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A couple of weeks ago, California decided that it would start having to borrow money from banks using IOUs; since then, many banks have decided that they will not accept the worthless sheets of paper being issued by the nearly bankrupt state.

Now, thousands of California creditors have been left with one less option for cashing IOUs being issued by the state. U.S. Bancorp, JPMorgan Chase, Wells Fargo, Bank of America and a handful of others have decided that they won’t be accepting the IOUs, if nothing else, simply because they can’t handle the chance of lending so much money and not being paid back due to their already tarnished image due to federal bailouts.

Some banks like those in the California Bankers Association had hoped that not accepting the IOUs would light a fire under the legislators’ bums and get them to close the deficit more quickly rather than simply making it worse.

The state started issuing IOUs at the beginning of July to help save some money and offset the $26.3 billion deficit. Right now, officials are saying that it is too early to say if the businesses and companies that are getting the IOUs are feeling financial pressure.

“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. “It’s logical to conclude that the potential for hardship has increased.”

So far, nearly 130,000 IOUs have been issued to the tune of $436 million. By the end of July, California expects to issue out $2.9 billion worth of the “registered warrants.”

IOUs being offered by a state is a crazy way to handle business in my opinion, but if this is the only way (which I’m sure it is not) to get things done in the state while it is in a financial crisis then it has to be done.

However, I would like to hear from some readers from California to tell me what they think!

Jeremy

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