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Valuing The Governator's Word

Now that the first phase of the great California currency experiment is under way, the natural first question is how much Governator IOUs are actually worth. BAC, JPM, and WFC have given the individuals lucky enough to receive approximately $53 million in 2008 tax refunds in state funny money until Friday to deposit the IOUs and get face value for them. While major banks may be forced into giving the state government full credit for its promises, everyone else- from hedge funds to individuals on Craigslist- is not so convinced.

Brandon Schlichter, a 23-year-old self-employed online marketer and blogger from Columbus, Ohio, is among those advertising on Craigslist. He is hoping to buy the IOUs for about half face value and has set up a website to connect buyers and sellers for 5-10 per cent commission. "As long as California keeps issuing these, buying and selling could become commonplace," Mr Schlichter said

If the state budget problem isn't solved by the end of July, another $3 billion+ of new Cali dollars will have been printed and available for arbitrage. This leaves the lucky holders of the IOUs with the choice of hitting the bid from a 23-year old Ohio blogger or betting there won't be tears when re-reading WFC's policy on what happens if Arnold's wallet remains empty:

We can charge the amount of any IOU the State does not pay back against your deposit account(s) under terms of your account agreement and you agree to pay us that amount. If you don't have enough money in your account to cover the unpaid IOU, we can overdraw your account(s) and you agree to pay back this debt and related expenses under terms of your account agreement.

It's a proud day when account holders wind up paying the fees and expenses associated with the inability of one of the world's 10 largest economies to honor its debts.
Wall Street gears up to trade California IOUs {FT]