How Worried is Citibank About California’s Ability to Handle It’s Budget Crisis?

I recently was withdrawing some money at the local Citibank ATM.  There was a notice attached to the ATM machine about the Registered Warrant, AKA “IOU’s” that the State of California has been handing out to various individuals in place of actual checks.

Citibank has been gracious enough to give you, the holder of one of these IOUs, actual cash for your Registered Warrant thus collecting the 3.75% interest for themselves.  Of course they see this as an advantage to them because the average CD for that time-frame is less than 1%.

This doesn’t discount the fact that the State of California has no right to hold your money from you, which is an entirely different discussion.  When push comes to shove, the State will do what is in their best interest.

So take a look at the actual document posted at the Citibank ATM below and see if you can catch the reality of how deeply concerned Citibank is about California’s budgetary crisis:

Did you see it?  It’s the last bullet point towards the bottom of the document it states:

“If California be unable to receive full payment under the Registered Warrant (or any replacement warrant), you agree to repay Citibank for any resulting loss, not to exceed the face value of the Registered Warrant.

If the State of California defaults on the warrant, or replacement warrant (in other words the Warrant bounces), you have to pay Citibank back the money they gave you.

Granted the odds of this happening are somewhat slim, but I believe it should give one concern as to what the future may hold for residents of California.

My advice:

If you are used to always getting a refund from the State of California Franchise Tax Board each year, I suggest you increase your withholding number on your W9 to a higher figure.  Talk to your CPA to see what that number is.  In the past that number was 9 without raising IRS concerns.  Most people have that number at one or two.  Take control of your finances and earn interest on it rather than letting the state just give you a return of your hard earned dollars.1

You don’t want the State of California holding onto your money, especially when you aren’t even sure you’ll get more than a Registered Warrant (IOU) in return.

Things Will Get Worse for the Residents of California

In late July, California Governor Schwarzenegger signed a current budget resolution Mish Shedlock does a good job of explaining the problems California has to face in the years to come and likens this current resolution as a “band-aid” on what is to come.

You see, politicians will never cut the hand that feeds them.  Instead of making the necessary cuts for the common good of the state and the people who reside there, legislators will do what’s in the best interest of the privileged employees of the state in a blatant attempt to take care of their own.  Any thoughts on how this will end?

The state never prepared for the rainy day and expected the good days to last forever.  They even tried to sucker the voters in with paying more in taxes, but the voters of California were too smart for their shenanigans.

Be Forewarned

So if you live in California, be forewarned that this budget crisis is far from over.  Add to the crisis any unforeseen (or foreseen when it comes to California), natural disasters of fire, mudslides or earthquakes, and you can expect your taxes to increase as California doesn’t have the ability to print their own money.  Although, isn’t that what California did with issuing Registered Warrants that even Citibank had to write a disclaimer before accepting?

1 This is not to be construed as tax advice.  Seek competent advice from a CPA or your tax advisor.
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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


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