Correction: BAC and other banks may not accept California ’s IOUs, or individual registered warrants starting on Jul 10. The previous edition of this post said the banks were “no long intending” to accept California ’s IOUs. Corrected version below.

Some of the largest U.S. banks, including Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and JP Morgan Chase (JPM), may not accept California ’s IOUs, or individual registered warrants beyond Jul 10. (Bank of America confirmed they will accept California registered warrants through Jul 10.)

On July 6, Fitch Ratings downgraded California ‘s bond debt rating to “BBB” from “A-minus.” The new rating which is still investment-grade is just two notches away from junk status.

We believe that the incoherent structure of the IOUs may invite further downgrades from Fitch Ratings in the coming days. A weak rating is keeping banks away from this issue. Moreover, the weak economic outlook is adding to the woes.

The state began issuing IOUs, which are informal debt instruments, to several creditors in an effort to plug a $26.3 billion budget deficit and stave off a cash crisis for the government. This was a result of disagreement among the state leaders on budget solutions.

California issued $53 million of registered warrants in the first week of July and is planning to issue over $3 billion of IOUs in the month July 2009 for payments such as tax refunds, welfare and vendor bills. The IOUs will carry an interest rate of 3.75% and are due on October 2, 2009.

IOUs are transferable, which means anyone can buy or sell them. This is leading to a growing speculation over the formation of an informal market for trading of these IOUs which is attracting the attention of regulators and state officials. Prospective buyers have expressed their interest on online marketplaces, such as Craigslist and eBay (EBAY).
Read the full analyst report on “BAC”
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Read the full analyst report on “WFC”
Read the full analyst report on “JPM”
Read the full analyst report on “EBAY”
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