Banks fear counterfeit California IOUs
As California begins issuing IOUs, banks are worried that counterfeit notes may become a big problem. But the state insists fraud protection efforts are in place. Sarah Gardner reports.
California Gov. Arnold Schwarzenegger during a press conference in Los Angeles where he addressed the state's budget crisis. The governor spoke as the state was about to start issuing IOUs instead of payments. (John Moore/Getty Images)
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Kai Ryssdal: Here in California the government printing presses are set to roll this afternoon. And they're going to be cranking out $53 million worth of IOUs. Since lawmakers here have failed to find a way out of our budget morass, the state doesn't have enough money to pay its bills. So far, Bank of America and Wells Fargo have said they'll honor what are called warrants, as have some smaller financial institutions. Whoever does decide to accept the notes will get a little interest-rate bonus when they're eventually redeemed, assuming the IOUs they have are the real thing.
SARAH GARDNER: The state of California is set to print more than 28,000 IOUs today. First in line: residents still waiting for refunds on their state income taxes. The IOUs or "registered warrants" look like regular state checks but with a difference. Beth Mills is with the California Bankers Association.
BETH MILLS: They will be a slightly different color, they'll say registered warrants up on the top, and they'll have the state Treasurer's seal on them.
Mills says bankers are worried about counterfeit IOUs. Bank of America, for example, says it will accept the IOUs only through July 10 for existing customers. B of A will hold them as deposits for seven days so it has time to verify them. But Jacob Roper at the California Controller's Office says the state is confident in its fraud protection efforts.
JACOB ROPER: We've built a number of security features into the note and have provided banks and credit unions and other financial institutions with those security measures that are proprietary but are ways they can independently verify.
The last time California issued IOUs in 1992, Bank of America honored them for several weeks and then stopped. Other banks followed and a budget deal quickly came together. Here's B of A's California President Janet Lamkin.
JANET LAMKIN: So it's our experience based on our history here in California that taking them in perpetuity simply facilitates the gridlock.
State officials said today they'll pay a 3.75% interest rate on the IOUs. That's more than a full percent less than in 1992.
I'm Sarah Gardner for Marketplace.
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