

The JPMorgan loan and the RAN deal will be put in motion after the state's Pooled Money Investment Board meets to bless the transactions on Friday.

Last month, JPMorgan, Bank of America, Wells Fargo and other banking titans were unwilling to cash the state's IOUs beyond the first week that Chiang began issuing them, despite pleas from Lockyer. The $2 billion in outstanding IOUs are earning a tax-free annualized yield of 3.75%, which would have accrued to the banks if they had continued to cash them for customers and then hold them to maturity.

But the banks, led by BofA, asserted that if they had agreed to accept the IOUs indefinitely they would have been enabling the Legislature to prolong the stalemate over the budget.

Beyond the interest it will earn on the $1.5-billion loan, JPMorgan's proactive move on the deal is a way to get back into the good graces of a state that always has plenty of fee-generating financing needs.

-- Tom Petruno

Photo: JPMorgan's headquarters in New York. Credit: Mark Lennihan / Associated Press

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