California's IOUs May Not Fly With Banks

California is running out of money while lawmakers battle over the budget. And as a result, the state has been paying some of its bills with IOU's. But now, California faces another problem. Most major national banks are no longer accepting the IOU's.

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This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Coming up, we go to the Bronx. And California, however, is running out of money while lawmakers there battle over the budget. And as a result, the state's been paying some its bills with IOUs. But now there's another problem. Most major national banks no longer accept those IOUs. They contend they're just trying to help the state fix its budget mess.

NPR's Martin Kaste reports.

MARTIN KASTE: The big banks warned that they'd take the IOUs only through midnight last night, and they've stuck to that deadline. Neither Wells Fargo nor Bank of America would talk about the decision on tape. But their spokesman said the decision was meant to pressure the state to solve the budget impasse.

Jennifer Westerman(ph) of Bank of America says if her bank kept accepting IOUs, it might - in her words - deter the state from reaching a budget agreement. In California, that explanation has encountered some skepticism.

Mr. HOWARD WINDERBAUM(ph): That's a bunch of bull from the banks. Just as good a - good reason as any, you know, 'cause they don't want them.

KASTE: Howard Winderbaum supplies food to California prisons and he just received his first IOU. It's a payment for some chili his company delivered in May to a prison on lockdown. Winderbaum's bank will take the IOU but it's going to put a five-day hold on the money while it verifies whether the IOU is legit.

Mr. WINDERBAUM: They feel forgery is going to run rampant with these IOUs, rampant. 'Cause I'm looking at this thing. I mean, yeah, it looks like a check, but I'm sure, I assume, there's watermarks in it somewhere, but it looks like a basic check. So they fear, the banking industry, there's going to be a tremendous amount of fraud and forgery.

KASTE: Winderbaum is just grateful that he's dealing with a small local bank, where he can still redeem the IOUs. As to the big banks, he doubts their refusal to take them will have any effect on the budget battle. But state Senator Mark Leno is more optimistic. He says the last time the state had to issue IOUs, the banks were the ones that broke the budget logjam.

State Senator MARK LENO (California): The IOUs came to an end in '92, also when the banks said, sorry, state government, we are not going to be your codependents in this, we're not going to accept your IOUs any longer.

KASTE: Meanwhile, some other financial institutions smell an opportunity. The trade group for California's credit unions is now calling attention to the fact that many of its members will still accept IOUs; in some cases, even from new customers.

Martin Kaste, NPR News.

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