Registered Warrants

People holding California state IOUs -- including taxpayers, vendors and local governments -- will soon have a tougher time redeeming them, as most major banks are standing firm on a vow not to cash the vouchers after today. Many credit unions say they will continue to redeem the IOUs for customers.

After trying for weeks to fix a state budget gone out of control, Gov. Arnold Schwarzenegger and state lawmakers stood frozen in conflict Wednesday with the state at the brink of a meltdown. A day after the state Senate failed in a late-night bid to close part of a deficit now projected at $26.3 billion, California Controller John Chiang took steps to begin issuing IOUs today to tens of thousands of companies and individuals that are owed millions of dollars by the state.

Citibank and Bank of the West agreed Friday to honor state officials' requests that they continue accepting California IOUs, as most other banks refused. With the state Legislature still embroiled in a fight over how to close a $26-billion budget deficit, the California government is expected to issue nearly $3 billion worth of interest-bearing IOUs this month. Starting today, major banks such as Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co.

California's finances have stabilized enough that on Friday the state was taken off one watch list of debtors facing possible bond-rating downgrades. Getting off the Moody's Investor Services "watch list" means there is less threat of a ratings reduction that would cost taxpayers millions of dollars more when the state borrows money. Moody's action came a month after the governor and Legislature plugged a $23.6-billion budget hole by making deep cuts in spending. "The outlook on the state of California is stable at this time, based on the expectation that the state will deal with any further challenges to its budgetary balance and liquidity without another major cash crisis," Moody's said.

An informal market is springing up online for the IOUs that cash-strapped California began issuing last week, attracting the attention of regulators and state officials. Meanwhile, the state's bonds moved a step closer to "junk" status because of the budget mess that has prompted the state to pay tax refunds and other obligations with the vouchers. Would-be buyers of the scrip, officially called registered warrants, have expressed their interest on Web marketplaces including Craigslist and EBay.

Bank of America Corp. set the tone for the banking industry's response to California's decision to issue IOUs. That message, essentially, is this: "We'll help you for a week. If you can't get your act together and nail down a budget by then, you're on your own." Bank of America announced late Wednesday that it would redeem in full the state's IOUs (formally, "registered warrants") from current BofA customers who want to cash them in. But the bank set a cutoff date of July 10.