SecondMarket plans organized trading for California IOUs, first transactions expected next week

By Aaron Hochman-Zimmerman

New York, July 16 - Organized trading of California's IOUs could start next week, according to New York-based firm SecondMarket Inc.

The "registered warrants," as they are officially known, carry a coupon of 3¾% and nearly as soon as they were issued buyers and sellers ran to the popular website craigslist.org.

Now SecondMarket is taking the opportunity to organize and legitimize the process.

The company is currently signing up potential traders and expects the first trades to be registered during the week of July 20.

Still, trades may not happen instantly, said chief strategist Jeremy Smith.

SecondMarket only serves to bring buyers and sellers together and does not intend to buy any of the securities itself, he said.

"We are only the registered marketplace," he noted.

Additionally, the firm will persist with ongoing background checks of investors as well as checks on the legitimacy of the IOUs themselves.

The warrants have been listed on Craigslist in the area of 90 cents to the dollar, but Smith declined to comment on what may be a fair price for such a new market.

"We could actually move the market," he said, but once liquidity develops and volume increases, SecondMarket will publish a list of recent trades, bids and asks.

The names and organizations playing in the market will be withheld as some sellers "don't want people to know they are selling at a discount," Smith said.

All sales final

The IOUs also may not trade more than one arm's length away from the original holder, said Tom Dressler, a spokesman for California treasurer Bill Lockyer.

Anyone redeeming a warrant must present a notarized bill of sale bearing the name of the primary recipient, he said.

Guidelines were put in place by the Municipal Securities Rulemaking Board which attempt to prevent a broker-dealer from offering cash for steeply discounted paper, but there is nothing to stop a person-to-person sale, he said.

The state was well aware that there would be "those in need of cash to feed their families who might fall prey to sharks," Dressler said.

New money

The generally new phenomenon of IOUs has created a new set of challenges for both the government and for investors.

"There are some parallels" to other asset classes, Smith said, referring to auction-rate instruments.

There were a group of people, he said, "who [had] an instrument that was a cash equivalent ... and then, was no longer."

Some of the auction-rates were municipal auction rate securities, so there are similarities to those as well, he said, but the IOUs are "very unique in that they're [often] small holdings."

Also, they are an asset class that "people did not choose to own," he said, similar to bankruptcy claims.

Endgame

As quickly as they arrived, the IOUs may be redeemed and gone, Dressler said.

The scheduled maturity is Oct. 2, but the state may choose to settle its debt sooner, he said.

Governor Arnold Schwarzenegger continued to wrangle with the legislature over the budget, which "did look hopeful for a while" on Wednesday, but "not so much today," he said on Thursday.

However, if the budget puzzle is solved, the IOUs may be redeemed at an earlier date.

Ten days notice is required by state law before an early redemption that would effectively end SecondMarket's secondary market.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.