Largest US banks will not accept the IOUs for payment

Starting Friday Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and some regional banks in the state will no longer accept the IOUs for payment. Thus, they want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money. Therefore, the Securities and Exchange Commission recommended Thursday that the IOUs, which carry an annual interest rate of 3.75 %, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. As of Wednesday, the state had issued more than 90,000 IOUs worth $354 million.

However, more than 60 credit unions in the state will continue to accept the IOUs after Friday, according to the California Credit Union League. Meanwhile, the Federal Reserve advised bank customers with an IOU that they should first check with their bank to make sure it will be accepted for deposit and whether any fees could be incurred.

Paul Maco, an attorney at Vinson & Elkins in Washington who was a director of the SEC`s Office of Munnicipal Securities, said that a regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price. The price they receive may be discounted in accordance with the market's perception of the risk of the state repaying the notes, but it would be an orderly market price, he said.

While California legislators haggle over how to close a $26.3 billion budget deficit, the state is expected to send out $3.3 billion in IOUs this month to an array of individuals, small businesses and local governments.

Most California state government offices will be closed on Friday, the first of three monthly furlough days intended to save the state money. The shutdowns are part of Gov. Arnold Schwarzenegger's order to give state employees three days off a month without pay, effectively cutting their income by about 14%.