San Diego Housing Bubble News and Analysis

The important lesson here is : California Problem + a few years = US problem. We are seeing US budget problem being played out for 2019.

I smell a business opportunity here....For folks that give a cash advance at a steep discount of the face value of the IOU....The longer CA drags this out, the more cash strapped folks with those IOU's will be.

I wouldn't be surprised if folks/company with cash start offering cash to holders of those IOUs in exchange for those IOUs being purchased at a significant discount.

For instance, suppose J6p has an IOU for $2000. Assuming it would be transferrable, why not offer cash-strapped J6P $1300 cash in exchange for the IOU? While it's seems like a shitty thing to do, it's really a win-win proposition for j6p....J6p gets to continue to live paycheck to paycheck, and the person offering the cash gets a premium for taking on the risk in case CA defaults and those IOUs aren't redeemable

Hell, folks can even advertise this on craigslist and or on those websites that attempts to raise money for 3rd world countries (appropriate, since we're definitely heading that direction !)

You can extrapolate this to businesses that have a nice big IOU too who need to meet payroll and bills.

I don't see this doom and gloom...In fact, as shitty as it sounds, I think it creates opportunity.

The apathy of the masses seems to bolster the hubris of the government "servants for the public good". For as long as the salaries and pensions are being doled out to highly paid "public servants", they don't care if the next guy is experiencing depression times. There should be a mass-initiated proposition that until a balanced budget is passed, your legislature and state servants should not get their salary. That would make them pass a budget in a New York minute.

I thought I did that on another thread...

"Does anyone have about $200-300k of registered warrants they want to sell?"
http://piggington.com/ot_no_bailout_for_...

This is good news for me. I now get to pay my additional state taxes with state tax free money.

Yippee...

Lucky In OC

I like your response, flu.

Maybe we should call these IOUs "California bucks". In your example, flu, each Calfornia buck can be converted to 0.65 of a Federal buck (or whatever the market determines those California bucks are worth).

This would be a nice solution to the problem of overspending by California government. All spending in California would effectively be reduced by 35%, across the board.

Of course, eventually the Federal bucks would also be convertible to less in other currencies and real goods, just like the California bucks. But that's another few years down the road.

I know, I know, this won't be allowed to happen - a permanent reduction in Cali govt spending. But it's fun to dream.

I don't see this doom and gloom...In fact, as shitty as it sounds, I think it creates opportunity.

That is exactly what baxter said about swine flu.

heh heh

Screw the 3.75%. If you want that, go buy Phillip Morris or some high dividend stock. I'm thinking that some people will need that money so desperately, they'll sell you the note at a discount on top of the 3.75% CA will already pay...Question is whether the IOU is assumable...and...how you spot a fake IOU from a real one.

Problem is that I really don't know too many j6p's :)

I don't see it different from folks that are hoping to pick up property at a steep discount....Someone else's financial mess is your gain.

Pardon my ignorance, but what is a j6p?

FLU: What you're talking about is essentially factoring (cash for discounted Accounts Receivable) and it happens frequently in other industries.

Usual rule of thumb is about 1.5% interest per month charged on 100% of the face value of the paper, but for 80% of the face value in cash (the other 20% being reserved as security). It's a risky business, but it can be exceptionally lucrative, too.

I think you're right, especially for those businesses in the construction and contracting trades that rely on state work for the bulk of their revenue (the subs working for Edge Construction in Temecula come to mind, for instance). I would imagine there are subs out there that would play ball and probably at significant discounts.

joe six pack

Unfortunately, I don't think I have the smarts to pull this off at a large scale. So short of doing this for a few small potatoes, I can only live vicariously to folks with deeper pockets that do it at the commercial level. Back in 97, i attended a few classes about trading commercial paper...It seemed like it would be lucrative if you were plugged in right...Unfortunately, I was too chicken to invest into doing it.

FLU: You can do it on a small scale. I know, because I have. During the last serious downturn in construction, an attorney buddy and I went into small-scale factoring (sub $100k in total invested dollars). He had a law school buddy who was working for a large commercial paper outfit in LA and drew up our contracts and taught us how to do UCC filings and encumbrances, as well as what our recourse was in case of a default.

We ran this on a part-time basis for about four years and made some decent money doing it. At the end, we were buying court judgments for less than a nickel on the dollar and making money there, too (nasty business in terms of collecting, though).

There is some really toxic paper out there right now that you can scoop up for pennies on the dollar from some fairly significant players (like Vedder Price), if you have the stones and the stomach to collect on it. Most of the big players in banking, law and finance are happy to get rid of the little stuff, since their overhead won't allow them to make money collecting it.

Why not start up a Pigg fund and let Allan head it up? :)

That's funny, that's exactly what I was thinking when I read this. With Allan picking up loans for us at pennies on the dollar, and SDR buying rental properties, Piggs would be all set. We need to bring a contract and serve 'em lots of beer at the next gathering before they sign on!

CA renter: Ha, ha. You're funny. No, thanks, I've been out of the finance/accounting biz for a while now and have no desire to go back.

You might ask Dave (davelj). He's a banking dude.

All kidding aside, there are some emerging opportunities out there as far as commercial paper goes. If you've got cash, you can drive some good deals.

Allan, Davelj might be happy to manage more money, but can we trust someone who thinks it's OK to take full advantage of any loopholes in a legal contract, regardless of the ethics? :) / Retract claws

Agree about the opportunities. Think about it, Allan. :)

Of course, if Dave is interested, we'd probably like to hear from him, too.

CA renter: If you're serious, I'd be willing to talk about it. Unfortunately for me, the primary deterrent isn't money or risk, it's time.

My schedule, work-wise, sucks royally and I'd be concerned about not having adequate time to do this right. Meaning, I wouldn't be able to properly perform due diligence and see if the various opportunities pencil.

I opined to someone recently that if you had about $10MM in ready cash, you could be a billionaire within the next 10 years and I didn't say that idly. I think if you have the requisite smarts and are aggressive and not risk averse, you can make a killing out there and I don't mean the stock market.

How much money under management do you think would make it worthwhile, Allan? Half-serious too.....

We could certainly all (or some of us) work together on this. I'd be willing to do my part! :)

PR: Good question, and one that I don't have an answer to right off the top of my head.

I've been on the lookout to buy a California B class contractor and perhaps a specialty subcontractor in electrical (low voltage) and mechanical. I was stunned at the response when I put feelers out there; the number of contractors that are out there hurting is staggering.

That got me to thinking about the factoring business again. Many of these contractors have decent enough backlog and Accounts Receivable, it's the cash flow that's killing them right now, especially since the banks aren't lending or extending lines of credit.

I'd have to think that the same holds true for a wide variety of small- and mid-market companies. The problem would be running down the opportunities and then performing the requisite DD. There are a ton of assets and companies available through BK proceedings right now, too.

I would think the investment pool would be driven by what is the best market or set of opportunities to pursue and then determine the best economies of scale to make significant profits.

Well, if you come to any conclusions on it, feel free to let us know. I am keeping powder dry for the cash purchase of a home, and for a boost in my equity holdings, but I'd be open to a few hundred K of other 'play' investments if it helps you get to a critical mass.

Dude, I'd be happy to commit some capital just to break even if it would mean I could learn some of the ropes in something completely different other than software software software. I'd be interested just to tag along to see how things work. Playing in commercial paper in a larger scale isn't something that I would just try to "learn on my own". Allan, if you are going to do this, and I'd be interested too.

PR: Like I said, I'd be open to discussing it. I don't consider myself an expert by any stretch of the imagination and, for the most part, my investment strategy over the years has been pretty staid and boring.

However, that said, I do think there are some unique opportunities out there. As with anything else promising significant upside, there is also significant downside and that's where really good due diligence comes into play. My worry has been not having the time to focus on this properly and that amplifies the risk in my opinion.

FLU: You hit on a very important aspect and that is making sure all of the structure is in place to do this right.

When my buddy Rob and I were in the factoring business, we had access to guys, including attorneys and CPAs, that did it for a living. They were happy to help, largely because we paid them for their expertise and cut them into some of the larger deals.

There is a lot of commercial paper out there, in everything from Commercial RE to auto loans to sub- and non-performing loans at banks and finance institutions. The problem is in assessing the toxicity of the paper and you really need to have the proper tools, resources and access to specialists to avoid getting burned and burned badly.

I like factoring and asset based lending because I understand it and have some experience with it, but the risk factors and potential downside are a couple of orders of magnitude worse than when I participated in this market before.

Like I said, I think there is big upside, but that also means you can lose your ass.

Shit... It's already happening.

http://sandiego.craigslist.org/csd/bar/1...

IOUmarket Launches Website for Business and Individuals to Buy and Sell California IOUs.

The website allows recipients of California or other government-issued IOUs, to cash-in their IOUs by offering them for sale. IOU investors have the ability to review IOUs and contact the IOU sellers to complete the transaction. Click Here to Sell or Buy California IOUs

Also.........

http://sandiego.craigslist.org/csd/bar/1...

WE BUY CALIFORNIA IOU'S!!!!! (SAN DIEGO)

Got shafted by California with an IOU check?
Need cash NOW?

Time to start doing something about this....

I don't think we expect you to work miracles, Allan. I, and most of us, are pretty good at accepting that risk = maybe gain, maybe loss. If everyone contributed only what I did to the fund, the gains, if any, would be enough to cover a few beers, and any losses would just trigger a few more beers. To make it really worthwhile, and cover overhead, it would probably have to be $5-50 mill. I doubt we can swing that.

So for this idea, we Piggs are just either beer money and an excuse to learn (like flu), or we're seed money for your 30-year plan to put Vanguard out of business. Cheers!

Allan,

I'm not quite sure dealing in the IOUs would exactly fit the definition of factoring. There's a difference that would influence the approach one may want to use.

In factoring, the creditor deals with many different debtors. Each has their own risk/reward profiles. The lender can earn a premium because they have the skills to identify the opportunities in each particular situation, and set the terms appropriately. The lender effectively gets paid because they do the diligence for each specific client.

California IOUs are a commodity. They are all the same and interchangeable. Markets will develop for them (they already have). They probably won't be quite as liquid as other bond markets, but they will essentially be traded like any other paper. Because these markets are not mature, there will certainly be some arbitrage opportunities for those that are aggressive. But like any major trading activity, the amateurs will likely get burned.

Probably the biggest difference between these IOUs and other bonds is that they will be issued to individuals who need a paycheck to survive. Many of these people will be financially unsophisticated, so there will be opportunities to exploit their ignorance (for those that want to go there.)

Pri: Agreed. I used factoring as an example because I'm familiar with it, and there are certain aspects to the California IOUs that are similar.

I don't like the IOU market particularly and largely because I don't know how the state is planning on bridging that $24Bn shortfall anytime soon. Until they do, their credit rating is going to suck and that will make borrowing nigh on impossible. Tax revenues are in the tank and unemployment is surging, none of which bodes well from a cash flow perspective.

You make some good points regarding diligence and not charging the market (whichever market it is) without having the proper resources in place. As with anything else, the smart and aggressive can prosper and the dumb and aggressive will perish.