California IOU Rush

A combination of individual investors and established securities firms are seeking to profit from California IOUs. As you may know, the state has run out of money with which to pay its bills, and has resorted to issuing IOUs. The IOUs are supposed to be redeemed in cash by October 2 and pay interest at a 3.75% annual rate. Since they are bearer instruments, they can be traded. Holders who are either in urgent need of cash now, or who have serious doubts about the state's ability to make good on these promises, are already selling these IOUs at discounts to their face value. There's already some brisk online trading in the IOUs, and more formal secondary markets are being established by some financial firms. This is per a report in the July 6 Financial Times.

In the same issue is an article about a Boston Consulting Group (BCG) study of the fund management industry. We've already noted how institutional investors, unhappy with big losses, are making noises. The BCG report predicts that there will be a great deal of belt-tightening in the sector, with headcount reductions of about 15% and pay cuts averaging 30% over the next few years. Watch out.