Bailed-Out Banks Bail On California IOUs

The banks, including Wells Fargo, Bank of America, Citigroup, JPMorgan Chase and some smaller regional outfits, claim that their decision late last week to stop redeeming California's registered warrants is a way to pressure the state legislature and Gov. Arnold Schwarzenegger to end their deadlock over California's $26 billion budget gap.

"The state of California, just like any household or business, must live within its means. Banks can't be the solution to the budget problems," a Wells Fargo spokesperson said last Thursday ahead of the bank's final Friday deadline for accepting the IOUs, which are scheduled to be paid by the state no later than Oct. 2.

Wells Fargo, for its part, received some $25 billion in bailout money last October as part of the federal government's Capital Purchase Program (CPP). Other banks unwilling to help backstop California's IOUs include some of the biggest beneficiaries of the $700 billion Troubled Asset Relief Program (TARP) and new government backing of their own exposure, such as the FDIC's Temporary Liquidity Guarantee Program.

Of the big national banks that have been bailed out by taxpayers and are now turning down California's registered warrants, Bank of America leads the list with $55 billion in federal government assistance, second only to AIG. Citigroup was a recipient of $50 billion through the federal government's Capital Purchase Program, Targeted Investment Program and Asset Guarantee Program, while JPMorgan Chase received $25 billion via the CPP but has now been approved to repay it.

Sacramento Technology Group, a Folsom, Calif.-based solution provider that provides managed IT services to the state, is owed about $500,000 by the California government -- and about $360,000 of it is past due, said President and co-founder George Usi. Though his company has yet to receive registered warrants, Usi said it remains a strong possibility.

Sacramento Technology banks with JPMorgan Chase and Usi said he was "disappointed" to learn that the bank is refusing to redeem the IOUs.

"Our bank was a receiver of TARP funds and they've since paid that back, but the fact that they did take the money and were sitting on some $25 billion, there's something to be said about them reciprocating toward us, a company in the public sector," Usi said.

Some banks are still redeeming the state's registered warrants. Those that have received bailout funds and are still accepting California's IOUs include City National of Beverly Hills, Calif., which received $400 million in CPP assistance last November, according to a spokesperson for the California State Treasurer's Office.

Some midsize institutions that did not receive TARP funds like San Francisco-based Bank of the West are honoring the IOUs as well, as are some 80 credit unions listed by the State Controller's Office, said Tom Dresslar, spokesman for Treasurer Bill Lockyer. A spot check of five credit unions on the State Controller's list confirmed that they are still accepting the registered warrants.

"Our official response to the banks who are refusing to accept IOUs is that while we understand their position, we don't agree with it," said Dresslar, who also praised banks and credit unions that are accepting the state's paper for "doing the right thing for their customers."

"As far as we're concerned, the potential hardships suffered by the banks' customers and the potential for taxpayers getting defrauded is sufficient reason for the banks to continue accepting these IOUs," he said, referring to reports that some IOU recipients might be turning to discount outlets for redemption of the registered warrants for fees as high as 15 percent.

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