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.)[/quote]
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.
