In the News: Two Faces of IOUs
July 16, 2009, 9:51 pm
Copyright © 2009 Integrated Profitability TM
Regarding California’s IOUs, there are two more articles in the Contra Costa Times of interest, with the second one being particularly pertinent to the current “Small Business Finance & Profitability” (SBF&P) series on cash flow.
The first article, “Options dwindle for those holding California IOUs” was on page AA1 on Tuesday; July 14, 2009. Taking a more professorial approach, the spokesman for the California treasurer’s office sheds slightly more useful light on the sad financial plight of the State of California:
““The decision by most major banks to not accept IOUs makes them less liquid, makes it more difficult to turn them into cash,” said Tom Dresslar, spokesman for the state treasurer’s office.”
Both phrases say the same thing and he still manages to make it sound like the banks are somehow causing the problem. It would be nice to hear him say that the State of California….well, let’s be honest. It’s not really the State of California that’s the problem: it’s the elected officials who have the job to balance the state’s budget and to manage the state’s financial condition. They aren’t doing either.
Here’s Dresslar’s inference after the lesson in liquidity:
“It’s logical to conclude that the potential for hardship has increased.”
This is disingenuous: the potential for hardship was set as soon as California issued IOUs. When banks stepped up and accepted them for deposit, they removed that potential—for as long as they continued accepting the IOUs as if they were cash. As the banks decline to do that forever, the potential for hardship merely returns to the same level originally caused by the State of California.
The second article was on page AA1 on Wednesday; July 15, 2009: “For some, IOUs from state mark a step up.”
Assuming that California’s IOUs are redeemed in October, the article covers several points relating to cash flow:
● California State is improving its cash flow by buying services and goods on credit (unilaterally, mind you)
● Service providers to the State are seeing their cash flow deteriorate in lock step
● Companies who are currently “cash rich” are going to benefit because the 3.75% interest rate on the IOUs is much higher than short-term deposit rates available elsewhere. The extra money from the higher interest rate won’t become cash until October—so cash flow takes a hit until then but there is a payoff.
Which underscores the importance of having good cash flow in the first place.
This has been a breaking news blog—we now return you to regular scheduled blogging: Cash Flow etc.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 30
Copyright © 2009 Integrated Profitability TM
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