US Government to Rescue AIG – Again

After last week's announcement that the US government would be increasing its stake in Citi, the rumors were rampant that more financial institutions would likely follow. And this morning most people have awakened to find that's true with regard to AIG.

Government revisits AIG bailout plan
After AIG posted a 2008 Quarter 4 loss of more than $60 billion, the US government has mounted its white horse and is coming in for the rescue. The idea is to restructure the AIG bailout plan, allowing the government to increase its stake in the ailing financial giant.

However, the government still maintains that ownership of private financial institutions is not a goal, so it is hoping that private funding can be found. AIG is also expected to go through a major restructure, selling off a number of its "non-core" businesses.

As one might expect, this latest development has sent risk aversion soaring in currency trading. Which means another shot of strength for the US dollar in forex trading.

UK Pound Heads Lower in Currency Trading

The UK pound is heading lower in currency trading right now. After making some gains, it has reversed course, in spite of gains in the stock market.

In forex trading, the sterling is struggling against the US dollar and the euro. The euro is seeing some rally action today as risk appetite makes a timid appearances.

China Ready to Diversify: Oil Investments Represent Shift to Commodities

Not to long ago, China indicated that it was ready to go on a shopping spree for European investments. This represents an interest in diversifying out of US assets. And this is not terribly surprising: 2/3 of China's reserves are in dollar denominations. That leaves China over-exposed in terms of asset allocation.

But China isn't just planning to diversify into other currencies and other countries' debts: China also wants something more...substantial. China is planning to move into oil investments. At any rate, that's what Chinese leaders say. 
It could be just posturing. But China would be wise to diversify its investments. Such a move could be harmful to the US dollar in forex trading, though. The Forex Blog explains what could happen if China does abandon its large amounts of US notes:

This may just be jawboning to try to slow down the US printing presses, but if it is more than that, it could have a significant effect on the perceived value of the US Dollar, especially in light of the current $1.75 trillion US deficit - a full 12.3% of the projected 2009 GDP. If foreigners lose confidence in the US Dollar, inflation and interest rates will certainly move sharply off their historic lows as the risk of “risk free” US treasuries is revealed and repriced.
No wonder Secretary of State Hillary Clinton was so conciliatory when she visited Asia. It looks as though the US may need China a little more than China needs the US.

China Targets 8% Growth for This Year

China has announced that it is on target to reach 8% growth in 2009. However, the Chinese do recognize the challenges. Stock Market Funding reports that Premier Wen Jiabao pointed this out about the global economy:
"First, the global financial crisis continues to spread and get worse. Demand continues to shrink on international markets; the trend toward global deflation is obvious; and trade protectionism is resurging," he said.

"The external economic environment has become more serious, and uncertainties have increased significantly."  
Last November, China announced a $585 billion economic stimulus package to help move things along. The Chinese government also says that it is planning to increase spending in areas of low-income housing, education and health care.  In addition to this type of spending, China also plans to diversify its investments, looking for returns in foreign holdings beyond US Treasuries.
It is possible that China could see 8% growth this year -- in this recession any substantial growth is good. In the good times, China surpasses 10% growth per year.

House Approves Mortgage Loan Modification Bill

The US House of Representatives has approved a mortgage loan modification bill. The bill, which was modified in a way so as to require homeowners to show proof that they were not being helped by mortgage lenders, allows so-called cram downs of mortgage principal.

The idea behind the bill is to prevent foreclosure by allowing judges to modify loan terms of a primary residence in some cases. However, there are restrictions to what is allowed:

Homeowners must show that they have tried to work things out with the lender.

The mortgage had to have been one that was affordable at one point in time.
Supporters of the bill point out that it's not really all that more onerous than the ability judges have to modify car loans and credit card loans. Opponents say that this would raise costs and take money away from the mortgage debt market.
The bill still has to make it through the Senate, where its passage is far from assured.