China and Argentina have made a tentative agreement to swap $10bn (£7bn) worth of their currencies.

The move, which allows both countries to bypass the US dollar, makes it easier for Argentine businesses to buy Chinese imports directly in yuan.

It also gives Argentina hard cash at a time when its finances have been hurt by the global financial crisis.

The deal comes after China suggested that the world should create a new reserve currency to replace the dollar.

The swap is being seen as a sign of China’s ambitions in South America.

China primarily imports agricultural products from Argentina, while the South American nation buys Chinese electronic goods.

In the past, China has signed similar deals with South Korea, Malaysia, Belarus and Indonesia.

http://news.bbc.co.uk/2/hi/business/7973541.stm

I think you will find that a lot of countries will start conducting business in another currency other than the U.S. dollar.  In addition to Argentina, China is reportedly in talks with a number of other nations to arrange similar swap arrangements.

While the amounts may be small, it reflects China’s desire to establish a greater importance on the yuan as a reserve currency.  I’ll be watching for similar deals, as this sort of things tends to have a cascading effect.  Is a bigger deal with another country in the workings?

China proposed yesterday a sweeping overhaul of the global monetary system, outlining how the U. S. dollar could eventually be replaced as the world’s main reserve currency by the IMF’s Special Drawing Right.

The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency, said Zhou Xiaochuan, governor of the People’s Bank of China.

“The role of the SDR has not been put into full play, due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system,” he said.

http://www.financialpost.com/scripts/story.html?id=1420262

Bad news for the U.S. dollar!!!  If this is any reflection of how foreign governments think, then you can be sure that these countries may be less inclined to buy U.S. debt in the future.

The switch to an SDR based on a basket of currencies seems like an idea worth exploring.  This would decrease the effect a single currency has on the global economy and help rein in the extravagant spending that the U.S. has been doing based on borrowed money.

To date, the policies Obama have introduced involved “unclogging” the financial system by using public money to fix the situation.  There has been no hard rebuke for the industry.

Excessive and reckless issuing of credit killed the financial markets.  Now it seems like Obama is trying to jump start the whole system again but this time with credit backed by the government.  What we want to see is legislature that will change the way the current financial system is run.

The House moved swiftly to quell public furor over bonuses to AIG executives Thursday, voting by a wide margin to heavily tax the money awarded to employees of the insurer and other companies bailed out by the government.

The 328-93 vote imposes a 90% tax on any bonuses given to employees with family incomes of more than $250,000 at firms that received more than $5 billion in bailout money.

Rep. Charles Rangel, the top Democrat on the House tax-writing committee, said the bill was a “red light” to companies receiving taxpayer aid. “Don’t dare try to take a bonus and get away with it,” he said after the vote.

President Obama said the House vote “rightly reflects that outrage that so many feel.”

http://www.usatoday.com/news/washington/2009-03-19-aigvote_N.htm

Ah… democracy.  The public wanted the bonus money back and now they are going to get it.  I wonder whether the government thinks on its own because right now it is mob rule.

The government is making AIG, Goldman Sachs and Citigroup even less desirable to work for; and at the same time demonstrating their skill at circumventing contract law by inventing new ones.

First, let me make it clear that I don’t work in any of the aforementioned financial institutions nor do I work in the banking or insurance industry at all.

But I believe the following:

  • The bigger the institution, the better people they need.  This is because of the extra bureaucracy and complexity of a large company.
  • Most people don’t deal with insecurity well.  Especially uncertainty related to their job and finances.
  • The best talent is mobile
  • Better performers generally get a bigger bonus than weaker performers

Imagine if the top 10% of AIG’s staff left!!!  By applying the tax, the government would in one fell swoop lower the compensation of the AIG’s top staff by a pretty substantial amount and remove much of the incentive to perform.

And with their bonuses lowered by such an extent, many of those workers could probably find a job with a salary similar to their lowered compensation but with considerably less stress!

All this leads me to believe that AIG, Citigroup, etc will be worse off after this law is passed.  If we feel that these institutions are beyond or not worth saving then by all means try to recoup every dollar you can.

But if you believe as I do, that AIG must be saved at all costs, then mucking around too much with employment conditions could cost the public more in the long run.

When employees are hired, they expect to receive a certain salary.

Bonuses, if they are contractually written into the terms of employment, are almost like a sort of salary. They have to get paid.

On the other hand, if AIG is issuing bonuses outside of these contractual arrangements, then I believe there should be some greater scrutiny of this. Ultimately though, they might still need to be paid.

The question is: How important are the people receiving these bonuses to the restoration of the health of the company?

Frankly, the company will lose even more taxpayer money if all the best staff leave. And if the government intervenes, it won’t stop at just AIG. The best staff (AKA the most mobile) will start leaving any firm that has received government money for fear that their compensation will be affected.

(Almost) Nobody good is going to stay at AIG out of goodwill. That’s a fact of life.

Mark-to-market rules, AKA fair value accounting, requires companies to value their assets at market prices when they report their accounts.

Under pressure from banks and lawmakers, the FASB is now looking at allowing banks more discretion on how to value their assets.

The argument from banks is that they have to write down the value of their assets under an environment with very little liquidity even though they argue that they have no plans to sell under this environment.

My advice to them: don’t invest in such risky assets! It’s your own damn fault.

What we don’t want is to give these same “FINANCIAL ABUSERS” even more leeway to artificially inflate the value of their books.

Have we not learned anything from Enron? Last time we had a company make up their own value for assets we had arguably the most spectacular collapse in corporate history.

If this passes, I will have lost all faith in the quality and all faith in how this government operates.

Obama, I had high hopes for you, but this is just cooking the books to make it seem like the recovery is under way.

http://www.chron.com/disp/story.mpl/business/6158481.html

WASHINGTON — The House on Wednesday night approved an emergency plan to prevent the collapse of the nation’s domestic automobile industry, but the measure faces serious opposition in the Senate, where Republicans are revolting against a White House-brokered deal to speed $14 billion to cash-starved General Motors and Chrysler.

Who really believes that $14 billion will really save GM and Chrysler?  It’s going to be billions more in a years time.  Everyone is talking about job cuts and how to streamline the companies, but doesn’t that reduce the benefits of bailing them out?

Really… why does everyone want to save the big 3 auto companies?  I believe it is to prevent massive job losses.  So to pump billions into a black hole and only save the outer facade of the company seems counter-intuitive.

Unless the government has a plan on how to prevent massive job losses (which I think is impossible) this is a mistake.  Hopefully the senate will show a bit more sense.

The US government rode to the rescue of Citigroup, entering an agreement to guarantee up to $306bn in problematic assets and inject $20bn in capital to restore confidence in a bank that defines the term “too big to fail”.

The 11th hour transaction, announced just before midnight on Sunday in the US, calls for Citi to absorb the first $29bn in losses it sustains from its portfolio of risky assets – from residential mortgages to commercial real estate and leveraged loans, collateralised debt obligations and auction rate securities. Federal government entities will stand behind 90 per cent of the remaining losses, which could amount to $249bn.

http://www.ft.com/cms/s/0/447938ee-b9f0-11dd-8c07-0000779fd18c.html

Basically the taxpayer is getting $20 billion worth of preferred shares for the cash injection.  Furthermore, the government is guaranteeing $306 billion worth of assets for an additional $7 billion worth of preferred shares.

Now I have no problem with getting preferred shares for the cash injection.  But $7 billion is a paltry sum when the pool of assets the government is guaranteeing can easily lose that much in a quarter.

The price for guaranteeing debt should be at least 2 to 3 times higher and reflect what the bank is likely to lose.

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