Trading and bartering California IOUs may come soon

SAN FRANCISCO (Reuters) - Interest among municipal bond investors in California's IOUs is increasing and trading the promissory notes is poised to start, a spokesman for an online marketplace creating a platform for them said on Monday.

Some are also seeking to barter with IOU recipients.

Earlier this month, California's state government began issuing the IOUs to taxpayers owed tax refunds and to vendors in lieu of payment to avoid a cash crisis, while Gov. Arnold Schwarzenegger and lawmakers haggle over filling a $26.3 billion budget gap to balance the state's books.

Three major banks stopped accepting the IOUs on Friday.

Recipients may hold on to the IOUs or take them to a number of smaller banks and credit unions -- or if pressed for cash, turn to check-cashing storefronts -- or try to sell them.

New York-based SecondMarket Inc, which manages marketplaces for illiquid assets, expects some recipients will want to sell their IOUs and is quickly setting up an online marketplace for them, said company spokesman Mark Murphy.

"It looks like the launch will be tomorrow or Wednesday," Murphy said, adding that municipal bond buyers are especially curious about the IOUs, which are technically registered as warrants.

"By its nature, it's attracting the same type of buyer," said Murphy, noting the tax-exempt IOUs carry a 3.75 percent interest rate and are payable on October 2.

Murphy said SecondMarket has yet to receive any pricing on the IOUs.

In contrast, a handful of advertisements posted on Monday on Craigslist.org offered from 85 cents to 95 cents on the dollar for the warrants.

BARTER ANOTHER OPTION

Larry Sheller of Millbrae, California, posted an advertisement on Craigslist.org for IOUs, but did not offer cash. Instead, the 62-year-old businessman is offering to exchange property in Nevada.

Some vendors receiving the IOUs may be interested in buying property with them, said Sheller, who owns an office building and commercial lot in Reno, Nevada, and a lot zoned for a recreational vehicle campground in Battle Mountain, Nevada.

"You give him a $400,000 piece of land, he can turn it into an $800,000 piece of land," Sheller said.

Sheller then would take the IOUs and barter them with California's state government for its surplus property or equipment.

"If I got $500,000 worth of IOUs, I'd go to the state of California ... and ask, 'What do you want to get rid of?'" Sheller said. "I don't care what it is."

Sheller said he is confident he could turn a profit with just about anything the state would give him. Idled heavy construction equipment, for instance, could be put to work in Mexico.

"Contractors there are always pushing dirt somewhere," Sheller said, adding that such a venture would not be the first time he had sought to make a profit with California IOUs.

This is only the second time since the Great Depression that California has resorted to IOUs. On the previous occasion in the early 1990s, Sheller swapped automobile and motorcycle rentals at his rental company in Hawaii with Californians on vacation who could offer only IOUs.

"When California paid off their IOUs, I sent in a couple of shoe boxes of them and got a check for about $40,000," Sheller said.

This time around, Sheller expects competition for the IOUs, and not just from banks and investors. Supermarkets, he said, would be smart to offer quick cash to individual recipients.

"If I were Safeway, which pays California taxes, I'd take the IOUs all day long," Sheller said. "I'd use the IOUs to pay taxes and people would shop all day long."

(Editing by Jan Paschal)