California sets terms for redeeming sold IOUs

By Jim Christie

SAN FRANCISCO, July 6 (Reuters) - California's state treasurer's office said on Monday it would redeem "IOUs" issued by the state in lieu of payments amid its cash crunch if they are sold through eBay (EBAY.O), Craigslist or other means only if certain requirements are met.

Foremost of the requirements, if recipients of the IOUs sell them to third parties, they will be redeemed by the state treasurer's office only if accompanied by a notarized bill of sale signed by their listed payee, the treasurer's office said in a statement.

"We are in the process of contacting officials of eBay and Craigslist to post a notice of the policy on their sites," the statement said.

Speculation is rising over whether California's tax-exempt IOUs, technically registered warrants, can be bought, sold and traded.

The Securities and Exchange Commission must first determine if the IOUs are securities to regulate them, said Ernesto Lanza, general counsel to the Municipal Securities Rulemaking Board, adding that the board was not working directly with the commission on that decision.

"It looks like it has all the hallmarks of a security," Lanza told Reuters. "If they are securities, I think they're pretty clearly municipal securities."

California last week started issuing "IOU" promissory notes for some bills to conserve cash for priority payments, including payments to investors holding the state's debt, while Governor Arnold Schwarzenegger and lawmakers try to plug a $26.3 billion budget deficit and stave off a cash crisis for the state's government.

The IOUs carry a 3.75 percent interest rate and are payable Oct. 2.

Bank of America (BAC.N) and Wells Fargo (WFC.N) have said they will honor the IOUs through this week, and a growing number of credit unions will as well, giving recipients little immediate reason to search for buyers online, analysts said.

But at least one website aims to offer a platform for selling the registered warrants.

Obed Dorceus, owner of ioumarket.com, said he sees a potential secondary market for the IOUs -- and potentially other government promises to pay.

"I'm thinking there may be a situation where other states may follow California," Dorceus said during a telephone interview.

To sell warrants on his website, holders of the IOUs would pay a fee to advertise them.

"I wanted to offer it as an alternative," said Dorceus, of St. Augustine, Florida. "If you're an average guy, with an IOU for $2,000, you go the website and post an ad ... It's there for a month, and for up to $2,000, you pay $9.99."

Dennis Ciocca, a senior managing director at public finance banker Sutter Securities Inc, doubts financial institutions that accept the warrants will try to sell them because their payment date is relatively soon, they offer an attractive rate and prospective buyers would demand a discount.

"Is it worth it to set up a secondary market for such a short-term instrument? I kind of doubt it would pay," Ciocca said. (Reporting by Jim Christie; Additional reporting by Lisa Lambert in Washington)