Trading website opens to IOUs

A trading firm Wednesday launched an online marketplace where people can buy and sell IOUs issued by California’s cash-short government.

SecondMarket Inc., which operates a number of markets for illiquid assets, is offering its SecondMarket.com site as a venue where holders of the state’s scrip can sell it to investors.

The New York company is registered as a broker-dealer with the Securities and Exchange Commission, so it is subject to the agency’s trading oversight.

California began issuing IOUs this month to pay some of its creditors.

The paper, formally known as registered warrants, will earn an annualized tax-free interest rate of 3.75% until the state redeems it.

The scheduled redemption date is Oct. 2, but could be sooner if Sacramento reaches a budget deal and state Controller John Chiang determines that California has the cash to pay off the scrip.

Some large banks have stopped accepting the warrants, but a number of smaller banks and credit unions are still taking them from customers.

It isn’t clear how much of a market for the IOUs will develop. Buyers might include hedge funds and investors who might otherwise buy municipal notes or bonds.

The best news for potential sellers: They’ll be able to see how much bidders are offering and what other sellers have received.

Jeremy Smith, SecondMarket’s chief strategy director, said the firm planned to show online the five most recent bids for IOUs and the five most recent asking prices, as well as the last 10 consummated trades -- including their dollar values.

The firm won’t start showing that data until it determines that the trading volume in IOUs is sufficient to keep the information from being misleading, he said.

SecondMarket will charge buyers of the IOUs a transaction fee of 1% or less, but sellers won’t pay any trading fees.

Once a trade is made, the firm will handle collecting the payment for the seller and sending the IOU to the buyer.

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