The SEC has given its blessing to the state of California by deeming the IOUs it's issuing amid its budget crisis to be municipal securities.

Investors and holders of the IOUs were looking for guidance on the instruments as the big banks kept flip-flopping on whether the IOUs would be accepted. Bank of America ( BAC) announced only a limited acceptance of the state-issued scrip.

Web sites sprung up in the absence of any guidance to create a secondary market for these securities: Buymyiou.com is one, and good old Craigslist entered the fray as holders looked for a way to cash them in. Luckily, the warrants weren't listed as "curb alerts" on Craigslist.

No doubt the exchanges weren't too happy to lose business, so low and behold the IOU's were magically deemed securities. Is there an office pool on how long will it take before CME Group ( CME) creates a futures market for California IOUs? How about a Deutsche Bank ( DB) Powershares Double Short Cali ETF?

Back in 1992 when California most recently issued warrants, the SEC decided the items were obligations of the state, but not securities. Also in 1992, Bank of America was the largest bank in California and was totally on board. My how things have changed.

Naming the junk paper a security also potentially clears the way for the IOUs to become the latest toxic asset. It isn't too much of a stretch to suggest that banks could use the IOUs as collateral for TALF loans. Hey, if an RV loan can be considered as collateral, why not Arnold bucks?

To make matters worse, the state keeps backing itself into a fiscal corner. Some of the warrants have expiration dates, meaning if they aren't cashed in on time they become worthless, setting up a run on the state's meager coffers as holders rush to cash in by those dates. Plus, California says it will pay off the IOUs in October, but the state has debt maturing to the tune of $28 billion in October.

Makes one wonder where all this money will come from when California's revenue is 50% personal income tax and 30% sales tax. No doubt furloughed workers that are making less money won't be shopping.

JPMorgan Chase ( JPM), which is familiar with receiving short-term financial assistance will only accept the warrants through July 10. Struggling TARP bank Citigroup ( C) is also playing hardball and so far is sticking to the July 10 date as well.