(emphasis mine) [my comment]

Everything suggests that the American bonds seized at Chiasso are real
ASIA-ITALY
06/30/2009 13:13

Official U.S. sources continue to say they are fakes, but there is no news that American experts have inspected them in person. Arrested for another matter, the director of a U.S. radio who says the bonds are real and Japan was trying to sell in Switzerland, not trusting the ability of the United States to honour its debt.



Milan (AsiaNews) – Four weeks have passed since American bonds were confiscated from two Japanese men who were travelling on a direct train to Chiasso, Switzerland, and while there has been clarification of some - very few -points, Italian authorities have remained silent on the rest of the episode.

In addition, a strange coincidence in the timing of the arrest of a director of an internet radio who had made revelations regarding the incident ,increases the already strong oddities surrounding the case. This added to the revaluation of the fact that among the evidence seized there were "Kennedy Bonds", all points toward the authenticity of the items seized by the Guardia di Finanza (GdF) in early June.

The major English-speaking newspapers ignored the story for a couple of weeks. They only started to report on it after the Bloomberg agency carried a story on 18 / 6, in which a spokesman for the Treasury, Meyerhardt, declared that the bonds, based on photos available on the Internet, were "clearly false." The same day, the Financial Times (FT) published an article whose title laid the blame for the (alleged) infringement at the feet of the Italian Mafia, despite the fact that the article failed to make even one possible connection with the episode in Chiasso. Nevertheless, the version of events as reported in FT was taken up by others as being "appropriate" (given that it is a very common cliché about Italy and it is a sequester that took place in Italy) and in the end "colourful." It’s a pity that it goes against all logic: that the Mafia tried to pass unnoticed in its attempt to dump fake bonds amounting to 134.5 billion dollars and moreover were to "stung" a mere step from their gaol, is not very credible.

Most recently last week, 25 / 6, the New York Times reported on the story in particular, the allegations of CIA spokesman, Darrin Blackford: the U.S. Secret Service carried out inspections, as required by the Italian judiciary, and found that they were fictitious financial instruments, never issued by the “U.S. government”. It is not clear, however, how the checks mentioned by Blackford were carried out and whether they were also are carried out via internet. In fact according to official Italian sources the Commission of American experts, expected in Italy, have yet to arrive. Furthermore, the bonds were accompanied by a recent and original bank record. It is therefore unclear how the U.S. authorities can declare fake documentation that does not originate from the Fed or the U.S. Department of Treasury.

On the contrary, claims in support of the bond’s authenticity were made 20 / 6 on the Turner Radio Network (TRN), an independent radio station broadcast via Internet. On that date in a massive exposure, TRN stated that the two Japanese men arrested by the Guardia di Finanza (GdF) and then released in Ponte Chiasso were employees of the Japanese Ministry for Treasury. AsiaNews had also received similar reports: one of the two Japanese arrested in Chiasso and then released is Tuneo Yamauchi, is the brother of Toshiro Muto, until recently vice governor of the Bank of Japan. On its website, the creator and presenter of the Radio, Hal Turner, had also claimed that his sources had revealed that the Italian authorities believe the evidence to be authentic and that the two Japanese officials are from the Japanese Ministry for Finance. They were supposed to bring the bonds to Switzerland because the Japanese government had apparently lost confidence in U.S. ability to repay its debt. Japanese financial authorities therefore were trying to sell a part of the securities in their possession through parallel channels ahead of an imminent financial disaster, thanks to the anonymity which, Turner said, is guaranteed by the laws of Switzerland.

AsiaNews does not know to what extent Turner’s revelations can be held as credible [neither do I], given that in this case too, it is difficult to believe that $ 134.5 billion would pass unnoticed anywhere in the world [It is possible if it was done through a Swiss “free ports”]. It seems far more logical to assume that the bonds, if authentic, were directed to the Bank for International Settlements in Basel, BIS, the central bank of central banks ahead of the issuance of securities in a new supranational currency [Had not considered this possibility]. Turner had in any event added that as evidence to support his revelations he would have provided the serial numbers of the seized bonds. Before he could do so, however, was imprisoned [Strange coincidence]. Hal Turner is the journalist who long ago first broke the news of a secret plan to replace the dollar, after a severe financial crisis, with a common North American currency, the Amero. In a dramatic phone call from inside the prison in which he is detained pending trial, relayed via internet, Hal Turner claims that his arrest is political and it is in relation to the securities seized in Chiasso, because the authorities are terrified by his revelations of the bonds’ authenticity [IF the bonds’s are authentic, then this is very logical]. Of course, the allegations made against him have to nothing to do with the story and thus an already intricate story becomes ever more complex. Turner maintains that he did not personally formulate the disclosure for which he has been imprisoned. Although it was clearly his responsibility to remain vigilant, it is also true that blogs from around the world and the U.S. themselves are full of threats and provocations. The coincidental timing, the unusual diligence and the details of his arrest arouse suspicions about the true motives of the American federal police. Indeed, this very arrest suggests that the evidence seized from GdF are truly authentic.

One more element in favour of the bond’s authenticity is found in the securities, which in the June 4 statement, the GdF termed "Kennedy Bonds” with photos provided. These photos reveal that the securities under discussion are not bonds but Treasury Notes, because they are securities that can be immediately exchanged for their worth in goods or services and because they are devoid of interest coupons. One side carries a reproduction of the image of the American president, the reverse side that of a spaceship. From confidential, usually well-informed sources, AsiaNews has learned that this type of paper money was issued less than ten years ago (in 1998), although it is difficult to know whether those seized in Chiasso are authentic. But the fact that the release of this particular State Treasury was not completely in the public domain tends to exclude the possibility of counterfeiting. It highly unreasonable to suppose that a forger would reproduce a State Treasury not commonly in circulation and of which there is no public knowledge. For this reason, it can be concluded that the 124.5 billion dollars divided in 249 bonds of 500 million each are authentic. These titles, although referred to as "Federal Reserve Notes" are actually bonds, because they accrue interest and are redeemable at maturity. But one question remains unsolved regarding them. It is somewhat hard to understand why the securities, which were from the outset indistinguishable from the original to the GdF, all have their coupons. Any ordinary investor, even a state, would have cashed in the interest coupon every year, so as not to lose purchasing power.

My reaction: It looks like the bonds seized in Chiasso might be real.

1) Four weeks have passed since American bonds were confiscated from two Japanese men who were travelling on a direct train to Chiasso, Switzerland

2) Major English-speaking newspapers ignored the story for a couple of weeks.

3) According to official Italian sources the Commission of American experts, expected in Italy, have yet to arrive.

4) The bonds were accompanied by a recent and original bank record.

5) Turner Radio Network stated that the two Japanese men arrested by the Guardia di Finanza (GdF) and then released in Ponte Chiasso were employees of the Japanese Ministry for Treasury.

6) AsiaNews received similar reports: one of the two Japanese arrested in Chiasso is Tuneo Yamauchi, is the brother of Toshiro Muto, until recently vice governor of the Bank of Japan.

7) The Italian authorities believe the evidence to be authentic and that the two Japanese officials are from the Japanese Ministry for Finance.

8) Japanese financial authorities therefore were trying to sell a part of the securities in their possession through parallel channels ahead of an imminent financial disaster

9) Hal Turner, the creator and presenter of the TRN, claimed he would have provided the serial numbers of the seized bonds as evidence to support his revelations.

10) Before he could do so, however, was imprisoned.

11) The coincidental timing, the unusual diligence and the details of his arrest arouse suspicions about the true motives of the American federal police. Indeed, this very arrest suggests that the evidence seized from GdF are truly authentic.

12) Photos reveal that the securities under discussion are not bonds but Treasury Notes and that this type of Treasury Notes was, in fact, issued less than ten years ago (in 1998).

13) the release of this particular State Treasury was not completely in the public domain tends to exclude the possibility of counterfeiting.

14) It can be concluded that the 124.5 billion dollars divided in 249 bonds of 500 million each are authentic.

15) It is somewhat hard to understand why the securities all have their coupons.


Conclusion:

1) IF one of the two Japanese arrested in Chiasso was really the brother of Toshiro Muto, until recently vice governor of the Bank of Japan, then he might have had the access to the real bonds necessary for forgery.

2) There is enough evidence to suggesting these bonds are real:

A) The bonds were accompanied by a recent and original bank record
B) Italian authorities reportedly believe the evidence to be authentic.
C) The two Japanese arrested in Chiasso were apparently connected to the Japanese government.
D) Hal Turner’s strange arrest before he could provided the serial numbers of the seized bonds
E) The type of Treasury Notes which were confiscated was, in fact, issued less than ten years ago (in 1998).

3) Even if fake, these bonds still represent a major problem, as I wrote in my last entry on the subject.

The Wall Street Journal asks Should You Bet Against the Dollar? (the answer is yes)

(emphasis mine) [my comment]

JULY 9, 2009, 6:26 A.M. ET
Should You Bet Against the Dollar? [Yes]
Foreign currency funds can protect you [will not protect you] from a dollar decline, but they might not be necessary.
By BRETT ARENDS

This week's G-8 meeting in Italy has kicked off with the traditional warm-up event -- yet another debate about whether the dollar will, or should, lose its place as the world's reserve currency.

This time the governments of China, Russia and Brazil all plan to raise the issue. In keeping with recent tradition, any demands that the dollar be toppled will, of course, be accompanied by soothing remarks that they are demanding no such thing.

Wall Street Journal columnist Brett Arends explains whether investors should be worried about the possibility of the dollar's decline.

For the rest of us, this debate raises three simple questions.

Is the dollar doomed? [Hell yes]
Does it matter? [is this a dumb question or what?]
And what can you do about it? [Buy physical gold]

Expectations of dollar decline are long established. The U.S. has been running massive federal budget and current account deficits for years. The government is now flooding the system with trillions of extra dollars – through deficits and purchases of Treasurys – in response to the crisis. Once, Uncle Sam would hardly have cared what China, Russia and Brazil said about the dollar. Today, those nations own more than $1 trillion worth of Treasurys.

So far, so bearish for the greenback. But currencies are like political parties -- they look awful until you consider the alternatives [Gold is an alternative to the dollar, and I see nothing "awful" about gold]. Europe, say many analysts, may face even deeper financial crises and banking problems than the U.S. will.

The European Central Bank, furthermore, still lacks the structure and flexibility necessary to function [print money] as easily as the Federal Reserve does. [The ECB's inability to print money makes the euro ATTRACTIVE compared to the dollar]

Meanwhile Asian currencies are, mostly, politically managed. They also lack liquidity. Right now they can't function as reserve currencies either. [If the China allowed the yuan to float freely (ie: made it liquid), the dollar would get destroyed by the competition. For some reason, this Wall Street Journal article assumes this won't happen despite all evidence to the contrary.]

The bear case for the dollar, if it materializes, may take generations. [THIS COMMENT IS UNBELIEVABLY IDIOTIC. An economy whose main product is toxic debt cannot go on functioning for "generations"]

And even if that happens, does it matter? A falling dollar should drive up the cost of overseas goods and services here -- from Japanese-made Priuses to European vacations. But it should also make U.S.-based businesses more competitive internationally by making their goods or services cheaper overseas [A falling dollar would help US-based businesses…IF WE HAD A MANUFACTURING SECTOR LEFT]. More competitive businesses stateside should, in due course, create more jobs. If anything, for most of Main Street, a weaker dollar ought to be a net gain. [Let's be perfectly clear. A weak dollar helps exporters (what is left of our manufacturing sector) and hurts importers (the US service sector). Since the US service sector makes up 75% of the US economy, a weak dollar would not make life better on Main Street]

What can you do about it?

You can open foreign bank accounts [could be a good idea] or buy foreign currency exchange-traded funds [NOT a good idea] – like the CurrencyShares Japanese Yen Trust (FXY) or Euro Trust (FXE). Or you can invest in a managed currency fund such as the Franklin Templeton Hard Currrency Fund (ICPHX) or the Merk Hard Currency (MERKX) and Asian Currency (MEAFX) Funds. Axel Merk, the fund manager of the last two, says he is taking long-term positions against the dollar. The first fund has 24% of its money in the euro, 17% in the Norwegian krone, nearly 35% in the commodity-related currencies of Australia, New Zealand and Canada, and 14% in gold. Mr. Merk particularly likes the krone, thanks to Norway's buoyant oil revenues. As for the Asian currency fund: It is largely a bet on a revaluation of the Chinese yuan in due course. About two-thirds of the fund tracks the Chinese currency.

China has been manipulating its currency for years to keep it artificially cheap. That can only go on for so long. [Agreed]

One quirk worth noting: The Asian Currency fund doesn't actually own any yuan. It can't. The yuan is a closed currency. Instead the fund invests in something called "non-deliverable forward contracts." In essence, it makes bets with big investment banks on the direction of the yuan exchange rate. That will probably [NOT] work out fine, although Mr. Merk concedes there is "counterparty risk" if [when] one of those banks ever gets into trouble. This is not exactly the same as owning actual currency. [Do not use derivatives or foreign currency exchange-traded funds to bet against the dollar.]

The bigger question is whether these funds are the best use of your investment dollars [buy gold or agricultural land]. Currency funds typically invest their money in short-term government paper in the relevant countries. The interest rates usually are very low. You are basically holding cash, while paying a fund-management fee.

Even if you bet the right way on currencies, you may have to wait a long time to get your rewards -- if at all [The dollar is doomed. This is nonsense]. From 2002 through 2007, dollar bears warned that the U.S. faced a looming credit crisis and a housing crash. They were right. But when the storm hit, the dollar went up instead.

Why using derivatives to bet against the dollar is NOT a good idea

Openmarket.org reports that EverBank Can Multiply Your Financial Woes.

EverBank Can Multiply Your Financial Woes
by Hans Bader
October 07, 2008 @ 11:04 am

Is any of our readers an expert on banking laws and customs? The reason I ask is that recently, EverBank World Markets, after agreeing to renew a CD denominated in Icelandic Krona, suddenly closed it, purportedly because the "currency stopped trading." [Something of this nature will happen to everyone who bets against the dollar using derivatives]

The bank then "converted" my CD from Icelandic Krona into dollars at an eye-popping rate of 171.98 per dollar on October 6, cutting the value of my CD from $5691.11 to $3744.68 — a loss of two thousand dollars — by assigning the krona an extraordinarily low value.

What is extremely odd about this is that the exchange rate that EverBank recorded — 171.98 per dollar — is strikingly different from the rate of 112 Krona per dollar cited on EverBank's own web site yesterday, and the rates cited by other financial information sources, like exchange-rates.org. (Even those rates were themselves a huge drop for the Krona, which traded at around 60 per dollar at the beginning of 2008). The net result of EverBank's using this bizarre currency exchange rate was to reduce the value of my CD by nearly $2,000. Icelandic currency traded at much higher rates on October 6 than the rate that Everbank used.

The rate EverBank used also finds no support at Bloomberg, the nation's leading source of financial information, which shows the Icelandic Krona ranging from 96.68 per dollar to 128.17 per dollar in the period of October 3 through October 7.

Can any of our readers explain why EverBank did this? [Ever bank was using derivatives instead of actually purchasing CDs denominated in Icelandic Krona. See comments below] And what remedies may exist under banking or contract law for what it did?

ADDENDUM, NOVEMBER 11: To all the folks who have emailed me about this: I apologize for this, but I am so busy now that I can't respond to all your emails. I believe that one avenue for you to pursue is to file a complaint with the Office of Thrift Supervision. Another option would be to file a class action lawsuit in court. I received an email a long time ago from an attorney, Mike Millen of 119 Calle Marguerita #100, Los Gatos, California 95032, expressing interest in learning more about this situation (MikeMillen-at-aol.com). Mr. Millen might be able to provide you with some advice or assistance if you write to him.

SECOND ADDENDUM, DECEMBER 12: Attorney Mike Millen asks if anyone who suffered at the hands of EverBank lives in California. Please let me him, or me, know if you are. You can reach him at MikeMillen-at-aol.com, or me at hbader-at-cei.org. Thanks.


Comments

Christian says:
October 14, 2008 at 10:12 am

I just found out that Everbank wants to liquidate my ISKs. I wrote to them the following:
"The Islandic Krona is still in existence. Everbank's account disclosures doc states and has stated that the "account will be used to HOLD funds denominated in a currency other than U.S. dollars". I will not accept a forced liquidation/conversion. If you choose to close my accounts, I demand you send me the actual physical ISKs.
Furthermore, it is absolutely incredible you have not notified me of your intentions, as I had to find out by reading some online-blog. I am ready to consult an attorney and sue Everbank should the need be.
Lastly, I will make this a very public matter, as I'm sure most people aren't aware of how Everbank negates its relationship to its customers and open contracts as soon as the wind blows another way."


Arpita says:
October 15, 2008 at 1:47 am

Hi, I am in the same boat…let me know if there is something can be done about it.


Charles P. Jackson says:
October 17, 2008 at 4:35 pm

Everbank also liquidated my ISK Cds without permission. I am a retired attorney, but unfortunately, my specialty was not banking or securities. I do think Everbank is at least in breach of contract in that the CDs were supposed to roll until we told them otherwise. I have sent them a demand letter and threatened to make a claim with the FDIC. I believe the stopping of interest payments (when Iceland interest rates had actually gone up) was an act of default and the unilateral liquidation a second default.
I believe the first action we can take must be to make claims with appropriate regulators (the FDIC i think) and exhaust all administrative remedies or a court will not even hear the case. Please stay in touch, and network to find out who else has been victimized.I think a lot of claims will get more attention than just a few.


MSA says:
October 19, 2008 at 10:18 am

My $50,000 went to $18,000 and is now being valued at $12,000. I am disgusted. The "official" exchange rate is 110. We should also note that Everbank began to reduce the interest rate on this investment in early summer citing market volatility. This was as the principle was being shaved away.

Truly disgusting that this was advertised and promoted in their very own newsletters.



Charles P. Jackson says:
October 26, 2008 at 4:25 am

In response to John's comment: Your point is only valid if you presume a current liquidation and current damages. I have a long horizon and it was my intention to ride out the current crisis. Iceland was not hit by an asteroid and has not disappeared into the North Atlantic. My biggest issue with Everbank is that they closed out my position without even consulting me. Since they have breached the contract and the future value of Iceland currency is unknowable, a more appropriate current measure of damages is the value of principal (my principal) they were entrusted with.
They are more than just a contract party and have fiduciary duties to the depositors. I can only hope the bank regulators see it the same way.
Remarkably, I just received the same (unless we receive instructions from you) automatic rollover notice about another ISK CD 3 days ago.
I also read and printed out the fine print we all accepted when we bought the CDs. The bad news is that they reserved the right to change interest rates at their discretion. The good news is that there is no language giving them the power to close out CDs at will or shifting the risk of a market meltdown to the CD holders.


[Here is the comment explaining what happened.]

Christian says:
November 3, 2008 at 7:22 am

CgmT and other non-shill posters here: I received a Fedex letter back from Everbank's General Counsel 2 days after the liquidated my 1st CD (I don't have the name in front of me ATM). Essentially, it boils down to this:

1. Everbank bought a forward contract at the time of CD opening with a non-disclosed financial intermediary, which in turn opened another forward contract with Iceland's central bank, SedlaBanki;
2. At maturity, they converted allegedly at the "auction" rate from Sedlabanki.

At the core:

* Everbank ISK CD customers did NOT buy a forward contract; we bought an FDIC insured Certificate of Deposit. We paid a SPOT conversion fee;
* Everbank forcefully liquidated our deposits at non-published rates (256:1) on a day (2008-10-29) the average quote from several sources were at 117:1;
* Everbank made no effort to inform its customers of what their intentions were, and went so far as to indicate rollovers up until they liquidated.

Now then, what's the best course of action? I provided links above to initiate complaints via regular channels. We should all do so promptly. I am in contact with a corporate attorney at this time looking into a attorney reference that can best handle a personal lawsuit. And last but not least, we need to get a good lawyer for a class-action lawsuit, this last situation in which I have no experience.


Christian says:
November 3, 2008 at 7:40 am

Oh, sorry Hans for taking so much space here, but I need to point out, there's not a single reference in any of their prospectus or account agreements mentioning "Forward Contracts". It is important to save your EXISTING documents, because Everbank will no doubt attempt to plop it in there during litigation…


Christian says:
November 3, 2008 at 7:55 am

Jeez, I forgot another important detail:
Forward contracts don't have a interest rate yield: Everbank was advertising, and providing at least initially, APYs within 2-3% of currency interest rates, which naturally increased the illusion we had deposits in ISK.


Dave says:
November 3, 2008 at 3:10 pm

We too just received our conversion statement and were outraged at the 256 conversion rate. Like others, we expected our CD to be rolled forward as we did not give them other instructions. Also, we have been monitoring the conversion rate and the Icelandic Central Bank has been quoted around 120 of late.

I agree, it is deceitful that we thought we were buying CDs but Everbank was actually buying forward contracts. That might also explain why they couldn't get the 12+% interest rate that the Central Bank has been offering in recent months.

I tried to have it out on the phone with the Everbank representatives, but they defer any difficulty and blame to the "non-disclosed financial intermediary." I would really like to know who this intermediary is, as I suspect is is a subsidiary of Everbank, and thus Everbank is benefiting from our misfortune much more than we are aware of.

Please inform us of the action being taken in regards to class-action or other effective outlets to voice our displeasure.


BOB says:
November 12, 2008 at 9:07 am

Did you notice that Everbank is finally quoting ISK this morning at 182!! The Central Bank of Iceland is quoting 137 today.


Dan says:
November 30, 2008 at 10:46 pm

Everbank committed fraud when they sent out statements showing accounts denominated in ISK. In fact, they purchased currency forward contracts with our money, made up an interest rate, and skimmed huge margins each and every time we rolled the "CD" over. File complaints with the OTS but don't stop there. Contact your state's attorney general office. And then file a lawsuit. Everbank doesn't have a leg to stand on.


MSA says:
December 4, 2008 at 11:00 am

Just sent my complaint to the OTS. They forcibly sold me out yesterday. I lost $38,000, folks. From $50 to $12. They also charged me commission on the way out!

I had started hoping that given the Icelandic Bank raised rates to 18 percent and announced they would float the currency, there would be some chance to recoup losses over time. Just today, Krona appreciated 10%.

I have a regular savings account with Everbank and I am transferring everything to Citi and JP Morgan ASAP.

I hate Everbank.


Christian says:
December 5, 2008 at 9:12 am

USDISK now being quoted at 121, whereas Everbank sold us out at 256! We had CDs, an investment vehicle of the most SAFE kind! Yet because Everbank gambled with our funds, UNBEKNOWN to us, we have taken the fall!

Yes, I have filed complaints with the Attorney Generals in 3 states (MO, FL and mine), still waiting to hear from them! No response from OTS yet either! I looks like I'm going to have to sue independently…


MSA says:
December 5, 2008 at 8:33 pm

Christian,

256? You got lucky. I was sold out at 263 and the Krona has appreciated 20% in the subsequent 2 days. Plus Ever-fraud charged commission on the way out just to piss on me while I was down.

Unbelievable.

I've already gotten an attorney for this. I'm looking to recoup 100% on this now based on Everbank's abdication of their fiduciary duty and false advertising of the product.


John Hutchins says:
December 11, 2008 at 4:42 pm

I too have been riped off by EVERBANK Today EVERBANK closed my CD and exchanged my ISK to USD at the rate of 217.1162 to 1 where other sites on the WWW showed an average of 116 ISK to 1 USD!
Looking for a SheepSkin for hire.

My reaction: Using derivatives to bet against the dollar is NOT a good idea.

global derivatives markets need stable dollar to operate

You must understand that global derivatives markets operate on the assumption of the stable value of the dollar and short term US debt. These derivatives markets cannot function without the collateral backing provided by short term US debt. If the value of dollar and short term US debt collapse, these markets will cease trading and contracts will be made worthless.

What this means

When you buy a gold call option, you are making two bets:

1) That the value of gold will appreciate
2) That the value of collateral backing the option (the dollar and short term US debt) will maintain its value.

I would like to point out that these two bets are mutually exclusive.


Conclusion: If you want to bet against the dollar, do it in a safe way. Avoid derivatives and invest in hard assets and unhedged commodity producers. Otherwise you will end up like the holders of Everbank's Krona denominated Icelandic CDs.

(emphasis mine) [my comment]

California Credit Rating Cut Close to Junk After IOUs
By William Selway

July 6 (Bloomberg) -- California’s credit rating was cut for the second time in as many weeks by Fitch Ratings after a stalemate over how to close a $26 billion budget deficit forced the most-populous U.S. state to pay some bills with IOUs.

Fitch lowered its rating of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further. The credit-rating company last lowered its assessment of California on June 25.

California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression as Governor Arnold Schwarzenegger and lawmakers remained deadlocked over the budget cuts needed to make up for revenue lost because of the recession. California Controller John Chiang said the step was needed to conserve cash.

“The downgrade to ‘BBB’ is based on the state’s continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis,” Fitch said in a statement.

California, with the world’s eighth-largest economy, was already the lowest-rated U.S. state. Standard & Poor’s gives the state it’s A grade, the sixth-highest of 10 investment levels. The firm reaffirmed that assessment on July 1. Moody’s Investors Service rates the debt A2 and placed it on watch on June 19.

The Fitch action affects $79 billion of debt -- $69.3 billion of general obligation bonds, rated BBB, and $9.7 billion of appropriations credits, rated BBB-.

...
Real Estate Bust

California, where the high cost of real estate fueled demand for adjustable-rate mortgages that helped trigger the recession, has been especially affected by the slump. Six of the state’s cities are among the 10 with the highest foreclosure rates in the U.S., according to RealtyTrac, an Irvine, California, company that keeps data on repossessed homes. The state’s unemployment rate of 11.5 percent in May was the fifth-highest in the U.S.

The disappearance of jobs and spending cutbacks by consumers has sapped the sales and income taxes that fund state government. Revenue collections dropped by $13 billion to $73 billion in the 11 months through May from a year earlier, according to Democratic Controller John Chiang’s office.

Fitch said its rating reflects that there is little risk of a default by California [This is why Fitch ratings are more or less worthless]. Officials including Treasurer Bill Lockyer have repeatedly said the state won’t default.

“The ‘BBB’ rating indicates that expectations of default risk remain low, although the rating is well below that of most other tax supported issuers,” Fitch said.

The Wall Street Journal reports that Big Banks Don't Want California's IOUs.

JULY 7, 2009
Big Banks Don't Want California's IOUs
By RYAN KNUTSON

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

Associated Press
Dorothy Cottrill of the state controller's office inspects IOUs last week.

The development is the latest twist in California's struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs -- or "individual registered warrants" -- to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July's end.

But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2 [Another reason why the dollar might run into trouble at the end of September.], or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.

Meanwhile, on Monday morning, a budget meeting between Gov. Arnold Schwarzenegger and legislative leaders failed to produce a result. Amid the budget deadlock, Fitch Ratings on Monday dropped California's bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

Mercury News reports that California leaders in no hurry to break budget impasse.

California leaders in no hurry to break budget impasse
By Mike Zapler
Updated: 07/08/2009 09:41:30 AM PDT

SACRAMENTO — Despite plunging tax revenues, Wall Street's unwillingness to loan the state money and billions of dollars worth of IOUs hitting mailboxes, California's leaders are displaying a seeming lack of urgency to close the state's $26.3 billion deficit.

Gov. Arnold Schwarzenegger and legislative leaders blew past a supposedly ironclad June 30 deadline to pass a new budget, and no one can say with any precision when the new moment of truth is, if there is one. Each side seems to be waiting for the other to blink. The question now hovering over the impasse: How long can this last?

Based on projections of the state's financial outlook by Controller John Chiang, the answer may be several more weeks, if not months. That's when he projects the state will finally run short of cash to make legally mandated payments to schools and bondholders; the crunch would have come even sooner had Chiang's office last week not resorted to IOUs to lower-priority creditors like vendors.

An extended delay would come at a huge cost to California's prestige, possibly sending its credit rating into junk-bond territory and driving an untold number of companies that rely on state money out of business.

"We're in deep trouble in September, if not sooner," Chiang said in an interview Tuesday.

Lengthy budget stalemates happen so frequently here that they are almost ingrained in the Capitol's DNA. But despite this summer's mammoth problems — and a looming deadline from the state's largest banks to stop cashing IOUs after Friday — it's looking like business as usual, with political leaders blaming one another for the standoff.

If the stalemate drags on past the summer, the state could be in jeopardy of missing required payments to schools or even defaulting on bonds — although officials insist they will do everything in their power to avoid missing a debt payment for the first time in state history.

"That would be like jumping into Death Valley," Chiang said.

Chiang said the state can probably make it until September without jeopardizing those legally mandated obligations by continuing to issue IOUs [“Probably”? So the world’s sixth largest economy will “probably” not default on its debt? How reassuring]. Chiang plans to issue $3.4 billion worth of the notes this month, and billions more in August if a budget deal isn't reached.

Fitch Ratings, which downgraded California's credit rating on Monday, estimated that so-called priority payments to schools and bondholders wouldn't be at risk until late October. Further credit downgrades would make it even harder — and more expensive — for the state to sell bonds to pay for schools, roads and other infrastructure.

No sign of a deal

Although budget negotiations are fluid, a deal to solve the deficit doesn't appear imminent. This week, Assembly Speaker Karen Bass, D-Los Angeles, threatened to boycott negotiating sessions with Schwarzenegger, saying he isn't serious about reaching a deal. The governor, in turn, blames what he calls intransigent Democrats for not being willing to make adequate programs cuts and farther-reaching reforms to fix the state's repeated deficits.

Schwarzenegger last week called an emergency session of the Legislature to address the budget. But that declaration gave lawmakers 45 days to act before they're legally precluded from working on anything besides the budget.

Meanwhile, IOUs continue to go out to vendors and taxpayers across California.

The notes can't be cashed until Oct. 2, except in cases where a recipient's bank agrees to honor them sooner. California's four largest banks have agreed to do that — but only through Friday — to give state leaders a window to solve the deficit.

It is far from clear, however, that top banks' refusal to honor the notes after Friday will be enough to prod the Legislature to a deal. Neither the two Democratic leaders nor a spokesman for Schwarzenegger could name a hard deadline for getting a budget agreement done.

"As far as I'm concerned, we've passed the deadline," Bass said recently. "I don't know what to tell you."

Damaging delays

What's more, every day that elapses without a deal means another day the state has to pay bills based on the budget legislators passed in February — a budget that quickly fell out of balance because of plummeting tax revenues. Legislators have proposed various savings measures to help bridge the shortfall, but the longer it takes to enact those savings, the less time there will be for them to take effect.

By the end of July, the state will have missed $800 million in potential savings lost to the simple passage of time. That will force legislators to cut even deeper to make up the difference.

Barbara O'Connor, director of the Institute for the Study of Politics and Media at Sacramento State, said she sees a "critical window" over the next week or 10 days for state leaders to close on a budget agreement.

Leaders and rank-and-file members, she said, are under enormous competing pressures — on one side from a public fed up about yet another drawn-out budget impasse, and on the other side from special interests and constituents angry about looming cuts to their programs. [The path of least resistance (which politicians love to take) is to do nothing until California eventually defaults.]

If the end of next week passes without an agreement, "then it could go on until September," O'Connor said. And "the longer it goes on, the harder it will be to get it resolved."

Humor about California’s IOUs





The huffingtonpost reports that California Cancels 2010.

July 8, 2009
California Cancels 2010
Jerome Halligan
Editor of satirical news site The National Protrusion.com

[This satire, not real news]

Sacramento, CA - California Governor Arnold Schwarzenegger announced that his state will not participate in the year 2010, and instead "will skip directly to 2011." California faces a projected $26.3 billion budget deficit, and the state's controller began handing out IOUs last week.

Gov. Schwarzenegger held a press conference, following an emergency meeting with key staff and several members of the State Senate. The governor said that at that meeting, it quickly became clear that there was no alternative to canceling the upcoming year.

"The fiscal emergency we now face is even worse than we had anticipated," the governor said, reading from a prepared statement. "We have decided the best option is to sit this year out, and pick up again in 2011. Hopefully, after that amount of time, and with the money we save by not participating in 2010, we'll be back on solid financial footing and we can return to the greatness that we Californians are known for. Until then, bear down and try to get through the rest of 2009. Because after that, you can sit back and relax. You won't be doing anything for a while."

All state services will cease to operate, all state employees will be laid off, according to Mr. Schwarzenegger.

"As far as California is concerned, there will not be a 2010. It does not and will not exist," he said. "If you try to call the police or the fire department, know that they will not be coming to help you. If you want a traffic light fixed, it may be time to take out your tool set and get to work with some handy friends. On the upside, you will not have to feed parking meters, and you won't be receiving any traffic tickets. If I were you, I would save that money, because you'll probably need it to pay for tutors for your children who won't have a public school to attend. But there's another upside for you kids: no school!"

Mr. Schwarzenegger said he regrets that his state will not be able to participate in 2010, as it "looks like it will be a pretty good year," but he said he's confident that 2011 will be a great one for California.

"I hate for my state to miss out on 2010," the governor said, "But I know that when we pick up again in 2011, we will be doing it with renewed vigor and energy and commitment. 2011 will be a great year for all Californians, at least the ones who don't rely on the state for any essential services, as those people probably won't survive 2010."

[Although this story is satire, there is a ring of truth to it. After California defaults, a lot of state services will cease to operate…]

My reaction: All is not well in California.

California issues IOUs

1) California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression.

2) California's four largest banks said they would stop accepting California's IOUs on Friday

3) if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2

4) California plans to issue more than $3 billion of IOUs in July.

5) State Controller John Chiang said that without IOUs, California would run out of cash by July's end.


California's credit rating downgraded

1) California's credit rating was cut for the second time in as many weeks by Fitch Ratings after the most-populous US state started issuing IOUs. The Fitch action affects $79 billion of debt.

2) California, with the world's eighth-largest economy, was already the lowest-rated U.S. state.

3) Further credit downgrades would make it even harder - and more expensive - for the state to sell bonds to pay for schools, roads and other infrastructure.


California’s economy is imploding

1) Six of the state's cities are among the 10 with the highest foreclosure rates in the U.S.

2) The state's unemployment rate of 11.5 percent in May was the fifth-highest in the U.S.

3) Revenue collections dropped by $13 billion to $73 billion in the 11 months through May from a year earlier.


No deal to solve the crisis appears imminent

1) California's leaders are displaying a seeming lack of urgency to close the state's $26.3 billion deficit.

2) Gov. Arnold Schwarzenegger and legislative leaders blew past a supposedly ironclad June 30 deadline to pass a new budget.

3) every day that elapses without a deal means another day the state has to pay bills based on the budget legislators passed in February

4) By the end of July, the state will have missed $800 million in potential savings lost to the simple passage of time.

5) California's leaders and rank-and-file members are under enormous competing pressures from:

A) A public fed up about yet another drawn-out budget impasse
B) Special interests and constituents angry about looming cuts to their programs.

6) If the stalemate drags on past the summer, the state could be in jeopardy of missing required payments to schools or even defaulting on bonds


Conclusion: California is experiencing a meltdown. Tax revenues are plunging. Its credit rating is being rapidly downgraded. Wall Street is unwillingness to loan the state money. Billions of dollars worth of IOUs are hitting mailboxes…

Despite California’s rapid descent into the abyss, politicians appear committed to the path of least resistance, which involves doing nothing until California eventually defaults. Considering that a Californian default would undermine all other US government obligations and that the treasury needs to sell 3.3 trillion debt in the second half of 2009, this is not going to have a happy ending.