Where Can I Buy California IOUs?

July 16, 2009 by TFB

California IOUs (aka "registered warrants") are all over the news. The SEC ruled that they are considered securities. They basically told people not to sell except to established muni bond dealers.

I think the 3.75% tax free yield together with the short maturity (< 3 months) make these IOUs attractive even at face value. Yet no brokerage firms I have account with buy them from the IOU holders, let alone sell them to customers. I'm guessing that's because these IOUs are in paper form, which makes them difficult to buy, sell, and transfer. The brokerage firms' computer systems are just not set up for these.

A legit broker-dealer called SecondMarket* has set up a process for buying and selling these IOUs. It looks quite convoluted to me.

SecondMarket: So How Does It Work?

Sellers:

  • Enter IOU into the system. Wait 48 hours for verification with the state.
  • Fax or e-mail copy of IOU and government issued ID
  • Listing appears at the price seller sets
  • Review and accept bids
  • Sign documents. Mail in original IOU.
  • Receive money from SecondMarket

Buyers

  • Sign up. Wait 48 hours for qualification check. A buyer must have a net worth of at least $1 million or an income of at least $300,000 in the last two years.
  • Bid on IOUs
  • Sign documents. Send money to SecondMarket. Buyer also pays a 1% fee.
  • Receive IOU from SecondMarket

* SecondMarket is regulated by FINRA (BrokerCheck). It's also a member of SIPC (membership search) and Municipal Securities Rulemaking Board (MSRB membership list).

For the time being, California IOUs remain off limit for small investors like me. Even if I qualify, the 1% transaction fee makes them not worthwhile unless the IOUs can be bought at a discount to face value.

What are the alternatives if I'm interested in muni bonds? There are mutual funds and ETFs that invest in short-term municipal bonds in many states across the country. The yield, however, is less than half of that on the California IOUs.

  Duration SEC Yield
Vanguard Short-Term Tax-Exempt Fund (VWSTX) 1.0 year 1.27%
Vanguard Limited-Term Tax-Exempt Fund (VMLTX) 2.4 years 2.00%
iShares S&P Short Term National Municipal ETF (SUB) 2.2 years 1.30%

There are also mutual funds and ETFs that invest only in California, where the yield is the highest in the country, but these are of longer maturity, which involve more risk.

  Duration SEC Yield
Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX) 6.1 years 3.81%
iShares S&P California Municipal Bond ETF (CMF) 8.0 years 3.88%

None of these is as good as the California IOUs. Too bad I can't buy them easily.

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Comments

2 Comments on Where Can I Buy California IOUs?

  1. indexfundfan on July 16, 2009 | permalink
     

    It is ironic that these IOUs seem to have become hot cakes!

  2. KingofthePaupers on July 17, 2009 | permalink
     

    Jct: There’s nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina’s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.
    When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
    See http://youtube.com/kingofthepaupers
    Too bad California IOUs won’t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
    If they make IOUs legal tender, I'll take back every joke I ever made about Girlieman Governor Musclehead if he engineers the California state currency lifeboat. .

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