A Tale of Two Treasuries

A Tale of Two Treasuries

By Darrell Issa

In his debut as the nation's 75th treasury secretary, Timothy Geithner has been a smashing success -- if success is measured by more federal debt and less accountability to American taxpayers. It was never supposed to be this way.

When our first treasury secretary, Alexander Hamilton, sought to establish the nation's first bank in 1791, he faced challenges from those who condemned the move as an unconstitutional power grab to control the flow of credit and direct the national economy. Against these criticisms, Hamilton drafted numerous provisions to ensure solvency, transparency and fiscal restraint on the part of the federal government. "No government,” Hamilton argued, "has a right to do merely what it pleases.”

But when it comes to the government's managing of the AIG bailout, that's exactly what is happening. An unprecedented power-grab by the Paulson/Geithner Treasury has spent an unparalleled amount of money to purchase a failing financial giant with no accountability, no return on the investment and no end in sight.

A bit of history. Before Timothy Geithner assumed his cabinet post at Treasury this year, he served as the president of the Federal Reserve Bank of New York, where he was the chief negotiator for many of the government's bailout proposals last year. One such bailout involved AIG, a whale of a multi-national corporation beached sideways on a mound of credit default swaps and other high-risk financial products.

In September 2008, Geithner engineered the government's purchase of an 80% share in AIG for the handsome sum of $85 billion, the amount necessary to prevent the company from entering bankruptcy. Losses continued to mount, however, and more federal dollars were needed.

Total cost of AIG's bailout to date? A staggering $185 billion -- or roughly $1400 per U.S. taxpayer. Yet today, according to AIG's own numbers, the company is worth less than $6 billion, and this after posting the largest quarterly loss in corporate history. Nevertheless, the problems at AIG extend beyond the balance sheets.

In March of this year, we learned what the Obama administration already knew -- that after receiving bailout funds, AIG paid $165 million in executive bonuses to employees of its troubled financial products division. Additionally, more than $30 billion in counterparty payments were made to Goldman Sachs, Bank of America, Citigroup, J.P. Morgan and Wachovia -- all of which received separate bailout funds directly from the government -- and foreign banks like Deutsche Bank, Société Générale and UBS, who received counterparty payments in excess of $50 billion.

The public was beyond outrage. They were sold something they didn't want for more than it was worth in a midnight fire sale of busted corporations over-leveraged in troubled, toxic assets. And yet, taxpayers are still kept in the dark about the management of their controlling interest in AIG.

In a legal sleight of hand, the New York Federal Reserve -- under Geithner's supervision and in corroboration with then-Secretary Hank Paulson -- established the AIG trust, an ill-conceived and likely unconstitutional arrangement. According to Geithner's scheme, three handpicked government trustees represent taxpayer interests with indemnity from lawsuits and exemptions that allow them to take advantage of business opportunities for personal profit that would otherwise benefit AIG.

A sweetheart deal to be sure. And while it's easy to see how the trust was structured to protect the trustees -- and perhaps the Treasury, in whose interests they are legally compelled to act -- there is almost no protection for the taxpayers who fronted the cash that's keeping AIG afloat.

In fact, provisions of the AIG trust threaten U.S. taxpayers. By tying the trustees' fiduciary duty to the Treasury -- now run by Secretary Geithner -- the risk that short-term political interests will trump long-term financial soundness is intensified.

Moreover, where ordinary trustees are generally prohibited from exploiting investment opportunities that they learn about as a direct result of their responsibilities, the AIG trustees are free to secretly invest their own capital without disclosure.

Finally, Secretary Geithner has ensured the broadest possible indemnity protections for AIG trustees. Ostensibly, the trustees could initiate a clandestine investment plan to pad their own portfolios, appoint directors complicit in the fraudulent scheme, run AIG into the ground while making dollar-for-dollar counterparty payments and leave U.S. taxpayers holding a paper company with no market capitalization and drowning in debt -- all without any legal recourse.

In the end, the bailout of AIG has made U.S. taxpayers more vulnerable, not less. It has established a dangerous precedent for impulsive federal control of private corporations, siphoned off billions of taxpayer dollars and aggravated our economic pain rather than heal it.

Astoundingly, Secretary Geithner recently announced the possibility of structuring a similar bailout trust for Citigroup. If insanity is doing the same thing over and over and expecting different results, I'm afraid the inmates are running the asylum over at the Department of Treasury.

And somewhere in the Trinity Church Cemetery in downtown Manhattan, Alexander Hamilton must be spinning.

: Stocks, Dollar, Treasuries Fall; Gold Rises

U.S. Markets Wrap: Stocks, Dollar, Treasuries Fall; Gold Rises

May 21 (Bloomberg) -- Stocks and Treasuries fell, and the dollar dropped to a four-month low on speculation the U.S. government’s credit worthiness is deteriorating.

U.S. stocks declined for a third day, extending a global slump, after jobless claims topped economists’ forecasts and Standard & Poor’s said the U.K. may lose its AAA credit rating.

“The markets are beginning to anticipate the possibility of” a downgrade to the U.S.’s top AAA credit rating, and it will “eventually” be lost, said Bill Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, in a Bloomberg Television interview. “It’s certainly nothing that’s going to happen overnight.”

The S&P 500, which has rebounded 31 percent from a 12-year low on March 9, slid 1.7 percent to 888.33 at 4:07 p.m. in New York as nine of 10 industry groups declined. The Dow Jones Industrial Average dropped 129.91 points, or 1.5 percent, to 8,292.13. Europe’s Stoxx 600 Index tumbled 2 percent, while the MSCI Asia Pacific Index lost 0.5 percent.

Initial jobless claims fell by 12,000 to 631,000 in the week ended May 16 from a revised 643,000 the prior week that was higher than initially estimated, the Labor Department said in Washington. Economists surveyed by Bloomberg had forecast claims would drop to 625,000, according to the median of 42 estimates. The total number of workers receiving benefits rose to a record, a sign that the job market continues to weaken even as the economic slump eases.

Alcoa, Schlumberger

Alcoa Inc., Schlumberger Ltd. and Deere & Co. slid at least 4.1 percent on concern a lingering recession will reduce demand for materials, energy and machinery. Regions Financial Corp. tumbled 16 percent after selling shares at a discount to boost capital. The U.K.’s FTSE 100 Index plunged 2.8 percent and gilts slid after S&P lowered its outlook on Britain to “negative” from “stable” as government finances deteriorate.

The dollar declined to the lowest level against the euro since January and dropped versus the yen as an increase in Treasury yields and gold prices indicated inflation may accelerate while the U.S. budget deficit widens.

The spread between yields on 10-year notes and Treasury Inflation Protected Securities, reflecting the outlook among traders for consumer prices, reached 1.73 percentage points, the highest level since September. Sterling erased its decline versus the dollar on speculation a credit downgrade from Standard & Poor’s wasn’t imminent and two other rating companies affirmed the U.K.’s “stable” outlook.

Dollar Slides

The dollar slid 0.9 percent to $1.3901 per euro at 4:02 p.m. in New York, from $1.3780 yesterday. It touched $1.3923, the weakest level since Jan. 5. The dollar fell 0.6 percent to 94.31 yen from 94.88 and reached 93.97, the lowest since March 19. The euro increased 0.3 percent to 131.93 yen from 130.77.

Treasuries dropped after the Federal Reserve bought a smaller percentage of debt than some expected at today’s purchase operation and traders shifted focus to the three note sales next week.

Yields on 10-year notes rose the most since May 7 as the Treasury announced it would auction $101 billion in two-, five- and seven-year notes next week. The central bank bought $7.398 billion, or 16 percent, of the $45.694 billion in U.S. debt due in 2013 to 2016 offered by dealers for consideration. A gauge of inflation reached the highest level since September.

The yield on the 10-year note rose 15 basis points, or 0.15 percentage point, to 3.35 percent at 2:50 p.m. in New York, according to BGCantor Market Data. The 3.125 percent security due May 2019 fell 1 7/32, or $2.19 per $1,000 face amount, to 98 3/32.

Treasury Spread

The difference between two- and 10-year Treasuries rose 0.15 percentage point to 2.50 percentage points today, the steepest the so-called yield curve has been since Nov. 14.

Gold rose to the highest price since March as the slump in global equity markets increased the appeal of precious metals as an alternative investment. Silver touched the highest since February.

Gold futures for June delivery gained $13.80, or 1.5 percent, to $951.20 an ounce on the New York Mercantile Exchange’s Comex division. Earlier, the price reached $951.80, the highest for a most-active contract since March 23. Bullion for immediate delivery in London jumped $16.19, or 1.7 percent, to $954.84 at 7:23 p.m.

Silver futures for July delivery climbed 16.5 cents, or 1.2 percent, to $14.445 an ounce in New York, after earlier touching $14.51, the highest since Feb. 24. The metal surged 28 percent this year, while gold is up 7.6 percent.

Oil Falls

Crude oil dropped from a six-month high after the Federal Reserve cut its forecast for the economy of the U.S., the world’s biggest energy-consuming country.

U.S. stocks erased gains in the final hour of trading yesterday after minutes from the Federal Reserve’s April meeting predicted a deeper recession.

Minutes of the Fed’s Open Market Committee meeting last month showed that policy makers see “significant downside risks” to the economic outlook. The price decrease accelerated after U.S. jobless claims topped forecasts. Fuel demand in the past four weeks fell 7.6 percent from a year earlier, the Energy Department said yesterday.

Crude oil for July delivery declined 99 cents, or 1.6 percent, to settle at $61.05 a barrel at 2:42 p.m. on the New York Mercantile Exchange, the first drop this week. Prices are up 37 percent this year.

U.S. Markets Wrap: Stocks Gain as AmEx Rallies, Treasuries Rise

U.S. Markets Wrap: Stocks Gain as AmEx Rallies, Treasuries Rise

April 15 (Bloomberg) -- U.S. stocks rose for the fourth time in five days as prospects for consumer-staples and industrial shares improved and American Express Co. triggered gains in financials after saying growth in bad loans slowed. Treasury 10-year notes advanced for a third day, while oil fell.

American Express, the biggest U.S. credit card company by purchases, rallied 12 percent. Procter & Gamble Co. rose 3.2 percent after boosting its dividend, while Dr Pepper Snapple Group Inc. climbed 2.2 percent as Goldman Sachs Group Inc. advised buying the shares. CSX Corp. rallied 7.8 percent to lead industrial shares higher after the railroad operator’s earnings topped estimates and a gauge of New York manufacturing was better than expected.

The Standard & Poor’s 500 Index added 1.3 percent to 852.06, erasing more than half of yesterday’s slump. The Dow Jones Industrial Average jumped 109.44 points, or 1.4 percent, to 8,029.62. The Nasdaq Composite rose 0.1 percent as falling profit at Intel Corp. spurred losses in technology companies.

“The end of the world is not nigh, but this is going to be a challenging environment going forward with respect to earnings, economic growth and consumption,” said Stephen Wood, who helps manage $151 billion as senior portfolio strategist at Russell Investments in New York. “We’re definitely getting mixed signals.”

Stocks extended gains after the Federal Reserve said in its regional business survey that the U.S. contraction slowed across several of the biggest regional economies last month, with some industries “stabilizing at a low level.” U.S. stocks yesterday halted a three-day advance after the government reported unexpected declines in retail sales and producer prices and Goldman Sachs Group Inc. sold shares to boost capital.

VIX Retreats

The benchmark index for U.S. stock options slid to the lowest in more than six months. The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 4 percent to 36.17. The index, which measures the cost of using options as insurance against declines in the S&P 500, is down from a record 80.86 in November yet still almost double the 20 average over its 19-year history.

The S&P 500 has rebounded 26 percent from a 12-year low on March 9 as lenders from Citigroup to JPMorgan Chase & Co. said they made money in the first two months of 2009 and Treasury Secretary Timothy Geithner announced plans to finance as much as $1 trillion in purchases of financial firms’ distressed assets.

American Express rallied $2.19 to $20.62. Charge-offs for managed consumer accounts rose at a slower pace in March as it sold soured loans to investors. Financial stocks in the S&P 500 added 5.6 percent for the best performance among 10 industry groups.

‘Shorts Ran to Cover’

“The shorts ran to cover when the American Express numbers weren’t as bad as expected,” said Justin Wiggs, an equity trader at Stifel Nicolaus & Co. in Baltimore. “We’re seeing a bit of resiliency in the higher-end consumer.” In a short sale, investors sell borrowed securities and agree to return them at a later date, profiting from any drop in the stock.

P&G, the largest consumer-products company, added $1.50 to $48.75 after boosting its quarterly dividend by 10 percent, one of a shrinking list of S&P 500 companies that have raised their payout for at least 25 straight years.

Dr Pepper Snapple rose 42 cents to $19.78 after Goldman Sachs analysts added the shares to their “conviction buy” list and said in a report that “fundamentals are trending even more favorably than we anticipated and valuation is still undemanding.”

‘Still in the Black’

CSX climbed $2.20 to $30.59. The third-largest U.S. railroad company reported a first-quarter net profit of $246 million, or 62 cents a shares, exceeding the 51-cent average estimate of 17 analysts surveyed by Bloomberg.

“Despite all the talk about downsizing and cutbacks, companies are still in the black and making money,” said Peter Sorrentino, who helps manage $13.3 billion at Huntington Asset Management in Cincinnati. “It’s a reason to be optimistic on stocks in general.”

Intel dropped 39 cents, or 2.4 percent, to $15.62 after Chief Executive Paul Otellini said his company still faces a “fragile global economic environment.” Sales of personal- computer processors likely bottomed out in the first quarter after manufacturers worked through their stockpiles of parts, he said. While the worst of the slump is “probably now behind us,” Intel isn’t ready to predict growth this quarter, Otellini added.

Fed Purchases

Treasury 10-year notes rose for a third day as the Federal Reserve announced the government securities it plans to purchase over the next two weeks.

The benchmark notes earlier fell as the central bank paused its buybacks after purchasing $10.34 billion in U.S. debt the last two days. It will resume tomorrow with a purchase of inflation-protected securities. The U.S. contraction slowed in March, the central bank’s regional business survey showed.

“You get the Fed purchasing in a week with no supply,” said Brian Brennan, who helps oversee $13 billion in fixed- income assets at T. Rowe Price Group Inc. in Baltimore. “Fed purchases bring yields down. Supply backs up yields. It’s the ying and yang of our Federal government.”

The yield on the 10-year note fell three basis points, or 0.03 percentage point, to 2.76 percent at 3:30 p.m. in New York, according to BGCantor Market Data. The 2.75 percent security due February 2019 rose 9/32, or $2.81 per $1,000 face amount, to 99 29/32.

Inflation Protection

The Fed will buy Treasury Inflation Protected Securities maturing from January 2010 to April 2032 tomorrow. On April 21 it will buy nominal Treasuries maturing from February 2016 to February 2019; on April 23, maturities from May 2012 to August 2013; April 27, maturities from September 2013 to February 2016; and April 30, maturities from August 2019 to February 2026.

The central bank has bought $51.214 billion in U.S. debt since the program began on March 25, and plans to purchase as much as $300 billion over six months in an effort to lower consumer borrowing costs.

Ten-year yields have traded between 2.45 percent and 3.05 percent since late January as the Fed’s purchase program offset concerns about record Treasury supply. The yield averaged 4.25 percent for the past five years.

“We are in an interesting but tedious environment,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut at RBS Securities Inc., one of 16 primary dealers that trade with the Fed. “We are in a range, but we can’t find any compelling motivation to break the range.”

Stockpiles at 19-Year High

Crude oil fell after a government report showed that U.S. stockpiles climbed to the highest level in almost 19 years as demand dropped.

Inventories rose 5.67 million barrels to 366.7 million last week, the highest since September 1990, the Energy Department said today. Total daily fuel demand averaged over the past four weeks was 18.7 million barrels, down 5.2 percent from a year earlier, according to the department.

“Demand stinks,” said Chip Hodge, who oversees a $9 billion natural-resource-company bond portfolio as managing director at MFC Global Investment Management in Boston. “Until you see consumption increase and inventories drop, this market will remain range-bound.”

Crude oil for May delivery fell 16 cents, or 0.3 percent, to $49.25 a barrel at 2:52 p.m. on the New York Mercantile Exchange, the lowest settlement since April 7. Futures have traded between $43.62 and $54.66 a barrel over the past month. Prices are up 10 percent so far this year.

Rising Demand

Copper rose the most in more than a week as declines in inventories signaled demand is rising for the metal used in pipes and wires.

Stockpiles monitored by the London Metal Exchange tumbled 2.4 percent to 480,400 metric tons. That’s the biggest one-day drop since Oct. 21. Copper prices have surged 57 percent this year on speculation that government spending will revive global growth and spur consumption of raw materials.

“The market has strengthened on the back of the decline in LME copper inventories,” Edward Meir, an analyst at MF Global Ltd. in Darien, Connecticut, said today in a report.

Copper futures for July delivery climbed 8.05 cents, or 3.8 percent, to $2.209 a pound on the New York Mercantile Exchange’s Comex division.

The price of copper will continue to climb as demand increases in emerging economies including China, the world’s biggest metals user, said Michael Cuggino, the chief executive officer of Pacific Heights Asset Management LLC.

“What’s happening in copper now is a reflection of the broader global economic story,” said Cuggino, who also helps oversee $3.4 billion as a portfolio manager. “We’re still expecting to see long-term global growth that’s going to drive demand for copper and the other commodities,” he said yesterday in an interview in New York.

Cuggino recommends investors buy shares of Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, as a way to take advantage of higher metals prices. Phoenix-based Freeport rose 81 percent this year before today.

Global Stocks, Oil Gain as Treasuries, VIX Fall; Banks Advance

Global Stocks, Oil Gain as Treasuries, VIX Fall; Banks Advance

April 9 (Bloomberg) -- Global stocks rallied, driving the benchmark index of investor anxiety to a six-month low, as better-than-estimated earnings at Wells Fargo & Co. and speculation American banks will pass government stress tests boosted confidence in the financial system. Oil gained and Treasuries fell.

Wells Fargo, the second-largest U.S. lender, jumped 32 percent. Bank of America Corp. climbed 35 percent and JPMorgan Chase & Co. added 19 percent on a New York Times report that all 19 banks examined by the government will pass a review to determine their viability should the recession deepen. Barclays Plc surged 12 percent in London after agreeing to sell its iShares unit. The VIX, as Wall Street’s stock market “fear gauge” is known, fell to its lowest level since September.

The Standard & Poor’s 500 Index added 3.8 percent to a two- month high of 856.56 and capped a fifth straight weekly gain, the longest stretch since the bear market started in October 2007. The Dow Jones Industrial Average rose 246.27, or 3.1 percent, to 8,083.38. Eleven stocks gained for each that fell on the New York Stock Exchange.

“The worst is behind us,” said Alan Gayle, a Richmond, Virginia-based senior investment strategist at RidgeWorth Capital Management, which oversees $60 billion. “We’re working our way through the credit crisis and that’s why the market is cheering.”

VIX Under 40

Stocks also rallied after the government reported that initial jobless claims in the U.S. decreased more than economists estimated last week and the trade deficit unexpectedly shrank 28 percent, the most since 1996, as imports decreased. The S&P 500 climbed 1.7 percent in the holiday- shortened week, while the Dow added 0.8 percent.

Financial markets will be closed tomorrow to mark the Good Friday holiday.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell to its lowest closing level since Sept. 26, dropping 5.1 percent to 36.87. The index measures the cost of using options as insurance against declines in the S&P 500.

Before Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history in September, the VIX surpassed 40 during four prior periods in its 19-year history and never stayed above that level for more than 10 days. It’s closed below 40 only eight times since Sept. 29.

Benchmark stock gauges in Germany and Hong Kong added 3 percent as the MSCI World Index of 23 developed nations increased 3 percent, the most in a week.

The S&P 500 has rallied 27 percent since reaching the lowest level in a dozen years on March 9 as banks from Citigroup to JPMorgan said they made money in the first two months of the year and Treasury Secretary Timothy Geithner announced plans to finance purchases of toxic assets from financial firms. The index is still down 5.2 percent in 2009 after tumbling 38 percent last year, its worst annual return since the Great Depression.

Wells Fargo Beats

Wells Fargo jumped $4.72, or 32 percent, to $19.61 for its best rally in almost nine months. The second-biggest U.S. home lender reported a record first-quarter profit that beat the most optimistic Wall Street estimates, sparking speculation that the industry’s slump has ended.

Net income rose about 50 percent from $2 billion a year earlier. Per-share profit equaled about 55 cents, more than double the average estimate of analysts surveyed by Bloomberg. The acquisition of Wachovia Corp., whose overdue home loans helped cut Wells Fargo’s stock price in half this year, is exceeding expectations, the statement said.

“Earnings expectations are so low, there’s wide open potential for pleasant surprises,” said Bruce Bittles, the Nashville-based chief investment strategist at Robert W. Baird & Co., which oversees $16 billion. “We see stocks moving higher into late summer.”

Banking Rally

Bank of America, the largest bank by assets, gained 35 percent to $9.55 and Citigroup climbed 13 percent to $3.04. JPMorgan, the biggest by market value, added 19 percent to $32.75. Fifth Third Bancorp surged 36 percent to $3.58.

The S&P 500 Financials Index, a gauge of 80 banks, insurers and investment firms, jumped 16 percent to its highest level in three months. The group has rallied 75 percent since its March 6 low.

Some of the largest lenders may still need additional capital infusions from investors or taxpayers, the New York Times said, citing unidentified officials involved in the research. Regulators may use the findings of the examinations, likely to be completed this month, to push some companies to sell distressed assets, according to the report.

China’s Premier Wen ‘Worried’

China’s Premier Wen ‘Worried’ on Safety of Treasuries (Update2)

March 13 (Bloomberg) -- China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

White House National Economic Council Director Lawrence Summers, asked about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline. President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of debt sales to fund a $787 billion stimulus package.

“China’s purchases of American debt have been one of the few bolts keeping the wheels on the global economy,” said Phil Deans, a professor of international affairs at Temple University in Tokyo. “If China stops buying, where does Obama’s borrowing to fund his stimulus come from?”

Treasuries declined after Wen’s remarks, before recouping the losses later. Yields on benchmark 10-year notes rose as high as 2.96 percent, from 2.85 percent late yesterday, and were at 2.83 percent at 12:27 p.m. in New York.

Loss on Treasuries

Treasuries have handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Chinese investors increased their holdings of the bonds 46 percent to $696 billion in 2008, according to U.S. Treasury data.

“Of course we are concerned about the safety of our assets,” Wen said after the annual meeting of the legislature. “To be honest, I am a little bit worried.”

Summers said that taking “austerity” measures would be even worse for the economy and financial markets, which he said he tracks “very closely.” Answering questions after a speech at the Brookings Institution in Washington, he said it’s “fiscally responsible” to implement measures in the near term that will restore longer-term growth.

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”

Haven Demand

Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.

Currency market moves have been more favorable to holding U.S. bonds this year. Chinese investors who bought Japanese government bonds would have lost 7.7 percent so far this year in yuan terms, compared with a 7.3 percent loss for holders of German bunds, according to the Merrill Lynch indexes.

“China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong- based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.

G-20 Meeting

U.S. Treasury Secretary Timothy Geithner will defend his spending plans at the Group of 20 meeting near London this weekend. French Finance Minister Christine Lagarde and Germany’s Peer Steinbrueck want the summit to focus on improving regulation and restraints on the finance industry.

The U.S. trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis, the People’s Bank of China said in a report today. The dollar has dropped 17 percent against the yuan since China ended a fixed exchange rate in July 2005. It was little changed at 6.8384 yuan today.

“China is worried that the U.S. may solve its problems by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

U.S. Secretary of State Hillary Clinton, while visiting officials in Beijing on Feb. 22, urged China to continue buying U.S. debt, which she called a “safe investment.” She didn’t press China on its foreign-exchange policy, backing away from January comments by Geithner that the Chinese government manipulates its currency to boost exports.

Exchange Rates

China will maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation’s exporters, Premier Wen said.

While the yuan has weakened 0.2 percent against the dollar this year, there has been a “drastic depreciation” in the euro and Asian currencies that has put a lot of pressure on Chinese exporters, Wen said. The currency has gained 8.6 percent against the euro this year and 6 percent against the Philippine peso.

“Our goal is to maintain a basically stable yuan at a balanced and reasonable level,” Wen said on the final day of the meeting of the National People’s Congress. “At the end of the day, it is our own decision and any other countries can’t press us to depreciate or appreciate our currency.”

Export Slump

Collapsing exports have dragged China’s economy to its weakest growth in seven years and eliminated the jobs of millions of migrant workers. Wen reaffirmed China’s target of an 8 percent expansion in 2009 as economies from the U.S. to Japan contract, saying the goal was “difficult but possible” to achieve.

China can add “at any time” to 4 trillion yuan ($585 billion) of stimulus measures to revive the world’s third-biggest economy, Wen said. Gross domestic product expanded 6.8 percent in the fourth quarter, compared with 9 percent for all of last year and 13 percent for 2007.

“We have reserved adequate ammunition,” Wen said, adding that the fiscal deficit is under control and the debt level still safe. “At any time, we can introduce new stimulus.”

Delegates of China’s legislative advisory body suggested that the government diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said on March 4 that the nation’s $200 billion sovereign wealth fund may invest in “undervalued” commodities.

Clinton Urges China to Keep Buying Treasuries

Clinton Urges China to Keep Buying Treasuries (Update3)

Feb. 22 (Bloomberg) -- U.S. Secretary of State Hillary Clinton urged China to continue buying Treasury bonds to help finance President Barack Obama’s stimulus plan.

The two nations’ economies are intertwined and it wouldn’t be in China’s interest if the U.S. were unable to sell its government debt, Clinton said in an interview with Shanghai’s Dragon Television today. China knows it needs a healthy American economy as its biggest export market, she said, adding that the U.S. must take “drastic measures” to stimulate growth.

“We are truly going to rise or fall together,” Clinton said. “By continuing to support American treasury instruments, the Chinese are recognizing” that interconnection.

China, the largest holder of U.S. government debt, boosted purchases by 46 percent last year to a record $696.2 billion as the global recession spurred demand for the securities. The Chinese government said last week it plans to keep buying Treasuries, adding that future purchases will depend on the preservation of their value and the safety of the investment.

China continued to buy the U.S. debt amid a 27 percent increase in its holdings of foreign currencies in 2008. JPMorgan Chase & Co. predicted in a Feb. 6 report that China will keep buying Treasuries “not only for the near-term stability of the global financial system, but also because there is no viable and liquid alternative market in which to invest China’s massive and still growing reserves.”

Chinese attempts to diversify from Treasuries into more risk-oriented assets have not fared well. It has lost at least half of the $10.5 billion it invested in New York-based Blackstone, Morgan Stanley and TPG Inc. since mid-2007.

China’s currency reserves of $1.95 trillion are about 29 percent of the world total.

Flying Home

Clinton also pledged that America would not practice protectionism. She said the “Buy American” provision of the stimulus package, which says U.S. goods must be used for infrastructure projects, would be carried out in compliance with existing international trade agreements.

Clinton today wrapped up a weeklong trip to Asia, her first as Obama’s top diplomat, having already stopped in Japan, Indonesia and South Korea. She attended services at a state- sanctioned church, and met with community organizers before starting the trip home. She met U.S. troops at Yokota Air Base in Japan on a refueling stop.

China and the U.S. will continue the bilateral strategic dialogue begun during the Bush administration, expanding it to include security and political issues, Clinton said yesterday after meeting with Chinese Foreign Minister Yang Jiechi.

Clinton will co-chair the dialogue on the U.S. side with Treasury Secretary Timothy Geithner, she said today.