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If they are suffering from florida problems, and maybe just filtered on particular searches, then it probably won't make any difference.
What makes you think that Google hates them? Do you know that they're doing something that might get them booted? Do they rank well in other SE's?
ADDED: Funny thing... the post sits there for hours with no reply, then suddenly gets two at virtually the same time. Plasma, you beat me by a matter of seconds.
He is in a similar industry and has other positions that are excellent - to have a reciprical arrangement would be good from that standpoint but I don't want to tbe seen to mixing with the "wrong crowd". Would it hurt if he linked to me but I didn't link to him?
Since Florida he's been dropped altogether
Is that just because you can't find the site in the SERPs for certain terms? Have you checked to see if any of the sites pages are indexed (try site:that domain.com thatdomain.com)? Or is it because toolbar PR has suddenly turned gray?
Haven't heard of too many actual bans coming out of Florida and WW's where you would here of them first.
It feels wrong to refuse this opportunity but I don't want to take any chances.
About the linktrade: if you're overly worried and may potentially lose sleep, I'd say, as above, don't do it. If you check his site manually and you see no sign of portals, cloaking, spammy stuff etc. then I don't see why just a grey bar would keep you from trading links.
Think about G's policy: "would you do it when there where no search engines?"
Would you even consider turning him down if there where no SEs?
Ofcourse it would be unfair to have G punishing sites on behalf of incoming links, but since a few weeks my opinion on what G will/won't do changed. Instead of thinking about what's fair or not, all they want is clean SERPs.
If they have the chance to take out lots of spammy sites, but with the side effect of taking out large informative good site, I don't think they will hestitate to do that anymore.
A site I suspect may have been banned from Google wants to exchange links, they get good traffic
So where is all there "good traffic" coming from? VERY few sites get banned. Only link *to* sites that are ontopic and if they truely are banned, don't link at all.