TREASURY DEPARTMENT NEWS

TREASURY DEPARTMENT NEWS

President’s Working Group on Financial Markets Releases Money Market Funds Report

WASHINGTON – The President's Working Group on Financial Markets (PWG) today released a report detailing a number of options for reforms related to money market funds.　 These options address the vulnerabilities of money market funds that contributed to the financial crisis in 2008. 　Following the crisis, the Treasury Department directed the PWG to develop this report to assess options for mitigating the systemic risk associated with money market funds and reducing their susceptibility to runs. The PWG agrees that, while a number of positive reforms have been implemented, more should be done to address this susceptibility.　

The PWG now requests that the Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, consider the options discussed in this report and pursue appropriate next steps. 　To assist the FSOC in any analysis, the Securities and Exchange Commission, as the regulator of money market funds, will solicit public comments, including the production of empirical data and other information in support of such comments.　 A notice and request for comment will be published in the near future.　

Today's release is one part in a series of steps that the regulatory community will be taking in the coming months to implement financial reform and to help ensure that the financial system continues to become more resilient.

The full report is available at the link below.

Full Report

　

2010 U.S. – Israel Joint Economic Development Group Statement

JERUSALEM – Delegations of the United States and Israel discussed the status of the U.S. and Israeli economies, the progress of Israel's economic reforms, and Israel's progress in meeting economic conditionality to be eligible for the FY 2011 tranche of $333 million in U.S. loan guarantees at the 2010 U.S.-Israel Joint Economic Development Group (JEDG) meeting held today in Jerusalem.　

The U.S. delegation was led by Charles Collyns, Assistant Secretary of the Treasury for International Affairs, and Tom Engle, Director of the Office of Monetary Affairs at the Department of State. The Israeli delegation was led by Stanley Fischer, Governor of the Bank of Israel, Haim Shani, Director General of the Israeli Ministry of Finance, and Eugene Kandel, Chairman of the Israeli National Economic Council.

During the 2010 JEDG, Israel presented its progress towards meeting the 2010 terms and conditions, as agreed to at the June 2009 JEDG,　 that will govern the U.S. Government's decision to make available the FY 2011 tranche of loan guarantees for use by Israel, subject to statutory deductions.　 The U.S. delegation commended Israel for progress on its 2010 targets, including a maximum 1.7 percent real increase in real expenditures over 2009 spending, a maximum 5.5 percent of GDP budget deficit, the approval of a new medium-term fiscal rule, and the creation of long-term analysis of the demographic strains on Israel's budget outlook.　

The delegations also discussed U.S. regulatory reform, ways to strengthen Israel's fiscal rule, and Israel's economic reform agenda, including reforms in Israel's labor market, Land Authority, seaports, energy sector and high-tech industry.　　

The United States looks forward to receiving a report from the Government of Israel in early 2011 detailing whether it has met 2010 conditions connected to the U.S. Fiscal Year (FY) 2011 loan guarantee tranche of $333 million.　

The U.S. Fiscal Year (FY) 2003 Wartime Supplemental Appropriations Act authorized $9 billion in loan guarantees be made available to Israel over time, subject to deductions. A 2006 Amendment extended this program until September 30, 2011, allowing unused amounts to carry over until 2012.　 The U.S- Israel Loan Guarantee Commitment Agreement (LGCA) sets forth the terms and conditions for issuing guarantees in exchange for meeting specific economic conditions set forth each year at the JEDG. The U.S. 2011 loan guarantee tranche of $333.3 million could be made available to the Government of Israel provided that Israel meets the requisite 2010 conditions, subject to statutory deductions. As of October 1, 2010, Israel has $3.481 billion available in U.S. loan guarantees, subject to statutory deductions.　　

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LINKS

Link to Signed JEDG Document

　

　

Treasury Announces Plan to Continue to Sell Citigroup Common Stock

WASHINGTON – The U.S. Department of the Treasury today announced its continued sale of its holdings of Citigroup common stock.　 Treasury has entered into a fourth pre-arranged written trading plan under which Morgan Stanley, as Treasury's sales agent, will have discretionary authority to sell 1.5 billion shares of Citigroup common stock under certain parameters.　　

Treasury invested a total of $45 billion in Citigroup through the Troubled Asset Relief Program (TARP).　 To date, taxpayers have received a total of $41.6 billion in revenue from this investment through repayments, dividends and interest, the sale of common stock, and the sale of other securities.

Treasury received 7.7 billion shares of Citigroup common stock last summer as part of the exchange offers conducted by Citigroup to strengthen its capital base.　 Treasury exchanged the $25 billion in preferred stock it received in connection with Citigroup's participation in the Capital Purchase Program for common shares at a price of $3.25 per common share. On September 30, Treasury announced the completion of its sale of a total of approximately 4.1 billion shares of Citigroup common stock across three trading plans and its receipt of approximately $16.4 billion in gross proceeds from the sale.

Treasury currently owns approximately 3.6 billion shares of Citigroup common stock and expects to continue selling its shares in the market in an orderly fashion.　The sale of 1.5 billion additional shares of Citigroup common stock, as authorized pursuant to the fourth trading plan, would bring Treasury's holdings of Citigroup common stock to approximately 7 percent of total shares outstanding – down from a high of approximately 27 percent. It would also mean that Treasury had disposed of nearly three-quarters of its original 7.7 billion share common stock stake in Citigroup.

As part of the disposition program, Morgan Stanley agreed to provide opportunities for involvement by small broker-dealers, including minority- and women-owned broker-dealers.　 Morgan Stanley has entered into agreements with the following 12 broker-dealers: Cabrera Capital Markets, LLC; Great Pacific Securities, Inc.; Guzman & Company; Kaufman Bros., L.P.; Loop Capital Markets; M. Ramsey King Securities, Inc.; Mischler Financial Group; M.R. Beal & Company; Sturdivant & Co. Inc.; Valdés and Moreno, Inc.; The Williams Capital Group, L.P.; and Wm Smith & Co.

Because Treasury will not sell shares during the blackout period set by Citigroup in advance of its fourth quarter earnings release, which period is expected to begin on January 1, 2011, this fourth trading plan will terminate on December 31, 2010 even if all shares have not been sold by that time.　　

The offering will be made only by means of a prospectus.　 Morgan Stanley & Co. Incorporated is acting as a sales agent to Treasury. Copies of the prospectus supplement and accompanying prospectus relating to the offering may be obtained from Morgan Stanley & Co. Incorporated, Attn: Prospectus Department, 180 Varick Street, New York, NY 10014, by emailing prospectus@morganstanley.com or by calling toll-free in the United States 1-866-718-1649.

Joint Statement of Timothy Geithner, Secretary of the Treasury, and Jeffrey Zients, Acting Director of the Office of Management and Budget, on Budget Results for Fiscal Year 2010

WASHINGTON, D.C. – U.S. Treasury Secretary Tim Geithner and Office of Management and Budget (OMB) Acting Director Jeffrey Zients today released details of the final fiscal year (FY) 2010 budget results. In making the announcement, Geithner and Zients underscored the Administration's commitment to getting Federal finances back on a sustainable path and ending emergency programs that proved instrumental to reviving growth while beginning the process of bringing down our deficit. As a result, our fiscal outlook, which remains challenging, has improved over the past year.

Due to careful stewardship of the emergency programs, their effect on the deficit was much smaller than previously estimated. The Troubled Asset Relief Program (TARP) had outlays of just $9.0 billion in FY 2010, which was $25.9 billion or 74 percent below previous estimates from July 2010. 　Aid to Fannie Mae and Freddie Mac was $52.6 billion in FY 2010 – $16.4 billion or 24 percent less than the most recent forecast. This played a large part in reducing the deficit, which as a percentage of gross domestic product (GDP) fell to 8.9 percent, down from 10.0 percent of GDP in FY 2009. This improvement – 1.1 percent of GDP – was the most rapid one-year improvement since FY 1987.

"By carefully managing the emergency initiatives to stop the financial panic and by accelerating our exit from those investments, we have significantly lowered the cost to taxpayers, bringing the costs of the financial rescue down by more than $240 billion this year.　 However, we still have a long way to go to repair the damage to the economy and address the long-term deficits caused by the crisis," Secretary Geithner explained.

"Thanks in large part to the tough decisions this Administration made over the past two years, the economy is recovering and we're spurring economic growth and job creation. Because the President believes that we must also work to get back on a fiscally sustainable path, our FY 2012 Budget policy process will continue to enforce the three-year, non-security discretionary spending freeze and continue our efforts to put the nation on firm fiscal footing," Acting Director Zients stated.　

Summary of Fiscal Year 2010 Budget Results

Year-end data from the September 2010 Monthly Treasury Statement of Receipts and Outlays of the United States Government show that the deficit for FY 2010 was $1.294 trillion, $122 billion or nine percent less than in FY 2009, and $177 billion or 12 percent less than estimated in the July 2010 Mid-Session Review of the FY 2011 Budget (MSR). The deficit was also $261 billion or 17 percent less than the estimate in the President's FY 2011 Budget submitted to Congress in February 2010. As a percentage of GDP, the deficit fell to 8.9 percent, down from 10.0 percent of GDP in FY 2009.

Table 1. Total Receipts, Outlays, and Deficit (in billions of dollars)

　
Receipts

Outlays

Deficit

FY 2009 Actual
2,104

3,520

-1,416

　　　 Percentage of GDP
14.9%

25.0%

10.0%

FY 2010 Estimates

　　　　2011 Budget
2,165

3,721

-1,556

　　　　2011 Mid-Session Review
2,132

3,603

-1,471

FY 2010 Actual
2,162

3,456

-1,294

　　　 Percentage of GDP
14.9%

23.8%

8.9%

The decline in the deficit from last year was due to a combination of higher receipts and lower outlays. Government receipts totaled $2.162 trillion in FY 2010. Receipts were $57 billion higher than in FY 2009, an increase of 2.7 percent. This turnaround in receipts, after two years of decline, was due to higher corporation income tax receipts and receipts from the Federal Reserve. These increases were partially offset by a decline in individual income and payroll tax receipts. As a percentage of GDP, receipts remained unchanged at 14.9 percent.

Outlays for FY 2010 were $64 billion less than in FY 2009, a decrease of 1.8 percent. As a percentage of GDP, total outlays shrank from 25.0 percent in FY 2009 to 23.8 percent in FY 2010. This reduction in outlays – of 1.2 percent of GDP – was the fastest one-year reduction since FY 1984. Spending for three large programs related to the financial crisis declined by $242 billion, year over year, from $272 billion in FY 2009 to $30 billion in FY 2010: the TARP; assistance to Fannie Mae and Freddie Mac; and deposit insurance activities of the Federal Deposit Insurance Corporation and the National Credit Union Administration. Excluding the $242 billion decline in outlays for these three programs, outlays for the remaining government agencies and programs increased by a net $178 billion or 5.5 percent. Spending in FY 2010 increased for major entitlement programs such as Social Security, Medicare and Medicaid, and unemployment benefits.

At $1.294 trillion, the FY 2010 deficit was $177 billion less than projected in the MSR.　 Receipts were $30 billion above the MSR estimate, while outlays were $147 billion below the MSR estimate. Although lower than expected, the FY 2010 deficit remained elevated as a result of the severe economic recession, high unemployment, and the financial crisis that were inherited by the current Administration. In order to shore up the economy, the Administration put in place temporary economic stabilization and recovery efforts, including the American Recovery and Reinvestment Act (Recovery Act), which provided much needed tax relief and jobs. The Administration also continued emergency economic stabilization efforts including the TARP, initiated by the previous administration. The TARP has proved to be effective and will cost far less than originally expected. In part because of these measures, the economy began to grow again in the second half of 2009, and the FY 2010 budget results reflect improving economic conditions.　

Federal borrowing from the public, net of financial assets, increased by $1.294 trillion during FY 2010 to $8.004 trillion, or 55.1 percent of GDP. [1]

Fiscal Year 2010 Receipts

Total receipts for FY 2010 were $2.162 trillion, $30 billion higher than the MSR estimate of $2.132 trillion. Higher-than-expected collections of individual income taxes, corporation income taxes, and miscellaneous receipts accounted for most of the net increase in receipts relative to the MSR. Table 2 displays actual receipts and estimates from the MSR by source.

·　　　　　　　　 Individual income taxes were $899 billion, $14 billion higher than the MSR estimate.　 Delay in enactment of the Administration's proposal to extend bonus depreciation for certain property accounted for $4 billion of the increase in individual income tax receipts relative to the MSR estimate. Higher-than-estimated withholding, attributable primarily to higher-than-anticipated wages, accounted for most of the remaining increase in individual income tax receipts relative to the MSR estimate.　　　　　　

·　　　　　　　　 Corporation income taxes were $191 billion, $11 billion higher than the MSR estimate.　 Delay in enactment of the Administration's proposal to extend bonus depreciation for certain property increased corporation income tax payments $5 billion relative to the MSR. The remaining increase was attributable to increased corporation income tax payments and reduced refunds, attributable to higher-than-expected corporate profits.　　　　

·　　　　　　　　 Social insurance and retirement receipts were $865 billion, the same as the MSR estimate, due to small offsetting differences among the sources of this category of receipts.　　　　　　　　　　　

·　　　　　　　　 Excise taxes were $67 billion, $3 billion lower than the MSR estimate of $70 billion.　 This decline was attributable to lower-than-expected demand for taxed goods and higher-than-expected refunds.　　　　

·　　　　　　　　 Estate and gift taxes were $19 billion, the same as the MSR estimate.　

·　　　　　　　　 Customs duties were $25 billion, $2 billion higher than the MSR estimate of $23 billion.　 This increase was attributable to higher-than-expected imports of taxed goods.

·　　　　　　　　 Miscellaneous receipts were $96 billion, $5 billion higher than the MSR estimate.　 Higher-than-expected deposits of earnings by the Federal Reserve System, attributable to higher-than-expected returns on its investment portfolio and higher-than-expected earnings on its foreign currency holdings, accounted for $3 billion of the increase in miscellaneous receipts relative to the MSR estimate.

·　　　　　　　　 The MSR included an allowance for jobs initiatives, which reduced expected receipts by $1 billion. Delay in enactment of a job creation package increased FY 2010 receipts $1 billion relative to the MSR.　　　　　　　

Fiscal Year 2010 Outlays

Total outlays were $3.456 trillion for FY 2010, which was $147 billion below the MSR estimate. Outlays were lower than estimated in the MSR for a number of agencies. The difference from the MSR estimate was $10 billion or more for the Departments of Agriculture, Defense, and Treasury; the Social Security Administration; and the Federal Deposit Insurance Corporation. The difference was $5 billion or more for the Departments of Health and Human Services, Homeland Security, Labor, Transportation, and Veterans Affairs. Within the Department of Treasury, TARP outlays were $26 billion less than projected in the MSR and outlays for assistance to the Government-sponsored enterprises, Fannie Mae and Freddie Mac, were $16 billion less than the MSR estimate.

Table 3 displays actual outlays by agency and major program as well as estimates from the Budget and the MSR. The largest changes in outlays from the MSR were in the following areas:

Department of Agriculture -- Outlays for the Department of Agriculture were $129.5 billion, $10.8 billion below the MSR estimate.　Major differences from MSR projections include:

Food and Nutrition Service outlays were $3.9 billion less than MSR estimates.　 Actual outlays for the Supplemental Nutrition Assistance Program were $2.1 billion lower than MSR estimates. Outlays for the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) were also lower by roughly $1.2 billion, as actual WIC participation and food costs were lower than expected.　　
Outlays for farm programs were $3.2 billion less than expected. 　First, outlays for crop insurance were about $2 billion less than projected in the MSR because claims for indemnities were significantly lower than anticipated due to good weather and higher-than-anticipated agricultural price indices. In addition, the Commodity Credit Corporation's (CCC) outlays were approximately $1.2 billion below MSR estimates. Roughly $900 million of that difference was due to higher-than-anticipated prices resulting in lower-than-anticipated outlays for commodity programs and commodity loans.　Rather than taking out commodity loans at harvest and waiting for prices to rebound before selling their crops, farmers sold their crops soon after harvest.　The majority of the remainder of the CCC decrease was due to lower-than-anticipated commodity purchases, including $265 million less than anticipated for food aid programs.　　
Other programs with major differences included USDA's Rural Development (RD) program, outlays for which were $1.8 billion below MSR estimates. The MSR greatly underestimated the actual rate of RD loan prepayments ($1.3 billion).　Due to current low interest rates, borrowers have paid back their loans more quickly than expected. Outlays for RD's water and waste programs were $400 million below MSR estimates as projects funded through the Recovery Act took precedence. In addition, Forest Service outlays were $875 million below MSR estimates, primarily due to the Wildland Fire Management account ($321 million) and the Capital Improvement and Maintenance account ($280 million); both of these accounts received Recovery Act funding that did not outlay as fast as expected.　In addition, this fire season was milder than expected, resulting in outlays for fire management that were below the MSR estimate.　　

Department of Commerce -- Outlays for the Department of Commerce were $13.2 billion, $2.7 billion less than the MSR estimate.　Three-fifths of the difference is due to favorable performance of the 2010 Decennial Census, including higher-than-expected workforce productivity and a higher-than-expected Census questionnaire mail-back response rate that reduced the need for costly non-response follow-up operations, resulting in no need to tap contingency funds set aside for disasters or major operational failures.　

Department of Defense -- Outlays for the Department of Defense (DoD) were $666.7 billion, $20.1 billion less than estimated in the MSR. Nearly half of the total difference was due to slower-than-expected outlays in the Department's procurement accounts, with much of the shortfall resulting from late passage of the FY 2010 Supplemental Appropriations Act. For example, DoD spent $1.4 billion less than expected for Air Force aircraft (especially C-130 Hercules transport aircraft), $1.8 billion less than projected for the Afghanistan Security Forces Fund, and $1.0 billion less than projected for Mine Resistant Ambush Protected Vehicles purchases. Another example of lower-than-projected outlays was in the DoD Working Capital funds, which were $2.5 billion lower than expected due to higher-than-projected sales and lower-than-anticipated fuel costs.　　　

Department of Education -- Outlays for the Department of Education　were $92.9 billion in FY 2010, $4.5 billion less than the MSR estimate. This difference was largely due to outlays from the State Fiscal Stabilization Fund, which were $3.6 billion lower than estimated in the MSR. A variety of smaller Department of Education programs made up the remainder of the difference.

Department of Energy -- Outlays for the Department of Energy were $30.7 billion, $1.7 billion lower than the MSR estimate. Outlays for the Energy Efficiency and Renewable Energy account were $880 million below MSR estimates. Lower outlays for Fossil Energy, $193 million less than the MSR estimate, and Science, $219 million less than the MSR estimate, were due primarily to later than assumed awarding of funds. Outlays for the National Nuclear Security Administration were $823 million less than estimated in the MSR because of lags in contractors billing the Department of Energy for costs incurred at the end of the year.

Department of Health and Human Services -- Outlays for the Department of Health and Human Services (HHS) were $854.1 billion in FY 2010, $9.8 billion below the MSR estimate.　Medicare gross outlays were $525.6 billion, $7.3 billion or 1.3 percent less than MSR estimates. This difference was largely due to lower-than-expected Part B gross expenditures, which were $7.8 billion (3.5 percent) lower than projected in the MSR. The lower Part B outlays were partly due to lower-than-expected volume growth for Part B services. Part A expenditures finished FY 2010 about $600 million (0.3 percent) above MSR estimates, while Part D spending was about $300 million (0.6 percent) higher than projected.　Actual year-end Medicaid outlays were $1.7 billion (0.6 percent) lower than MSR estimates.　While year-end financial and enrollment data are still being finalized, the difference between the estimated and actual Medicaid spending growth appears to be primarily the result of lower-than-projected administrative spending, likely due to stronger efforts by States to control program spending. Actual year-end Children's Health Insurance Program (CHIP) outlays were $1.0 billion (11.5 percent) lower than MSR estimates.　The difference between the estimated and actual CHIP spending was due to lower-than-projected State spending for health coverage, compared with State estimates received during development of the MSR.　　While actual outlays were less than MSR estimates,　CHIP spending still increased by $341 million (4.5 percent) over FY 2009.　

Department of Homeland Security -- Outlays for the Department of Homeland Security were $44.5 billion, $7.3 billion less than the MSR estimate.　 Approximately $6 billion of　this difference was due to the later-than-expected passage of the FY 2010 Supplemental Appropriations Act, along with enactment in August of the FY 2010 Emergency Border Security Supplemental Appropriations Act.　Due to the late passage of these bills, the Department was required to limit spending from the Federal Emergency Management Agency's Disaster Relief Fund (DRF) to immediate needs or emergency funding only.　 Also, the mild 2010 hurricane season reduced the need to spend from the DRF.　In addition, Customs and Border Protection outlays were lower and funding provided in the border supplemental was carried over into FY 2011.　Outlays for the Transportation Security Administration (TSA) were $720 million below the MSR estimate.　This difference was attributable to slower-than-expected obligation of program funding for the TSA explosives detection systems and checkpoint programs, due in part to additional airport security projects not being ready for funding by the end of FY 2010.

Department of Housing and Urban Development -- Outlays for the Department of Housing and Urban Development were $60.1 billion in FY 2010, $1.0 billion below the MSR estimate.　More than half of this difference ($512 million) was due to lower-than-expected spending in the Community Development Fund because of slower spending from the $6.1 billion supplemental provided for 2008 disaster recovery (P.L. 110-329) and $2 billion provided for Neighborhood Stabilization Program II (P.L. 111-5).　Outlays for disaster recovery activities are often uneven.　The remainder of the difference was due to higher-than-expected interest earnings by the Government National Mortgage Association and higher-than-anticipated loan volume and recoveries from defaulted loans in the FHA General and Special Risk Insurance programs.　　

Department of Interior --Outlays for the Department of the Interior were $13.2 billion, $1.0 billion more than estimated in the MSR.　The MSR estimate included $2.0 billion in receipts from the Department of the Treasury relating to the Cobell v. Salazar settlement, which has not yet been approved by Congress.　This difference was offset in Treasury outlays. Offsetting receipts from Mineral Leasing, Public Lands were $256 million higher and Reclamation Fund, Royalties on Natural Resources had receipts that were $184 million higher than MSR estimates.

Department of Labor -- Outlays for the Department of Labor were $172.9 billion in FY 2010, $7.8 billion less than the MSR estimate.　Most of the difference was due to lower-than-expected spending on　unemployment compensation benefits, including Emergency Unemployment Compensation.　The insured unemployment rate has been lower than projected at MSR, which results in lower benefit outlays.　Lower-than-anticipated outlays at the Pension Benefit Guaranty Corporation accounted for about $1 billion of the difference, primarily due to higher PBGC interest income than estimated in the MSR.

Department of State -- Outlays for the Department of State were $23.8 billion in FY 2010, $2.0 billion below the MSR estimate. Most of the difference was due to the Global Health and Child Survival account, outlays for which　were $1.9 billion below the MSR estimate. Changes in State's operational planning process delayed obligations and transfers in this account by 3 months, thus delaying the typical fourth-quarter surge in outlays to purchase commodities for the President's Emergency Plan for AIDS Relief.

Department of Transportation -- Outlays for the Department of Transportation were $77.8 billion, $7.7 billion lower than projected in the MSR. The surface transportation programs, which were $6.0 billion below MSR projections, were affected by uncertainty due to numerous short-term program authorization extensions.　The largest difference was in the Federal Highway Administration, where Federal Aid Highway program outlays were $4.4 billion below the MSR projection.　In addition, Federal Transit Administration program outlays were $1.4 billion below expected levels.　For these two programs, short-term authorizations limited States' ability to obligate funds in a timely manner. Further, other program outlays were lower because States were focused on Recovery Act projects and using those funds before they expired.

Department of the Treasury -- Outlays for the Department of Treasury totaled $444.4 billion, $49.0 billion lower than the MSR estimate. Major differences from the MSR estimate include the following:

The TARP had net outlays of $9.0 billion for the loan, equity and housing programs, $25.9 billion lower than the MSR estimate. The decrease in net outlays was the result of lower-than-projected net disbursements in TARP investment, loan, and housing programs.　
FY 2010 outlays for the Small Business Lending Fund (SBLF) were below the MSR estimate by $1.0 billion because the legislation establishing the SBLF was not enacted until September 2010, and no outlays were recorded in FY 2010.
Outlays from payments to Fannie Mae and Freddie Mac under Treasury's Preferred Stock Purchase Agreements (PSPAs) were $52.6 billion in FY 2010, $16.4 billion less than estimated in the MSR.　This difference was due almost entirely to lower-than-expected outlays in the fourth quarter.　PSPA outlays are determined by the quarterly financial results of Fannie Mae and Freddie Mac as reported in their financial statements and are highly dependent on GAAP accounting standards and assumptions about future U.S. home prices.
Outlays for refundable tax credit programs and other Internal Revenue Code-based programs administered by Treasury and the Internal Revenue Service were about $7 billion lower than estimated in the MSR.　The First-Time Homebuyer Credit Program accounted for the largest part of this decrease, coming in lower than expected by more than $5 billion due to significantly fewer claims received and/or paid out during FY 2010 than previously estimated. In addition, a Recovery Act program that provides cash assistance to States in lieu of low-income housing tax credits outlaid $2.2 billion less than the MSR estimate, largely due to Congress not enacting the Administration's proposal to extend the program.　Outlays for the Child Tax Credit and Making Work Pay Credit were below MSR estimates by $1.8 billion and $2.4 billion, respectively, as the state of the economy generally　reduced taxpayers' eligibility for these credits.　These below-MSR outlays were partially offset by COBRA program outlays nearly $3.1 billion above the MSR estimate. This difference was attributable to a difference in classification of the COBRA payments between the MSR estimates and the year-end actual results, and was offset in the results for individual income tax receipts.
Interest on the public debt, which includes interest paid to Government accounts as well as interest paid to the public, was $414.0 billion, $5.8 billion lower than the MSR estimate.　Interest paid to Government accounts was $5.0 billion lower than projected, due primarily to lower-than-estimated interest paid to trust funds, as discussed below.　Interest paid to the public was $0.8 billion lower than estimated in the MSR due to lower-than-projected new borrowing, interest rates, and growth in the Consumer Price Index.
An additional $15.6 billion of the difference in Treasury outlays was due to intra-governmental interest transactions with credit financing accounts, including $11.7 billion lower-than-projected interest paid to credit financing accounts and $27.3 billion lower-than-anticipated receipts of interest from credit financing accounts.　(Interest received from credit financing accounts is reported in Treasury's aggregate offsetting receipts.)　Transactions with the TARP financing accounts comprised $17.1 billion of the total $15.6 billion difference, slightly offset by a $1.5 billion net difference in interest transactions with other credit financing accounts.　Relative to the MSR estimates, interest paid to TARP financing accounts was $1.9 billion lower and interest received from TARP financing accounts was $19.0 billion lower.　These differences were primarily the effects of TARP statutory requirements for interest rates; actual TARP financing account interest transactions are recorded using Treasury interest rates, while budget projections use market risk-adjusted rates.

Department of Veterans Affairs -- Outlays for the Department of Veterans Affairs were $108.3 billion in FY 2010, $6.9 billion less than the MSR estimate.　The Compensation and Pensions program accounted for nearly $4.9 billion of the difference.　Of the $4.9 billion, $4.0 billion represents supplemental funds provided for new Agent Orange claims by P.L. 111-212 that were expected to be obligated before the end of the fiscal year.　However, publication of the final regulation establishing the new Agent Orange presumptions took longer than originally expected.　Because of the mandatory 60-day waiting period required under the Congressional Review Act, none of these funds will be obligated until the end of October 2010.　Most of the remaining $0.9 billion in lower Compensation and Pensions outlays resulted from a decline in retroactive benefit payments from the levels observed earlier in the fiscal year, along with fewer-than-expected original claims for Disability Compensation.　In addition, $0.5 billion of the lower outlays occurred due to the Readjustment Benefits program.　Nearly 150,000 more service members and veterans than expected chose to use the less generous, but somewhat more flexible, Chapter 30 education benefits rather than convert to Chapter 33 education benefits.　An additional $0.6 billion reduction in outlays occurred in the Information Technology account, attributable to the implementation of the Project Management Accountability System, which resulted in unexpected development project delays and lower-than-expected staffing levels.

International Assistance Programs -- Outlays for International Assistance Programs were $20.0 billion in FY 2010, $1.3 billion below the MSR estimate. Outlays for the Millennium Challenge Corporation were $1.1 billion lower than projected in the MSR due to　lower-than-expected disbursements. In addition, outlays for the Agency for International Development (USAID) were $0.8 billion below the MSR estimate due primarily to lower-than-expected outlays in USAID's Operating Expenses account for its capital expansion program as well as late-fiscal-year reprogramming that further delayed outlays. The third major factor was Economic Support Fund outlays, which were $1.3 billion less than the MSR estimate due to longer-than-usual consultation with Congress on use of economic assistance funds in Afghanistan and Pakistan. Partially offsetting these reduced outlays, net outlays relating to Foreign Military Sales (FMS) were $2.1 billion higher than the MSR estimate due to higher spending on FMS contracts and lower-than-anticipated receipts.

Office of Personnel Management -- The Office of Personnel Management had outlays of $69.9 billion in FY 2010, $1.6 billion less than estimated in the MSR. The difference was almost entirely due to net outlays for the Employee and Retired Employee Health Benefits Funds, which were $1.5 billion lower than expected, due to lower-than-anticipated claims presented by experience-rated carriers.

Social Security Administration -- Outlays for the Social Security Administration (SSA) were $754.2 billion in FY 2010, $13.9 billion less than the MSR estimate. Nearly all of this difference arose because the MSR proposal for a second round of $250 Economic Recovery Payments has not been enacted.　The MSR estimated that this proposal would raise FY 2010 outlays for SSA by $12.5 billion.

Federal Deposit Insurance Corporation -- The Federal Deposit Insurance Corporation (FDIC) had　actual net outlays　of -$20.6 billion, $13.6 billion　higher than the MSR estimate of -$34.2 billion. The difference was largely driven by lower-than-anticipated proceeds from the liquidation of banks held in FDIC receivership. This difference was partially offset by lower-than-expected payments related to FDIC's guarantee of non-interest bearing transaction accounts.

National Credit Union Administration -- Net outlays for the National Credit Union Administration (NCUA) were -$11.4 billion, a difference of $1.4 billion from the MSR estimate of -$10.0 billion. Unanticipated borrowing to improve liquidity in the Temporary Corporate Credit Union Stabilization Fund led to a $1 billion assessment on Federally insured credit unions. The assessment was not included in the MSR estimate and primarily accounts for the difference.

Postal Service -- The United States Postal Service (USPS) had actual net outlays of $4.8 billion, $1.7 billion lower than the MSR estimate. The majority of the difference was due to lower-than-anticipated USPS expenses, allowing USPS to borrow $1.2 billion less from the Federal Financing Bank at the Department of the Treasury in FY 2010 than was expected.　　

Railroad Retirement Board -- FY 2010 outlays for the Railroad Retirement Board (RRB) of $5.1 billion were $1.1 billion lower than estimated in the MSR.　This was the result of higher-than-expected market gains on non-Federal securities held by the RRB.　The Railroad Retirement and Survivors Improvement Act of 2001 permitted assets of Tier II of the Railroad Retirement program to be invested in private equities.　Net returns for FY 2010 on non-Federal securities, including unrealized gains and losses, were $0.9 billion　higher than estimated in the MSR.

Undistributed Offsetting Receipts -- Undistributed offsetting receipts were $267.9 billion in FY 2010, $1.8 billion lower (higher net outlays)　than the MSR estimate. Interest received by trust funds was $185.8 billion, $4.0 billion lower than the MSR estimate (higher net outlays), due largely to lower-than-estimated interest earnings for the Civil Service Retirement and Disability Fund (CSRDF). Partially offsetting these higher net outlays were receipts of Federal employer payments into the CSRDF, which were $1.5 billion more than projected in the MSR.

To view the 2010 Budget Receipts by Source (table 2) and 2010 Budget Outlays by Agency (table 3), visit link below.

###

[1] This measure of net borrowing, as reported in the Monthly Treasury Statement, excludes the Federal Government's holdings of Fannie Mae and Freddie Mac preferred stock. If those stock holdings were included, net borrowing as a percentage of GDP would be smaller by one-half to one percentage point.

　

LINKS

2010 Budget Receipts by Source (table 2) and 2010 Budget Outlays by Agency (table 3)

　

Administration Announces Amtrak Refinancing Plan to Save Taxpayers More Than $160 Million

A refinancing agreement between the U.S. government and Amtrak will save taxpayers approximately $162 million, the U.S. Departments of Transportation and Treasury announced today.

“This announcement is good for taxpayers and important for the future of rail service in America,” said U.S. Treasury Secretary Tim Geithner. “Refinancing these leases will save taxpayers money while continuing the President’s vision of improving passenger rail service across the country at a lower cost.”

“This is a great opportunity to help Amtrak and save money for the taxpayer,” said U.S. Transportation Secretary Ray LaHood.　“These savings also represent funds that could be used to support the development of high-speed rail.”

Over the years, Amtrak has incurred a large amount of debt paid by the government through an annual appropriation to the railroad.　The Passenger Rail Investment and Improvement Act of 2008 (PRIIA) permitted the Treasury Department to study ways to repay or restructure Amtrak’s debt that would save money for the taxpayer and the railroad, and to take action on its findings if this would produce substantial savings.　Today’s action is based on the government’s findings.

Under the terms of today’s Memorandum of Understanding, the government will exercise early buyout options on 13 existing high-cost leases over the next three years. The $420 million up-front cost will save approximately $582 million in future payments, in effect saving the taxpayer approximately $162 million.　

During fiscal year 2010 the railroad’s revenue was 9 percent higher than during the previous 12 months and its ridership increased 5.7 percent.

-END-

　

reasury Releases Two-Year Retrospective Report on the Troubled Asset Relief Program

TARP Played a Critical Role in Stabilizing the Financial Sector and Restarting Credit Markets, So That Our Nation's Economy Could Recover;

WASHINGTON – On the heels of the recent expiration of the Troubled Asset Relief Program (TARP) on October 3, the U.S. Department of the Treasury today announced the release of a "Two-year Retrospective" report on TARP.

The report provides a comprehensive overview of the steps that Treasury took under TARP to contain a growing financial panic that gripped our country in late 2008 and early 2009. The program played a critical role in recapitalizing the financial sector and restarting the credit markets, which made it possible for businesses, municipalities, and families to borrow again, so that our economy could recover.

According to the report, in light of the recently announced AIG restructuring and when valued at current market prices, Treasury now estimates that the total cost of TARP will be about $50 billion. In addition, using the same assumptions, Treasury estimates that the combined cost of TARP programs and other Treasury interests in AIG will be about $30 billion. (For a full description of cost estimates, please see pages 3-5 of the report.)　　

To view the full TARP report, please visit the link below.

###

LINKS

TARP Report

U.S. ECONOMIC STATISTICS - MONTHLY DATA

2004 2005 2006 2007 2008 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

(Annual Average)

Unemployment Rate (level) 5.5 5.1 4.6 4.6 5.8 9.4 9.5 9.4 9.7 9.8 10.2 10.0

Payroll Employment (monthly increase, thousands) (Annual Average)

Total Nonfarm 173 212 178 96 -257 -303 -463 -304 -154 -139 -111 -11

Private 159 197 161 72 -270 -292 -391 -246 -166 -100 -157 -18

Inflation (percent) (Dec to Dec)

CPI (over year or month) 3.3 3.4 2.5 4.2 -0.1 0.1 0.7 0.0 0.4 0.2 0.3

CPI (over year ago) -1.0 -1.2 -1.9 -1.4 -1.3 -0.2

excluding food and energy (over year or month) 2.2 2.2 2.6 2.4 1.7 0.1 0.2 0.1 0.1 0.2 0.2

excluding food and energy (over year ago) 1.8 1.7 1.6 1.5 1.5 1.7

PPI - finished goods (over year or month) 4.4 5.5 1.1 6.4 -1.2 0.2 1.7 -1.0 1.7 -0.6 0.3

PPI - finished goods (over year ago) -4.5 -4.2 -6.4 -4.3 -4.7 -1.9

(Annual Average)

West Texas Intermediate crude oil ($/barrel, spot) 41.4 56.5 66.1 72.4 99.6 59.2 69.7 64.1 71.1 69.5 75.8 78.1

Housing (thousand units, annual rate) (Annual Average) (Annual Rate)

Housing Starts 1,950 2,073 1,812 1,342 900 551 590 593 581 592 529

N Si l F New Single-Family Homes Sold 1,201 1,279 1,049 769 481 371 399 419 415 405 430

(Total)

Auto and Light Truck Sales (million units, ann'l rate) 16.8 17.0 16.5 16.2 13.2 9.9 9.7 11.2 14.1 9.2 10.5 10.9

(Dec to Dec) (previous month)

Retail Sales and Food Services (growth, percent) 8.1 4.7 5.1 3.3 -10.6 0.5 0.9 -0.1 2.4 -2.3 1.4

ex - motor vehicles and parts dealers 8.2 6.8 5.3 4.7 -7.1 0.2 0.7 -0.5 0.8 0.4 0.2

Industrial Production (growth, percent) (Dec to Dec)

Total 4.3 2.9 1.5 1.7 -8.9 -1.0 -0.4 0.9 1.2 0.7 0.0

Manufacturing 5.1 3.7 1.6 1.4 -11.5 -0.9 -0.3 1.2 1.5 0.7 -0.1

Capacity Utilization (percent) (Annual Average)

Total 78.5 80.1 80.9 80.6 77.5 68.5 68.3 69.0 70.0 70.5 70.7

Manufacturing 77.1 78.6 79.4 79.0 75.1 65.3 65.1 66.0 67.0 67.6 67.6

(Annual Average)

ISM Composite Index - Manufacturing 60.5 54.4 53.1 51.1 45.5 42.8 44.8 48.9 52.9 52.6 55.7 53.6

ISM Business Activity Index - Nonmanufacturing 62.4 60.1 58.0 56.0 47.4 42.4 49.8 46.1 51.3 55.1 55.2 49.6

U.S. ECONOMIC STATISTICS - MONTHLY DATA

2004 2005 2006 2007 2008 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09

(Dec to Dec) (previous month)

New Orders for Durables (advance report, growth, per 6.4 14.8 0.5 2.6 -22.9 1.3 -1.1 4.8 -2.7 2.0 -0.6

New Orders for Nondefense Capital Goods 8.4 29.6 -0.9 4.7 -31.0 9.1 -0.2 7.0 -7.8 3.2 1.2

(Dec to Dec) (previous month)

Business Inventories (percent change) 7.6 5.4 6.4 4.0 0.6 -1.2 -1.4 -1.1 -1.6 -0.4

(Annual Average)

Business Inventories/sales ratio 1.30 1.27 1.28 1.28 1.32 1.41 1.38 1.36 1.32 1.32

Manufacturing 1.19 1.17 1.19 1.23 1.28 1.45 1.41 1.39 1.38 1.35

Wholesale Trade 1.18 1.18 1.17 1.16 1.17 1.28 1.25 1.23 1.20 1.18

Retail 1.56 1.51 1.50 1.49 1.52 1.50 1.47 1.45 1.38 1.42

U.S. Trade Balance (billions of dollars, BOP Basis) (Annual Total) (monthly)

Goods and services -617.6 -715.3 -760.4 -701.4 -695.9 -26.4 -27.5 -31.9 -30.8 -36.5

Goods -665.4 -790.9 -847.3 -831.0 -840.3 -37.2 -38.3 -42.8 -42.0 -47.6

(Dec to Dec)

Index of Leading Indicators (percent change) 5.2 2.3 0.5 -1.6 -4.0 1.3 0.9 1.0 0.4 1.0 0.3

Index of Coincident Indicators (percent change) 3.6 2.0 1.9 1.0 -3.5 -0.4 -0.4 0.1 0.1 -0.1 0.0

Interest Rates (percent) (Annual Average)

3-month T-bill 1.39 3.15 4.72 4.41 1.46 0.19 0.17 0.19 0.18 0.13 0.08

10-year T-note 4.27 4.29 4.79 4.63 3.67 3.29 3.72 3.56 3.59 3.40 3.39

Baa rate 6.39 6.06 6.48 6.48 7.45 8.06 7.50 7.09 6.58 6.31 6.29

Mortgage rate, 30-year fixed 5.84 5.87 6.41 6.34 6.04 4.86 5.42 5.22 5.19 5.06 4.95

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $127,009 million as of the end of that week, compared to $127,018 million as of the end of the prior week.

I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)


	September 4, 2009
A. Official reserve assets (in US millions unless otherwise specified) ¹	Euro	Yen	Total
(1) Foreign currency reserves (in convertible foreign currencies)			127,009
(a) Securities	10,090	13,999	24,090
of which: issuer headquartered in reporting country but located abroad			0
(b) total currency and deposits with:
(i) other national central banks, BIS and IMF	12,989	6,826	19,815
ii) banks headquartered in the reporting country			0
of which: located abroad			0
(iii) banks headquartered outside the reporting country			0
of which: located in the reporting country			0
(2) IMF reserve position ²	12,648
(3) SDRs ²	52,553
(4) gold (including gold deposits and, if appropriate, gold swapped) ³	11,041
--volume in millions of fine troy ounces	261.499
(5) other reserve assets (specify)	6,862
--financial derivatives
--loans to nonbank nonresidents
--other (foreign currency assets invested through reverse repurchase agreements)	6,862
B. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--financial derivatives not included in official reserve assets
--gold not included in official reserve assets
--other

II. Predetermined short-term net drains on foreign currency assets (nominal value)


			Maturity breakdown (residual maturity)
		Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits
--outflows (-)	Principal
	Interest
--inflows (+)	Principal
	Interest
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) Short positions ( - ) ⁴		-61,607	-48,095	-13,512
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)


III. Contingent short-term net drains on foreign currency assets (nominal value)


		Maturity breakdown (residual maturity, where applicable)
	Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1 year
(b) Other contingent liabilities
2. Foreign currency securities issued with embedded options (puttable bonds)
3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (+)
--BIS (+)
--IMF (+)
(b) with banks and other financial institutions headquartered in the reporting country (+)
(c) with banks and other financial institutions headquartered outside the reporting country (+)
Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (-)
--BIS (-)
--IMF (-)
(b) banks and other financial institutions headquartered in reporting country (- )
(c) banks and other financial institutions headquartered outside the reporting country ( - )
4. Aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) Short positions
(i) Bought puts
(ii) Written calls
(b) Long positions
(i) Bought calls
(ii) Written puts
PRO MEMORIA: In-the-money options ¹¹
(1) At current exchange rate
(a) Short position
(b) Long position
(2) + 5 % (depreciation of 5%)
(a) Short position
(b) Long position
(3) - 5 % (appreciation of 5%)
(a) Short position
(b) Long position
(4) +10 % (depreciation of 10%)
(a) Short position
(b) Long position
(5) - 10 % (appreciation of 10%)
(a) Short position
(b) Long position
(6) Other (specify)
(a) Short position
(b) Long position

IV. Memo items


(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic currency)
--nondeliverable forwards
--short positions
--long positions
--other instruments
(c) pledged assets
--included in reserve assets
--included in other foreign currency assets
(d) securities lent and on repo	6,998
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
--borrowed or acquired and included in Section I
--borrowed or acquired but not included in Section I	6,998
(e) financial derivative assets (net, marked to market)
--forwards
--futures
--swaps
--options
--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) short positions ( – )
(b) long positions (+)
--aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) short positions
(i) bought puts
(ii) written calls
(b) long positions
(i) bought calls
(ii) written puts
(2) To be disclosed less frequently:
(a) currency composition of reserves (by groups of currencies)	127,009
--currencies in SDR basket	127,009
2--currencies not in SDR basket
--by individual currencies (optional)

Notes:

1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account (SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and deposits reflect carrying values.

2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.

3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

4/ The short positions reflect foreign exchange acquired under reciprocal currency arrangements with certain foreign central banks. The foreign exchange acquired is not included in Section I, "official reserve assets and other foreign currency assets," of the template for reporting international reserves. However, it is included in the broader balance of payments presentation as "U.S. Government assets, other than official reserve assets/U.S. foreign currency holdings and U.S. short-term assets."

Federal, State Partners Convene to Discuss Ongoing
Anti-Fraud Efforts in Housing Markets

WASHINGTON – This morning, Treasury Secretary Tim Geithner hosted Attorney General Eric Holder, Housing and Urban Development (HUD) Secretary Shaun Donovan, Federal Trade Commission (FTC) Chairman Jon Leibowitz, Financial Crimes Enforcement Network (FinCEN) Director Jim Freis and attorneys general from 12 states to discuss emerging trends and proactive strategies to combat fraud against consumers in the housing markets as well as best practices to bolster coordination across state and federal agencies. This meeting follows up on an announcement by the Obama Administration in April of a multi-agency crackdown on foreclosure rescue scams and loan modification fraud designed to protect homeowners from predatory financial practices.

"A clear lesson of this financial crisis is that American consumers need better protection against fraud," said Treasury Secretary Tim Geithner. "And while we will prosecute anyone who violated the law, going forward we will not wait for problems to peak before we respond. The Obama Administration is acting preemptively, across federal agencies and alongside state governments, to stop consumer fraud."

Treasury, FinCEN, and DOJ, HUD, and FTC have committed to taking proactive measures to curb abuse by coordinating information and resources across agencies to maximize targeting and efficiency in fraud investigations. This includes alerting financial institutions to emerging schemes, stepping up enforcement actions and educating consumers to help those in financial trouble avoid becoming the victims of a loan modification or foreclosure rescue scam.

"Our efforts to attack mortgage fraud must be, and are, concerted and coordinated," said Attorney General Holder. "Working together, we can send a clear and straightforward message: Those who prey on vulnerable American homeowners cannot hide from the hand of the law. If you perpetrate mortgage fraud, we will find you and we will bring you to justice."

"At HUD, we firmly believe that the first line of defense is an informed consumer, and that's why we're working with our state and local partners on the ground, particularly housing counselors, to increase consumer awareness and give homeowners and homebuyers a trusted place to turn for assistance," said Secretary Donovan. "HUD has also requested $37 million in our FY2010 budget to combat fraud by training industry partners and giving FHA access to state-of-the-art fraud detection tools, as well as to help curb discrimination through increases in HUD's fair housing activities."

The FTC today announced two new law enforcement actions in a continuing crackdown on mortgage foreclosure rescue and loan modification scams, bringing to 22 the number of these cases the Commission has filed since the housing crisis began. The FTC also announced developments in similar pending mortgage-related actions, several of which have involved coordinated case work from FinCEN.

"Today's challenging economy presents an opportunity for con artists who prey upon financially distressed consumers. The Federal Trade Commission and our state and federal partners will continue to bring law enforcement actions to stop this insidious fraud," FTC Chairman Leibowitz said. "If you're worried about keeping your home, avoid any company that asks for a large fee in advance, guarantees that they'll stop a foreclosure or modify a loan, or tells you to stop paying your mortgage company and to pay them instead."

Illegal and predatory practices in the mortgage market are rampant in the wake of the recent financial crisis, including many fraudulent television ads that run on prominent networks promising simple solutions to complex financial problems. Federal and state officials discussed patterns of fraud in today's meeting and best practices for addressing them early, before American families suffer further financial harm.

Participating in today's meeting were attorneys general Dustin McDaniel, Arkansas; Terry Goddard, Arizona; Richard Blumenthal, Connecticut; Lisa Madigan, Illinois; Tom Miller, Iowa; Doug Gansler, Maryland; Chris Koster, Missouri; Catherine Cortez Masto, Nevada; Roy Cooper, North Carolina; Richard Cordray, Ohio (by phone); Patrick Lynch, Rhode Island; Rob McKenna, Washington (by phone). Collectively, these offices have taken action on scores of fraud cases in the housing markets and opened hundreds of investigations to date.

Statements from these attorneys general follow:

"Mortgage rescue schemes are becoming an epidemic -- preying on families facing foreclosure in exploding numbers. These mortgage rescue scams raise false hopes and then cruelly exploit them, which is why my office is fighting them and welcomes the federal government as a strong ally. Connecticut has adopted a landmark ban on upfront fees for mortgage repair schemes -- a model for national action in the battle against exploitation of consumers seeking to save their homes. I proposed and fought for it, and will enforce it vigorously. Today's meeting is an historic step toward a powerful alliance of state and federal law enforcers battling scammers who profit on homeowners facing foreclosure." - Connecticut Attorney General Richard Blumenthal

"Homeowners should never pay an upfront fee for help with negotiating a loan modification. If you're asked to pay an upfront fee, that's a sure sign you're dealing with a scavenger whose only goal is to con you out of money you can't afford to lose, and who will ultimately rob you of any opportunity to save your home with the help of legitimate organizations." - Illinois Attorney General Lisa Madigan

"Mortgage foreclosure rescue scams ask consumers to pay hundreds of dollars up-front for so-called rescue from foreclosure, but they just take your money and do nothing to help. The scam puts the homeowner deeper into a financial hole and does nothing to save the home. In fact, the scam often diverts consumers from getting the real help they need such as from the free Iowa Mortgage Help Hotline sponsored by our office." – Iowa Attorney General Tom Miller

"An unfortunate result of the country's current economic situation is the exponential increase in the number of disreputable companies and individuals eager to strip homeowners of their most valuable asset. I am pleased that our federal partners are working with the Attorneys General to help shut these operations down and keep millions of families in their homes." - Maryland Attorney General Douglas F. Gansler

"In Missouri we have zero tolerance for people who prey on those in serious risk of losing their homes. We will continue to aggressively pursue businesses that engage in mortgage-relief scams to stop them from operating in Missouri." - Missouri Attorney General Chris Koster

"This federal and state partnership is an important continuing effort to bring relief and justice to Nevadans from mortgage fraud." - Nevada Attorney General Catherine Cortez Masto

"Foreclosure scams cost homeowners time and money, two things you can't afford to lose when you're fighting to save your home. We're cracking down on foreclosure scammers who take homeowners' money but do little or nothing to help them." – North Carolina Attorney General Roy Cooper

"Consumer education is the new burglar alarm and state-federal cooperative enforcement is the deadbolt that will protect homeowners from today's crooks – fraudsters who claim to offer mortgage relief." - Washington Attorney General Rob McKenna

Treasury Issues Debt Management Guidance
on the Supplementary Financing Program

Washington – The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program:

"Treasury currently anticipates that the balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks to $15 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy."

TREASURY INTERNATIONAL CAPITAL DATA FOR JULY

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for July 2009. The next release, which will report on data for August 2009, is scheduled for October 16, 2009.

Net foreign purchases of long-term securities were $15.3 billion.

	Net foreign purchases of long-term U.S. securities were $44.0 billion. Of this, net purchases by private foreign investors were $32.1 billion, and net purchases by foreign official institutions were $12.0 billion.
	U.S. residents purchased a net $28.8 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $7.4 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $4.5 billion. Foreign holdings of Treasury bills increased $14.4 billion.

Banks' own net dollar-denominated liabilities to foreign residents decreased $85.7 billion.

Monthly net TIC flows were negative $97.5 billion. Of this, net foreign private flows were negative $131.3 billion, and net foreign official flows were $33.8 billion.

Complete data are available on the Treasury website at www.treas.gov/tic

Note: The data for lines 22-32, and especially line 29, include data from a number of institutions previously reporting only quarterly as nonbanks, but which are now reporting monthly as banking entities. This change in reporter classification affects data going back to October 2008.

			TIC Monthly Reports on Cross-Border Financial Flows
			(Billions of dollars, not seasonally adjusted)
								12 Months Through
						2007	2008	Jul-08	Jul-09	Apr-09	May-09	Jun-09	Jul-09
		Foreigners' Acquisitions of Long-term Securities

1			Gross Purchases of Domestic U.S. Securities			29730.6	30673.4	33482.0	21998.0	1474.7	1544.7	2039.3	1655.4
2			Gross Sales of Domestic U.S. Securities			28724.8	30260.9	32742.1	21769.3	1440.5	1536.8	1915.7	1611.4
3			Domestic Securities Purchased, net (line 1 less line 2) /1			1005.8	412.5	739.9	228.7	34.3	7.9	123.6	44.0

4				Private, net /2		818.1	309.1	490.8	265.2	18.3	31.3	105.2	32.1
5					Treasury Bonds & Notes, net	195.0	239.4	245.1	269.0	24.8	-0.8	78.0	15.3
6					Gov't Agency Bonds, net	99.9	-6.2	76.4	-53.3	1.0	13.4	10.9	2.5
7					Corporate Bonds, net	342.8	58.5	143.2	-29.3	-11.2	1.9	-0.6	-9.8
8					Equities, net	180.4	17.4	26.2	78.8	3.7	16.8	16.9	24.0

9				Official, net /3		187.7	103.4	249.1	-36.5	16.0	-23.4	18.4	12.0
10					Treasury Bonds & Notes, net	3.0	76.6	90.3	45.1	17.1	-21.8	22.5	15.8
11					Gov't Agency Bonds, net	119.1	-31.5	64.9	-94.1	-3.5	-0.6	-5.9	-7.2
12					Corporate Bonds, net	50.6	34.9	61.4	0.2	1.5	-0.9	-0.4	-1.2
13					Equities, net	15.1	23.4	32.4	12.2	0.9	-0.1	2.2	4.6

14			Gross Purchases of Foreign Securities from U.S. Residents			8187.6	7701.4	8522.7	5445.9	379.2	397.9	483.2	438.6
15			Gross Sales of Foreign Securities to U.S. Residents			8416.8	7599.6	8636.6	5444.8	402.0	425.3	516.6	467.3
16			Foreign Securities Purchased, net (line 14 less line 15) /4			-229.2	101.8	-113.9	1.1	-22.8	-27.4	-33.4	-28.8

17					Foreign Bonds Purchased, net	-133.9	81.8	-71.1	2.2	-13.8	-16.2	-19.6	-14.2
18					Foreign Equities Purchased, net	-95.3	20.1	-42.8	-1.1	-8.9	-11.2	-13.8	-14.5

19			Net Long-term Securities Transactions (line 3 plus line 16):			776.6	514.3	626.0	229.8	11.5	-19.4	90.2	15.3

20			Other Acquisitions of Long-term Securities, net /5			-235.2	-198.1	-226.9	-199.1	-20.0	-17.5	-19.4	-22.7

21		Net Foreign Acquisitions of Long-term Securities
					(lines 19 and 20):	541.4	316.2	399.1	30.7	-8.5	-36.9	70.7	-7.4

22		Increase in Foreign Holdings of Dollar-denominated Short-term
					U.S. Securities and Other Custody Liabilities: /6	198.0	229.4	181.6	219.3	-42.1	21.5	-38.1	-4.5
23			U.S. Treasury Bills			49.7	456.0	134.4	489.8	-44.5	53.1	-11.3	14.4
24				Private, net		28.1	196.5	78.4	115.7	-32.4	-2.5	3.2	-20.5
25				Official, net		21.5	259.5	56.1	374.1	-12.1	55.6	-14.5	34.9
26			Other Negotiable Instruments
					and Selected Other Liabilities: /7	148.4	-226.6	47.2	-270.5	2.4	-31.6	-26.8	-18.9
27				Private, net		72.2	-107.2	-2.6	-146.9	-1.9	-28.5	-22.2	-9.9
28				Official, net		76.2	-119.4	49.8	-123.6	4.2	-3.1	-4.6	-8.9

29		Change in Banks' Own Net Dollar-denominated Liabilities				-127.2	130.3	-364.8	-210.7	-4.0	-41.6	-89.5	-85.7

30	Monthly Net TIC Flows (lines 21,22,29) /8					612.2	675.9	216.0	39.3	-54.6	-57.0	-56.8	-97.5
		of which
31			Private, net			329.1	516.3	-46.3	-59.2	-59.9	-72.6	-53.3	-131.3
32			Official, net			283.1	159.6	262.3	98.5	5.3	15.6	-3.5	33.8


/1			Net foreign purchases of U.S. securities (+)
/2			Includes international and regional organizations
/3			The reported division of net purchases of long-term securities between net purchases by foreign official institutions and net purchases
				of other foreign investors is subject to a "transaction bias" described in Frequently Asked Questions 7 and 10.a.4 on the TIC web site.
/4			Net transactions in foreign securities by U.S. residents. Foreign purchases of foreign securities = U.S. sales of foreign securities to foreigners.
				Thus negative entries indicate net U.S. purchases of foreign securities, or an outflow of capital from the United States; positive entries
				indicate net U.S. sales of foreign securities.
/5			Minus estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities +
				estimated foreign acquisitions of U.S. equity through stock swaps -
				estimated U.S. acquisitions of foreign equity through stock swaps +
				increase in nonmarketable Treasury Bonds and Notes Issued to Official Institutions and Other Residents of Foreign Countries
/6			These are primarily data on monthly changes in banks' and broker/dealers' custody liabilities. Data on custody claims are collected
				quarterly and published in the Treasury Bulletin and the TIC web site.
/7			"Selected Other Liabilities" are primarily the foreign liabilities of U.S. customers that are managed by U.S. banks or broker/dealers.
/8			TIC data cover most components of international financial flows, but do not include data on direct investment flows, which are collected
				and published by the Department of Commerce's Bureau of Economic Analysis. In addition to the monthly data summarized here, the
				TIC collects quarterly data on some banking and nonbanking assets and liabilities. Frequently Asked Question 1 on the TIC web
				site describes the scope of TIC data collection.

Vice President Biden Holds Middle Class Task Force Meeting on
College Access and Affordability

www.AStrongMiddleClass.gov

THE WHITE HOUSE
Office of the Vice President

SYRACUSE, NY - The White House Task Force on Middle Class Families, chaired by Vice President Joe Biden, held a meeting at Syracuse University in New York to discuss ways to help families save and pay for college. The meeting, "Making College More Accessible and Affordable for Middle Class Families," also highlighted specific improvements the Administration is making to the overall process of paying for college.

The Vice President was joined today by Secretary of Treasury Timothy Geithner, Secretary of Education Arne Duncan, Syracuse University Chancellor Nancy Cantor, State University of New York Chancellor Nancy Zimpher and other higher education experts.

"I know how challenging it is for parents and students who are trying to save or pay for college," said Vice President Biden. "We should be making this process easier, not more difficult, and we're starting by tearing down barriers so that middle class families have the means to send their kids to college."

Earlier this year, the Task Force held its first college affordability discussion in St. Louis, Missouri. At this meeting, the Vice President asked the Treasury Department to look into 529 plans and find ways to make them more effective and reliable for middle class families. A 529 plan, offered by states, provides a convenient, tax-preferred way for families to save for college, and works much like ROTH IRAs, wherein contributions are made with after-tax income, returns accumulate tax free and distributions can be for qualified educational expenses without taxes. Based on a study of best plan management practices, the Treasury Department today provided recommendations that can be implemented now to make 529 plans more accessible, effective and reliable for the middle class. To view the full study and recommendations, please go to:

http://www.treas.gov/press/releases/docs/529.pdf.

"Today, we have identified several ways to make these plans more effective and reliable for middle class families," said Secretary of Treasury Geithner. "By encouraging all states to offer low-fee, age-based index funds and by encouraging greater competition among state plans, we can help make the dream of a college education a reality for millions of middle class families."

"We have to educate our way to a better economy. That's why we have an agenda to make college affordable and accessible to everyone - recent high school graduates, adults wanting to improve their careers, laid-off workers needing new job skills," said Secretary of Education Duncan. "As the President told high school students yesterday, if you drop out of school, you're not just quitting on yourself, you're quitting on your country. We also want to send the message that we're not quitting on you. We're providing the resources you need to go to college and succeed there."

The complicated and intrusive Free Application for Federal Student Aid (FAFSA) creates an obstacle to college affordability. By asking 153 questions, many of which have little or no impact on student aid eligibility, FAFSA imposes an unnecessary ordeal on 16 million students and parents every year, and more than a million students who are eligible for student aid fail to fill out the form. While the Administration is currently seeking legislation removing 29 of the most difficult questions from the form, it is also streamlining the form by tailoring it to individual students, skipping unnecessary questions, and allowing many students to electronically retrieve their tax information from the IRS and enter it into the online FAFSA. Two key members of the Task Force, the National Economic Council (NEC) and the Council of Economic Advisors (CEA), today released a report discussing the need to simplify the process of applying for federal student aid, describing President Obama's plan for simplification and analyzing the potential impact of such improvements on Pell Grant recipients. To view the NEC/CEA report, please go to:

http://www.whitehouse.gov/assets/documents/FAFSA_Report.pdf.

Today, the Task Force also released a full staff report diagnosing the existing barriers to higher education in America and highlighting ways for middle class families to better access higher education.

The staff report examines factors that limit students' access to higher education, including income inequality, mobility, cost of college, and debt load. The report reiterates the Administration's belief that a student's merit should be the determining factor in getting into, and graduating from, a good school, because a clear pathway to a college education is a clear pathway into the middle class. President Obama has set a goal that by 2020, America should once again lead the world in the proportion of adults with a college degree. A central goal of the Middle Class Task Force is to ensure that public policy is helping middle class families to realize their aspirations. The President, the Vice President and the Middle Class Task Force are committed to making sure that every student has the opportunity to earn a postsecondary credential or degree.

The full staff report is attached, or go to:

http://www.whitehouse.gov/assets/documents/MCTF_staff_report_barriers_to_college_FINAL.pdf.

Treasury Secretary Timothy F. Geithner
As Prepared for Delivery
White House Task Force on Middle Class Families Meeting on College
Access and Affordability
Syracuse University, Syracuse, New York

Mr. Vice President, Secretary Duncan, Chancellor Cantor, I am pleased to join you today to discuss the importance of college education and college affordability to the U.S. economy and American families. This subject is touching close to home these days because next week I'll be dropping my daughter off at college.

But besides the personal significance, college affordability is central to two key economic trends. Over the past generation, we have gone from a nation of savers to one of borrowers. We have devoted too many resources to consumption and not enough to investment. During this same period, we have also lost our global educational lead. While we once outpaced all other advanced economies in the percentage of our population that graduated from high school and college, much of the rest of the economically developed world has now caught up or surpassed us.

Americans are already on the way to reversing the first of these trends. After years of taking on too much debt, Americans are starting to save again. The saving rate has climbed from a low 1.2 percent at the beginning of 2008 to an average of 5 percent during the second quarter of this year. The Administration has sought to help encourage greater savings by devoting a substantial portion of the Recovery Act to providing a tax cut for 95 percent of American working families and additional support for the unemployed. People are using these resources to pay off their debts and rebuild their savings.

It is also important that America regain its global educational lead. This is critical to the health of our overall economy because a better-educated workforce is a more productive and innovative one. One way to gauge the extent to which we have fallen behind is to look at two groups of Americans. Among 55-to-60 year olds today, we have the highest high school and college graduation rates of any advanced economy in the world. Yet among today's 25-to-34 year olds, we are below average for high school graduation and in the middle of the pack for college graduation.

A college education is one of the best investments a family can make. Beyond the many intangible rewards, economists estimate that college graduates earn 50 percent more than otherwise similar high school graduates over the course of their lifetimes.

The Administration has sought to boost college attainment by including an American Opportunity Tax Credit in the Recovery Act. The credit provides up to $2,500 to help offset the cost of tuition and other expenses of college and is expected to save nearly 5 million low- and moderate-income families $9 billion between now and the end of 2010.

As the Vice President has said, we are also working to implement, expand or improve a wide array of other government programs that encourage education savings and increase college enrollment. Today I want to highlight one program in particular, Section 529 savings plans.

These plans can be an immensely effective way for Americans to save for college. They are generally administered by the states, and they allow people to put aside money for college and enjoy investment earnings that are free of federal taxes and, in some cases, receive state tax benefits, as well. When state tax benefits are included, a typical middle class family can accumulate 25 percent more in 529 accounts than they can in a typical taxable savings account.

But in a report being issued by Treasury today, we find that these accounts are not being broadly used by Americans who could benefit from them. For example, only 5 percent of families with children in the middle of the income distribution have 529 accounts, while nearly one third of those in the top 5 percent of the distribution have them. The report makes a series of recommendations to expand their use, lower investment fees and make them safer for Americans across a wide range of incomes.

Helping Americans save more for college will help more go to college. Helping Americans save more generally will help the overall economy. Only by pursuing both aims and reversing the unfortunate trends of the past generation will we achieve the President's goal of a new foundation for growth and a sustainable prosperity for all Americans.

Statement by Secretary Geithner at the G-20 Meeting of Finance Ministers and Central Bank Governors

Good afternoon. My thanks and compliments to Chancellor Darling and his team for hosting this meeting. The United States looks forward to welcoming the Prime Minister and the Chancellor to Pittsburgh , along with the Leaders and Finance Ministers of the G-20, in just a few weeks.

On April 2, facing the greatest challenge to the world economy in generations, the G-20 gathered here in London and committed to an unprecedented program of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway.

However, we still face significant challenges ahead. Unemployment is unacceptably high. Conditions for a sustained recovery led by private demand are not yet established. The classic errors of economic policy during crises are that governments tend to act too late with insufficient force and then put the brakes on too early. We are not going to repeat those mistakes.

We need to provide sustained support for growth and financial repair until we have in place a strong foundation for recovery. But that strategy will not be effective unless we can make fully credible our commitment to reverse those actions as soon as conditions permit. This means our strategies will need to evolve as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.

We must lay a foundation for a more balanced and sustainable pattern of future growth, both within and across countries. In the United States , we are going through a necessary and fundamentally healthy transition, raising savings rates and borrowing less from the rest of the world. As this happens, we need to see a complementary shift in countries outside the United States toward stronger domestic demand-led growth.

Alongside this growth imperative, we need to bring greater urgency to the financial reform agenda.

We have broad agreement on a very strong set of principles and objectives for building a more stable global financial system. But we need to move now to put that framework in place. That will require actions at the national level to implement stronger rules of the game, but also more rapid progress internationally in reaching agreement on the details of more rigorous standards that create a more level playing field. In the United States , we are moving forward to legislate reforms designed to protect consumers and investors and create a more stable, more resilient financial system.

These are far reaching and comprehensive reforms, because fundamental change is necessary. The great failure of regulation was the failure to prevent the build up of excess leverage and risk within and alongside the banking system.

Our strategy is to put in place stronger constraints on risk taking across the financial system, to bring comprehensive oversight to key institutions and to critical markets, such as derivatives, to reform the securities markets, and to provide the tools necessary to wind down firms that fail.

The fundamental test of reform is to make the system resilient enough to withstand future storms.

Toward this effort, we outlined here the critical elements of a stronger international capital standard for banks. Our objective is to reach agreement by the end of next year on a new standard that will raise capital and liquidity requirements and dampen rather than amplify future credit and asset price bubbles. Financial activities which present the most risk should have higher capital requirements. And the major globally active financial institutions, those firms that present the greatest risk of systemic crisis, should be held to more demanding standards.

A crucial part of financial reform is to change compensation practices. On February 4 of this year, the President of the United States first outlined a set of proposals to reform compensation practices, both for institutions that receive exceptional financial assistance and for all banks. These proposals were designed to constrain excess risk taking by making sure that compensation is tied to risk and long-term performance. We have proposed, and the House has already passed, legislation to require firms to submit compensation practices to an approval by shareholders. And the Federal Reserve and other bank supervisors will enforce these standards through the supervisory process.

We welcome the support we found here in Europe and among the G-20 for compensation reform as part of comprehensive reform of the financial system. Stronger capital standards are not a substitute for compensation reform. Compensation reform is a necessary part of building a more stable system.

In addition to capital and compensation, more work needs to be done on over-the-counter derivatives and cross-border resolution frameworks.

Another critical part of the reform agenda is building stronger international financial institutions. We must provide the resources and tools necessary to support development and provide insurance against future crises. But this is not just about resources. We need these institutions to play a greater role in preventing future crises, with stronger surveillance by the IMF. We need the multilateral development banks to focus their efforts on the key priorities of fighting poverty, supporting higher productivity in agriculture, building the institutions necessary for private investment and growth, and facilitating the transition to a green economy. And we must reform the institutions' governance structures to better reflect the important role of emerging market and developing economies.

Let me close by saying that, as we look toward the G-20 Summit in Pittsburgh , we need to bring the sense of common purpose and urgency that we demonstrated at the peak of the crisis to the challenges of restoring growth and to reforming the financial system. We have made a lot of progress, but we have a ways to go. We can't let momentum for reform fade as the crisis recedes.

Thank you.

Statement of Treasury Secretary Tim Geithner on the Administration’s New Retirement Security Initiatives

"Today, the Administration announced steps we are taking to make it easier for working families to save, particularly for retirement. Working Americans should be able to retire with dignity and security, but nearly half of the nation's workforce has little or nothing beyond Social Security benefits to get by on in old age. The measures we are announcing today will give more choices to families who want to save, and will complement the Administration's legislative proposals to expand retirement savings. Just as the Administration is dedicated to reviving the economy and getting people back to work, so too it is dedicated to helping put retirement security within the reach of all Americans."

REPORTS

Retirement Security for American Families

Treasury Highlights Recovery Act Impact

Report Details Cumulative, State-by-State Data on Treasury's Recovery Act Programs, Including $66.1 Billion in Tax Benefits to Date for Individuals, Families, Businesses

WASHINGTON – As part of an effort to highlight the success of the American Recovery and Reinvestment Act (Recovery Act) in revitalizing communities across the country, the U.S. Department of the Treasury today released a report providing state-by-state data on Treasury program funding. The report, issued around the 200 day anniversary of the Recovery Act, details funds provided to states, local communities, and families through a variety of programs, including the Making Work Pay Tax Credit, payments for renewable energy production, funds for affordable housing development, and Build America Bonds.

"In 200 days, the Recovery Act has made significant progress in revitalizing our communities and providing the basis for economic growth," said Treasury Deputy Secretary Neal Wolin. "Through innovative programs established by the Recovery Act, the Treasury Department has provided tax relief to millions of families, supported increased development of affordable housing and clean energy projects, and provided new tools for states and communities to fund much needed infrastructure projects."

Highlights of the impact from Treasury's Recovery Act programs during the first 200 days include:

· $66.1 billion in estimated tax benefits provided to individuals, families, and businesses through the implementation of various tax provisions. The Making Work Pay credit has been a significant element of these provisions.

· $502 million in payments made to promote renewable energy production throughout the country

· $2.3 billion provided to 37 states to spur the development of affordable housing

· $28.2 billion in Build America Bonds issuances to help 37 states finance a variety of public improvement projects

The report also provides information on the First Time Homebuyer's Tax Credit, the $250 one- time stimulus payments, New Markets Tax Credits, Qualified School Construction Bonds, and Recovery Zone Bonds. The comprehensive report is available here. Additional information on Treasury's Recovery Act programs follows:

Making Work Pay Tax Credit: In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act provides a credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. The tax credit is calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

Recovery Zone Bonds: Recovery Zone Economic Development Bonds are one type of taxable Build America Bond that allow state and local governments to obtain lower borrowing costs through a new direct federal payment subsidy, for 45 percent of the interest, to finance a broad range of qualified economic development projects, such as job training and educational programs. Recovery Zone Facility Bonds are a type of traditional tax-exempt private activity bond that may be used by private businesses in designated recovery zones to finance a broad range of depreciable capital projects. Both of these are allocated directly to counties and large municipalities

Qualified School Construction Bonds: Investors who buy these bonds receive tax credits worth 100 percent of the interest, allowing state and local governments to obtain financing without having to pay any interest. States may directly issue the bonds on behalf of eligible schools or provide school districts with the authority to issue the bonds within the state.

Qualified Energy Conservation Bonds: These bonds are authorized under an expanded tax credit bond program of the Recovery Act of 2009 for states and large local governments based on population data. The bonds are tax credit bonds that provide a federal subsidy for repair and rehabilitation of public schools and related authorized purposes through a federal tax credit to investors intended to cover 70 percent of the interest on the bonds.

Build America Bonds: Under the Build America Bonds program, Treasury makes a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the Build America Bonds. Potential investors include pension funds that traditionally do not hold tax exempt bonds and foreign investors. These investors have been important additions to the market for municipal debt.

One-time $250 Payments: Treasury's Financial Management Service, in coordination with the Social Security Administration, the Railroad Retirement Board, and the Department of Veterans Affairs, have issued more than 54 million Economic Recovery payments to beneficiaries totaling more than $13 billion.

Community Development Financial Institutions: The CDFI Fund makes monetary awards (grants, loans and other investments) on a competitive basis to certified CDFIs. A CDFI is a specialized financial institution that works in low-income communities or serves individuals or businesses that lack access to mainstream financial institutions. Among many financial services, CDFIs provide capital to small businesses and micro-enterprises; mortgage loans to first-time homebuyers; financing to support the development of affordable housing projects and community facilities; and retail banking services to the unbanked.

New Markets Tax Credit: With the increased investment authority made available through the Recovery Act, this program incentivizes private-sector capital investment in distressed communities across the country to create jobs, stimulate economic growth, and jumpstart the lending necessary for financial stability. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period.

Affordable Housing Payments: Under this program, state housing agencies that apply receive funds to finance the construction or refurbishment of qualified affordable housing developments. Applicants agree to forgo tax credits down the line in favor of an immediate payment. Through this program, the Treasury Department works with state housing agencies to jump start the development or renovation of qualified affordable housing across the country.

Renewable Energy Payments: The Recovery Act authorized Treasury to make direct payments to companies that create and place in service renewable energy facilities. Previously, these companies could file for a tax credit to cover a portion of the renewable energy project's cost. Under the new program, applicants would agree to forgo tax credits down the line in favor of an immediate payment.

First Time Homebuyer's Tax Credit: Taxpayers who qualify for the first-time homebuyer credit and purchase a home this year before December 1 have a special option available for claiming the tax credit either on their 2008 tax returns or on their 2009 tax returns next year. The maximum credit is $8,000.

Stronger Capital and Liquidity Standards for Banking Firms

To read the Treasury Department's policy statement, "Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms," please visit link.

The global regulatory framework failed to prevent the build-up of risk in the financial system in the years leading up to the recent crisis. Major financial institutions around the world had reserves and capital buffers that were too low; used excessive amounts of leverage to finance their operations; and relied too much on unstable, short-term funding sources. The resulting distress, failures, and government bailouts of these firms imposed unacceptable costs on individuals and businesses around the world. Going forward, global banking firms must be made subject to stronger regulatory capital and liquidity standards that are as uniform as possible across countries. Today the Treasury Department set forth the core principles that should guide reform of the international regulatory capital and liquidity framework to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy.

Stronger capital and liquidity standards for banking firms:

· Capital requirements should be designed to protect the stability of the financial system, not just the solvency of individual banking firms, including banks, bank holding companies, financial holding companies and large, interconnected firms.

· Capital requirements for all banking firms should be increased, and capital requirements for financial firms that could pose a threat to overall financial stability should be higher than those for other banking firms.

· The regulatory capital framework should put greater emphasis on higher quality forms of capital that enable banking firms to absorb losses and continue operating as going concerns.

· The rules used to measure risks embedded in banks' portfolios and the capital required to protect against them must be improved. Risk-based capital requirements should be a function of the relative risk, including systemic risk, of a banking firm's exposures, and risk-based capital rules should better reflect a banking firm's current financial condition.

· The procyclicality of the regulatory capital and accounting regimes should be reduced and consideration should be given to introducing countercyclical elements into the regulatory capital regime.

· Banking firms should be subject to a simple, non-risk-based leverage constraint.

· Banking firms should be subject to a conservative, explicit liquidity standard.

· Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability.

· A comprehensive agreement on new international capital and liquidity standards should be reached by December 31, 2010 and should be implemented in national jurisdictions by December 31, 2012.

Fact Sheet: Treasury Amends Cuban Assets Control Regulations
To Implement the President’s Initiative on
Family Visits, Remittances, and Telecommunications

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today issued a final rule amending the Cuban Assets Control Regulations, 31 C.F.R. Part 515 (CACR), to implement the President's initiative of April 13, 2009, to reach out to the Cuban people in support of their desire to freely determine their country's future, promote greater contact between separated family members in the United States and Cuba, and increase the flow of remittances and information to the Cuban people.

Today's amendments to the CACR change the rules in three major areas: (1) family visits; (2) family remittances; and (3) telecommunications. These amendments also make certain technical and conforming changes to the CACR.

Family visits. OFAC has eased restrictions on travel-related transactions for visits to "close relatives" who are nationals of Cuba by issuing a general license.

	Travelers may visit "close relatives" (including, for example, aunts, uncles,cousins, and second cousins) who are nationals of Cuba.
	There is no limit on the duration of a visit to these "close relatives."
	There is no limit on the frequency of visits to these "close relatives."
	Authorized expenditure limits for travel within Cuba have been increased to match the expenditures allowed for all other authorized categories of travel to Cuba -- specifically, the current State Department "per diem rate" for Havana (for use anywhere in Cuba) plus amounts for additional transactions directly incident to visiting close relatives in Cuba. The current "maximum per diem rate" is $179. For future updates to this rate, travelers may check the Department of State's Office of Allowances web site (http://aoprals.state.gov).
	Travelers may be accompanied by persons who share a common dwelling as a family with them.

Remittances. OFAC has also eased restrictions on remittances (including from inherited blocked accounts) to "close relatives" who are nationals of Cuba by issuing a general license.

	Persons subject to the jurisdiction of the United States may send remittances to "close relatives" (including, as noted above, aunts, uncles, cousins, and second cousins) who are nationals of Cuba. These amendments do not affect the prohibition on remittances to a "prohibited official of the Government of Cuba" or a "prohibited member of the Cuban Communist Party," as defined in the CACR.
	There is no limit on the amount of such a remittance.
	There is no limit on the frequency with which persons subject to the jurisdiction of the United States may send such remittances.
	Authorized family travelers may carry up to $3,000 of such remittances to Cuba.
	Remittances for emigration-related purposes continue to be subject to separate restrictions.
	Remittances may be made from depository institutions. To facilitate this, depository institutions are permitted to set up testing arrangements and exchange authenticator keys with Cuban financial institutions.

Telecommunications. Certain telecommunications services, contracts, related payments, and travel-related transactions are authorized by general licenses. The CACR amendments ease the telecommunications rules in three broad areas, as well as allow travel-related transactions for the specific purpose of conducting business in all three areas.

	Persons subject to U.S. jurisdiction may contract with and pay non-Cuban telecommunications services providers to provide services to particular individuals in Cuba (other than prohibited officials of the Government of Cuba or prohibited members of the Cuban Communist Party, as defined in the CACR). For example, an individual in the United States may contract with and pay a U.S. or third-country telecommunications company to provide cellular telephone service for a phone owned and used by that individual's friend in Cuba. Moreover, a U.S. telecommunications services provider may enter into a contract with a particular individual in Cuba to provide telecommunications services to that individual.
	Telecommunications services providers that are persons subject to U.S. jurisdiction are generally licensed (1) to make payments incident to the provision of telecommunications services between the United States and Cuba and the provision of satellite radio or satellite television services to Cuba and (2) to enter into and perform (including making payments) under roaming services agreements with telecommunications services providers in Cuba.
	Transactions incident to establishing facilities to provide telecommunications services linking the United States and Cuba, including fiber-optic cable and satellite facilities, are authorized by general license. The Bureau of Industry and Security of the U.S. Department of Commerce licenses the exportation and re-exportation of goods and technology for the establishment of telecommunications facilities linking the United States and Cuba.
	Two general licenses have been added authorizing, with certain conditions, travel-related transactions incident to authorized telecommunications transactions. One of these licenses authorizes, with certain conditions, travel transactions incident to the commercial export of telecommunications-related items that have been authorized by the Department of Commerce. The second license authorizes travel transactions incident to participation in telecommunications-related professional meetings.

New general license for TSRA travel-related transactions. The new amendments to the CACR also implement provisions of the Omnibus Appropriations Act, 2009. Pursuant to section 620 of the Omnibus Appropriations Act, 2009, which amended the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), there is a new general license for travel-related transactions incident to agricultural and medical sales under TSRA.

	This new general license authorizes, with certain conditions, travel-related transactions that are directly incident to the commercial marketing, sales negotiation, accompanied delivery, or servicing in Cuba of agricultural commodities, medicine, or medical devices that appear consistent with the Department of Commerce's export or reexport licensing policy.
	A traveler may rely on this general license if he or she is regularly employed by a producer or distributor of the agricultural or medical items or by an entity duly appointed to represent such a producer or distributor, and if that traveler's schedule of activities is consistent with a full work schedule.
	Under the new general license, written reports must be submitted to OFAC at least 14 days before departure for Cuba and within 14 days of return.

You may view the amended CACR here: http://www.federalregister.gov/inspection.aspx

Treasury, Energy Announce $500 Million in Recovery Act Awards for Clean Energy Projects

Initial Round of Cash Assistance for Wind, Solar Projects in Eight States
Will Create Jobs, Increase Development

WASHINGTON– Marking a major milestone in the effort to spur private sector investments in clean energy and create new jobs for America's workers, Treasury Secretary Tim Geithner and Energy Secretary Steven Chu today announced $502 million in the first round of awards from an American Recovery and Reinvestment Act (Recovery Act) program that provides cash assistance to energy production companies in place of earned tax credits. The new funding creates additional upfront capital, enabling companies to create jobs and begin construction that may have been stalled until now.

"The Recovery Act is investing in our long-term energy needs while creating jobs in communities around the country," said Treasury Secretary Tim Geithner. "This renewable energy program will spur the manufacture and development of clean energy in urban and rural America, allowing us to protect our environment, create good jobs and revitalize our nation's economy."

Said Secretary Chu: "These grants will help America's businesses launch clean energy projects, putting Americans back to work in good construction and manufacturing jobs. The initiative will help double our renewable energy capacity over the next few years and make sure America leads the world in creating the clean energy economy of the future."

Created under Section 1603 of the Recovery Act, the program is expected to provide more than $3 billion in financial support for clean energy projects by providing direct payments in lieu of tax credits. These payments will support an estimated 5,000 bio-mass, solar, wind, and other types of renewable energy production facilities in all regions of the country over the life of the program. As a result of this first round of funding, more than 2,000 Americans will have access to jobs in the renewable energy industry – both in construction and in manufacturing – while moving the nation closer to meeting the Administration's goal of doubling renewable energy generation in the next few years.

The Treasury Department opened the application process for the 1603 program on July 31, 2009 and is today making the first awards in half the statutorily mandated turnaround time of 60 days. The following is a chart of projects funded as part of today's announcement. Additional awards under the program will be announced in the coming weeks.

STATE	PROJECT	LOCATION	AMOUNT
CO	Movement Gym PV System (Solar)	Boulder, CO	$157,809
CT	Solaire Development, LLC	Danbury, CT	$2,578,717.00
ME	Evergreen Wind Power V, LLC	Danforth, ME	$40,441,471
MN	Moraine II Wind Farm	Woodstock, MN	$28,019,520
NY	Canadaigua Power Partners, LLC (Wind)	Cohocton, NY	$52,352,334
NY	Canadaigua Power Partners II, LLC (Wind)	Cohocton, NY	$22,296,494
OR	Wheat Field Wind Farm	Arlington, OR	$47,717,155.00
OR	Hay Canyon Wind Farm	Moro, OR	$47,092,555
OR	Pebble Springs Wind Farm	Arlington, OR	$46,543,219
PA	Highland Wind Farm	Salix, PA	$42,204,562
PA	Locust Ridge II, LLC (Wind)	Shenandoah, PA	$59,162,064
TX	Penascal Wind Farm	Sarita, TX	$114,071,646
			$502,637,546

Treasury Targets FARC Operative and Affiliated Companies

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated Jose Cayetano Melo Perilla for materially assisting the narcotics trafficking activities of, and acting for or on behalf of, the Revolutionary Armed Forces of Colombia (FARC), a drug trafficking organization. OFAC also today named four entities that are owned, controlled, or directed by, or act for or on behalf of, Jose Cayetano Melo Perilla. Today's action, pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act), is OFAC's tenth set of designations against the FARC under the Kingpin Act since 2004. These designations under the Kingpin Act freeze any assets the five designees may have under U.S. jurisdiction and prohibit U.S. persons from conducting financial or commercial transactions with them.

"Although recent actions by the Colombian Government have undercut the FARC significantly, it continues to be the leading trafficker of narcotics out of Colombia," said Adam J. Szubin, Director of OFAC. "Today's designation builds on our longstanding campaign against the FARC by targeting a key trafficker and money launderer."

The FARC was identified by the President as a significant foreign narcotics trafficker, or drug kingpin, pursuant to the Kingpin Act on May 29, 2003. The State Department designated the FARC as a Specially Designated Global Terrorist in 2001 pursuant to Executive Order 13224 and as a Foreign Terrorist Organization in 1997.

Jose Cayetano Melo Perilla, a Colombian national and resident of Costa Rica, is a narcotics trafficker and important financial contact for the FARC's 27th Front, which is led by Luis Eduardo Lopez Mendez (a.k.a. "Efren Arboleda"). Lopez Mendez ultimately reports to the FARC's chief of military operations and Commander of the Eastern Bloc, Victor Julio Suarez Rojas (a.k.a. "Mono Jojoy"). Suarez Rojas and Lopez Mendez were previously designated by OFAC on February 18, 2004, and November 1, 2007, respectively.

Also designated today are the following companies owned by Melo Perilla: Carillanca Colombia Y Cia S en CS, a Colombian company dedicated to hydroponic agriculture; Carillanca S.A., a Costa Rican company involved in tomato cultivation; Carillanca C.A., a company located in Venezuela whose focus is real estate and construction; and Parqueadero De La 25-13, a commercial parking lot located in Bogota, Colombia.

Today's action continues ongoing efforts under the Kingpin Act to apply financial measures against significant foreign narcotics traffickers and their organizations worldwide. In addition to the 82 drug kingpins designated by the President, 498 businesses and individuals have been designated pursuant to the Kingpin Act since June 2000. Today's designation would not have been possible without support from the Drug Enforcement Administration.

Penalties for violations of the Kingpin Act include civil penalties of up to $1.075 million per violation, criminal penalties for corporate officers up to 30 years in prison and $5 million in fines, and criminal fines for corporations up to $10 million. Other individuals face up to 10 years in prison for criminal violations of the Kingpin Act and fines determined pursuant to Title 18 of the United States Code.

REPORTS

International FARC network

Treasury International Capital (TIC) Data for June

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for June 2009. The next release, which will report on data for July 2009, is scheduled for September 16, 2009.

Net foreign purchases of long-term securities were $90.7 billion.

	Net foreign purchases of long-term U.S. securities were $123.6 billion. Of this, net purchases by private foreign investors were $105.2 billion, and net purchases by foreign official institutions were $18.4 billion.
	U.S. residents purchased a net $32.9 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $71.3 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $19.5 billion. Foreign holdings of Treasury bills decreased $11.3 billion.

Banks' own net dollar-denominated liabilities to foreign residents decreased $82.9 billion.

Monthly net TIC flows were negative $31.2 billion. Of this, net foreign private flows were negative $27.7 billion, and net foreign official flows were negative $3.5 billion.

Complete data are available on the Treasury website at www.treas.gov/tic.

###

REPORTS

(PDF) TIC Monthly Reports on Cross-Border Financial Flows (Billions of dollars, not seasonally adjusted)

U.S. Treasury and Commerce Departments Announce
$9.4 Million Settlement with DHL

United States Government reaches settlement with DHL
for violation of Treasury, Commerce regulations

WASHINGTON – The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) and the U.S. Department of Commerce's Bureau of Industry and Security (BIS) today announced a $9.4 million settlement with DPWN Holdings (USA) Inc., formerly known as DHL Holdings (USA) Inc and DHL Express (USA) Inc. – collectively DHL – concerning shipments to Iran, Sudan and Syria and failures to meet recordkeeping requirements.

DHL has agreed to remit $9,444,744 to settle alleged violations of the Iranian Transactions Regulations (ITR); the Sudanese Sanctions Regulations (SSR); the Reporting, Procedures and Penalties Regulations (RPPR) – collectively, the OFAC Regulations – and the Commerce Department's Export Administration Regulations (EAR).　

"DHL's pervasive compliance failures allowed for numerous shipments to Iran and Sudan in apparent violation of Treasury and Commerce Department regulations," said OFAC Director, Adam J. Szubin. "Today's joint enforcement actions signal the U.S. Government's commitment to ensuring that sanctions laws – including recordkeeping requirements – are followed carefully."

OFAC alleged that between August 2002 and March 2007, DHL made more than 300 shipments to Iran and Sudan in violation of the ITR and SSR respectively. Additionally, OFAC alleged that between December 2002 and April 2006 the company failed to maintain required records with respect to numerous other shipments to Iran, in violation of the RPPR.　 OFAC Regulations prohibit the shipment of most goods to Iran and Sudan and require the maintenance of complete records on shipments for five years.　 Descriptions of the contents of the packages described above were missing from thousands of air waybills. Many of the shipments were intercepted and reported to OFAC by the U.S. Department of Homeland Security's Customs and Border Protection (CBP); this settlement with DHL was reached after a five and a half year investigation that was conducted with the assistance of CBP.

Along with significant improvements in its compliance program, DHL has also agreed to hire an unaffiliated third-party consultant to conduct audits of DHL's compliance with OFAC Regulations and the EAR from March 2007 through 2011.

Treasury Announces Sanctions of Mexican Drug Lords
Treasury, Justice, and State Coordinate Efforts to Combat Drug Trafficking

WASHINGTON – As part of an ongoing effort to apply financial measures against narcotics traffickers worldwide, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated four drug cartel leaders as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act).　 The four individuals designated today are leaders of the Gulf Cartel and Los Zetas, groups that are responsible for much of the violence taking place in Mexico today.

"Following on the heels of the President's naming of Los Zetas as a drug kingpin organization in April, we are today targeting sanctions against four drug lords who are senior leaders in Los Zetas and the Gulf Cartel," said OFAC Director Adam J. Szubin. "We remain committed to using all tools at our disposal to assist President Calderon in his courageous efforts against Mexico's deadly narcotics cartels."

OFAC designated the following two individuals, who are leaders of the Gulf Cartel:

Jorge Eduardo Costilla Sanchez (alias "El Coss")

Ezequiel Cardenas Guillen (alias "Tony Tormenta")

The following two individuals were also designated and are leaders of Los Zetas:

Heriberto Lazcano Lazcano (alias "Lazca")

Miguel Angel Trevino Morales (alias "Cuarenta")

Today's action is the latest in a series of coordinated efforts by the U.S. government to neutralize and dismantle Mexico's violent drug cartels.　 The Department of Justice, in coordination with the Drug Enforcement Administration (DEA),　has　today announced new　drug trafficking　charges against Miguel Angel Trevino Morales. In June 2009, the Department of Justice charged 19 of the drug cartels' top lieutenants, including Jorge Costilla Sanchez, Ezequiel Cardenas Guillen, Heriberto Lazcano Lazcano, and Miguel Trevino Morales with drug trafficking-related crimes.　 Today, the State Department announced rewards of up to $5 million each, for information leading to the capture or conviction of 10 Gulf Cartel and Los Zetas leader, including Ezequiel Cardenas Guillen, Heriberto Lazcano Lazcano and Miguel Trevino Morales. The State Department is also offering a $5 million reward for Jorge Costilla Sanchez. In 2008, Jorge Costilla Sanchez, Ezequiel Cardenas Guillen, Heriberto Lazcano Lazcano, and Miguel Trevino Morales were previously charged with drug trafficking crimes in the District of Colombia. Jorge Costilla Sanchez and Ezequiel Cardenas Guillen are also subjects of drug trafficking charges in the Southern District of Texas. The Mexican Attorney General's Office also announced rewards of up to $2.4 million dollars (30,000,000 pesos), per individual, for information leading to their capture.　　

In 2007, the Gulf Cartel was identified as a significant foreign narcotics trafficker pursuant to the Kingpin Act.　 The Gulf Cartel is responsible for the smuggling and distribution of significant amounts of cocaine and marijuana to the United States.　 Jorge Eduardo Costilla Sanchez and Ezequiel Cardenas Guillen direct the Gulf Cartel's trafficking and sale of narcotics and ensure the flow of illicit proceeds earned from the drug trade back to the Gulf Cartel's coffers.　 Ezequiel Cardenas Guillen is the brother of Osiel Cardenas Guillen, who was identified as a significant foreign narcotics trafficker in 2001. Osiel Cardenas Guillen was extradited from Mexico to the United States in January 2007.

Los Zetas were identified under the Kingpin Act in 2009. Heriberto Lazcano Lazcano and Miguel Angel Trevino Morales, as leaders of Los Zetas, control drug smuggling operations and battle rival cartels trying to expand into Gulf Cartel/Zeta territory.　 Historically, Los Zetas are considered to be the armed-wing of the Gulf Cartel, but they often operate independently.

Treasury's OFAC is responsible for an ongoing effort under the Kingpin Act to apply financial measures against significant foreign narcotics traffickers worldwide.　 Since June 2000, more than 475 businesses and individuals associated with 82 drug kingpins have been designated by OFAC. Designation action freezes any assets the designees may have under U.S. jurisdiction and prohibits U.S. persons from conducting transactions or dealings in the property interests of the designated individuals and entities

Penalties for violations of the Kingpin Act range from civil penalties of up to 1.075 million per violation to more severe criminal penalties.　 Criminal penalties for corporate officers may include up to 30 years in prison and fines of up to $5 million.　 Criminal fines for corporations may reach $10 million. Other individuals face up to ten years in prison for criminal violation of the Kingpin Act and fines pursuant to Title 18 of the United States Code.

Treasury Secretary Timothy F. Geithner Written Testimony
before the House Financial Services Committee

Chairman Frank, Ranking Member Bachus, and members of the Financial Services Committee, thank you for the opportunity to testify before you today about the Administration's plan for financial regulatory reform.

On June 17, President Obama unveiled a sweeping set of regulatory reforms to lay the foundation for a safer, more stable financial system; one that properly delivers the benefits of market-driven financial innovation while safeguarding against the dangers of market-driven excess.

The President's plan focuses on the essential reforms. It addresses the core causes of the current economic crisis. It addresses the areas critical to confronting future vulnerabilities. And, in pursuing what amounts to the most extensive overhaul of our financial regulatory regime in decades, it makes clear to the American people that their government, at an early stage in this new Administration, is intent on fixing the basic regulatory flaws that caused extensive damage to families and businesses.

Over the past five weeks, in Congress and in the press, among legislators and business leaders, academics and advocates, the Administration's proposals have spurred an important and sometimes heated debate about how best to reform the financial regulatory system. That debate is to be expected, and is welcome. While crafting our plan, the Administration sought input from all points of view, considered all options and heard many of the opinions being expressed today.

We understand that on any issue this complex and this important there will be areas where parties genuinely disagree, and we look forward to refining our recommendations through the legislative process.

But there should be no disagreement on the need to act.　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　

Over the past two years, we have faced the most severe financial crisis since the Great Depression. The damage has been indiscriminate and unforgiving. Millions of Americans have lost their jobs; families have lost their homes; small businesses have shut down; students have deferred college educations; and seniors have shelved retirement plans. Some of our largest financial institutions failed; others came under extraordinary pressure; and many of the securities markets that are critical to the flow of credit broke down.

As a country, we now know that our financial system failed in its most basic responsibility to be stable and resilient enough to provide credit while protecting consumers and investors.

We now know that our regulatory regime permitted an excessive build-up of leverage, both outside the banking system and within the banking system; that the shock absorbers critical to preserving the stability of the financial system – capital, margin, and liquidity cushions in particular – were inadequate to withstand the force of the global recession; and that they left the system too weak to withstand the failure of major financial institutions.

We now know that millions of Americans were left without adequate protection against financial predation, especially in the mortgage and consumer finance areas; and that many were unable to evaluate the risks associated with borrowing to support the purchase of a home, a car, or an education.

And, we know that the United States entered this crisis without an adequate set of tools to contain the risk of broader damage to the economy and to manage the failure of large, complex financial institutions.

As a result, American families have made essential changes and they expect their government to do the same. There exists today a national mandate, not seen in years, to reform our outdated and ineffective regulatory system.

Still, despite that reality, there are some who suggest we are trying to do too much too soon, and that we should wait until the crisis has definitively receded. Others say we do not need comprehensive change or that it will destroy innovation. And with respect to consumer protection in financial services, there are even those who contend we should leave things as they are.

That is not surprising. Every financial crisis of the last generation has sparked some effort at reform, but past attempts began too late, after the will to act had subsided.

That cannot happen this time.

The reforms proposed by the President are necessary. They would substantially alter the ability of financial institutions to escape regulation, to choose which regulator suits them best, to shape the content of future regulation and to continue the financial practices that were lucrative for parts of the industry for a time, but that ultimately proved so damaging. That is why we have to act, and why we need to deliver real, meaningful change.

The Administration welcomes the commitment of this Committee and your counterparts in the Senate, as well as other key committees and the Congressional leadership, to pass legislation this year. And the Administration is moving aggressively to help advance the overall process.

In the weeks following the President's announcement, we have delivered detailed legislative language to Congress on virtually all of our proposals: on the enhanced regulation of our largest, most interconnected financial firms; on the supervision and regulation of federal depository institutions; on new resolution authority; on payments and settlement systems;　 on investor protection;　 on private fund registration; on executive compensation; 　on securitization and credit rating agencies; and on the proposed new Financial Services Oversight Council and Consumer Financial Protection Agency (CFPA).

We are also working to put in place reforms that do not require legislation. We have used the President's Working Group on Financial Markets to pull together all government agencies that oversee elements of the financial system to formulate more detailed proposals for implementing the comprehensive reforms outlined by the President.　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　

By now the details of our plan are widely known and so I would like to provide some additional context by explaining our key priorities for reform.

Consumer Protection

Let me begin with a pressing concern for this Committee – building strong protections for consumers, and ensuring they can understand the risks and rewards associated with the products sold to them. I know you will soon be marking up legislation on this issue.

There is broad agreement that consumer protection needs to be stronger. Achieving this objective requires mission focus, market-wide coverage, and consolidated authority, none of which exist in today's system.

That is why we are proposing one agency for one market place with one mission – protecting consumers.

The case for the Consumer Financial Protection Agency is clear.

First, non-banks such as mortgage brokers and large independent mortgage companies, consumer credit companies and pay-day loan operations, currently operate under no federal supervision. No federal agency sends consumer protection examiners into these institutions to review their files or interview their salespeople. No federal regulator collects information from them, except for limited mortgage data.

In the years before the crisis, capital flowed heavily to these unsupervised non-banks in large measure because they enjoyed the advantage of weak consumer oversight. Banks were left with the untenable choice of lowering their standards to compete or giving up market share.

The proposed CFPA would fix this problem and ensure a level playing field by extending the reach of federal oversight to all financial firms, no matter whether they are banks or non-banks.

Second, even where federal oversight exists, standards are weakened by the ability of banks and thrifts to choose the regulator that will have the least restrictive oversight of consumer protection, something we also saw in the years leading up to the current crisis.

The President's proposal would correct this by consolidating responsibility for consumer protection into one agency, meaning financial institutions would no longer be able to shop for the weakest regulator and pursue a race to the regulatory bottom.　　　　　　　　　　　　　　　　　　　　　　　　　　　

Third, the banking agencies responsible for implementing and enforcing consumer protection have higher priorities. The agencies' primary focus is the safety and soundness of the institutions they oversee. As a matter of mission and internal organization, they are focused on the effect of a bank's products and practices on the bank itself, rather than the effect on consumers. That is why the CFPA would have as its sole mission examining how a product or practice affects consumers.

Importantly, nothing in the CFPA's mission or authority would conflict with or undermine the safety and soundness of banking institutions. Our proposal ensures cooperation with prudential regulators by placing one of them on the board of directors and requiring examiners to exchange examination reports.

Making banks act fairly and transparently with their customers only enhances their safety and soundness. Market-wide jurisdiction of the CFPA will ensure that banks are not forced to choose between lowering their standards and giving up market share.

Finally, the government agencies that have responsibility for consumer financial protection are limited in their ability to do something about the problems they encounter because they have only one set of authorities available to them, instead of the full range, from rule-writing to supervision to enforcement. This leads to inertia and finger-pointing in place of action. And it makes any action taken less likely to be effective.

For example, when it comes to credit cards, the Federal Reserve has substantial power to write rules but has little authority to enforce them outside of bank holding companies, while the Office of the Comptroller of the Currency has little authority to write rules but wide power to enforce them. As concerns about fairness and transparency emerged, each agency looked to the other to act and, in the end, not enough was done.

Even in cases where agencies have what, in principle, should be the more flexible authority to issue regulatory guidance to institutions, they are hampered by the fact that several agencies have similar authority.

In the case of subprime mortgages, it took the federal banking agencies until June 2007 to reach final consensus on supervisory guidance imposing even general standards on subprime mortgages. By then it was too late.

Our consumer protection proposal would put an end to this problem by giving the CFPA consolidated authority to write rules, supervise compliance and take enforcement action when there are violations.

It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion. Our proposal achieves that by ensuring consumer choice, preserving innovation, strengthening depository institutions, reducing regulatory costs, and increasing national regulatory uniformity and accountability.　

Financial Stability

Our second priority was creating a more stable financial system by strengthening supervision and regulation of financial firms.

That necessarily begins with higher capital requirements. The most important thing to lowering risk in the financial system is stronger capital cushions.

The Committee is well aware that in the years leading up to this crisis, as rising asset prices, particularly in housing, concealed a sharp deterioration of some of the underwriting standards for loans, risks built up substantially while capital cushions did not. The nation's largest financial firms, already highly leveraged, became increasingly dependent on unstable sources of short-term funding.

These firms did not plan for the potential demands on their liquidity during a crisis. And when asset prices started to fall and market liquidity froze, they were forced to pull back from lending, limiting credit for households and businesses.

Looking back it is clear that regulators did not require firms to hold sufficient capital to cover risks from their trading assets, high-risk loans, and off-balance sheet commitments.

Under our plan, that will change. Financial firms will be required to follow the example of millions of families across the country that are saving more money as a precaution against bad times. They will be required to keep more capital and liquid assets on hand and, importantly, the biggest, most interconnected firms will be required to keep even bigger cushions.

Now, higher capital requirements are an important step towards longer-term stability, but they are only the first step.

While many of the financial firms at the center of this crisis were under some form of federal supervision and regulation, that oversight did not do enough. A patchwork of supervisory responsibility, loopholes that allowed some institutions to shop for the weakest regulator, and the rise of new financial institutions and instruments that were almost entirely outside the government's supervisory framework left regulators largely blind to emerging dangers and without the tools needed to address them.

That is why we propose evolving the Federal Reserve's authority to create a single point of accountability for the consolidated supervision of all large, interconnected firms whose failure could threaten the stability of the system, regardless of whether they own an insured depository institution. This is a role the Fed plays today, given its supervision and regulation of bank holding companies, including all major U.S. commercial and investment banks.　

While our plan gives some new authority – along with necessary accountability – to the Fed, it also takes some away. That includes transferring the Fed's consumer protection responsibility to the CFPA and requiring the Fed to receive written approval from the Secretary of the Treasury before exercising its emergency lending authority.

Alongside the new role played by the Fed, there must also be a mechanism to look at the system as a whole for dangers, given that risk can emerge from almost any quarter.

That is why we are proposing a Financial Services Oversight Council to bring together the heads of all of the major federal financial regulatory agencies. This Council will improve coordination of policy and resolution of disputes among the agencies. It will have a significant consultative role to play in helping preserve financial stability. And, most importantly, it will have the power to gather information from any firm or market to help identify emerging risks.

Improving the supervision and regulation of financial firms broadly also requires reducing the ability of depository institutions to choose their regulator and regulatory framework. To address this problem, we have proposed eliminating the thrift and thrift holding company charter and removing other loopholes in the Bank Holding Company Act.

Market Oversight

The third priority that guided our decision making was establishing comprehensive regulation of financial markets.

The current financial crisis emerged after a long and remarkable period of growth and innovation.　 New instruments, such as over-the-counter (OTC) derivatives, allowed risks to be spread quickly and widely, enabling investors to diversify their portfolios in new ways and enabling banks and other companies to shed exposures that had once resided on their balance sheets.　

However, the OTC derivatives markets, which were thought to efficiently promote dispersion of risk to those most able to bear it, instead became a major channel of contagion through the financial sector in the crisis.　 When fear spread that any institution could fail, the markets for risk transfer and liquidity froze – making it difficult for all financial institutions to maintain daily operations.

Two weeks ago, I testified at a joint hearing of this committee and the House Agriculture Committee on our comprehensive regulatory framework for the OTC derivatives markets. I outlined how our plan would provide strong regulation and transparency for all OTC derivatives regardless of whether the derivative is customized or standardized. In addition, I discussed how our plan will provide for strong supervision and regulation of all OTC derivative dealers and all other major participants in the OTC derivative markets.

We intend very soon to send up draft legislation on derivatives to implement our proposal.

Alongside reforms in the derivatives market, we also propose enhanced regulation of the securitization markets.

In the years preceding the crisis, mortgages and other loans were aggregated with similar loans and sold in tranches to a large and diverse pool of new investors with different risk profiles. Securitization, by breaking down the traditional relationship between borrowers and lenders, created various conflicts of interest that market discipline failed to correct.

Loan originators failed to require sufficient documentation of income and ability to pay.　 Securitizers failed to set high standards for the loans they were willing to buy, encouraging underwriting standards to sag.　 Investors were overly reliant on credit rating agencies, whose procedures proved no match for the complexity of the instruments they were rating.　 In each case, lack of transparency prevented market participants from understanding the full nature of the risks they were taking.

In response, the President's plan requires securitization sponsors to retain five percent of the credit risk of securitized exposures; it requires transparency of loan level data and standardization of data formats to better enable investor due diligence and market discipline; and, with respect to credit rating agencies, it ends the practice of allowing them to provide consulting services to the same companies they rate, requires these agencies differentiate between structure and other products, and requires disclosure of any "ratings shopping" by issuers.

Crisis Resolution

Our fourth priority was addressing the basic vulnerabilities in our capacity to manage future crises.

The United States came into the current crisis without an adequate set of tools to contain the risk of broader damage to the economy and to manage the failure of large, complex financial institutions. That left the government with extremely limited choices when faced with the failure of the largest insurance company in the world and one of the largest U.S. investment banks.

That is why, in addition to addressing the root causes of our current crisis, we must also act preemptively to provide the government better tools to manage future crises. To do that, we have proposed a new resolution authority for financial firms whose disorderly failure would threaten the stability of the financial system.　

Our proposal is modeled on the existing FDIC resolution regime for banks. This exception allows the FDIC to depart from the least cost resolution standard only when financial stability is at risk. Similarly, our resolution authority would only be for extraordinary times and would be subject to very strict governance and control procedures.

Any costs to the taxpayer from the use of this authority would be recovered through ex post assessments on large financial firms. As such, it will reduce moral hazard by allowing the government to resolve failing large, interconnected financial institutions in a way that imposes costs on owners, creditors and counterparties, making them more vigilant and prudent.

No one should assume that the government will step in and bail them out if their firm fails.　

In addition, we propose that the biggest firms prepare, continuously update, and periodically provide to regulators a credible plan for their rapid resolution in the event of severe financial distress. This would create incentives for firms to better monitor and simplify their organizational structure and would better prepare the government, as well as the firm's investors, creditors, and counterparties, for the possibility of a firm's collapse.

The key test of these reforms will be whether we make this system strong enough to withstand the stress of future recessions and the failure of large institutions.

Level Playing Field Internationally

The final priority of the Administration was working with our global partners to raise international regulatory standards and improve international cooperation.

As we have witnessed during this crisis, financial stress can spread easily and quickly across national boundaries. Yet, regulation is still set largely in a national context. Without consistent supervision and regulation, financial institutions will tend to move their activities to jurisdictions with looser standards, creating a race to the bottom and intensifying systemic risk for the entire global financial system.

The United States is playing a strong leadership role in efforts to coordinate international financial policy through the G-20, the Financial Stability Board, and the Basel Committee on Banking Supervision. Alongside our partners, we are proposing that the international banking regulators responsible for setting capital requirements take forward their work on reforming capital ratios to more effectively constrain leverage in the future. More broadly, we will call on the international banking regulators to develop proposals by the end of this year for countries to have the necessary tools to quickly resolve failures of cross-border financial firms.

Conclusion

Over the past six months, in responding to the current economic crisis, the Obama Administration has taken extraordinary action.

We moved quickly to restore confidence in the banking system. Without first stabilizing and repairing the financial system, broader economic recovery would not be possible. In doing so, we have increased transparency and disclosure, helping to bring billions of dollars of private capital into banks so they could safeguard against a deeper recession, and enabling some banks who took taxpayer funds to start paying back the government.

We worked to ease the housing crisis by helping to bring mortgage rates down to historic lows and establishing new programs to allow responsible homeowners to refinance into affordable mortgages or alter at-risk loans and help homeowners lower their monthly mortgage payments. Estimates indicate that up to 3 to 4 million homeowners will be offered trial loan modifications under the Administration's program.

We worked to offset the dramatic contraction in demand by working with Congress to put in place the most sweeping economic recovery package in our nation's history – a comprehensive program of immediate tax incentives for businesses and households, support for state and local governments, and investments in critical economic priorities, from infrastructure and energy to health care and education. The Recovery Act was designed to provide a sustained boost to economic demand, concentrated over a two year period and, as designed, the largest effects on the spending side will come in the next six months.

Through the G-20 and G-8, we are working with the major economies of the world on a coordinated program of macroeconomic stimulus and financial stabilization, alongside regulatory reform. This has amounted to the most aggressive international response to any financial crisis in the last fifty years, implemented with unprecedented speed and breadth.

Because of these steps, in just six months, the Administration has substantially reduced the risk of a much deeper and more prolonged recession. We have begun stabilizing an economy that in January was in a free-fall. And we have seen improvements that have been more substantial and have come more quickly than expected when we were designing our response in December and January. Business and consumer confidence has started to improve, housing markets have begun to stabilize, the cost of credit has fallen significantly and credit markets are starting to open up.

But there is still a long way to go. We have a lot more work to do to lay the foundation for a more sustainable recovery, with the gains more broadly shared among all Americans, and central to that effort is passing comprehensive regulatory reform legislation by the end of the year.　

We simply cannot afford inaction on this issue. We cannot afford a situation where we leave in place vulnerabilities that will sow the seeds for future crises, and prevent our financial system from functioning properly.　

The United States is the world's most vibrant and flexible economy, in large measure because our financial markets and our institutions create a continuous flow of new products, services and capital. That makes it easier to turn a new idea into the next big company.

America's tradition of innovation has been vital to our prosperity. The reforms proposed in the Administration's plan are designed to strengthen our markets by restoring confidence and accountability, while preserving that tradition of innovation.

In the weeks and months ahead I look forward to working this Committee to help pass regulatory reform legislation and, in turn, build a stronger American economy.

Thank you.

U.S. Fact Sheet: First Cabinet-level Meeting of Economic Track of U.S.-China Strategic and Economic Dialogue

The first cabinet-level meeting of the U.S.–China Strategic and Economic Dialogue addressed a range of critical bilateral and global economic, environmental and diplomatic issues.　 The Economic Track of the Dialogue, chaired by Treasury Secretary Timothy Geithner and China 's Vice Premier Wang Qishan, laid out a framework for U.S.-China cooperation to steer a course of sustainable and balanced global growth.　 That framework of cooperation has four pillars: macroeconomic and structural policies to achieve sustainable and balanced growth, promoting more resilient, open, and market-oriented financial systems, strengthening trade and investment ties, and strengthening the international financial architecture.　 Twelve U.S. Cabinet officials and agency heads joined Secretary Geithner for two days of economic discussions with Vice Premier Wang and a distinguished delegation of Chinese ministry and agency heads.

Promoting a Strong Recovery and More Balanced Growth. The most urgent issue for citizens of both nations is recovery from the global economic crisis and the resumption of sustained growth in jobs and incomes. The United States and China have responded to the global economic crisis with comprehensive stimulus measures and financial stability plans that have boosted confidence and supported demand.　 Both countries pledged to maintain their strong policy responses until recovery is secured.

The two sides noted that these economic programs are working.　 In the United States , confidence has returned, and there are signs that the economy has bottomed out and will start to grow in the second half of the year. 　 China 's economy reached the bottom of its cycle in the first quarter and has already started to rebound. U.S. and Chinese external imbalances are declining.

Recognizing that continued close cooperation between the United States and China is critical to the health of the world economy, the two sides committed to policies that would lead to more sustainable and balanced growth in the future.　 U.S. policy will reinforce and sustain recent gains in private savings rates and will bring the fiscal deficit down to a sustainable level by 2013, which in turn means a smaller role for the U.S. consumer in driving global growth than in the past half decade. China 's policies in turn will aim to increase the contribution of domestic consumption to economic growth through measures such as strengthening and extending the social safety net, reform of the health care system, strengthening public and private pensions, and increasing minimum subsistence grants for the poor.　 China 's measures to develop the services sector and shift towards lighter industries will be an important part of this process.　 These policies will also shift China away from heavy industry towards a less energy- and carbon-intensive growth path over time.

As U.S. savings rise, a Chinese economy that is powered by domestic demand growth and greater household consumption will contribute to stronger, more sustainable, and more balanced global economic growth.

Promoting More Resilient, Open, and Market-Oriented Financial Systems. 　Achieving sustainable and more balanced growth in both economies will depend on more resilient and efficient financial systems.　 Although the two countries face different challenges in their financial systems, successful reform of both will be equally important to global financial resilience and rebalancing.

The United States is committed to stronger regulation and supervision of its financial system.

China will take a series of measures to build a more market-based financial system. 　China will promote consumer finance; allow foreigners to invest more in China's capital markets by accelerating the allocation of Qualified Foreign Institutional Investor quotas to $30 billion; increase the number of joint-venture securities companies that can participate in brokerage, proprietary trading　 and advisory services; allow foreign banks incorporated in China to underwrite corporate bonds on China's inter-bank market on the same basis as Chinese banks; and promote the listing of qualified overseas companies on Chinese stock markets and of Chinese companies on U.S. stock markets.　

The United States welcomed China 's plans to liberalize interest rates.　 Higher deposit interest rates will result in more efficient use of capital by firms, supporting the rebalancing of the economy away from investment in capital- and carbon-intensive industries and towards household consumption.　

The United States is committed to strengthening its financial system. Further development and reform of the Chinese financial sector, including liberalizing interest rates and providing a wider variety of financial products and services, will promote the shift to a more domestic-demand and consumption-driven economy.　 It will also create new opportunities for U.S. financial services firms.　

Strengthening Trade and Investment. The United States and China are among the biggest beneficiaries of the global trading system and share a common interest in ensuring that global trade and investment remain open and rules-based.　　 China and the United States reiterated their commitments in the G-20 to resist protectionist measures during this global economic crisis, complete an ambitious Doha trade round, and continue to dismantle barriers to trade and investment.

China intends to undertake several key measures that will create new opportunities for U.S. firms and workers through increased trade and investment over time.　 China announced its intention to further open its service markets to private investment and decentralize its foreign investment reviews, including by raising over time the dollar threshold of foreign investments that requires central government review. 　Chinese authorities also clarified that foreign-invested enterprises would be treated the same as domestic producers in qualifying for government procurement of goods and agreed to intensify efforts to join the WTO Government Procurement Agreement.

Strengthening the International Financial Architecture. The United States and China recognized the critical role that the international financial institutions play in responding to crisis and ensuring sustainable and balanced growth.　 The United States and China agreed to work together to ensure China 's full engagement and representation in the design of key multilateral agreements and groupings, such as the G20, the Financial Stability Board, and the international financial institutions. 　Both countries agreed to work together constructively and cooperatively to promote reforms that strengthen the legitimacy of these institutions and to ensure that they have the resources and the effectiveness necessary to their task.　

The work of global rebalancing will require sustained cooperation bilaterally and multilaterally.　 The first meeting of the U.S.-China S&ED has established a strong framework for cooperation into the future.

ACT SHEET: Administration’s Regulatory Reform Agenda Moves Forward:
New Independence for Compensation Committees

Today, as part of its push for comprehensive regulatory reform, Treasury delivered draft legislation to Congress that would take steps to ensure that compensation committees are independent in fact, not just in name.　 Compensation committees are responsible for negotiating executive compensation arrangements that protect long-term shareholder value.　 Yet some compensation committees may not be fully independent of management--for example, because the directors themselves stand to gain from the decisions of executives.　 And even where the members of the committee are independent of management, they may lack the tools to bargain effectively with executives over complex compensation decisions or may receive advice from consultants or legal counsel that face conflicts of interest.

The Administration's proposed legislation takes three important steps to ensure that compensation committees have the independence and expert assistance they need to serve their important role:　

First, the legislation requires that members of the compensation committee meet exacting new standards for independence, just as Sarbanes-Oxley did for members of audit committees.

Second, to ensure that committees are receiving objective advice, the legislation requires that any compensation consultants and legal counsel they hire be independent from management.

Finally, the legislation requires that compensation committees be given the authority and funding to hire independent compensation consultants, outside counsel, and other advisers who can help ensure that the committee bargains for pay packages in the best interests of shareholders. At the same time, it requires that if the committee decides not to use its own compensation consultant, it explain that decision to shareholders.　　

I. To ensure that compensation committees setting executive pay are independent from management, the Administration will require that compensation committee members meet stronger standards for independence.

Directors responsible for ensuring that executive pay is in the best interest of shareholders should not have financial conflicts with management. Some directors have financial relationships with the company and its executives that may compromise their independence.　 Studies have linked some of the most controversial pay practices, such as option backdating, with the absence of independent directors on the board.　 A study by Lucian Bebchuk of Harvard, Yaniv Grinstein of Cornell and Urs Peyer of INSEAD, for example, concluded that backdating is "correlated with . . . CEO influence over internal decision-making processes," such as "the lack of a majority of independent directors on the board."^[i]　 Current law does not prohibit these conflicted directors from sitting on the committees that set executive pay at American companies.

Strict independence standards have curbed abusive accounting practices.　 The Administration's legislation would require that compensation committee members meet strict independence standards--just as Sarbanes-Oxley did for audit committees.　 The independence of audit committees has been a critical factor in restoring investors' confidence in American companies.　 For example, academic studies have linked increased audit committee independence with the reduced incidence of　 the most abusive accounting practices, such as the practice of "managing" the company's earnings in order to satisfy financial analysts' expectations.^[ii]

While stock exchanges have set independence standards, they may not go far enough to ensure shareholder interests are protected: The major stock exchanges now require that compensation committee members meet certain minimum standards for independence, and studies have indicated that directors who meet these minimum standards may be better guardians of shareholder interests.^[iii]　 But under New York Stock Exchange standards, directors can still be considered independent even if they receive up to $100,000 in outside compensation from the company--in addition to directors' fees.　 And a director who owns or operates a business receiving up to $1 million in revenue from the company is considered independent under these standards.　

II. The Administration will give compensation committees the authority and funding to retain their own compensation consultants and counsel to help them set compensation packages that protect shareholder interests.

Compensation committees can be at a disadvantage in setting pay due to a lack of independent expertise.　　 Compensation committees may negotiate pay at a significant disadvantage because executives use compensation consultants to advocate for their views -- while the committee may not have access to experts of their own.　 Under those circumstances, it is unsurprising that academic studies have repeatedly established a link between the use of compensation consultants and higher pay.　 A study by Chris Armstrong and Christopher Ittner of the University of Pennsylvania and David Larcker of Stanford found that the use of consultants was most closely correlated with higherCEO pay most when other shareholder protections are weakest, noting that "compensation consultants provide a mechanism for CEOs of companies with weak governance to extract and justify excess pay."^[iv]

　Providing compensation committees with access to independent consultants can level the playing field in a way that protects shareholder interests. Directors themselves have long recognized that management's use of consultants without comparable access on the part of compensation committees may compromise their ability to establish compensation packages that protect shareholder interests.　 In 2003, a blue-ribbon panel established by the National Association of Corporate Directors recommended that compensation committees be given access to their own consultants.^[v]　 The Business Roundtable's own "Executive Compensation Principles" make clear that "the compensation committee should have independent, experienced expertise available to provide advice on executive compensation arrangements and plans."^[vi]　

Just as compensation committees need access to their own compensation consultants to protect shareholder interests, committees should have the authority to hire legal counsel and other advisers that report only to the committee. For the same reasons that compensation committees need the assistance of their own compensation consultant in order to ensure that executive pay is designed to protect shareholder interests, directors also need help from independent legal counsel when bargaining with executives over compensation.　 Many companies have already authorized their compensation committees to retain independent counsel as they see fit, and giving the committee this authority has long been considered a best practice among corporate governance experts.^[vii] In 2003, the well-respected group of top corporate lawyers and academics that comprised the American Bar Association Task Force on Corporate Responsibility concluded that compensation committees should have the authority to hire independent counsel,^[viii] while two prominent academics found it to be a "necessary conclusion" that "the independent directors of a public company have their own legal counsel."^[ix]　

III.　 The Administration will ensure that compensation consultants and outside counsel that work for compensation committees are independent from management.

Compensation consultants sometimes also provide non-compensation related services to companies and stand to profit when executives agree to use their firms for those services. 　In 2003, the Conference Board's Commission on Public Trust and Private Enterprise, which included both former CEOs and public officials such as John Snow, concluded that major financial scandals were frequently accompanied by the "excessively close relationship between executives and compensation consultants who recommend to the board appropriate levels of executive compensation."^[x]　 In December 2007, the House Committee on Oversight and Government Reform conducted a comprehensive survey of conflicts among compensation consultants, noting further that there appears to be a correlation between the retention of compensation consultants with significant conflicts of interest and levels of CEO pay.　　 The report's key findings indicated that:

Compensation consultant conflicts of interests are "pervasive," affecting at least 113 of the Fortune 250 companies;

The fees "earned by compensation consultants for providing other services often far exceed those earned for advising on executive compensation;"

Some compensation consultants received "over $10 million" in 2006 to provide non-compensation related services; according to the committee, "[o]ne Fortune 250 company paid a compensation consultant over $11 million for other services in 2006, over 70 times more" than for compensation services; and

Over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings.^[xi]

This legislation recognizes that compensation consultants provide valuable services to companies, while ensuring that advice given directly to compensation committees is independent. While consulting firms offer expertise to companies on emerging best practices across a wide range of business contexts, an independent review of management's proposals is also needed to ensure that compensation is structured in order to maximize long-term shareholder value.　 As a result, this legislation allows the SEC to strike the appropriate balance between the need for companies to have the benefit of expertise and for compensation committee members to receive independent advice.

　　
[i] See, e.g., Lucian Bebchuk, Yaniv Grinstein, and Urs Peyer, Lucky CEOs and Lucky Directors (June 2009), at 3.

[ii] April Klein, Audit Committees, Board of Director Characteristics, and Earnings Management (October 2006).

[iii] Sanjai Bhagat & Brian J. Bolton, Sarbanes-Oxley, Governance and Performance (March 2009).

[iv] Chris Armstrong et al., Economic Characteristics, Corporate Governance, and the Influence of Compensation Consultants on Executive Pay Levels (June 2008).

[v] NACD Blue Ribbon Commission, Report on Executive Compensation and the Role of the Compensation Committee (2003).

[vi] The Business Roundtable, Executive Compensation Principles (2007).

[viii] Report of the American Bar Association Task Force on Corporate Responsibility (March 2003).

[ix] Geoffrey C. Hazard, Jr. & Edward B. Rock, A New Player in the Boardroom: The Emergence of the Independent Directors' Counsel, 59 Bus. Law. 1389 (August 2004).

[x] James Fanto, Whistleblowing and the Public Director: Countering Corporate Inner Circles 83 Or. L. Rev. 435 (2004) (quoting The Conference Board, Commission on Public Trust and Private Enterprise 2 (January 2003)).

[xi] Majority Staff of the United States House of Representatives Committee on Oversight and Government Reform, Executive Pay: Conflicts of Interest Among Compensation Consultants (December 2007).

Treasury International Capital (TIC) Data for May

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for May 2009. The next release, which will report on data for June 2009, is scheduled for August 17, 2009.

Net foreign purchases of long-term securities were negative $19.8 billion.

Net foreign purchases of long-term U.S. securities were $7.9 billion. Of this, net purchases by private foreign investors were $31.3 billion, and net purchases by foreign official institutions were negative $23.4 billion.

U.S. residents purchased a net $27.7 billion of long-term foreign securities.　

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $37.2 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $9.8 billion. Foreign holdings of Treasury bills increased $53.1 billion.

Banks' own net dollar-denominated liabilities to foreign residents decreased $39.2 billion.

Monthly net TIC flows were negative $66.6 billion. Of this, net foreign private flows were negative $82.2 billion, and net foreign official flows were $15.6 billion.　

Complete data are available on the Treasury website at www.treas.gov/tic.

Fact Sheet: Administration's Regulatory Reform Agenda Moves Forward: Legislation for the Registration of Hedge Funds Delivered to Capitol Hill

Continuing its push to establish new rules of the road and make the financial system more fair across the board, the Administration today delivered proposed legislation to Capitol Hill to require all advisers to hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission (SEC). In recent years, the United States has seen explosive growth in a variety of privately-owned investment funds, including hedge funds, private equity funds, and venture capital funds. At various points in the financial crisis, de-leveraging by such funds contributed to the strain on financial markets.　 Because these funds were not required to register with regulators, the government lacked the reliable, comprehensive data necessary to monitor funds' activity and assess potential risks in the market. 　The Administration's legislation would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability.　

　

Protect Investors From Fraud And Abuse

Require Advisers To Private Investment Funds to Register With The SEC.　 Although some advisers to hedge funds and other private investment funds are required to register with the Commodity Futures Trading Commission (CFTC), and some register voluntarily with the SEC, current law generally does not require private fund advisers to register with any federal financial regulator. The Administration's legislation would, for the first time, require that all investment advisers with more than $30 million of assets under management to register with the SEC.　 Once registered with the SEC, investment advisers to private funds will be subject to important requirements such as:

Substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds

Disclosure requirements to investors, creditors, and counterparties of their advised private funds

Strong conflict-of-interest and anti-fraud prohibitions

Robust SEC examination and enforcement authority and recordkeeping requirements

Requirements to establish a comprehensive compliance program

Require Increased Disclosure Requirements. The Administration's legislation would require that all investment funds advised by an SEC-registered investment adviser be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements.

Protect Financial System From Systemic Risk

Monitor Hedge Funds For Potential Systemic Risk. Under the Administration's legislation, the regulatory requirements mentioned above would include confidential reporting of amount of assets under management, borrowings, off-balance sheet exposures, counterparty credit risk exposures, trading and investment positions, and other important information relevant to determining potential systemic risk and potential threats to our overall financial stability. The legislation would require the SEC to conduct regular examinations of such funds to monitor compliance with these requirements and assess potential risk. In addition, the SEC would share the disclosure reports received from funds with the Federal Reserve and the Financial Services Oversight Council. This information would help determine whether systemic risk is building up among hedge funds and other private pools of capital, and could be used if any of the funds or fund families are so large, highly leveraged, and interconnected that they pose a threat to our overall financial stability and should therefore be supervised and regulated as Tier 1 Financial Holding Companies.

Secretary Geithner Joins U.S. –UAE Business Council
to Discuss the Importance of Education
Policy in the Drive for Economic Growth

ABU DHABI – Treasury Secretary Tim Geithner joined HE Sheikha Lubna Al Qasimi, United Arab Emirates (UAE) Minister of Foreign Trade, today for a breakfast event hosted by the U.S.-UAE Business Council to recognize the importance of education policy in the Middle East in the drive for global economic growth.

The open dialogue provided Secretary Geithner and the UAE representatives with the opportunity to share views on the priorities and commitments of both the United States and the UAE, regarding the importance of developing a highly-educated work force within the context of sustainable economic growth.

"Just one month ago, President Obama reminded us that we must recognize that education and innovation will be the currency of the 21st century," said Secretary Geithner. "The group we have here with us today embodies that reality. It is conversations like this that move us one step closer to the President's commitment to deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world."

The event brought together a dozen people representing the UAE's economy, trade and education sectors.　 Attendees included HE Reem Al Hashemi, UAE Minister of State; HE Ahmed Al Sayegh, Chairman of the Masdar Initiative; and Aldar Academies and Fahad Saeed Al Raqbani, Deputy Director General of the Abu Dhabi Council for Economic Development.

"The UAE is one of the world's most open and dynamic economies," said Sheikha Lubna Al Qasimi. "The UAE's future sustainable economic growth will be derived from a concerted effort to develop and harness human capital.　 Education is therefore a fundamental economic policy pillar. This commitment to education has resulted in highly effective collaborative relationships with first-rate, American institutions, such as Harvard University, Johns Hopkins University, the Massachusetts Institute of Technology and New York University."

Other areas of the morning's discussion included:

The vision and strategy of creating a knowledge-based economy

Aligning the education sector with development goals

The challenges in meeting future needs in talent and labor

The role of women and young people in a country's economic development

Secretary Geithner's visit to Abu Dhabi is part of a week-long trip also including visits to London, England; Jeddah and Yanbu, Saudi Arabia and Paris, France.　 One of the objectives for Secretary Geithner on his visit to the Gulf is to further evaluate the contribution and significance of education within the framework of economic growth and sustainability.

Statement from Treasury Secretary Geithner on the Presidential Task Force on the Auto Industry

The U.S. Department of the Treasury today released the following statement from Secretary Tim Geithner as the government scales back its day-to-day involvement in the auto industry:

"With the emergence of both General Motors and Chrysler from bankruptcy, we enter a new phase of the government's unprecedented and temporary involvement in the automotive industry.

"I am very proud of the work done by the Auto Task Force, under the leadership of Steven Rattner and Ron Bloom, to help oversee the efficient, fair and commercial restructuring of two great American companies.

"With GM's restructuring complete, Steven Rattner, whose leadership and vision were invaluable to the Auto Task Force's efforts, has decided to transition back to private life and his family in New York City. We are extremely grateful to Steve for his efforts in helping to strengthen GM and Chrysler, recapitalize GMAC, and support the American auto industry. I hope that he takes another opportunity to bring his unique skills to government service in the future.

"Ron Bloom will assume leadership of the Task Force's activities as the government transitions its role away from day-to-day restructuring to monitoring this vital industry and protecting the substantial investment the American taxpayers have made in GM, Chrysler, and GMAC.

"Because of the President's commitment to this industry and the deep sacrifices of all stakeholders, GM and Chrysler have achieved a quick restructuring, and the economy avoided the devastation that would have accompanied their liquidation. Now, with day-to-day management of these companies in the hands of the private sector, the American taxpayers have a better chance of recouping their investment in these companies.

"There is still much work ahead to ensure that GM and Chrysler re-emerge as stronger, more competitive companies. President Obama has made it perfectly clear that it is the responsibility of their private boards of directors and management teams to deliver that result. And thanks to the hard work of Steve, Ron, and the entire Auto Task Force, they have a much better chance today of rebuilding those companies and making them once again symbols of American success."

.S.-China Strategic and Economic Dialogue to be held July 27-28, 2009 in Washington, D.C.

Two-Day Meeting Co-Hosted by U.S Departments of State and Treasury to Focus on Addressing Mutual Challenges, Opportunities and Promoting U.S.-China Cooperation

WASHINGTON – The U.S. Departments of Treasury and State today announced that the first joint meeting of the U.S.-China Strategic and Economic Dialogue will be held in Washington, D.C. from July 27-28, 2009.

The Dialogue will focus on addressing the challenges and opportunities that both countries face on a wide range of bilateral, regional and global areas of immediate and long-term strategic and economic interests. This first meeting of the Dialogue will also set the stage for intensive, ongoing and future bilateral cooperative mechanisms.

Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy F. Geithner will be joined for the Dialogue by their respective Chinese Co-Chairs, State Councilor Dai Bingguo and Vice Premier Wang Qishan.

The schedule of press events will include but are not limited to an opening session on Monday, July 26 and a joint U.S.-China press conference on Tuesday, July 27.

Fact Sheet: Administration’s Regulatory Reform Agenda
Moves Forward
Legislation for Strengthening Investor Protection Delivered to Capitol Hill

To view the Legislative Language, please visit link.

Continuing its push to establish new rules of the road and make the financial system more fair for consumers and investors, the Administration today delivered proposed legislation to strengthen the SEC's authority to protect investors. The legislation outlines steps to establish consistent standards for all those who provide investment advice about securities, to improve the timing and the quality of disclosures, and to require accountability from securities professionals. The legislation would also establish a permanent Investor Advisory Committee to keep the voice of investors present at the SEC.

Fairness

Establish Consistent Standards for Broker-Dealers and Investment Advisers: Under current law, different standards apply for broker-dealers and investment advisers – even though many investors rely on the investment advice of broker-dealers in the same manner as an investment adviser. The Administration's legislation would give the SEC authority to require a fiduciary duty for any broker, dealer, or investment adviser who gives investment advice about securities, aligning the standards based on activity, instead of based on legal distinctions that are no longer meaningful. In addition, the SEC would be empowered to examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary, but are not in the investors' best interest.

Authority to Restrict or Limit Mandatory Arbitration: Although arbitration may be a reasonable option for many consumers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes – and eliminating access to courts – may unjustifiably undermine investor interests. The Administration's legislation would give the SEC authority to prohibit mandatory arbitration clauses in broker-dealer, municipal securities dealer, and investment advisory agreements.

Disclosure

Authority to Require Disclosure Prior to Purchase of a Fund: Currently most fund disclosures and prospectuses are not required to be delivered to investors until after a transaction is complete. Our legislation would give the SEC authority to regulate the quality and timing of disclosures. For example, the SEC could require a concise summary prospectus and a simple disclosure showing the costs of a fund in a comparative context prior to the completion of a sale.

Consumer Testing of Disclosures and Rules: The Administration's legislation would clarify the SEC's authority to conduct consumer testing and encourage it to do so, in order to create more effective and clearer disclosures and to better assess its rules and programs.

Accountability

Expand Protections for Whistleblowers: The SEC should gain the authority to establish a fund to pay whistleblowers for information that leads to enforcement actions resulting in significant financial awards. Currently, the SEC has the authority to compensate sources that provide evidence leading to a successful insider trading cases; that authority should be extended to other types of securities law violations. This authority will encourage insiders and others with strong evidence of securities law violations to bring that evidence to the SEC and improve its ability to enforce the securities laws. The Administration supports the creation of this fund using monies that the SEC collects from enforcement actions that are not otherwise distributed to investors.

Harmonize Liability Standards so that the SEC Can Pursue those who Aid and Abet Securities Fraud: The SEC currently has the ability to pursue actions against those who aid and abet securities fraud in cases brought under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, but not under the Securities Act of 1933 nor the Investment Company Act of 1940. The Administration's legislation closes this gap to create consistent remedies that the SEC can seek and eliminates significant limitations on the SEC's ability to pursue serious misconduct. The Administration's legislation also clarifies the legal standard for aiding and abetting and makes clear that the SEC can obtain penalties under any of its aiding and abetting provisions.

Require Accountability of Securities Professionals throughout the Financial Services Industry: Under current law, an individual barred from being an investment adviser because of serious misconduct could still apply to become a broker-dealer. The Administration's legislation would give the SEC authority to remove regulated persons from all aspects of the securities industry rather than just a specific segment.

Investor Engagement

Establish a Permanent Investor Advisory Committee: The SEC has recently established an Investor Advisory Committee, made up of a diverse group of well-respected investors, to advise on the SEC's regulatory priorities, including issues concerning new products, trading strategies, fee structures, and the effectiveness of disclosure. The Investor Advisory Committee would be made permanent by this legislation.

Secretary Timothy F. Geithner before the House Financial Services and Agriculture Committees
Joint Hearing on Regulation of OTC Derivatives

Chairman Frank, Ranking Member Bachus, Chairman Peterson, Ranking Member Lucas, members of the Financial Services and Agriculture Committees, thank you for the opportunity to testify today about a key element of our financial regulatory reform package – a comprehensive regulatory framework for the over-the-counter (OTC) derivatives markets.

Over the past two years, we have faced the most severe financial crisis in generations. Some of our largest financial institutions failed. Many of the securities markets that are critical to the flow of credit in our financial system broke down. Banks came under extraordinary pressure. And these forces magnified the overall downturn in the housing market and the broader economy.

President Obama, working with the Congress, has taken extraordinary steps to stabilize the economy and to repair the damage to the financial system. As we continue to put in place conditions for economic recovery, we need to lay the foundation for a safer, more stable financial system in the future.

This financial crisis has exposed a set of core problems with our financial system. The system permitted an excessive build-up of leverage, both outside the banking system and within the banking system.

The shock absorbers that are critical to preserving the stability of the financial system – capital, margin, and liquidity cushions in particular – were inadequate to withstand the force of the global recession, and they left the system too weak to withstand the failure of major financial institutions.

In addition, millions of Americans were left without adequate protection against financial predation, particularly in the mortgage and consumer finance areas. Many were unable to evaluate the risks associated with borrowing to support the purchase of a home or to sustain a higher level of consumption.

The United States entered this crisis without an adequate set of tools to contain the risk of broader damage to the economy and to manage the failure of large, complex financial institutions.

Many forces contributed to these problems. Household debt rose dramatically as a share of total income, financed by a willing supply of savings from around the world. Risk management practices at financial firms failed to keep abreast of the rising complexity of financial instruments. Compensation rose to exceptionally high levels in the financial sector, with rewards for executives unmoored from an assessment of long-term risk for the firm, thus mis-aligning the incentive structures in the system. Our framework of financial supervision and regulation, designed in a different era for a more simple bank-centered financial system, failed in its most basic responsibility to produce a stable and resilient system for providing credit and protecting consumers and investors.

The Administration proposed in June a comprehensive set of reforms to address the problems in our financial system that were at the core of this crisis and to reduce the risk of future crises.

We proposed to establish a new Consumer Financial Protection Agency with the power to establish and enforce protections for consumers on a wide array of financial products.

We proposed to put in place more conservative constraints on risk taking and leverage through higher capital requirements for financial institutions and stronger cushions in the core market infrastructure.

We proposed to extend the scope of regulation beyond the traditional banking sector to cover all firms who play a critical role in market functioning and the stability of the financial system.

We proposed to put in place stronger tools for managing the failure of large, complex financial institutions by adapting the resolution process that now exists for banks and thrifts.

We proposed to reduce the substantial opportunities for regulatory arbitrage that our system permitted by consolidating safety and soundness supervision for federal depository institutions, eliminating loopholes in the Bank Holding Company Act, moving toward convergence of the regulatory frameworks that apply to securities and futures markets, and establishing more uniform standards and enforcement of standards for financial products and activities across the system.

And we proposed to work with other countries to establish strong international standards, so the reforms we put in place here are matched and informed by similarly effective reforms elsewhere.

Any regulatory reform of magnitude requires deciding how to strike the right balance between financial innovation and efficiency, on the one hand, and stability and protection, on the other. We failed to get this balance right in the past. The reforms that we propose seek to shift the balance by creating a more resilient financial system that is less prone to periodic crises and credit and asset price bubbles, and better able to manage the risks that are inherent in innovation in a market-oriented financial system.

We consulted widely with members of Congress, consumer advocates, academic experts, and former regulators in shaping our recommendations. And we look forward to refining these recommendations through the legislative process.

One of the most significant developments in our financial system during recent decades has been the substantial growth and innovation in the markets for derivatives, especially OTC derivatives.

Because of their enormous scale and the critical role they play in our financial markets, establishing a comprehensive framework of oversight for the OTC derivative markets is crucial to laying the foundation for a safer, more stable financial system.

A derivative is a financial instrument whose value is based on the value of an underlying "reference" asset. The reference asset could be a Treasury bond or a stock, a foreign currency or a commodity such as oil or copper or corn, a corporate loan or a mortgage-backed security. Derivatives are traded on regulated exchanges, and they are traded off exchanges or over the counter.

The OTC derivative markets grew explosively in the decade leading up to the financial crisis, with the notional amount or face value of the outstanding transactions rising more than six-fold to almost $700 trillion at the market peak in 2008. Over this same period, the gross market value of OTC derivatives rose to more than $20 trillion.

Although derivatives bring substantial benefits to our economy by enabling companies to manage risks, they also pose very substantial challenges and risks.

Under our existing regulatory system, some types of financial institutions were allowed to sell large amounts of protection against certain risks without adequate capital to back those commitments. The most conspicuous and most damaging examples of this were the monoline insurance companies and AIG. These firms and others sold huge amounts of credit protection on mortgage-backed securities and other more complex real-estate related securities without the capacity to meet their obligations in an economic downturn.

Banks were able to get substantial regulatory capital relief from buying credit protection on mortgage-backed securities and other asset-backed securities from thinly capitalized, special purpose insurers subject to little or no initial margin requirements.

The apparent ease with which derivatives permitted risk to be transferred and managed during a period of global expansion and ample liquidity led financial institutions and investors to take on larger amounts of risk than was prudent.

The complexity of the instruments that emerged overwhelmed the checks and balances of risk management and supervision, weaknesses that were magnified by systematic failures in judgment by credit rating agencies. These failures enabled a substantial increase in leverage, outside and within the banking system.

Because of a lack of transparency in the OTC derivatives and related markets, the government and market participants did not have enough information about the location of risk exposures in the system or the extent of the mutual interconnections among large firms. So, when the crisis began, regulators, financial firms, and investors had an insufficient basis for judging the degree to which trouble at one firm spelled trouble for another. This lack of visibility magnified contagion as the crisis intensified, causing a very damaging wave of deleveraging and margin increases, and contributing to a general breakdown in credit markets.

Market participants and investors used derivatives to evade regulation, or to exploit gaps and differences in regulation, and to minimize the tax consequences of investment strategies.

The lack of transparency in the OTC derivative markets combined with insufficient regulatory policing powers in those markets left our financial system more vulnerable to fraud and potentially to market manipulation.

These problems were not the sole or the principal cause of the crisis, but they contributed to the crisis in important ways. They need to be addressed as part of comprehensive reform. And they cannot be adequately addressed within the present legislative or regulatory framework.

In designing its proposed reforms for the OTC derivative markets, the Administration has attempted to achieve four broad objectives:

	Preventing activities in the OTC derivative markets from posing risk to the stability of the financial system;
	Promoting efficiency and transparency of the OTC derivative markets;
	Preventing market manipulation, fraud, and other abuses; and
	Protecting consumers and investors by ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.

Our proposals have been carefully designed to provide a comprehensive approach. The plan will provide for strong regulation and transparency for all OTC derivatives, regardless of the reference asset, and regardless of whether the derivative is customized or standardized. In addition, our plan will provide for strong supervision and regulation of all OTC derivative dealers and all other major participants in the OTC derivative markets.

We propose to achieve this with the following broad steps:

First, we propose to require that all standardized derivative contracts be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems.

Central clearing involves the substitution of a regulated clearinghouse between the original counterparties to a transaction. After central clearing, the original counterparties no longer have credit exposure to each other – instead they have credit exposure to the clearinghouse only. Central clearing of standardized OTC derivatives will reduce risks to those on both sides of a derivative contract and make the market more stable. With careful supervision and regulation of the margin and other risk management practices of central counterparties, central clearing of a substantial proportion of OTC derivatives should help to reduce risks arising from the web of bilateral interconnections among our major financial institutions. This should help to constrain threats to financial stability.

Second, through capital requirements and other measures, we propose to encourage substantially greater use of standardized OTC derivatives and thereby to facilitate substantial migration of OTC derivatives onto central clearinghouses and exchanges.

We will propose a broad definition of "standardized" OTC derivatives that will be capable of evolving with the markets and will be designed to be difficult to evade. We will employ a presumption that a derivative contract that is accepted for clearing by any central counterparty is standardized. Further attributes of a standardized contract will include a high volume of transactions in the contract and the absence of economically important differences between the terms of the contract and the terms of other contracts that are centrally cleared.

We also will require that regulators carefully police any attempts by market participants to use spurious customization to avoid central clearing and exchanges. In addition, we will raise capital and margin requirements for counterparties to all customized and non-centrally cleared OTC derivatives. Given their higher levels of risk, capital requirements for derivative contracts that are not centrally cleared must be set substantially above those for contracts that are centrally cleared.

Third, we propose to require all OTC derivative dealers, and all other major OTC derivative market participants, to be subject to substantial supervision and regulation, including conservative capital requirements; conservative margin requirements; and strong business conduct standards. Conservative capital and margin requirements for OTC derivatives will help ensure that dealers and other major market participants have the capital needed to make good on the protection they have sold.

Fourth, we propose steps to make the OTC derivative markets fully transparent. Relevant regulators will have access on a confidential basis to the transactions and open positions of individual market participants. The public will have access to aggregated data on open positions and trading volumes.

To bring about this high level of transparency, we will require the SEC and CFTC to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives. We will require that OTC derivatives that are not centrally cleared be reported to a regulated trade repository on a timely basis.

These reforms will bring OTC derivative trading into the open so that regulators and market participants have clear visibility into the market and a greater ability to assess risks in the market. Increased transparency will improve market discipline and regulatory discipline, and will make the OTC derivative markets more stable.

Fifth, we propose to provide the SEC and CFTC with clear authority for civil enforcement and regulation of fraud, market manipulation, and other abuses in the OTC derivative markets.

Sixth, we will work with the SEC and CFTC to tighten the standards that govern who can participate in the OTC derivative markets. We must zealously guard against the use of inappropriate marketing practices to sell derivatives to unsophisticated individuals, companies, and other parties.

Finally, we will continue to work with our international counterparts to help ensure that our strict and comprehensive regulatory regime for OTC derivatives is matched by a similarly effective regime in other countries.

Turning our proposals into law will require that a number of difficult judgments be made. Some of these judgments involve assigning jurisdiction over particular transactions or particular market participants to particular regulatory agencies. We have been working with the SEC and the CFTC over the past few months to develop a sensible allocation of duties. We have made great progress in narrowing the outstanding issues, and intend to send up draft legislation that will provide for a clear allocation of oversight authority between the SEC and CFTC. In making these decisions, we are striving to utilize each agency's expertise, eliminate gaps in regulation, eliminate uncertainty about which agency regulates which types of derivatives, and maximize consistency of the regulatory approach of the two agencies.

Our plan will help prevent the OTC derivative markets from threatening the stability of the overall financial system.

By requiring central clearing of all standardized derivatives and by requiring all OTC derivative dealers and all other significant OTC market participants to be strictly supervised by the federal government, to maintain substantial capital buffers to back up their obligations, and to comply with prudent initial margin requirements, the regulatory framework that we seek to put in place should help lower systemic risk.

Our plan will help make the derivatives markets more efficient and transparent.

By requiring all standardized derivatives to be cleared through regulated central counterparties and executed on regulated exchanges or through regulated electronic trade execution systems and by requiring that detailed information about all types of derivatives be readily available to regulators, our plan will help ensure that the government is not caught--as it was in this crisis--with insufficient visibility into market activity, risk concentrations, and connections between firms.

Our plan will help prevent market manipulation, fraud and other abuses by providing full information to regulators about activity in the OTC derivative markets and by providing the SEC and the CFTC with full authority to police the markets.

Finally, our plan will help protect investors by taking steps to prevent OTC derivatives from being marketed inappropriately to unsophisticated parties.

As Congress moves to craft legislation to reform our financial system, we are moving quickly to advance the overall process.

Following the release of our White Paper on financial regulatory reform in mid-June, we sent up detailed legislative language for the establishment of the Consumer Financial Protection Agency.

We have used the President's Working Group on Financial Markets to pull together all government agencies that oversee elements of the financial system to begin the process of formulating more detailed proposals for implementing the comprehensive reforms outlined by the President.

The SEC is moving forward to put in place new rules to govern credit-rating agencies, which failed to adequately assess the risks of mortgage-backed and other structured securities at the center of the crisis.

The CFTC has announced hearings on whether to impose limits on speculation in energy derivatives in order to dampen price swings, and to require new disclosures by derivative traders.

SEC Chairman Schapiro and CFTC Chairman Gensler were recently on Capitol Hill testifying together about progress in coordinating their agencies' approaches to derivatives and developing a reasonable division of labor in the oversight of these markets.

We welcome the commitment of the Congressional leadership and of the key committees to move forward with legislation this year. This is an enormously complex project. It is important that we get it right. And we need a comprehensive approach.

This crisis caused enormous damage to trust and confidence in the U.S. financial system and to the American economy.

We share responsibility for fixing the system and we can only do that with comprehensive reform.

We look forward to working with you to achieve that objective.

Treasury Announces $486 Million in Recovery Act Funds to Create Jobs,
Provide Affordable Housing

With Funds from Fourth Award Round, More Than $1 Billion Obligated to Date under Innovative Recovery Program to Help Local Communities

WASHINGTON – As part of the Obama Administration's effort to create jobs and ease pressures on the housing market, the U.S. Department of the Treasury today announced $486 million in American Recovery and Reinvestment Act (Recovery Act) funding to spur the development of affordable housing units in Alabama, Arkansas, Connecticut, Georgia, Louisiana, Maryland, Massachusetts, Montana, New Hampshire, New Mexico, the Virgin Islands, and Vermont.

"Today's announcement of housing funds demonstrates how the Recovery Act is putting our nation on the path to economic stability, one community at a time," said Treasury Deputy Secretary Neal Wolin. "This initiative will help spur construction and development, create much needed jobs, and increase the availability of affordable housing for families around the country."

The labor and housing crises in this country are deeply inter-connected. Since their peak level at the beginning of 2006, housing starts have fallen almost 80 percent. Houses currently under construction are at a 13-year low, down more than 60 percent from the peak in the first quarter of 2006. This collapse has led to severe job losses in the residential building and specialty trades sector related to housing, with employment down by nearly one-third -- a loss of over one million jobs. Such losses not only indicate significant problems in the residential construction sector, but also suggest that the need for affordable housing has risen markedly during the recession.

In response, the Treasury Department and the Department of Housing and Urban Development have been implementing new efforts designed to help families while providing important assistance to homebuilders. Specifically, Treasury has launched an innovative program that will provide more than $3 billion from the Recovery Act to put people to work building quality, affordable housing for individuals and families affected by the current crisis.

Today, the Treasury Department is announcing the fourth round of recipients: $36 million in Alabama; $29 million in Arkansas; $34 million in Connecticut; $76 million in Georgia; $114 million in Louisiana; $44 million in Maryland; $51 million in Massachusetts; $16 in Montana; a second round for $17 million in New Hampshire bringing the total to nearly $28 million; $38 million in New Mexico; $20 million to the Virgin Islands; and $10 million to Vermont.

The funds announced today are the fourth round in a series of awards based on a rolling application process. The Treasury Department anticipates making similar announcements in the coming weeks. To view the terms and conditions for the Treasury application, please click here.

Recovery Act Awards for Affordable Housing Projects in Lieu of Housing Tax Credits (in order of application submission)
State	Amount Awarded
Kansas Housing Resources Corporation	$ 23,185,466
Ohio Housing Finance Agency	$ 21,250,000
Puerto Rico Housing Finance Authority	$ 99,555,290
Michigan State Housing Development Authority	$ 78,310,613
Wisconsin Housing & Economic Development Authority	$ 115,827,117
Washington Finance Housing Commission	$ 10,979,349
New Hampshire Housing Finance Authority	$ 10,289,626 (1^st round – 6/4/09)
	$ 17,423,436 (2^nd round – 7/10/09)
Iowa Finance Authority	$ 72,772,712
Rhode Island Housing and Mortgage Finance Corporation	$ 36,811,103
Maine State Housing Authority	$ 4,142,789
Indiana Housing and Community Development Authority	$ 164,011,126
Missouri Housing Development Commission	$ 17,000,000
Tennessee Housing Development Agency	$ 53,035,205
DC Department Housing and Community Development	$ 33,770,695
Arkansas Development Finance Authority	$ 29,170,283
Virgin Islands Housing Finance Authority	$ 20,246,499
New Mexico Mortgage Finance Authority	$ 38,250,000
Vermont Housing Finance Agency	$ 10,281,430
Maryland Community Development Administration	$ 44,054,729
Alabama Housing Finance Authority	$ 36,456,058
Georgia Housing and Finance Authority	$ 75,952,358
Montana Board of Housing	$ 15,510,979
Connecticut Housing Finance Authority	$ 34,000,136
Massachusetts Dept. of Housing and Community Development	$ 50,814,102
Louisiana Housing Finance Agency	$ 114,065,141
Total	$ 1,227,166,242

Monthly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

Quarterly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $81,694 million as of the end of that week, compared to $81,350 million as of the end of the prior week.

I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)


	June 19, 2009
A. Official reserve assets (in US millions unless otherwise specified) ¹	Euro	Yen	Total
(1) Foreign currency reserves (in convertible foreign currencies)			81,694
(a) Securities	9,790	13,482	23,272
of which: issuer headquartered in reporting country but located abroad			0
(b) total currency and deposits with:
(i) other national central banks, BIS and IMF	11,202	6,581	17,782
ii) banks headquartered in the reporting country			0
of which: located abroad			0
(iii) banks headquartered outside the reporting country			0
of which: located in the reporting country			0
(2) IMF reserve position ²	11,987
(3) SDRs ²	9,373
(4) gold (including gold deposits and, if appropriate, gold swapped) ³	11,041
--volume in millions of fine troy ounces	261.499
(5) other reserve assets (specify)	8,239
--financial derivatives
--loans to nonbank nonresidents
--other (foreign currency assets invested through reverse repurchase agreements)	8,239
B. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--financial derivatives not included in official reserve assets
--gold not included in official reserve assets
--other

II. Predetermined short-term net drains on foreign currency assets (nominal value)


			Maturity breakdown (residual maturity)
		Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits
--outflows (-)	Principal
	Interest
--inflows (+)	Principal
	Interest
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) Short positions ( - ) ⁴		-121,950	-90,126	-31,824
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)


III. Contingent short-term net drains on foreign currency assets (nominal value)


		Maturity breakdown (residual maturity, where applicable)
	Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1 year
(b) Other contingent liabilities
2. Foreign currency securities issued with embedded options (puttable bonds)
3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (+)
--BIS (+)
--IMF (+)
(b) with banks and other financial institutions headquartered in the reporting country (+)
(c) with banks and other financial institutions headquartered outside the reporting country (+)
Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (-)
--BIS (-)
--IMF (-)
(b) banks and other financial institutions headquartered in reporting country (- )
(c) banks and other financial institutions headquartered outside the reporting country ( - )
4. Aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) Short positions
(i) Bought puts
(ii) Written calls
(b) Long positions
(i) Bought calls
(ii) Written puts
PRO MEMORIA: In-the-money options ¹¹
(1) At current exchange rate
(a) Short position
(b) Long position
(2) + 5 % (depreciation of 5%)
(a) Short position
(b) Long position
(3) - 5 % (appreciation of 5%)
(a) Short position
(b) Long position
(4) +10 % (depreciation of 10%)
(a) Short position
(b) Long position
(5) - 10 % (appreciation of 10%)
(a) Short position
(b) Long position
(6) Other (specify)
(a) Short position
(b) Long position

IV. Memo items


(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic currency)
--nondeliverable forwards
--short positions
--long positions
--other instruments
(c) pledged assets
--included in reserve assets
--included in other foreign currency assets
(d) securities lent and on repo	8,404
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
--borrowed or acquired and included in Section I
--borrowed or acquired but not included in Section I	8,404
(e) financial derivative assets (net, marked to market)
--forwards
--futures
--swaps
--options
--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) short positions ( – )
(b) long positions (+)
--aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) short positions
(i) bought puts
(ii) written calls
(b) long positions
(i) bought calls
(ii) written puts
(2) To be disclosed less frequently:
(a) currency composition of reserves (by groups of currencies)	81,694
--currencies in SDR basket	81,694
2--currencies not in SDR basket
--by individual currencies (optional)

Notes:

3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

Monthly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

Quarterly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

reasury announces $268 Million more in Recovery Act Funds
to Create Jobs, Provide Affordable Housing

WASHINGTON – As part of the Obama Administration's effort to create jobs and ease pressures on the housing market, the U.S. Department of the Treasury today announced $268 million in American Recovery and Reinvestment Act (Recovery Act) funding to spur the development of affordable housing units in Indiana, Missouri, Tennessee, and Washington D.C.

"Today's announcement of housing funds demonstrates how President Obama's Recovery Act is putting our nation on the path to economic stability, one community at a time," said Treasury Deputy Secretary Neal Wolin. "This initiative will help spur construction and development, create much needed jobs, and increase the availability of affordable housing for families around the country."

The labor and housing crises in this country are deeply inter-connected. Since their peak level at the beginning of 2006, housing starts have fallen 80 percent. Houses currently under construction are at a 13-year low, down more than 60 percent from the peak in the first quarter of 2006. This collapse has led to severe job losses in the residential building and specialty trades sector related to housing, with employment down by nearly one-third -- a loss of over one million jobs. Such losses not only indicate significant problems in the residential construction sector, but also suggest that the need for affordable housing has risen markedly during the recession.

In response, the Department of Housing and Urban Development and the Treasury Department have been implementing new efforts designed to help homeowners while providing important assistance to homebuilders. Specifically, Treasury has launched an innovative program that will provide more than $3 billion from the Recovery Act to put people to work building quality, affordable housing for individuals and families affected by the current crisis.

Today, the Treasury Department is announcing the second round of recipients: $164 million in Indiana; $17 million in Missouri; $53 million in Tennessee; and $ 33.7 million in the District of Columbia.

The funds announced today are the second round in a series of awards based on a rolling application process. The Treasury Department anticipates making similar announcements in the coming weeks. To view the terms and conditions for the Treasury application, please click her

United States, Switzerland Agree to Increased Tax Information Exchange

WASHINGTON--As part of the Obama Administration's aggressive efforts to enforce U.S. tax laws and reduce offshore tax evasion, the U.S. Department of the Treasury today announced the conclusion of negotiations with Switzerland to amend the U.S.-Switzerland income tax treaty to provide for increased tax information exchange. Official signing of the protocol is expected in the next few months.

"This Administration is committed to reducing off shore tax evasion to help ensure that all U.S. taxpayers are playing by the same rules," said Treasury Secretary Tim Geithner. "This treaty will increase our ability to enforce our tax laws and will help bring an end to an era of offshore accounts and investments being used for tax evasion."

The protocol would revise the existing U.S.-Switzerland income tax treaty to allow for the exchange of information for income tax purposes to the full extent permitted by Article 26 of the Organization for Economic Co-operation and Development (OECD) Model Income Tax Convention.

In recent months, the Administration has demonstrated its commitment to closing the tax gap. At the G-20 Leaders' Summit, the U.S. strongly supported efforts to ensure that all countries adhere to international standards for exchange of tax information. In the FY 2010 Budget, the Administration delivered a detailed reform agenda to reduce the amount of taxes lost through unintended loopholes and the illegal use of hidden accounts by well-off individuals. The Treasury Department recently concluded Gibraltar's first-ever tax information exchange agreement and also signed an agreement with Luxembourg to provide for greater exchange of tax information.

Treasury Secretary Tim Geithner's Opening Statement before the U.S. Senate Banking Committee

Financial Regulatory Reform

Opening Statement – As Prepared for Delivery

Chairman Dodd, Ranking Member Shelby, members of the Banking Committee. I'm pleased to be here today to testify about the Administration's plan for financial regulatory reform.

Over the past two years, our nation has faced the most severe financial crisis since the Great Depression. Our financial system failed to perform as it should have – by distributing and reducing risk.

Instead, the system magnified risk. Some of the world's largest institutions failed. The resulting damage on Wall Street hit Main Streets across the country, affecting virtually every American.

Millions have lost their jobs, families have lost their homes, small businesses have shut down, students have deferred college, and seniors have shelved retirement plans.

American families are making essential changes in response to this crisis. It is our responsibility to do the same – to make our government work better.

That is why yesterday President Obama unveiled a sweeping set of regulatory reforms to lay the foundation for a safer, more stable financial system; one that can deliver the benefits of market-driven financial innovation even as it guards against the dangers of market-driven excess.

Every financial crisis of the last generation has sparked some effort at reform. But past efforts have begun too late, after the will to act has subsided.

We cannot let that happen this time. We may disagree about the details, and we will have to work through those issues. But ordinary Americans have suffered too much; trust in our financial system has been too shaken; our economy has been brought too close to the brink for us to let this moment pass.

In crafting our plan, the Administration sought input from all sources. We consulted extensively with Members of Congress, regulators, consumer advocates, business leaders, academics and the broader public.

We considered a full range of options and decided that now is the time to pursue the essential reforms, those that address the core causes of the current crisis; and that will help to prevent or contain future crises.

Let me be clear, our plan does not address every problem in our financial system. That is not our intent. It does not propose reforms that, while desirable, would not move us towards achieving those core objectives and creating a more stable system.

By now, the details of our proposals are widely available so I would like to spend a few minutes explaining the priorities that guided us.

If this crisis has taught us anything, it is that risk to our financial system can come from almost any quarter, so we must be able to look in every corner and across the horizon for dangers.

Clearly, our current regulatory structure was not able to do that.

While many of the firms and markets at the center of the crisis were under some form of federal regulation, that supervision didn't prevent the emergence of large concentrations of risk.

A patchwork of supervisory responsibility; loopholes that allowed some institutions to shop for the weakest regulator; and the rise of new financial institutions and instruments that were almost entirely outside the government's supervisory framework left regulators largely blind to emerging dangers.

And regulators were ill-equipped to spot system-wide threats because each was assigned to protect the safety and soundness of the individual institutions under their watch. None was assigned to look out for the system as a whole.

That is why we propose establishing a Financial Services Oversight Council to bring together the heads of all of the major federal financial regulatory agencies. This Council will fill gaps in the regulatory structure where they exist. It will improve coordination of policy and resolution of disputes. And, most importantly, it will have the power to gather information from any firm or market to help identify emerging risks.

The Council does not have the responsibility for supervising the largest, most complex and interconnected institutions. The reason is simple: that is a specialized task, which requires tremendous institutional capacity and organizational accountability.

Nor would the council be an appropriate first responder in a financial emergency. You don't convene a committee to put out a fire.

The Federal Reserve is best positioned to play that role. It already supervises and regulates bank holding companies, including all major U.S. commercial and investment banks. Our plan gives a modest amount of additional authority - and accountability - to the Fed to carry out that mission. But it also takes some authority away.

Specifically, we propose removing from the Federal Reserve and other regulators, oversight responsibility for consumers. Historically, in those agencies, consumer interests were often perceived to be in conflict with the safety and soundness of institutions.

That brings me to our second key priority -- consolidating protection for consumers and ensuring they can understand the risks and rewards associated with products sold directly to them.

Before this crisis many federal and state regulators had authority to protect consumers, but few viewed it as their primary charge. As abusive practices spread, particularly in the market for subprime and nontraditional mortgages, our regulatory framework proved inadequate.

This lack of oversight led millions of Americans to make bad financial decisions that emerged at the heart of our current crisis. Consumer protection is not just about individuals but also about safeguarding the system as a whole.

Congress, the Administration, and regulators have already taken steps to address consumer problems in two key markets, those for credit cards and mortgages. But here too we need comprehensive reform.

Our proposed Consumer Financial Protection Agency will serve as the primary federal agency looking out for the interests of consumers of credit, savings, payment and other financial products.

This agency will be able to write rules that promote transparency, simplicity and fairness, including defining standards for "plain vanilla" products that have straightforward pricing.

Our third priority was making sure that reform, while discouraging abuse, encourages financial innovation.

Our core challenge is to design a system that has a proper balance between innovation and efficiency on the one hand, and stability and protection on the other.

We did not get that balance right. That requires reform.

We think that the best way to keep the system safe for innovation is to have stronger protections against risk with stronger capital buffers, greater disclosure so investors and consumers can make more informed financial decisions, and a system that is better able to evolve as innovation advances and the structure of the financial system changes.

I know that some suggest we should ban or prohibit specific types of financial instruments as too dangerous. And we are proposing to strengthen consumer protections and enforcement by, among other things, prohibiting practices such as paying brokers for pushing consumers into higher-priced loans or penalties for early repayment of mortgages.

However in general, we do not believe that you can build a system based on banning individual products because the risks will simply emerge in new forms.

Our approach is to let new products develop, but to bring them into a regulatory framework with the necessary safeguards.

America's tradition of innovation has been central to our prosperity. These reforms are designed to strengthen our markets by restoring confidence and accountability.

A fourth priority was addressing the basic vulnerabilities in our capacity to manage future crises.

The United States came into the current crisis without an adequate set of tools to confront the potential failure of large, interconnected financial institutions. That left the government with extremely limited choices when faced with the failure of the largest insurance company in the world and one of the largest US investment banks.

That is why, in addition to addressing the root causes of our current crisis, we must also act preemptively to provide the government better tools to manage future crises.

We propose a new resolution authority, modeled on the existing authority of the FDIC to handle weak or failing banks, that will give the government more options.

That authority will reduce moral hazard by allowing the government to resolve failing institutions in ways that impose the costs on owners, creditors and counterparties, making them more vigilant and prudent.

We must also minimize the moral hazard of institutions considered too big or too interconnected. No one should assume that the government will step in to bail them out if their firm fails.

We do this by making sure financial firms follow the example of families across the country that are already saving more money as a precaution against bad times. We require all firms to keep more capital and liquid assets on hand as a greater cushion against losses. And the bigger, most interconnected firms will be required to keep even bigger cushions.

The critical test of our reforms will be whether we make this system strong enough to withstand the stress of future recessions and the failure of large institutions.

That's our basic objective; we want to make it safe for failure.

We cannot afford inaction. We cannot afford a situation where we leave in place vulnerabilities that will sow the seeds for future crises. And in the weeks and months ahead I look forward to working with this Committee to build

Treasury International Capital (TIC) Data for April

– The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for April 2009. The next release, which will report on data for May 2009, is scheduled for July 16, 2009.

Net foreign purchases of long-term securities were $11.2 billion.

	Net foreign purchases of long-term U.S. securities were $34.3 billion. Of this, net purchases by private foreign investors were $18.3 billion, and net purchases by foreign official institutions were $16.0 billion.
	U.S. residents purchased a net $23.0 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $8.8 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $39.4 billion. Foreign holdings of Treasury bills decreased $44.5 billion.

Banks' own net dollar-denominated liabilities to foreign residents decreased $5.0 billion.

Monthly net TIC flows were negative $53.2 billion. Of this, net foreign private flows were negative $58.4 billion, and net foreign official flows were $5.2 billion.

Complete data are available on the Treasury website at www.treas.gov/tic.

Statement of G8 Finance Ministers

Lecce, Italy, 13 June, 2009

We, the G8 Finance Ministers, remain focused on addressing the ongoing global economic and financial crisis. We have taken forceful and coordinated action to stabilize the financial sector and provide stimulus to restore economic growth. There are signs of stabilization in our economies, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence, but the situation remains uncertain and significant risks remain to economic and financial stability.

Even after output growth begins picking up, unemployment may continue to increase. Our countries will continue to implement actions to reduce the impact of the crisis on employment and maximise the potential for growth in jobs in the period of economic recovery, including by promoting targeted active labor market policies, enhancing skills development, ensuring effective social protection systems and enabling labour markets to respond to broader structural changes.

We must remain vigilant to ensure that consumer and investor confidence is fully restored and that growth is underpinned by stable financial markets and strong fundamentals. We will continue working with others in taking the necessary steps to put the global economy on a strong, stable and sustainable growth path, including by continuing to provide macroeconomic stimulus consistent with price stability and medium-term fiscal sustainability and restore lending. We reaffirm our commitment to address liquidity and capital needs of banks, as necessary, and to take all necessary actions to ensure the soundness of systemically important institutions.

We discussed the need to prepare appropriate strategies for unwinding the extraordinary policy measures taken to respond to the crisis once the recovery is assured. These "exit strategies", which may vary from country to country, are essential to promote a sustainable recovery over the long term. We asked the IMF to undertake the necessary analytical work to assist us with this process.

While the stabilization of the economy over the short term is critical, we also discussed other challenges ahead of us.

The crisis has revealed the importance of strengthening our commitment to standards of propriety, integrity and transparency. To address these issues in a comprehensive fashion, we agreed on the need to develop the Lecce Framework – a set of common principles and standards regarding the conduct of international business and finance – which builds on existing initiatives and lays the foundation for a stable growth path over the long term (see the attached annex for details). We are committed to working with our international partners to make progress with this initiative, with a view to reaching out to broader fora, including the G20 and beyond.

We discussed regulatory reform in our countries and at the international level. We are swiftly implementing the decisions taken at the London Summit and call on others to join our efforts to ensure global financial stability and an international level playing field. We urge the relevant international institutions to closely monitor the implementation of these decisions. We also call on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions.

We welcome progress in negotiations of agreements on the exchange of information for tax purposes. We urge further progress in the implementation of the OECD standards and the involvement of the widest possible number of jurisdictions, including developing countries. It is also essential to develop an effective peer-review mechanism to assess compliance with the same standards. This could be delivered by an expanded Global Forum. We also look forward to an update on progress on the G20 agreement to tackle tax havens at the next OECD Ministerial meeting.

We welcome FATF engagement with the G20 to fight against money laundering and the financing of terrorism. We are also committed to working with FATF on improving international standards and their global implementation, including preparation for the next round of mutual evaluations, promoting international cooperation and reinforcing actions on jurisdictions with vulnerabilities. FATF should report back by September on its progress in identifying uncooperative jurisdictions. We endorse the FATF's call for countries to protect the financial system from illicit financing and implement counter-measures against Iran, in particular to mitigate the risk posed by correspondent relationships with Iranian financial institutions.

We are committed to the effective and timely implementation of financial measures against North Korea as set out, among other measures, in UN Security Council resolution N. 1874.

To facilitate the recovery and sustain growth over the longer term, we reaffirm our commitment to refrain from protectionism and we commit to continue working towards an ambitious conclusion of the Doha Round. The rapid implementation of the trade finance support announced in April in London is essential in restoring international trade flows, particularly to emerging and developing countries. Excess volatility of commodity prices poses risks to growth. We will consider ways to improve the functioning and transparency of global commodity markets, including considering IOSCO work on commodity derivative markets.

We have led efforts to provide the IMF with the necessary resources to expand its lending capacity and are fully committed to swiftly implement the London Summit commitment, and urge other countries to participate. We are also exploring ways to substantially increase the IMF capacity for concessional lending through the sale of gold or other means, consistent with the new income model, and we encourage the Fund to explore the scope for increased concessionality to low-income countries. We remain committed to reforming the IMF to enable it to carry out its critical role in the modern global economy. We welcome the actions being taken by the World Bank and other Multilateral Development Banks (MDBs) that highlight their important countercyclical role in responding to the global crisis. After comprehensively reviewing their capital positions, including a thorough resource demand analysis based on agreed medium to long-term strategies, we are prepared to consider additional financing needs. Additional elements to be considered include a clearer division of labor and collaboration among institutions, enhanced balance sheet flexibility, good governance, better risk management, effective use of aid, progress on promoting innovation, and an adequate focus on the world's poorest.

The 2007-2008 food crisis had a devastating impact on the living conditions of the poor, and brought attention to the urgent need to promote sustainable investment in agriculture. We reiterate our commitment to address medium and long-run food security in poor developing countries. We will work together bilaterally and through existing international institutions to increase investment in these countries aimed at raising sustainable agricultural productivity and food security, with a particular focus on assisting small-scale farmers, protecting natural resources, supporting infrastructure, innovation and catalyzing private investment. We discussed possible joint initiatives by the World Bank, the African Development Bank and IFAD, and support further work in this area with a view to advancing this discussion at the L'Aquila Summit. We note the publication of the report by the High Level Task Force (HLTF) that presents proposals to accelerate progress in the health systems of the world's poorest countries.

We discussed the economic, financial and developmental aspects of climate change. This is a global issue that requires a global and balanced solution and we advocate an ambitious, efficient, effective and fair outcome of the UNFCCC process. Financial and investment needs will be substantial in the future, thus making it imperative that all resources be used in the most effective way to achieve true emission reductions, that they be channeled through highly efficient, coordinated and equitable instruments, and that market-based mechanisms play a central role to drive private finance. While developed countries should continue to play a leading role, all but the least developed countries should commit to measurable, verifiable and reportable mitigation actions and financial participation. Adaptation is a development challenge and, therefore, international financing should primarily target the poorest countries, be fully integrated in their development strategies and follow the principles of aid effectiveness.

The Lecce Framework: Common Principles and Standards for Propriety, Integrity and Transparency

We are in the middle of the worst crisis since the Great Depression. The breadth and intensity of the prolonged downturn have revealed the importance of strengthening our commitment to standards of propriety, integrity and transparency. Excessive risk taking and the violation of these basic principles contributed to undermine international economic and financial stability. This occurred both in areas that relied on self regulation and market discipline and in fields with formal rules and oversight, revealing flaws in the functioning of markets.

For the market economy to generate sustained prosperity, fundamental norms of propriety, integrity and transparency in economic interactions must be respected. The magnitude and reach of the crisis has demonstrated the need for urgent action in this regard. Reform efforts must address these flaws in international economic and financial systems with resolve. This will require promoting appropriate levels of transparency, strengthening regulatory and supervisory systems, better protecting investors, and strengthening business ethics.

Today, we, the G8 Finance Ministers, discussed the need for a set of common principles and standards for propriety, integrity and transparency regarding the conduct of international business and finance. We have agreed on the objectives of a strategy, "the Lecce Framework", to create a comprehensive framework, building on existing initiatives, to identify and fill regulatory gaps and foster the broad international consensus needed for rapid implementation.

The Lecce Framework recognizes that there is a wide range of instruments, both existing and under development, which have a common thread related to propriety, integrity and transparency and classifies them into five categories: corporate governance, market integrity, financial regulation and supervision, tax cooperation, and transparency of macroeconomic policy and data. Specific issues covered include, inter alia, executive compensation, regulation of systemically important institutions, credit rating agencies, accounting standards, the cross-border exchange of information, bribery, tax havens, non-cooperative jurisdictions, money laundering and the financing of terrorism, and the quality and dissemination of economic and financial data. International institutions and fora have already developed a significant body of work addressing a number of important issues in these areas, but, in many cases, the initiatives suffer from insufficient country participation and/or commitment.

Today, we agreed to create a coherent framework which builds on work done by the IMF, World Bank, OECD, FSB, FATF, and other international organizations, to strengthen the global market system. To ensure effectiveness, we will make every effort to pursue maximum country participation and swift and resolute implementation. We are committed to working with our international partn

Treasury Announces $25 Billion in Direct Allocations of Recovery Zone Bonds

New Program to Help State, Local Governments Finance Economic Development

WASHINGTON--As part of the Obama Administration's efforts to stimulate economic growth and jumpstart the availability of financing critical for economic recovery, the U.S. Treasury Department announced $25 billion in bonds authority available under the Recovery Zone Bonds program. Created by the American Recovery and Reinvestment Act (Recovery Act), Recovery Zone Bonds are targeted to areas particularly affected by job loss and will help local governments obtain financing for much needed economic development projects, such as public infrastructure development.

"Creating the conditions for economic recovery requires addressing the challenges facing state and local governments," said Treasury Secretary Tim Geithner. "State budgets have been scaled back and local services cut at a time when they are most needed. Turning things around requires innovative strategies, which is what the Recovery Act has provided in the form of the Recovery Zone Bonds. The new financing tools provided by Recovery Zone Bonds will help state and local governments obtain the funds needed to revitalize our communities."

The Recovery Act included $25 billion for two new types of Recovery Zone Bonds – $10 billion for Recovery Zone Economic Development Bonds and $15 billion for Recovery Zone Facility Bonds. Recovery Zone Economic Development Bonds are one type of taxable Build America Bond that allow state and local governments to obtain lower borrowing costs through a new direct federal payment subsidy, for 45 percent of the interest, to finance a broad range of qualified economic development projects, such as job training and educational programs. Recovery Zone Facility Bonds are a type of traditional tax-exempt private activity bond that may be used by private businesses in designated recovery zones to finance a broad range of depreciable capital projects.

To make this program as easy as possible for state and local governments to administer and use, the Treasury Department has also detailed the bond volume cap allocations at the local level for counties and large cities. The total state allocations and the complete list of direct county and large city allocations can be found here.

Treasury Sanctions Drug Trafficker’s Illicit Network in Mexico and Colombia

WASHINGTON – The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated 15 entities and nine individuals as Specially Designated Narcotics Traffickers (SDNTs) pursuant to Executive Order 12978. The OFAC designations target the illicit activities and assets of Fabio Enrique Ochoa Vasco (a.k.a. "Juan Carlos Martinez Perez"), a significant Colombian drug trafficker, who was designated as an SDNT principal in 2007. Today's designation action freezes any assets the designees may have that are subject to U.S. jurisdiction and prohibits all financial and commercial transactions by any U.S. person with the designated companies and individuals.

"Our sanctions investigation uncovered an additional network of front companies and trusted financial managers for Fabio Enrique Ochoa Vasco in Colombia , Mexico , and the Caribbean ," said OFAC Director Adam J. Szubin. "OFAC's action attacks the financial underpinnings of Ochoa Vasco's drug trafficking empire to deny him and his associates the benefits of these illicit assets."

The additional businesses and individuals designated today are linked to several previously designated members of the Ochoa Vasco network. These SDNTs control a varied network of front companies located throughout Colombia , Mexico , and the Caribbean . Today's OFAC designations expose a Guadalajara-based network of companies controlled by a previously designated key Ochoa Vasco front man, Luis Pacheco Mejia. These Mexican companies include an agricultural company, Granoproductos Agricolas S.A. de C.V., as well as construction and real estate companies such as Grupo C.L.P. Constructora S.A. de C.V., Grupo Constructor Inmobiliario Pacar S.A. de C.V., and Cimientos La Torre S.A. de C.V. Also designated in today's action are seven key front companies based in the Colombian cities of Medellin, Envigado, Cali, Girardot, Bogota, Santa Marta, and Barranquilla. These companies include Parque Ecologico Recreacional de las Aguas de Girardot Limitada, a large-scale water park in the city of Girardot , and Mision Inmobiliaria Limitada, a real estate firm in Bogota . Three offshore shell companies in the British Virgin Islands and Cayman Islands also were designated today.

In addition, today's OFAC action targets several Mexican nationals in Guadalajara , Mexico : Juan Cardenas Real, Jose Luis Lares Rangel, Jorge Octavio Lopez Rodriguez, Mario Antonio Flores Salinas, and Luz del Rocio Arambula Garcia. These individuals are involved in the management of front companies and are complicit in the money laundering activities of the Ochoa Vasco organization. Key Colombian individuals designated today include Ricardo Espitia Pinilla, a Colombian lawyer who works with Ochoa Vasco criminal operatives. Jose Roberto Bedoya Velez, another Colombian individual designated today, plays a significant role in companies controlled by John Jairo Gallego Valencia , another previously designated SDNT who is the right-hand man of Ochoa Vasco.

Ochoa Vasco began his drug trafficking career in Medellin , Colombia and has been involved in trafficking narcotics from Colombia to the United States for more than 25 years. During this period, as he climbed the ranks of the growing Medellin drug cartel, his drug trafficking empire has grown into a widespread international network that extends beyond Colombia to Ecuador, Panama, Honduras, Belize, Mexico, and the Caribbean Islands. On March 28, 2007, OFAC designated Ochoa Vasco along with 45 companies and 64 individuals that are part of his extensive criminal and financial network.

Ochoa Vasco was charged with cocaine trafficking and money laundering in a September 2004 indictment in the U.S. District Court for the Middle District of Florida. During the past five years, OFAC investigators have worked closely with agents from Operation Panama Express based in Tampa , Florida on the sanctions case against the Ochoa Vasco organization. Operation Panama Express is an Organized Crime Drug Enforcement Task Force (OCDETF) Strike Force investigation conducted by U.S. Immigration and Customs Enforcement (ICE), the Drug Enforcement Administration (DEA), the Federal Bureau of Investigation, the Internal Revenue Service, the Florida Department of Law Enforcement, and the Pinellas County Sheriff's Office, along with the U.S. Attorney's Office for the Middle District of Florida. The investigation was also supported by the DEA Bogota Country Office, ICE-Attaché Bogota, DEA Cartagena, the DEA Mexico City Country Office, and DEA Guadalajara. OFAC would also like to recognize Mexican authorities for their efforts to dismantle the Ochoa Vasco organization.

"ICE cannot allow these dangerous cartels to disguise their illicit activities as legitimate operations in our communities," said John Morton, Assistant Secretary of Homeland Security for ICE. "By OFAC freezing their assets, we continue to shut down the ability of drug kingpins to do business in the United States and abroad."

These designations are part of the ongoing interagency effort by the Department of the Treasury and the Departments of Justice, State, and Homeland Security to implement Executive Order 12978 of October 21, 1995, which applies financial sanctions against Colombia 's drug cartels.

For a complete list of the individuals and entities designated today, please visit: http://www.treasury.gov/offices/enforcement/ofac/actions/index.shtm

Treasury Secretary Timothy F. Geithner
Opening Statement – As Prepared for Delivery
Senate Committee on Appropriations
Subcommittee on Financial Services and General Government
June 9, 2009

Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary on the President's Fiscal Year 2010 Budget request for the Department of the Treasury.

While we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges.

President Obama and his Administration are working to meet these challenges by getting Americans back to work and getting our economy to grow again; by restoring fiscal discipline to ensure a sustained recovery, and by making the long-neglected investments in health care, energy and education needed to enhance America's global competitiveness and produce more balanced, sustainable growth over the long-term.

Treasury's Key Priorities

To achieve these goals, we are repairing and reforming our financial system so that it works for, not against, a recovery that serves all Americans.

To restore growth and meet our fiscal goals, we are redesigning and bolstering enforcement of our tax code so that it is both fairer and more efficient.

To advance our interests globally, we are working with other nations to promote economic recovery and financial repair, and to ensure more open markets for U.S. business.

And to protect the country, we are deploying all of the tools at our disposal to exclude terrorists, proliferators, and other illicit actors from the international financial stage, and thereby secure our financial system and combat threats to our security.

The Fiscal Year 2010 Budget that you have before you will allow Treasury to pursue these core missions assigned to the Department by the President and the Congress. The $13.4 billion request includes a $676 million, or 5.3 percent, increase over enacted 2009 levels.

Of this increase, $14 million would go to bolstering the staffs of our Domestic Finance and Tax Policy offices, which are at the epicenter of Administration efforts to support rigorous analysis and implementation of revenue policy and to redesign and improve our tax policies and tax code.

Some $137 million would be devoted to more than doubling our Community Development Financial Institutions (CDFI) Fund to ensure that the benefits of our financial repairs reach beyond our major banks and businesses to help economically distressed communities. These communities were underserved by our financial system even before the current crisis, and have been deeply hurt by the job losses and business failures that the crisis has spawned.

A total of $332 million would be devoted to new Internal Revenue Service (IRS) enforcement efforts, including $128.1 million to add nearly 800 new IRS employees to combat offshore tax evasion and improve compliance with U.S. international tax laws by businesses and high-income individuals. Another $130 million would go to bolster the security of the IRS information technology, improve the efficiency of its business systems and upgrade its fraud detection capabilities.

Although not directly under the jurisdiction of this Subcommittee, our Budget also includes funds to meet our international obligations to help us in mounting a global response to the crisis and in creating mutually reinforcing growth around the world.

As we seek these additional funds to respond to our nation's troubles, we have cut back on some programs that are either ineffective or that we believe can be safely delayed.

For example, while the Earned Income Tax Credit (EITC) continues to be one of the most effective anti-poverty programs that the Federal government administers, the Advanced EITC, a related program which provides benefits in advance of filing a tax return, has been prone to exceptionally high levels of error and low use by those eligible for it. Accordingly, our Budget proposes to end this latter program for savings next fiscal year of $125 million.

Similarly, even as we seek to increase capital investment for the IRS, our Budget would reduce the Department-wide capital investment account by 65 percent for a savings of $17 million.

The Treasury Budget would reduce the number of international economic attachés from 20 to 16, saving $2 million next fiscal year. It would absorb a portion of our non-pay inflation through more efficient use of contracting and other cutbacks, saving $18 million. It would take advantage of the growth of efficient electronic filing of tax returns to reduce the IRS processing budget by $8 million next fiscal year.

Given we have had control over the budget for fewer than five months, the reductions that I have just described represent a first attempt to do more with less. As we begin work on the Budget for Fiscal Year 2011, Treasury has prepared itself for a more rigorous assessment of its spending.

I have already issued guidance to Treasury senior staff that says, in part: "To afford any new investments, we will have to take new approaches to solving old problems. I expect each bureau and policy office to identify opportunities for innovation that will transform how Treasury fulfills its missions in order to both improve performance and reduce cost."

In addition, the President has announced his intention to nominate Dan Tangherlini to be our Assistant Secretary for Management and Budget. Consistent with the President's mandate, I will look to Mr. Tangherlini to scour the Treasury's budget for efficiencies and cost savings. He comes to the job with an impressive track record of working on budget, management and performance issues with District of Columbia Mayor Adrian Fenty, and I am convinced that he will bring the same results-oriented approach to the federal government.

Repairing and Reforming the Financial System

The President has assigned the Treasury to repair key sectors of our economy so that they help revive growth and produce broadly shared prosperity.

The Treasury has been working to repair and reform every major element of our financial system, and to fill gaps in the system so that it benefits all Americans.

Last month, federal banking supervisors announced results of the stress tests that we asked them to conduct on our 19 largest financial institutions. The aim of these assessments was to ensure that these institutions have sufficient capital buffers to absorb the losses that they could suffer under worse-than-expected economic conditions and continue to make the loans necessary to sustain recovery.

The clarity and transparency provided by the tests has helped improve market confidence in the banks, making it possible for them to collectively raise nearly $90 billion through private equity offerings, bond issuances without government guarantees and sales of business units.

On housing, Treasury is working with HUD to bolster our housing markets by helping to drive down mortgage interest rates and by assisting responsible homeowners to refinance into more affordable mortgages or modify their at-risk loans to avoid preventable foreclosures.

In terms of the non-bank financial sector, Treasury is working to revive critically important securitization markets for both new and old asset-backed securities.

We have begun to boost new consumer and business lending by re-starting the markets for asset-backed securities that financed almost half of all lending in this country before the crisis. There were more securities of this type issued the four months after we launched our effort than in the preceding nine.

Additionally, Treasury is about to join with private investors in seeking to restart the markets for legacy mortgage loans and securities that are now stuck on bank balance sheets, keeping these institutions from making new loans to families and businesses.

As we have made repairs to the financial system, we have understood that repair alone is not enough. We must also reform the system so that it is less prone to crises of the dimensions that we now face.

In the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system. Together, these changes will help prevent another crisis of the magnitude that we have just lived through, and give the government new tools to better cope with similar problems should they occur in the future.

In addition to the financial system, Treasury is helping to ensure that the nation has a viable auto industry in the future. We are working with General Motors and Chrysler to make sure these companies make the changes necessary to again prosper. As President Obama has said "we cannot…must not…and will not let our auto industry simply vanish."

The resources for administering key elements of both our financial and auto repair efforts were authorized by the Emergency Economic Stabilization Act.

These activities are being handled by our Office of Financial Stability (OFS), which is focused on ensuring that TARP funds serve the public purpose of economic and financial stabilization; that they are fulfilling this purpose in ways that protect taxpayers; and that we can provide a clear account to the Congress and the American people about the effectiveness of the funds' use.

In order to administer TARP and ensure compliance by TARP recipients, OFS has had to quickly assemble a substantial staff. OFS staffing levels, which were at 88 when I arrived in office, had risen to approximately 165 by the end of last month and are expected to rise to 225 by next fiscal year. The office's budget for next fiscal year will total $262 million, a 6 percent decline from the current fiscal year's $279 million. The change is largely due to a decline in estimated spending on contracts as part of the program's initial start-up.

While TARP is proving effective at improving the immediate stability of the financial system, the scope of the issues that this Administration and this Department face extend beyond TARP to include striking the delicate balance between intervention and allowing market participants latitude to operate; devising a new financial regulatory structure for the future; and working through the tough problems of what form our government-sponsored enterprises, Fannie Mae and Freddie Mac, should take as we emerge from this difficult period.

All of these issues fall to Treasury's Office of Domestic Finance, which, together with OFS, is having to operate on new policy terrain, tackling problems that the country has not faced in generations and for which we have few guideposts in our immediate past.

That is why the workload of the Office Domestic Finance has already expanded greatly, and is all but certain to expand still further. And it is why we are seeking to modestly increase its size and bolster its expertise in several critical areas.

Our Budget requests an additional $8.7 million for the office to add 26 full-time equivalent (FTE) positions to the staff. This represents a 26 percent increase from the office's current fiscal year staffing of 101.

The additional funds will be used to create two new Deputy Assistant Secretary positions, one for housing finance, small business and consumer issues, and a second for capital markets. These two new officials will lead teams that will perform the economic and institutional research necessary to ensure that we understand all of the policy options in each of these areas and choose the most effective ones for solving our problems.

As we seek additional funds for Treasury, we must also seek them for the front-line institutions that will sustain our economic recovery and ensure that its benefits are broadly shared.

Our Budget would more than double the resources of the Community Development Financial Institutions (CDFI) Fund to $243.6 million. The fund's mandate is to help low-income, economically distressed communities that were poorly served by our financial system even in economic good times, and – although they had nothing to do with causing current conditions –have been significantly hurt by the economic and financial fallout of the crisis that we now face.

The $136.6 million, or 128 percent increase in funding, would allow this program to support financial institutions in making job-creating investments and in providing access to capital in communities that are often considered too risky for mainstream financial institutions to serve. By targeting lenders and borrowers in these communities, the Fund would help some of our most vulnerable populations weather the crisis and benefit once recovery is underway.

The aim of the fund is to make sure that we provide distressed communities with more than simply government grants and aid. We must also build the capacity of their local financial institutions to ensure that capital is flowing to homebuyers and businesses so that they can finance their own economic futures. Since its inception in 1994, the fund has directed nearly $1 billion to distressed communities, and allocated $19.5 billion in tax credits through its New Markets Tax Credit program.

Financial institutions funded through the CDFI program make loans to small businesses and micro-enterprises and take equity positions in them. They provide mortgages to low-income homebuyers, and finance developers of low-income housing and community facilities, such as charter schools, health clinics and child care centers.

One example can be seen right here in the Anacostia neighborhood of Washington, DC. City First Bank – a local CDFI – and Charter Schools Development Corporation partnered to provide a $13.3 million New Markets Tax Credit for the Thurgood Marshall Academy, the city's first charter school focused on law, serving 360 students in grades nine through twelve and achieving a 100 percent college acceptance rate for its first three graduating classes.

Historically, the CDFI program has been heavily oversubscribed and has had to turn away qualified applicants. For example, in the current fiscal year, the program for CDFI financial and technical assistance awards is budgeted at $55 million, but it expects to receive applications for more than $500 million in funding.

Redesigning the Tax System for Fairness and Efficiency

The President has asked Treasury to redesign and bolster enforcement of our tax code so that it supports growth, sets the stage for our return to a sustainable fiscal path, and accomplishes these goals in a manner that is fair, efficient and supportive of our society's broadest goals.

To make good on the President's assignment, our Budget requests a modest increase in funding for Treasury's Office of Tax Policy and more substantial increases to expand IRS enforcement activities and to improve its information technology.

Treasury has moved quickly in implementing the more than 30 tax provisions of the President's economic recovery plan. Treasury also has played an integral role in designing the tax provisions of the President's Fiscal 2010 Budget, and it will play a similar role in implementing these.

The President has made clear that he will not seek any major revenue increases until 2011 when the recovery should be firmly in place. He has, however, been equally clear that once recovery is underway, we must get our fiscal house in order or risk having government borrowing crowd out productive private investment. Treasury and the White House will work with Congress to make the tax changes that are necessary to reduce deficits and to do so in a manner that is fair to all Americans.

As part of our efforts to make sure that the tax system is working for recovery and is operating fairly, we have designed new policies to curb the use of off-shore tax havens, close the international tax gap, remove tax incentives for companies to shift jobs overseas, and replace these incentives with ones that encourage creation of jobs at home.

Our tax work on the recovery plan, the Fiscal Year 2010 Budget, and these international tax issues are just the beginning of an ambitious agenda for this Administration.

On health care, the President has made clear that the road to fiscal discipline and to solvency for Medicare and Social Security runs through overall health care reform. Although much of the cost of the President's reform plan will be covered by savings from the system, we will need to design programs to cover some of the costs in ways that are fair to all Americans and do not harm the economy. Treasury is deeply involved in this effort and in the related work to expand coverage and improve our health care system in other important ways.

On retirement and economic security, Treasury and, in particular, the Office of Tax Policy, is taking the lead in developing and actively working with Congress to flesh out the initiatives proposed in the President's budget to help enhance retirement security and savings for the half of working Americans who have no retirement provisions beyond Social Security. These proposals would make it easier for people to save for their own retirement, either through their workplaces or on their own, and would move us toward universal retirement savings coverage.

On climate change, Treasury is already working closely with Congress to design the auction mechanisms that will be needed to implement the Administration's greenhouse gas cap-and-trade program.

Our Office of Tax Policy has been deeply involved in all of these issues from the outset of the Administration. Like our Office of Domestic Finance, its workload already has substantially increased and is certain to grow as the health reform, retirement security and climate change debates get underway in earnest.

At the moment, the Office of Tax Policy's career staff includes 30 lawyers and 44 economists as well as support staff for an overall staffing level of 93. This is lower than its usual complement of over 100 professionals.

Our Fiscal Year 2010 Budget would increase the office budget by $4.9 million to add 15 full-time equivalent (FTE) positions in order to increase overall staffing to 108, and would therefore represent a return to historical norms. The additional staff is needed to perform analysis and revenue estimates for new policy proposals, conduct research for, among other things, congressionally mandated studies, and develop regulations and guidance for new legislation.

The vast majority of the new funds that we request in this Budget are for improving the enforcement efforts and the information technology of the IRS.

As I have said, $332 million would go to new IRS enforcement efforts, including $128.1 million to improve international tax compliance. The balance of these funds would be used to support three critical programs: 755 employees to increase examinations of tax returns for businesses and high-income individuals; 300 employees to expand the IRS document matching program, which compares tax returns to other forms such as W-2s and 1099s; and an additional 491 employees to improve collection operations and build two new IRS automated collection center sites.

Turning to IT, our Budget requests a $90 million increase in funding to protect taxpayers' personal records from the increasing number and sophistication of Internet-based attacks. With these funds, the agency will deploy state-of-the-art, automated tools to improve record access management, risk assessment and system auditing. This effort would address concerns noted in the past by both the Government Accountability Office and the Treasury Inspector General for Tax Administration.

Our Budget also requests an additional $18 million for systems to help the IRS return review program detect noncompliance and fraudulent refunds, and a $22 million increase to continue modernizing the agency's core taxpayer account database and modernized the e-File web-based platform.

Reengaging with the World on Economic Issues

The President assigned Treasury to ensure that this country reengages with the world, not just on issues of war and peace, but also on the current crisis, and on issues crucial to our common economic futures.

This is a global crisis. Recovery here depends on recovery abroad. We are working closely with other major economies to put in place the fiscal stimulus and make the financial repairs necessary to ensure U.S. and global recovery.

The U.S. is seeking to mobilize the financial resources of the better-off nations to help the emerging and developing economies that have been especially hard-hit by this crisis. We are doing this for more than simply humanitarian reasons; as recently as last fall, these economies accounted for fully 42 percent of all U.S. exports.

Last month, the President and leaders of the other G-20 nations agreed on the need to make more than $1 trillion in financial resources available to support global growth and trade.

Those funds include our commitment of up to $100 billion for an expanded New Arrangements to Borrow, a permanent back-up mechanism that provides the International Monetary Fund with supplemental resources to help emerging markets and developing nations weather the crisis.

As part of our effort to rekindle global growth for the sake of our own recovery, we are seeking to meet our past and present financial commitments to the multilateral development banks that help emerging and developing countries.

Although the funds to do this are not directly within the purview of your Subcommittee, I mention them to illustrate how Treasury's entire budget is tailored to let us fulfill the missions that the President has set out for us. Our budget request includes $2.5 billion for international programs, most of which would serve to meet our past and present commitments to the multilateral development banks.

Our financial reform effort in the United States must be matched by similarly strong efforts elsewhere in order to succeed.

Conclusion

Before I end, let me say a word about the Department's staff. I have the honor of leading a team of smart and dedicated individuals who are working to make our government more effective and our society fairer, who are following a long tradition of debating policies fearlessly on their merits, doing what is right and not what is expedient, and drawing on the best ideas and expertise that are available. They are performing an incalculable service to our country in these challenging times, and I am immensely grateful to them.

The Department of the Treasury is responsible for promoting the nation's economic prosperity and protecting its financial security. We advance our interests around the world through the strength not only of our economy but of our ideas.

This President and Treasury have already begun the hard work of recovery and reform. Our Fiscal Year 2010 Budget will allow us to pursue these critical goals, and deliver the balanced and sustainable growth that the American people seek and deserve.

Treasury Announces $68 Billion in Expected CPP Repayments

WASHINGTON – The U.S. Department of the Treasury announced today that 10 of the largest U.S. financial institutions participating in the Capital Purchase Program (CPP) have met the requirements for repayment established by the primary federal banking supervisors. Following consultation with the primary banking supervisor of each institution, Treasury has notified the institutions that they are now eligible to complete the repayment process. If these firms choose to do so, Treasury will receive $68 billion in repayment proceeds.

Combined with repayments received to date from other institutions, Treasury will have received approximately $70 billion in repayments from CPP participants. More than 600 banks across the country have participated in the CPP, representing $199 billion in investments.

"These repayments are an encouraging sign of financial repair, but we still have work to do," said Secretary Tim Geithner.

These repayments follow a period in which many banks have successfully raised equity capital from private investors. Also, for the first time in many months, these banks have issued long-term debt that is not guaranteed by the government.

Under the CPP investment agreements, firms that repay their preferred stock have the right to repurchase the warrants Treasury holds in their firms at fair market value. In addition to Treasury's potential income from sale of the warrants, these 10 institutions have already paid dividends on the preferred stock totaling approximately $1.8 billion over the last seven months. Dividend payments received for all CPP participants are approximately $4.5 billion to date.

Under the Emergency Economic Stabilization Act, proceeds from repayment will be applied to Treasury's general account. These repayments help to reduce Treasury's borrowing and national debt. The repayments also increase Treasury's cushion to respond to any future financial instability that might otherwise jeopardize economic recovery.

reasury Announces $135 Million More in Recovery Act Funds to Create Jobs, Provide Affordable Housing

WASHINGTON – As part of the Obama Administration's effort to create jobs and ease pressures on the housing market, the U.S. Department of the Treasury today announced nearly $135 million in American Recovery and Reinvestment Act (Recovery Act) funding to spur the development of affordable housing units in Iowa, Maine, New Hampshire, Rhode Island, and Washington.

"Today's announcement of housing funds demonstrates how the Recovery Act is putting our nation on the path to economic stability, one community at a time," said Treasury Deputy Secretary Neal Wolin. "This initiative will help to spur construction and development, create much needed jobs, and increase the availability of affordable housing for families around the country."

The labor and housing crises in this country are deeply inter-connected. Since their peak level at the beginning of 2006, housing starts have fallen 80 percent. Houses currently under construction are at a 13-year low, down more than 60 percent from the peak in the first quarter of 2006. This collapse has led to severe job losses in the residential building and specialty trades sector related to housing, with employment down by nearly one-third -- a loss of more than one million jobs. Such losses not only indicate significant problems in the residential construction sector, but also suggest that the need for affordable housing has risen markedly during the recession.

In response, the Treasury Department has launched an innovative program that will provide more than $3 billion from the Recovery Act to put people to work building quality, affordable housing for individuals and families affected by the current crisis.

The Treasury Department will work with state housing agencies to jump start the development or renovation of qualified affordable housing for families across the country. Under this program, after meeting certain eligibility requirements, state housing agencies will receive funding to construct affordable housing developments.

Today, the Treasury Department is announcing funding for five states: $72 million in Iowa; $4 million in Maine; $10 million in New Hampshire; $ 36 million in Rhode Island; and $11 million in Washington. These states have elected to exchange a portion of their unutilized allocation of low-income housing tax credits (LIHTCs) for direct cash assistance, which will then be provided to developers in support of affordable housing. LIHTC projects around the nation have experienced financial problems getting to the finish line but these critical funds will provide a much-needed final push to get people home.

The funds announced today are the second round in a series of awards based on a rolling application process. The Treasury Department anticipates making similar announcements in the coming weeks. To view the terms and conditions for the Treasury application, please click here

Treasury Announces Additional Investment in GMAC LLC

WASHINGTON –The U.S. Department of the Treasury today announced that it has made an investment of $7.5 billion in GMAC LLC. This investment will support GMAC's ability to originate new loans to Chrysler dealers and consumers and help address GMAC's capital needs as identified through the Supervisory Capital Assessment Program (SCAP).

"Over the past several months, the contraction of credit in the auto finance markets has helped drive our auto industry into a historic crisis. This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars," said Secretary Tim Geithner. "Alongside our efforts through the TALF program, a recapitalized GMAC will offer strong credit opportunities, help stabilize our auto financing market, and contribute to the overall economic recovery."

Treasury's $7.5 billion investment in GMAC will be made in the form of 9 percent Mandatorily Convertible Preferred Interests. This investment includes $4 billion to support GMAC's anticipated growth in Chrysler dealer and retail loans. The remaining $3.5 billion will help GMAC address its capital needs as identified through the SCAP completed with the Federal Reserve. As a participant in the SCAP program, GMAC will announce an approved Capital Plan on June 8. This plan will outline how GMAC will meet the full $9.1 billion in new capital need identified in the SCAP program.

Treasury's $7.5 billion investment will be in preferred equity. Therefore, as a result of this transaction, Treasury will not immediately hold common equity interests in GMAC. However, as part of an earlier transaction, the U.S. Treasury retained the right to exchange the $884 million loan it made to GM for common equity interests in GMAC. Treasury expects to exercise this exchange right in the very near future, after which it would hold a 35.4 percent common equity interest in GMAC.

As part of the investment and related agreements, GMAC must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act (EESA).

Treasury exercised this funding authority under EESA's Troubled Asset Relief Program (TARP). The investment was made under the Automotive Industry Financing Program.

U.S. ECONOMIC STATISTICS - QUARTERLY DATA

Latest

2005 2006 2007 2008 4 qtrs Q2-08 Q3-08 Q4-08 Q1-09

-----------------(Q4 to Q4)------------------ (Avg) ---------------(annual rate)------------------

Real GDP (percent change) 2.7 2.4 2.3 -0.8 -2.4 2.8 -0.5 -6.3 -5.7

Consumption 2.6 3.2 2.2 -1.5 -1.3 1.2 -3.8 -4.3 1.6

Business Investment 4.9 6.5 6.4 -5.2 -14.5 2.5 -1.7 -21.7 -36.9

Structures -0.5 12.8 14.5 6.3 -5.9 18.4 9.6 -9.4 -42.3

Equipment and Software 7.0 4.2 2.8 -11.0 -18.5 -5.0 -7.5 -28.1 -33.5

Residential Construction 5.4 -15.5 -19.0 -19.4 -22.7 -13.3 -16.1 -22.7 -38.7

Exports 7.0 10.1 8.9 -1.8 -9.3 12.3 3.0 -23.6 -28.7

Imports 4.8 3.8 1.1 -7.5 -15.6 -7.3 -3.5 -17.5 -34.1

Federal 1.0 2.9 2.3 8.2 5.7 6.6 13.8 6.9 -4.3

State and Local 0.3 1.6 2.4 0.4 -0.3 2.5 1.4 -2.0 -3.0

Levels -------------annual average--------------- (Avg) ---------------(annual rate)------------------

Net Export Balance (nominal) -713.6 -757.3 -707.8 -669.2 -576.1 -718.2 -707.7 -545.1 -333.4

Current Account Balance as share of GDP (percent) -5.9 -6.0 -5.3 -4.7 -4.7 -5.1 -5.0 -3.7

Price Indexes (percent change) -----------------(Q4 to Q4)------------------ (Avg) ---------------(annual rate)------------------

GDP 3.5 2.8 2.6 2.0 2.1 1.1 3.9 0.5 2.8

Gross Domestic Purchases 4.0 2.5 3.3 2.0 1.0 4.2 4.5 -3.9 -1.0

PCE 3.3 1.9 3.5 1.9 0.9 4.3 5.0 -4.9 -1.0

Saving (percent) (Avg)

Personal Saving Rate 0.4 0.7 0.6 1.8 2.9 2.5 1.3 3.2 4.4

Gross Saving as a Share of NNP 14.7 15.2 14.0 11.9 11.7 11.4 11.6 12.1 11.9

Net Saving as a Share of NNP 2.1 3.6 1.9 -1.1 -1.4 -1.3 -1.8 -1.1 -1.5

Productivity (percent change) -----------------(Q4 to Q4)------------------ (Avg) ---------------(annual rate)------------------

Nonfarm 1.5 0.6 2.6 2.2 1.8 4.7 2.2 -0.6 0.8

Manufacturing 3.5 1.3 3.6 -1.8 -3.3 -2.5 -2.9 -4.2 -3.4

Unit Labor Costs - Nonfarm 2.1 3.7 0.9 1.8 2.4 -2.8 3.5 5.7 3.3

Hourly Compensation - Nonfarm 3.6 4.2 3.6 4.1 4.2 1.7 5.7 5.2 4.1

Employment Cost Index, compensation, civillian 3.1 3.3 3.3 2.6 2.1 2.6 2.6 2.2 1.1

Treasury Secretary Timothy G. Geithner
Names Additions to Economic and Financial leadership Team for China

Appoints David Loevinger as Executive Secretary and Senior Coordinator for China Affairs and the Strategic and Economic Dialogue and Intends to Name David Dollar as Economic and Financial Emissary to China

BEIJING – Treasury Secretary Timothy F. Geithner today announced that he is appointing David Loevinger as the Department's Executive Secretary and Senior Coordinator for China Affairs and the Strategic and Economic Dialogue and intends to name David Dollar as Economic and Financial Emissary to China . They will work with Treasury Deputy Assistant Secretary for Asia Robert Dohner in leading Treasury's efforts on China .

Today's announcement was made after Secretary Geithner's meeting in Beijing with his counterpart in the US-China Strategic and Economic Dialogue, Vice Premier Wang Qishan. Secretary Geithner and Vice Premier Wang met to discuss the outlook for the U.S. and Chinese economies, measures to promote economic recovery and financial sector reform, the importance of continued high-level dialogue through the Strategic and Economic Dialogue, and the need to keep both countries' respective markets open for trade and investment.

"David Loevinger and David Dollar are both uniquely qualified to serve in these roles because of their deep expertise and extended experience in handling a broad array of U.S.-China economic affairs," said Secretary Geithner. "David Loevinger's experience in areas such as financial regulation and macroeconomic policies, among others, and David Dollar's world renowned expertise in development economics and distinguished career at the World Bank will help strengthen the U.S.-China partnership in an economically challenging time. I look forward to having both of them play important roles in moving the U.S.-China economic relationship forward."

Loevinger currently serves as Treasury's Minister-Counselor for Financial Affairs in China , where as Treasury's first permanent representative in China , he is responsible for engaging with China on a broad array on economic issues including financial regulation, monetary policy, and exchange rate policy. Loevinger played a lead role in establishing the U.S.-China Strategic and Economic Dialogue and has worked with Chinese regulators to open new markets for U.S. financial services firms, including recent breakthroughs to rescind a moratorium on new licenses for foreign securities firms and allow f oreign banks to trade corporate bonds.

Prior to his appointment, Loevinger was Treasury Deputy Assistant Secretary for Africa, the Middle East and Asia and represented Treasury in the Asia-Pacific Economic Cooperation and other multilateral fora. Since joining Treasury in 1991 as a staff economist, Loevinger has served as Special Assistant to the Under Secretary, Assistant Attaché in Paris, Economist on the Mexico Crisis Task Force, and Director of the Office of East Asian Nations. He was also an economist at the International Monetary Fund. Loevinger received a B.A. from Dartmouth College in 1984 and a Masters in Public Policy from the Harvard Kennedy School of Govern ment in 1988.

Dollar currently serves as the Country Director for China and Mongolia at the World Bank and has been based in Beijing since 2004. Under his leadership, the World Bank launched a China quarterly report that has become one of the most respected sources of information and analysis on the Chinese economy. Dollar also championed the expansion of the World Bank program to cover environmental issues such as energy efficiency, carbon reduction, clean water, and reforestation.

Previous to that post, Dollar worked in the research department of the Bank, where he specialized in the study of globalization and aid effectiveness. He was country economist for Vietnam from 1989 to 1995, a period of intense reform and structural adjustment. Before joining the Bank he was an assistant professor in the economics department at UCLA, where he spent the spring 1986 semester teaching microeconomics at the Chinese Academy of Social Science Graduate School in Beijing on a program sponsored by the Ford Foundation.&nb sp; Dollar has a PhD in economics from NYU (1984). He graduated summa cum laude from Dartmouth College in 1975 with a special major focusing on Chinese language and history.

Loevinger will be based at the Treasury Department in Washington , D.C. ; Dollar will be based in China .

Speech by Secretary Geithner - The United States and China, Cooperating for Recovery and Growth

The United States and China, Cooperating for Recovery and GrowthTreasury Secretary Timothy F. Geithner
Speech at Peking University - Beijing, China
June 1^st, 2009

It is a pleasure to be back in China and to join you here today at this great university.

I first came to China, and to Peking University, in the summer of 1981 as a college student studying Mandarin. I was here with a small group of graduate and undergraduate students from across the United States. I returned the next summer to Beijing Normal University.

We studied reasonably hard, and had the privilege of working with many talented professors, some of whom are here today. As we explored this city and traveled through Eastern China, we had the chance not just to understand more about your history and your aspirations, but also to begin to see the United States through your eyes.

Over the decades since, we have seen the beginnings of one of the most extraordinary economic transformations in history. China is thriving. Economic reform has brought exceptionally rapid and sustained growth in incomes. China¡¯s emergence as a major economic force more fully integrated into the world economy has brought substantial benefits to the United States and to economies around the world.

In recognition of our mutual interest in a positive, cooperative, and comprehensive relationship, President Hu Jintao and President Obama agreed in April to establish the Strategic and Economic Dialogue. Secretary Clinton and I will host Vice Premier Wang and State Councilor Dai in Washington this summer for our first meeting. I have the privilege of beginning the economic discussions with a series of meetings in Beijing today and tomorrow.

These meetings will give us a chance to discuss the risks and challenges on the economic front, to examine some of the longer term challenges we both face in laying the foundation for a more balanced and sustainable recovery, and to explore our common interest in international financial reform.

Current Challenges and Risks

The world economy is going through the most challenging economic and financial stress in generations.

The International Monetary Fund predicts that the world economy will shrink this year for the first time in more than six decades. The collapse of world trade is likely to be the worst since the end of World War II. The lost output, compared to the world economy's potential growth in a normal year, could be between three and four trillion dollars.

In the face of this challenge, China and the United States are working together to help shape a strong global strategy to contain the crisis and to lay the foundation for recovery. And these efforts, the combined effect of forceful policy actions here in China, in the United States, and in other major economies, have helped slow the pace of deterioration in growth, repair the financial system, and improve confidence.

In fact, what distinguishes the current crisis is not just its global scale and its acute severity, but the size and speed of the global response.

At the G-20 Leaders meeting in London in April, we agreed on an unprecedented program of coordinated policy actions to support growth, to stabilize and repair the financial system, to restore the flow of credit essential for trade and investment, to mobilize financial resources for emerging market economies through the international financial institutions, and to keep markets open for trade and investment.

That historic accord on a strategy for recovery was made possible in part by the policy actions already begun in China and the United States.

China moved quickly as the crisis intensified with a very forceful program of investments and financial measures to strengthen domestic demand.

In the United States, in the first weeks of the new Administration, we put in place a comprehensive program of tax incentives and investments ¨C the largest peace time recovery effort since World War II - to help arrest the sharp fall in private demand. Alongside these fiscal measures, we acted to ease the housing crisis. And we have put in place a series of initiatives to bring more capital into the banking system and to restart the credit markets.

These actions have been reinforced by similar actions in countries around the world.

In contrast to the global crisis of the 1930s and to the major economic crises of the postwar period, the leaders of the world acted together. They acted quickly. They took steps to provide assistance to the most vulnerable economies, even as they faced exceptional financial needs at home. They worked to keep their markets open, rather than retreating into self-defeating measures of discrimination and protection.

And they have committed to make sure this program of initiatives is sustained until the foundation for recovery is firmly established, a commitment the IMF will monitor closely, and that we will be able to evaluate together when the G-20 Leaders meet again in the United States this fall.

We are starting to see some initial signs of improvement. The global recession seems to be losing force. In the United States, the pace of decline in economic activity has slowed. Households are saving more, but consumer confidence has improved, and spending is starting to recover. House prices are falling at a slower pace and the inventory of unsold homes has come down significantly. Orders for goods and services are somewhat stronger. The pace of deterioration in the labor market has slowed, and new claims for unemployment insurance have started to come down a bit.

The financial system is starting to heal. The clarity and disclosure provided by our capital assessment of major U.S. banks has helped improve market confidence in them, making it possible for banks that needed capital to raise it from private investors and to borrow without guarantees. The securities markets, including the asset backed securities markets that essentially stopped functioning late last year, have started to come back. The cost of credit has fallen substantially for businesses and for families as spreads and risk premia have narrowed.

These are important signs of stability, and assurance that we will succeed in averting financial collapse and global deflation, but they represent only the first steps in laying the foundation for recovery. The process of repair and adjustment is going to take time.

China, despite your own manifest challenges as a developing country, you are in an enviably strong position. But in most economies, the recession is still powerful and dangerous. Business and households in the United States, as in many countries, are still experiencing the most challenging economic and financial pressures in decades.

The plant closures, and company restructurings that the recession is causing are painful, and this process is not yet over. The fallout from these events has been brutally indiscriminant, affecting those with little or no responsibility for the events that now buffet them, as well as on some who played key roles in bringing about our troubles.

The extent of the damage to financial systems entails significant risk that the supply of credit will be constrained for some time. The constraints on banks in many major economies will make it hard for them to compensate fully for the damage done to the basic machinery of the securitization markets, including the loss of confidence in credit ratings. After a long period where financial institutions took on too much risk, we still face the possibility that banks and investors may take too little risk, even as the underlying economic conditions start to improve.

And, after a long period of falling saving and substantial growth in household borrowing relative to GDP, consumer spending in the United States will be restrained for some time relative to what is typically the case in recoveries.

These are necessary adjustments. They will entail a longer, slower process of recovery, with a very different pattern of future growth across countries than we have seen in the past several recoveries.

Laying the Foundation for Future Growth

As we address this immediate financial and economic crisis, it is important that we also lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established.

A successful transition to a more balanced and stable global economy will require very substantial changes to economic policy and financial regulation around the world. But some of the most important of those changes will have to come in the United States and China. How successful we are in Washington and Beijing will be critically important to the economic fortunes of the rest of the world. The effectiveness of U.S. policies will depend in part on China's, and the effectiveness of yours on ours.

Although the United States and China start from very different positions, many of our domestic challenges are similar. In the United States, we are working to reform our health care system, to improve the quality of education, to rebuild our infrastructure, and to improve energy efficiency. These reforms are essential to boosting the productive capacity of our economy. These challenges are at the center of your reform priorities, too.

We are both working to reform our financial systems. In the United States, our challenge is to create a more stable and more resilient financial system, with stronger protections for consumer and investors. As we work to strengthen and redesign regulation to achieve these objectives, our challenge is to preserve the core strengths of our financial system, which are its exceptional capacity to adapt and innovate and to channel capital for investment in new technologies and innovative companies. You have the benefit of being able to learn from our shortcomings, which have proved so damaging in the present crisis, as well as from our strengths.

Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies. Because of this, our policies have to be directed at very different outcomes.

In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past.

In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China's ability to weather fluctuations in global supply and demand.

If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down. And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.

Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer.

The policy framework for a successful transition to this outcome is starting to take shape.

In the United States, we are putting in place the foundations for restoring fiscal sustainability.

The President in his initial budget to Congress made it clear that, as soon as recovery is firmly established, we are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term. This will mean bringing the imbalance between our fiscal resources and expenditures down to the point - roughly three percent of GDP -- where the overall level of public debt to GDP is definitively on a downward path. The temporary investments and tax incentives we put in place in the Recovery Act to strengthen private demand will have to expire, discretionary spending will have to fall back to a more modest level relative to GDP, and we will have to be very disciplined in limiting future commitments through the reintroduction of budget disciplines, such as pay-as-you go rules.

The President also looks forward to working with Congress to further reduce our long-run fiscal deficit.

And, critical to our long-term fiscal health, we have to put in place comprehensive health care reform that will bring down the growth in health care costs, costs that are the principal driver of our long run fiscal deficit.

The President has also proposed steps to encourage private saving, including through automatic enrollment in retirement savings accounts.

Alongside these fiscal actions, we have designed our policies to address the financial crisis to carefully minimize risk to the taxpayer and to allow for an orderly exit or unwinding as soon as conditions permit. Across the various financial facilities put in place by the Treasury, the Federal Reserve, and the FDIC, we have been careful to set the economic terms at a level so that demand for these facilities will fade as conditions normalize and risk premia recede. Banks have a strong incentive to replace public capital with private capital as soon as conditions permit.

Let me be clear - the United States is committed to a strong and stable international financial system. The Obama Administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home. As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary governmental support that we have put in place to overcome the crisis, we will continue to preserve the openness of our economy, and we will resolutely maintain the policy framework necessary for durable and lasting sustained non-inflationary growth.

In China, the challenge is fundamentally different, and at least as complex.

Critical to the success of your efforts to shift future growth to domestic demand are measures to raise household incomes and to reduce the need that households feel to save large amounts for precautionary reasons or to pay for major expenditures like education. This involves strengthening the social safety net with health care reform and more complete public retirement systems, enacting financial reforms to help expand access to credit for households, and providing products that allow households to insure against risk. These efforts can be funded through the increased collection of dividends from state-owned enterprises.

The structure of the Chinese economy will shift as domestic demand grows in importance, with a larger service sector, more emphasis on light industry, and less emphasis on heavy, capital intensive export and import-competing industries. The resulting growth will generate greater employment, and be less energy-intensive than the current structure of Chinese industry. Allowing the market, interest rates, and other prices to function to encourage the shift in production will be particularly important.

An important part of this strategy is the government's commitment to continue progress toward a more flexible exchange rate regime. Greater exchange rate flexibility will help reinforce the shift in the composition of growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future.

International Financial Reform

These are some of the most important domestic economic challenge we face, and these issues will be at the core of our agenda for economic cooperation.

But I think it is important to underscore that we also have a very strong interest in working together to strengthen the framework for international economic and financial cooperation.

Let me highlight three important areas.

At the G-20 Leaders meeting, we committed to a series of actions to help reform and strengthen the international financial architecture.

As part of this, we agreed to put in place a stronger framework of standards for supervision and regulation of the financial system. We expanded and strengthened the Financial Stability Forum, now renamed the Financial Stability Board. China and other major emerging economies are now full participants, alongside the major financial centers, in this critical institution for cooperation. We will have the chance together to help redesign global standards for capital requirements, stronger oversight of global markets like derivatives, better tools for resolving future financial crises, and measures to reduce the opportunities for regulatory arbitrage.

We also committed to an ambitious program of reform of the IMF and other international financial institutions. Our common objective is to reform the governance of these institutions to make them more representative of the shifting balance of economic and financial activity in the world, to strengthen their capacity to prevent future crisis, with stronger surveillance of macroeconomic, exchange rate, and financial policies, and to equip them with a stronger financial capacity to respond to future crises. We also committed to mobilize $500 billion in additional finance through the enlargement and membership expansion of the IMF's New Arrangements to Borrow in order to provide an insurance policy for the global financial system.

As part of this process of reform, the United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China's importance in the global economy.

I believe that a greater role for China is necessary for China, for the effectiveness of the international financial institutions themselves, and for the world economy.

China is already too important to the global economy not to have a full seat at the international table, helping to define the policies that are critical to the effective functioning of the international financial system.

Second, we must cooperate to assure that the global trade and investment environment remains open, and that opportunities continue to expand. As economies have become more open and more closely integrated, global economic growth has been stronger and more broad-based, bringing increasing numbers out of poverty, and turning developing nations into major emerging markets. The global commitment to trade liberalization and increasingly open investment played a critical role in this process ¨C in the industrialized world, in East Asia, and, since 1978, in China. As we go through the severe stresses of this crisis, we must not turn our backs on open trade and investment - for ourselves and for those who have yet to experience the fruits of growth and development. The United States, China, and the other members of the G20 have committed to not resort to protectionist measures by raising trade and investment barriers and to work toward a successful conclusion to the Doha Development Round.

And third, one of the most critical long-term challenges that we both face is climate change. Individually and collectively, there is an urgent need to ensure that each and every country takes meaningful action to deal with this threat. Reducing land and forest degradation, conserving energy, and using clean technology are important objectives that complement both our efforts to achieve a new, sustainable pattern of growth and our goal of reducing greenhouse gas emissions. China and the United States already are working closely through the Strategic and Economic Dialogue in areas such as clean transportation, clean and efficient production of electricity, and the reduction of air and water pollution. We must continue these efforts for the sake of our natio ns and the planet.

Conclusion

In the last few years the frequency, intensity, and importance of U.S.-China economic engagements have multiplied. The U.S.-China Strategic and Economic Dialogue that President Obama and President Hu initiated in April is the next stage in that process. I look forward to welcoming Vice Premier Wang, State Councilor Dai and their colleagues to Washington to participate in the first meeting of the U.S.-China Strategic and Economic Dialogue.

Our engagement should be conducted with mutual respect for the traditions, values, and interests of China and the United States. We will make a joint effort in a concerted way "同心协力". We should understand that we each have a very strong stake in the health and the success of each other's economy.

China and the United States individually, and together, are so important in the global economy and financial system that what we do has a direct impact on the stability and strength of the international economic system. Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.

We come together because we have shared interests and responsibilities. We also have our own national interests. I will be a strong advocate for U.S. interests, just as I expect my counterparts to represent China¡¯s. China has benefited hugely from open trade and investment, and the ability to greatly increase its exports to the rest of the world. In turn, we expect increased opportunities to export to and invest in the Chinese economy.

We want China to succeed and prosper. Chinese growth and expanding Chinese demand is a tremendous opportunity for U.S. firms and workers, just as it is in China and the rest of the world.

Global problems will not be solved without U.S.-China cooperation. That goes for the entire range of issues that face our world from economic recovery and financial repair to climate change and energy policy.

I look forward to working with you cooperatively, and in a spirit of mutual respect.

Quarterly Report to Congress on International Monetary Fund Lending

January 1 – March 31, 2009

View Full Report

Treasury Targets Hizballah Network in Africa

WASHINGTON- The U.S. Department of the Treasury today designated Kassim Tajideen and Abd Al Menhem Qubaysi, two Africa-based supporters of the Hizballah terrorist organization, under E.O. 13224. E.O. 13224 targets terrorists and those providing support to terrorists or acts of terrorism by freezing any assets the designees have under U.S. jurisdiction and prohibiting U.S. persons from engaging in any transactions with them.

"We will continue to take steps to protect the financial system from the threat posed by Hizballah and those who support it," said Under Secretary for Terrorism and Financial Intelligence Stuart Levey. "Not only is Hizballah itself a terrorist organization with global reach, it also recently acknowledged publicly that it provides support to Hamas."

Kassim Tajideen is an important financial contributor to Hizballah who operates a network of businesses in Lebanon and Africa. He has contributed tens of millions of dollars to Hizballah and has sent funds to Hizballah through his brother, a Hizballah commander in Lebanon . In addition, Kassim Tajideen and his brothers run cover companies for Hizballah in Africa . In 2003, Tajideen was arrested in Belgium in connection with fraud, money laundering, and diamond smuggling.

Abd Al Menhem Qubaysi is a Cote d'Ivoire-based Hizballah supporter and is the personal representative of Hizballah Secretary General Hassan Nasrallah. Qubaysi communicates with Hizballah leaders and has hosted senior Hizballah officials traveling to Cote d'Ivoire and other parts of Africa to raise money for Hizballah. Qubaysi plays a visible role in Hizballah activities in Cote d'Ivoire , including speaking at Hizballah fundraising events and sponsoring meetings with high-ranking members of the terrorist organization.

Qubaysi also helped establish an official Hizballah foundation in Cote d'Ivoire which has been used to recruit new members for Hizballah's military ranks in Lebanon .

Identifying Information

KASSIM TAJIDEEN

Individual:
TAJIDEEN, Kassim
AKA:
Kassim Mohammad Tajiddine
AKA:
Qasim Taji Al-Din
AKA:
Kasim Taji Al-Din
AKA:
Kasim Tajmudin
DOB:
March 21, 1955
POB:
Sierra Leone
Passport 1:
0285669 (Sierra Leone)
Passport 2:
RL1794375 (Lebanon)
Nationality 1:
Leonean
Nationality 2:
Lebanese

ABD AL MENHEM QUBAYSI

Individual:
Abd-Al-Munim Al-Qubaysi
AKA:
Abd Al Menhem Kobeissi
AKA:
Abd Al Menhem Qubaysi
AKA:
Abd Al Munhim Kubaysy
AKA:
Abdul Menhem Kobeissy
AKA:
Abdul Menhem Kobeissi
AKA:
Abdel Menhem Kobeissi
DOB 1:
January 1, 1964
DOB 2:
1961
POB:
Beirut, Lebanon
Passport:
RL1622378 (Lebanon)
Nationality:
Lebanese

Background on Hizballah

Hizballah is a Lebanon-based terrorist group, which, until September 11, 2001, was responsible for more American deaths than any other terrorist organization. Hizballah is closely allied with Iran and often acts at its behest, but it also can and does act independently. In addition, the group has been a strong ally in helping Syria advance its political objectives in the region, although Hizballah does not share the Syrian regime's secular orientation.

Iran and Syria provide significant support to Hizballah, giving money, weapons and training to the terrorist organization. In turn, Hizballah is closely allied with and has an allegiance to these states. Iran is Hizballah's main source of weapons and uses its Islamic Revolutionary Guard Corps to train Hizballah operatives in Lebanon and Iran . Iran provides hundreds of millions of dollars per year to Hizballah.

The Majlis al-Shura, or Consultative Council, is the group's highest governing body and has been led by Secretary General Hasan Nasrallah since 1992. Hizballah is known or suspected to have been involved in numerous terrorist attacks throughout the world, including the suicide truck bombings of the U.S. Embassy and U.S. Marine Corps barracks in Beirut in 1983 and the U.S. Embassy annex in Beirut in September 1984.

Hizballah also perpetrated the 1985 hijacking of TWA Flight 847 en route from Athens to Rome , and has been implicated in the attacks on the Israeli Embassy in Argentina in 1992 and a Jewish cultural center in Buenos Aires in 1994. The U.S. Government has indicted members of Hizballah for their participation in the June 1996 truck bomb attack of the U.S. Air Force dormitory at Khobar Towers in Saudi Arabia. Most recently, in July 2006, Hizballah terrorists kidnapped two Israeli soldiers, triggering a violent conflict that resulted in hundreds of civilian casualties in Lebanon and Israel.

The Annex to Executive Order 12947 of January 23, 1995 listed Hizballah as a Specially Designated Terrorist (SDT). The Department of State designated Hizballah as a Foreign Terrorist Organization (FTO) in 1997. Additionally, on October 31, 2001, Hizballah was designated as a Specially Designated Global Terrorist under Executive Order 13224.

Statement by
Timothy F. Geithner
U. S. Secretary of the Treasury
before the
Senate Banking Committee
May 20, 2009

Introduction

Good morning.

Chairman Dodd, Ranking Member Shelby, members of the Senate Banking Committee, thank you for the opportunity to testify before you today.

On October 3, 2008, during a time of tremendous financial upheaval and economic uncertainty, Congress passed the Emergency Economic Stabilization Act (EESA) with the specific goal of stabilizing the nation's financial system and preventing catastrophic collapse. Soon after taking office, this Administration rebuilt the EESA programs from the ground up with a new foundation. We also unveiled a financial stability plan to restore the flow of credit to consumers and businesses, tackle the foreclosure crisis in order to help millions of Americans stay in their homes, and comprehensively reform the nation's financial regulatory system so that a crisis like this one never happens again.

Today, just four months into President Obama's term of office, there are important indications that our financial system is starting to heal. For example, spreads for investment grade corporate bonds have fallen about 210 basis points and spreads on high yield corporate bonds are down about 770 basis points since the end of November. Spreads on AAA municipal bonds have come down 150 basis points since October. Risk premiums in short-term, inter-bank markets have fallen 280 basis points over roughly the same period and the cost of credit protection for the largest U.S. banks has fallen by about 180 basis points just since early April. Treasury is continuing to look into additional metrics that gauge the markets more broadly, as well as additional economic metrics, to determine the effectiveness of the current strategy and whether additional or different steps are needed.

With the help of our lending facility with the Federal Reserve, new securities issuance has started to revive. Spreads for AAA credit card receivables asset-backed securities (ABS) have fallen about 330 basis points from their peak. There has been more issuance of consumer ABS in the past two months than in the preceding five months combined. In our housing market, interest rates on 30-year mortgages have dropped to historic lows and refinancing has surged.

Finally, we have already seen a substantial amount of adjustment in our financial system. Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk, and banks are funding themselves more conservatively.

These are all welcome signs. However, the process of financial recovery and repair will take time.

The Conditions We Confronted Upon Taking Office

The challenges that our financial system confronts are complex, interrelated, and the result of developments over many years. Earlier this decade, a combination of factors generated unsustainable bubbles in many housing markets across the country. A protracted period of rapid innovation, excessive risk taking, and inadequate regulation produced a financial system that was far more fragile than was generally appreciated during the boom times.

Starting in 2007, unexpected losses experienced by major banks on mortgage-backed securities set off a vicious cycle. The losses reduced their capital, which forced them to pull back on lending. This put downward pressure on asset prices, which generated further losses for the banks and reduced wealth for millions of American families and businesses. Tightening financial conditions became a drag on the broader economy. As workers lost jobs and as prospects for businesses darkened, prospective losses on consumer and business loans increased. And as the scale of the potential financial losses increased, market concerns about the viability of individual institutions mounted, and as firms became reluctant to maintain even normal exposures to one another, the basic functioning of our financial markets was compromised.

In the fall of 2008, major policy intervention (including the EESA legislation) was, in the end, successful in achieving the vital but narrow objective of preventing a systemic financial meltdown. However, while those actions reduced overt concerns about systemic risk, as President-Elect Obama and his economic team prepared an economic program, the outlook for the economy was deteriorating rapidly. Economic data that became available in November and December pointed to a very sharp fall in economic activity. For example, the advanced data on orders for durable goods fell by 6.2 percent in October, the largest monthly decrease in two years. On December 4, it was reported that payroll employment had fallen by 533,000 in November.[1] This was the largest monthly decline since the deep recession of 1973-74. Quickly worsening prospects for the economy meant that likely losses for U.S. financial institutions were rising sharply as well, and this heightened concerns about the adequacy of their capital.

The disruptions to the financial system were a major factor undermining the economy. Liquidity in a broader range of securities markets, including the market for long-term Treasuries, fell sharply. Credit spreads for virtually all credit products reached historic highs in the fourth quarter. Loan growth and bond issuance slowed in the fourth quarter. In particular, the issuance of new ABS essentially came to a halt in October. Part of the decline in credit growth reflected falling demand for credit as consumers and businesses became more cautious. But a variety of factors pointed to meaningful constraints on the supply of credit. For example, a record number of banks reported tightening credit standards in the fourth quarter.

In addition, given the substantial burden placed upon the American taxpayers, there was deep public anger, skepticism about whether the government was using taxpayer money wisely, and a perceived lack of transparency, all of which led to eroding confidence.

Our Response

Leaving that situation unaddressed would have undoubtedly risked a deeper recession and more damage to the productive capacity of the American economy. It would have resulted in higher unemployment and greater failures of businesses.

The lesson of past economic crises is that early, forceful and sustained action is necessary to spur growth, repair the financial system and restore the flow of credit in order to sustain economic recovery.

Facing these extraordinary challenges, this Administration and the Congress responded with extraordinary action. Within weeks, we enacted the American Recovery and Reinvestment Act (ARRA) that is giving 95 percent of working Americans a tax cut, creating or saving 3.5 million jobs, providing nearly 4 million students with a new higher education tax cut and helping 1.4 million Americans purchase their first home by providing $6.5 billion in tax credits.

On February 10, the Administration outlined a series of proposals to stabilize the housing market; boost new consumer and business lending by re-starting the market for securities; increase transparency and new capital in the financial system by conducting an unprecedented regulatory review of our nation's largest banks; and create a market for legacy real-estate related loans and securities that are clogging banks and making them reluctant to lend.

Reforming EESA

Upon taking office, this Administration reformed EESA in four concrete ways. First, we brought a new framework of transparency, accountability and oversight. Second, we redirected the program to get credit flowing again to the financial system. Third, we focused the program on the housing market, consumer business lending, small business lending, and efforts to help create a market for legacy loans and securities. Finally, we worked to ensure that our programs facilitated broader restructuring in the financial system by providing unprecedented transparency about the health of our major financial institutions, allowing investors to differentiate more clearly among banks and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government. I would like to update the committee on each.

Transparency, Accountability and Oversight

A key element to our new approach came in March, when the Department of the Treasury launched a new website, www.financialstability.gov, that lists how taxpayer dollars are spent, what conditions are placed on institutions in exchange for government assistance, and provides an interactive map illustrating state-by-state bank and financial institution funding.

We have also taken a number of steps to better measure whether our programs are increasing the flow of credit through Monthly Lending and Intermediation Surveys. Treasury undertook this important initiative to better understand the effects the program is having and to help the public easily assess the lending and intermediation activities of banks participating in the Capital Purchase Program (CPP). The Surveys capture data from the 20 largest recipients of investments under the CPP, detailing quantitative information on three major categories of lending – consumer, commercial, and other financial activities – based on banks' internal reporting, as well as commentary to explain changes in lending levels for each category. We are in the process of expanding our monthly survey to include all banks participating in the CPP, including more than 500 small and community banks across the country and are adding a metric to follow lending to small businesses. For institutions taking part in the Capital Assistance Program (CAP), which I will describe momentarily, Treasury is requiring recipients to detail in monthly reports their lending broken out by category.

In addition, on January 28, 2009, Treasury announced that it would begin posting all of its investment contracts online within five to ten business days of each transaction's closing. Treasury is in the process of posting all the contracts signed prior to January 28 to the website as well. To date, Treasury has posted over 240 investment contracts on www.financialstability.gov, in addition to terms and program guidelines for all programs under the EESA.

Since taking office we have worked closely with the Government Accountability Office, the Congressional Oversight Panel, and the Special Inspector General for the Troubled Asset Relief Program, the three oversight bodies examining the implementation of EESA. We are continually reviewing their recommendations and are adapting our programs in response to their proposals.

Finally, on February 4, the President laid out a set of broad reforms for compensation packages for financial institutions that receive government assistance. Congress put in place additional reforms and currently Treasury is preparing an Interim Final Rule to implement the executive compensation and corporate governance provisions of the ARRA.

Housing

As we are all painfully aware, the collapse of the housing price bubble, and the sharp reversal in lending standards that helped fuel that bubble, have had a devastating effect on homeowners and the financial sector, with dire consequences for the economy overall. In addition to reducing household wealth across the country, and thereby further intensifying the economic contraction, falling home prices and extraordinarily tight lending standards have trapped homeowners in their old mortgages. Even many homeowners who made what seemed to be conservative financial decisions three, four, or five years ago find themselves unable to benefit from the low interest rates available to unencumbered borrowers today. At the same time, increases in unemployment and other recessionary pressures have continued to impair the ability of some otherwise responsible families to stay current on mortgage payments.

Since January, the Administration has spent considerable effort developing and implementing a comprehensive plan for stabilizing our housing market. Working with the Federal Reserve, along with enacting programs to help provide more financial strength to the GSEs, we helped bring overall mortgage interest rates down to historic lows.

We launched a new program called Making Home Affordable to make it possible for millions of American homeowners to refinance and take advantage of those lower interest rates.

And we put in place a program to reduce the monthly mortgage payments for eligible borrowers. This loan modification program ensures monthly mortgage payments are at most 31 percent of a person's income for five years.

On April 6, building on MHA, Treasury announced a major inter-agency effort to combat mortgage rescue fraud and put scammers on notice that we will not stand by while they prey on homeowners seeking help to avoid foreclosure.

On April 28, Treasury announced a Second Lien Program so that, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Servicers alternatively have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate. Treasury also announced steps to incorporate the Federal Housing Administration's (FHA) Hope for Homeowners into MHA.

And on May 14, Treasury announced new details on Foreclosure Alternatives and Home Price Decline Payments. The Foreclosure Alternatives are meant to prevent costly foreclosures by providing incentives for servicers and borrowers to pursue short sales and deeds-in-lieu of foreclosure in cases where a borrower is eligible for a MHA modification but unable to complete the modification process. The Home Price Decline Protection Incentives will provide additional payments based on recent home price declines, and therefore will incentivize additional modifications in areas where home prices have been falling.

To date, MHA's progress has been substantial. Fourteen servicers, including the five largest, have signed contracts and begun modifications under our program. Between loans covered by these servicers and loans owned or securitized by Fannie Mae or Freddie Mac, more than 75 percent of all loans in the country are now covered by MHA. The 14 participating servicers have extended offers on over 55,000 trial modifications and mailed out over 300,000 letters with information about trial modifications to borrowers and Fannie Mae and Freddie Mac have acquired thousands of refinancings for high loan-to-value (LTV) borrowers.

Since the launch of its new automated underwriting system on April 4, Fannie Mae has had over 233,000 eligible refinance applications through DU Refi Plus, with over 51,000 of these having LTVs between 80 and 105 percent. More than 3,650 Home Affordable Refinance loans have closed and been delivered to Fannie Mae and Freddie Mac already. These application volumes indicate the desire of homeowners to take advantage of the Administration's program.

Since the Treasury released guidelines for servicers under MHA on March 4, close to 3 million borrowers have accessed Fannie Mae and Freddie Mac loan look-up tools online to see if they have a loan eligible for refinancing. Just two weeks after the guidelines were released Treasury also launched www.makinghomeaffordable.gov, a website dedicated to helping empowering homeowners with the tools to gather information about the program and determine whether they might be eligible. The site has received more than 17.7 million page views in less than two months.

Going forward, we will continue to explore additional ways to help the housing market and report on ongoing progress.

Capital Assistance Program

Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators. However, concerns about economic conditions – combined with the destabilizing impact of distressed "legacy assets" – have created an environment under which uncertainty about the health of individual banks has sharply reduced lending across the financial system, working against economic recovery.

For every dollar that banks are short of the capital they need, they will be forced to shrink their lending by eight to twelve dollars. Conversely, every additional dollar of capital gives banks the capacity to expand lending by eight to twelve dollars. Providing confidence that banks have a sufficient level of capital even if the economic outlook deteriorates is a necessary step to restart lending, so that families have access to the credit they need to buy homes or pay for college, and businesses can get the loans they need to expand. Moreover, reassuring investors that banks have sufficient resources to weather even a very adverse economic scenario will make it possible for banks to raise additional private capital.

That is why a key component of any credible program to restore confidence to the financial system and get credit flowing again is to recapitalize the banking system, ensuring that the largest banks in the country have sufficient capital so they can support lending, even in a more severe economic scenario.

On May 7, Federal banking supervisors announced the results of the most extensive regulator review in our nation's history of the biggest 19 banks. The forward-looking test provided unprecedented levels of transparency and clarity to address uncertainty in the banking system.

The results found that 9 of the 19 firms currently have capital buffers sufficient to get through the adverse scenario and that the remaining 10 firms collectively need to add $75 billion to their capital buffers to reach the target.

Any Bank Holding Company needing to augment its capital buffer is required to develop a detailed capital plan to be approved by its primary supervisor, after consultation with the FDIC and Treasury. These plans are due 30 days following the release of the results, on June 8th, and must be implemented within six months of the release of the results. Also, some firms may choose to apply to Treasury for Mandatory Convertible Preferred (MCP) under our program as a bridge to private capital.

This review is helping to increase confidence in the financial system. To date, more than $56 billion in funds have been raised or announced by the 19 banks, including $34 billion in common equity capital. Of the $56 billion, about $48 billion has been planned or executed by banks with a SCAP shortfall. Banks without a shortfall have signaled their intent to use funds to repay EESA capital if approved. One of the preconditions to repaying EESA capital is that banks must demonstrate financial strength by issuing senior unsecured debt for a term greater than five years not backed by FDIC guarantees. To date, banks have also raised $8 billion in non-FDIC guaranteed bonds.

Going forward, we plan to re-open the application window for banks with total assets under $500 million under the Capital Purchase Program, established last October by the previous Administration, and raise from 3 percent of risk-weighted assets to 5 percent the amount for which qualifying institutions can apply. This applies to all term sheets – public and private corporations, Subchapter S corporations, and mutual institutions. Current CPP participants will be allowed to reapply, and will have an expedited approval process.

In addition, we plan to extend the deadline for small banks to form a holding company for the purposes of CPP. Both the window to form a holding company and the window to apply or re-apply for CPP will be open for six months.

These are essential steps to ensuring that community banks, a source of strength and resilience for the U.S. financial system, continue to lend during this economic crisis. Community banks have accounted for more than one third of the dollar volume of loans to small businesses – the businesses which in turn have accounted for the majority of new jobs created annually over the past decade.

Consumer and Business Lending Initiative

Securitization has come to play a very important role in the U.S. financial system. Banks develop and maintain expertise in originating certain types of loans. This includes loans to individuals through credit cards, mortgages, student loans, and other forms of consumer credit as well as loans to businesses, particularly those that are not able to raise funds directly in securities markets. In recent years, an increasing portion of these loans have been aggregated into pools and sold as so-called Asset Backed Securities, or ABS. The rapid growth of the market for ABS in the years before the current crisis increased the supply of credit available to individuals and small businesses because once banks pool and sell loans to the securitization market, it opens up their balance sheet to create new loans.

As the economy deteriorated over the summer of 2008, credit spreads on ABS began to rise, and the disruptions that followed the failure of Lehman Brothers severely disrupted the market of newly issued ABS. Issuance of consumer ABS averaged $20 billion per month in 2007, and $18 billion per month during the first half of 2008. However, ABS issuance slowed sharply in the third quarter before coming to a virtual halt in October 2008. The closure of this market is a major constraint on the supply of new credit to individuals and businesses, particularly in an environment where banks have little scope to expand their balance sheets.

An important part of the FSP is a significant expansion of the Term Asset-Backed Securities Loan Facility (TALF) through the Consumer and Business Lending Initiative (CBLI). The TALF is designed to jumpstart the securitization markets, which in turn will increase lending throughout the economy. Under the TALF, the Federal Reserve extends loans to investors who purchased newly issued ABS. Treasury has committed funds under the EESA program to provide a degree of credit protection for the Federal Reserve's TALF loans. The program was initially proposed in November 2008, with a focus on highly-rated ABS backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). As part of our financial stability plan, we announced an expansion of the size and scope of the program, increasing the scale of potential ABS funding under TALF.

Recently, Treasury and the Federal Reserve expanded TALF to include newly or recently issued AAA-rated ABS backed by four additional types of consumer and business loans – mortgage servicing advances, loans or leases relating to business equipment, leases of vehicle fleets, and floor plan loans. Treasury and the Federal Reserve have expanded the 3-year TALF loans to include a 5-year term and just yesterday we announced extending certain legacy commercial mortgage backed securities as an eligible collateral for TALF loans. Addressing the dislocation in the commercial real estate market through this program is critical to restoring the flow of credit to owners of commercial real estate and preventing a damaging chain of events in this market.

The terms of the funding provided under TALF, including fees, are set in a way that is designed to limit the risks faced by U.S. taxpayers while still meeting the objective of encouraging lending to consumers and small businesses. The amount and cost of funding that is provided varies depending on the riskiness of the assets being financed. Treasury and the Federal Reserve used conservative assumptions when calibrating the limits on the funding provided given the uncertain economic environment.

To date there has been $24.8 billion in total new issuance under TALF, of which $17.2 billion was borrowed by investors using TALF loans. The three month average of TALF issuance was equivalent to 50 percent of the 2007 market volume. Spreads on ABS securities have narrowed between 40-60 percent from the peak in December 2008. Since the fourth quarter of 2008, 5-year fixed rate AAA credit cards tightened 300 basis points in four months. Finally, the commercial mortgage-backed securities spreads have narrowed by 800 basis points just from the presence of the TALF program.

Going forward, Treasury and the Federal Reserve will continue to monitor and enhance the ABS programs to bring in new, more niche asset classes and make sure that the number of eligible borrowers and issuers continues to increase.

Small Business Initiative

In recent years, securitization has supported over 40 percent of lending guaranteed by the Small Business Administration (SBA). As a result of the severe dislocations in the credit markets that began in October 2008, however, both lenders that originate loans under SBA programs and the "pool assemblers" that package such loans for securitization have experienced significant difficulty in selling those loans or securities in the secondary market. This, in turn, has significantly reduced the ability of lenders and pool assemblers to make new small business loans. While the SBA guarantees about $18 billion in new lending in 2008, new lending was trending below $10 billion earlier this year.

On March 16, 2009, Treasury announced a program to unlock credit for small businesses as part of the Consumer and Business Lending Initiative. As part of the program, Treasury will make up to $15 billion in EESA funds available to make direct purchases to unlock the secondary market for the government-guaranteed portion of SBA 7(a) loans as well as first-lien mortgages made through the 504 program. These purchases, combined with temporary benefits, including higher loan guarantees and reduced fees implemented under the American Recovery and Reinvestment Act of 2009, will help provide support to small business lending.

The announcement impact of this initiative – combined with the implementation of 90 percent guarantees and reduced fees – has helped raise weekly SBA loan volumes by over 25 percent since March 16. In addition, secondary market activity has picked up, with $185 million in total loan volume settled from lenders to brokers in April, the highest monthly total since September.

Going forward, Treasury expects to finalize details that will allow purchases to begin shortly.

Public Private Investment Program

A variety of troubled legacy assets are congesting the U.S. financial system. The vicious cycle of deleveraging has pushed some asset prices to extremely low levels, levels that are indicative of distressed sellers. The difficulty of obtaining private financing on reasonable terms to purchase these assets has reduced secondary market liquidity and disrupted normal price discovery. This constraint on capital reduces the ability of financial institutions to provide new credit and uncertainty about the value of legacy assets is constraining the ability of financial intuitions to raise private capital.

The Public Private Investment Program (PPIP) is intended to restart the market for these assets while also restoring bank balance sheets as these devalued loans and securities are sold. Using $75 to $100 billion in capital from EESA and capital from private investors – as well as funding enabled by the Federal Reserve and FDIC – PPIP will generate $500 billion in purchasing power to buy legacy assets, with the potential to expand to $1 trillion over time. By providing a market for these assets, PPIP will help improve asset values, increase lending capacity for banks, and reduce uncertainty about the scale of losses on bank balance sheets – making it easier for banks to raise private capital and replace the capital investments made by Treasury.

By following three basic principles, PPIP is designed as part of an overall strategy to resolve the crisis as quickly as possible with the least cost to the taxpayer. First, by partnering with the FDIC, the Federal Reserve, and private sector investors, we will make the most of taxpayer resources under EESA. Second, PPIP will ensure that private sector participants invest alongside the government, with the private sector investors standing to lose money in a downside scenario and the taxpayer sharing in profitable returns. Third, the program will use competing private sector investors to engage in price discovery, reducing the likelihood that the government will overpay for these assets. By contrast, if the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying. Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time. PPIP strikes the right balance, making the most of taxpayer dollars, sharing risk with the private sector, and taking advantage of private sector competition to set market prices for currently illiquid assets.

The program has two major components, one each for securities and loans. The Legacy Securities Program initially will target commercial mortgage-backed securities and residential mortgage-backed securities. Treasury will partner with approved asset managers. Pre-approved asset managers will have an opportunity to raise private capital for a public-private investment fund ("PPIF"). Treasury will invest equity capital from the EESA in the PPIF on a dollar-for-dollar basis with participating private investors. Additional funding will be available either directly from Treasury or through TALF. The program is designed to encourage participation by a wide range of investors, and we extended the application deadline to facilitate that objective.

The Legacy Loans Program is designed to attract private capital to purchase eligible legacy loans and other assets from participating banks through the availability of FDIC debt guarantees and Treasury equity co-investments. Under the program, PPIFs will be formed – with up to 50 percent equity participation by Treasury – to purchase and manage pools of legacy loans and other assets purchased from U.S. banks and savings associations. The FDIC will provide a guarantee of debts issued by PPIFs and collect a guarantee fee. The FDIC will be responsible for overseeing the formation, funding, and operation of legacy loan PPIFs and for overseeing and managing the debt guarantees it provides to the PPIFs.

The terms of the funding provided under both parts of PPIP, including fees, will be set in a way that is designed to limit the risks faced by U.S. taxpayers while still meeting the objective of generating new demand for legacy assets. In addition, those participating in the program will be subject to a significant degree of oversight to ensure that their actions are consistent with the objectives of the program.

To date, Treasury has received more than 100 unique fund manager applications representing various types and sizes of institutions, geographical diversity and including a significant number of women, minorities and veterans. Treasury is evaluating a select group of finalists and will inform applicants of their preliminary qualifications in the next several weeks.

Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks.

Auto Task Force

On February 20, 2009, National Economic Council Director Larry Summers and I convened the official designees to the Presidential Task Force on Autos to analyze the February 17 restructuring plan submissions of Chrysler and General Motors and work toward a determination on the ability of the plans to yield long-term financial viability and competitiveness for these companies without taxpayer support. On March 30, the President laid out a new finite path forward for both companies to restructure and succeed; Chrysler would have until April 30 to reach a definitive deal with Fiat and secure the necessary support of stakeholders, and General Motors would have until June 1 to engage in more fundamental restructuring and develop a credible strategy for implementation.

In addition to supporting these companies with working capital during this restructuring period, the Administration took steps to ensure that consumers had confidence in the cars they buy and that suppliers that depend on viable auto companies had support to weather the storm. To this end, the President announced a warranty commitment program, which would guarantee the warranty of all new cars purchased from GM or Chrysler during the restructuring period, and a $5 billion Supplier Support Program to provide suppliers with the confidence they need to continue shipping their parts and the support they need to help access loans to pay their employees and continue their operations. In addition, the launch of the Term Asset-Backed Securities Loan facility (TALF) has expanded the funding available for retail auto loans.

On April 30, President Obama announced an agreement among Chrysler, Fiat and their key stakeholders that positions Chrysler for a viable future. As a result of the sacrifices by key stakeholders and a substantial commitment of U.S. government resources, Chrysler now has a new opportunity to thrive as a long-term viable 21st century company. We have been heartened by the steady progress that Chrysler has made through its bankruptcy proceeding and are confident that the new Chrysler-Fiat partnership will emerge from the court process shortly. A sale hearing on the transaction is scheduled for May 27 – less than a month after the company filed for Chapter 11.

As the President has made clear, this restructuring process will require sacrifice by all stakeholders in the auto industry, including auto workers, debt and equity investors, dealers, suppliers, and the communities in which they operate. Yet, the Administration's commitment to the American automotive industry has given both GM and Chrysler a new lease on life, preventing plant and dealership closings on a massive scale and saving tens of thousands of jobs across the country. By helping these companies become more competitive, this process will result in more secure employment for tens of thousands of American workers and the best possible chance for the American auto industry to create more good jobs in the future.

Through the Task Force, we will continue to work with GM and its stakeholders in the lead up to the June 1 deadline. We will also continue our significant efforts to ensure that financing is available to creditworthy dealers and to pursue efforts to help boost domestic demand for cars.

EESA Funds

Some of the programs I have mentioned have required the Administration to use additional EESA funds and I would like to provide the latest estimate we have on how much remains. By the time President Obama was sworn in, over half of the $700 billion allocated to Treasury under the EESA had already been committed.

The new programs where we committed additional resources are our housing programs, consumer business lending, small business lending, the auto program and our program to create a market for legacy loans and securities. We've also had to make additional resources available to help stabilize AIG. An attached chart shows our latest accounting.

Today, Treasury estimates that there is at least $123.7 billion in resources authorized under EESA still available. The attached table provides a breakdown of our expenditures. This figure assumes that the projected amount committed to existing programs will be $601.3 billion (of which $355.4 billion was committed under the previous administration), but also anticipates that $25 billion will be paid back under the CPP over the next year and available for new assistance.

Because the most relevant consideration is what funds will remain available for new programs, we believe that our estimates are conservative for two reasons. First, our estimates assume 100 percent take-up of the $220 billion made available for our housing and liquidity programs, which require significant voluntary participation from financial participants. If any of those programs experience less than full take-up, additional funds will be available. Secondly, our projections anticipate only $25 billion will be paid back under CPP over the next year, a figure lower than many private analysts expect.

Regulatory Reform

As we work to stabilize the financial system, we need to make sure we are also putting in place comprehensive reforms to ensure a crisis like this never happens again.

The rapid growth of the largest financial institutions and their increasing interconnections through securities markets have heightened systemic risk in the system. In response, we need to expand our capacity to contain systemic risk. This crisis – and the cases of firms like Bear Stearns, Lehman Brothers and AIG – has made clear that certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime. It is not enough to address the potential insolvency of individual institutions – we must also ensure the stability of the system itself.

Financial innovation has expanded the financial products and services that are available to consumers. These changes have brought many benefits. But we have to make sure that when households make choices to borrow, or to invest their savings, there are clear and fair rules of the road that prevent manipulation, deception, and abuse. Lax regulation has left too many households exposed to those risks. We need meaningful disclosures that actual consumers and investors can understand. We need to promote simplicity, so that financial choices offered to consumers are clear, reasonable, and appropriate. Furthermore, there must be clear accountability for protecting consumers and investors alike.

The rapid pace of development in the financial sector in recent decades has meant that gaps and inconsistencies in our regulatory system have become more meaningful and problematic. Financial activity has tended to gravitate towards the parts of the system that are regulated least effectively. Looking ahead, our regulatory structure must assign clear authority, resources, and accountability for each of its key functions.

The financial landscape has become ever more global in recent years. Advances in information technology have made it easier to invest abroad, which has expanded and accelerated cross-border capital flows. Greater global macroeconomic stability has also helped to accelerate financial development around the world. To keep pace with these trends, we must ensure that international rules for financial regulation are consistent with the high standards we will be implementing in the United States. Additionally, we must seek to materially improve prudential supervision, tax compliance, and restrictions on money laundering in weakly-regulated jurisdictions.

Finally, the recent financial crisis has shown that the largest financial institutions can pose special risks to the financial system as a whole. In addition to regulating these institutions differently, we must give the Federal government new tools for dealing with situations where the solvency of these institutions is called into question. Treasury has proposed legislation for a resolution authority that would grant additional tools to avoid the disorderly liquidation of systemically significant financial institutions that fall outside of the existing resolution regime for banks under the FDIC.

Conclusion

Let me conclude by saying that our central obligation is to ensure that the economy is able to recover as quickly as possible, and a prerequisite for that is a stable financial system that it is able to provide the credit necessary for economic recovery. Our work is not yet completed.

But, even then, stability is not enough. We need a financial system that is not deepening or lengthening the recession, and once the conditions for recovery are in place, we need a financial system that is able to provide credit on the scale that a growing economy requires.

Meeting this obligation requires early and aggressive action by the government to repair the financial system and promote the flow of credit. It requires governments to take risks. It also requires the financial system to support sustainable economic expansion. And it requires comprehensive regulatory reforms that deter fraud and abuse, protect American families when they buy a home or get a credit card, reward innovation and tie pay to job performance, and end past cycles of boom and bust.

This is our commitment. Thank you.

The estimated change in payroll employment in November was later revised to a decline of 597,000.

See "White Paper: Public Private Investment Program," U.S. Treasury, March 23, 2009, http://www.treas.gov/press/releases/reports/ppip_whitepaper_032309.pdf

Projected Use of TARP/Financial Stability Plan Funds by Administration as of May 18, 2009

Programs Announced Under Previous Administration
AIG $40 billion

Citi/Bank of America (TIP and Guarantees)    $52.5 billion
Autos    $24.9 billion
Capital Purchase Program $218 billion
TALF 1.0    $20 billion
Subtotal $355.4 billion
Programs Announced Under Obama Administration
Housing $50 billion
AIG (Second Investment) $30 billion
Auto Suppliers    $5 billion
Additional Autos    $10.9 billion
Expansion of Consumer and Business Lending Initiative[1]
TALF Asset Expansion (New Issuance) [2] $35 billion
Unlocking SBA Lending Markets $15 billion
Public Private Investment Program[3]
TALF for Legacy Securities $25 billion
Other PPIP Programs for Legacy Assets $75 billion
Subtotal $245.9 billion
Total Committed (Without Potential Repayments) $601.3 billion
Total Remaining (Without Potential Repayments) $98.7 billion
Conservative Estimate of Potential Repayments $25 billion
Total Committed (Including Potential Repayments) $576.3 billion
Total Remaining (Including Potential Repayments) $123.7 billion
Additional Funding
Additional Support for the Auto Industry
Capital Assistance Program

STATEMENT FROM SECRETARY GEITHNER PRAISING SENATE PASSAGE OF CREDIT CARDHOLDERS’ BILL OF RIGHTS

"Over the past few months, the Obama Administration has worked aggressively to set our economy back on track, repair our financial system, and help support the flows of credit on which small businesses and consumers depend. This effort requires new rules of the road that will protect consumers from predatory and unfair lending practices. Credit card reform is a key part of increasing those consumer protections– protections against deceptive and complex rules, from sudden rate hikes to hidden fees that have hurt millions of responsible b orrowers. The Senate passage of the Credit Card Accountability, Responsibility, and Disclosure Act in an overwhelmingly bipartisan vote, led by Senators Chris Dodd and Richard Shelby, is an important step forward in consumer protection and will help create a more fair, transparent, and simple consumer credit market."

Fact Sheet: IMF Reforms and New Arrangements to Borrow

WASHINGTON – The U.S. Department of the Treasury today released a letter from the Bretton Woods Committee, which includes the bipartisan support of five former secretaries of the Treasury, four former secretaries of State and America's leading foreign economic policy and national security experts to Speaker Pelosi and Majority Leader Reid expressing their support for the Administration's request for prompt enactment of additional funding for the International Monetary Fund (IMF), including the Obama Administration's request for the IMF's New Arrangements to Borrow (NAB). To view full text of the May 14th letter, click here.

Below is the U.S. Treasury Department's Fact Sheet on IMF Reforms and New Arrangements to Borrow.

FACT SHEET
IMF Reforms and New Arrangements to Borrow

On April 2, at the G-20 Leaders' Summit in London, President Obama secured agreement to increase the IMF New Arrangements to Borrow (NAB ) by up to $500 billion, of which the United States committed up to $100 billion.

President Obama is seeking Congressional approval for two actions to strengthen the IMF as part of the FY 2009 supplemental bill currently under consideration – an increase of up to $100 billion for U.S. participation in the NAB, and an increase of about $8 billion in the U.S. quota in the IMF. Fulfilling this U.S. commitment is critical to leveraging significant participation by other countries, restoring a healthy world economy, and preserving the prosperity and security of the United States.

Worst Economic Crisis Since World War II. The world is experiencing the worst economic crisis in the post-World War II period. The global economic crisis is seriously affecting emerging markets and developing countries, which are now experiencing severe economic declines and massive withdrawals of capital. The recovery of the global economy is critical to restoring U.S. exports and jobs.

U.S. Leadership in Crisis Response. The world has looked to the United States to demonstrate strong leadership in finding global solutions to the crisis. The U.S. commitment to lead with a commitment of up to $100 billion for an expanded NAB restores the historic American role in confronting global challenges. In addition, an increase of about $8 billion in the U.S. quota is needed to implement the April 2008 IMF quota reform package which allows the IMF's governance structure to keep pace with the rapid growth and increasing significance of dynamic emerging economies.

IMF as First Line of Defense. A well-equipped IMF is in the national interest. Expanding the NAB will ensure the IMF has adequate resources to play its central role in resolving and preventing the spread of international economic and financial crises. Large and urgent financing needs projected for emerging market and developing countries cannot be met from pre-crisis IMF lending resources ($250 billion, of which about $140 billion already has been committed).

Failure to meet member countries' needs for IMF financing would have significant adverse economic, political and security implications.

	*Without adequate IMF support, countries may be forced to contract or let their currencies weaken sharply, triggering corporate and financial institution insolvency.* Such financial instability would not only reduce economic growth and well-being in these countries, but would also negatively impact U.S. exports and jobs.
	*An expanded NAB enhances international stability and security.* IMF financing reduces economic instability in vulnerable states. For example, the Fund has been able to act swiftly to avoid crises in countries like Pakistan, and is lending strong support to key U.S. allies including Mexico, Poland and Colombia.
	Ensuring adequate IMF resources through an expanded NAB provides immediate benefits in terms of confidence to markets, reducing the need for more costly rescues of crisis countries in the future. An adequately funded IMF promotes market confidence that emerging market and developing countries have the financing they need to address the effects of the current crisis.
	*The NAB provides an insurance policy for the global economy.* The NAB is a set of credit arrangements that the IMF maintains with 26 countries to obtain supplemental resources temporarily when the IMF's existing resources are substantially drawn down in circumstances that threaten the stability of the international monetary system.

Protecting U.S. Jobs and Exports, and Supports U.S. Economic Recovery. This is a central component of our comprehensive economic strategy to protect American families. Without adequate IMF support, countries may experience financial failures that negatively impact U.S. jobs and exports and undermine the substantial efforts the Administration has taken to stimulate and revive our economy. Equipping the IMF to prevent the financial crisis from spreading will promote global economic recovery, which in turn will benefit the United States.

U.S. Participation Leverages Other Financial Commitments. The U.S. commitment of up to $100 billion could leverage as much as $400 billion from other countries - four times the U.S. share. European partners, Japan, the United States, and other countries together have committed to increase their participation by about $350 billion. The U.S. share of up to $100 billion is necessary to secure significant additional participation by other countries.

Helping the IMF to be Flexible and Respond to Needs of the Poorest. An expansion of the NAB is critical to enable the IMF to carry out recent reforms and to provide the international monetary system with the insurance policy it needs to prevent the crisis from worsening. The IMF is also significantly increasing resources available to the poorest and responding to its members' needs with new instruments, rapid financing, and targeted policy advice.

	Stepping up its crisis lending. The IMF has responded quickly to the global economic crisis, with lending commitments reaching a record level of $157 billion, including a doubling of concessional resources to $3 billion a year to the world's poorest nations.
	Overhauling its lending framework and becoming more flexible. The IMF has overhauled its general lending framework to provide lending products that are tailored to suit to country needs and have streamlined conditions attached to loans to focus on only conditions that are critical to a resumption of growth. Reforms include the creation of a new Flexible Credit Line (FCL) for strong-performing economies.
	Creating a financial safety net. In this difficult environment, the IMF is helping governments to ring-fence social spending on the most vulnerable in society.

Treasury Department Statement on GM Dealer Consolidation Announcement

WASHINGTON – Today, General Motors initiated the dealer consolidation plan it laid out in its interim plan on April 27, 2009.

GM's announcement is part of the company's larger effort to restructure to achieve financial viability. The Task Force is continuing to work with GM and all its stakeholders and will stand behind GM during this process to ensure that it emerges as a more competitive, viable business in the long-term. As was the case with Chrysler's dealer consolidation plan, the Task Force was not involved in deciding which dealers, or how many dealers, were part of GM's announcement today.

As difficult as these announcements are for the dealers that will no longer be selling GM and Chrysler cars and the communities in which they operate, without the President's intervention, the entire GM and Chrysler dealer networks could have been lost. The Administration's commitment to this industry has given both companies a new lease on life. By supporting a restructuring that results in stronger car companies – supported by efficient and effective dealer networks – this process will not only provide more stability and certainty for current employees but the prospect for future employment growth.

In addition, the Administration is committed to continuing its significant efforts to help ensure that financing is available to creditworthy dealers and to pursuing efforts to help boost domestic demand for cars. These steps will help auto dealers, the auto industry, and the American economy.

FY 2010 Congressional Justification

FY 2010 Budget-in-Brief

AVID S. COHEN CONFIRMED AS ASSISTANT SECRETARY FOR TERRORIST FINANCING

WASHINGTON -- David S. Cohen was confirmed by the United States Senate today to serve as the Department of the Treasury's Assistant Secretary for Terrorist Financing. As Assistant Secretary for Terrorist Financing, Cohen is responsible for formulating and coordinating the counter-terrorist financing and anti-money laundering efforts of the Department of the Treasury. In this role, Cohen will be a key member of the Obama Administration's national security team in developing financial strategies to combat such wide ranging threats as terrorism, organized crime, and the proliferation of weapons of mass destruction.

"I am pleased to welcome David back to the Treasury Department and am confident that his wealth of experience in both the private and public sectors will enable him to make invaluable contributions to protecting the U.S. and international financial system from illicit finance," said Treasury Secretary Tim Geithner.

From 1999-2001, Cohen served in the Treasury Department's General Counsel's Office as, successively, Senior Counsel to the General Counsel, Associate Deputy General Counsel, and Acting Deputy General Counsel. While in the General Counsel's Office, Cohen worked extensively with policy makers to develop and implement the Department's anti-money laundering and counter-terrorist financing policies.

Cohen received his J.D. from Yale Law School in 1989, and his B.A., magna cum laude, from Cornell University, in 1985. He resides in Chevy Chase, Maryland with his wife, Suzy, and their two children, Sam and Zeke.

Report on Foreign Holdings of U.S. Securities at End-June 2008

WASHINGTON -- The final results from the survey of foreign portfolio holdings of U.S. securities at end-June 2008 are released today and posted on the U.S. Treasury web site at (http://www.treas.gov/tic/fpis.html).

This annual survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System. The next survey will be for end-June 2009, and preliminary data are expected to be released by February 26, 2010.

Complementary surveys measuring U.S. holdings of foreign securities are also carried out annually. Data from the most recent survey, reporting on securities held on year-end 2008, are currently being processed. Preliminary results are expected to be reported by August 31, 2009.

Overall Results

The survey measured foreign holdings of U.S. securities as of June 30, 2008, to be $10,322 billion, with $2,969 billion held in U.S. equities, $6,494 billion in U.S. long-term debt securities^[1] (of which $1,532 billion are holdings of asset-backed securities (ABS)^[2] and $4,962 billion are holdings of non-ABS securities), and $858 billion held in U.S. short-term debt securities. The previous survey, conducted as of June 30, 2007, measured foreign holdings to be $9,772 billion, with $3,130 billion in U.S. equities, $6,007 billion in U.S. long-term debt securities, and $635 billion in short-term U.S. debt securities (see Table 1).

Table 1. Foreign holdings of U.S. securities, by type of security, as of recent survey dates
(Billions of dollars)

Type of Security	June 30, 2007	June 30, 2008

Long-term Securities	9,136	9,463
Equity	3,130	2,969
Long-term debt	6,007	6,494
Asset-backed	1,472	1,532
Other	4,535	4,962
Short-term debt securities	635	858

Total	9,772	10,322
Of which: Official	2,823	3,493

Table 2. Foreign holdings of U.S. securities, by country and type of security, for the major investing countries into the U.S., as of June 30, 2008
(Billions of dollars)

	Country or category	Total	Equities	Long-term debt		Short-term
				ABS	Other	debt
1	Japan	1,250	199	163	823	66
2	China (Mainland)1	1,205	100	376	700	30
3	United Kingdom	864	376	90	375	24
4	Cayman Islands	832	317	230	227	58
5	Luxembourg	656	191	81	315	70
6	Belgium	456	20	74	357	5
7	Canada	441	321	17	86	17
8	Ireland	400	75	76	113	135
9	Middle East Oil Exporters2	391	141	30	143	77
10	Switzerland	314	162	25	107	21
11	Netherlands	312	188	45	70	9
12	Germany	247	71	49	117	10
13	Russia	223	*	*	139	84
14	France	222	133	28	47	14
15	Bermuda	210	52	59	77	21
16	Brazil	162	2	*	159	1
17	Singapore	160	94	13	49	5
18	Taiwan	150	11	37	100	2
19	Hong Kong	147	29	19	83	17
20	Australia	137	81	9	41	7
21	Mexico	133	18	2	96	17
22	Korea, South	131	8	24	89	10
23	Norway	127	76	25	24	1
24	British Virgin Islands	107	53	3	34	17
25	Sweden	88	53	1	32	3
	Country Unknown	185	1	*	183	1
	Rest of the World	772	200	59	378	135
	Total	10,322	2,969	1,532	4,962	858
	of which: Official	3,493	363	475	2,281	373

1. Excludes Hong Kong, Macau, and Taiwan, which are reported separately.
2. Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates.

_________________________________________

Long-term debt securities have an original term-to-maturity of over one year.
Asset-backed securities are backed by pools of assets, such as pools of residential home mortgages or credit card receivables, which give the security owners claims against the cash flows generated by the underlying assets. Unlike most other debt securities, these securities generally repay both principal and interest on a regular basis, reducing the principal outstanding with each payment cycle.

Treasury Announces Receipt of Applications to Become Fund Managers
under Public Private Investment Program

Washington, DC -- The Treasury Department today announced the receipt of more than 100 unique applications from potential fund managers interested in participating in the Legacy Securities portion of the Public Private Investment Program (PPIP). A variety of institutions applied, including traditional fixed income, real estate, and alternative asset managers.

Successful applicants must demonstrate a capacity to raise private capital and manage funds in a manner consistent with Treasury's goal of protecting taxpayers. Treasury will also evaluate the applicant's depth of experience investing in eligible assets. Finally, the applicant must be headquartered in the United States.

Treasury expects to inform applicants of their preliminary qualification around May 15, 2009. Once a fund receives preliminary qualification, it can begin raising the expected minimum of $500 million in private capital that will serve as the investment that, pending further approval, will be matched with taxpayer funds. As we have stated previously, Treasury anticipates opening the program to smaller fund managers in the future, which may result in a lower minimum private capital raising requirement.

Since announcing the program details on March 23, Treasury has encouraged small, veteran, minority and women owned private asset managers to partner with other private asset managers. On April 6, Treasury extended the deadline for fund manager applications to provide more time to facilitate these types of partnerships. We are pleased to see a number of creative partnership proposals among the applications we are currently evaluating.

Today's announcement is the latest milestone in making operational the PPIP for legacy loans and securities, a key part of the Administration's efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

For further information on the PPIP, please visit:

http://www.financialstability.gov/roadtostability/publicprivatefund.html

Minutes of the Meeting of the
Treasury Borrowing Advisory Committee
of the Securities Industry and Financial Markets Association

April 28, 2009

The Committee convened in closed session at the Hay-Adams Hotel at 10:30 a.m. All Committee members were present. Acting Assistant Secretary for Financial Markets Karthik Ramanathan welcomed the Committee and gave them the charge.

The first item on the charge related to Treasury's short, intermediate, and long term financing needs given recent guidance provided by the Office of Management and Budget and estimates provided by other agencies. Treasury requested the Committee's perspective on debt issuance in consideration of each of these horizons in terms of adjustments to size, frequency, or debt instruments. Assistant Secretary Ramanathan delivered a presentation to the Committee which highlighted current fiscal conditions and potential factors to consider in addressing these issues.

Assistant Secretary Ramanathan stated that recent adjustments in the bill and coupon cycles created enough capacity to address market estimates of over $8 trillion in gross Treasury issuance and $2 trillion in net issuance in fiscal year 2009. For comparison, in fiscal year 2008, there was $5.5 trillion in gross issuance and $700 billion in net issuance.

Assistant Secretary Ramanathan clearly outlined the path which Treasury has taken over the past 18 months to manage the change in the fiscal situation. Specifically, Assistant Secretary Ramanathan stated that Treasury increased bill financing to address sudden outflows related to economic stability measures and Federal Reserve liquidity initiatives, while at the same layering in predictable increases in nominal coupon issuance to address budgetary trends. Securities were adjusted in terms of frequency on or added to the auction calendar after consultation with market participants regarding supply and demand dynamics and sensitizing financial market to these potential changes.

At the same time, Treasury sought to minimize market dislocations and remained mindful of portfolio considerations, particularly regarding the transition from bill financing to coupon financing over the medium to longer term. As a result, Treasury is confident of its ability to address these large financing needs with its current suite of securities and with minimal further adjustments to the auction calendar.

The most recent market estimates for the FY 2009 deficit averaged $1.75 trillion, nearly $150 billion higher than previous estimates at the February 2009 refunding. More importantly, marketable borrowing needs were both higher and had a wider dispersion, ranging between $1.6 trillion and $2.7 trillion, than estimates from three months ago.

The presentation noted that recent trends in the fiscal situation show a continued deterioration of receipts and an increase in outlays. Corporate and individual non withheld taxes were weaker while outlays were nearly 33% higher, reflecting nearly $350 billion in expenditures related to the Troubled Assets Relief Program (TARP) and the Housing and Economic Recovery Act of 2008 (Senior Preferred Agreement investments and Agency MBS purchases related to Government Sponsored Enterprises) as well as other financial market stabilization efforts.

Current trends in both receipts and outlays, and the lag effects of economic activity related to employment, suggest that Treasury's borrowing needs will remain sizable for the remainder of this fiscal year and into next year.

Assistant Secretary Ramanathan stated that the average maturity of the overall marketable debt portfolio stabilized at 49 months in the previous quarter as a result of increased coupon issuance. While month over month duration continues to increase to accommodate this extension, Treasury considers this approach prudent to mitigate the need for significant additional issuance of bills to address cyclical and potentially structural shifts in the budget outlook.

To that end, Assistant Secretary Ramanathan stated that Treasury will continue to seek to extend the average maturity of the portfolio; however, this process will be gradual with potential decreases resulting from unexpected outlays or other liquidity initiatives. Moreover, Assistant Secretary Ramanathan, noting that break-even inflation rates were very low, stated that issuance sizes of TIPS would continue to grow at a slower pace than nominal coupons based on studies which show a higher cost of issuance relative to nominal issuance, particularly for shorter dated inflation-indexed issues.

Assistant Secretary Ramanathan concluded his presentation by stating that Treasury had built its capacity to address its potential borrowing needs in a manner consistent with its regular and predictable framework. Ramanathan noted that calendar issues, including dates for auctions and settlement dates, needed to be considered if additional securities were introduced.

At that point, a discussion followed regarding the best course of action for Treasury in the short, medium, and long term given its borrowing needs.

The Committee began by commending the efforts of Treasury in increasing capacity in a transparent, regular manner with minimal market dislocations or surprises given extremely challenging fiscal conditions.

Members then acknowledged that the fiscal outlook clearly suggested that more borrowing was necessary and that Treasury needed to consider increasing issuance sizes and frequencies of issuance before considering adding additional maturity points to address the financing shortfall.

Several members stated that the first sensible action that Treasury should take is to offer a second reopening of the 30-year bond, even before increasing issue sizes of existing offerings. With the auction calendar now complete on a monthly basis, Treasury would have more flexibility given its goals. Members then focused on how much issue sizes could be increased from current levels to meet the increased financing needs.

Members generally felt that over the near term there was still significant capacity to increase coupon issuance without creating sizable auction tails. Discussing a broader time horizon and also in consideration of economic trends, the Committee believed that on a monthly basis and in a deliberate manner, 2-year notes could be gradually increased to around $50 billion while the 3- and 5-year notes could be increased to at least $40 billion each. The 7-year note could go higher to at least $28 billion while 10-year notes could move to $75 billion per quarter. The 30-year bond could go as high as $45 billion per quarter if Treasury added a second reopening. These moves, if implemented in a consistent and transparent manner similar to Treasury current operating framework, would serve to extend the average maturity while potentially adding nearly $400 billion in new financing capacity.

A member suggested that there was strong demand for coupon debt and Treasury should accommodate the market by providing coupons. Several members agreed that given the guidance provided by OMB, increased coupon sizes were being expected by the market. Another member pointed out that Fed's secondary market purchases of Treasury debt may absorb some of this issuance. Other members stated that Treasury needed to address brrowing needs across multiple time horizons, and increased nominal coupon issuance best fit that objective

Regarding increasing the issuance of TIPS, the Committee thought that TIPS were a costly form of financing relative to nominal issuance and that increasing TIPS was not prudent for the Treasury. The Committee reiterated the view that Treasury should limit the issuance of TIPS in general, and consider eliminating the 5-year TIPS and other issues at some point and replace that issuance with nominal securities. One member stated that even if concessions were to occur, nominal coupons would represent cheaper funding than TIPS. Another member stated that the investor base for TIPS did not appear to be diversified. Another member countered that in recent months there had been an increase in TIPS appetite from retail accounts, and that some firms were beginning to offer TIPS funds as part of 401k plans for their workers. The Committee refocused the discussion then back to nominal issuance.

The Committee discussed whether there was demand for other maturity points such as the 4-year and 20-year maturity points. Many members stated that, aside from crowding the limited auction calendar further, the 4-year point would not really attract a new base of investors. Other members also felt that a 20-year bond had less appeal at this time, with one member stating that it was always a point that was difficult to sell and usually cheap. Several members stated that Treasury may need to consider this alternative, but should begin with a second reopening of the 30-year bond and monitor developments in the long end of the curve.

Another member raised the idea that at some point, Treasury might consider auctioning 2-year notes twice a month before moving to new maturity points. Several members agreed that maintaining existing points was preferable to adding new maturity points. While members thought it was premature for such a move, they generally thought that it was an idea worth further exploration by Treasury if fiscal events continue to deteriorate.

One member, citing low 10- and 30-year swap rates as a measure of demand for long-duration products, raised the idea of Treasury issuing ultra-long maturity debt. Another member pointed out that derivatives markets beyond 30 years tended to be illiquid and that it was hard to issue in size beyond 30 years. Several members stated that while the idea seemed interesting from an academic perspective, such a move would raise very little new debt and would cost the taxpayer a significant concession. Most members felt that such long dated issue did not serve any purpose, and Treasury's objective would be better served through its current security offerings.

The Committee then moved on to the second item in the charge concerning the effects on Treasury auction dynamics of the issuance of Agency debt, Temporary Liquidity Guarantee Program (TLGP), other global sovereign debt issuance, as well as other potential debt issuance. A Committee member gave the presentation.

The member presented a slide indicating that debt issuance by sovereign issuers continues to rise. This was followed by a series of sides depicting flows into various asset classes. The member pointed out that Treasury issuance has benefited from a flight to quality and general risk aversion. Aggregate foreign inflows into US assets have shifted dramatically in favor of Treasuries.

The presenting member then showed a slide projecting that rising Treasury issuance relative to other debt issuance will likely cause the Treasury component of common benchmark indices to increase from 31% currently to 34% by the end of the calendar year, and perhaps even to 36% if the methodology is changed to account for Fed purchases, particularly of MBS. It was noted that the effect of such a change in methodology would be to increase inflows into Treasuries by passive investors that manage to a benchmark.

At that point, a discussion followed regarding the effect on demand for Treasuries posed by quasi-government or government-guaranteed debt issuance. It was noted that issuance of quasi-governmental debt was projected to increase dramatically. One member stated that many of these assets were directly competing with Treasuries and cited an expected $50 billion of issuance of Build America bonds as an example. Another member noted that FDIC-backed debt offered a significant pick-up in yield over comparable Treasury debt and that substitution by traditional Treasury investors was occurring.

Most members however felt that while these products offered higher yield, they were not directly comparable to Treasuries given their illiquidity and unique characteristics. However, the presenting member warned that policy makers should not assume that such issuance if indefinite would not have an impact on Treasuries.

The discussion then moved to the budget deficit over the next ten years. While highly uncertain, the presenting member noted the cyclical budget deficit was substantially greater than in previous recessionary periods. The member noted that even if spending related to recovery programs abated, the structural deficit could increase given entitlement expenditures. It was noted that despite projections for declining deficits, gross coupon issuance remains very large for years based on Congressional Budget Estimates.

This point led to the observation by a member that the impact on the Treasury market of improving economic conditions and the return of risk appetite should be considered in the future.

One member stated that the Federal Reserve's purchase program and exit strategy would drive market expectations.

Next, the presenter discussed technical challenges faced by debt managers and, in particular, choosing the best days of the week for holding coupon auctions given the sizable increase in the number of coupon auctions. The member noted that Monday auctions tended to tail, while auctions on Tuesday through Thursday came in under the when-issued rate. The member noted that while practical considerations made avoiding Monday auctions impossible, Treasury should continue to the best of its ability to avoid Friday auctions. If absolutely necessary to hold an auction on a Friday, the auction should be held early in the day to accommodate the broadest set of domestic and international investors.

The presenter then turned to the impact of the Federal Reserve's Treasury purchase program. The member stated that while it is difficult to isolate the impact of these operations, preliminary analysis indicated that six of the last nine operations led to a cheapening of the targeted section of the yield curve.

The discussion then turned to liquidity initiatives which Treasury conducted on behalf of the Federal Reserve. The presenter highlighted several options mentioned in the public domain that Treasury should be cognizant of including SFP bills not subject to the debt limit, bills issued by the Federal Reserve, and raising the interest rate on reserves. A member noted that Treasury needed to be mindful of the ultimate approach and how it may impact its portfolio and demand base.

The Committee then turned its attention to the third item in the charge regarding the impact of Treasury, Federal Reserve, and FDIC actions on the Treasury and credit markets. A Committee member gave the presentation.

The member began by noting the multitude of different actions taken by government entities since December 2007. These actions have improved conditions in some credit markets.

The member further noted that the Capital Purchase Program (CPP) and the Temporary Liquidity Guarantee Program (TLGP) along with the Federal Reserve's short-term credit market stabilization programs have helped to decrease the spread between LIBOR and OIS. The CPP has also substantially improved bank credit default swaps (CDS). Commercial mortgage backed securities (CMBS) and asset backed securities (ABS) have stabilized with TALF but new issuance has remained subdued in CMBS.

The members noted that Term Asset-Backed Loan Facility could be further enhanced by improvements in TALF loan transferability. Gross issuance of Auto, Credit Card and Student loan ABS has returned to levels from before the dramatic increase in leverage and subsequent correction. Home-equity loans, non-agency mortgage backed, and commercial mortgage backed securities markets remained under stress as does the high-yield market. The presenting member noted that financial debt issuance is virtually nonexistent except for TLGP.

Government money-market funds have begun to see withdrawals as government actions to support the broader credit markets have increased the cost of holding cash and near cash. The risk taking, however, has only returned to government supported sectors of the market. Treasury needed to monitor these developments as improved risk appetite reappears in the market.

While net loan growth has gone negative this is not different than many previous recessions. In fact loan growth has outperformed many previous recessionary periods. The presenting member noted that measures taken by the various government agencies – particularly the "direct" programs have had an impact, and continuing this momentum will be positive.

Several members agreed that the combined efforts of several agencies have led to improved conditions in the credit markets, and now the focus was really on the economy. One member stated that imminent Treasury and Federal Reserve programs if executed properly could lead to further broad based improvement.

The meeting adjourned at 12:20 PM.

The Committee reconvened at the Hay Adams at 6:00 p.m. All of the Committee members were present except for Ashok Varadhan. The Chairman presented the Committee report to Acting Assistant Secretary Ramanathan.

A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.

The Committee then reviewed the financing for the remainder of the April through June quarter and the July through September quarter (see attached).

The meeting adjourned at 6:20 p.m.

_________________________________

Karthik Ramanathan, Director
Acting Assistant Secretary for Financial Markets
Director, Office of Debt Management
United States Department of the Treasury
April 28, 2009

Certified by:

___________________________________

Keith T. Anderson, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
April 28, 2009

Treasury Borrowing Advisory Committee Quarterly Meeting

Committee Charge – April 28, 2009

Fiscal Outlook

In recognition of short, intermediate, and long-term financing needs, as well as recent estimates provided by the Office of Management and Budget and other agencies, what adjustments to debt issuance, if any, should Treasury make in consideration of each of these horizons in terms of adjustments to size, frequency, or debt instruments?

Auction Dynamics

Given the issuance of Agency debt, Temporary Liquidity Guarantee Program, global sovereign debt, and other potential debt instruments, describe the dynamics surrounding Treasury auctions as well as potential methods to minimize the cost of borrowing while maximizing market liquidity.

Credit Market Conditions

The Treasury, Federal Reserve, and FDIC have undertaken a series of actions to foster the robust functioning of credit markets. Please discuss how these actions have impacted credit markets, what additional steps may be considered, and the implications of any current or additional steps on the Treasury market.

Financing this Quarter

We would like the Committee's advice on the following:

	The composition of Treasury notes and bonds to refund approximately $52.2 billion of privately held notes called or maturing on May 15, 2009.
	The composition of Treasury marketable financing for the remainder of the April - June quarter, including cash management bills.
	The composition of Treasury marketable financing for the July – September quarter, including cash management bills.

Obama Administration Announces New Details
on Making Home Affordable Program

Parallel Second Lien Program to Help Homeowners Achieve Greater Affordability

Integration of Hope for Homeowners to Help Underwater Borrowers
Regain Equity in their Homes

You can view the Fact Sheet and Case Examples here.

WASHINGTON – The Obama Administration today announced details of new efforts to help bring relief to responsible homeowners under the Making Home Affordable Program, including an effort to achieve greater affordability for homeowners by lowering payments on their second mortgages as well as a set of measures to help underwater borrowers stay in their homes.

"With these latest program details, we're offering even more opportunities for borrowers to make their homes more affordable under the Administration's housing plan," said Treasury Secretary Tim Geithner. "Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind."

"Today's announcements will make it easier for borrowers to modify or refinance their loans under FHA's Hope for Homeowners program," said HUD Secretary Shaun Donovan. "We encourage Congress to enact the necessary legislative changes to make the Hope for Homeowners program an integral part of the Making Home Affordable Program."

The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate.

Separately, the Administration has also announced steps to incorporate the Federal Housing Administration's (FHA) Hope for Homeowners into Making Home Affordable. Hope for Homeowners requires the holder of the mortgage to accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan. Refinancing into a new loan below the home's market value takes a borrower from a position of being underwater to having equity in their home. By increasing a homeowner's equity in the home, Hope for Homeowners can produce a better outcome for borrowers who qualify.

Under the changes announced today and, when evaluating borrowers for a Home Affordable Modification, servicers will be required to determine eligibility for a Hope for Homeowners refinancing. Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower. To ensure proper alignment of incentives, servicers and lenders will receive pay-for-success payments for Hope for Homeowners refinancings similar to those offered for Home Affordable Modifications. These additional supports are designed to work in tandem and take effect with the improved and expanded program under consideration by Congress. The Administration supports legislation to strengthen Hope for Homeowners so that it can function effectively as an integral part of the Making Home Affordable Program.

Making Home Affordable, a comprehensive plan to stabilize the U.S. housing market, was first announced by the Administration on February 18. The three part program includes aggressive measures to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac; a Home Affordable Refinance Program, which will provide new access to refinancing for up to 4 to 5 million homeowners; and a Home Affordable Modification Program, which will reduce monthly payments on existing first lien mortgages for up to 3 to 4 million at-risk homeowners. Two weeks later, the Administration published detailed guidelines for the Home Affordable Modification Program and authorized servicers to begin modifications under the plan immediately. Twelve servicers, including the five largest, have now signed contracts and begun modifications under the program. Between loans covered by these servicers and loans owned or securitized by Fannie Mae or Freddie Mac, more than75 percent of all loans in the country are now covered by the Making Home Affordable Program.

Continuing to bolster its outreach around the program, the Administration also announced today a new effort to engage directly with homeowners via MakingHomeAffordable.gov. Starting today, homeowners will have the ability to submit individual questions through the website to the Administration's housing team. Members of the Treasury and HUD staffs will periodically select commonly asked questions and post responses on MakingHomeAffordable.gov. To submit a question, homeowners can visit www.MakingHomeAffordable.gov/feedback.html. Selected questions from homeowners across the country and responses from the Administration will be available at www.MakingHomeAffordable.gov/asked-and-answered.html.

For additional details on the program announced today, please see the Program Update Fact Sheet.

Director of the Office of Macroeconomic Analysis
Ralph M. Monaco

Statement for the Treasury Borrowing Advisory Committee
of the Securities Industry and Financial Markets Association
April 27, 2009

U.S.economic activity contracted sharply again at the start of 2009, more than a year after the economy slipped into recession. The housing correction entered its third year, financial market volatility persisted, and credit markets, though improved from the last quarter of 2008, remained impaired. Labor market conditions worsened notably. Over 2 million jobs were lost in the first quarter alone and the unemployment rate climbed to a 26-year high of 8.5 percent in March. The economy is still expected to contract through mid-year as the housing sector continues to adjust and imbalances in financial and credit markets dissipate, but there have been tentative signs that the pace of deterioration is slowing. Most economists see some growth in the second half of 2009, boosted by fiscal stimulus provided by the American Reinvestment and Recovery Act (ARRA) of 2009.

Data for growth in the first quarter will not be available until April 29, but economic indicators released thus far suggest that real GDP declined sharply again in the first three months of 2009. In the fourth quarter of 2008, real GDP fell by 6.3 percent at an annual rate – the largest quarterly loss since early 1982. That followed a 0.5 percent decline in the third quarter. Private forecasters are looking for about a 5 percent decline in the first quarter.

A sharp drop in consumer spending during the second half of 2008 was largely responsible for the downturn in economic activity. In both the third and fourth quarters, falling real personal consumption expenditures (PCE) accounted for close to 3 percentage points of the decline in real GDP. Consumer spending stabilized early in the first quarter, according to data available through February, and appears to be on track to make a modest positive contribution to growth in the first quarter.

Business investment in plant and equipment weakened further in the first quarter after falling by nearly 22 percent at an annual rate in the fourth quarter of 2008. Shipments of nondefense capital goods excluding aircraft – used to estimate equipment and software spending in GDP – fell by 35 percent at an annual rate in the first quarter, more than double the pace of decline recorded in the fourth quarter. This trend suggests that equipment and software investment continued to deteriorate in the first quarter even after falling by 28 percent at an annual rate in the final quarter of 2008. Business outlays for new construction were also down substantially through February, pointing to another decline in structures investment following the fourth quarter's 9.4 percent drop.

Residential investment fell further in the first quarter as well, although there were some modest signs of stabilization. Spending on residential construction declined rapidly through February and housing starts were down in March. Sales of new and existing homes continued to fall in the first quarter, although each showed some signs of stabilizing. One major measure of house prices, the Federal Housing Finance Administration (FHFA) home price index rose in each of the first two months of 2009, the first two month increase since April 2007. Despite modest signs of potential improvement, housing activity likely subtracted about a percentage point from real GDP growth in the first quarter, in line with the average reduction during each of the past twelve quarters. Housing is expected to remain a drag on the economy through at least the second quarter, but private forecasters see the housing sector beginning a gradual recovery in late 2009.

Exports, an important source of strength in the U.S. economy for much of the past two years, have trended lower since last July as economies around the world have moved into recession. In the fourth quarter, exports fell by nearly 24 percent at an annual rate in real terms, the largest quarterly decline since the early 1970s. The sharp decline in exports in the fourth quarter was mostly offset by a similarly sharp decline in imports such that net exports (exports less imports) subtracted only 0.2 percentage point from real GDP growth. Although exports rose slightly in February, they were down significantly compared with Q4. Imports, however, fell even faster, suggesting that foreign trade could still be a positive for GDP in the first quarter as imports fell even faster.

The broad-based decline in economic activity over the past several quarters has triggered large job losses and a rise in unemployment. Nonfarm payrolls declined by 663,000 in March marking the 15^th straight month of such losses. More than 5 million (3.9 percent) jobs have been cut from payrolls since the recession began in December 2007. In percentage terms, the 15-month job loss total is the largest since July 1958. The unemployment rate jumped 0.4 percentage point to a 26-year high of 8.5 percent in March and has risen by 3.6 percentage points since December 2007. Weekly data on initial claims for unemployment insurance point to further job losses in April.

Inflation – an area of mounting concern about a year ago when energy prices rose to record levels – has moderated dramatically in recent months. Headline consumer prices fell by 0.4 percent in the twelve months ending in March after climbing 4.0 percent in the same period last year. The swing was due in large part to a reversal in the energy price run-up. Consumer energy prices fell by 23 percent over the latest twelve months, following a 17 percent jump in the year ending March 2008. Core inflation, a measure that excludes both energy and food prices, was a moderate 1.8 percent over the year ended March 2009, down from 2.4 percent over the year ended March 2008.

Private forecasters see real GDP shrinking once again in the first quarter but by somewhat less than the fourth quarter's 6.3 percent decline. The outlook for the second quarter is notably better, although activity is still expected to contract. Growth is expected to resume in the second half of 2009 as the impact of the federal government's fiscal stimulus package and other policy measures starts to be felt. Improvements in unemployment will tend to lag behind GDP growth, but should begin to stabilize and then decline as the recovery picks up steam.

Key policy actions taken during the first quarter are setting the stage for recovery in the second half of the year. The ARRA puts $787 billion toward stimulating domestic demand, and is expected to create or save an estimated 3.5 million jobs in a range of industries from clean energy to health care. Over 90 percent of these jobs will be in the private sector. By the end of 2010, the ARRA is expected to raise GDP by more than 3 percent.

In addition to the ARRA, the Treasury Department recently introduced several new initiatives to stabilize and strengthen our financial system under the umbrella of the Financial Stability Plan (FSP). The FSP includes the Capital Assistance Program (CAP), which is designed to ensure that major financial institutions have adequate capital to lend even in a worse-than-expected economic environment. The Public Private Investment Program (PPIP) will use private and government capital to purchase legacy assets in order to help jump-start the market for private real-estate-related assets that have been a core factor in the current financial crisis. In response to falling home prices, the Administration introduced the Making Home Affordable Plan to support lower mortgage rates and help millions of homeowners refinance and avoid foreclosure. Finally, as a mechanism to unlock frozen credit markets, the Consumer and Business Lending Initiative was created to restart activity in the secondary markets for securitized loans, lower borrowing costs, and restore the flow of credit. Together these efforts will help lay the foundations necessary for economic recovery and clear the credit conduits to support future growth.

Credit market conditions have improved, but indicators suggest several important sectors remain challenged. The LIBOR-OIS spread – a measure of what banks perceive as the credit risk in lending to one another – stood at about 90 basis points in the week of April 23, far below the peak of 365 basis points recorded on October 10, but still high by historical standards. The spread between the Baa corporate bond rate (a measure of mid-level corporate bond quality) and the 10-year Treasury remained elevated at about 530 basis points; still, this is an improvement compared to the spread of 616 basis points recorded in early December. The rate on 30-year conventional mortgages eased to 4.80 percent in the week ended April 23, the sixth straight week the conventional mortgage rate was below 5 percent.

It will take time for the stimulus and credit market programs to have a meaningful impact and they will not come without significant costs in the short term. Partly as a result of these programs, the federal budget deficit is expected to rise to $1.75 trillion (12.3 percent of GDP) in fiscal year 2009 from $459 billion (3.2 percent of GDP) in fiscal year 2008 according to estimates provided by the Office of Management and Budget. The deficit is expected to narrow in subsequent years as the economy strengthens and temporary spending measures expire. Over the longer term, the deficit will average about 3 percent of GDP and the level of publicly held debt (net of the assets the government has acquired) will be stable at about 60 percent of GDP and in line with other developed nations.

The expenditures leading to these deficits represent an investment in near-term economic growth. Without the programs that these deficits support, the U.S. economy would be in much worse shape, and the conditions to support a recovery would take longer to take hold.

In sum, real GDP is expected to decline further in the near term and job losses and unemployment are likely to mount. However, there is reason to be cautiously optimistic about the outlook for the second half of 2009 and beyond. Growth is expected to resume, and federal efforts to stimulate the economy and restore stability to financial and credit markets will speed the process of steering the U.S. economy back on the path to long-term sustainable growth.

Treasury Announces Marketable Borrowing Estimates

Washington, D.C. -- The U.S. Department of the Treasury today announced its current estimates of marketable borrowing for the April - June 2009 and July – September 2009 quarters:

During the April – June 2009 quarter, Treasury expects to borrow $361 billion of marketable debt, assuming an end-of-June cash balance of $245 billion, which includes $200 billion for the Supplementary Financing Program (SFP). The borrowing estimate is $196 billion higher than announced in February 2009. The increase in borrowing is primarily related to a continuation of the SFP, and lower receipts and outlays.

During the July – September quarter, Treasury expects to borrow $515 billion of marketable debt, assuming an end-of-September cash balance of $270 billion, which includes $200 billion for the SFP.

During the January – March 2009 quarter, Treasury borrowed $481 billion of marketable debt, finishing at the end of March with a cash balance of $269 billion, of which $200 billion was attributable to the SFP. In February, Treasury estimated $493 billion in marketable borrowing, assuming an end-of-March cash balance of $225 billion. The increase in borrowing was related to lower receipts offset by lower outlays and adjustments in the cash balance.

Additional financing details relating to Treasury's Quarterly Refunding will be released at 9:00 a.m. on Wednesday, April 29.

Treasury Outlines Framework For Regulatory Reform

Provides new Rules of the Road, focuses first on containing systemic risk
The crisis of the past 18 months has exposed critical gaps and weaknesses in our financial regulatory system. As risks built up, internal risk management systems, rating agencies and regulators simply did not understand or address critical behaviors until they had already resulted in catastrophic losses. These failures have caused a dramatic loss of confidence in our financial institutions and have contributed to severe recession. Our financial system failed to serve its historical purpose of helping families finance homes and college educations for their children or of providing affordable capital for entrepreneurs and innovators – enabling them to turn new ideas into jobs and growth that raise our living standards. The President's comprehensive regulatory reform is aimed at reforming and modernizing our financial regulatory system for the 21st century, providing stronger tools to prevent and manage future crises, and rebuilding confidence in the basic integrity of our financial system – for sophisticated investors and working families with 401(k)s alike.
As Secretary Geithner stated in his testimony today, "To address these failures will require comprehensive reform -- not modest repairs at the margin, but new rules of the road. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market."

Four Broad Components of Comprehensive Regulatory Reform:

Addressing Systemic Risk: This crisis – and the cases of firms like Lehman Brothers and AIG – has made clear that certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime. It is not enough to address the potential insolvency of individual institutions – we must also ensure the stability of the system itself.
Protecting Consumers and Investors: It is crucial that when households make choices to invest their savings we have clear rules of the road that prevent manipulation and abuse. While outright fraud like that perpetrated by Bernie Madoff is already illegal, these cases highlight the need to strengthen enforcement and improve transparency for all investors. Lax regulation also left too many households exposed to deception and abuse when taking out home mortgage loans
Eliminating Gaps in Our Regulatory Structure: Our regulatory structure must assign clear authority, resources, and accountability for each of its key functions. We must not let turf wars or concerns about the shape of organizational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people.
Fostering International Coordination: To keep pace with increasingly global markets, we must ensure that international rules for financial regulation are consistent with the high standards we will be implementing in the United States. Additionally, we will launch a new, three-pronged initiative to address prudential supervision, tax havens, and money laundering issues in weakly-regulated jurisdictions.

Today – A Focus on One of the Four Components of Regulatory Reform: Systemic Risk: In the coming weeks, Secretary Geithner will present detailed frameworks for each of these areas. Today, his testimony focused on systemic risk – both because financial stability is critical to economic recovery and growth, and because systemic risk is expected to be a primary focus for discussions at the G20 Leaders' Meeting in London on April 2.

Addressing The First Component of Regulatory Reform: Systemic Risk

A Single Independent Regulator With Responsibility Over Systemically Important Firms and Critical Payment and Settlement Systems
Higher Standards on Capital and Risk Management for Systemically Important Firms
Registration of All Hedge Fund Advisers With Assets Under Management Above a Moderate Threshold
A Comprehensive Framework of Oversight, Protections and Disclosure for the OTC Derivatives Market
New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals

I. A Single Independent Regulator with responsibility over Systemically Important Firms and Critical Payment and Settlement Systems: While we strengthen prudential oversight for all firms, we must also create higher standards for all systemically important financial firms – regardless of whether they own a depository institution – to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy. We will work with Congress to enact legislation that defines the characteristics of covered firms; sets objectives and principles for their oversight; and assigns responsibility for regulating these firms.

1) Defining a Systemically Important Firm:In identifying systemically important firms, we believe that the characteristics should include:

	the financial system's interdependence with the firm;
	the firm's size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding;
	the firm's importance as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.

2) Focusing On What Companies Do, Not the Form They Take:These institutions would not be limited to banks or bank holding companies, but could include any financial institution that was deemed to be systemically important in accordance with legislative requirements. These provisions will focus on what companies do and their potential for systemic risk – and no longer on the form they take – to determine who will regulate them.

3) Clarifying Regulatory Authority Over Payment and Settlement Activities:Federal authority for payment and settlement systems is incomplete and fragmented. Weaknesses in key funding and risk transfer markets, notably over-night and short term lending markets and OTC derivatives, increased uncertainty as major institutions such as Bear Stearns neared failure. This created a pathway for large financial institutions to spread financial distress between institutions and across borders.

	While some progress was made in the markets for CDS and other OTC derivatives under Secretary Geithner's leadership at the New York Fed, regulators have been forced to rely heavily on moral suasion to encourage market participants to strengthen these markets.
	We need to clarify and expand authority over these systems and activities, giving a single entity the ability to supervise, examine, and set prudential requirements for these critical parts of our financial system.

II. Higher Standards on Capital and Risk Management for Systemically Important Firms:

Setting More Robust Capital Requirements:Capital requirements for these firms must be more conservative than for other institutions and be sufficiently robust to be effective in a wider range of deeply adverse economic scenarios than is typically required.
Imposing Stricter Liquidity, Counterparty and Credit Risk Management Requirements:Supervisors will also need to impose liquidity, counterparty, and credit risk management requirements that are more stringent than for other financial firms. For instance, supervisors should apply more demanding liquidity constraints; and require that these firms are able to aggregate counter-party risk exposures on an enterprise-wide basis within a matter of hours.
Creating Prompt-Corrective Action Regime: The regulator of these entities will also need a prompt-corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to the powers of the FDIC with respect to its covered agencies.

III. Requiring All Hedge Funds Above A Certain Size to Register: U.S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the Commodity Futures Trading Commission and many funds register voluntarily with the Securities and Exchange Commission. As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability. The Madoff episode is just one more reminder that, in order to protect investors, we must close gaps and weaknesses in the regulation and enforcement of broker-dealers, investment advisors and the funds they manage.

Requiring Registration of All Hedge Funds: All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed a certain threshold should be required to register with the SEC.
Mandating Investor and Counterparty Disclosure: All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements.
Providing Information Necessary to Assess Threats to Financial Stability:The regulatory reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability.
Sharing Reports With Systemic Risk Regulator:The SEC should share the reports that it receives from the funds with the systemic risk regulator, which would then determine whether any hedge funds could pose a systemic threat and should be subjected to the prudential standards outlined above.

IV. A Comprehensive Framework of Oversight, Protection and Disclosure for the OTC Derivatives Market:The current financial crisis has been amplified by excessive risk-taking by certain insurance companies and poor counterparty credit risk management by many banks trading Credit Default Swaps on asset-backed securities. Neither counterparties to these trades nor regulators identified the risk that these complex products could threaten to bring down a company of the size and scope of AIG or the stability of the entire financial system, in part because these markets lacked transparency.

Regulating Credit Default Swaps and Over-the-Counter Derivatives for the First Time:In our proposed regulatory framework, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time.
Instituting a Strong Regulatory and Supervisory Regime:We will subject all dealers in OTC derivative markets to a strong regulatory and supervisory regime as systemically important firms.
Clearing All Contracts Through Designated Central Counterparties:We will force all standardized OTC derivative contracts to be cleared through appropriately designed central counterparties (CCPs) and encourage greater use of exchange traded instruments. These CCPs will be subject to comprehensive settlement systems supervision and oversight, consistent with the authority outlined above.
Requiring Non-Standardized Derivatives to Be Subject to Robust Standards: We will require that all non-standardized derivatives contracts report to trade repositories and be subject to robust standards for documentation and confirmation of trades; netting; collateral and margin practices; and close-out practices.
Making Aggregate Data on Trading Volumes and Positions Available:Central counter-parties and trade repositories will be required to make aggregate data on trading volumes and positions available to the public and make individual counterparty trade and position data available on a confidential basis to appropriate federal regulators.
Applying Robust Eligibility Requirements to All Market Participants:Finally, we will apply robust eligibility requirements and, where appropriate, standards of care; and will require that they meet recordkeeping and reporting requirements.

V. New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals: In the wake of Lehman Brothers' bankruptcy, we learned that even one of the most stable and least risky investment vehicles – money market mutual funds – was not safe from the failure of a systemically important institution. These funds are subject to strict regulation by the SEC and are billed as having a stable asset value – a dollar invested will always return the same amount. But when a major prime MMF "broke the buck," the event sparked a run on the entire prime MMF industry. The run resulted in severe liquidity pressures, not only on prime MMFs but also on financial and non-financial companies that relied significantly on MMFs for funding. In response, we commit to:

Strengthening the Regulatory Framework Around Money Market Funds:We believe that the SEC should strengthen the regulatory framework around MMFs in order to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs.

VI. A Stronger Resolution Authority to Protect Against the Failure of Complex Institutions: We must create a resolution regime that provides authority to avoid the disorderly liquidation of any nonbank financial firm whose failure would have serious adverse effects on the financial system or the U.S. economy. This authority should include:

Covering Financial Institutions That May Pose Systemic Risks:We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the FDIC. This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm that could pose substantial risk to our economy. This resolution authority would be undertaken through the following process:

i. A Triggering Determination:Before any of the emergency measures specified could be taken, the Secretary, upon the positive recommendations of both the Federal Reserve Board and the FDIC and in consultation with the President, would have to make a triggering determination that (1) the financial institution in question is in danger of becoming insolvent; (2) its insolvency would have serious adverse effects on economic conditions or financial stability in the United States; and (3) taking emergency action as provided for in the law would avoid or mitigate those adverse effects.

ii. Choice Between Financial Assistance or Conservatorship/Receivership:The Secretary and the FDIC would decide whether to provide financial assistance to the institution or to put it into conservatorship/receivership. This decision will be informed by the recommendations of the Federal Reserve Board and the appropriate federal regulatory agency (if different from the FDIC).

Options for Financial Assistance: The U.S. government would be permitted to utilize a number of different forms of financial assistance in order to stabilize the institution in question. These include making loans to the financial institution in question, purchasing its obligations or assets, assuming or guaranteeing its liabilities, and purchasing an equity interest in the institution.

Options for Conservatorship/Receivership:Depending on the circumstances, the FDIC and the Treasury would place the firm into conservatorship with the aim of returning it to private hands or a receivership that would manage the process of winding down the firm. The trustee of the conservatorship or receivership would have broad powers, including to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts (including with its employees), and to deal with a derivatives book. A conservator would also have the power to restructure the institution by, for example, replacing its board of directors and its senior officers. None of these actions would be subject to the approval of the institution's creditors or other stakeholders.

iii. Taking Advantage of FDIC/FHFA Models:This authority is modeled on the resolution authority that the FDIC has under current law with respect to banks and that the Federal Housing Finance Agency has with regard to the GSEs. Here, conservatorships or receiverships aim to minimize the impact of the potential failure of the financial institution on the financial system and consumers as a whole, rather than simply addressing the rights of the institution's creditors as in bankruptcy.

2) Requiring Covered Institutions to Fund the Resolution Authority: The proposed legislation would create an appropriate mechanism to fund the limited exercise of these resolution authorities. This could take the form of a mandatory appropriation to the FDIC out of the general fund of the Treasury and/or through a scheme of assessments, ex ante or ex post, on the financial institutions covered by the legislation. The government would also receive repayment from the redemption of any loans made to the financial institution in question, and from the ultimate sale of any equity interest taken by the government in the institution. The Deposit Insurance Fund will not be used to fund such assistance.

Treasury Announces Auto Supplier Support Program

Program Will Aid Critical Sector of American Economy

WASHINGTON, DC – The U.S. Department of the Treasury today announced a new program to help stabilize the auto supply base and restore credit flows in a critical sector of the American economy. As the President's Task Force on the Auto Industry continues to review restructuring plans submitted by General Motors and Chrysler, Treasury announced an Auto Supplier Support Program that will provide up to $5 billion in financing, giving suppliers the confidence they need to continue shipping parts, pay their employees and continue their operations.

As rising unemployment and contracting credit continue to threaten economic recovery, today's announcement will support an industry employing more than 500,000 American workers across the country. Because of the credit crisis and the rapid decline in auto sales, many of the nation's auto parts suppliers are unable to access credit and are facing growing uncertainty about the prospects for their businesses and for the auto companies that rely on the parts they ship. This program will help break this cycle and provide confidence in the supplier base at an important time for the domestic auto industry. It is part of the Administration's broader efforts to ensure that our Financial Stability Plan reaches the main street businesses that create good jobs for American workers.

"The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period of restructuring the lies ahead, " said Treasury Secretary Geithner. "The program will provide supply companies with much needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need. "

An overview of the Auto Supplier Support Program is below. A full fact sheet on the program can be found here:

http://www.treas.gov/press/releases/docs/supplier_support_program_3_18.pdf

	The program will provide suppliers with access to government-backed protection that money owed to them for the products they ship will be paid no matter what happens to the recipient car company.
	Participating suppliers will also be able to sell their receivables into the program at a modest discount. This will provide suppliers with desperately needed funding to operate their businesses and help unlock credit more broadly in the supplier industry.
	The program will be run through American auto companies that agree to participate in the program. Suppliers to those companies that agree to maintain qualifying commercial terms will have the opportunity to request this government backed protection. If granted, the supplier will pay a small fee for the right to participate in the program.
	The Treasury Department has made available up to $5 billion in financing under this program.

Treasury Announces Auto Supplier Support Program

Program Will Aid Critical Sector of American Economy

An overview of the Auto Supplier Support Program is below. A full fact sheet on the program can be found here:

http://www.treas.gov/press/releases/docs/supplier_support_program_3_18.pdf

	The program will provide suppliers with access to government-backed protection that money owed to them for the products they ship will be paid no matter what happens to the recipient car company.
	Participating suppliers will also be able to sell their receivables into the program at a modest discount. This will provide suppliers with desperately needed funding to operate their businesses and help unlock credit more broadly in the supplier industry.
	The program will be run through American auto companies that agree to participate in the program. Suppliers to those companies that agree to maintain qualifying commercial terms will have the opportunity to request this government backed protection. If granted, the supplier will pay a small fee for the right to participate in the program.
	The Treasury Department has made available up to $5 billion in financing under this program.

Prepared Statement by Treasury Secretary Tim Geithner at the G-20 Finance Ministers and Central Bank Governors Meeting

You can view the U.S. G-20 Fact Sheet here.

Horsham, UK -- I am very pleased to be in the UK for the G-20 Finance Ministers and Central Bank Governors meeting. I want to compliment Chancellor Darling for his leadership and the excellent work of his staff in preparing for this meeting.

We met to prepare a comprehensive set of recommendations for the meeting of the heads of state early next month. This is a global crisis and it requires a coordinated global response. We have a strong consensus on the need for both recovery and reform so that we never face a crisis like this again.

An effective response to restore global growth requires several things. It requires a sustained commitment to macroeconomic stimulus and pro-growth policies on a scale commensurate with the severity of the problem. It requires aggressive actions to fix our financial systems and get credit flowing again. It requires substantial support from the international financial institutions targeted to those emerging markets and developing economies most affected by the crisis. This means a significant increase in resources – deployed more quickly – to provide financing in support of counter-cyclical fiscal policies, bank repair and recapitalization to increase lending, trade finance, and support to the poorest countries that are most impacted by the crisis.

Alongside these actions must come a clear commitment, when recovery is firmly established, to return to fiscal sustainability and to unwind the extraordinary policy actions needed to restore economic growth and solve the financial crisis.

You are seeing the world move together at a speed and on a scale without precedent in modern times. All the major economies are putting in place substantial fiscal packages. The stronger the response, the quicker recovery will come. That is why the United States has passed the largest, most comprehensive recovery package in decades.

We are each moving preemptively to get ahead of the intensifying pressures that you see across national financial systems and we released today a common framework for restoring the flow of credit.

In the United States, we have launched a new program to help revive the credit markets. We have initiated a forward-looking assessment of the potential capital needs of our major financial institutions, and outlined the terms of the capital assistance program that will provide a backstop for those institutions that need additional capital. We will soon outline our program to use market mechanisms to help clean up the legacy assets on bank balance sheets and bring in private capital alongside government financing to help restart markets for these assets.

As President Obama has said, we will bring the full force of the federal government to ensure that the major banks are able to meet their commitments so that they continue to play critical roles in market functioning and in providing credit to households and businesses.

The G-20 has agreed to the need for mobilizing more resources for the international financial institutions to address the risks posed by the pull back of capital flows and the fall in external demand. The G-20 supports our proposal for a substantial increase to emergency IMF resources through a major enlargement of the New Arrangements to Borrow (NAB) and expansion of its membership. We have asked the World Bank and other Multilateral Development Banks to leverage existing resources by flexible use of their balance sheets to help meet financing needs.

Now turning to reform. The G-20 has agreed on a common framework of concrete changes to the international financial architecture. Risk does not respect national borders. We must establish a much stronger form of oversight and clear rules of the game, more evenly enforced across the international financial system. This will require comprehensive changes both at the national and international levels. The United States will soon be releasing a comprehensive framework of regulatory reform. Our strategy underscores our commitment to encourage a race to the top rather than a race to the bottom; a global move to higher standards.

We have committed to broad principles to guide the reform of the financial system:

First, all institutions that are important to the stability of the financial system should come within a much stronger framework of oversight, with clearer rules of the game that are enforced more evenly and consistently across countries.

Second, all markets, including the derivatives markets, need to be subject to standards for stability and a framework for disclosure.

Third, looking forward we need to provide much stronger cushions of stability to ensure that the framework of capital requirements and accounting standards dampens rather than amplifies future financial crises.

Fourth, we must promote financial market integrity. We welcome Switzerland's announcement to increase information sharing as part of the global effort to end tax evasion.

Alongside this framework, we have expanded membership of the Financial Stability Forum, and we should elevate its role in the international system so that the global economy has – alongside the original Bretton Woods institutions of the IMF, the World Bank and the WTO – a strong institution able to lead these critical efforts to a more robust framework of oversight and standards for the global financial system.

We are committed to accelerating the timetable of reform of the broader governance structure of the international financial institutions to increase the role of developing countries in these institutions.

Let me just conclude by saying that we have a very broad basis of consensus globally on the need to act aggressively to restore growth to the global economy and a commitment to move together to address the evolving crisis.

U.S. workers are among the most productive in the world, but U.S. companies need open and growing markets. As President Obama stressed this week, a healthy United States requires a healthy global economy. Our recovery will be stronger if the world is stronger.

I am very pleased by the progress achieved today on both recovery and reform.

Treasury Designates Companies Tied to Iran’s Bank Melli as Proliferators

Washington, DC -- The U.S. Department of the Treasury today designated 11 companies under Executive Order 13382 for their ties to Iran's Bank Melli. E.O 13382 is an authority aimed at freezing the assets of Weapons of Mass Destruction proliferators and those who support them. Bank Melli has been designated as a proliferator by the United States, the European Union, and Australia for its role in Iran's nuclear and ballistic missile programs. Additionally, United Nations Security Council Resolution 1803 calls on all Member States to exercise vigilance with respect to activities between financial institutions in their territories and all Iranian banks, particularly Bank Melli.

"The international community has recognized the proliferation risks posed by Iran's Bank Melli," said Under Secretary for Terrorism and Financial Intelligence Stuart Levey. "We will continue to take steps to protect the integrity of the international financial system by exposing the banks, companies, and individuals supporting Iran's nuclear and missile programs."

Bank Melli provides financial services, including opening letters of credit and maintaining accounts, for Iranian front companies and entities engaged in proliferation activities. Further, Bank Melli has facilitated the purchase of sensitive materials utilized by Iran's nuclear and missile industries and has handled transactions for other designated Iranian entities, including Bank Sepah, Defense Industries Organization, and Shahid Hammat Industrial Group.

Bank Melli Iran Investment Company (BMIIC) and Bank Melli Printing and Publishing Co. were designated because they are owned or controlled by Bank Melli. The following five entities were designated because they are owned or controlled by BMIIC: BMIIC International General Trading Ltd., Melli Investment Holding International (MEHR), Cement Investment and Development Company (CIDCO), Mazandaran Textile Company, and Melli Agrochemical Company. Two entities, MEHR Cayman Ltd. and First Persian Equity Fund, were designated because they are owned or controlled by, or acting or purporting to act for or on behalf of,directly or indirectly,MEHR and BMIIC. The remaining entities, Mazandaran Cement Company and Shomal Cement Company, were designated because they are owned or controlled by CIDCO.

BMIIC is one of the largest publicly listed companies on Tehran's Stock Exchange with a current market capitalization of more than $1 billion. BMIIC's portfolio includes investments in more than 100 companies across a variety of business sectors including, but not limited to, petrochemicals, industrial contracting, non-ferrous minerals, financial intermediaries, as well as the food and beverage sector.

The Bank Melli Printing and Publishing Co. is responsible for meeting the printing needs of Bank Melli's domestic branches as well as other Government of Iran institutions. Melli Investment Holding International (MEHR) was incorporated in the Dubai International Financial Centre (DIFC), United Arab Emirates (UAE), in 2005 and is wholly-owned by BMIIC. BMIIC established BMIIC International General Trading Ltd. in 2004 in Dubai, UAE.In this manner, BMIIC used the DIFC as a free zone jurisdiction to carry outits investment-related activities.

MEHR Cayman Ltd. is domiciled in the Cayman Islands and is the investment manager and placement agent for First Persian Equity Fund, an investment vehicle launched in June 2007 that focuses primarily on companies listed on Tehran's stock exchange. BMIIC advises First Persian Equity Fund and demonstrated its commitment to First Persian Equity Fund by agreeing to invest the equivalent of Euro 15 million as seed capital. In order to avoid liquidity issues in the Fund's infancy, MEHR Cayman Ltd. was permitted to source First Persian Equity Fund's stock portfolio from the existing holdings of BMIIC.

MEHR's Executive Chairman, Chief Investment Officer and Managing Director occupy three of the four corporate director slots at First Persian Equity Fund. These same individuals have previously occupied or currently occupy senior positions at other Bank Melli affiliates, including MEHR Cayman Ltd., BMIIC International General Trading Ltd., and Future Bank, a Bahraini financial institution designated under E.O. 13382 in March 2008. Thus, BMIIC, via its subsidiaries in the UAE and the Cayman Islands, exerts a controlling interest on the overall strategic direction of, potential shareholders of, and investment decisions of, the First Persian Equity Fund.

CIDCO was established in 2004 by BMIIC as a holding company that specializes in the cement industry. According to BMIIC, CIDCO was created to manage its cement interests. These interests include the Mazandaran Cement Company, which CIDCO majority owns, and the Shomal Cement Company.

As a result of Treasury's actions today, all transactions involving any of the designees and any U.S. person are prohibited and any assets the designees may have under U.S. jurisdiction are frozen.

Identifying Information on Designees:

BANK MELLI IRAN INVESTMENT COMPANY

AKA: BMIIC
Location: No. 2, Nader Alley, Vali-Asr Str., Tehran, Iran,
P.O. Box 3898-15875
Alt. Location: Bldg 2, Nader Alley after Beheshi Forked Road,
P.O. Box 15875-3898,Tehran, Iran 15116
Alt. Location: Rafiee Alley, Nader Alley, 2 After Serahi Shahid Beheshti, Vali E Asr Avenue, Tehran, Iran
Business RegistrationNumber: 89584

BANK MELLI PRINTING AND PUBLISHING CO.

AKA: Bank Melli Printing Co.
Location: 18th Km Karaj Special Road, Tehran, Iran, P.O. Box 37515-183
Alt. Location: Km 16 Karaj Special Road, Tehran, Iran
Business Registration Number: 382231

MELLI INVESTMENT HOLDING INTERNATIONAL

AKA: MEHR
Location: 514, "Business Avenue" Building, Deira, PO Box 181878, Dubai, UAE
Trade License Number: 0107 (Dubai) issued 30 November 2005

MEHR CAYMAN LTD.

Location: Walker House, 87 Mary Street, George Town,
Grand Cayman, KY1-9002, Cayman Islands

CEMENT INVESTMENT AND DEVELOPMENT COMPANY

AKAs:CIDCO
CIDCO Cement Holding
Location: No. 241, Mirdamad Street, Tehran, Iran

MAZANDARAN CEMENT COMPANY

Location: Africa Street, Sattari Street No. 40, P.O. Box 121, Tehran, Iran 19688
Alt Location: 40 Satari Ave. Afrigha Highway, P.O. Box 19688, Tehran, Iran

SHOMAL CEMENT COMPANY

Location: Dr Beheshti Ave No. 289, Tehran, Iran 151446
Alt. Location: 289 Shahid Baheshti Ave., P.O. Box 15146, Tehran, Iran

MAZANDARAN TEXTILE COMPANY

AKAs: Sherkate Nasaji Mazandaran
Location: Kendovan Alley 5, Vila Street, Enghelab Ave, P.O. Box 11365-9513, Tehran, Iran 11318
Alt. Location: 28 Candovan Cooy Enghelab Ave., P.O. Box 11318, Tehran, Iran
Alt. Location: Sari Ave., Ghaemshahr, Iran

MELLI AGROCHEMICAL COMPANY PJS

AKAs:Sherkat Melli Shimi Keshavarz
Location: Mola Sadra Street, 215 Khordad, Sadr Alley No. 13, Vanak Sq, P.O. Box15875-1734, Tehran, Iran

FIRST PERSIAN EQUITY FUND

AKAs: FIRST PERSIA EQUITY FUNDFPEF
Location: Walker House, 87 Mary Street, George Town, Grand Cayman, KY1-9002, Cayman Islands
Alt. location: Clifton House, 75 Fort Street, P.O. Box 190, Grand Cayman, KY1-1104, Cayman Islands
Alt. location: Rafi Alley, Vali Asr Avenue, Nader Alley, Tehran, 15116, Iran, P.O. Box 15875-3898

BMIIC INTERNATIONAL GENERAL TRADING LTD.

AKAs:BMIIGT
"BMIICGT"
BMIIC Trading UAE
Location: P.O. Box 11567, Dubai, UAE
Alt. location: Deira, P.O. Box 181878, Dubai, UAE

Treasury Outlines Framework For Regulatory Reform

Four Broad Components of Comprehensive Regulatory Reform:

Addressing Systemic Risk: This crisis – and the cases of firms like Lehman Brothers and AIG – has made clear that certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime. It is not enough to address the potential insolvency of individual institutions – we must also ensure the stability of the system itself.

Protecting Consumers and Investors: It is crucial that when households make choices to invest their savings we have clear rules of the road that prevent manipulation and abuse. While outright fraud like that perpetrated by Bernie Madoff is already illegal, these cases highlight the need to strengthen enforcement and improve transparency for all investors. Lax regulation also left too many households exposed to deception and abuse when taking out home mortgage loans

Eliminating Gaps in Our Regulatory Structure: Our regulatory structure must assign clear authority, resources, and accountability for each of its key functions.　 We must not let turf wars or concerns about the shape of organizational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people.　

Fostering International Coordination: To keep pace with increasingly global markets, we must ensure that international rules for financial regulation are consistent with the high standards we will be implementing in the United States.　 Additionally, we will launch a new, three-pronged initiative to address prudential supervision, tax havens, and money laundering issues in weakly-regulated jurisdictions.　

Addressing The First Component of Regulatory Reform: Systemic Risk

A Single Independent Regulator With Responsibility Over Systemically Important Firms and Critical Payment and Settlement Systems

Higher Standards on Capital and Risk Management for Systemically Important Firms

Registration of All Hedge Fund Advisers With Assets Under Management Above a Moderate Threshold

A Comprehensive Framework of Oversight, Protections and Disclosure for the OTC Derivatives Market

New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals

I. A Single Independent Regulator with responsibility over Systemically Important Firms and Critical Payment and Settlement Systems: While we strengthen prudential oversight for all firms, we must also create higher standards for all systemically important financial firms – regardless of whether they own a depository institution – to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy.　 We will work with Congress to enact legislation that defines the characteristics of covered firms; sets objectives and principles for their oversight; and assigns responsibility for regulating these firms.　

1) Defining a Systemically Important Firm:In identifying systemically important firms, we believe that the characteristics should include:　

the financial system's interdependence with the firm;

the firm's size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding;

the firm's importance as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.

2) Focusing On What Companies Do, Not the Form They Take:These institutions would not be limited to banks or bank holding companies, but could include any financial institution that was deemed to be systemically important in accordance with legislative requirements. These provisions will focus on what companies do and their potential for systemic risk – and no longer on the form they take – to determine who will regulate them.

3) Clarifying Regulatory Authority Over Payment and Settlement Activities:Federal authority for payment and settlement systems is incomplete and fragmented. Weaknesses in key funding and risk transfer markets, notably over-night and short term lending markets and OTC derivatives, increased uncertainty as major institutions such as Bear Stearns neared failure. This created a pathway for large financial institutions to spread financial distress between institutions and across borders.

While some progress was made in the markets for CDS and other OTC derivatives under Secretary Geithner's leadership at the New York Fed, regulators have been forced to rely heavily on moral suasion to encourage market participants to strengthen these markets.

We need to clarify and expand authority over these systems and activities, giving a single entity the ability to supervise, examine, and set prudential requirements for these critical parts of our financial system.　　　

II. Higher Standards on Capital and Risk Management for Systemically Important Firms:

Setting More Robust Capital Requirements:Capital requirements for these firms must be more conservative than for other institutions and be sufficiently robust to be effective in a wider range of deeply adverse economic scenarios than is typically required.　　　　

Imposing Stricter Liquidity, Counterparty and Credit Risk Management Requirements:Supervisors will also need to impose liquidity, counterparty, and credit risk management requirements that are more stringent than for other financial firms.　　 For instance, supervisors should apply more demanding liquidity constraints; and require that these firms are able to aggregate counter-party risk exposures on an enterprise-wide basis within a matter of hours.　　　　　　

Creating Prompt-Corrective Action Regime: The regulator of these entities will also need a prompt-corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to the powers of the FDIC with respect to its covered agencies.

III. Requiring All Hedge Funds Above A Certain Size to Register: U.S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the Commodity Futures Trading Commission and many funds register voluntarily with the Securities and Exchange Commission.　 As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability.　 The Madoff episode is just one more reminder that, in order to protect investors, we must close gaps and weaknesses in the regulation and enforcement of broker-dealers, investment advisors and the funds they manage.

Requiring Registration of All Hedge Funds: All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed a certain threshold should be　required to register with the SEC.　

Mandating Investor and Counterparty Disclosure: All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements.　

Providing Information Necessary to Assess Threats to Financial Stability:The regulatory reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability.　

Sharing Reports With Systemic Risk Regulator:The SEC should share the reports that it receives from the funds with the systemic risk regulator, which would then determine whether any hedge funds could pose a systemic threat and should be subjected to the prudential standards outlined above.

IV. A Comprehensive Framework of Oversight, Protection and Disclosure for the OTC Derivatives Market:The current financial crisis has been amplified by excessive risk-taking by certain insurance companies and poor counterparty credit risk management by many banks trading Credit Default Swaps on asset-backed securities.　 Neither counterparties to these trades nor regulators identified the risk that these complex products could threaten to bring down a company of the size and scope of AIG or the stability of the entire financial system, in part because these markets lacked transparency.　

Regulating Credit Default Swaps and Over-the-Counter Derivatives for the First Time:In our proposed regulatory framework, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time.

Instituting a Strong Regulatory and Supervisory Regime:We will subject all dealers in OTC derivative markets to a strong regulatory and supervisory regime as systemically important firms.

Clearing All Contracts Through Designated Central Counterparties:We will force all standardized OTC derivative contracts to be cleared through appropriately designed central counterparties (CCPs) and encourage greater use of exchange traded instruments.　These CCPs will be subject to comprehensive settlement systems supervision and oversight, consistent with the authority outlined above.

Requiring Non-Standardized Derivatives to Be Subject to Robust Standards: We will require that all non-standardized derivatives contracts report to trade repositories and be subject to robust standards for documentation and confirmation of trades; netting; collateral and margin practices; and close-out practices.

Making Aggregate Data on Trading Volumes and Positions Available:Central counter-parties and trade repositories will be required to make aggregate data on trading volumes and positions available to the public and make individual counterparty trade and position data available on a confidential basis to appropriate federal regulators.　

Applying Robust Eligibility Requirements to All Market Participants:Finally, we will apply robust eligibility requirements and, where appropriate, standards of care; and will require that they meet recordkeeping and reporting requirements.

V. New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals: In the wake of Lehman Brothers' bankruptcy, we learned that even one of the most stable and least risky investment vehicles – money market mutual funds – was not safe from the failure of a systemically important institution.　 These funds are subject to strict regulation by the SEC and are billed as having a stable asset value – a dollar invested will always return the same amount.　 But when a major prime MMF "broke the buck," the event sparked a run on the entire prime MMF industry.　 The run resulted in severe liquidity pressures, not only on prime MMFs but also on financial and non-financial companies that relied significantly on MMFs for funding.　In response, we commit to:

Strengthening the Regulatory Framework Around Money Market Funds:We believe that the SEC should strengthen the regulatory framework around MMFs in order to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs.　

VI. A Stronger Resolution Authority to Protect Against the Failure of Complex Institutions: We must create a resolution regime that provides authority to avoid the disorderly liquidation of any nonbank financial firm whose failure would have serious adverse effects on the financial system or the U.S. economy.　This authority should include:　

Covering Financial Institutions That May Pose Systemic Risks:We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the FDIC. This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm that could pose substantial risk to our economy. This resolution authority would be undertaken through the following process:

i. A Triggering Determination:Before any of the emergency measures specified could be taken, the Secretary, upon the positive recommendations of both the Federal Reserve Board and the FDIC and in consultation with the President, would have to make a triggering determination that　 (1) the financial institution in question is in danger of becoming insolvent; (2) its insolvency would have serious adverse effects on economic conditions or financial stability in the United States; and (3) taking emergency action as provided for in the law would avoid or mitigate those adverse effects.

ii. Choice Between Financial Assistance or Conservatorship/Receivership:The Secretary and the FDIC would decide whether to provide financial assistance to the institution or to put it into conservatorship/receivership.　 This decision will be informed by the recommendations of the Federal Reserve Board and the appropriate federal regulatory agency (if different from the FDIC).

iii. Taking Advantage of FDIC/FHFA Models:This authority is modeled on the resolution authority that the FDIC has under current law with respect to banks and that the Federal Housing Finance Agency has with regard to the GSEs.　 Here, conservatorships or receiverships aim to minimize the impact of the potential failure of the financial institution on the financial system and consumers as a whole, rather than simply addressing the rights of the institution's creditors as in bankruptcy.

2) Requiring Covered Institutions to Fund the Resolution Authority: The proposed legislation would create an appropriate mechanism to fund the limited exercise of these resolution authorities. This could take the form of a mandatory appropriation to the FDIC out of the general fund of the Treasury and/or through a scheme of assessments, ex ante or ex post, on the financial institutions covered by the legislation. The government would also receive repayment from the redemption of any loans made to the financial institution in question, and from the ultimate sale of any equity interest taken by the government in the institution.　 The Deposit Insurance Fund will not be used to fund such assistance.

Monthly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

Treasury Designates Free Life Party of Kurdistan a Terrorist Organization

Washington, DC – The U.S. Department of the Treasury today designated the Free Life Party of Kurdistan (PJAK), a Kurdish group operating in the border region between Iraq and Iran, under Executive Order 13224 for being controlled by the terrorist group Kongra-Gel (KGK, aka the Kurdistan Workers Party or PKK).

"With today's action, we are exposing PJAK's terrorist ties to the KGK and supporting Turkey's efforts to protect its citizens from attack," said Stuart Levey, Treasury's Under Secretary for Terrorism and Financial Intelligence.

Designated in December 2002 under E.O. 13224, KGK has been involved for more than 20 years in targeting Turkish government security forces, local Turkish officials, and villagers who oppose the KGK in Turkey. Turkish authorities have confirmed or suspect that KGK is also responsible for dozens of bombings since 2004 in western Turkey.

The KGK leadership authorized certain Iranian-Kurdish KGK members to create a KGK splinter group that would portray itself as independent from but allied with KGK. PJAK was created to appeal to Iranian Kurds. KGK formally institutionalized PJAK in 2004 and selected five KGK members to serve as PJAK leaders, including Hajji Ahmadi, a KGK affiliate who became PJAK's General Secretary. KGK leaders also selected the members of PJAK's 40-person central committee. Although certain PJAK members objected to the KGK selecting their leaders, the KGK advised that PJAK had no choice.

As of April 2008, KGK leadership controlled PJAK and allocated personnel to the group. Separately, PJAK members have carried out their activities in accordance with orders received from KGK senior leaders. In one instance, PJAK's armed wing, the East Kurdistan Defense Forces, had been acting independently in Iran. KGK senior leaders immediately intervened, however, and recalled the responsible PJAK officials to northern Iraq.

Under E.O. 13224, any assets PJAK has under U.S. jurisdiction are frozen, and U.S. persons are prohibited from engaging in any transactions with PJAK.

Identifying Information
FREE LIFE PARTY OF KURDISTAN
AKAs:
Kurdistan Free Life Party
Party of Free Life of Kurdistan Partiya Jiyana Azad a Kurdistane
PJAK
PEJAK
PEZHAK

Location:
Qandil Mountain, Irbil Governorate, Iraq

Alt, Location:
Razgah, Iran

Quarterly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

Treasury Designates Two Colombian Companies

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated two Colombian companies, Aquilea S.A. and Megaplast S.A., as Specially Designated Narcotics Traffickers (SDNTs) pursuant to Executive Order 12978. These two companies are controlled by previously designated family members of drug kingpins Miguel Rodriguez Orejuela and Gilberto Rodriguez Orejuela, who once led the Cali drug cartel.

"Thanks to Colombian and U.S. efforts, the heads of the Cali cartel today sit in jail and their family members have agreed to forfeit over $2 billion in tainted assets to the relevant authorities," said OFAC Director Adam J. Szubin. "Today's designation exposes two additional companies that had been hidden by Rodriguez Orejuela family members and are now subject to sanctions."

Aquilea S.A., which is located in Cali, Colombia, owns pharmaceutical patents and trademarks. This company is controlled by Amparo Rodriguez Orejuela and her daughter, Angela Maria Gil Rodriguez, who were designated in 1995 and 2003, respectively. Amparo Rodriguez Orejuela is the sister of SDNT principals Miguel and Gilberto Rodriguez Orejuela.

Megaplast S.A., which is located in Palmira, Valle, Colombia, is a manufacturer of plastic bags. This company is controlled by Humberto Rodriguez Mondragon and Jaime Rodriguez Mondragon, who were both designated in 1995 and are the sons of SDNT principal Gilberto Rodriguez Orejuela.

In 2006, Miguel and Gilberto Rodriguez Orejuela pleaded guilty to drug trafficking charges in the U.S. District Court for the Southern District of Florida and money laundering charges in the U.S. District Court for the Southern District of New York. These guilty pleas resulted in 30-year prison sentences for each brother.

In connection with Miguel and Gilberto Rodriguez Orejuelas' guilty pleas, 28 of their family members who were previously designated as SDNTs entered into an agreement with the U.S. Department of Justice and the U.S. Department of the Treasury in September 2006. As part of this agreement, the 28 family members were obligated to identify all "forfeitable property" financed in whole or in part with narcotics proceeds and to identify all other assets of any nature whatsoever that are owned or controlled by any family member who is a party to the agreement. In exchange, the U.S. Government agreed to remove the family members from the list of SDNTs after certain conditions, including final forfeiture and/or divestiture of all forfeitable property under the agreement, were met.

Amparo Rodriguez Orejeula, Angela Maria Gil Rodriguez, Humberto Rodriguez Mondragon, and Jaime Rodriguez Mondragon are all parties to this agreement. Although these four individuals controlled Aquilea S.A. and Megaplast S.A. at the time of the agreement, they did not identify these entities under the agreement. OFAC has notified the four family members of this material omission and will evaluate their response.

This designation is part of the ongoing interagency effort by the Departments of the Treasury, Justice, State and Homeland Security to implement Executive Order 12978 of October 21, 1995, which applies financial sanctions against Colombia's drug cartels. Today's designation action freezes any assets the designated entities may have that are subject to U.S. jurisdiction and prohibits all financial and commercial transactions by any U.S. person with those entities.

A detailed look at the program against Colombian drug organizations is provided in OFAC's March 2007 Impact Report on Economic Sanctions Against Colombian Drug Cartels.

http://www.treas.gov/offices/enforcement/ofac/reports/narco_impact_report_05042007.pdf

Chart: Designation of Rodriguez Orejuela Companies – January 2009

Treasury Provides Funding to Bolster Healthy, Local Banks

Capital Purchase Program Funds 23 Banks
to Help Meet Lending Needs of Local Consumers, Businesses

Washington, DC - The U.S. Treasury Department today announced investments of approximately $386 million in 23 banks across the nation as part of its Capital Purchase Program (CPP), a means to directly infuse capital into healthy, viable banks with the goal of increasing the flow of financing available to small businesses and consumers. With additional capital, banks are better able to meet the lending needs of their customers, and businesses have greater access to the credit that they need to keep operating and growing.

Since its inception in October 2008, Treasury has strengthened regional, small and large financial institutions as well as Community Development Financial Institutions through total CPP investments of $194.2 billion in 317 institutions in 43 states and Puerto Rico . To date, the largest investment was $25 billion and the smallest investment was approximately $1 million.

Among the most recent banks to receive Treasury funding through the CPP is the United Labor Bank, which provides cash management services to unions, multi-family lending and small commercial real estate loans throughout California .

"With the addition of this capital, we will expand our branch network from five branches to seven or eight in the Pacific Northwest . We also plan to expand our lending platform with the addition of residential loan products. Our lending goals for the 2009 business year will exceed $50 million of new loan growth," said Malcolm Hotchkiss, President and Chief Executive Officer, First ULB Corp and United Labor Bank.

Under the CPP, Treasury is purchasing up to a total of $250 billion of senior preferred shares from viable U.S. financial institutions such as those announced today. Institutions that participate in the CPP must comply with restrictions on executive compensation during the period that Treasury holds equity issued through the CPP and agree to limitations on dividends and stock repurchases. Banks participating in the CPP will pay the Treasury a five percent dividend on senior preferred shares for the first five years following the investment and a rate of nine percent per year thereafter. Banks may repay Treasury under the conditions established in the purchase agreements, and Treasury may sell these shares when market conditions stabilize. Further information about the terms of the program, including weekly transactions, can be found at http://www.treas.gov/initiatives/eesa/.

The following is a complete list of banks receiving funding on January 23, 2009:

Arkansas
Liberty Bancshares, Inc.	$57,500,000
California
California Oaks State Bank	$3,300,000
Calwest Bancorp/South County Bank	$4,656,000
Commonwealth Business Bank	$7,701,000
First ULB Corp.	$4,900,000
Fresno First Bank	$1,968,000
Delaware
WSFS Financial Corporation	$52,625,000
Florida
Alarion Financial Services, Inc.	$6,514,000
Seaside National Bank & Trust	$5,677,000
Illinois
Midland States Bancorp, Inc.	$10,189,000
Princeton National Bancorp, Inc.	$25,083,000
Southern Illinois Bancorp, Inc.	$5,000,000
Indiana
1st Source Corporation	$111,000,000
Louisiana
FPB Financial Corp	$3,240,000
Minnesota
Crosstown Holding Company/21st Century Bank	$10,650,000
Missouri
Calvert Financial Corporation	$1,037,000
Mississippi
BankFirst Capital Corporation	$15,500,000
North Carolina
AB&T Financial Corporatiolliance Bank & Trust Company	$3,500,000
Ohio
First Citizens Banc Corp	$23,184,000
Pennsylvania
Stonebridge Financial Corp.	$10,973,000
Tennessee
Moscow Bancshares, Inc.	$6,216,000
Virginia
Farmers Bank	$8,752,000
Washington
Pierce County Bancorp	$6,800,000

Treasury Secretary Opens Term Opens With New Rules
To Bolster Transparency, Limit
Lobbyist Influence in Federal investment Decisions

Washington, DC – In light of President Barack Obama's firm commitment to transparency, accountability and oversight in our government's approach to stabilizing the financial system, U.S. Treasury Secretary Tim Geithner today announced several key reforms to the Emergency Economic Stabilization Act (EESA). As one of his first acts as the 75th Treasury Secretary, Secretary Geithner outlined new, stepped up rules designed to limit the influence of lobbyists and special interests in the EESA process and ensure that investment decisions are guided by objective assessments in the best interest of the health and stability of the financial system.

"American taxpayers deserve to know that their money is spent in the most effective way to stabilize the financial system. Today's actions reaffirm our commitment toward that goal," said Secretary Geithner.

Today's announcement builds on several reforms to the EESA previously outlined by President Obama, including monitoring and tracking lending patterns by financial institutions, limiting executive compensation, and preventing shareholders from being unduly rewarded at taxpayer expense. These new rules go beyond the approach taken under the EESA to date and will help ensure a new level of openness and accountability going forward.

The new rules include:

Combating lobbyist influence in the EESA process: The Treasury Department will implement safeguards to prevent lobbyist influence over the program, including restricting contacts with lobbyists in connection with applications for, or disbursements of, EESA funds.

Keeping politics out of funding decisions: The Treasury Department will ensure that political influence does not interfere with EESA decision making, using as a model for these protections the limits on political influence over tax matters.

Certification to Congress on objective decision making: In reporting to Congress, the Office of Financial Stability (OFS) will certify that each investment decision is based only on investment criteria and the facts of the case.

The investment process will be transparent and based on objective criteria:

Only banks recommended by the primary bank regulator will be eligible for capital investments.

OFS will publish a detailed description of the investment review process undertaken by the regulators and OFS.

The Treasury Department will ensure adequate resources exist to process applications as quickly

Remarks of Secretary Timothy Geithner
Swearing-In Ceremony
January 26, 2009

Thank you Mr. President.

Thank you Mr. Vice President.

And thanks to my many friends and colleagues for being here this evening.

My wife, Carole, stood beside me as I took this oath of office, as she has before in this building. I want to thank her for extraordinary grace and support. She has a remarkable capacity for calm wisdom and empathy. Our children Elise and Benjamin are back at school in New York doing their mid term exams. I miss them and am proud of them.

I am very pleased that my father, Peter Geithner, and my brother David are here, representing my terrific family. My father gave me, among many wonderful things, the important gift of showing me the world as a child. He took us to live in Zambia and Rhodesia , then to India and Thailand , and from those places I saw America through the eyes of others. It was that experience -- seeing first hand the extraordinary influence of American policy on the world -- that led me to work in government.

I first walked into this building about 20 years ago.

I had at Treasury the wonderful experience of working with smart and dedicated people working for their country, with the shared goal of making government more effective, improving the results produced by policy, in an environment where our obligation was to debate the merits, to do what was right not what was expedient, drawing on the best ideas and expertise.

Treasury's tradition is to defend the integrity of policy, to respect the constraints imposed by limited resources, and to limit government intervention to where it is essential to protect our financial system and improve the lives of the American people.

That tradition is important today, but because it is that tradition of credibility that makes it possible for governments to do what is necessary to resolve a crisis. In the world we confront today, Treasury has to be a source of initiative, not just a reminder of the constraints of reality.

We are at a moment of maximum challenge for our economy and our country.

Our agenda is to move quickly to help you do what the country asked you to do.

To launch the programs that will bring economic recovery sooner, to make our economy more productive, to restore trust in our financial system with fundamental reform, to make our tax system better at rewarding work and investment, more fair and more simple.

And to restore confidence in America 's economic leadership around the world.

I pledge all of my ability to help you meet that challenge and to restore to all Americans the promise of a better future.

Mr. President, I am deeply grateful for your trust and confidence.

We will work our hearts out for you.

Thank you for giving me this great privilege of working for you.

Interim Assistant Secretary for Financial Stability Neel Kashkari
Testimony before the Senate Committee
on Banking, Housing and Urban Affairs

Washington - Chairman Dodd, Senator Shelby, members of the committee, good morning and thank you for the opportunity to appear before you today. I would like to provide an update on the Treasury Department's progress implementing our authorities under the Emergency Economic Stabilization Act of 2008.

Every American depends on the flow of money through our financial system. They depend on it for car loans, home loans, student loans and household needs. Employers rely on credit to pay their employees. In recent months, our credit markets froze up and lending became extremely impaired.

The President asked Congress to move rapidly last month to grant the Treasury Department extraordinary authority to address this unprecedented situation. Congress, led by this Committee and others, recognized the threat frozen credit markets posed to Americans and to our economy as a whole.

The Treasury has moved quickly since enactment of the bill to implement programs that will provide stability to the markets and help enable our financial institutions to support consumers and businesses across the country. We are focused on applying the authorities you provided in ways that are highly effective and protect the taxpayer to the maximum extent possible.

Secretary Paulson is implementing the Department's new authorities with one simple goal - to restore capital flows to the consumers and businesses that form the core of our economy. To achieve this goal, Treasury is pursuing steps that are intended to help financial institutions remove illiquid assets from their balance sheets and to attract both private and public capital. Our programs are being designed to help financial institutions of all sizes so they can grow stronger and provide crucial funding to our economy.

Since the announcement of our capital purchase program, we have seen numerous signs of improvement in our markets and in the confidence in our financial institutions. While there have been recent positive developments, the markets remain fragile.

Implementation

I'd like to spend a few minutes outlining the steps we have taken to implement the EESA. In the three weeks since Congress passed the new law, we have accomplished a great deal on many fronts. We are moving quickly - but methodically - and I am confident we are building the foundation for a strong, decisive and effective program.

As I have previously described, we have seven policy teams driving forward. They are making rapid progress:

1) Mortgage-backed securities purchase program: This team has made tremendous progress. We have announced that the Bank of New York-Mellon has been selected to serve as our master custodian. A Treasury team has been working with the Bank of New York to design the auction, identify which mortgage-backed securities to purchase and determine how best to reach thousands of potential bidders, quickly and effectively. This team is completing its review of more than 100 securities asset manager solicitations and expects to hire asset managers in the coming days.

2) Whole loan purchase program: This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy objectives. They also have made tremendous progress in reviewing over 100 whole loan asset manager proposals and expect to hire asset managers very soon.

3) Insurance program: We are establishing a program to insure troubled assets. On Friday, October 10 we submitted a request for comment to the Federal Register seeking the best ideas on structuring options for the insurance program. That request posted on Thursday, October 16 and responses are due by Tuesday, October 28. We already have received responses and expect to receive many more before the comment period closes. We will begin designing and establishing the program immediately.

4) Equity purchase program: On Tuesday, October 14, Treasury announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. Throughout the process of developing this comprehensive and effective program, we worked very closely with the four banking regulatory agencies.

Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms. The program is available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged solely or predominantly in financial activities permitted under the relevant law.

The minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. Treasury intends to fund the senior preferred shares purchased under the program by the end of this year.

As Secretary Paulson noted on Monday, this is an investment. The government will not only own shares that we expect will result in a reasonable return, but also will receive warrants for common shares in participating institutions. And we expect all participating banks to continue to strengthen their efforts to help struggling homeowners avoid preventable foreclosures.

On Monday, October 20, Treasury announced a streamlined, systematic process for all banks wishing to access this program. We worked with the four banking regulatory agencies to finalize the application process. Qualified and interested publicly-held financial institutions will use a single application form to submit to their primary regulator – the Federal Reserve, the FDIC, the OCC or the OTS. These regulators have posted this common application form on their websites. We are working hard to finalize and publish the required legal documents so private banks can participate as well on the same economic terms as public banks.

The terms for this program are the same for all institutions that apply before the capital purchase program deadline of November 14, 2008. We have allocated sufficient capital, $250 billion, so that all qualifying banks can participate. Therefore, it is important to note that Treasury will not implement this program on a first-come-first-served basis.

I would like to walk you through the application process, which we made very simple so that all banks can apply. To apply for the capital program, banks should review the program information on the Treasury website and consult with their primary federal regulator. They can go to the regional office of their primary federal regulator anywhere in the country, be it California, Kansas or Texas. After this consultation, the institution should submit an application to that same regulator. Treasury worked with the regulators to establish an evaluation process; this means that all regulators will use a standardized process to review all applications to ensure consistency.

Once a regulator has reviewed an application, it will send the application and its recommendation to the Office of Financial Stability at the Treasury Department. Treasury will give considerable weight to the regulators' recommendations and decide whether or not to make the capital purchase. All completed transactions will be publicly announced within 48 hours of execution, as per the requirements of the law. We will not, however, announce any applications that are withdrawn or denied.

5) Homeownership preservation: We have begun working with the Department of Housing and Urban Development and HOPE NOW to maximize the opportunities to help as many homeowners as possible, while also protecting taxpayers. We have hired Donna Gambrell, Director of the Community Development Financial Institutions Fund and former Deputy Director of Consumer Protection and Community Affairs of the FDIC, to oversee this effort and to serve as interim Chief of Homeownership Preservation. When we purchase mortgages and mortgage-backed securities, we will look for every opportunity possible to help homeowners.

6) Executive compensation: Companies participating in Treasury's programs must adopt the Treasury Department's standards for executive compensation and corporate governance, for the period during which we hold equity issued under this program. These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers. We do not believe senior officers should be rewarded for failure. Treasury issued executive compensation guidelines on Tuesday, October 14, for three TARP programs:

A.Troubled Asset Auction Program- As prescribed by the Act, any financial institution that sells more than $300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. Treasury released Treasury Notice 2008-TAAP regarding this restriction. Furthermore, under the Act, (1) the financial institution may not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive, (2) the financial institution may not deduct certain golden parachute payments to its senior executives and (3) a 20-percent excise tax will be imposed on the senior executive for these golden parachute payments. Treasury released I.R.S. Notice 2008-94 regarding these new tax rules.

B.Capital Purchase Program- Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

C.Programs for Systemically Significant Failing Institutions- The Treasury Department may have to provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis. Treasury issued guidance for the executive compensation standards that will apply to the firms participating in such programs and their senior executives (Treasury Notice 2008-PSSFI). These standards are similar in all respects to the Capital Purchase Programs executive compensation standards described above, with one significant difference. In situations where Treasury provides assistance under the systemically significant failing institutions programs, golden parachutes will be defined more strictly to prohibit any payments at all to departing senior executives.

7) Compliance: Treasury is committed to transparency and oversight in all aspects of the program and has taken several important steps to meet the letter and spirit of our important compliance requirements.

A.Government Accountability Office: We have been meeting regularly with the Government Accountability Office to monitor the program. In addition, GAO is establishing an office at Treasury.

B.Financial Stability Oversight Board: The Financial Stability Oversight Board was established and the group selected the Chairman of the Federal Reserve Board to chair the group. While the law requires the Oversight Board to meet once a month, the Board had its second board meeting only six days later, on Monday, October 13 to review the Capital Purchase Program. The Board met again on Wednesday, October 22 to review progress of the TARP work-streams, as well as to appoint staff to the Board, including William Treacy as Executive Director, Kieran J. Fallon as General Counsel, and Jason A. Gonzalez as Secretary.

C.Special Inspector General: The Administration is working to identify and interview potential candidates to serve as Special Inspector General for potential nomination and confirmation in November. In the interim, Treasury's Inspector General has been monitoring our progress.

Recruitment

Recruiting the right people is essential to the success of this program and we continue to move quickly. It will obviously take time to bring on board permanent members of the team that will manage this program over the long term and provide stability during the transition. While the permanent team is being identified for tomorrow, we are tapping the very best, seasoned, financial veterans from across the government to help launch the program today. We have been successful in recruiting outstanding interim leaders for key positions in the Office of Financial Stability and the team continues to grow daily.

Procurement

Now, let me turn to procurement.

Our approach to procurement is based on the following strategy. First, in order to protect the taxpayers, we will seek the very best in private sector expertise to help execute this program. Second, to the extent possible, opportunities to compete for contracts and provide services should be available to small businesses, veteran-owned businesses, and minority and women-owned businesses. Third, we are taking appropriate steps to mitigate and manage conflicts of interest.

We have established formal procurement processes, to ensure that selections are fair and in the best interest of the taxpayers. In many cases, we have established expert review panels, comprised of Treasury employees, employees of other federal agencies and expert consultants who review submissions and make recommendations regarding the quality of the proposals. The review committees make recommendations for a final decision to a senior career officer in the Treasury.

As announced, Treasury has retained: The Bank of New York Mellon as our lead custodian; EnnisKnupp as our investment adviser; Simpson, Thacher and Bartlett as our legal adviser for the equity program; Pricewaterhouse Coopers and Ernst & Young for internal control and accounting services. In the coming weeks we expect to issue additional procurement requests.

Taking aggressive steps to manage conflicts of interest is essential because firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP or represent other clients who hold troubled assets. Firms competing to provide services must disclose their potential conflicts of interest and recommend specific steps to manage those conflicts. Treasury's review team evaluates firms' conflicts and their plans and ability to impose procedures to manage them. Treasury will only hire firms when we are confident in our and their ability to successfully mitigate any conflicts. Furthermore, the Office of Financial Stability has a Chief Compliance Officer who will be responsible for making certain that firms comply with agreed upon mitigation procedures.

Secretary Paulson and I believe that it is essential that the TARP be structured in a manner that encourages participation of small businesses, veteran-owned businesses, and minority and women-owned businesses. We asked vendors to demonstrate their ability and commitment to working with small, veteran, minority and women-owned businesses as sub-contractors. And we are evaluating their submissions in part on their capability to do this. In addition, we announced on Friday, October 17 subsequent guidelines for solicitations with specific opportunities for these businesses.

As you can see, we have accomplished a great deal in a short time. But our work is only beginning. A program as large and complex as this would normally take months - or even years - to establish. We don't have months or years. Hence, we are moving to implement the TARP as quickly as possible while working to ensure high quality execution.

Paulson Statement on the BSAAG Plenary

--The Treasury Department today released the following statement from Treasury Secretary Henry M. Paulson, Jr. following his meeting with the semi-annual plenary of the Bank Secrecy Act Advisory Group (BSAAG).

"I appreciate the hard work by the advisory group in helping to make the financial sector inhospitable to bad actors and their illicit funds. Terrorists, criminals, proliferators and other dangerous actors are continuously looking for cracks in our regulatory framework through which to move or store their funds without detection.

"As stewards of the financial system, we must always keep one step ahead of criminals to help protect our economic and national security. This includes remaining vigilant in protecting the financial system from abuse while continuing to address the current financial market turmoil.

"As representatives of the financial industry, regulatory community, and law enforcement, the advisory group is an important voice in the financial system. We will continue to work as partners to ensure that our financial system is safe, sound, and secure from abuse."

Export Development Bank of Iran Designated as a Proliferator

Washington, DC --The U.S. Department of the Treasury today designated the Export Development Bank of Iran (EDBI) pursuant to Executive Order 13382 for providing or attempting to provide financial services to Iran 's Ministry of Defense and Armed Forces Logistics (MODAFL).

"In response to international sanctions and the refusal of many responsible banks to do business with Iranian banks, Iran has adopted a strategy of using less prominent institutions, such as the Export Development Bank of Iran , to handle its illicit transactions." said Under Secretary for Terrorism and Financial Intelligence Stuart Levey. "Today's action exposes EDBI's role in helping Iran violate UN sanctions so that financial institutions around the world can take appropriate steps to protect themselves."

Established in 1991, the EDBI is an Iranian state-owned financial institution whose primary purpose is to serve Iran 's import and export communities. In addition, the EDBI operates as the Iranian representative for the Islamic Development Bank, a multinational institution that cultivates economic and social improvements in member nations, in accordance with Islamic law.

However, the EDBI provides financial services to multiple MODAFL-subordinate entities that permit these entities to advance Iran 's WMD programs. Furthermore, the EDBI has facilitated the ongoing procurement activities of various front companies associated with MODAFL-subordinate entities.

Since the United States and United Nations designated Bank Sepah in early 2007, the EDBI has served as one of the leading intermediaries handling Bank Sepah's financing, including WMD-related payments. In addition to handling business for Bank Sepah, the EDBI has facilitated financing for other proliferation-related entities sanctioned under U.S. and UN authorities.

Also designated today are three additional entities which were determined to be owned or controlled by or acting or purporting to act for or on behalf of, directly or indirectly, the EDBI. These entities are: the EDBI Stock Brokerage Company and the EDBI Exchange Company, both located in Iran , and Banco Internacional de Desarollo, C.A. , a financial institution located in Venezuela .

These actions were taken pursuant to Executive Order 13382, an authority aimed at freezing the assets of proliferators of WMDs and their supporters, and at isolating them from the U.S. financial and commercial systems. Designations under E.O. 13382 are implemented by Treasury's Office of Foreign Assets Control, and they prohibit all transactions between the designees and any U.S. person, and freeze any assets the designees may have under U.S. jurisdiction.

Background on Entities Previously Designated Under E.O. 13382

In October 2007, the U.S. Department of State designated MODAFL pursuant to E.O. 13382. MODAFL controls the Defense Industries Organization, an entity identified in the Annex to UNSCR 1737 and designated by the United States pursuant to E.O. 13382 on March 30, 2007.

MODAFL has ultimate authority over the Aerospace Industries Organization (AIO), an umbrella group that controls Iran 's ballistic missile research, development and production activities and organizations, including the Shahid Hemmat Industrial group (SHIG) and the Shahid Bakeri Industrial Group (SBIG). AIO, SHIG and SBIG were named in the Annex to E.O. 13382; SHIG and SBIG were also listed in the Annex to UNSCR 1737. MODAFL has publicly stated that one of its major products is the manufacture of the Shahab-3 ballistic missile.

The Treasury Department designated Bank Sepah under E.O. 13382 in January 2007 for providing financial support and services to Iran 's AIO, SHIG and SBIG. Since at least 2000, Bank Sepah has provided a variety of critical financial services to Iran 's missile industry, arranging financing and processing dozens of multimillion dollar transactions for AIO and its subordinates, including SBIG and SHIG.

Identifying Information

EXPORT DEVELOPMENT BANK OF IRAN

AKAs: EDBI

Bank Toseh Saderat Iran

Bank Towseeh Saderat Iran

Addresses: Tose'e Tower, Corner of 15 St. , Ahmad Qasir Ave. , Argentine Square , Tehran , Iran

No. 129, 21's Khaled Eslamboli, No. 1 Building, Tehran , Iran

Export Development Building , Next to the 15 Alley, Bokharest Street, Argentina Square , Tehran , Iran

C.R. No. 86936 ( Iran )

All branches worldwide

EDBI STOCK BROKERAGE COMPANY

Address: Tehran , Iran

EDBI EXCHANGE COMPANY

Address: Tehran , Iran

BANCO INTERNACIONAL DE DESAROLLO , C.A.

Address: Urb. El Rosal, Avenida Francisco de Miranda, Edificio Dozsa, Piso 8, Caracas , Venezuela , C.P. 1060

Tax Identification: RIF No. J294640109 ( Venezuela )

SWIFT/BIC No: IDUNVECA

Note: Banco Internacional de Desarrollo, C.A. is a separate and distinct entity from Banco Interamericano de Desarrollo, known in English as the Inter-American Development Bank (IADB) and Banco Desarrollo Economico y Social De Venezuela (BANDES), an entity owned by the Government of Venezuela.

Secretary Henry M. Paulson, Jr. Remarks on China and the Global Economy to the National Committee on U.S.-China Relations

New York - Good evening. Thank you, Carla, and thanks to all of you at the National Committee for the exceptional work that you do for U.S. – China relations. As we approach the 30-year anniversary of a turning point in U.S. and Chinese history, we also recall the strategic vision of the National Committee and its role in the historic 1971 ping-pong exchange that helped make resumption of normalized relations possible. Through visions such as yours, the American and Chinese people began to understand one another and to see the benefits – indeed, the necessity – of normalization.

I am pleased to accept this award in recognition of the work so many have done to forward the U.S. – China relationship. This is critically important and I am grateful to see so many people here this evening who have led this effort, including my friend Duncan Niederauer. Congratulations to you, Duncan, for your well-deserved recognition as well.

My remarks will focus on the future of our economic relationship with China. We will soon have a new U.S. President who will face the continuing challenge and opportunity of responding to China's emergence as a global economic leader.

Responses to Current Global Financial Market Turmoil

The world's financial markets are undergoing the most serious stresses in recent memory and this financial crisis has begun to negatively impact real economies here and around the world. China is feeling this stress as well, but fortunately its economy is expected to continue to be an important engine for global growth during this period. In the United States, recent collaborative actions by the Federal Reserve, the FDIC and the Treasury clearly demonstrate that our government will do what is necessary to significantly strengthen our banks and financial institutions, enabling them to increase financing for the consumption and business investments that drive U.S. economic growth. Through a multitude of powerful actions we have and will demonstrate our commitment to unlocking our credit markets and minimizing the impact of the current instability on the rest of the U.S. economy.

Addressing the effects of financial market turmoil around the world requires the dramatic steps we are taking here in the United States, and it requires close international corroboration and cooperation. We have been in close contact with Chinese leaders, as well as with leaders of many other nations. And we welcome Premier Wen's statement that China will play a constructive and cooperative role in global efforts to deal with the current financial market turmoil. Throughout this turbulent time, I have stayed in close touch with Vice Premier Wang Qishan, who has now been appointed to lead China's newly established international financial crisis committee. Our conversations have been useful and constructive. It is clear that China accepts its responsibility as a major world economy that will work with the United States and other partners to ensure global economic stability.

Governments must continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions through the provision of capital and the disposition of troubled assets, prevent markets abuse, and protect the savings of their citizens. We must also take care to ensure that our actions are closely coordinated and communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole.

Ten days ago leaders from the world's 20 largest economies met in Washington and found ways to further enhance our collective efforts to lessen the effects of global market turmoil. Those meetings brought concrete actions that have supported world markets. I am heartened that the international community is working together for stability and to regain a footing of confidence. As confidence returns to the system, normal financial activities will resume. And we are all grateful for President Bush's leadership during this time. As the President said on Friday, "The American people…can have confidence that this economy will recover. We're a country where all people have the freedom to realize their potential and chase their dreams." As the President knows, Americans are a strong and optimistic people. Although we expect current challenges to continue for a number of months, we will overcome them as we have overcome every challenge our Nation has ever faced.

A Strong Future for U.S. – China Economic Relations

We will elect a new president two weeks from today, and our new President should start from the perspective that China will continue to play a key role in the world economy. As a matter of fact, today more than ever the world is looking to China to be a big contributor to global economic growth. While some see China as a threat that must be countered or contained, I believe that the only path to success with China is through engagement. We must recognize that China's growth is an opportunity for U.S. companies and consumers, for our producers, exporters and investors. A stable, prosperous and peaceful China is in the best interest of the Chinese people, the American people and the rest of the world.

U.S.-China relations are more productive today than ever before, largely because we have engaged China as it is, not as we might wish or imagine it to be. We have acted to lessen misperceptions and miscommunication between our countries.

An important part of the engagement has been through the Strategic Economic Dialogue established in 2006 by President Bush and President Hu. We have worked from the understanding that robust and sustained economic growth is a social imperative for China and that Beijing views its international interactions primarily through an economic lens. We have worked with Beijing on economic issues that are of mutual interest, and we have found that we can produce tangible results in both economic and noneconomic areas. Our recent close and frequent communication and cooperation as we address the challenges in the financial markets is a tangible example of the power and utility of a Strategic Economic Dialogue based on mutual trust

Over the past two years we have built a strong foundation for this dialogue by focusing on policy areas in which China's reform agenda and U.S. interests intersect. The SED has found new and constructive ways to address some of the most important matters in our economic relationship --- including growth imbalances, energy security and environmental sustainability, trade and investment issues, product safety, and China's position in the world economy. Addressing these questions serves China's interests, and is also vital to the U.S. and global economic future.

One of the SED's major achievements is the Ten Year Energy and Environment Cooperation Framework. This framework is a bilateral mechanism to create a new energy-efficient model for sustainable economic development and to address the factors that cause climate change. Greater breakthroughs can be expected in the years ahead, and this framework provides the next administration a critically important platform for U.S. economic engagement with China.

Trade and investment, once the glue of U.S. -Chinese relations now also represent a source of increased tension. Any dynamic economy that is constantly creating new, higher-value jobs faces factory closings and job losses that are real and painful. The benefits of free trade are often spread across an entire country, while the lost jobs are more immediately visible. But succumbing to the temptation to make trade and foreign investment a scapegoat only breeds support for isolationist policies that will make us worse off, sacrificing future job opportunities and higher standards of living.

American investors in China, and Chinese investors in America, question whether the other country is truly open to investment and provides adequate legal protections. To answer this question, we sent a powerful and clear signal at the June SED meeting by launching negotiations of a U.S. - China bilateral investment treaty. Through these negotiations, we seek to assure our people and the world that our two nations welcome investment and will treat each other's investors in a fair and transparent manner. And we will work even harder to resolve a critical issue for American companies working in China --- better enforcement of intellectual property laws, to help China on its path to become an innovation society, while accelerating the development and competitiveness of its economy.

In the area of product safety, we have made real progress but need to intensify our work together to enhance China's regulatory and legal infrastructure, to help them build quality into each stage of the manufacturing and distribution process.

In the financial sector, we have worked steadily to help China develop and open up its institutions. Some in China look at the recent failures in our financial markets and conclude that they should slow down their reforms. But there is a great opportunity for China to learn from our significant mistakes and move forward with reforms that have the potential to produce important gains for China and its people.

For example, a capital markets reform agenda will advance China's economic goals in four important ways. It will rebalance the sources of China's growth to ensure that it is more harmonious, more energy and environmentally efficient, and provides greater welfare for Chinese households. It will create effective macroeconomic policy tools to ensure stable, non-inflationary growth. It will support China's transition to a market-driven and innovation-based economy; and, finally, it will assist China in dealing with its demographic challenges.

The SED has also provided an excellent forum for discussing the value of the RMB; I am pleased that China has appreciated the RMB by over 20 percent since July of 2005.

More Progress is Possible

The SED has shown that active economic engagement between the highest levels of U.S. and Chinese leadership can keep our relationship on an even keel even as we tackle our most challenging issues and manage short-term tensions.

Chinese leaders understand that if the SED is to be sustained, it must be more than talk; it must continue to yield specific, tangible results, what I call signposts along the path toward transformational reform. We look forward to further progress in the on-going discussions with Chinese officials and at our next SED meeting in Beijing in December.

The successes of the SED in the past two years have created a foundation of mutual understanding and trust and a platform for further progress. And perhaps most importantly the SED has established a new model for communication, enabling us to address urgent issues such as turmoil in our financial markets, energy security and climate change. I hope that the next U.S. president will expand on the SED to take U.S.-Chinese relations to the next level. Thank you.

Treasury Hires Accounting Firms Under the Emergency Economic Stabilization Act

Washington- The U.S. Treasury Department today announced that PricewaterhouseCoopers LLP and Ernst & Young will assist the Department in the implementation of the Troubled Asset Relief Program authorized under the Emergency Economic Stabilization Act. Treasury hired PricewaterhouseCoopers on Thursday and hired Ernst & Young on Saturday.

The firms will help the Department with accounting and internal controls services needed to administer the complex portfolio of troubled assets the Department will purchase, including whole loans and mortgage backed securities. PricewaterhouseCoopers will help the Department establish a sound internal control posture and Ernst & Young will provide general accounting support and expert accounting advice.

The two agreements last until September 30, 2011. Treasury issued two requests for quotes from 12 firms on the General Services Administration's Federal Supply Schedules on October 8. The Department received six responses for each request and awarded contracts to PricewaterhouseCoopers and Ernst & Young. The initial orders are worth $191,469.27 and $492,006.95, respectively. More information on these contracts will be posted at https://www.fpds.gov (Federal Procurement Data System).

Treasury, Regulators Issue Additional Guidance on Capital Purchase Program

Washington, DC-- Treasury, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation today issued application guidelines and other documents for the Capital Purchase Program announced last week. Attached are application guidelines, an application form and a Frequently Asked Questions document to provide additional details.

-30-

REPORTS

	Application Guidelines for Capital Purchase Program
	FAQs for Capital Purchase Program

Small Business Participation

Washington - Treasury today released the following document on the procurement process for small business participation in the implementation of the Emergency Economic Stabilization Act of 2008.

REPORTS

Small Business Participation

Deputy Secretary Kimmitt to Announce $3.5 Billion in Tax Credits
for
Low-Income Community Investment

U.S. Treasury Deputy Secretary Robert M. Kimmitt and Treasury's Community Development Financial Institutions (CDFI) Fund Director Donna J. Gambrell will award on Monday $3.5 billion in tax credits to organizations investing in rural and urban low-income communities across the United States. The awards are being made under the 2008 round of the New Markets Tax Credit Program.

Deputy Secretary Kimmitt and CDFI Fund Director Gambrell will highlight the work of four local Washington, DC organizations receiving New Markets Tax Credits and on how allocatees are serving rural low-income communities.

The following event is open to credentialed media:

Who
Deputy Treasury Secretary Robert M. Kimmitt
CDFI Fund Director Donna J. Gambrell

What
National New Markets Tax Credit Program Award Announcement

When
Monday, October 20, 11:00 AM (EDT)

Where
Cash Room
U.S. Department of the Treasury
Washington, DC

Note
Media without Treasury press credentials should contact Frances Anderson at (202) 622-2960 or Frances.Anderson@do.treas.gov with full name, Social Security number, and date of birth.

About the New Markets Tax Credit Program
The NMTC Program, established by Congress in December 2000, provides individual and corporate taxpayers with a credit against federal income taxes for making qualified equity investments in investment vehicles known as Community Development Entities (CDEs). Substantially all of the taxpayer's investment must be used by the CDE to make qualified investments supporting certain business activities in low-income communities. More information on the NMTC program can be found at www.cdfifund.gov.

G-7 Finance Ministers and Central Bank Governors Plan of Action

Washington-- The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:

Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.
Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF's critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.

Paulson Statement on Emergency Economic Stabilization Act

Washington- By acting this week, Congress has proven that our Nation's leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.

The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.

This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.

We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.

Under Secretary David H. McCormick Remarks at
Wharton’s Eleventh Annual Investment Management Conference

Responding to Today’s Market Turmoil

Philadelphia - These are incredibly challenging and unprecedented times for the United States. Over the last twelve months, we have witnessed one of the most significant periods of economic turmoil that has ever faced our country, and I have had the opportunity to see first hand how our country's leaders have responded. Today I'd like to share my views on how we arrived at this place, what we have done about it up to this point, and what else we must do to stabilize our markets and ensure America's long term prosperity.

The seeds of the challenges we face today were sown many years ago, beginning with a gradual weakening of lending practices by banks and financial institutions and by greater willingness by borrowers to take out mortgages they couldn't afford. These factors, combined with growing complexity and opaqueness in our capital markets, are at the heart of the current crisis.

We are now paying the price. We've seen the results for homeowners in higher foreclosure rates affecting individuals and neighborhoods. We are now seeing the impact on struggling financial institutions. These weak loans started a chain reaction, and in recent weeks, our credit markets have tightened dramatically with even some non-financial companies around the country having difficulties financing their day-to-day business operations. These effects are already beginning to trickle down and affect all parts of the U.S. economy.

In response to this worsening situation, the U.S. government has taken bold and decisive actions in recent months to stabilize the markets, mitigate the impact on our financial system and the U.S. economy, and address the underlying sources of market uncertainty.

Root Causes of the Market Turmoil

How did we get to this point? The story begins with a decade of benign economic conditions marked by low interest rates, low inflation, and less volatile asset markets, which led many to ignore the "risk" half of the risk-reward equation at the heart of financial markets. Investors around the world, who in preceding years had enjoyed above-historical returns on most assets, continued reaching for ever-higher gains. The financial-services industry created a variety of complicated new products to meet this demand. Regulators and investors alike showed a growing complacency toward risk. These factors blended into a dangerous cocktail of underlying conditions ripe for instability.

This imbalance between risk and reward was most evident in the U.S. housing market, where lenders significantly loosened credit standards, particularly for a new generation of adjustable-rate mortgages. Yet aggressive financial innovation went well beyond mortgages. Banks and brokers created an alphabet soup of products with simple names like CDOs, CLOs, and SIVs, which were in fact complex and opaque investment products and structures. Credit-rating agencies responsible for assessing and rating these assets, as well as investors who purchased them, failed to question the chances of these underlying investments going bad.

Last summer these vulnerabilities in our financial system became clear. Looser credit standards in the housing market combined with an end to rapid home-price appreciation led to a significant rise in delinquent mortgages. This in turn contributed to immediate and unexpected losses for investors and a reconsideration of the risk-reward relationship--first in housing, and soon after, across all asset classes. The shaken investor confidence in housing assets had a domino effect throughout world markets, ratcheting up demand for cash and liquidity, and curtailing the pace of the new lending and investment necessary for strong growth to continue.

Actions to Mitigate Risk and Stabilize Markets

Recognizing the risk to the U.S. economy of the housing downturn, the Administration and Congress acted quickly earlier this year to pass a $150 billion stimulus bill. At Treasury, we brought together mortgage providers through the HOPE NOW alliance to help families avoid foreclosure on their homes. Yet, as we seek to minimize the impact of the housing correction on the economy, we must avoid impeding its progress. The sooner we turn the corner on housing, the sooner we will see home values stabilize, the sooner we will see more people buying homes, and the sooner housing will once again contribute to economic growth.

In the financial markets, progress has not moved in a straight line, and additional challenges clearly lie ahead. There have been some positive developments. In the past year, for example, U.S. financial institutions (often under new management) have recorded losses of over $300 billion and raised over $200 billion in new capital. Yet, the events of the last few weeks – where we have acted on a case-by-case basis to address destabilizing financial conditions in a number of institutions – demonstrate continued weakness across the financial services sector.

In March, the Federal Reserve took unprecedented action to ensure an orderly resolution for Bear Stearns, and in September, authorities around the world took steps to mitigate the impact of the bankruptcy of Lehman Brothers, America's fourth largest investment bank. That same week, the Federal Reserve provided funding to American International Group (AIG) to address the systemic risk that would have resulted from a sudden collapse of the firm. And last week, the FDIC brokered a deal and supported the sale of Wachovia's banking operations to Citigroup in order to prevent its failure following the earlier collapse of Washington Mutual. In each of these cases, policymakers attempted to strike a careful balance of mitigating systemic risk while promoting market discipline, holding investors and management teams responsible, while protecting blameless consumers from collateral damage.

And we are not alone. Europe and Asia are also suffering through their own financial turmoil. In recent days, the United Kingdom, Iceland, Belgium, the Netherlands, Luxemburg, France and Germany have all intervened to support troubled institutions. And last week, we also saw how rumors precipitated a run on Hong Kong's Bank of East Asia. We see from these examples that our financial markets are more global and more interdependent than at any time in history.

The cases of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, deserve special mention, particularly given their significance to investors around the world. The GSEs have become the largest sources of mortgage finance in the United States, touching roughly 70 percent of mortgages originated. Not surprisingly, the prolonged housing correction weakened their financial condition, and both institutions faced a loss of investor confidence. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that if either of them were to fail, it would have far reaching effects on the U.S. and global economies. Business finance would be more difficult to obtain, constraining job creation and making it harder for Americans to get home loans, auto loans, and consumer credit.

This past summer, investors began to express growing concerns over the stability of Fannie and Freddie and the ambiguity over the scope and certainty of government support for these institutions. In response, Secretary Paulson asked Congress for authorities regarding Fannie Mae and Freddie Mac in order to help stabilize our financial markets and support our housing market. Congressional leaders acted promptly and decisively with the needed legislation, and in the days and weeks that followed, Jim Lockhart, the director of the GSE's regulator, the Federal Housing Finance Agency (FHFA), Federal Reserve Chairman Bernanke, and Secretary Paulson concluded they needed to act decisively to avert instability in our markets. As a first critical step, the FHFA put Fannie and Freddie into conservatorship, allowing for the government to take temporary control and make needed changes at both institutions.

In a complementary step, Treasury established contractual Preferred Stock Purchase Agreements with both institutions under which it committed up to $100 billion per institution to ensure that each GSE maintains a positive net worth. These Preferred Stock Purchase Agreements are intended to explicitly address the underlying ambiguities in the GSE Congressional charters and to give the holders of Fannie Mae and Freddie Mac debt confidence in the promise of government support for their investments. Because the U.S. Government created these ambiguities and the resulting uncertainty, Secretary Paulson felt strongly that we had a responsibility to address the systemic risk posed by the scale and breadth of the agency debt.

The terms of these purchase agreements provide taxpayers significant protection. The existing common and preferred shareholders of the GSEs will lose 100 percent of their investment before the American taxpayers lose a penny. Moreover, as part of the terms of the agreement, Treasury has received from each company $1 billion in senior preferred stock and warrants providing options to purchase up to 79 percent of the companies' outstanding shares.

Second, Treasury established a new, temporary credit facility for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank to fund, if necessary, their regular business activities. Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase mortgage-backed securities issued by the GSEs, thereby providing additional capital to the mortgage marketplace.

These steps are the best means of protecting taxpayers and stabilizing our markets, but they leave for future policymakers fundamental decisions about the role and structure of these enterprises. Our recent actions have afforded a "time out" – providing the stability, time, and flexibility for Congress and the next Administration to address the inherent conflict in the GSE charters that require them to serve the interests of private investors and the broader public.

A Comprehensive Policy Response

Despite the hardening of the government's support and involvement in Fannie Mae and Freddie Mac, and the decisive resolutions of Bear Stearns, Lehman Brothers, AIG, Washington Mutual, and Wachovia, investors have become increasingly concerned over the possibility of other failing financial institutions. And, this has made them increasingly reluctant to extend credit.

This has led to sharp increases in the cost of credit for financial and non-financial companies, increasing the risk that corporate America would be unable to roll over maturing corporate debt. Given this environment, it was necessary for U.S. authorities to act decisively and comprehensively to provide capital, liquidity, and smooth market operations with the goals of stabilizing the markets and addressing the underlying sources of uncertainty. The three components of the plan rolled out two weeks ago by Secretary Paulson and Chairman Bernanke seek to achieve these goals.

First, central banks from around the world have acted together to provide additional liquidity for financial institutions. The Federal Reserve has established swap lines with nine central banks to reduce pressures in global short-term U.S. dollar markets. Additionally, Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry, which has experienced funding problems in recent weeks. This temporary $50 billion guaranty program offers government insurance that was previously unavailable in order to address concerns about whether these investments are safe and accessible.

Second, we have put forward a plan to provide much needed capital to address the root causes of the current stress in our financial system – the ongoing housing correction and the consequent buildup of illiquid mortgage-related assets. These troubled assets remain frozen on the balance sheets of banks and other financial institutions, constraining the flow of credit that is so vitally important to our economic growth. The failure to address this root cause would mean that every aspect of our financial and funding markets, ranging from consumer credit to money market funds, would continue to be impaired.

The Administration has worked with Congress to develop a $700 billion comprehensive program for addressing the problem of these illiquid assets on the balance sheets of institutions within the financial system. This will help reduce an enormous source of uncertainty in the markets and stimulate the raising of capital within the financial services sector. In addition, the bill will help ensure the availability of credit so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. A failure to act comprehensively and decisively could have dire consequences for the U.S. economy and all Americans. This plan also sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system.

Third, we have taken steps to improve market operations and market integrity. As an example, the Securities and Exchange Commission took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The SEC's exceptional actions were joined by regulators in the UK, France, Germany, and other countries who also imposed restrictions on short selling.

A Possible Turn Inward

In addition to the things we must do, there are also things we must avoid. Our recent downturn has contributed to a climate of increased distrust and anxiety among Americans that is fueling support for protectionist policies. The benefits of trade and open investment are being openly questioned across the political spectrum, and this rhetoric is particularly pronounced on Capitol Hill. There is reluctance, for example, to pass the pending trade agreements with Colombia, Panama, and Korea, and there are concerns over foreign investment in U.S. companies, despite the clear and unequivocal benefits of both to the United States. These trends, dangerous at any time, could be devastating in this period of heightened market uncertainty and fragility.

This trend is all the more concerning because trade and investment play such an important role in the competitiveness and success of the U.S. economy. Overseas sales by U.S. companies account for about 50 percent of all U.S. exports, and the profit growth of U.S. companies comes chiefly from the global sales. Remarkably, exports now account for 13% of the U.S. GDP – the highest level in history. Moreover, foreign-owned firms in the US employ more than 5 million workers directly and another 5 million indirectly, and these jobs pay on average a quarter more than jobs created by U.S.-owned companies.

However, these facts are understandably lost on many Americans who have been negatively affected by the dynamism and speed of global markets. With this in mind, we must work to build public support for openness in this era of globalization, even as we acknowledge and take steps to mitigate some of its negative consequences of dynamic global competition. This too must be a priority as we work through the economic challenges that lie ahead.

Conclusion

Ladies and Gentleman, now is the time to act quickly, decisively, and collaboratively with regulators and market participants around the world to restore stability and confidence to our markets. It will no doubt take time to work through the excesses that were built up over a number of years. U.S. policymakers are decisively implementing policies that address our short-term economic challenges and rebuild faith in the market. When we emerge from this difficult period – and we will emerge both wiser and stronger – our next task will be to strengthen our financial regulatory structure to guard against such excesses in the future.

The interdependence of our global economy makes this challenge more complex, and it also makes our work with international counterparts to promote growth and financial stability all the more important. I'm confident that our leaders and our great country are up to this pressing challenge.

Thank you.

Treasury Designates Corporate Network Tied
to the Amezcua Contreras Organization

Washington, D.C.– The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today named 10 individuals and six companies tied to the Amezcua Contreras Organization, a major Mexican drug trafficking organization, as Specially Designated Narcotics Traffickers (SDNTs). The designees, all based in Mexico , are now subject to economic sanctions pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act).

"We are further sanctioning the Amezcua Contreras Organization today to degrade and dismantle its network of associates and companies producing methamphetamines for distribution in the United States and elsewhere. We applaud the Mexican authorities' recent seizures of illicit pseudoephedrine shipments, and will continue to take steps in support of their efforts to target the diversion of methamphetamine precursor materials" said OFAC Director Adam J. Szubin.

Today's designation includes key Amezcua Contreras associates Adan Amezcua Contreras, Jaime Ladino Avila, Patricia Amezcua Contreras, Gerardo Alvarez Vazquez, and Telesforo Baltazar Tirado Escamilla, owner of Productos Farmaceuticos Collins, S.A. de C.V. Today's designation also includes Jalisco businessman Carlos Lomeli Bolanos, who reportedly assisted in the illicit diversion of methamphetamine precursor materials to the Amezcua Contreras Organization. Included as well are Javier Pulido Valdivia and Rosalinda Rendon Poblete, the owner and general director, respectively, of Laboratorios Willmar, S.A. de C.V., and Luis Alfonso Tirado Diaz and Rolando Tirado Diaz, both senior managers at Productos Farmaceuticos Collins, S.A. de C.V.

The financial and supply network included among today's designations is comprised of companies in the Mexican states of Jalisco and Baja California, including three pharmaceutical companies, Productos Farmaceuticos Collins, S.A. de C.V.; Laboratorios Willmar, S.A. de C.V., and Lomedic, S.A. de C.V.; a natural health products company, Salud Natural Mexicana, S.A. de C.V.; an automobile parts store, American Tune Up, S.A. de C.V.; and a pharmacy company, Farmacia Jerlyne, S.A. de C.V.

On June 1, 2000, the President identified Jose de Jesus and Luis Ignacio Amezcua Contreras as significant foreign narcotics traffickers pursuant to the Kingpin Act. They are currently imprisoned in Mexico . The Amezcua Contreras Organization, which the President identified as a significant foreign narcotics trafficker on June 1, 2006, continues to produce methamphetamine in Mexico and distribute it to the United States . The Amezcua Contreras Organization controls a network of businesses in Mexico that supplies precursor materials for methamphetamine production. Most notably, multiple tons of pseudoephedrine-based cold medicines that were manufactured or purchased by some of the companies designated today were illicitly diverted to the Amezcua Contreras Organization for the purpose of manufacturing methamphetamine.

This action is part of ongoing efforts under the Kingpin Act to apply financial measures against significant foreign narcotics traffickers worldwide. Internationally, more than 475 businesses and individuals associated with 75 drug kingpins have been designated by OFAC pursuant to the Kingpin Act since June 2000.

Today's designation would not have been possible without key support from the Drug Enforcement Administration (DEA), Mexico .

The designation action freezes any assets the 16 designees may have under U.S. jurisdiction and prohibits U.S. persons from conducting transactions or dealings in the property interests of the designated individuals and entities. Penalties for violations of the Kingpin Act range from civil penalties of up to $1,075,000 per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines up to $5,000,000. Criminal fines for corporations may reach $10,000,000. Other individuals face up to 10 years in prison for criminal violations of the Kingpin Act and fines pursuant to Title 18 of the United States Code.

Statement by Secretary Paulson on the Sale of Wachovia Bank

Washington – Treasury issued the following statement by Secretary Henry M. Paulson, Jr. on the sale of Wachovia Bank:

"I commend the action taken by Chairman Bair and the FDIC today to facilitate the sale of Wachovia Bank to Citigroup in an orderly fashion to mitigate potential market disruptions. I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk. As a result of this transaction, all Wachovia depositors will be protected and Wachovia's senior and subordinated debt will be assumed by Citigroup. The FDIC's actions help to mitigate potential systemic risk to our financial system. As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy."

Statement by Secretary Henry M. Paulson, Jr. on Emergency Economic Stabilization Act

Washington, DC -- Treasury issued the following statement by Secretary Henry M. Paulson, Jr. on the Emergency Economic Stabilization Act of 2008:

I thank my colleagues on both sides of the aisle for their hard work over a very short time period to craft strong legislation that will enable us to strengthen our financial markets and promote the flow of credit to businesses and consumers that is so vital to our economic growth and prosperity. This bill provides the necessary tools to deploy up to $700 billion to address the urgent needs in our financial system, whether that be by purchasing troubled assets broadly, insuring troubled assets, or averting the potential systemic risk from the disorderly failure of a large financial institution. I am confident this legislation gives us the flexibility to unclog our financial markets and increase the ability of our financial institutions to deliver the credit that will help create jobs. We are taking the steps needed to be ready to begin implementing this legislation as soon as it is signed.

Members on both sides were focused on the right things – creating an effective program that can be implemented quickly and effectively, and doing everything possible to protect the taxpayers.

Quick, effective and bipartisan action sends a signal to investors large and small, here and abroad, that we are committed to taking the necessary actions to protect our financial system and our economy. The American people will recognize the leadership you have all shown to protect them – to preserve their access to credit, and preserve jobs.

Testimony by Secretary Henry M. Paulson, Jr.
before the Senate Banking Committee
on Turmoil in US Credit Markets: Recent Actions regarding
Government Sponsored Entities, Investment Banks and
other Financial Institutions

Washington, DC--Chairman Dodd, Senator Shelby, members of the committee, thank you for the opportunity to appear before you today. I appreciate that this is a difficult period for the American people. I also appreciate that Congressional leaders and the Administration are working closely together so that we can help the American people by quickly enacting a program to stabilize our financial system.

We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy.

The events leading us here began many years ago, starting with bad lending practices by banks and financial institutions, and by borrowers taking out mortgages they couldn't afford. We've seen the results on homeowners – higher foreclosure rates affecting individuals and neighborhoods. And now we are seeing the impact on financial institutions. These bad loans have created a chain reaction and last week our credit markets froze – even some Main Street non-financial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy.

As we've worked through this period of market turmoil, we have acted on a case-by-case basis --- addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. We have also taken a number of powerful tactical steps to increase confidence in the system, including a temporary guaranty program for the U.S. money market mutual fund industry. These steps have been necessary but not sufficient.

More is needed. We saw market turmoil reach a new level last week, and spill over into the rest of the economy. We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.

And that root cause is the housing correction which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth.

We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.

The market turmoil we are experiencing today poses great risk to US taxpayers. When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.

The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.

Over these past days, it has become clear that there is bipartisan consensus for an urgent legislative solution. We need to build upon this spirit to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don't have broad support. This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.

Earlier this year, Congress and the Administration came together quickly and effectively to enact a stimulus package that has helped hard-working Americans and boosted our economy. We acted cooperatively and faster than anyone thought possible. Today we face a much more challenging situation that requires bipartisan discipline and urgency.

When we get through this difficult period, which we will, our next task must be to address the problems in our financial system through a reform program that fixes our outdated financial regulatory structure, and provides strong measures to address other flaws and excesses. I have already put forward my recommendations on this subject. Many of you also have strong views, based on your expertise. We must have that critical debate, but we must get through this period first.

Right now, all of us are focused on the immediate need to stabilize our financial system, and I believe we share the conviction that this is in the best interest of all Americans.

Thank you.

Statement by G-7 Finance Ministers and Central Bank Governors on Global Financial Market Turmoil

Washington, DC-- The Group of Seven Finance Ministers and Central Bank Governors released the following statement today:

The G-7 held a conference call today to discuss global financial markets. We reaffirm our strong and shared commitment to protect the integrity of the international financial system and facilitate liquid, smooth functioning markets, which are essential for supporting the health of the world economy.

We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilizing financial institutions. We also strongly welcome the measures taken by other G-7 countries. Major central banks have been coordinating to address liquidity pressures in funding markets, which has been critical in addressing disruptions in global financial markets. Several regulators have taken decisive actions to combat market manipulation and stabilize financial markets, including a temporary ban on short selling of financial stocks.

We recognize the importance of making regulation more effective and bringing investors back into a liquid and stable marketplace. We remain committed to full and rapid implementation of the Financial Stability Forum (FSF) recommendations to enhance the resilience of the global financial system for the longer term. We look forward to the FSF report this fall on progress made in strengthening prudential supervision and regulation, improving firms' risk management practices, enhancing disclosure and transparency, and strengthening accounting frameworks.

We pledge to enhance international cooperation to address the ongoing challenges in the global economy and world markets and maintain heightened close cooperation between Finance Ministries, Central Banks and regulators. We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system.

FACT SHEET:
Proposed Treasury Authority to Purchase Troubled Assets

Washington – The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth. The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.

Management and Disposition of the Assets. The assets will be managed by private asset managers at the direction of Treasury to meet program objectives. Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets. Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers.

Funding. Funding for the program will be provided directly by Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly. As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement. (http://www.fms.treas.gov/dts/)

Reporting. Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate

Statement by Secretary Henry M. Paulson, Jr. on Comprehensive Approach to Market Developments

Washington, DC-- Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many Members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with the Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.

Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans – their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs – depends on our ability to restore our financial institutions to a sound footing.

Treasury Announces Guaranty Program for Money Market Funds

Washington- The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below.

Money market funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system.

Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets. In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets. Absent the provision of such financing, there is a substantial risk of further heightened global instability.

Maintenance of the standard $1 net asset value for money market mutual funds is important to investors. If the net asset value for a fund falls below $1, this undermines investor confidence. The program provides support to investors in funds that participate in the program and those funds will not "break the buck".

This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss. Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.

The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934. This Act authorizes the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found at http://www.treas.gov/offices/international-affairs/esf/.

Treasury Designates Iranian Military Firms

Washington - The U.S Department of the Treasury today designated six Iranian military firms that are owned or controlled by entities previously designated for their roles in Iran's nuclear and ballistic missile programs, including Iran's Ministry of Defense and Armed Forces Logistics (MODAFL) and Defense Industries Organization (DIO).

"Iran attempts to shield its procurement activities behind a maze of entities, essentially hoodwinking those still doing business with Iran into facilitating illicit transactions for the transport of dual use, missile-related items," said Stuart Levey, Under Secretary for Terrorism & Financial Intelligence.

Iran Electronics Industries , Shiraz Electronics Industries , Iran Communications Industries , Iran Aircraft Manufacturing Industrial Company , Farasakht Industries, and Armament Industries Group were designated today pursuant to Executive Order 13382, an authority aimed at freezing the assets of proliferators of weapons of mass destruction and their supporters, and at isolating them from the U.S. financial and commercial systems. Designations under E.O. 13382 are implemented by Treasury's Office of Foreign Assets Control and they prohibit all transactions between the designees and any U.S. person, and freeze any assets the designees may have under U.S. jurisdiction.

Treasury prepared these designations in close coordination with the Commerce Department's Bureau of Industry and Security as well as the Justice Department. The designations complement Commerce's and Justice's criminal investigation of Iranian procurement front companies.

Iran Electronics Industries , as well as two subsidiary organizations, Shiraz Electronics Industries and Iran Communications Industries , are being designated because they are owned or controlled by Iran's MODAFL. MODAFL, which was designated under Executive Order 13382 on October 25, 2007, controls other previously designated entities DIO, and Aerospace Industries Organization, which is the overall manager and coordinator of Iran's missile program.

Iran Electronics Industries (IEI) offers a diversified range of military products including electro-optics and lasers, communication equipment, telecommunication security equipment, electronic warfare equipment, new and refurbished radar tubes, and missile launchers. IEI manufactures military tactical communication systems and also electronic field telephones and switchboards. IEI also manufactures night vision systems and laser range finders in addition to binoculars and periscopes.

Shiraz Electronics Industries is engage in the production of various electronics equipment for the Iranian military, including radars, microwave electron vacuum tubes, naval electronics, avionics and control systems, training simulators, missile guidance technology, and electronic test equipment.

Iran Communications Industries (ICI) is Iran's leading manufacturer of military and civilian communication equipment and systems. ICI offers more than seventy-five products, including tactical communications and encryption systems that meet a wide range of the Iranian military's requirements.

Iran Aircraft Manufacturing Industrial Company (HESA) is being designated because it is owned or controlled by MODAFL, and also because it has provided support to the Iranian Revolutionary Guard Corps (IRGC). The IRGC, which was designated under Executive Order 13382 on October 25, 2007, is considered to be the military vanguard of Iran and has been outspoken about its willingness to proliferate ballistic missiles capable of carrying WMD.

HESA utilizes its own facilities for the inspection, maintenance, repair overhaul research, development, and manufacture of military and civilian aircraft and related military logistic systems. HESA conducts research on, development of, production of, and flight operations for unmanned aerial vehicles (UAVs) in Iran. The IRGC utilizes the "Ababil" UAV, manufactured by HESA. HESA produces different variants of the Ababil UAV, which can be used for surveillance and attack. Farasakht Industries is a subsidiary of HESA that specializes in the manufacturing of various aerospace tools and equipment.

Armament Industries Group is also being designated because it is owned or controlled by and acts on behalf of Iran's DIO. Armament Industries Group is directly subordinate to DIO and is known to manufacture arms such as gun howitzers, multiple rocket launchers, sniper rifles and a variety of machine guns. DIO was designated under Executive Order 13382 on March 30, 2007, for having engaged in activities that materially contribute to the development of Iran's nuclear and missile programs.

Identifying Information

ARMAMENT INDUSTRIES GROUP
AKA:
"AIG-Armament Industries Group"

Addresses:
Pasdaran Ave., P.O. Box 19585/777
Tehran, Iran
Sepah Islam Road, Karaj Special Road Km 10, Iran

FARASAKHT INDUSTRIES
Address:
P.O. Box 83145-311, Kilometer 28, Esfahan -- Tehran Freeway
Shahin Shahr, Esfahan, Iran

IRAN AIRCRAFT MANUFACTURING INDUSTRIAL COMPANY

AKAs:
HESA
Hava Peyma Sazi-E Iran
Hevapeimasazi;
Havapeyma Sazi Iran
Havapeyma Sazhran
Iran Aircraft Manufacturing Industries
Karkhanejate Sanaye Havapaymaie Iran
Iran Aircraft Manufacturing Company
IAMCO
IAMI
HESA Trade Center

Address:
P.O. Box 83145-311, 28 km Esfahan -- Tehran Freeway
Shahin Shahr, Esfahan, Iran

Shahih Shar Industrial Zone Isfahan, Iran

P.O. Box 81465-935, Esfahan, Iran

P.O. Box 8140, No. 107 Sepahbod Gharany Ave, Tehran, Iran

P.O. Box 14155-5568, No. 27 Shahamat Ave, Vallie Asr Sqr,
Post Code 15946, Tehran, Iran

IRAN COMMUNICATION INDUSTRIES
AKAs:
ICI
IRAN COMMUNICATIONS INDUSTRIES GROUP
SANAYE MOKHABERAT IRAN

Addresses:
P.O. Box 19295-4731, Pasdaran Avenue, Tehran, Iran

P.O. Box 19575-131, 34 Apadana Avenue, Tehran, Iran

Shahid Langari Street, Nobonyad Square Ave., Pasdaran, Tehran, Iran

IRAN ELECTRONICS INDUSTRIES
AKAs:
IEI
Sanaye Electronic Iran
Sasad Iran Electronics Industries
Sherkat Sanayeh Electronics Iran

Company Registration Number:
829

Addresses:
P.O. Box 19575-365
Shahied Langari Street, Noboniad Sq, Pasdaran Aye, Saltanad Abad, Tehran, Iran

P.O. Box 71365-1174, Hossain Abad/Ardakan Road, Shiraz, Iran

SHIRAZ ELECTRONICS INDUSTRIES
AKAs:
Shiraz Electronic Industries
SEI

Addresses:
P.O. Box 71365-1589, Shiraz, Iran

Hossain Abad Road, Shiraz, Iran

Treasury Designates Individuals and Entities Fueling Violence in Iraq

Washington, DC--The U.S. Department of the Treasury today designated five individuals and two entities under Executive Order (E.O.) 13438 for threatening the peace and stability of Iraq and the Government of Iraq. Four of the individuals designated today commit, direct, support, or pose a significant risk of committing acts of violence against Iraqi citizens, Iraqi government officials, and Coalition Forces.

"These individuals are targeting and planning attacks against innocent Iraqis, the Government of Iraq, Coalition Forces, and U.S. troops. Their lethal and destabilizing tactics, especially by Iran's Qods Force, are intended to undermine Iraq as it strives for peace and prosperity," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence.

One of the individuals designated today is a member of Iran's Qods Force, the arm of the Islamic Revolutionary Guard Corps (IRGC) that is responsible for providing material support to Lebanese Hizballah, Hamas, Palestinian Islamic Jihad, and the Popular Front for the Liberation of Palestine – General Command. Further, the Qods Force provides lethal support in the form of weapons, training, funding, and guidance to select groups of Iraqi Shia militants who target and kill Coalition and Iraqi forces and Iraqi civilians. The IRGC–Qods Force was named a Specially Designated Global Terrorist by the Treasury Department on October 25, 2007.

The Syria-based individual and entities designated today act for and on behalf of, or are owned and controlled by, Syria-based Specially Designated National Mish'an Al-Jaburi, who was designated by Treasury under E.O. 13438 in January 2008 for providing financial, material, and technical support for acts of violence that threaten the peace and stability of Iraq.

Today's action follows President Bush's issuance of E.O. 13438 on July 17, 2007, which targets insurgent and militia groups in Iraq and their supporters. Designations under E.O. 13438 are administered by Treasury's Office of Foreign Assets Control and prohibit all transactions between the designees and any U.S. person and freeze any assets the designees may have under U.S. jurisdiction. Treasury previously designated four individuals and one entity under E.O. 13438 in January 2008.

Identifying Information

ABDUL REZA SHAHLAI
AKAs:
Abdol Reza Shahlai
Abdul Reza Shala'i
`Abd-al Reza Shalai
`Abdorreza Shahlai
Abdolreza Shahla'i
Abdul-Reza Shahlaee
Hajj Yusef
Haji Yusif
Hajji Yasir
Hajji Yusif
`Yusuf Abu-al-Karkh'
Year of Birth:
Circa 1957
Location:
Kermanshah, Iran
Alt. Location:
Mehran Military Base, Ilam Province, Iran

Iran-based Abdul Reza Shahlai--a deputy commander in the IRGC–Qods Force--threatens the peace and stability of Iraq by planning Jaysh al-Mahdi (JAM) Special Groups attacks against Coalition Forces in Iraq. Shahlai has also provided material and logistical support to Shia extremist groups--to include JAM Special Groups--that conduct attacks against U.S. and Coalition Forces. In one instance, Shahlai planned the January 20, 2007 attack by JAM Special Groups against U.S. soldiers stationed at the Provincial Joint Coordination Center in Karbala, Iraq. Five U.S. soldiers were killed and three were wounded during the attack.

In late-August 2006, Shahlai provided material support to JAM Special Groups by supplying JAM Special Groups members with 122mm grad rockets, 240mm rockets, 107mm Katyushas, RPG-7s, 81mms, 60mm mortars, and a large quantity of C-4.

Shahlai also approved and coordinated the training of JAM Special Groups. As of May 2007, Shahlai served as the final approving and coordinating authority for all Iran-based Lebanese Hizballah training for JAM Special Groups to fight Coalition Forces in Iraq. In late-August 2006, Shahlai instructed a senior Lebanese Hizballah official to coordinate anti-aircraft rocket training for JAM Special Groups.

AKRAM 'ABBAS AL-KABI
AKAs:
Akram Abas al-Ka'bi
Sheik Akram al-Ka'abi
Shaykh Abu-Akram al-Ka'abi
Abu-Muhammad
Karumi
Abu 'Ali
Nationality:
Iraqi
Year of Birth:
Circa 1976
Alt. Year of Birth:
Circa 1973
Place of Birth:
al 'Amarah, Iraq
Alt. Place of Birth:
al Kalamiy, Iraq

JAM Special Groups leader Akram 'Abbas al-Kabi threatens the peace and stability of Iraq and the Government of Iraq by planning and leading attacks against members of the Government of Iraq and Coalition Forces. As of early-2008, al-Kabi was planning multiple attacks against Coalition Forces in order to show that JAM Special Groups were capable of conducting operations even when there was a freeze. In one instance, in late-February 2008, JAM Special Groups led by al-Kabi claimed responsibility for mortar and rocket attacks against Coalition and Iraqi Security Forces in Baghdad's International Zone. In March 2008, al-Kabi also led JAM Special Groups members who launched rockets into the International Zone. Additionally, as of February 2008, al-Kabi sanctioned attacks targeting Coalition Forces to include indirect fire attacks against the International Zone.

Al-Kabi also provided financial and material support to Shia militia groups that committed acts of violence in Iraq. In one instance, in early-April 2008, al-Kabi paid a JAM Special Groups leader 50 million Iraqi dinars (approximately $41,684 USD) for carrying out three separate improvised explosive device (IED) attacks against Coalition Forces in Baghdad. As of February 2008, al-Kabi had also allegedly provided funding to JAM Special Groups for recruitment purposes. Separately, as of early-2008, al-Kabi was providing weapons for large-scale military operations against Coalition Forces.

HARITH SULAYMANAL-DARI
AKAs:
Harith Al-Dari
Harith Al-Dhari
Harith Al-Dari Al-Zawbai
Harith S. Al-Dhari
Hareth Al Dari
Hareth Al-Dauri
Harith Dari Al-Zawba'i
Harith Al-Duri
Year of Birth:
1941
Place of Birth:
Baghdad, Iraq
Citizenship
Iraqi
Nationality:
Iraqi
Passport Number:
N348171/IRAQ
Title:
Secretary General of the Muslim Ulema Council
Alt. Title:
Leader of the Muslim Scholars Association
Location:
Jordan
Alt Location:
Akashat, Iraq
Alt Location:
Abu Ghuraib, Iraq
Alt Location:
Qatar
Alt Location:
Egypt

Jordan-based Harith Al-Dari-the Secretary General of the Muslim Ulama Council (MUC)-threatens the peace and stability of Iraq and the Government of Iraq by ordering and directing attacks against civilians and Iraqi and Coalition Forces. As of mid-May 2008, Al-Dari ordered leaders of Al-Qa'ida in Iraq (AQI)-affiliated cells to attack Coalition Forces and the Sons of Iraq--local citizens who support Coalition and Iraqi Security Force operations against AQI and Sunni extremists by serving as auxiliary police forces. Two of these cells--both under Al-Dari's control--emplace IEDs along Coalition convoy routes and conduct small arms fire attacks against the Sons of Iraq at checkpoints. Previously, in early-December 2005, Al-Dari ordered and was responsible for the kidnapping of four foreign nationals in Iraq by a group under Ansar al-Sunna, a Specially Designated Global Terrorist.

Separately, in early-October 2006, Al-Dari directed a plot to bring IEDs into the International Zone, Baghdad. Although foiled, the plot was intended to be part of other coordinated attacks, to include plans to assassinate the commander of U.S. Forces in Iraq and the U.S. and British ambassadors to Iraq. Al-Dari also ordered a MUC advisor to plan and direct late-November 2005 attacks against Coalition and Iraqi forces.

Al-Dari has also provided financial and material support to terrorist and insurgent groups that conduct attacks against Coalition and Iraqi Forces. As of mid-April 2008, Al-Dari continuously travels between Lebanon, Syria, Jordan, and Saudi Arabia to elicit monetary and material donations that finance two Sunni terrorist groups in Baghdad. The groups--using funds provided by Al-Dari to purchase large amounts of bomb-making material, explosives, and weapons--emplace IEDs, launch mortars and rockets, and conduct sectarian violence. Additionally, as of mid-April 2008, Al-Dari was in charge of funding for the AQI-affiliated Mujahidin Army (MA), to include distributing funds collected by foreign "investors" to support MA operations. As of mid-2008, Al-Dari allegedly arranged financing for an AQI-affiliated group whose operational plans included emplacing IEDs, launching rockets, and conducting assassinations of political and religious figures that cooperated with the United States. Additionally, as of early-2008, Al-Dari provided financial support to a Sunni extremist cell formed for the purpose of carrying out attacks on Multi-National Force – Iraq.

Previously, in June 2006, Al-Dari provided financial and logistical support for an attack against Iraqi forces. Al-Dari owned a front company that received a money transfer of $5 million USD to finance a chemical mortar attack against Iraqi forces. The money transfer was intended to provide logistical support for the attack, to include facilitating the use of Al-Dari's farm house and complex as a staging area and paying for the billeting of the foreign fighters slated to carry out the attack.

AHMAD HASSAN KAKA AL-UBAYDI
AKAs:
Ahmed Hassan Kaka al-Obeidi
Ali Al Nobani
Hazim Kaka
Nationality:
Iraqi
Year of Birth:
1949
Place of Birth:
Baghdad, Iraq
Passport Number:
F032516
Date of Issue:
19760504
Place of Issue:
Baghdad, Iraq
Location:
Al Humayra village, Taza sub district, Iraq
Alt. Location:
Kurdi Al Nasir village, Iraq

Iraq-based Ahmad Hassan Kaka Al-Ubaydi--a former Iraqi Intelligence Service officer and a Ba'th Party official--leads a network of Kirkuk, Iraq-based insurgents that commits and poses a significant risk of committing acts of violence that threaten the peace and stability of Iraq and the Government of Iraq. Kaka also provides financial support for acts of violence that have the purpose or effect of threatening the peace and stability of Iraq and the Government of Iraq.

In 2005, Kaka was identified as the leader of a Kirkuk-based network that attacked Coalition and Iraqi forces with IEDs and plotted assassinations of Iraqi government officials. As of late-October 2007, Kaka directs assassinations of Iraqi Kurds and in one instance authorized a member of his network to assassinate tribal leaders because of their cooperation with U.S. and Iraqi forces.

Kaka also plans acts of violence targeting Kirkuk. In February 2007, Kaka planned to take over Kirkuk using sophisticated weapons and numerous armed fighters.

In addition to directing and planning acts of violence against Coalition and Iraqi forces, Kaka provided financial support for vehicle borne improvised explosive devices (VBIED) attacks in Iraq. As of August 2007, Kaka and his group purchased sedans to use as VBIEDs against Coalition and Iraqi government forces in Kirkuk, and certain government facilities in Mosul, Iraq. Previously, in May 2007, Kaka was providing funding to a group that manufactured IEDs to attack Coalition Forces.

RAW'A AL-USTA
AKAs:
Raw'a al-Ousta
Raw'ah al-Usta
Raw'ah al-Ustah
Rawa al-`Usta
Rawaa Alousta
Raw'ah Al-Astah
Nationality:
Syrian
Year of Birth:
1982
Location:
Damascus, Syria

AL-RA'Y SATELLITE TELEVISION CHANNEL
AKAs:
Satellite Television Channel Al Ra'y
Al-Ra'y Satellite Channel
Al-Ra'i Satellite Channel
Al Ra'y satellite television station
Al Raie TV Channel
Arrai TV
Al Ra'y TV
The Opinion satellite television channel
Internet Address:
www.arrai.tv
Email Address:
info@arrai.tv
Location:
Near Damascus in the Yaafur area, Syria

SURAQIYA FOR MEDIA AND BROADCASTING
AKAs:
Soraqia for Media and Broadcasting
Soraqiya for Media and Broadcasting
SBC Television
SBC TV
Location:
Al Sufara' Street in the Ya'fur district of Damascus, Syria

Syria-based Al-Ra'y Satellite Television Channel is owned and controlled by Syria-based Specially Designated National Mish'an Al-Jaburi. Although Al-Jaburi publicly denied owning Al-Ra'y and claimed it was owned by a Syrian woman named Raw'a Al- Usta, Al-Jaburi established Al-Ra'y in Syria, is the real owner of the station, and manages it through Al-Usta-his wife. Al-Usta works for and on behalf of Al-Jaburi as Al-Ra'y's general manager--dealing with the station's personnel and technical issues and making requests on behalf of the station. Syria-based Suraqiya for Media and Broadcasting--Al-Ra'y's parent company--is also owned and controlled by Al-Jaburi.

In addition to the reasons for which Al-Ra'y is being designated, as of late-March 2008, despite experiencing technical difficulties, Al-Ra'y had transmitted videos of Iraqi insurgent groups conducting operations.

Treasury Office of Debt Management Director Karthik Ramanathan
Remarks at Real Return USA:
The Euromoney Inflation Linked Products Conference

New York City - Good Morning. Thank you for giving me this opportunity to share my thoughts on Treasury debt management. I'm going to start off by explaining the role that our office and Treasury securities play in the capital markets, then describe some of the challenges posed by recent market conditions, and finally, address Treasury Inflation Protected Securities.

In my role as the Director of the Office of Debt Management, I provide recommendations on matters related to the Treasury's debt management policy, the issuance of Treasury securities, and the state of financial markets. By actively engaging with reserve managers, institutional investors, and market participants like you, we remain well informed regarding financial market conditions, liquidity in the fixed income markets, and Treasury-market-specific issues.

Our mission is to issue debt in a manner that provides the U.S. government – and ultimately the taxpayer – with the lowest cost of financing over time. With over $4 trillion of annual marketable Treasury issuance, more than 200 Treasury auctions each year, and nearly $9.5 trillion in total federal debt, the numbers are large, so discussing these issues is quite relevant.

U.S. Treasuries play an important role in the global capital markets. They are actively used by portfolio managers, investors, and traders to hedge existing positions, to serve as the risk-free pricing benchmark, and to provide the ultimate source of liquidity. In addition, the Federal Reserve uses Treasury securities to affect the supply of reserves in the banking system, and Treasuries provide foreign central banks with a highly liquid investment vehicle. The central roles that Treasuries play contribute to a lower overall cost of capital.

However, despite this prominent role, we do not take our position in the debt markets for granted. We constantly strive to enhance Treasury's status as the preeminent sovereign debt market by adhering to our clear mission. This gives us confidence that Treasury will remain the borrower of choice in global capital markets.

Now, before I delve into more detail on TIPS, I'd like to first talk about Treasury's debt management objectives, then financial market challenges over the past year, and finally, how we as debt managers responded.

Debt Management Objectives and Operating Principles

The Treasury Department's primary goal in debt management is to finance the government's borrowing needs at the lowest cost over time. In meeting this objective, we face numerous constraints and risks.

Perhaps the most prevalent of these constraints is uncertainty. Uncertainty arises from many different sources including changes in economic conditions, unexpected legislative initiatives, and fluctuations in non-marketable debt issuance. In a given year, these factors could easily shift borrowing by a significant amount with little advance warning.

Another major source of uncertainty stems from deficit forecast errors with various estimates off by more than $100 billion on average. Collectively, the private sector as well as policy makers have difficulty in consistently projecting deficits in the coming twelve months – let alone further into the future.

Given the extensive uncertainty Treasury faces, debt management requires considerable flexibility. The recent fiscal stimulus package, in which rebates were literally place into the hands of Americans just 20 weeks after enactment, shows such a need for adapting to rapidly changing conditions. At the same time, our large size makes behaving opportunistically impractical. Moreover, it would not necessarily lower borrowing costs. Financial market participants would likely model our interest rate objectives and anticipate our debt issuance behavior, limiting any potential gains we might hope to achieve.

In addition, opportunistic behavior would increase investor uncertainty and could limit demand for our securities. Therefore, in order to ensure ready market access, we issue debt regularly and in predictable amounts. Our set of instruments consists of 8 nominal issues and 3 inflation indexed issues – a very simple, liquid set of benchmarks which investors can tailor to their needs.

Under these conditions, we must not create additional constraints based on externalities that result from a particular debt management strategy. For example, the U.S. Treasury often receives requests for debt tailored to particular interests such as GDP-linked debt, annuitizing debt instruments, and callable debt. However, it is the Treasury's policy not to issue debt targeted to any particular constituency. As taxpayers, we are better off with the Treasury market being deep and liquid. We consider the market's appetite for certain securities or debt management practices; however, debt management policy decisions cannot be held captive solely to the market's preferences.

For example, when Treasury discontinued the 52-week bill in 2001, we did so despite positive externalities associated with the security including its wide use as a benchmark point for pricing derivatives (such as adjustable rate mortgages and interest rate swaps), and its use for setting rates for statutorily required credit programs (which required Congress and Treasury to make legislative changes). We simply did not need it at the time, and acted in the best interest of the taxpayer. Similarly, the 30-year bond and 30-year TIPS were also discontinued in 2001 due to reduced borrowing needs.

Decisions to adopt or suspend particular debt management practices are similarly made by always keeping in mind our goal of the lowest borrowing cost over time. For instance, despite the benefits of multiple-price auctions to certain more sophisticated segments of the financial markets, Treasury moved to uniform-price auctions. Internal studies and empirical analysis indicated that such auctions broaden the distribution of auction awards, promote efficiency in the markets, and lead to more aggressive bidding – all factors which collectively reduce the cost of financing the federal debt.

As another example, we continue to have the authority to conduct buybacks of Treasury securities. However, Treasury suspended this practice when they were no longer practical despite the benefits to some investors of having a regular buyer for relatively illiquid securities.

While not limiting potential responses to ever changing financial market conditions, we make any changes to Treasury debt issuance and debt management practices in a transparent manner, in consultation with market participants, and based on analyses of how to best meet our goals.

Financial Market and Debt Management Challenges

The financial markets have faced challenging conditions over the past year, many of which have impacted the broader economy. Tighter credit standards and pressure on interest rate spreads have made it more difficult to obtain credit in many sectors. In the face of these challenges, Treasury has responded aggressively.

To provide confidence and stability to financial markets, Treasury financed an economic stimulus package and moved to support the housing government sponsored enterprises Fannie Mae and Freddie Mac. A cyclical correction is underway, particularly in the housing sector, and this process of re-pricing of risk and deleveraging across asset classes has created additional challenges for market participants.

Borrowing requirements have risen swiftly in response to the economic stimulus legislation as well as actions take by the Federal Reserve related to its liquidity initiatives. To sterilize the monetary effects of these initiatives, the Federal Reserve redeemed Treasury securities held in its portfolio and also sold securities outright which resulted in nearly $300 billion in additional Treasury issuance. We responded successfully to these challenges by increasing bill auction sizes, reintroducing the 52-week bill, and issuing longer dated cash management bills.

Looking ahead, a wide variety of factors could potentially impact Treasury's marketable borrowing including a less robust economy, the possibility of additional legislative initiatives enacted by Congress, and further pressures on the financial sector.

In this rapidly evolving economic and financial market environment, Treasury has responded to changes in marketable borrowing needs in its traditional manner by first reviewing the size of our existing securities, then addressing the frequency of issuance, and finally, making adjustments to the auction calendar as necessary.

In addition, through our meetings with major investors domestically and abroad, many ideas have been suggested to better position Treasury to meet these challenges. Some recommendations include increasing the frequency of the 10-year note and 30-year bond, reintroducing other securities including the 3-year note and 7-year note, and reintroducing a Treasury buyback program to better manage our debt maturity profile.

Other ideas included issuing additional longer dated inflation linked securities versus shorter dated securities to potentially better capture any inflation premium. We appreciate all of these suggestions, and take them all under consideration in achieving the lowest cost of financing over time.

Treasury Inflation-Protected Securities

Now, turning to inflation linked securities, Treasury has been issuing TIPS for over 10 years and is the largest issuer of inflation linked bonds globally. We have held 60 TIPS auctions since the inception of the program and have over half a trillion dollars of such debt outstanding. Average daily trading volume of $9 billion also makes the TIPS market the most liquid of any sovereign inflation-linked debt market. With 27 issues outstanding, the TIPS curve is well established out to 10 years, and well on its way to being complete out to 20 year.

Let me give you some other figures about the size and liquidity if the TIPS market. In fiscal year 2007, TIPS issuance totaled $57 billion, or 10 percent of total Treasury coupon issuance, and represented about 30 percent of total global inflation linked debt issuance. In comparison, such issuance was $29 billion in the United Kingdom, $27 billion in Japan, and $26 billion in France. Although the growth rate of TIPS has slowed, it still outpaces nominal coupons.

In terms of secondary market liquidity, which often receives much attention, the TIPS market is much more liquid than any other sovereign inflation linked market. Prior to this most recent period of stress in credit markets, the typical bid-ask spread on the benchmark 10-year TIPS on a trading size of $50 million was about 1 basis point. In contrast, for similar benchmark issues in the United Kingdom, France and Japan, the bid–ask spreads ranged between 2.5 and 5 basis points.

So, while TIPS will likely remain less liquid than nominal coupons due to their unique qualities, from an investor perspective, the depth of the TIPS market is unrivaled. Calls to increase liquidity through much larger issuance need to be carefully evaluated.

Taken together, these market statistics illustrate our preeminent stance in the inflation-indexed market in terms of size, depth, and liquidity, even in an environment without regulatory mandates and in the absence of a high rate of indexation to inflation compared to other sovereigns.

While the TIPS auction calendar has seen several changes since the inception of the program, we have repeatedly communicated to market participants our commitment to the program. Let me again reassure you that inflation linked securities are an important part of our portfolio.

As I mentioned earlier, determining the proper mix of our portfolio in pursuit of the lowest cost of borrowing is an ongoing effort. From our perspective, TIPS offer potential benefits including a more diversified portfolio, a potentially broader investor base, and a liability that theoretically tracks tax receipts.

However, you may be aware that recently the Treasury's Borrowing Advisory Committee of the Securities Industry and Financial Markets Association, or TBAC, prepared a presentation on TIPS. The presenting Committee member concluded that the cost of the program, compared to nominal debt issued at a similar time, was estimated at close to $30 billion. This cost was attributed to two factors: the low level of breakeven inflation and the reduced level of liquidity of TIPS compared to nominal securities.

It was also noted that private issuers have been less willing to issue inflation linked securities because they view them as costly and because of unfavorable accounting treatment. In fact, over the past ten years, there have been only a handful of corporate issuers of inflation indexed debt, thereby limiting the growth of the inflation derivatives markets. The large majority of corporate issuance is immediately hedged with TIPS, so it does not really create new inflation-linked supply. Instead, the Treasury continues to be the only significant payer of inflation in the United States.

This situation naturally raises many questions. Why are corporations not issuing such debt more generally? Are we selling insurance on inflation protection for too little? Should unknown future liabilities resulting from inflation accretion concern debt issuers? Certainly in a corporation or financial institution, these issues would be taken into consideration. Are we as sovereign debt issuers doing the same?

Not surprisingly, the financial press has been discussing the deliberations of the TBAC's presentation. Some have agreed with its findings, while others have disputed them. As debt managers, we greatly appreciate all viewpoints and encourage further constructive dialogue. The growth in the significance of the inflation linked debt market over the past decade by sovereign issuers has made having an accurate understanding of the costs involved in their issuance more important than ever.

Sovereign debt issuers have issued inflation indexed debt with the belief that such issuance would diversify their portfolios and better track receipts. In addition, there was a belief that borrowing costs would be lower due to the willingness of some investors to pay a premium in return for inflation compensation. Other nations have recently joined this trend, issuing inflation linked debt with the same intentions and with little empirical or analytical studies of costs versus benefits. Unfortunately, though, there have been only a few published studies of the costs of issuing TIPS, and these have offered conflicting conclusions.

In May of 2004 then Federal Reserve economists Brian Sack and Robert Elsasser estimated that TIPS issuance since the inception of the program had been expensive relative to comparable nominal securities, primarily due to the difficulties in launching a new asset class and the flight to quality earlier in the decade. Sack and Elsasser used realized costs - an "ex post" approach - in their estimates. They estimated that the cost of the program as of June 2003 was $2.8 billion, and estimated a projected total cost of $12.3 billion.

An update to this analysis in 2007 by Sack showed that the 10-year TIPS that matured in January 2007 saved the Treasury $1.1 billion.

In October 2007, also using ex-post calculations, Federal Reserve Board economist Jennifer Roush concluded that TIPS issuance was relatively costly due to illiquidity in the early years of the program. She estimated the cost of the program through early 2007 at around $5 billion to $8 billion.

Roush's analysis, however, also suggested that beginning with issuance in 2004, TIPS have actually saved Treasury a small amount of money, and will save Treasury from $1 billion to $4 billion over the entire life of these securities. Moreover, she finds that if the illiquidity effects of the early years of the TIPS program are excluded, the TIPS program would have saved the Treasury a substantial amount – from $14 billion to $17 billion through early 2007. The "liquidity premium" effectively cost Treasury between $10 billion and $15 billion.

On the other hand, some economists have suggested that ex-post analyses are too simplistic and that the relevant question is whether the Treasury obtained the financing it needed at a lower "ex-ante cost;" that is, using expected inflation at the time of issuance in determining the cost. However, one of the difficulties of an ex-ante approach is obtaining an accurate estimate of investors' inflation expectations. Studies using an ex-ante approach have shown neither a benefit nor a cost from issuing TIPS relative to nominal securities.

As can be seen from these studies, the results to date have been conflicting and, at times, inconclusive. Assumptions which are used greatly vary. Perhaps most disturbing, few rigorous, analytical approaches have been undertaken to fully understand the efficiency of the program.

Treasury has a duty to ensure that taxpayers attain the lowest cost of borrowing over time. In that vein, we must continuously study our models, develop alternative perspectives, and institute changes if warranted. We need to focus on our mission and less on positive externalities. From our perspective as debt issuers, we have a wealth of information to examine. We know the details of every competitive bid made at each auction. We know the concentration of bids by particular investors at given auctions. And we know our alternative funding choices. Moreover, we have a large set of observations. While the growth of inflation-indexed securities remains robust, and the importance investors place on them continues to grow, taking a step back, evaluating our practices, and examining the costs and benefits of any program in a deliberative manner is only prudent. .

Treasury, like other major sovereign issuers of debt, needs to attract capital from the market, but we need to do so in a thoughtful manner. So I want to make the earnest request to all sovereign debt issuers and members of the financial market community actively develop an appropriate framework for assessing the cost of issuing inflation linked debt versus nominal debt.

Such an undertaking will benefit all who participate in this market, most importantly the taxpayer. As we undertake these deliberations in concert with financial market participants, Treasury will continue to issue TIPS in a regular and predictable manner and continue to maintain these securities as a significant portion of our overall debt portfolio.

Thank you.

Treasury Targets Venezuelan Government Officials Supporting the FARC

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated two senior Venezuelan government officials, Hugo Armando Carvajal Barrios and Henry de Jesus Rangel Silva, and one former official, Ramon Rodriguez Chacin, for materially assisting the narcotics trafficking activities of the Revolutionary Armed Forces of Colombia (FARC), a narco-terrorist organization.

"Today's designation exposes two senior Venezuelan government officials and one former official who armed, abetted, and funded the FARC, even as it terrorized and kidnapped innocents," said Adam J. Szubin, Director of OFAC. "This is OFAC's sixth action in the last ten months against the FARC. We will continue to target and isolate those individuals and entities that aid the FARC's deadly narco-terrorist activities in the Americas ."

Hugo Armando Carvajal Barrios is the Director of Venezuela's Military Intelligence Directorate (DGIM). His assistance to the FARC includes protecting drug shipments from seizure by Venezuelan anti-narcotics authorities and providing weapons to the FARC, allowing them to maintain their stronghold of the coveted Arauca Department. Arauca , which is located on the Colombia/Venezuela border, is known for coca cultivation and cocaine production. Carvajal Barrios also provides the FARC with official Venezuelan government identification documents that allow FARC members to travel to and from Venezuela with ease.

Henry de Jesus Rangel Silva, the Director of Venezuela's Directorate of Intelligence and Prevention Services or DISIP, is in charge of intelligence and counterintelligence activities for the Venezuelan government. Rangel Silva has materially assisted the narcotics trafficking activities of the FARC. He has also pushed for greater cooperation between the Venezuelan government and the FARC.

Ramon Emilio Rodriguez Chacin, who was Venezuela 's Minister of Interior and Justice until September 8, is the Venezuelan government's main weapons contact for the FARC. The FARC uses its proceeds from narcotics sales to purchase weapons from the Venezuelan government. Rodriguez Chacin has held numerous meetings with senior FARC members, one of which occurred at the Venezuelan government's Miraflores Palace in late 2007. Rodriguez Chacin has also assisted the FARC by trying to facilitate a $250 million dollar loan from the Venezuelan government to the FARC in late 2007. We cannot confirm whether the loan materialized.

On May 29, 2003, President George W. Bush identified the FARC as a significant foreign narcotics trafficker, or drug kingpin, pursuant to the Kingpin Act. In 2001, the State Department designated the FARC as a Specially Designated Global Terrorist pursuant to Executive Order 13224, and in 1997 as a Foreign Terrorist Organization.

This OFAC action continues ongoing efforts under the Kingpin Act to apply financial measures against significant foreign narcotics traffickers and their organizations worldwide. In addition to the 75 drug kingpins that have been designated by the President, 460 businesses and individuals have been designated pursuant to the Kingpin Act since June 2000.

Today's action freezes any assets the designated entities and individuals may have under U.S. jurisdiction and prohibits U.S. persons from conducting financial or commercial transactions involving those assets. Penalties for violations of the Kingpin Act range from civil penalties of up to $1,075,000 per violation to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines of up to $5,000,000. Criminal fines for corporations may reach $10,000,000. Other individuals face up to 10 years in prison for criminal violations of the Kingpin Act and fines pursuant to Title 18 of the United States Code.

For a complete list of the individuals and entities designated today, please visit:
http://www.treasury.gov/offices/enforcement/ofac/actions/index.shtml

To view previous OFAC actions directed against the FARC, please visit:

	Treasury Action against the FARC on July 31, 2008
	Treasury Action against the FARC on May 7, 2008.
	Treasury Action against the FARC on April 22, 2008.
	Treasury Action against the FARC on January 15, 2008.
	Treasury Action against the FARC on November 1, 2007.
	Treasury Action against the FARC on September 28, 2006.
	Treasury Action against the FARC on February 19, 2004.

Paulson Statement on SEC and Federal Reserve Actions
Surrounding Lehman Brothers

Treasury Secretary Henry M. Paulson, Jr. made the following statement today:

I strongly support the actions announced tonight by SEC Chairman Chris Cox, Federal Reserve Chairman Ben Bernanke and market participants. These changes will strengthen and enhance our financial markets.

These initiatives will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets.

I particularly appreciate the efforts of market participants who came together this weekend and initiated a set of steps to facilitate orderliness and stability in our financial markets as we work through this extraordinary environment.

Today we are looking forward. This weekend's discussions made clear that both market participants and regulators in this country and abroad recognize the need to support market stability and remove uncertainty as they address current challenges.

I am committed to working with regulators and policymakers – including Congress – to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets. And I will engage with regulators and policymakers around the world to that end.

Healthy capital markets are the backbone of a vibrant U.S. economy and critical to the well-being of our economy and American families. I am confident in the resilience of our capital markets, and in the commitment of U.S. regulators and market participants to work together through this difficult period.

Frequently Asked Questions:
Treasury Senior Preferred Stock Purchase Agreement

Can the U.S. Congress or the Executive Branch change the terms of the preferred stock purchase agreement?
This preferred stock purchase agreement is a binding legal obligation between two parties. The agreement is designed to prohibit any amendment that would decrease the amount of Treasury's funding commitment or add funding conditions that would adversely affect debt or mortgage-backed securities holders.

Some may speculate that a future Congress could pass a law that would abrogate the agreement. But any such law would be inconsistent with the U.S. government's longstanding history of honoring its obligations. Such action would also give rise to government liability to parties suing to enforce their rights under the agreement.

The U.S. Government stands behind the preferred stock purchase agreements and will honor its commitments. Contracts are respected in this country as a fundamental part of rule of law.

Can the U.S. Congress or the Executive Branch change the covenants in the agreement, such as the covenant requiring the reduction of the companies' portfolios?
As with any contract, the parties to the agreement may modify the covenants by mutual agreement only.

Does the senior preferred stock purchase agreement protect debt and mortgage backed securities issued or maturing after 2009?
Yes. The holders of senior debt, subordinated debt, and mortgage backed securities issued or guaranteed by these GSEs are protected by the agreement without regard to when those securities were issued or guaranteed. Debt and mortgage backed securities issued or guaranteed both before and after December 31, 2009 are protected by the agreement.

If the preferred stock purchase agreement protects senior and subordinated debt securities issued at any time in the future, how can the agreement ever be terminated?
Treasury's funding commitment in the agreement would terminate under three events:

The funding commitment terminates if the commitment is fully funded by Treasury.
If a GSE liquidates its assets, its net worth deficiency is computed at that time and the GSE can call upon the Treasury to fund under its preferred stock purchase agreement. After that final funding, the funding commitment in the agreement would terminate.
When a GSE satisfies all of its liabilities, whether at maturity or by making some other provision for payment in full of its obligations, the funding commitment will also terminate.

Why is the preferred stock purchase agreement limited to $100 billion? Is that enough to protect against even the worst downside scenario? What happens if losses exceed $100 billion?
Treasury deliberately chose a large number to give confidence to the markets.

If Treasury has already received $1 billion in senior preferred stock, how can you say that no investment has been made yet?
The companies each issued $1 billion in senior preferred stock to Treasury in connection with Treasury's commitment to maintain a positive net worth in the GSE. No taxpayer money was spent to receive this stock.

How is it legal for this preferred stock purchase agreement to be valid beyond the December 31, 2009 expiration of Treasury's authority?
Treasury received the preferred stock and received warrants for common stock as of Sunday September 7, 2008 and will not need to purchase any additional shares relative to this agreement. No payments by the Treasury will be made under this agreement until and unless necessary to prevent a negative net worth position for either GSE.

If the Treasury makes payments under its funding commitment, the liquidation preference of the Treasury shares will increase accordingly

What happens to the declared dividends for investors of existing GSE preferred stock?
Dividends actually declared by a GSE before the date of the senior preferred stock purchase agreement will be paid on schedule.

Can the government exercise its warrants whenever it wants, even if it is disadvantageous to the companies?
Yes. Treasury can exercise its warrant for up to 79.9% of the common stock of each GSE on a fully diluted basis at any time during the 20-year life of the warrant.

What do the rating agencies think of this agreement?
All of the rating agencies have reaffirmed the United States' current rating status.

Major Iranian Shipping Company Designated for Proliferation Activity

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control today designated the Islamic Republic of Iran Shipping Lines (IRISL), and 18 other affiliated entities, for providing logistical services to Iran's Ministry of Defense and Armed Forces Logistics (MODAFL).

"Not only does IRISL facilitate the transport of cargo for U.N. designated proliferators, it also falsifies documents and uses deceptive schemes to shroud its involvement in illicit commerce," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence. "IRISL's actions are part of a broader pattern of deception and fabrication that Iran uses to advance its nuclear and missile programs. That conduct should give pause to any financial institution or business still choosing to deal with Iran."

MODAFL, which was designated by the U.S. Department of State in October 2007 under E.O. 13382, has the ultimate authority over previously designated entities including the Aerospace Industries Organization an umbrella group which controls Iran's ballistic missile research, development and production activities and organizations.

IRISL is Iran's national maritime carrier; a global operator with a worldwide network of subsidiaries, branch offices and agent relationships. It provides a variety of maritime transport services, including bulk, break-bulk, cargo and containerized shipping. These services connect Iranian exporters and importers with South America, Europe, the Middle East, Asia, and Africa.

According to information available to the U.S. government, IRISL also facilitates shipments of military-related cargo destined for MODAFL and its subordinate entities, including organizations that have been designated by the United States pursuant to E.O. 13382 and listed by United Nations Security Council Resolutions 1737 and 1747.

In order to ensure the successful delivery of military-related goods, IRISL has deliberately misled maritime authorities through the use of deception techniques. These techniques were adopted to conceal the true nature of shipments ultimately destined for MODAFL. Furthermore, as international attention over Iran's WMD programs has increased, IRISL has pursued new strategies, which could afford it the potential to evade future detection of military shipments.

Specifically, IRISL has employed the use of generic terms to describe shipments so as not to attract the attention of shipping authorities and created and made use of cover entities to conduct official, IRISL business. For example, in 2007, IRISL transported a shipment of a precursor chemical destined for use in Iran's missile program. The end user of the chemical was Parchin Chemical Industries, an entity listed by the United States pursuant to E.O. 13382 and listed in UNSCR 1747 as a subordinate of Iran's Defense Industries Organization (DIO).

Also designated today were 17 entities, which were found to be owned or controlled by or acting or purporting to act for or on behalf of, directly or indirectly, IRISL. These entities are:

	Valfajr 8th Shipping Line Co SSK
	Khazar Sea Shipping Lines
	Irinvestship Ltd.
	Shipping Computer Services Company
	Iran o Misr Shipping Company
	Iran o Hind Shipping Company
	IRISL Marine Services & Engineering Company
	Irital Shipping SRL Company
	South Shipping Line Iran
	IRISL Multimodal Transport Co.
	Oasis Freight Agencies
	IRISL Europe Gmbh
	IRISL Benelux NV
	IRISL China Shipping Co., Ltd.
	Asia Marine Network Pte. Ltd.
	CISCO Shipping Co. Ltd.
	IRISL (Malta) Limited

One additional entity, IRISL (UK) Ltd., was designated today for being owned or controlled by Irinvestship Ltd.

Today's designations reinforce United Nations Security Council Resolution 1803 of March 2008, which among other things, calls upon all States, in a manner consistent with their national legal authorities and international law, to inspect IRISL cargoes to and from Iran, transiting their ports, "provided there is reasonable grounds to believe that the vessel is transporting prohibited goods" pursuant to UNSCRs 1737, 1747 and 1803.

These designations also highlight the dangers of doing business with IRISL and its subsidiaries. Countries and firms, including customers, business partners, and maritime insurers doing business with IRISL, may be unwittingly helping the shipping line facilitate Iran's proliferation activities.

Identifying Information on Designees:

ISLAMIC REPUBLIC OR IRAN SHIPPING LINES

A.K.A.
IRISL Group
IRI Shipping Lines
ARYA Shipping Company
IRISL

Address 1 No. 37, Aseman Tower, Sayyade Shirazee Square, Pasdaran Ave., Tehran, Iran, P.O. Box 19395-1311

Address 2 No. 37, Corner of 7th Narenjestan, Sayad Shirazi Square, After Noboyand Square, Pasdaran Ave., Tehran, Iran

VALFAJR 8TH SHIPPING LINE CO SSK

AKA
Sherkat Sahami Khass Keshtirani Valfajr 8th
Valfajre Eight Shipping Co.
Val Fajr-E-8 Shipping Company
Val Fajr Hasht Shipping Co.
VESC

Address 1 Shahid Azodi St., Karimkhan Zand Ave., Abiar Alley, P.O. Box 4155, Tehran, Iran

Address 2 Abyar Alley, Corner of Shahid Azodi St & Karim Khan Zand Ave., Tehran, Iran

KHAZAR SEA SHIPPING LINES

AKA
Darya-ye Khazar Shipping Company
Khazar Shipping Co.

Address 1 M. Khomeini St., Ghazian, Bandar Anzali, Gilan, Iran

Address 2 No. 1, End of Shahid Mostafa Khomeini St., Tohid Square, P.O. Box 43145, Bandar Anzali, 1711-324, Iran

IRINVESTSHIP LTD.

Address 1
Global House 61 Petty France, London, SW1H 9EU, United Kingdom,

Registration Number: 4110179

IRAN O HIND SHIPPING COMPANY

AKA
Keshtirani Iran Ve Hend Sahami Khass
Irano Hind Shipping Company
Iranohind Shipping Company (PJS)
IHSC

Address 1 265, Next to Mehrshad, Sedaghat St., Opposite of Mellat Park, Vali Asr Ave., Tehran, IAOO1, Iran

Address 2 18 Mehrshad Street, Sadaghat Street, Opposite Park Mellat, Vali-e-Asr Ave., Tehran, Iran

SHIPPING COMPUTER SERVICES COMPANY

AKA
SCSCO

Address 1 No. 37, Asseman, Shahid Sayyad Shirazeesq, Pasdaran Ave., Tehran, Iran, P.O. Box 1587553-1351

Address 3 No. 13, 1st Floor, Abgan Alley, Aban Ave., Karimkhan Zand Blvd., 15976 Tehran

IRAN O MISR SHIPPING COMPANY

AKA
Iranmisr Shipping Company
Iran & Egypt Shipping Lines

Address 1 El Nahda Building, Elnahda St., 4th Floor, Port Said, Egypt

Address 2 No. 41, 3rd Floor, Corner of 6th Alley, Sanaei St., Karim Khan Zand Ave., Tehran, Iran

Address 3 6 El Horreya Avenue, Alexandria, Egypt

IRISL MARINE SERVICES & ENGINEERING COMPANY

AKA
Sherkate Khadamte Darya and Moharndesi Keshtirani
IMSENGCO

Address 1 No. 221, Northern Iranshahr St. Karimkhan Ave., Tehran, Iran

Address 2 Karim Khane Zand Ave., Iran Shahr Shomai, No. 221, Tehran, Iran Address 3 Sarbandar, Gas Station, P.O. Box 199, Bandar Imam Khomeini, Iran

IRITAL SHIPPING SRL COMPANY

Address
Ponte Francesco Morosini 59, 16126 Genova (GE) Italy;

Fiscal Code: 03329300101
VAT Number: 12869140157
CCIAA: GE 426505

SOUTH SHIPPING LINE IRAN

AKA
South Shipping Lines Iran Line Company

Address 1 Qaem Magham Farahani St., Tehran, Iran

Address 2 Apt. No. 7, 3rd Fl., No. 2, 4th Alley, Gandi Ave., Tehran, Iran

IRISL MULTIMODAL TRANSPORT CO.

AKA
Rail Iran Shipping Company

Address 1
No. 25, Shahid Arabi Line, Sanaei St., Karimkhan Zand St., Tehran, Iran

OASIS FREIGHT AGENCIES

AKA
Oasis Freight Agency LLC

Address 1 Sharaf Building, No. 4, 2nd Floor, Al Meena Road, Opposite Customs, Dubai, UAE

Address 2 Sharaf Shipping Building, 1st Floor, Al Mankhool St., Bur Dubai, P.O. Box 5562, Dubai, UAE

Address 3 Kayed Ahli Building, Jamal Abdul Nasser Road (Parallel to Al Wahda St.), P.O. Box 4840, Sharjah, UAE

IRISL EUROPE GMBH

Address
Schottweg 5, 22087 Hamburg, Germany

VAT Number: DE217283818

IRISL BENELUX NV

Address
Noorderlaan 139, B-2030, Antwerp, Belgium

VAT Number: BE480224531

IRISL (UK) LTD

Address
2 Abbey Road, Barking, Essex IG11 7 AX, United Kingdom

Registration Number: 4765305

IRISL CHINA SHIPPING CO., LTD

AKA
Yi Hang Shipping Company, Ltd

Address
F23A-D, Times Plaza No. 1, Taizi Road, Shekou, Shenzhen, China, ZIP: 518067

ASIA MARINE NETWORK PTE. LTD.

AKA
IRISL Asia Pte. Ltd.
Asian Perfect Marine Pte. Ltd.

Address 200 Middle Road, #14-01 Prime Centre, Singapore 188980

CISCO SHIPPING CO. LTD.

AKA
IRISL Korea Co., Ltd.
SISCO
Seoul International Shipping Co.

Address 1
8th Floor, Sebang Bldg., 708-8, Yeoksam-dong, Kangnam-Gu, Seoul, Republic of Korea

Address 2
4th Floor, Sebang Bldg. 68-46, Jwacheon-Dong, Dong-Gu, Busan, Republic of Korea

IRISL (MALTA) LIMITED

AKA
IRISL Malta Limited

Address Flat 1, 181, Tower Road, Sliema SLM 1604, Malta
Registration Number: C33735
Tax Registration Number: MT 17037313

These actions were taken pursuant to Executive Order 13382, an authority aimed at freezing the assets of proliferators of weapons of mass destruction and their supporters, and at isolating them from the U.S. financial and commercial systems. Today's designations are part of the ongoing interagency effort by the U.S. Government to combat WMD trafficking by blocking the property of entities and individuals that engage in proliferation activities and their support networks. Designations under E.O. 13382 are implemented by Treasury's OFAC, and they prohibit all transactions between the designees and any U.S. person, and freeze any assets the designees may have under U.S. jurisdiction.

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Washington, DC-- Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.

We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.

Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.

***

I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today's action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009.

Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs' business outlook.

Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.

And let me make clear what today's actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a "time out" where we have stabilized the GSEs while we decide their future role and structure.

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don't use this time out to permanently address the structural issues presented by the GSEs.

In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $72,510 million as of the end of that week, compared to $72, 619 million as of the end of the prior week.

I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)


	August 29, 2008
A. Official reserve assets (in US millions unless otherwise specified) ¹	Euro	Yen	Total
(1) Foreign currency reserves (in convertible foreign currencies)			72,510
(a) Securities	9,549	11,821	21,370
of which: issuer headquartered in reporting country but located abroad			0
(b) total currency and deposits with:
(i) other national central banks, BIS and IMF	13,615	5,807	19,422
ii) banks headquartered in the reporting country			0
of which: located abroad			0
(iii) banks headquartered outside the reporting country			0
of which: located in the reporting country			0
(2) IMF reserve position ²	4,774
(3) SDRs ²	9,465
(4) gold (including gold deposits and, if appropriate, gold swapped) ³	11,041
--volume in millions of fine troy ounces	261.499
(5) other reserve assets (specify)	6,438
--financial derivatives
--loans to nonbank nonresidents
--other (foreign currency assets invested through reverse repurchase agreements)	6,438
B. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--financial derivatives not included in official reserve assets
--gold not included in official reserve assets
--other

II. Predetermined short-term net drains on foreign currency assets (nominal value)


			Maturity breakdown (residual maturity)
		Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits
--outflows (-)	Principal
	Interest
--inflows (+)	Principal
	Interest
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) Short positions ( - ) ⁴		-62,000	-62,000
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)


III. Contingent short-term net drains on foreign currency assets (nominal value)


		Maturity breakdown (residual maturity, where applicable)
	Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1 year
(b) Other contingent liabilities
2. Foreign currency securities issued with embedded options (puttable bonds)
3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (+)
--BIS (+)
--IMF (+)
(b) with banks and other financial institutions headquartered in the reporting country (+)
(c) with banks and other financial institutions headquartered outside the reporting country (+)
Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (-)
--BIS (-)
--IMF (-)
(b) banks and other financial institutions headquartered in reporting country (- )
(c) banks and other financial institutions headquartered outside the reporting country ( - )
4. Aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) Short positions
(i) Bought puts
(ii) Written calls
(b) Long positions
(i) Bought calls
(ii) Written puts
PRO MEMORIA: In-the-money options ¹¹
(1) At current exchange rate
(a) Short position
(b) Long position
(2) + 5 % (depreciation of 5%)
(a) Short position
(b) Long position
(3) - 5 % (appreciation of 5%)
(a) Short position
(b) Long position
(4) +10 % (depreciation of 10%)
(a) Short position
(b) Long position
(5) - 10 % (appreciation of 10%)
(a) Short position
(b) Long position
(6) Other (specify)
(a) Short position
(b) Long position

IV. Memo items


(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic currency)
--nondeliverable forwards
--short positions
--long positions
--other instruments
(c) pledged assets
--included in reserve assets
--included in other foreign currency assets
(d) securities lent and on repo	6,567
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
--borrowed or acquired and included in Section I
--borrowed or acquired but not included in Section I	6,567
(e) financial derivative assets (net, marked to market)
--forwards
--futures
--swaps
--options
--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) short positions ( – )
(b) long positions (+)
--aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) short positions
(i) bought puts
(ii) written calls
(b) long positions
(i) bought calls
(ii) written puts
(2) To be disclosed less frequently:
(a) currency composition of reserves (by groups of currencies)	72,510
--currencies in SDR basket	72,510
--currencies not in SDR basket
--by individual currencies (optional)

Notes:

3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

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U.S. ECONOMIC STATISTICS - QUARTERLY DATA

Latest

2003 2004 2005 2006 4 qtrs Q3-07 Q4-07 Q1-08 Q2-08

-----------------(Q4 to Q4)------------------ ---------------(annual rate)------------------

Real GDP (percent change) 3.7 3.1 2.7 2.4 2.2 4.8 -0.2 0.9 3.3

Consumption 3.4 3.7 2.6 3.2 1.4 2.0 1.0 0.9 1.7

Business Investment 4.9 7.5 4.9 6.5 4.2 8.7 3.4 2.4 2.2

Structures 0.2 2.3 -0.5 12.8 12.7 20.6 8.6 8.7 13.6

Equipment and Software 6.6 9.4 7.0 4.2 0.2 3.6 1.0 -0.5 -3.2

Residential Construction 11.7 6.7 5.4 -15.5 -22.2 -20.6 -27.0 -25.0 -15.8

Exports 5.8 7.4 7.0 10.1 11.2 23.0 4.4 5.1 13.2

Imports 4.8 11.5 4.8 3.8 -2.0 3.0 -2.3 -0.8 -7.5

Federal 5.5 2.4 1.0 2.9 4.8 7.2 -0.5 5.8 6.8

State and Local -0.4 -0.4 0.3 1.6 1.4 1.9 1.6 -0.3 2.2

Levels ------------annual average-------------- (Avg) ---------------(annual rate)------------------

Net Export Balance (nominal) -499.4 -615.4 -713.6 -757.3 -698.8 -682.6 -696.7 -705.7 -710.0

Current Account Balance as share of GDP (percent) -4.8 -5.3 -5.9 -6.0 -5.1 -5.0 -4.8 -5.0

Price Indexes (percent change) -----------------(Q4 to Q4)------------------ ---------------(annual rate)------------------

GDP 2.2 3.2 3.5 2.8 2.0 1.5 2.8 2.6 1.2

Gross Domestic Purchases 2.2 3.7 4.0 2.5 3.5 2.2 4.0 3.5 4.2

PCE 1.9 3.1 3.3 1.9 3.7 2.5 4.3 3.6 4.2

Saving (percent) (Avg)

Personal Saving Rate 2.2 1.8 0.4 0.8 0.9 0.5 0.4 0.2 2.6

Gross Saving as a Share of GDP 13.4 14.0 14.9 13.8 13.7 14.0 13.6 12.5

Net Saving as a Share of NNP 1.5 2.0 2.4 2.1 1.3 1.8 1.2 0.0

Productivity (percent change) -----------------(Q4 to Q4)------------------ ---------------(annual rate)------------------

Nonfarm 4.7 1.8 1.5 0.6 2.8 5.8 0.8 2.6 2.2

Manufacturing 5.2 3.1 3.4 1.5 2.6 4.5 4.2 3.4 -1.4

Unit Labor Costs - Nonfarm 0.5 2.1 2.1 3.6 1.5 -2.4 4.5 2.5 1.3

Hourly Compensation - Nonfarm 5.3 3.9 3.6 4.3 4.3 3.3 5.4 5.2 3.6

Employment Cost Index, compensation, civillian 3.9 3.6 3.2 3.3 3.0 3.1 3.4 3.0 2.6

U.S. ECONOMIC STATISTICS - MONTHLY DATA

year to date

2004 2005 2006 2007 2008 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08

(Annual Average) (Avg)

Unemployment Rate (level) 5.5 5.1 4.6 4.6 5.2 4.8 5.1 5.0 5.5 5.5 5.7

Payroll Employment (monthly increase, thousands) (Avg)

Total Nonfarm 173 211 175 91 -66 -83 -88 -67 -47 -51 -51

Private 159 197 159 71 -93 -109 -103 -91 -99 -94 -76

Inflation (percent) (Dec to Dec) (Ann rate)

CPI (over year or month) 3.3 3.4 2.6 4.1 6.2 0.0 0.3 0.2 0.6 1.1 0.8

CPI (over year ago) 4.1 4.0 3.9 4.1 4.9 5.5

excluding food and energy (over year or month) 2.2 2.2 2.6 2.4 2.5 0.0 0.2 0.1 0.2 0.3 0.3

excluding food and energy (over year ago) 2.3 2.4 2.3 2.3 2.4 2.5

PPI - finished goods (over year or month) 4.4 5.4 1.1 6.4 12.8 0.3 0.9 0.3 1.4 1.8 1.2

PPI - finished goods (over year ago)

(Annual Average) (Avg)

West Texas Intermediate crude oil ($/barrel, spot) 41.4 56.5 66.1 72.4 114.2 95.4 105.6 112.6 125.4 133.9 133.4

Housing (thousand units, annual rate) (Annual Average) (Avg) (Annual Rate)

Housing Starts 1,950 2,073 1,812 1,341 1,028 1,107 988 1,004 982 1,084 965

New Single-Family Homes Sold 1,201 1,279 1,049 768 537 572 513 542 514 503 515

(Avg)

Auto and Light Truck Sales (million units, ann'l rate) 16.8 17.0 16.5 16.2 14.4 15.4 15.1 14.5 14.3 13.7 12.6

(Dec to Dec) (Ann rate) (previous month)

Retail Sales and Food Services (growth, percent) 8.1 4.8 5.3 3.4 3.1 -0.5 0.5 0.2 0.8 0.3 -0.1

ex - motor vehicles and parts dealers 8.2 6.9 5.5 4.8 8.3 -0.2 0.8 1.0 1.2 0.9 0.4

Industrial Production (growth, percent) (Dec to Dec) (Ann rate)

Total 4.3 2.8 1.3 2.0 -0.9 -0.3 -0.3 -0.6 -0.2 0.5 0.2

Manufacturing 5.1 3.5 1.5 1.8 -1.5 -0.6 0.1 -0.9 0.1 0.1 0.4

Capacity Utilization (percent) (Annual Average) (Avg)

Total 78.5 80.2 80.9 81.0 80.1 80.3 80.5 79.8 79.6 79.8 79.9

Manufacturing 77.1 78.6 79.4 79.4 78.0 78.4 78.5 77.6 77.5 77.5 77.7

(Annual Average) (Avg)

ISM Composite Index - Manufacturing 60.5 54.4 53.1 51.1 49.4 48.3 48.6 48.6 49.6 50.2 50.0

ISM Business Activity Index - Nonmanufacturing 62.4 60.2 58.0 56.0 49.8 50.8 52.2 50.9 53.6 49.9 49.6

Preliminary Annual Report on U.S. Holding of Foreign Securities

Preliminary data from an annual survey of U.S. portfolio holdings of foreign securities at year-end 2007 are released today and posted on the U.S. Treasury web site at (http://www.treas.gov/tic/fpis.html). Final survey results, which will include additional detail as well as revisions to the data, will be reported on October 31, 2008.

The survey was undertaken jointly by the U.S. Treasury Department, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System.

A complementary survey measuring foreign holdings of U.S. securities also is conducted annually. Data from the most recent such survey, which reports on securities held on June 30, 2008, are currently being processed. Preliminary results are expected to be reported on February 27, 2009.

Overall Preliminary Results

The survey measured U.S. holdings at year-end 2007 of approximately $7.2 trillion, with $5.2 trillion held in foreign equities, $1.6 trillion in foreign long-term debt securities (original term-to-maturity in excess of one year), and $0.4 trillion held in foreign short-term debt securities. The previous such survey, conducted as of year-end 2006, measured U.S. holdings of $6.0 trillion, with $4.3 trillion held in foreign equities, $1.3 trillion in foreign long-term debt securities, and $0.4 trillion held in foreign short-term debt securities.

Table 1. U.S. holdings of foreign securities, by type of security, as of survey dates

(Billions of dollars)

Type of Security	Dec. 31, 2006	Dec. 31, 2007

Long-term Securities	5,623	6,855
Equity	4,329	5,248
Long-term debt	1,294	1,607
Short-term debt securities	368	357

Total	5,991	7,212

U.S. Portfolio Investment by Country

Table 2. U.S. holdings of foreign securities, by country of issuer and type of security, for the countries attracting the most U.S. portfolio investment, as of December 31, 2007

(Billions of dollars, except as noted)

	Country	Total	Equity	Long-Term Debt	Short-Term Debt
1	United Kingdom	1,142	715	286	141
2	Japan	594	529	60	4
3	Canada	586	379	185	22
4	Cayman Islands	544	232	271	41
5	France	448	348	83	17
6	Germany	426	329	89	8
7	Switzerland	288	281	4	3
8	Bermuda	273	256	17	*
9	Netherlands	235	154	76	5
10	Australia	223	138	73	11
11	Brazil	189	173	16	*
12	Spain	146	107	38	2
13	Korea, South	140	129	10	*
14	Ireland	132	49	50	33
15	Hong Kong	121	120	2	*
16	Italy	120	97	22	1
17	Sweden	112	57	29	26
18	Mexico	110	85	24	*
19	China²	97	96	1	*
20	Luxembourg	95	40	44	11
21	Finland	94	90	4	*
22	Netherlands Antilles	89	88	1	*
23	India	85	82	3	*
24	Taiwan	81	81	*	0
25	Russia	81	74	7	*
	Rest of world	761	519	211	30
	Total	7,212	5,248	1,607	357

The stock of foreign securities for December 31, 2007 reported in this survey may not, for a number of reasons, correspond to the stock of foreign securities on December 31, 2006, plus cumulative flows reported in Treasury's transactions reporting system. The final report on U.S. holdings of foreign securities as of end-year 2007 will contain an analysis of the relation between the stock and flow data.

Treasury Distributes 2.404 Million Additional Stimulus Checks Since End of Mass Disbursement

Washington--The Treasury Department announced today that it has distributed 2.404 million stimulus payments, totaling $1.5 billion since mass disbursement of payments ended July 11. As of the end of August, a total of 114.809 million payments have been distributed totaling $93.389 billion.

While mass disbursement of stimulus checks ended July 11, small batches of payments continue to be sent out to American households. The Treasury Department will announce updates monthly until the end of the year. The Treasury Department also reminds Americans, especially those seniors and veterans who do not normally file a tax return, to file a return by the October 15^{th filing
deadline to receive a stimulus payment this year.}

Treasury Targets Rising Colombian Narcotics Traffickers

Washington, DC--The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today designated two Colombian individuals, Jesus Maria Alejandro Sanchez Jimenez and Rafael Angel Sanchez Rua, as Specially Designated Narcotics Traffickers (SDNTs) pursuant to Executive Order 12978. OFAC also designated as SDNTs two other individuals and four entities located in Colombia . Sanchez Jimenez and Sanchez Rua are among those who have inherited the drug trafficking organization once led by SDNT principal Carlos Mario Jimenez Naranjo (alias "Macaco"), who is now in U.S. custody.

"The recent extradition of Carlos Mario Jimenez Naranjo represents a success in the U.S. and Colombian governments' efforts against narcotics trafficking. It also demonstrates the Colombian government's commitment and leadership in this effort," said OFAC Director Adam J. Szubin. "Today's designation exposes two of the individuals who have replaced Jimenez Naranjo, who headed one of the most powerful and ruthless criminal groups in Colombia ."

Carlos Mario Jimenez Naranjo was extradited to the United States on May 7, 2008. He faces federal drug trafficking charges, among other charges, in the U.S. District Court for the District of Columbia and the U.S. District Court for the Southern District of Florida.

Jesus Maria Alejandro Sanchez Jimenez, also known as "El Primo" and "Scubi," is from Pereira , Colombia and is a cousin of Jimenez Naranjo. Sanchez Jimenez helped manage Jimenez Naranjo's drug trafficking operations while the latter was in a Colombian prison awaiting extradition to the United States . Sanchez Jimenez has grown more powerful following the recent assassination in Argentina of his close associate, Hector Edilson Duque Ceballos (alias "Monoteto"), who was also a lieutenant in Jimenez Naranjo's drug trafficking organization. Rafael Angel Sanchez Rua is from Cartago , Colombia and is a long-time drug trafficking partner of Jimenez Naranjo. Sanchez Rua is involved in the transportation of Colombian cocaine to Europe through Venezuela . In the late 1990s, Sanchez Rua was arrested by Colombian authorities on arms smuggling charges. The current whereabouts of Jesus Maria Alejandro Sanchez Jimenez and Rafael Angel Sanchez Rua are unknown.

Today's OFAC action also targets entities and individuals that hold assets on behalf of Jesus Maria Alejandro Sanchez Jimenez and Rafael Angel Sanchez Rua. Ganaderia Arizona, controlled by Sanchez Jimenez, is a prize-winning cattle farm located in Caucasia , Colombia with an office in Medellin . Sanchez Rua controls three companies in or near Cartago , Colombia : Almacen y Compraventa Los 3 Oros, an agricultural store; Granja Porcicola La Fortaleza, a commercial pig farm; and Motel Momentos E.U., an hourly motel. OFAC also designated today Luz Piedad Restrepo Encizo and Marisol Viedma Abonce, who act for or on behalf of Sanchez Rua.

This designation is part of the ongoing interagency effort by the Departments of the Treasury, Justice, State and Homeland Security to implement Executive Order 12978 of October 21, 1995, which applies financial sanctions against Colombia 's drug cartels. Today's designation action freezes any assets the designees may have that are subject to U.S. jurisdiction and prohibits all financial and commercial transactions by any U.S. person with the designated companies and individuals.

A detailed look at the program against Colombian drug organizations is provided in OFAC's March 2007 Impact Report on Economic Sanctions Against Colombian Drug Cartels.

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $74,791 million as of the end of that week, compared to $75,185 million as of the end of the prior week.

I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)


	August 1, 2008
A. Official reserve assets (in US millions unless otherwise specified) ¹	Euro	Yen	Total
(1) Foreign currency reserves (in convertible foreign currencies)			74,791
(a) Securities	10,057	11,925	21,982
of which: issuer headquartered in reporting country but located abroad			0
(b) total currency and deposits with:
(i) other national central banks, BIS and IMF	15,364	5,865	21,229
ii) banks headquartered in the reporting country			0
of which: located abroad			0
(iii) banks headquartered outside the reporting country			0
of which: located in the reporting country			0
(2) IMF reserve position ²	4,926
(3) SDRs ²	9,765
(4) gold (including gold deposits and, if appropriate, gold swapped) ³	11,041
--volume in millions of fine troy ounces	261.499
(5) other reserve assets (specify)	5,848
--financial derivatives
--loans to nonbank nonresidents
--other (foreign currency assets invested through reverse repurchase agreements)	5,848
B. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--financial derivatives not included in official reserve assets
--gold not included in official reserve assets
--other

II. Predetermined short-term net drains on foreign currency assets (nominal value)


			Maturity breakdown (residual maturity)
		Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits
--outflows (-)	Principal
	Interest
--inflows (+)	Principal
	Interest
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) Short positions ( - ) ⁴		-62,000	-62,000
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)


III. Contingent short-term net drains on foreign currency assets (nominal value)


		Maturity breakdown (residual maturity, where applicable)
	Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1 year
(b) Other contingent liabilities
2. Foreign currency securities issued with embedded options (puttable bonds)
3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (+)
--BIS (+)
--IMF (+)
(b) with banks and other financial institutions headquartered in the reporting country (+)
(c) with banks and other financial institutions headquartered outside the reporting country (+)
Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (-)
--BIS (-)
--IMF (-)
(b) banks and other financial institutions headquartered in reporting country (- )
(c) banks and other financial institutions headquartered outside the reporting country ( - )
4. Aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) Short positions
(i) Bought puts
(ii) Written calls
(b) Long positions
(i) Bought calls
(ii) Written puts
PRO MEMORIA: In-the-money options ¹¹
(1) At current exchange rate
(a) Short position
(b) Long position
(2) + 5 % (depreciation of 5%)
(a) Short position
(b) Long position
(3) - 5 % (appreciation of 5%)
(a) Short position
(b) Long position
(4) +10 % (depreciation of 10%)
(a) Short position
(b) Long position
(5) - 10 % (appreciation of 10%)
(a) Short position
(b) Long position
(6) Other (specify)
(a) Short position
(b) Long position

IV. Memo items


(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic currency)
--nondeliverable forwards
--short positions
--long positions
--other instruments
(c) pledged assets
--included in reserve assets
--included in other foreign currency assets
(d) securities lent and on repo	5,967
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
--borrowed or acquired and included in Section I
--borrowed or acquired but not included in Section I	5,967
(e) financial derivative assets (net, marked to market)
--forwards
--futures
--swaps
--options
--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) short positions ( – )
(b) long positions (+)
--aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) short positions
(i) bought puts
(ii) written calls
(b) long positions
(i) bought calls
(ii) written puts
(2) To be disclosed less frequently:
(a) currency composition of reserves (by groups of currencies)	74,791
--currencies in SDR basket	74,791
--currencies not in SDR basket
--by individual currencies (optional)

Notes:

3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

Economic Statistics - Monthly Data for U.S. Department of the Treasury. This information has recently been updated, and is now available.

Remarks by Secretary Henry M. Paulson, Jr.
on the Markets and Economy
at the Exchequer Club

Washington - Good afternoon. Thank you for the opportunity to share my thoughts on the current state of the U.S. economy, and our housing and capital markets.

U.S. Economy

Data released this morning show that our economy expanded in the second quarter – GDP growth was 1.9 percent. This despite an unusually large inventory reduction which subtracted 1.9 percentage points from growth. Consumption added 1.1 percentage points – with a good boost from the stimulus. Trade continues to drive growth, adding 2.4 percentage points. Earlier this year, before the bipartisan stimulus plan was enacted, many had predicted far slower growth, even approaching zero. Clearly, the stimulus plan has supported the U.S. economy during this difficult period, and couldn't have been timelier. American families spent; companies invested and benefited from strong export growth.

I spent time last fall and winter traveling the country, and heard from many homeowners about their mortgage and other housing difficulties, and of their concerns about the broader economy. I also talked to people in a variety of industries and asked them what their business was telling them about where the economy was headed. My travels, my discussions with industry leaders and a review of the economic data with the rest of the President's economic team convinced me in mid-December that the economy had taken a sharp turn for the worse and the risks were to the downside going forward. President Bush recognized the downturn early, and directed me to work with Congress to craft legislation to bolster both consumer spending and business investment to protect the health of our economy. We all worked together quickly to enact a stimulus package that is temporary, targeted, big enough to have an impact and easy to implement quickly.

On April 28, just 75 days after the President signed the Economic Stimulus Act of 2008, the first electronic deposits were sent into Americans' bank accounts. One week later, the first week of May, paper checks were being printed and mailed. In the second quarter, Treasury employees sent almost 95 million payments totaling over $78 billion to American households. The Financial Management Service managed the high demands of tax season and simultaneously printed stimulus checks; the IRS has handled millions of taxpayer inquiries over the phones and through its website. Given the enormity of the effort, it was accomplished effectively and with minimal disruptions.

The private sector offered promotions that increased stimulus payment buying power. Local and national retailers, from vacation planners to supermarkets, gave incentives, sometimes as much as a 10 percent bonus, to those who spent their checks at those businesses.

We also know that companies are taking advantage of the stimulus package's temporary tax incentives. Businesses ranging from restaurants to computer service providers are using these provisions to invest in their companies and grow. We expect the stimulus to continue to support the economy in the second half of the year.

While the stimulus is making our economy stronger than it would have been otherwise, the housing correction, credit market turmoil, and high energy prices remain a considerable drag on the economy – and the effects of this drag can be seen in the soft job market.

Record high oil prices, which have increased dramatically since year-end, are putting a large burden on the U.S. and the world economy and creating hardships for families, households and industries everywhere. There are no simple or quick remedies for this. High oil prices are the result of supply and demand factors that are likely to persist for some time.

On the positive side, global economic growth from 2002 through the end of 2007 was remarkably strong, averaging over 4 percent. This growth, led by emerging market economies like China and India, has lifted millions of people around the world out of poverty. As living standards improve in emerging economies, demand for oil will continue to rise. Producers, unfortunately, have not made the investments necessary to keep pace with this growing demand. Because production capacity and investment has been curtailed over the last decade, supply now barely offsets declining production in older fields, let alone meets new demand.

Successfully alleviating the pressures in oil markets will require a long-term, comprehensive effort to keep supply on pace with demand. On the demand side, we need to allow market forces to work, to avoid subsidies and other potentially distorting policies. We also need to reduce oil dependency through investments in renewable fuels and alternative technologies, and improved energy efficiency and conservation.

While our economy faces substantial difficulties that will continue to be a drag on growth in the short term, it is important to remember that our long term fundamentals are strong. Recognizing the challenges ahead of us, I expect our economy to continue growing this year although at a moderate pace. We are making progress although not in a straight line; housing continues to be at the heart of our economic challenges and remains our most significant downside risk. We must work through the necessary adjustments in housing and credit markets to return to stronger growth next year and beyond.

Housing Markets

It took years of excesses – lax underwriting standards, excessive home price appreciation and overbuilding – to sow the seeds of the housing correction.

That said, we need to recognize that there is not a national housing market, but a collection of regional markets. The severity of the current correction varies widely by state and region. Areas that had some of the most pronounced price appreciation are facing the most pronounced price declines and foreclosure increases. Of course, that does not mean the correction isn't being felt across the nation. Foreclosure starts as a share of total outstanding mortgages have risen from 0.4 percent to 1.0 percent since the beginning of 2006. However, OFHEO's home price data shows that home prices actually rose in about half of the states in the first quarter.

Due to overbuilding in prior years, home inventories are now far above normal levels. At the current sales rate, there is a ten month inventory of new single-family homes on the market, and an 11 month inventory of existing single-family homes. This compares with a historical average of about six to seven months. The key to stabilizing the housing and financial markets is to work through these home inventories as quickly as possible.

Inventories decrease in two ways – fewer homes are built, and more buyers come into the market. We are seeing the necessary sharp decline in homebuilding. Single-family housing starts are down 65 percent from their 2006 peak and look to remain weak through this year.

New home sales appear to have stabilized to a degree – sales of new single-family homes are down 62 percent from their peak; and sales have been flat, rather than declining, for three months now. The drastic slowing in new construction has helped reduce the number of new single-family homes on the market, which is down 26 percent since its 2006 peak. The number of existing homes on the market remains elevated, but there are also tentative signs that sales in this category have been stabilizing since early 2008.

We all recognize that foreclosure sales increase inventories and, as foreclosed homes are put on the market, they drive down prices. Foreclosures and short sales now make up about one-third of existing home sales.

Treasury has worked closely with lenders and key industry participants on an aggressive strategy to do everything possible to help avoid preventable foreclosures. Last summer, we foresaw a wave of struggling homeowners and recognized that without some changes, the industry's protocol would not be able to handle the volume of homeowners seeking assistance. We supported the creation of the HOPE NOW Alliance of industry participants to work to avoid a market failure, in which homeowners who otherwise would have been able to modify or refinance into an affordable mortgage instead lost their homes simply because the system was too overwhelmed to help them. HOPE NOW has been instrumental in this effort and the industry reports that it has helped 1.9 million homeowners avoid foreclosure through loan workouts since last July. At the current pace, nearly 200,000 additional borrowers are helped every month.

From the outset of the HOPE NOW process, I have measured success by whether a borrower who has made all the payments at the initial rate, but couldn't afford the reset and reached out for help avoids going into foreclosure. And so far, the data on this question show an unqualified success. However, given the lax underwriting standards that preceded this correction, some people bought homes that they simply cannot afford. Many of them will become renters again.

Foreclosures and existing home inventories are likely to remain substantially elevated this year and next and home prices are likely to decline further on a national basis. The key question is, "When will the correction be largely behind us?" While home price adjustments will continue for some time, and certainly well beyond the end of the year, I believe we can move through the bulk of the correction in months rather than years.

Supporting the Availability of Mortgage Finance

Of course, to turn the corner mortgage financing must be available. We need more homebuyers to return to the market and buy homes, and to do that they need available and affordable mortgage financing. We have taken several steps to support the mortgage financing market now, and to address some of the structural issues that contributed to the current credit contraction.

In the past year, the FHA has implemented several initiatives to expand access to mortgage credit to troubled borrowers and since last August, nearly 300,000 borrowers have refinanced into affordable FHA fixed rate mortgages. Yesterday, President Bush signed the Housing and Economic Recovery Act into law, which will modernize FHA programs to provide greater access to FHA mortgages, including to some borrowers who are underwater on their mortgage.

More importantly to our system, the new law also includes significant, temporary provisions that will boost market confidence in the two current, largest sources of U.S. mortgage finance, the housing GSEs Fannie Mae and Freddie Mac, and establish the world-class regulator needed to address the systemic risk they pose.

Fannie and Freddie's continued activity is central to the speed with which we emerge from this housing correction and remove the underlying financial market and financial institution uncertainty. The temporary liquidity and capital backstops included in this new law are aimed at supporting the short and longer term stability of financial markets, not just these two enterprises. I would rather not have been in the position of asking for extraordinary authorities to support the GSEs. But I am playing the hand that I have been dealt. We saw a clear need to strengthen Fannie and Freddie's ability to continue to play their important role in financing mortgages and in our capital markets more broadly. There are no plans to access either of these temporary backstops. If accessing them becomes necessary, we would do so only under terms and conditions that protect the U.S. taxpayer.

Over the longer term, it is just as vital to our housing markets and our capital markets that structural concerns about the GSEs be addressed. We have long maintained that the GSEs have the potential to pose a systemic risk and recent events remove any debate on that question. Congress now has created a GSE regulator with authorities appropriate to the task and on par with other financial regulators. We have long sought this result, and our work is far from done. All parties must get to work immediately to begin to address the systemic risk issues posed by the GSEs.

In addition to securitization done by Fannie and Freddie, private mortgage-backed securitization provides additional mortgage funding for U.S. homebuyers. This private-label securitization has become severely strained. The sooner we work through the housing correction stabilizing home prices will do much to alleviate uncertainty about the values of mortgage-related assets. The private-label market will evolve in response to current challenges, and I expect it to return with greater risk-awareness and investor discipline.

As we focus on reinvigorating the traditional sources of mortgage financing, we have studied the range of other available choices. Three days ago, Treasury and U.S. regulators were joined by the nation's four largest banks to announce a Best Practices guide to kick-start the residential covered bonds market. Covered bonds are used for mortgage financing throughout the United Kingdom and Europe, and I believe covered bonds are a promising path for a new source of mortgage financing that will complement our existing system.

Capital Markets

The housing correction has fostered capital market strains that are having an impact on the broader economy. Tighter credit standards and increased interest rate spreads affect anyone who wants to buy a house or a car, get a credit card, or take out a loan to pay for school. Credit market strains affect cities, institutions and companies looking to fund long-term projects. Along with the Federal Reserve, we have taken aggressive actions to provide confidence and stability to financial markets, and I continue to urge financial institutions to strengthen their balance sheets by raising capital, de-leveraging and reviewing dividend policies so that they continue to play their vital role in supporting economic growth.

Even in this difficult environment, financial institutions have raised $190 billion in capital. Markets and financial institutions continue to reassess risk and re-price securities across a number of asset classes and sectors. This is a positive return to market fundamentals, and we are making progress. However, until the housing market stabilizes further we should expect some continued stresses in our financial markets.

Our first and most urgent priority is working through the housing downturn and capital market turmoil, and that will be our priority until these situations are resolved. At the same time, we are also examining and addressing the policy issues raised by the events of recent months. Our regulators are shining a light on our challenges, and market practices and discipline on the part of financial institutions and investors are improving. Through the President's Working Group on Financial Markets, the PWG, we have issued a report analyzing the causes of the current turmoil and recommending a comprehensive policy response, implementation of which is well underway. Regulators are enhancing guidance, issuing new rules, and communicating more effectively across agencies – domestically and internationally.

In addition to these immediate actions, the Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and reinforced my view that it must be updated.

In March, after almost a year of study and analysis, we released our recommendations in the Blueprint for a Modernized Financial Regulatory Structure. It is as compelling now as ever that we need a financial regulatory structure better suited to protect investors, protect the stability of the financial system, support the innovation and risk-taking that fuel our economy and improve both market oversight and market discipline.

In our Blueprint, we recommend a U.S. regulatory model based on objectives that more closely link the regulatory structure to the reasons why we regulate. Our model proposes three primary regulators that are organized by objective rather than functional financial institution category: one regulator focused on market stability across the entire financial sector, another focused on safety and soundness of institutions supported by a federal guarantee, and a third focused on protecting consumers and investors. This structure takes into account the new financial landscape and the role played by non-bank institutions and can more easily adapt to the ever-changing marketplace. Our Blueprint also recognizes the critical role market discipline plays in maintaining stability.

When we released the Blueprint, I was clear that it was a long-term vision that would take time to consider and implement. That is still the case, but today we have both a clear need and a unique opportunity to accelerate this process.

Whether it was Long Term Capital Management in 1998 or Bear Stearns this year, Americans have come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk. But, as we noted in our Blueprint, the Fed has neither the clear statutory authority nor the mandate to attempt to anticipate and prevent risks across our entire financial system. Therefore we should consider how most appropriately to give the Federal Reserve the information and authority necessary to play its expected role of market stability regulator. The Fed would need the authority to access necessary information from complex financial institutions -- whether it is a commercial bank, an investment bank, a hedge fund, or another type of financial institution -- and the tools to intervene to mitigate systemic risk in advance of a crisis.

This is a tall order. History teaches us that in a dynamic market economy regulation alone cannot eliminate instability. To be clear, I do not believe that we can eliminate, by regulation or otherwise, all future bouts of market instability -- they are difficult to predict and past history may be a poor predictor of the future. However, just because the overall task is difficult, we should not stop trying to understand and mitigate instability.

To that end, we should create a system that gives us the best chance of foreseeing a crisis, including a market stability regulator with the authorities to avert systemic issues it foresees and providing the information, tools and authorities to deal better with unexpected events when they inevitably occur.

To complement this regulator's efforts, we must have strong market discipline to reinforce the stability of our markets. Market discipline constrains risk most effectively when a financial institution can fail without threatening the overall system.

However, two concerns underpin expectations of regulatory intervention to prevent a failure. They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so -- and that requires that we reduce the likelihood that it is so.

Strengthening market infrastructure will reduce the expectation that an institution is too interconnected to fail. We need to strengthen our practices and financial infrastructure in the OTC derivatives market and in the tri-party repo system. Important work is underway in each of these areas, and needs to be completed quickly.

To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large complex financial institution. Today, our tools are limited. We have specialized resolution provisions that apply solely to insured depository institutions. For these institutions, this special insolvency regime was deemed necessary because of the role these institutions play in the overall financing of economic activity and the presence of a government guarantee.

In contrast, bankruptcy law serves as the resolution regime for non-depository financial institutions and most corporations. These two very different approaches for resolution have advantages and disadvantages. Bankruptcy imposes market discipline on creditors, but in a time of crisis could involve undue market disruption.

We need to consider broadly the resolution regime in light of a changed financial landscape where non-bank financial institutions play a significantly greater role. It is clear that some institutions, if they fail, can have a systemic impact, so we must give regulators the authorities to limit that impact and facilitate an orderly failure. In my view, looking beyond the immediate market challenges of today, we need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm. To do this, we will need to give our regulators additional emergency authority to limit temporary disruptions. These authorities should be flexible and -- to reinforce market discipline -- the trigger for invoking such authority should be very high, such as a bankruptcy filing. As part of this process we should consider ways to ensure that costs are imposed on creditors and equity holders. Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch. It should be focused on areas with the greatest potential for market instability and should contain sufficient criteria to ensure that the cost to the taxpayers is minimized.

Conclusion

This period of market stress has revealed broader financial regulatory issues, and we are working to address these on a number of fronts as I have described. We remain focused and vigilant. I am confident that we will work through current challenges and Americans will benefit from an economy that emerges stronger and better poised for robust growth.

Minutes of the Meeting of the
Treasury Borrowing Advisory Committee
Of the Securities Industry and Financial Markets Association
July 29, 2008

The Committee convened in closed session at the Hay-Adams Hotel at 10:30 a.m. All Committee members were present. Acting Undersecretary for Domestic Finance Anthony Ryan and Office of Debt Management Director Karthik Ramanathan welcomed the Committee and gave them the charge.

The first item on the charge related to Treasury's financing needs in the coming years as well as current and medium-term trends in the economic outlook. In particular, Treasury sought the Committee's advice on whether the recent adjustments to the financing schedule provided Treasury with sufficient debt management tools to handle a wide range of budgetary and financing outcomes, or if additional adjustments should be considered.

To provide background, Director Ramanathan delivered a presentation to the Committee which highlighted current credit market conditions and potential factors to consider in addressing this issue. In particular, current credit market conditions remained volatile, and potential pressures on corporate tax receipts and individual withheld taxes could increase Treasury's borrowing needs in FY 2008 and FY 2009.

Director Ramanathan noted that marketable borrowing – i.e. borrowing from the public – is projected to total $555 billion in FY 2008 versus just $134 billion for FY 2007, and that this large increase warranted the Committee's focus.

The potential weakness in receipts as a result of the challenges facing the economy as well as reduced non-marketable debt issuance, large redemptions by the Federal Reserve in conjunction with its various liquidity initiatives, and expedited payments related to the fiscal stimulus package – all within a compressed time period - necessitated the increased issuance of Treasury bills, cash management bills, and shorter dated nominal coupons. Redemptions and outright sales by the Federal Reserve since the beginning of the fiscal year for liquidity purposes have resulted in the Treasury's need to issue over $150 billion in additional bills and coupons. Moreover, state and local government issuance for which net issuance was $58 billion in fiscal year 2007 versus total a net redemption of $10 billion in 2008 fiscal year to date.

Director Ramanathan also noted that total cash management bills in FY 2008 year to date total over $300 billion versus about $250 billion for all of FY 2007. At the same time, 2-year note issue sizes have increased $13 billion year to date and 5-year note issue sizes have increased $8 billion. In addition to increasing bills by over $200 billion this fiscal year, Treasury introduced a monthly 52-week bill in July 2008. Nonetheless, debt rollover and average portfolio metrics have changed modestly and remain within historical ranges.

Based on deficit projections from the recently released Mid Session Review, as well as estimates provided by primary dealers of $413 billion for FY 2008 and $422 billion for FY 2009, Director Ramanathan noted that Treasury's additional funding needs may need to be focused on other nominal coupon issuances beyond the short end of the curve. While the 2-year note to 5-year note sector raises cash in FY09, Treasury needs to be flexible beyond that time horizon as a result of the uncertainty regarding financing needs and due to the debt maturity profile of the portfolio. Treasury will continue to adjust issuance sizes in the front of the curve, but also look to adjustments in the medium to longer dated sector of the existing curve to meet borrowing needs.

With these highlights, Director Ramanathan asked the Committee its views on debt issuance options and the optimal financing strategy given current projections and constraints.

A Committee member began by asking about the average maturity of the debt, noting that Treasury had over the last year issued a significant amount of debt in bills and short to intermediate coupons. Director Ramanathan explained that the current average maturity was 56 months, well within the historical norms of the last 30 years. Treasury does not target an average maturity at this time, but feels comfortable with this measure being within historical norms as long as overall flexibility is maintained.

Another Committee member asked if the volatility in the cash balance was typical of prior years. Director Ramanathan replied that while cash balances maintain a seasonal pattern, the current fiscal year has seen more volatility due to many factors including liquidity intitatives, stimulus payments, unexpected outlays, and a decline in the growth of receipts.

The member pointed out that Treasury has benefited from the flight to quality, but needs to consider the situation in which credit market conditions improve. Several members stated that Treasury's issuance of bills was clear and transparent given its needs, and that at some point, the Federal Reserve would look to reconstitute its portfolio. As a result, Treasury's marketable borrowing needs would decline. Another member commented that the short to intermediate coupon sector has seen significant increases in issue sizes and that moving further out the curve was prudent.

Another member pointed out that there was a significant uncertainty in the fiscal situation posed by dislocations in the credit markets, the slowdown in the economy, supplemental expenditures, and the imminent need for large entitlement spending (Social Security, Medicare, and Medicaid, etc.). Given the recent increases in shorter term funding and the sizable projected borrowing needs going forward, the member believed that this may be the time to recognize that the borrowing needs were becoming more structural. This member continued by stating that Treasury should consider increasing its maturity profile using existing securities to meet these financing needs.

A discussion followed regarding the best method for Treasury to raise cash and reduce rollover risk. One member, noting the chart with the maturity profile indicated that there was room to add issuance that matures in the 2011 to 2013 region and also to add maturities in the 2019 to 2028 region. This member suggested adding 3-year notes or 10-year notes to more evenly distribute the debt profile..

Another member suggested that Treasury first consider issuing 10-year notes monthly, either through a double reopening or through new initial offerings of 10-year notes each month. This same member also suggested that Treasury offer new initial quarterly 30-year bonds, as opposed to the current practice of offering a combination of new and reopened 30-year bonds. Another member stated that there would be substantial demand for securities greater than 5-year in length from investors seeking to add duration. Several members stated that there may also be substantial demand for longer-term products, specifically 10-year notes, from accounts seeking to hedge mortgage duration.

A few members noted that the current 30-year auction cycle with an initial offering and reopening with accrued interest was unduly, and that Treasury should switch to original issue 30-year bonds. Director Ramanathan noted that Treasury moved to the current cycle of 30-year bond issuance to enhance liquidity in the STRIPS market by adding May/November maturity points, but that Treasury understood that such an adjustment may improve the debt maturity profile.

Alternative maturity points were discussed briefly by the committee. One member commented that previous issues of 4-year notes, 7-year notes, and 20-year bonds always traded at a discount. This member thought it would be costly to issue at those points or any "new" points outside of current points at this time. Another member stated that if Treasury were to increase 10-year and 30-year issuance, it could then reintroduce a 3-year to meet even greater than expected borrowing needs as well as to prevent average maturity from extending too far. Another member stated given the projected secular borrowing needs, Treasury should consider new liquidity points, including 50-year bonds or callable issues, but that such issuances we unnecessary at this point and prior to all of the other adjustments Treasury could make in their place.

A general consensus developed that Treasury should consider issuing 10-year notes with two reopenings instead of one reopening, and also move to new issue quarterly 30-year bonds. In addition, the Committee generally agreed that there was additional room in the front end of the curve to make modest increases in 2-year and 5-year notes, and that further deterioration in the fiscal outlook could be met by reintroducing the 3-year note or other such securities.

After finishing this discussion relate dto the fiscal outlook, the Committee moved on to the second item on the charge dealing with credit market conditions. The presenting member began by reviewing the history of the funding strains that were characteristic of recent credit market conditions. The member noted that LIBOR/OIS spreads were significantly more volatile and were trading at elevated levels relative to the historical trends. Similarly, credit default swaps for banks were trading higher. High volatility in LIBOR/OIS reduced investor confidence by creating strains in the repo markets, resulting in wider bid-ask spreads and less liquidity.

The Committee member then discussed the various Federal Reserve initiatives designed to enhance liquidity. The presenter began with the a discussion of the Term Auction Facility (TAF) noting that it had grown in size from $40 billion from its inception in December of 2007 to its current size of $150 billion. At the current size, bid-to-cover ratios were around 1, suggesting that some level of equilibrium had been reached. The presenting member suggested that while the TAF has been effective in reducing 1 month LIBOR/OIS spreads lower by over 60bps, 3 month LIBOR/OIS spreads remained elevated at 80 bps. The presenting member suggested extending the TAF to 90-days to complement the current 1-month TAF. The presenting member then provided background on the Treasury Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) as well as their impact on Treasury issuance. The presenting member noted that Treasury Bills and Treasury repo have cheapened due to increased Treasury issuance and as a result of the initiatives of the Federal Reserve.

The presenting member then moved on to investor activity and sentiment. The presenting member noted the increase of assets flowing into money market funds. The member noted that a reconstitution of the SOMA portfolio could mitigate any significant improvement in market conditions, but that Treasury would be prudent in extending its portfolio. The presenting member also noted that GSE discount note issuance has doubled and that the Federal Home Loan Bank had provided $380 billion of funding in return for mortgage collateral.

After the presentation was completed, Committee members commented on the various issues related to credit markets. One member commented that tri-party best practices would be extremely helpful especially if it included a discussion on clearing agent responsibilities. One member suggested regulation in the repo market might prevent some of the fails. Another member remarked that if issues like rollover risk in tri-party repo were addressed, investor confidence would further benefit. Finally one member suggested that concerns in the repo market should be resolved before PDCF is eliminated.

The Committee then moved on to the second presentation to Treasury which focused on TIPS and trends in inflation. The presenting member begun by noting that while headline CPI should remain well above 5% for the rest of the year, it is expected to collapse to core next year even if oil were to increase an additional $10 from current levels. The Committee member then noted that most surveys related to inflation lacked any significant predictive power and tended to be reactive to current inflation.

The presenting member noted that even with $497 outstanding in the TIPS market, daily trading volume is estimated to be $8 billion, representing a daily turnover of total outstanding of about 2%. By comparison, average daily turnover in the $4 trillion nominal Treasury market is estimated to be nearly 14%. The member pointed out that TIPS seem to have reached a plateau in terms of trading volume despite Treasury's continued efforts to grow the market. The member also stated that the TIPS market appealed to "buy-and-hold" investors while the nominal market attracted many more traders.

The presenting member then stated that TIPS have been a good value to investors, helping them to diversify inflation risks in fixed income portfolios and to express views on realized and expected inflation. The key downside for investors is the illiquidity of the product. Moreover, liquidity does not seem likely to improve given the private sector's reluctance to issue inflation indexed securities. This reluctance on the part of private issuers to issue such debt reflects very high costs (and uncertainty) associated with such issuance, very little fundamental depth of demand, and FAS-133 hedge accounting related issues.

On the other hand, from Treasury's perspective, while TIPS have modestly diversified the investor base, there have been substantial associated costs. The presenting member developed a cost model comparing TIPS issuance versus potential nominal coupon issuance, and concluded that the aggregate cost of the TIPS program was over $30 billion. This cost reflects the fact that realized inflation has been higher than expectations.

The member noted that excess expense of the TIPS program compared to the equivalent amount of nominal issuance is 30% of the overall program expense this year. The cost for the lack of liquidity in TIPS makes up 22% of the excess cost, or approximately $1 billion a year. The presenting member viewed this cost as non-transient. The other 78% of the excess cost was related to the difference between realized inflation and expectations. The presenting member measured liquidity differentials by comparing TIPS and nominal asset swap spreads.

Finally, the presenting member stated that TIPS did not gain the same flight to quality bid that nominal securities did in the recent credit market tightening which in turn caused an increase in the cost of 5-year TIPS relative to the 10-year TIPS and 20-year TIPS. The Committee member concluded the presentation by stating that extending the average maturity of the TIPS portfolio was not so obvious given variable demand at the 20-year point.

The Committee generally agreed that an increase of average maturity in the TIPS program would be best accomplished by reducing or eliminating 5-year TIPS issuance. There was general agreement that given the excess cost to date and the non-transient liquidity premium of TIPS, inflation indexed secruties over the past 10 years have proven to be a less efficient funding mechanism given Treasury's objective of the lowest cost of borrowing over time. The Committee also reiterated its previous suggestion of moderating the growth of the program and eliminating 5-year TIPS issuance.

Director Ramanathan responded by stating that Treasury remained committed to the TIPS, but that a moderation in the growth of the program has occurred given the pace of issuance ver the past ten years relative to nominal issuance.

One member remarked that the lack of a swaps market for TIPS or any sort of liquid CPI-U NSA inflation derivatives market made the TIPS market unattractive to private issuers. This factor helped to explain why TIPS were currently a more costly financing vehicle for Treasury relative to comparable nominal issuance. Another member stated that many investors were not interested in hedging CPI-U NSA. The lack of an inflation derivatives market also prevented short sales of TIPS, which reduced trading volumes and helped explain why there was no flight-to-quality buying in stressed markets.

Another member stated that TIPS should not be considered a growth product in the Treasury debt issuance portfolio. The product was complicated to price, the return profiles were difficult to explain, and the tax treatment made it unattractive to many accounts.

Another member noted, however, that globally there was growing interest in inflation-indexed products, and that if inflation were to continue to rise, there could be additional demand for TIPS. One member suggested that much of that interest was driven by regulatory induced demand that required investors to hold assets that are inflation indexed.

To conclude the discussion, a member asked if another distribution mechanism should be considered for selling TIPS such as by subscription with a price determined by Treasury. Members recommended that Treasury maintain its auction disctibutin method, but study the alternative strategy further.

The meeting adjourned at 11:56 a.m.

The Committee reconvened at the Hay-Adams Hotel at 6:00 p.m. All of the Committee members were present. The Chairman presented the Committee report to Acting Under Secretary Ryan.

The Committee then reviewed the financing for the remainder of the July through September quarter and the October through December quarter (see attached).

A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.

The meeting adjourned at 6:20 p.m.

_________________________________
Karthik Ramanathan, Director
Office of Debt Management, United States Department of the Treasury
July 29, 2008

Certified by:

___________________________________
Keith T. Anderson, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
July 29, 2008

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – July 29, 2008

Fiscal Outlook

Given Treasury's financing needs in the coming years as well as current and medium-term trends in the economic outlook, what are the Committee's thoughts on Treasury's debt issuance? In particular, we would like the Committee's advice on whether the recent adjustments to the financing schedule provide Treasury with sufficient debt management tools to handle a wide range of budgetary and financing outcomes, or if additional adjustments should be considered.

Credit Market Conditions

Treasury seeks the Committee's perspectives on the current conditions of credit markets. What are investors' perceptions of risk in light of previous actions by the Federal Reserve, including its introduction of various temporary facilities such as the Term Securities Lending Facility and the Primary Dealer Credit Facility, and additional recent initiatives by the Treasury and Federal Reserve? What are the implications for financial market investors, regulatory oversight, and market infrastructure, as well as their potential impact on Treasury market dynamics?

TIPS and Inflation Trends

In light of recent trends, Treasury would like the Committee's views on TIPS, particularly in regard to issuance of shorter-dated versus longer-dated inflation-indexed securities.

Financing this Quarter

We would like the Committee's advice on the following:

	The composition of Treasury notes and bonds to refund approximately $43.5 billion of privately held notes maturing on August 15, 2008.
	The composition of Treasury marketable financing for the remainder of the July-September quarter, including cash management bills.
	The composition of Treasury marketable financing for the October-December quarter, including cash management bills.

Treasury Releases Fifth in a Series of Social Security Papers

Washington, DC – Treasury today released the fifth in a series of papers on Social Security. Issue Brief No. 5 is entitled Social Security Reform: Strategies for Progressive Benefit Adjustments.

REPORTS

Social Security Reform

Treasury Releases Fifth in a Series of Social Security Papers

　

Statement For the Record of the Senate Committee on Finance Hearing on International Tax Reform Held on June 26, 2008

Chairman Baucus, Ranking Member Grassley, and Members of the Finance Committee, the Office of Tax Policy of the United States Department of the Treasury is pleased to present these comments for the record, as well as the attached Treasury Department report entitled, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.

The global economy has changed markedly over the past half century, and so too has the U.S. role in that global economy. Trade and investment flow across borders in greater volume and with greater ease. As we look to the future, many factors, including education, immigration, and trade policies play an important role in the lives and living standards of U.S. workers and in the ability of U.S. companies to compete globally. By influencing incentives to acquire and use capital, the U.S. international tax regime, and U.S. business taxes more generally, also play an important role in economic decision making.

Increasingly, the ability of U.S. companies to grow and prosper depends on their ability to do business globally. In the 1960s, the decade during which many of our current tax rules regarding cross-border activities and investment were first enacted, international trade and investment flows were much less important than they are today to the U.S. economy and to U.S. companies. Thus, the United States was free to make decisions about its tax system based primarily on domestic considerations. Moreover, our trading partners generally followed the U.S. lead in tax policy.

Circumstances have changed since the 1960s. Globalization – the growing interdependence of countries resulting from increasing integration of trade, finance, investment, people, information, and ideas in one global marketplace – has resulted in increased cross-border trade and the establishment of production facilities and distribution networks around the globe. Businesses now operate more freely across borders, and business location and investment decisions are more sensitive to tax considerations than in the past.

As barriers to cross-border movement of capital and goods have been reduced, differences in nations' tax systems have become a greater factor in the success of global companies. Globalization has made it imprudent for the United States, or any other country, to enact tax rules that do not take into account what other countries are doing. Our major trading partners recognize this. Many have modified or plan to modify their business tax systems to improve their global competitiveness. For example, during the past two decades, many of our major trading partners have lowered their corporate tax rates, causing the United States to go from being a low statutory corporate tax-rate country to being a high statutory tax-rate country. Moreover, during the same period, many of the member countries of the Organisation for Economic Co-operation and Development (OECD) have changed how they tax the foreign earnings of their companies, increasingly moving toward systems that exempt from tax the active foreign earnings of their multinational companies.

As our major trading partners respond to the realities of the global economy, U.S. companies increasingly suffer a competitive disadvantage. The U.S. business tax system imposes a burden on U.S. companies and U.S. workers by raising the cost of investment in the United States and burdening U.S. companies as they compete with foreign companies in foreign markets. Business taxes play a key role in the economy because they influence the incentive to acquire and use capital – the plants, offices, equipment, and software that corporations employ to produce goods and services. In general, an economy with more capital is more productive and ultimately attains a higher standard of living than economies that have accumulated less capital. Workers gain when businesses have more capital and, correspondingly, workers stand to lose when the tax system leads businesses to invest less and have a smaller capital stock.

The current U.S. system for taxing multinational companies has been developed in a patchwork fashion, resulting in a web of tax rules that is unlikely to promote maximum economic efficiency. The United States cannot afford to be left behind as other nations modernize their business tax systems, including the taxation of foreign earnings. In general, inaction would make the United States a less attractive place in which to invest, innovate, and grow. As capital moves more freely across borders, and emerging countries begin to approach U.S. levels of education and training, some advantages that the United States currently has will erode. Americans deserve a tax system that is simple, fair, and pro-growth – in tune with the nation's dynamic economy.

The tax relief proposed by President Bush and enacted by Congress in the past few years has helped lay the foundation for considering ways to ensure that the U.S. tax system helps U.S. businesses and U.S. workers compete in a global economy. In 2005, the President established the President's Advisory Panel on Federal Tax Reform to identify the major problems with the current tax system and to provide recommendations on making the tax code simpler, fairer, and better suited to the modern economy. The Tax Panel's report recommended two options for comprehensive overhaul of our federal income tax system – the Growth and Investment Tax plan and the Simplified Income Tax plan. These approaches differ somewhat, but both would reduce taxes on business and capital income.

Last year Secretary Paulson, recognizing that an examination of our business tax system in the context of the global marketplace was overdue if the competitiveness of U.S. businesses and U.S. workers in a global economy is to be maintained, initiated a review of the nation's system for taxing businesses. On July 26, 2007, the Secretary hosted a conference on Business Taxation and Global Competitiveness, where distinguished business leaders and policy experts discussed how the current business tax system can be improved to make U.S. businesses more competitive in today's global economy. The conference highlighted the need for reform. The participants stressed that the U.S. business tax system has not kept pace with changes in the world economy. The conference participants expressed a conviction that in order for U.S. companies and U.S. workers to compete and thrive in today's global economic climate, the U.S. business tax system also must adapt to these changes.

Treasury Report on Business Taxation and Global Competitiveness

In December 2007, the Treasury Department released a comprehensive study addressing business taxation and global competitiveness as a follow-up to the July 2007 conference. This report, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21^st Century, examines how business taxation in the United States compares with that of the United States' major trading partners. It also outlines several broad approaches to business tax reform, including some approaches to taxing foreign earnings.

International Comparison of Business Taxation

Since 1980, the United States has gone from a high statutory corporate tax-rate country to a low-rate country, following the Tax Reform Act of 1986, and, based on some measures, back again to a high-rate country today. During the past two decades, many of our major trading partners have lowered their corporate tax rates, some dramatically. Within the OECD, the United States now has the second highest statutory corporate tax rate at 39 percent (including state corporate taxes) compared with the average OECD statutory tax rate of 31 percent.

Statutory corporate income tax rates are the most common measure of the tax burden imposed on corporations. The evolution of OECD corporate tax rates over the past two decades suggests that corporate tax rate setting is an interactive process subject to the pressures of international competition. In the early 1980s, the United States had a relatively high statutory corporate tax rate of nearly 50 percent (i.e., combined federal and average state rates). The Tax Reform Act of 1986 lowered the U.S. federal statutory corporate tax rate to 34 percent, and the U.S. combined statutory corporate tax rate fell to 38 percent, well below the then-prevailing OECD corporate tax rates. OECD rates trended steadily down over the ensuing decade, while the top U.S. federal statutory corporate tax rate increased to 35 percent in 1993. The average and median OECD statutory corporate tax rates fell below the U.S. corporate tax rate in the 1990s and have continued to decline. Now, the United States is once again a high corporate tax rate country.

The decline in OECD corporate tax rates appears likely to continue. Other countries are reducing their corporate tax rates, leaving the United States further behind. Effective this year, Canada reduced its corporate income tax rate from 21 percent to 19.5 percent, lowering its combined central and local corporate rate to approximately 33 percent. Canada has indicated also that it will reduce its central corporate tax rate to 15 percent by 2012. Germany reduced its total corporate tax rate from 38 percent to 30 percent, Italy reduced its corporate tax rate from 33 percent to 27.5 percent, and the United Kingdom reduced its corporate tax rate from 30 percent to 28 percent. Smaller countries among the OECD also have been particularly aggressive in cutting their corporate tax rates, with Iceland, Ireland, Hungary, Poland, the Slovak Republic, Greece, Korea, and Luxembourg reducing their corporate tax rates significantly in recent years.

Of course, statutory corporate tax rates provide an incomplete picture of the corporate tax burden because they reflect neither the corporate tax base nor investor-level taxes. Depreciation allowances – the rate at which capital investment costs may be deducted from taxable income over time – are a key determinant of the corporate tax base and an important factor distinguishing the statutory corporate tax rate from the effective marginal corporate tax rate.The difference between the statutory corporate tax rate and the effective marginal corporate tax rate varies depending on the source of finance – debt or equity – because interest is generally deductible, but dividends are not.The required rate of return for debt-financed investment, therefore, is lower than the required return for equity-financed investment. Most OECD countries offer accelerated depreciation for equipment investment. However, in contrast to its high statutory corporate tax rate relative to other OECD countries, the United States has relatively generous depreciation allowances for equipment. In the OECD, only Greece and Italy have more generous depreciation allowances.

Worldwide vs. Territorial Tax Systems for Taxing Foreign Earnings

The increased globalization of U.S. businesses and the decline in corporate tax rates abroad have focused attention on the U.S. corporate tax rules in the international context.

Under current law, corporations formed in the United States are subject to tax on their worldwide income, meaning that they are subject to immediate U.S. tax on all of their direct earnings, whether earned in the United States or abroad. However, U.S. corporations with foreign subsidiaries generally are not taxed on the foreign subsidiaries' active business income (such as from manufacturing operations) until the income is repatriated. That is, until that active business income is returned to the United States, typically through a dividend to the parent corporation, U.S. tax is deferred. Not all foreign subsidiary income is subject to deferral, however. For example, U.S. tax is not deferred on passive or easily moveable income of foreign subsidiaries of U.S. corporations, under the anti-deferral rules in subpart F of the Internal Revenue Code.

To prevent double taxation of income by both a foreign country and the United

States, a U.S. corporation is generally allowed a foreign tax credit for foreign taxes paid by it. In addition, a U.S. corporation is generally allowed a foreign tax credit for foreign taxes paid by a foreign corporation, of which it owns 10 percent or more of the voting stock, on earnings the foreign corporation repatriates. The foreign tax credit is claimed by a taxpayer on its U.S. tax return, and reduces U.S. tax liability on foreign source income.

The major alternative to a worldwide system is a territorial system in which the home country exempts all or a portion of the foreign earnings from home-country taxation.The U.S. system was developed at a time when the United States was the primary source of capital investment and dominated world markets. The global landscape has shifted considerably over the past several decades, with other countries challenging the U.S. position of economic pre-eminence.

Although a predominantly worldwide approach to the taxation of cross-border income was once prevalent, it is now used by less than one half of OECD countries. Instead, many of these countries now use predominantly territorial tax systems. Furthermore, the United Kingdom and Japan, large U.S. trading partners that still have a worldwide system of taxation, are both studying the adoption of a more territorial tax system.

Approaches to Business Tax Reform

Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century, attached to this statement, seeks to advance the dialogue on the key linkages between tax policy and American competitiveness in the global economy. To that end, the study outlines specific business tax areas that can be addressed, including the taxation of cross-border corporate income. Shaped by the discussion at the Treasury Department's July 2007 conference on competitiveness and the evolution of the global marketplace, the report discusses three bold approaches for business tax reform: (1) replacing business income taxes with a business activities tax (BAT), a type of consumption tax, (2) eliminating special business tax provisions coupled with a business tax rate reduction, and (3) eliminating special business tax provisions coupled with faster write-off of business investment, potentially combined with the exemption of active foreign earnings. The study also discusses implementing specific changes to our current system of taxing business income that focus on important structural problems within our business tax system. As noted in the study, these changes could take place within or outside the context of broad tax reform.

Rather than present a particular recommendation, the report examines the strengths and weaknesses of the various approaches. The various policy ideas discussed in the report represent just some of the approaches that could be considered. The report does not advocate any specific recommendation nor does it call for or advance any legislative package or regulatory changes. The report discusses the issues posed in this statement for the record in greater detail.

Each of the approaches discussed in the report would improve the competitiveness of the United States compared to our current system for taxing U.S. business. Nevertheless, the approaches differ in a number of dimensions. The BAT described in Chapter II of the report would possibly provide the largest benefit in terms of its effect on expanding the size of the economy – ultimately increasing output (measured in terms of Gross Domestic Product, or GDP) by roughly 2.0 percent to 2.5 percent – but raises a number of serious implementation and administrative issues.

The second and third approaches focus on fundamental reform of the existing system for taxing business income by broadening the tax base, and either lowering the business tax rate or providing a faster write-off of the cost of investment. These approaches would replace a vast array of special tax provisions, which are sometimes highly targeted to encourage particular economic activity, with broad tax relief for U.S. businesses.

These approaches also examine the possibility of the adoption of a territorial tax system in the United States. The report outlines a few types of territorial tax systems. It describes a type of territorial tax system that exempts dividends from abroad from home-country tax and that is generally referred to as a "dividend exemption" system. The report describes a "basic dividend exemption system." It also describes a few alternative territorial types of tax systems.

The present U.S. system for taxing the foreign source income of U.S. multinational corporations has several undesirable effects. The present system distorts economic behavior. For example, corporations may forgo U.S. investment opportunities to avoid the imposition of U.S. taxes. The current system also distorts the choice of where to exploit intangible assets, such as patents, and the choice of where to locate income and expenses for tax purposes. Finally, the current system is very complex, and a dividend exemption system would reduce some of the complexity related to the taxation of repatriated earnings.

Moving to a type of territorial system, therefore, could have several advantages as compared to present law. More than half of OECD countries use some type of dividend exemption system, and a dividend exemption system could reduce some of the economic distortions imposed by the current U.S. tax system.

However, there may be drawbacks to the adoption of a dividend exemption system in the United States. Various complex provisions would need to remain in the Internal Revenue Code, including those related to non-exempt income as well as income inclusions resulting under the current subpart F rules. Moreover, rules regarding the pricing of transactions between U.S. corporations and their foreign affiliates (the so-called "transfer pricing" rules) would come under increased pressure, as the move to a territorial system would increase the incentive to shift income and assets to low-taxed offshore jurisdictions. However, extending the exemption system to include additional forms of business income (such as active royalties) could relieve some of that pressure and in addition allow for further simplification, but could raise other issues and concerns.

Last, the study also discusses implementing specific changes to our current system of taxing business income with a focus on important structural problems within the current system, including the taxation of certain foreign earnings. The international tax issues considered in the report include targeted reforms to the anti-deferral rules of subpart F and simplifying the U.S. tax rules for taxing the foreign earnings of small businesses.

Conclusion

The U.S. business tax system must help U.S. companies and workers compete globally by taking into account the increasingly integrated global economy. With a view to maintaining our competitiveness, U.S. tax policy must respond to and anticipate changes in the global marketplace. The current U.S. system is far from optimal, and we cannot afford to be left behind as other nations modernize their business tax systems, including the taxation of foreign earnings. The U.S. system for taxing businesses needs to be reevaluated to consider how it can be improved to attract and generate the investment and innovation necessary to advance the living standards of all Americans. The Administration looks forward to working with the Finance Committee on this important topic.

　

Week 9 Wrap-Up:
Treasury Sent 9.674 Million Stimulus Payments This Week

This week the Treasury Department sent out 9.674 million economic stimulus payments to American households totaling $7.522 billion. So far, Treasury has sent out 94.849 million total economic stimulus payments totaling $78.304 billion.

Cumulative Total

Total Number of Payments: 94.849 million
Total Amount of Payments: $78.304 billion

Week Nine (June 23-27)

Total Number of Payments: 9.674 million
Total Amount of Payments: $7.522 billion

Week Eight (June 16-20)

Total Number of Payments: 9.071 million
Total Amount of Payments: $6.919 billion

Week Seven (June 9-13)

Total Number of Payments: 9.526 million
Total Amount of Payments: $7.032 billion

Week Six (June 2-6)

Total Number of Payments: 9.143 million
Total Amount of Payments: $6.789 billion

Week Five (May 26-30)

Total Number of Payments: 5.757 million
Total Amount of Payments: $4.320 billion

Week Four (May 19-23)

Total Number of Payments: 6.211 million
Total Amount of Payments: $4.927 billion

Week Three (May 12-16)

Total Number of Payments: 15.575 million
Total Amount of Payments: $13.562 billion

Week Two (May 5-9)

Total Number of Payments: 22.180 million
Total Amount of Payments: $20.138 billion

Week One (April 28-May 2)

Total Number of Payments: 7.708 million
Total Amount of Payments: $7.091 billion

The Treasury Department will announce at the end of every week the total number of payments that have been sent to households, and the total amount of payments sent. Payments began April 28 and will continue via direct deposit or paper check through mid-July. For a single filer, the minimum payment is generally $300 and the maximum payment is $600. For joint filers, the minimum is generally $600 and the maximum $1,200. There is also an additional $300 payment for each qualifying child.

For tax returns processed by the Internal Revenue Service by April 15 households will receive their payments according to the last two digits of the Social Security number on the tax form. On a joint return, the first number listed will determine when a stimulus payment will be sent.

Week 8 Wrap-Up:
Treasury Sent 9.071 Million Stimulus Payments This Week

This week the Treasury Department sent out 9.071 million economic stimulus payments to American households totaling $6.919 billion. So far, Treasury has sent out 85.174 million total economic stimulus payments totaling $70.782 billion.

Cumulative Total

Total Number of Payments: 85.174 million
Total Amount of Payments: $70.782 billion

Week Eight (June 16-20)

Total Number of Payments: 9.071 million
Total Amount of Payments: $6.919 billion

Week Seven (June 9-13)

Total Number of Payments: 9.526 million
Total Amount of Payments: $7.032 billion

Week Six (June 2-6)

Total Number of Payments: 9.143 million
Total Amount of Payments: $6.789 billion

Week Five (May 26-30)

Total Number of Payments: 5.757 million
Total Amount of Payments: $4.320 billion

Week Four (May 19-23)

Total Number of Payments: 6.211 million
Total Amount of Payments: $4.927 billion

Week Three (May 12-16)

Total Number of Payments: 15.575 million
Total Amount of Payments: $13.562 billion

Week Two (May 5-9)

Total Number of Payments: 22.180 million
Total Amount of Payments: $20.138 billion

Week One (April 28-May 2)

Total Number of Payments: 7.708 million
Total Amount of Payments: $7.091 billion

REPORTS

Direct Deposit Payments

Assistant secretary of the U.S. Treasury Anthony Ryan
Remarks at SIFMA “Wall Street to Washington” Conference

Washington - Good afternoon. Thank you for inviting me to join you today. It's a pleasure to be here.

The title of this conference is Wall Street to Washington. It sounds like a one way trip, but I imagine that most of you are only visiting our nation's capital, and plan on returning to New York later this evening. Your trip reflects that it is a two way street, and recognizes that the relationship must be as well. The reality is, not only does Wall Street go to Washington, but as we have also witnessed in recent weeks, Washington goes to Wall Street.

This two-way relationship goes back to the founding of our Republic. In fact, our first Secretary of the Treasury, Alexander Hamilton brought Wall Street ideas to Washington. These ideas continue to affect how we finance the Federal government's operations to this day.

The relationship between Wall Street and Washington is critically important because it influences what ultimately is experienced on Main Street. Our policies and regulations, coupled with how efficiently and effectively capital is created and transmitted, affects every American. This is true for citizens who seek to borrow money to purchase a car, parents looking to finance their children's education, married couples looking to buy their first home, and entrepreneurs hoping to secure a small business loan. It is equally true for providers of capital, whether they are individuals investing their savings, or a pension official overseeing a retirement plan.

How should we define this relationship? What forces affect it? What are the mechanisms for change? Fortunately, nature provides alternative models.

One is competition. We embrace competition and the efficiency it brings to our markets. Competition is a force that is critically important in our capital markets. Competition spurs innovation. As market participants seek better ways to meet consumer and investor demands, more choices are created, and the cost of capital is reduced.

A second model is predation. While predation is the law of the jungle in nature, as civilized society, we need to have laws in place to protect investors and consumers. Market integrity is critical for a sound and robust market. Market participants must know the playing field is level and the rules are fair. There is a real benefit to the existence and enforcement of broad anti-fraud and anti-manipulation authorities. Predatory lenders, rumor mongers, market manipulators, insider traders and others who seek to gain an unfair advantage must be identified and prosecuted. It is important that regulators have broad authority to investigate and prosecute these actions. These measures instill confidence in market participants that the market is operating in a fair and transparent fashion where rules matter.

Other types of relationships also come to mind. For example, commensalism is one relationship in which one entity gains some benefit while the other is neither helped nor harmed. Another relationship that we all know is parasitism, whereby one entity gains some benefit at the expense of another.

Each of these types of relationships exists and play a role as the natural world continually evolves. The capital markets are no different. Well before the days of Hamilton, financial systems had been evolving. They will continue to evolve, and remain influenced by various types of relationships.

Successful capital markets and effective regulatory policy do not happen independently; quite the contrary. The fact is, success is inter-dependent; hence the need for the relationship to be two way. How it evolves is up to both the private and public sectors.

Evolution is not only driven simply by competition, but also by cooperation, interaction, and some level of mutual dependence. As we look forward, we must recognize how much we have to gain or lose, individually and collectively, if the relationship is not more symbiotic.

We need to ensure that our capital markets remain the most efficient in the world. I have great confidence in our markets, but private sector calls for more voluntary industry efforts will ring hollow if they are not followed with proactive and tangible actions that result in changed behavior. The objective is not to study issues, write reports, or propose protocols that sit on a shelf. We need to see constructive ideas not just developed, but implemented. We need to see changes in market practices. It is that simple.

Meaningful change often requires leadership. It is not surprising that it is difficult to ensure unanimous support for strengthening practices or that suggesting change attracts antagonism.

Make no mistake about it, change will occur, one way or the other, and there is a great deal to be said when it originates within the private sector. Policy makers will welcome such constructive developments by the private sector, but regulatory practices will have to change as well. The question, which time will ultimately answer, is what is the appropriate balance? If private sector market practices do not change, and market discipline is not significantly strengthened, legislators and regulators will certainly move to address the weaknesses in the private sector's contribution to market discipline.

So, let me highlight four areas where Washington is looking to partner with you, and where we need to work together to strengthen our capital markets.

Market Turmoil

Our first priority must be to confront the current challenges in our capital markets, and to seek to minimize the spillover effects on our real economy. A great deal of de-leveraging is occurring, which has created liquidity challenges and compromised our credit markets' ability to facilitate economic activities.

Working closely through the President's Working Group on Financial Markets (PWG), we recently completed a rigorous review of the underlying causes of the turmoil, and released a policy statement that included specific recommendations to address the underlying weaknesses that caused, facilitated, and exacerbated the challenges in our capital markets.

The PWG recommendations cover the practices of a broad array of market participants, as well as supervisors. The participants include originators of credit such as mortgage brokers, financial firms that securitize credit, rating agencies, and investors.

At the Treasury Department, we look forward to seeing the recommendations implemented. Everybody has a role to play, and efforts must be made to strengthen practices in:

Transparency and disclosure. The effect of many of the weaknesses in the market and the resulting challenges in addressing them were exacerbated by complexity and opacity. The best antidote to opacity is transparency and better and more useful disclosure.

2. Risk awareness. Regulators and all market participants must be more aware of, and better able to respond, to risks. Credit rating agency practices must improve, and the users of their services must rely less on, and appreciate more, the limitations of ratings products.

3. Risk management. We need improved risk management practices by investors and financial institutions, and continued review and guidance from regulators. Risk management is everyone's business.

4. Capital management. Well-capitalized institutions are better prepared to deal with challenges, foster economic growth and enhance market confidence.

As Chairman Bernanke recently remarked, "We do not have the luxury of waiting for markets to stabilize before we think about the future. Indeed, many of the necessary changes that have been identified, including increasing transparency, improving risk management, and attaining better coordination among regulators, could provide important support to the process of normalizing our financial markets."

Hedge Funds

Another area in which the private sector must continue to move forward is hedge funds. Over a year ago, the PWG released principles and guidelines regarding private pools of capital. While private pools of capital bring many advantages to our capital markets, they also pose challenges, including systemic risk and investor protection. We must rely on a combination of strong market discipline and regulatory policies to address these risks.

In September 2007, the PWG tasked two private-sector committees, comprised of well-known and well-respected asset managers and investors, to develop best practices for their respective groups. Their reports were released for public comment two weeks ago, and after a period of public comment, the groups will release final reports this summer.

The "Best Practices for Asset Managers" calls on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. They recommend innovative and far-reaching practices that exceed existing industry standards, and called for increased accountability for hedge fund managers.

The "Best Practices for Investors" includes both a Fiduciary's Guide and an Investor's Guide. The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor's Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to an investment portfolio. Their best practices offer a guide for responsible investment in hedge funds. In the months ahead, we believe that it is critical to see these implemented.

There is also need to move forward on a longer term, strategic basis. Treasury recently released a Blueprint for Financial Regulatory Reform. Our current regulatory structure is not optimally positioned to address the modern financial system with its diversity of market participants, innovation, complexity of financial instruments, convergence of financial intermediaries and trading platforms, and global integration and interconnectedness.

We suggested in the Blueprint a new framework, one that includes a market stability regulator with broad powers focusing on the overall financial system. The market stability regulator would have the ability to evaluate the capital, liquidity, and margin practices across the entire financial system and their potential impact on overall financial stability.

To do this effectively, the market stability regulator would collect information from commercial banks, investment banks, insurance companies, hedge funds, and commodity pool operators. Rather than focus on the health of a particular organization, the market stability regulator would focus on whether a firm's or industry's practices threaten overall financial stability. It would have broad powers and the necessary corrective authorities to deal with deficiencies that pose threats to our financial stability.

Our ambition is to frame the debate and put forth a model that can guide all stakeholders as we seek to modernize our financial regulatory structure.

Market Infrastructure

A third area where we need to see further progress by the private sector is market infrastructure. It includes market-making capacity and systems for processing, settling, and clearing financial transactions. Comprehensive and dependable market infrastructure inspires investor confidence and plays an important role in the integrity of our marketplace. Market infrastructure is critical as it ultimately affects the ability to transfer risk and facilitate liquidity. For this reason, the financial industry must continue its efforts to enhance its strong system of clearance and settlement, including secure custodial arrangements.

Over the past ten months, despite dislocations in our financial markets, our market infrastructure has proven quite resilient. Payments were made, transaction processing continued, and exchanges handled massive surges in volume across the globe.

While these signs are encouraging, we constantly must seek to improve our position and ensure business continuity. Over the past decade there has been a tremendous expansion in the scale, diversity, and impact of over-the-counter (OTC) derivatives, which have become important vehicles for hedging and transferring risk. But as with most financial products, infrastructure development has lagged innovation. Market volume and instrument complexity call for a clear, functional, well-designed infrastructure that can meet the needs of the OTC derivatives markets in the years ahead.

Asset managers, investors, counterparties, and creditors must promptly set ambitious standards for trade data submission and resolution; promptly amend standard credit derivative trade documentation to incorporate the cash settlement protocol; and develop a longer-term plan for an integrated operational infrastructure supporting OTC derivatives. The industry needs to take further steps to limit the domino effect of lagging and uncertain post-trade processes in the event of a counterparty default or failure.

We need to remain focused and complete the work already underway. The Federal Reserve Bank of New York (FRBNY) and an industry group (the "Operations Management Group" or OMG) have been working collaboratively to address the OTC processing and infrastructure issues. ISDA has developed a cash settlement protocol and is exploring incorporating the auction mechanism into its documentation. The private-sector committee on risk management recommended by the PWG statement will look at strengthening the operational infrastructure of financial markets, including settlement protocols, close-outs in defaults, and processing of OTC derivatives. On all of these issues, the industry has an opportunity to improve market practices, and must do so.

U.S. Treasury Market

The final area that I will highlight this afternoon concerns an issue that is core to the mission of my Department – the U.S. Treasury marketplace. We value the symbiotic relationship that we have with the participants in the Treasury market. Because our operating principles of transparency and predictability are well established, buyers of Treasury securities come to us in greater numbers and bid with more confidence and in larger amounts. Our predictability, coupled with our unitary financing approach, increases the depth and liquidity of the Treasury marketplace and results in lower cost borrowing for the government.

We appreciate the principles-based framework outlined by the Treasury Markets Practices Group (TMPG). The principles and guidelines they put forth provide a strong foundation for how all stakeholders should enhance their current practices, fulfill their responsibilities, and support actions that facilitate liquidity in the U.S. Treasury market. As debt managers, we constantly encourage the implementation and evolution of these principles in our discussions with major institutional investors, reserve managers, and central banks.

When these principles were laid out almost a year ago, I remarked that success will be determined by how market participants interpret and implement these practices, and how market practices evolve from this point forward. I also pointed out that SIFMA is engaging its membership on negative repo rate trading, improved buy-in procedures, and the margining of fails.

At the February 2008 Quarterly Refunding, we discussed settlement failures in the Treasury market with our Treasury Borrowing Advisory Committee (TBAC), a committee sponsored by SIFMA and comprised of some of the finest, most experienced professionals in the financial market place. As you know, settlement failures, or fails, occur when a party selling a security fails to deliver the security to the buyer on the agreed upon settlement date. Settlement failures, occur for a variety of reasons including errors in the back office and miscommunications, and are generally small and resolved quickly.

Larger, more chronic fails can occur due to wide-scale operational disruptions or financial market conditions, such as when interest rates reach low levels.

Treasury and the TBAC discussed the potential risk of chronic fails in a lower interest rate environment, a risk that we believe impairs liquidity and threatens to raise our cost of borrowing. In addition, we asked market participants to pursue market-oriented solutions, adapt and implement practices for such a situation, and report back to us regarding their progress.

Over the past twelve weeks, we have seen rates drop quickly, the demand for Treasury securities skyrocket, and a rapid increase in fails to deliver in the Treasury market. In a short time period, we entered an interest rate regime in which the cost associated with fails declined significantly – and, perversely, weakened the financial incentive to rectify a fail. While the cost of failing to deliver may be low for a single market participant, the aggregate cost can be high when it potentially impairs the overall system, and such behavior is certainly not consistent with professional best practices.

This week, at the May 2008 Quarterly Refunding, we asked the TBAC for their view on actions taken by market participants to date. Committee members were encouraged by the collaborative efforts undertaken by the private sector industry groups to formulate viable solutions to address chronic fails, and members broadly accepted that the initiatives outlined by SIFMA and TMPG would improve market practices for fails monitoring and remediation in the near-term.

Implementation of the potential steps outlined and recommended by SIFMA and the TMPG, such as encouraging cash settlement of fails before the 30th day after the fail had occurred, "Fails Best Practices" which define such parameters as margining of fails, cash settlement procedures, and initiatives related to pair-offs and security-delivery, and the enactment of a Fails Monitoring Committee, were broadly agreed upon. The TBAC emphasized the need for industry groups to quickly execute recommended practice guidance and urged both groups to employ measures that would collectively help prevent chronic fails situations.

Treasury agrees that now is the time to act. We believe that private sector action now regarding the implementation of these mitigating initiatives is optimal, and we will continue to monitor progress closely.

Conclusion

As financial industry professionals and policy leaders, you know first hand the benefits of dynamic economic growth, and thus have a vested interest in capital markets that enhance investor confidence and market liquidity - both of which have been challenged significantly in recent months.

These are important issues, and we need to see material steps taken towards our goals. Both market and regulatory practices will evolve from here. All stakeholders, including regulators, must remain on top of these issues. We must not just define solutions, but implement them, and continually seek to strengthen both our market and regulatory practices.

By positively changing market practices, you will help strengthen market discipline, mitigate systemic risk, restore investor confidence, and facilitate stable economic growth.

The health of our capital markets reflects the collective efforts of both the public and private sectors. To reap the benefits, both sectors must share responsibility and be actively engaged. So, as you return to Wall Street, know that there is much work to do, and that each of you has an important responsibility to strengthen the vitality, stability, and integrity of our capital markets.

Thank you very much.

　

　

Testimony of Deputy Assistant Secretary for Tax Policy
Karen Gilbreath Sowell
Before the House Ways and Means Subcommittee on Select Revenue Measures
on Tax Incentives for Higher Education

Washington --Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee:

Introduction

Thank you for the opportunity to appear before the Subcommittee today to discuss tax incentives for higher education, which currently include more than a dozen credit, deduction, exclusion, and deferral provisions. While my testimony today focuses on tax incentives, I note that there are numerous non-tax governmental and other programs to help make higher education affordable and that figure into an individual's or family's decisions regarding higher education. The principal Federal student financial assistance programs are authorized under Title IV of the Higher Education Act of 1965, as amended, and this year will provide more than $90 billion in grant, loan and work-study assistance to students and their families. The Title IV programs include Federal Pell Grants, which serve low-income undergraduate students, and Federal student loans, both the bank-based Federal Family Education Loan program and the Department of Education's Direct Loan program, which serve undergraduate students and their parents, as well as graduate professional school students. In addition, colleges, universities, non-profit organizations, and the private sector furnish scholarships, tuition programs, and other assistance to students pursuing higher education, which according to the College Board exceeds $35 billion annually.

Education is important to the Administration, and we recognize that there is room for improvement in the tax benefits currently provided through the Internal Revenue Code to encourage higher education. We believe that the goal of providing incentives to make higher education affordable is best achieved by identifying the most efficient ways to address student needs and effectively utilizing those mechanisms. My testimony will focus first on a brief review of current tax incentives for college and other post-secondary education, and then discuss areas for potential improvement.

Over the last several decades, various provisions have been added to the Internal Revenue Code to facilitate savings for, and to incentivize the pursuit of, post-secondary education. Building on these existing provisions, the Administration and Congress have made significant progress during the past seven years to provide tax benefits related to higher education, particularly in helping families save for post-secondary education. Notably, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expanded Qualified Tuition Programs, also known as section 529 plans, to permit tax-free distributions from plan accounts to be used for post-secondary education expenses, and to allow private educational institutions (in addition to states) to create section 529 plans. The Pension Protection Act of 2006 made these changes to section 529 of the Internal Revenue Code permanent, which helped eliminate uncertainty with respect to this education savings vehicle. Further, the Administration's Budget for FY 2009 includes a proposal to extend the Saver's Credit to contributions to section 529 plans in order to encourage and assist lower-income families in saving for higher education.

EGTRRA also expanded Coverdell education savings accounts (formerly known as Education IRAs) by raising the annual contribution limit to Coverdell accounts from $500 to $2,000, and increasing the income phase-outs for joint filers. In addition, EGTRRA eliminated the disallowance of qualified distributions from Coverdell accounts or section 529 plans for those taxpayers who claim an education credit.

Notwithstanding these savings programs for those who have the ability and who have sufficient time to save for higher education, students and families who are facing immediate education-related costs must confront a patchwork of education-related tax incentives. Current law tax incentives may take the form of a credit against tax liability, a deduction from gross income, an exclusion from gross income, or a deferral of (or exemption from) tax. A detailed table of all the major tax incentives related to post-secondary education is attached as Table 1.

Set forth below is a brief overview of certain of the significant provisions under current law. Focusing on but a few of the available incentives reveals the complexity of these tax incentives, all of which are aimed at post-secondary education, but which apply to different people, in different circumstances, and for different educational ends. It is important to keep in mind that consideration of tax incentives is only one piece of the financial puzzle. Students pursuing higher education – be they recent high school graduates, high school graduates returning to higher education after entering the job market or raising a family, or professionals interested in pursuing an advanced degree or a different career – also have available to them the panoply of government grant and loan programs, as well as the many forms of non-governmental assistance available from educational institutions, non-profit organizations and the private sector.

Overview of Major Current Law Tax Incentives for Post-Secondary Education

As noted above, current law tax incentives may take the form of a credit, deduction, exclusion, or deferral. Many of these incentives have unique eligibility requirements, different phase-out limits, and various filing requirements. Generally, if an expense would qualify under more than one provision, current law allows only one tax benefit for the particular educational expense.

Credits

In 1997, Congress enacted a pair of tax credits to help families pay for higher education – the Hope Scholarship Credit (Hope Credit) and the Lifetime Learning Credit. In 2008, a taxpayer may claim a Hope Credit for 100 percent of the first $1,200 and 50 percent of the next $1,200 in qualified tuition and related expenses (for a maximum credit of $1,800 per student) for the first two years of college for a student enrolled at least half-time. A taxpayer may claim a Lifetime Learning Credit for 20 percent of up to $10,000 in qualified tuition and related expenses (for a maximum credit of $2,000) per taxpayer for any post-secondary education. Both credits are subject to an adjusted gross income ( AGI ) phase-out. In 2008, the credits phase out between $48,000 and $58,000 of AGI ($96,000 and $116,000 if married filing jointly). Only one credit may be claimed by each eligible student.

Dependent Related Deductions and Credits

For parents supporting college students, there is an extension of the benefit provided by the personal exemption for full-time students aged 19 through 23. Dependent children over the age of 18 do not qualify as children for the personal exemption unless they remain full-time students (through age 23). In 2008 the personal exemption amount is $3,500.

This favorable treatment of a full-time student aged 19 through 23 as a qualifying child also applies for purposes of the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit for working families with low incomes. The EITC for families with one eligible child phases in over the first $8,580 of earned income for a maximum credit of $2,917. The credit phases out between $15,740 and $33,995 of earned income ($18,740 and $36,995 for joint filers). For families with modest incomes, allowing dependent students to qualify as children for EITC purposes provides the families supporting the students with a large tax benefit.

Deductions

A deduction may be allowed above-the-line (i.e., without itemization) for up to $2,500 of interest per year on any qualified education loan, subject to an AGI phase-out beginning at $55,000 ($115,000 if married filing jointly). In addition, through 2007, a taxpayer could claim an above-the-line deduction for qualified tuition and related expenses. The maximum amount of the deduction was $4,000 for taxpayers with AGI below $65,000 ($136,000 if married filing jointly), or $2,000 for taxpayers with AGI between $65,000 and $80,000 ($136,000 and $160,000 if married filing jointly) in 2007.

Moreover, deductions may be allowed to taxpayers for work-related education expenses. An employee who itemizes deductions may deduct work-related education expenses as one of a class of miscellaneous itemized deductions subject to a floor of 2 percent of AGI . Similarly, if an employer pays an employee's education expenses and the reimbursement does not take place through an accountable plan, the amount reimbursed is included in the employee's gross income, but the employee may deduct the expenses as a miscellaneous itemized deduction subject to the 2-percent floor.

Exclusions from Income

In addition to any available credits or deductions, any student who receives a qualified scholarship to a degree-granting program (including certain Federal medical training programs) may exclude from gross income amounts used to pay qualified tuition and related expenses, including fees, books, supplies, and required equipment. Under another provision, originally enacted in 1976, a student may exclude from gross income the amount of a loan that is forgiven if the student works for a required period of time in certain professions or locations. For example, after graduating from college, a student might have a loan forgiven if he or she were to become a teacher in an underserved community. Additionally, there is an unlimited exclusion from the gift and generation-skipping transfer tax for tuition paid directly to a school on behalf of a student, resulting in an incentive to make gifts of college tuition

There are also incentives for individuals to continue their education while employed. An employee may exclude employer-provided education expenses (up to $5,250 since 1986) that are part of an Educational Assistance Program (EAP). Under an EAP, there is no requirement that the education be work-related. In addition, like other work-related expense reimbursements, an employee may exclude from gross income employer reimbursements for work-related education made under an accountable plan.

Certain colleges and universities offer tuition-reduction programs to their employees (which can include the employee's spouse or dependent child). Tuition benefits under such programs may be excluded from gross income. Also, certain graduate students employed in teaching or research may exclude tuition reductions from gross income.

Savings Related Deferrals and Exclusions

Traditionally, tax deferral has been afforded to income saved for retirement in an Individual Retirement Arrangement (IRA). Since 1998, an IRA distribution for qualified higher education expenses has been permitted, with penalties waived, although tax attributable to the amounts distributed is still due. The exclusion covers both Traditional and Roth IRAs (effectively without income limits on contributors), encompasses grandchildren as beneficiaries, and extends qualified expenses beyond tuition and required fees to room and board (for students attending college at least half time), books, and supplies.

As noted above, tax deferral on income saved for college expenses has been available since 1996 through Qualified Tuition Programs, also called section 529 plans. Individuals at all income levels may contribute to a section 529 account or prepaid tuition plan. Contributors may use up to five years of annual gift tax exclusion amounts in advance for a gift-tax-free contribution to a student in a single year (for a total of $60,000 in 2008). There is no limit on the number of permissible student donees per year. Some states permit contributors to deduct a limited amount of contributions for state income tax purposes. Not only does income accumulate tax-free in a section 529 account, but distributions from the account, which include a return of contributions and earnings on those contributions, are also excluded from gross income as long as they are used for qualified higher education expenses.

In 1997, an additional deferral vehicle was created in the form of an Education IRA. Subject to an AGI phase-out, contributors were allowed to contribute in the aggregate up to $500 per year to an Education IRA. As noted above, EGTRRA increased contribution limits to Education IRAs, now named Coverdell Education Savings Accounts, to $2,000. Not only does income accumulate tax-free in a Coverdell account, but distributions from the account, which include a return of contributions and earnings on those contributions, are also excluded from gross income as long as they are used for qualified education expenses, including college expenses.

Since 1988, there also has been a college saving incentive in the form of an exclusion of interest on qualified United States Savings Bonds, provided that the proceeds are used to pay for qualified higher education expenses, subject to an AGI phase-out.

Complexity of Tax Incentives

As reflected in the overview above, the education tax incentives under current law are numerous, often overlapping, and complex. The incentives vary in terms of who may receive benefits, which expenses may be covered, and how large an exclusion, deduction, or credit may be allowed. For example, part-time students may be eligible for the education credits (at least half-time in the case of the Hope Credit) and savings bond interest exclusion. Only full-time students may qualify for the dependent deduction or EITC. Some provisions, like the Hope Credit, are calculated per student, but others, like the Lifetime Learning Credit and the student loan interest deduction, are calculated per taxpayer. Different expenses qualify under different provisions. For example, books, supplies and equipment are qualified expenses for many savings provisions but not for purposes of the credits. Finally, phase-outs with different thresholds apply for purposes of the credits, dependent deduction, student loan interest deduction, Coverdell account contribution, and savings bond interest exclusion.

Consider the following examples and their disparate results. The examples show the value of education benefits available under 2007 law to typical families facing a wide range of circumstances regarding their education expenses.[1] In each example, we calculate the tax benefits that typical families would receive from five tax provisions that may help families with education expenses as in effect for 2007: (a) the Hope Credit, (b) the Lifetime Learning Credit, (c) the tuition deduction (expired December 31, 2007 ), (d) the dependent exemption, and (e) the EITC. Savings incentives, such as Coverdell accounts and section 529 accounts are not considered.

Because the provisions interact, and because only the EITC is refundable, some families may not have sufficient tax liability to benefit fully from all provisions for which they are eligible. The examples show that total tax benefits vary with the family's specific circumstances: family income, filing status, age of the student, dependent status of the student, whether the student attends part-time, year of study, and their expenses. The families in the examples presented are otherwise typical of families with similar incomes. Of course, the results may vary as the facts vary from the typical family model.

Taxpayers may often be eligible for more than one benefit and only some benefits may be used together. Thus, in many instances, the family must choose among the various benefits. The first example shows the optimal choice may not be obvious before computing the family's taxes.

Example 1: A Family May Need to Make Many Calculations to Determine the Best Outcome

A family of three (Family A) has an income of $100,000. Their 19-year-old son is a full-time freshman at the local state university. His tuition and fees for the year are $6,000. The family knows that they are eligible for the Hope Credit, the Lifetime Learning Credit, the tuition deduction, and the dependent exemption that the family would not be eligible for if the son were not a full-time student. The family may use no more than one of the following three benefits: the Hope Credit, the Lifetime Learning Credit, or the tuition deduction. The family is in the phase-out range for the education credits.

Family A could receive $2,005 – from the Hope Credit ($1,555) and the dependent exemption ($850).

Family A could receive $1,690 – from the Lifetime Learning Credit ($840) and the dependent exemption ($850).

Family A could receive $1,850 – from the tuition deduction ($1,000) and the dependent exemption ($850).

Note that if this family had additional children with education expenses, the calculation exercise would be even more complicated. For example, the Lifetime Learning Credit provides a maximum of $2,000 per family and thus, may be limited for families whose total tuition expenses exceed $10,000.

The remaining examples calculate the optimal education benefit for a series of taxpayers with different incomes, filing status, and education needs to demonstrate the potential range of results.

Example 2: Individual in Part-time Training Programs – Income Affects Tax Benefits

A single taxpayer attends a training program that costs $1,000. He attends less than half-time, is not in a degree program, and is not in his first two years of post-secondary study.

If Taxpayer B earns $25,000, B could receive a Lifetime Learning Credit of $200 (the tuition deduction would be worth $150).

If Taxpayer B earns $50,000, B could receive a tuition deduction worth $250 (the Lifetime Learning Credit would be worth only $140 due to the phase out).

Example 3: Moderate Income Students Working Toward an Associate's Degree – Family Structure Affects Tax Benefits

A student begins work on an associate's degree at the local community college. The student's family has income of $25,000. The student attends at least half-time. Tuition and required fees are $4,000.

C, a single student who is not dependent on his or her parents, could receive the maximum Hope Credit of $1,650.

D, a married student who is not a dependent, could receive a Hope Credit or a Lifetime Learning Credit for $750. (D's family does not have sufficient tax liability to benefit from the education credit fully.)

E, the married parents of a 19-year old living at home and supported by his or her parents, could receive benefits totaling $2,387 from the Hope Credit ($410), the dependent exemption ($340), and the EITC ($1,637).

Example 4a: Students Attending the Local State University – Income Affects Tax Benefits

A college-age student enrolls full-time at the local state university where tuition and fees are $6,000. The student is in his or her first year of study.

F, a family earning $25,000, would receive $2,387 – from the Hope Credit ($410), the dependent exemption ($340), and the EITC ($1,637).

G, a family earning $50,000, would receive $2,160 – from the Hope Credit ($1,650) and the dependent exemption ($510).

H, a family earning $100,000, would receive $2,005 – from the Hope Credit ($1,155) and the dependent exemption ($850).

I, a family earning $150,000, would receive $1,350 – from the tuition deduction ($500) and the dependent exemption ($850).

J, a family earning $200,000, would receive $952 – from the dependent exemption.

Example 4b: This example is the same as Example 4a, except that the student is enrolled in his or her third year of study. As a result, the Hope Credit would no longer be available.

F, a family earning $25,000, would still receive $2,387 – from the Lifetime Learning Credit ($410), the dependent exemption ($340), and the EITC ($1,637).

G, a family earning $50,000, would receive $1,710 – from the Lifetime Learning Credit ($1,200) and the dependent exemption ($510).

H, a family earning $100,000, would receive $1,690 – from the Lifetime Learning Credit ($840) and the dependent exemption ($850).

I, a family earning $150,000, would still receive $1,350 – from the tuition deduction ($500) and the dependent exemption ($850).

J, a family earning $200,000, would still receive $952 – from the dependent exemption.

Attached as Table 2 are figures that illustrate graphically the tax value of education benefits under 2007 law, taking into account the same five major tax provisions. The figures show the value of the education benefits for typical families by AGI . As in the examples above, the value of these provisions depends on a student's or family's circumstances: the cost of tuition; family income (including whether the family has any income tax liability); whether the student attends college full-time or part-time; filing status; and for the Hope Credit, whether the student is in the first two years of post-secondary education.

The tax savings for a student or family vary significantly with income and tuition level. At the tuition levels paid by most full-time students whose families are eligible for the credits, the Lifetime Learning Credit offers less assistance than the Hope Credit. The Hope Credit, however, is only available to students in their first two years of college. Thus, the tax value associated with a college freshman or sophomore is larger in many cases than the tax value associated with a college junior or senior.

In general, families with incomes under $100,000 in 2007 owing tuition expenses would have maximized their benefits by claiming an education credit; higher income families would have claimed a tuition deduction. As income rises further, the dependent deduction phases out. Families with no income tax liability receive no benefit from the dependent deduction, the tuition deduction, or education credits. However, a college student may qualify a low-income or moderate-income family for the EITC. Large families may lose the benefit of the dependent deduction because they are more likely to be subject to the alternative minimum tax.

Like the family filing a joint return, higher income individuals who file single returns would have maximized their benefits by claiming the tuition deduction, while individuals with incomes under $50,000 would have claimed a credit. A low-income independent student may be eligible for the EITC, but there is no additional education-related benefit from the EITC and thus, the EITC benefit would be the same as for other low-income individuals. Because independent students receive no benefit from the dependent deduction and no education-related benefit from the EITC, the tax value of the benefits associated with an independent student is smaller than the corresponding tax value for a dependent student.

As illustrated in the examples above and the figures in Table 2, the value of various tax incentives attributable to a student may range from a few hundred to a few thousand dollars depending on filing status and AGI . In addition, a claim of one credit or deduction may adversely affect a taxpayer's eligibility for another credit or deduction. From this variety of incentives, a student or parent must discern the optimal combination of tax benefits, which may require many taxpayers to generate alternative complex computations. As in Example 1 above, taxpayers with dependent students who are eligible for a tuition deduction as well as a Hope or Lifetime Learning Credit must run multiple calculations to determine their maximum benefits. Because a qualified expense may not be eligible for more than one benefit, careful recordkeeping is required to ensure both the optimal distribution of expenses and compliance.

Because of the complexity, it may be difficult for a student or parent to determine the value of the tax incentives. In addition, for incentives based on AGI , their value is necessarily retrospective unless the student or parents can predict their income with precision. The more difficult it is to predict the value of the tax benefit accurately, the less effective these benefits are as incentives for the pursuit of a college education.

In addition to the challenges that students face in navigating the myriad education tax incentives to optimize their use, the complexity of these provisions increases the record-keeping and reporting burden on taxpayers, while making it difficult for the IRS to monitor compliance. For example, to claim an education credit, a taxpayer must file a Form 1040 even if he or she otherwise qualifies to file a Form 1040EZ, and the taxpayer must file an IRS Form 8863, a 17-line form with two pages of instructions.

Observations on Simplification

Despite the complexity, because the tax incentives may provide significant value to a family or individual in pursuit of higher education, it appears the various incentives are widely utilized. Table 3 sets forth statistics on the use of the education credits and the tuition deduction based on the most recent IRS data available (for tax year 2005). In the fall of 2005, more than 17 million students were enrolled in college in the United States . As noted in Table 3, a substantial number of these students claimed some combination of the deduction and credits. Overall, in 2005, more than 11.6 million taxpayers claimed an education credit or tuition deduction. Our data cannot capture whether students and families are utilizing the tax incentives optimally, nor what impact, if any, the tax incentives have on decision-making regarding post-secondary education. However, one would anticipate that the complexity would detrimentally affect the efficient utilization and administration of the benefits.

Because the value of a particular tax incentive may not become apparent until the end of the tax year, which may be months after the tuition or other expense was due, and the tax year does not coincide with the academic year, the tax system is not well suited to provide assistance on the "front end" of funding higher education. Generally, tax benefits become available only after year-end (especially in the case of benefits limited by AGI , which is determined at year-end). As a result, the complexity of the current provisions makes it difficult for even a very sophisticated taxpayer to adjust withholding to "advance" the benefit.

In addition, it is important to remember that recent high school graduates do not constitute the only type of person interested in pursuing a college education. Prospective students also include older persons who entered the job market after high school as well as those who have an interest in pursuing an advanced degree or a career different from the one in which they were originally engaged. The provision of different tax incentives for similar higher education expenses may result in the unequal tax treatment of similarly situated taxpayers.

Suggestions have been offered regarding potential simplifications, primarily along three themes. First, it has been suggested that uniform definitions for operative terms such as "qualified higher education expenses" or "qualified tuition and related expenses" and "eligible education institution" be adopted. For example, currently only tuition may qualify for tuition reduction for college employees and gift tax exclusions; tuition and required fees may qualify for the Hope and Lifetime Learning Credits, tuition deduction, and savings bond interest exclusion; tuition, fees, books, supplies, and equipment may qualify for the scholarship exclusion, employer EAP, and student loan interest deduction; and tuition, fees, books, supplies, equipment (and in the case of a student attending at least half time, room and board) may qualify for penalty-free distributions from IRAs, section 529 accounts, and Coverdell accounts.

A second suggestion has been to conform the phase-out thresholds and ranges and index all amounts for inflation. As noted above, different income thresholds apply to the education credits, dependent deduction, student loan interest deduction, and the different savings provisions.

Third, it has been suggested that the education credits be consolidated along with certain deductions. In particular, the AGI phase-out for the credits could be increased to eliminate the need for the tuition deduction; or a single credit could be designed to cover the same population.

While there is clearly a need to address the complexity concerns arising from the current welter of tax incentives, it is important to remain cognizant that revisions to the tax regime may lead to unintended consequences, and any revision may unsettle taxpayer expectations. Recognizing budgetary constraints, legislative reform of tax incentives will almost invariably result in additional benefits for certain taxpayers and fewer benefits for others. Because of the varying profiles of those who seek the benefits of tax incentives for higher education, it may be challenging to streamline the incentives in a way that would benefit the entire target group. Legislative reform of tax incentives would also need to address transition issues for those students or families who may be planning to rely on relevant provisions under current law.

In contemplating legislative reform of current tax incentives, a good starting point would be to focus on clear, simple ways to help students and their families meet the cost of higher education. While efforts can be made to consolidate and streamline the education tax incentives, to be successful, those efforts should not overlook the non-tax benefits that are available to many students, especially those in low-income and middle-income families, either from Department of Education and other federal and state governmental programs or from private-sector sources.

Thank you Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee for the opportunity to participate in today's hearing on this important subject. I would be pleased to respond to your questions.

[1] The families in these examples have average levels of deductible expenses and no capital gains income. For families eligible for the EITC, all income is from wages.

REPORTS

Table 1 - Summary of Tax Provisions Related to Higher Education

Table 2 - The Tax Value of a Student under 2007 Law

Table 3 - Use of Tax Incentives for Higher Education

U.S. ECONOMIC STATISTICS - QUARTERLY DATA

Latest

2003 2004 2005 2006 4 qtrs Q2-07 Q3-07 Q4-07 Q1-08

-----------------(Q4 to Q4)------------------ ---------------(annual rate)------------------

Real GDP (percent change) 3.7 3.1 2.9 2.6 2.5 3.8 4.9 0.6 0.6

Consumption 3.4 3.7 2.8 3.4 1.9 1.4 2.8 2.3 1.0

Business Investment 4.9 7.5 5.1 5.2 5.8 11.0 9.4 6.0 -2.5

Structures 0.2 2.3 -0.4 12.4 11.5 26.2 16.4 12.4 -6.2

Equipment and Software 6.6 9.4 7.1 2.5 3.3 4.7 6.2 3.1 -0.7

Residential Construction 11.7 6.7 6.4 -12.8 -21.2 -11.8 -20.5 -25.2 -26.6

Exports 5.8 7.4 7.0 9.3 9.5 7.5 19.1 6.5 5.5

Imports 4.8 11.5 5.1 3.7 0.7 -2.7 4.3 -1.4 2.5

Federal 5.5 2.4 1.3 3.7 4.5 6.0 7.1 0.5 4.6

State and Local -0.4 -0.4 0.7 1.8 2.1 3.0 1.9 2.8 0.6

Levels ------------annual average-------------- (Avg) ---------------(annual rate)------------------

Net Export Balance (nominal) -499.4 -615.4 -714.6 -762.0 -713.8 -714.2 -694.7 -708.9 -737.3

Current Account Balance as share of GDP (percent) -4.8 -5.5 -6.1 -6.2 -5.3 -5.5 -5.1 -4.9

Price Indexes (percent change) -----------------(Q4 to Q4)------------------ ---------------(annual rate)------------------

GDP 2.2 3.2 3.4 2.7 2.2 2.6 1.0 2.4 2.6

Gross Domestic Purchases 2.2 3.7 3.8 2.4 3.2 3.8 1.8 3.7 3.5

PCE 1.9 3.1 3.2 1.9 3.4 4.3 1.8 3.9 3.5

Saving (percent) (Avg)

Personal Saving Rate 2.1 2.1 0.5 0.4 0.4 0.4 1.0 0.3 0.4

Gross Saving as a Share of GDP 13.3 13.8 13.9 13.8 13.4 14.3 13.9 13.9 13.3

Net Saving as a Share of NNP 1.3 1.8 1.1 2.1 1.4 1.6 1.7 1.9 1.4

Productivity (percent change) -----------------(Q4 to Q4)------------------ ---------------(annual rate)------------------

Nonfarm 4.7 1.8 1.7 0.9 2.9 2.6 6.3 1.9

Manufacturing 5.0 2.8 4.4 4.0 3.2 3.4 4.1 2.3

Unit Labor Costs - Nonfarm 0.5 2.1 1.6 4.1 0.9 -1.3 -2.7 2.6

Hourly Compensation - Nonfarm 5.2 3.9 3.3 5.0 3.9 1.3 3.4 4.6

Employment Cost Index, compensation, civillian 3.8 3.7 3.2 3.3 3.3 3.5 3.1 3.4 3.0

U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $74,541 million as of the end of that week, compared to $74,782 million as of the end of the prior week.

I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)


	April 25, 2008
A. Official reserve assets (in US millions unless otherwise specified)	Euro	Yen	Total
(1) Foreign currency reserves (in convertible foreign currencies)			74,541
(a) Securities	15,591	11,730	27,321
of which: issuer headquartered in reporting country but located abroad			0
(b) total currency and deposits with:
(i) other national central banks, BIS and IMF	15,545	6,591	22,136
ii) banks headquartered in the reporting country			0
of which: located abroad			0
(iii) banks headquartered outside the reporting country			0
of which: located in the reporting country			0
(2) IMF reserve position	4,256
(3) SDRs	9,787
(4) gold (including gold deposits and, if appropriate, gold swapped)	11,041
--volume in millions of fine troy ounces	261.499
(5) other reserve assets (specify)	0
--financial derivatives
--loans to nonbank nonresidents
--other
B. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--financial derivatives not included in official reserve assets
--gold not included in official reserve assets
--other

II. Predetermined short-term net drains on foreign currency assets (nominal value)


			Maturity breakdown (residual maturity)
		Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Foreign currency loans, securities, and deposits
--outflows (-)	Principal
	Interest
--inflows (+)	Principal
	Interest
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) Short positions ( - )
(b) Long positions (+)
3. Other (specify)
--outflows related to repos (-)
--inflows related to reverse repos (+)
--trade credit (-)
--trade credit (+)
--other accounts payable (-)
--other accounts receivable (+)


III. Contingent short-term net drains on foreign currency assets (nominal value)


		Maturity breakdown (residual maturity, where applicable)
	Total	Up to 1 month	More than 1 and up to 3 months	More than 3 months and up to 1 year
1. Contingent liabilities in foreign currency
(a) Collateral guarantees on debt falling due within 1 year
(b) Other contingent liabilities
2. Foreign currency securities issued with embedded options (puttable bonds)
3. Undrawn, unconditional credit lines provided by:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (+)
--BIS (+)
--IMF (+)
(b) with banks and other financial institutions headquartered in the reporting country (+)
(c) with banks and other financial institutions headquartered outside the reporting country (+)
Undrawn, unconditional credit lines provided to:
(a) other national monetary authorities, BIS, IMF, and other international organizations
--other national monetary authorities (-)
--BIS (-)
--IMF (-)
(b) banks and other financial institutions headquartered in reporting country (- )
(c) banks and other financial institutions headquartered outside the reporting country ( - )
4. Aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) Short positions
(i) Bought puts
(ii) Written calls
(b) Long positions
(i) Bought calls
(ii) Written puts
PRO MEMORIA: In-the-money options ¹¹
(1) At current exchange rate
(a) Short position
(b) Long position
(2) + 5 % (depreciation of 5%)
(a) Short position
(b) Long position
(3) - 5 % (appreciation of 5%)
(a) Short position
(b) Long position
(4) +10 % (depreciation of 10%)
(a) Short position
(b) Long position
(5) - 10 % (appreciation of 10%)
(a) Short position
(b) Long position
(6) Other (specify)
(a) Short position
(b) Long position

IV. Memo items


(1) To be reported with standard periodicity and timeliness:
(a) short-term domestic currency debt indexed to the exchange rate
(b) financial instruments denominated in foreign currency and settled by other means (e.g., in domestic currency)
--nondeliverable forwards
--short positions
--long positions
--other instruments
(c) pledged assets
--included in reserve assets
--included in other foreign currency assets
(d) securities lent and on repo
--lent or repoed and included in Section I
--lent or repoed but not included in Section I
--borrowed or acquired and included in Section I
--borrowed or acquired but not included in Section I
(e) financial derivative assets (net, marked to market)
--forwards
--futures
--swaps
--options
--other
(f) derivatives (forward, futures, or options contracts) that have a residual maturity greater than one year, which are subject to margin calls.
--aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps)
(a) short positions ( – )
(b) long positions (+)
--aggregate short and long positions of options in foreign currencies vis-à-vis the domestic currency
(a) short positions
(i) bought puts
(ii) written calls
(b) long positions
(i) bought calls
(ii) written puts
(2) To be disclosed less frequently:
(a) currency composition of reserves (by groups of currencies)	74,541
--currencies in SDR basket	74,541
--currencies not in SDR basket
--by individual currencies (optional)

Notes:

3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

Deputy Assistant Secretary Mark Sobel
Remarks at Conference on U.S. – EU Regulatory Cooperation
U.S. Chamber of Commerce

Washington - Thank you for the invitation to join this panel and discuss U.S.-EU financial market issues ahead of the TEC.

Obviously, the current global financial turmoil and US/EU cooperation is uppermost in people's minds. As noted in the recent G7 statement, the world's major central banks have coordinated their actions to address liquidity pressures in funding markets and disruptions in global financial markets. The Financial Stability Forum (FSF) -- which consists of the G7 countries, Switzerland, the Netherlands, Australia, Hong Kong and Singapore, and also brings together the key standard setting bodies -- put forward a strong consensus-based report with proposals on prudential oversight, transparency and valuation, the role of credit rating agencies, supervisory authorities' responsiveness to risk and robust arrangements for dealing with stress in the financial system.

Several EU members are active participants in the FSF and the European Commission works closely with many standard setting bodies and has itself pursued work in the European context aimed at addressing the turmoil. The substance of this work is closely aligned with that of the FSF as well as U.S. work in the President's Working Group on Financial Markets. These activities underscore that US-EU cooperation in addressing global financial market turmoil is excellent and that this work needs to be anchored not just in transatlantic cooperation but also in the global system.

Let me step back now and put US/EU financial discussions in a broader context. This decade, the EU intensified its efforts to forge an integrated financial market under its Financial Services Action Plan (FSAP). Transformation is already visible, especially at the wholesale level. The EU Markets in Financial Instruments Directive has made for more seamless trading across European platforms. Stock exchanges are being consolidated in Europe and across the Atlantic. Several EU cross-border bank mergers have taken place. All listed European firms use International Financial Reporting Standards (IFRS). Efforts are underway to create more efficient clearance, settlements and payments systems.

In the United States, change is also afoot. Financial markets have evolved significantly reflecting the increased globalization of finance and commerce. Technological change has increased trading efficiency. Cross-border capital flows have picked up and corporate governance has been strengthened.

While financial market regulation is undertaken at the national level, one nation's actions clearly don't stop at the water's edge. This is a reality that the U.S. and EU have confronted. Against that background, in 2002, the informal U.S.-EU Financial Market Regulatory Dialogue (FMRD) began. This dialogue complemented many other critical international processes, for example, in the G-7, Financial Stability Forum, Basel Committee, IOSCO and the like.

Since then, the Dialogue has addressed many topics, including the impact of the FSAP on U.S interests; the effect of U.S. regulatory actions on the EU; how to manage these spillovers; and our common interests in working with emerging markets on financial sector issues. Let me underscore -- this is an "informal dialogue", not a negotiation. Both sides respect the independence of regulatory authorities, recognize that our structures are different and focus on promoting the common objective of facilitating global financial stability and finding practical solutions, if possible.

Much has been achieved. The relationships among the players are extremely cordial and virtual. The nitty-gritty depth of our discussions at times can be mind-numbing. Since many items I will discuss in the rest of my remarks fall in the domain of our regulators, let me be clear that they are independent, I would not presume to speak on their behalf, and my points are solely intended to be factual. To list a few things done since 2002:

Asset pledge requirements for foreign branches in the U.S. were reduced.

U.S. firms continued their European operations in the presence of the EU's Financial Conglomerates Directive.

Accommodations were reached on the impact of Sarbanes-Oxley on Europe.

European financial rule-making became more transparent and consultation with market participants improved.

Europe allowed for internalization of stock trading.

Good discussions were held on the timeline for implementing Basel II, helping to facilitate the smooth management of this issue. Trading book capital charges were included in European legislation.

Rules were put in place making it easier for foreign companies to terminate SEC registration and reporting requirements when there is little US market interest in their securities.

In 2005, the SEC and EU began work on a landmark "roadmap" for the United States to accept IFRS statements as a basis for U.S. public listings no later than 2009, and the EU to find US GAAP statements "equivalent" in order to ensure their continued use on European markets without a reverse reconciliation requirement.

And in early 2007, an active debate emerged on establishing a system of "substituted compliance" for recognition of foreign broker-dealer regimes, or what the G7 Finance Ministers have labeled "mutual recognition of comparable regimes," aimed at facilitating cross-border access by securities exchanges, other trading systems and investment firms, while ensuring high quality investor protection.

With the launch of the Transatlantic Economic Council, the U.S. and EU highlighted the benefits to our economies from promoting greater transatlantic economic integration and seeking to reduce regulatory burdens. Given that some two-thirds of global capital flows take place in the transatlantic space, it was natural that the TEC highlighted financial market issues. Three issues, long in the financial realm, will be in focus.

Accounting Convergence: Following up on the accounting "roadmap" work, in late 2007, the SEC decided to abolish the requirement for reconciliation to US GAAP for foreign companies using IFRS as issued by the International Accounting Standards Board and solicited comment on the possibility of allowing domestic companies to file using IFRS. Noting the report published by the EC Services earlier this month that US GAAP meets the criteria established for recognition as "equivalent" to IFRS, we look forward to a formal decision confirming this finding. We fully expect this to happen this year. It bears underscoring that this work, along with efforts to converge global accounting standards and strengthen international accounting governance, offers the prospect for firms to use one set of financial statements for their global activities, with all of the attendant benefits in terms of reduced costs and greater efficiencies. This is a hugely positive achievement, and the SEC and EU deserve tremendous praise for their hard work in past in bringing these efforts toward fruition.

Mutual Recognition in Securities: Work in this area is proceeding apace. Last year, consultations and roundtables were held with stakeholders to flesh out ideas. In February, Chairman Cox and EU Internal Markets Commissioner McCreevy issued a joint statement on the common willingness of the US and EU to work together on mutual recognition in securities. In late March, the SEC announced actions to further the implementation of the concept of mutual recognition for high-quality regulatory regimes in other countries. It also announced that it would work to develop a process for discussing mutual recognition with the EU, hopefully by mid-2008.

Insurance Issues: Undoubtedly, lively discussions will continue on insurance issues – notably on the implications of U.S. state reinsurance collateral requirements for unlicensed reinsurers and the EU's forthcoming Solvency II Directive for foreign insurance firms operating in the EU.

The US is open to foreign reinsurers, who account for 85% of the US reinsurance market. On reinsurance collateral, certain European reinsurers operating without licenses in given states take the view that the requirement to hold 100% collateral against gross liabilities is excessively costly and inconsistent with a risk-based regime. High-level discussions have occurred for years on reinsurance collateral, including through the NAIC/EU insurance dialogue, a NAIC dialogue with the European committee of insurance supervisors and the FMRD. Unfortunately, a solution which could be implemented has not been found, though many good ideas have been advanced and work undertaken in good faith to address the matter. Those efforts continue among state insurance commissioners.

On Solvency II, Europe is moving to adopt a new regime, perhaps in 2012, which would provide for consolidated supervision of insurance firms at the financial holding company level and a risk-based approach to capital requirements. Solvency II also provides that foreign firms operating in the EU must be supervised on an "equivalent" basis by their home supervisor or face unspecified measures. Large U.S. insurance firms operating in Europe fear the EU will find the U.S. insurance supervisory regime not equivalent and that they in turn will face uncertainties and higher costs in continuing their European operations. This is a matter requiring intensive discussion.

The Chair specifically asked me to address Treasury's "Blueprint for a Modernized Financial Regulatory Structure" in this context. As Secretary Paulson has said, a state-based regulatory system is burdensome, and it can hinder development of national products and directly impact the competitiveness of U.S. insurers. Also, he has said insurance presents a clear need for regulatory modernization. Certainly in my talks with regulators across the globe, a familiar refrain has been that foreign firms find interacting with many state regulators cumbersome.

Against this background, the Blueprint made two proposals. First, Treasury recommended the establishment of a federal insurance regulatory structure to provide for the creation of an Optional Federal Charter. Second, as an intermediate step, Treasury recommended that Congress create a federal Office of Insurance Oversight within Treasury to establish a federal presence in insurance for international and regulatory issues. These reforms would provide in Treasury's view for more effective, efficient and consistent regulation for national insurers.

Two weeks ago, Congresspersons Kanjorski and Pryce of the House Financial Services Committee introduced legislation to create a federal insurance adviser within Treasury, similar to the intermediate step proposal in the Blueprint. As Assistant Secretary David Nason stated, Treasury welcomes this proposal and it would help the U.S. address international regulatory issues affecting our markets' competitiveness.

Needless to say, these proposals are not yet law and until such time that they are implemented, the current U.S. insurance regulatory structure will remain in place. It is in this context for the period ahead that U.S.-EU international insurance discussions will continue to take place in the various dialogues previously outlined. It is Treasury's strong hope and expectation that all parties will work constructively together in search of practical solutions.

Thank you.

Report to The Secretary of the
Treasury from The Treasury Borrowing Advisory Committee
of the
Securities Industry And Financial Markets Association

April 29, 2008

Dear Mr. Secretary:

Since the Committee's previous meeting in late January, credit conditions have remained stringent and the economy has weakened. Overall, Federal Reserve policies have proved effective in forestalling a financial market crisis by effectively eliminating the possibility of another bank failure but concerns remain about the appropriate quoting of money markets rates, term financing and continued proper functioning of the money markets in the absence of these Fed programs. Expectations for economic growth in the first half of 2008 have continued to fall and a number of primary dealers judge the economy currently to be in recession. Housing remains a notable drag through a variety of channels and that weakness now is being augmented by a more cautious approach to spending by businesses and consumers. Forthcoming tax rebates likely will boost consumer spending in the months ahead but that lift will be temporary. On balance, the outlook for the economy will remain uncertain until credit conditions improve and financial intermediation begins to function more smoothly.

Inflation has remained somewhat elevated due to ongoing price increases for food and energy. Slowing economic growth has had a moderating effect on an array of other consumer prices, especially for credit-sensitive goods such as motor vehicles and household durables. Core consumer prices are increasing in a 2% to 2-1/2% range. Chances favor some improvement in these measures amid tight financial conditions, softer home prices and higher unemployment. Nonetheless, rising food and energy costs' possible effect on inflation expectations may sustain concerns about inflationary pressures.

The steady tightening in financial conditions has led the Federal Reserve to lower the federal funds target rate to 2-1/4%. Futures markets anticipate another quarter-point reduction in the policy rate, followed by a period of stability. The shift in investor expectations for the path of monetary policy has contributed to the recent rise in market interest rates and the flattening of the U.S. Treasury yield curve.

The Federal government's budget balance is deteriorating in fiscal year 2008. Weaker economic activity has dampened the pace of revenue collection and lifted growth in economically sensitive spending. A recent survey of primary dealers estimates that the deficit for the 2008 fiscal year ending in September will exceed $400 billion with some economists expecting a deficit of more than $500 billion--a significant deterioration from fiscal 2007's deficit of $163 billion. Economic stimulus measures will complement the forces widening the budget deficit. This year's shortfall may surpass fiscal year 2004 as the largest on record in nominal dollars.

In its first charge to the Committee, the Treasury solicited our advice and recommendations for Treasury issuance over the near and intermediate term given the aforementioned deterioration in the fiscal budget outlook.

As a near-term solution, there was universal agreement on the Committee that the Treasury should introduce a 52-week bill to its auction schedule. A "year bill" would reduce the Treasury's reliance on large cash management bills and provide sufficient financing to absorb the increased borrowing needs that have grown so quickly over the last year.

There was also universal agreement on the Committee that the Treasury needs to prepare for additional financing needs over a more intermediate term. In fact, several members argued that the current deterioration in the fiscal outlook might be more than temporary and that the risk of further deterioration outweighs the risk of a surprise improvement in the deficit.

Furthermore, additional members again reiterated their concern that this latest "cyclical" deterioration in the fiscal outlook is particularly troublesome as the longer-term "secular" forces of entitlement spending and the aging of the baby boom generation and their effect on the budget deficit are no longer that distant in the future.

Consequently, there was strong agreement on the Committee that the Treasury consider altering its issuance calendar over the intermediate term to account for these forces.

The Committee recommends that the Treasury review its issuance calendar and increase the size and the frequency of existing coupon issuance over the coming quarters in addition to the near-term solution of adding a year bill. Several members noted that the increased reliance on Treasury bills, as the deficit has deteriorated, has shortened the average maturity of the debt, and that steps should be taken to arrest this trend, if not, to purposefully reverse it.

The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term.

Consequently, most members recommended that the Treasury prepare the markets for a re-introduction of a coupon note over the coming quarters. The Committee was somewhat divided as to the maturity of such a note. A 3-year note was suggested by some given its relative ease of issuance, while longer-dated notes were suggested by others who are concerned with the shrinking of the average maturity of the debt as argued above.

In any event, the Committee was in strong agreement that the Treasury cannot view the deterioration in the fiscal deficit as "temporary" and must plan for increased flexibility of bills and notes over coming quarters to ensure a continued effective financing environment.

In the second charge, the Committee was asked to address the prevailing low interest rate environment's potential impact on an increase in systemic fails in the Treasury market. The consequences of such fails would be an impairment of liquidity and an increased cost to Treasury borrowing. Consequently, the Treasury has encouraged market participants to discuss and pursue market-oriented solutions to ease this potential burden.

The discussion was accompanied by a chart that depicted tangible spikes in fail activity during the low rate periods of 2001, 2003 into 2004, and the recent fail rate increases over the past few months, as rates have once again declined precipitously.

The presentation suggested that a number of private sector participants, including the Securities Industry and Financial Markets Association Group (SIFMA) and the Treasury Market Practices Group (TMPG), were encouraging some actionable steps towards dealing with this issue. A few of the Borrowing Committee members actually sit on one or more of these industry groups and suggested that their work was yielding some positive results.

One of these suggestions was in the form of a prompt delivery trading practice or buy-in mechanism. A couple of Committee members suggested that while these measures would enhance clarity and boundaries for market participants, they would also encourage arbitrage, and increased market activity around these rules or guidelines. However, the notes from the presentation did suggest that there was a broad consensus around encouraging a cash settlement of fails before the 30^th day after the fail had occurred.

There was also some discussion of a negative rate repo trading practice, which had some support, due to its ability to allow the marketplace to source securities at a price that would guarantee delivery. SIFMA has formed a task force to study this and related issues.

There was general consensus among committee members that a well-defined series of "Fails Best Practices" outlined by SIFMA and TMPG, which defined such parameters as margining of fails, cash settlement procedures, and initiatives related to pair-offs and security-delivery, would be extremely beneficial.

To supplement this "Best Practices" set of procedures, the Committee was supportive of a Treasury Fails Monitoring Committee that would be comprised of senior funding and cash market participants. This committee would be established to assess market conditions in this arena, make those issues transparent to the broader market, and recommend practices aimed at dealing with the issues if they became outside the bounds of normal market activity.

This Fails Monitoring Committee, alongside of traditional Treasury Department surveillance, and potentially increased Treasury position disclosure (although some suggested that this could have harmful market-effects), should provide for the ability to monitor and influence appropriate market behavior.

The majority of the Committee feels as if subtle activity by the Treasury such as moral suasion, timely reporting of abnormal market activity, and otherwise regular market surveillance, will also help provide for efficient and normal market conditions to exist.

The Committee suggested that continued review and assessment of these issues would be beneficial in the near future, as it would appear that the market will be in for a more sustained low interest rate environment.

In its third charge to the Committee, the Treasury asked for our views of recent initiatives taken by public and private entities to address the problems in the U.S. housing sector.

Committee members were in agreement that the problems in the housing market were significant, and many were concerned that without intervention the problems would grow worse. In fact, housing price data from S&P/Case-Shiller was released hours before our meeting and highlighted that the decline in housing prices is not over but that prices are actually accelerating to the downside. For example, while year-over-year prices were reported to be down almost 13%, prices on a 6-month, 3-month and 1-month basis have declined 21%, 25% and 28% annualized, respectively.

Several members voiced their endorsement for the Frank/Dodd bill that is currently in Congress. One member noted that while none of these bills are perfect, that this proposal is certainly focused on the key problem which is encouraging lenders and borrowers to find an alternative to foreclosure which serves few interests and might in and of itself fuel housing price declines and create additional defaults.

While few members argued against the "intent" of the proposal, several people articulated their concerns that embedded in such proposals are many unintended consequences. One such concern that otherwise able borrowers would be incentivised to default to capture the same benefit as the borrowers targeted by this legislation.

Several members noted that one of the key issues to encourage servicers to modify loans in hopes of preventing default and foreclosures is the legal liability associated with these actions given the disparate interests embedded in a securitized loan. A number of members recommended that Congress indemnify the servicers while at least one other questioned the long-term impact of what is essentially a repudiation of contract law.

In the final section of the charge, the Committee considered the composition of marketable financing for the April-June Quarter to refund the $74.0 billion of privately held notes and bonds maturing May 15, 2008, the Committee recommended a $15 billion 10-year note due May 15, 2018 and a $7 billion reopening of the 30-year bond due February 15, 2038. For the remainder of the quarter, the Committee recommends a $30 billion 2-year note in May and $31 billion 2-note in June, $20 billion 5-year notes in May and June, and a $10 billion re-opening of the 10-year note in June.

For the July-September quarter, the Committee recommended financing as found in the attached table. Relevant figures included three 2-year note issuances monthly, three 5-year note issuances monthly, a 10-year note issuance in August followed by a re-opening in September, a 30-year bond in August, as well as a 10-year TIPs note in July, and a 20-year TIPs re-opening later that same month.

Respectfully submitted,

Keith T. Anderson
Chairman

Rick Rieder
Vice Chairman

REPORTS

Statement by U.S. Treasury Secretary Henry M. Paulson, Jr.
at the Development Committee Meeting

Washington, DC –While the long-run economic fundamentals remain sound, the U.S. economy faces challenges. The housing correction, credit market turmoil, and high oil prices are all weighing on growth and short-term risks are to the downside. However, the fundamental drivers that make the U.S. economy healthy over the long term are sound, including the flexibility, innovation, and entrepreneurship that characterize our country.

These risks notwithstanding, it is important to remember that developing countries are on track to record their sixth consecutive year of average GDP growth in excess of 6%, an accomplishment unparalleled in recent history. Stronger macroeconomic policies, buoyant external demand, low real interest rates, and increased access to private capital markets – over $600 billion in net private inflows in 2007 – are major factors for strong growth performance.

Recent Market Developments – Challenges and Opportunities Resulting from Higher Commodity Prices

The strong upward movements in world commodity prices in recent years have generally produced large beneficial shifts in the terms of trade for many developing countries. For these countries, we support the recommendations contained in this year's Global Monitoring Report (GMR) that sound management of these windfall revenues is essential to translate this boom into the foundations for higher sustainable growth. This will require establishing and maintaining sound institutions, combined with good governance and public finance management to ensure quality spending.

Governments of countries that are experiencing severe negative shifts in the terms of trade due to higher commodity prices, including higher food prices, may need to implement better energy demand policies and targeted safety net programs while considering longer term measures, such as promoting sustainable energy development and agricultural growth. Existing international facilities can also help mitigate the impacts of negative terms of trade movements when appropriate. Governments, however, need to resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups. They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries.

Challenges and Opportunities for Low and Middle Income Countries

Despite impressive advances in most developing countries, the World Bank and other development partners have a large unfinished agenda. While many developing countries have been able to capitalize on the opportunities offered by increased globalization and a favorable export environment, a key challenge for the international financial institutions is to assist those countries whose growth is lagging. We agree with the assessment in the GMR that three broad areas emerge as major factors necessary for strong growth: sound macroeconomic policies, favorable private investment climates, and good governance.

We also agree with the conclusion in the GMR that the relationship between trade expansion and economic growth is positive and that trade reforms are critical means to lifting people out of poverty. Reducing barriers to trade in goods and services enables local firms to access low-cost and high-quality services such as telecommunications, transport and distribution services and financial intermediation, thus enhancing their ability to compete more effectively in international markets.

Overcoming Poverty in Fragile States and Post-Conflict Countries

The development challenges are all the more formidable in fragile and post-conflict states. It is increasingly becoming apparent that the international development community needs to be more effective in its efforts to lay the groundwork for economic growth and employment so that the people living in these states believe they have a stake in the future.

The development programs for these countries, which are mostly located in sub-Saharan Africa, will require a challenging mixture of security enhancement, political reform and consolidation, capacity building, and actions to build private sector growth opportunities. While international aid flows are an important element for successful development, establishment of basic government capacity is required to ensure that aid is used effectively. The Bank Group, working with other members of the international community, has done much in the last year – including in IDA15 – to develop a more effective strategy for promoting development in these countries and we urge swift implementation of these measures.

Environmental Sustainability and Climate Change

The World Bank and its sister institutions face multiple and growing challenges in incorporating environmental sustainability into their development and anti-poverty mandates. For instance, the MDBs are generally financing a shrinking share of investment projects relative to other lenders (especially in International Bank for Reconstruction and Development countries), which reflects positively on these countries economic development and access to private markets but dilutes MDB leverage with respect to the overall environmental performance of projects in those countries.

The Bank needs to continue to emphasize its core mandate while becoming more creative in utilizing the linkages between environmental trends and poverty. Potential areas for this include leveraging its own tools – for example safeguard policies, environmental capacity-building, payments for ecological services, techniques for adaptation to climate change, and monitoring trends in natural capital. Second, the bank should maximize the global as well as local benefits of its work in the areas of environment and climate change.

We welcome the Bank ' s increasing focus on climate change as it becomes clear that the issue must be addressed in the context of development efforts. However, we realize that addressing climate change is also technically and financially challenging. In this vein we applaud the Bank ' s work to create the Climate Investment Funds, which we intend to support with a $2 billion contribution over the next three years through the Clean Technology Fund that will help developing countries invest in a clean energy future.

Conclusion

President Zoellick outlined six strategic themes for the World Bank Group at the Development Committee meeting last fall. As these strategic themes evolve and are incorporated into a strategic framework, the Bank Group will need to make key decisions on where it will focus its resources and how to best coordinate and lead activities with other development partners. We look forward to working with President Zoellick as this strategy unfolds.

Under Secretary for Terrorism and
Financial Intelligence Stuart Levey
Testimony Before the Senate Committee on Finance

Washington - Chairman Baucus, Ranking Member Grassley, and distinguished members of the Committee, thank you for the opportunity to speak with you today about the work of the Treasury Department's Office of Terrorism and Financial Intelligence (TFI). I want to thank this Committee and the others that oversee TFI for the continued support and guidance we have received. Today, I want to brief you on the progress we have made over the past four years and also talk about some of the challenges we face moving forward.

THE OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE AND THE TREASURY DEPARTMENT'S ROLE IN PROTECTING NATIONAL SECURITY

Nearly four years have passed since I first testified before this committee as the nominee for my current position. At the time, I think it is fair to say that the extent of the Treasury Department's future role in protecting U.S. national security was uncertain at best. Most of the Treasury's law enforcement functions had been moved to the Departments of Justice and Homeland Security in 2003, the Treasury was not integrated into the Intelligence Community, and the office that I was being asked to lead was only in the process of being established.

But there were some who recognized that the Treasury Department's efforts to protect the safety and soundness of the international financial system were indispensable to our national security, especially given the types of threats we face in a post -9/11 world. Globalization is a positive trend; open finance and free trade enhance the economic security and prosperity of people in this country and around the world. But illicit actors seek to abuse the global financial system to support their dangerous activities. The financing of terrorism and weapons proliferation often occurs within the same system that spreads prosperity at home and abroad. It was therefore important to adapt our national security strategy to confront this challenge. This was the genesis of the Office of Terrorism and Financial Intelligence, or TFI.

Fast-forward to today, and we have a Treasury Department that is playing a greater role in national security than ever before. The guiding principle of TFI's approach is that many of the threats we face – from terrorism to the proliferation of weapons of mass destruction (WMD) to narcotics trafficking – all have one thing in common: they rely on financial support networks. These threats are not neatly confined within the borders of another country. They are asymmetric and borderless and thus not necessarily susceptible to being solved exclusively by traditional means of deterrence. The Treasury is well-situated to address them because of the authorities we command, the relationships we possess with governments and private sector actors around the world, and the financial information we can draw upon.

Transactions by those engaged in threatening conduct typically leave a trail of detailed information that we can follow to identify key actors and map their networks. Opening an account or initiating a funds transfer requires a name, an address, a phone number. This information tends to be very accurate and durable. In 2004, with the creation of TFI's Office of Intelligence and Analysis, the Treasury became the first finance ministry in the world to develop in-house intelligence and analytic expertise to use this information. We now work with the broader Intelligence Community to communicate the Department's requirements and evaluate information that threatens our national security. The Treasury then considers this information with an eye toward potential action – be it a designation, an advisory to the private sector, or a conversation to alert the private sector and government officials in another country to a particular threat. The financial networks of these illicit actors are not only a rich source of intelligence, but also they are a vulnerability we can exploit. As I will explain, we have seen in various contexts that targeting these financial networks, when we do it right, can place an enormous amount of pressure on these networks and the actors they support.

A. COMBATING THREATS WITH TARGETED FINANCIAL MEASURES

As we have applied our authorities to different threats over the past several years, we have adopted a new strategy of using targeted, conduct-based financial measures aimed at particular bad actors. I intentionally refer to these targeted actions as "financial measures" rather than "sanctions" because the word "sanctions" often evokes such a negative reaction. These targeted financial measures are proving to be quite effective, flying in the face of a widely-held historical view that dismisses sanctions as ineffective, harmful to innocents, or both.

In the case of broad, country-wide sanctions that are often perceived as political statements, it can be difficult to persuade other governments and private businesses to join us in taking action. Even when other governments agree with us politically, they generally tend to be unwilling to force their businesses to forgo opportunities that remain open to others. When the private sector views such broad sanctions as unwelcome barriers to business, companies are unmotivated to do more than what is minimally necessary to comply. Indeed, history is replete with examples of participants in the global economy working to evade such sanctions while their governments turn a blind eye.

The dynamic is different when we instead impose financial measures specifically targeted against individuals or entities engaging in illicit conduct. When we use reliable financial intelligence to build conduct-based cases, it is much easier to achieve a multilateral alignment of interests. It is difficult for another government, even one that is not a close political ally, to oppose isolating actors who are demonstrably engaged in conduct that threatens global security or humanitarian interests. Also, whatever their political views, all countries want their financial sectors to prosper and to have good reputations. They therefore share a common interest with us in keeping their financial sectors untainted by illicit conduct.

The key difference when we use targeted financial measures is the reaction of the private sector. Rather than grudgingly complying with, or even trying to evade these measures, we have seen many members of the banking industry, in particular, voluntarily go beyond their legal requirements because they do not want to handle illicit business. This is a product of good corporate citizenship and a desire to protect their institutions' reputations. The end result is that private sector voluntary actions amplify the effectiveness of government-imposed measures.

Once some in the private sector decide to cut off companies or individuals we have targeted, it becomes an even greater reputational risk for others not to follow, and so they often do. Such voluntary implementation in turn makes it even more palatable for foreign governments to impose similar measures because their financial institutions have already given up the business, thus creating a mutually-reinforcing cycle of public and private action.

Armed with the critical intelligence capability I have described, as well as our experience building and maintaining multilateral government and private sector support for our actions, TFI draws on any one or a combination of authorities to respond to a particular threat. In many circumstances, we have found that our most effective tool is simply sharing information about illicit actors with other governments and members of the international private sector.

I would now like to describe some of the results of this marriage of intelligence and strong financial authorities, and the role it plays across various elements of our national security strategy.

1. Disrupting and Dismantling Terrorist Support Networks

Our efforts to track and combat terrorist financing are critical pillars of the U.S. government's efforts to protect U.S. citizens and other innocents around the world from terrorist attacks. These efforts span across U.S. departments and agencies and range from intelligence collection and analysis to public actions aimed at holding terrorist financiers accountable for their conduct and deterring other would-be donors. Activities to combat terrorist financing are more integrated than ever before into the U.S. government's strategic approach to counterterrorism by virtue of the National Implementation Plan, which synchronizes the U.S. government's overall counterterrorism efforts.

Over the last four years, we have become more adept at pursuing that strategy and at pursuing the most appropriate course of action to combat the particular terrorism threat presented. In December of 2005, the 9/11 Commission's Public Discourse Project awarded its highest grade, an A-, to the U.S. government's efforts to combat terrorist financing. Since then, we have continued to develop and improve our strategy and there are signs that we are making important progress.

To start, we have made significant progress in mapping terrorist networks. "Following the money" yields some of the most valuable sources of information we have in this effort. As 9/11 Commission Chairman Lee Hamilton has stated: "Use of this tool almost always remains invisible to the general public, but it is a critical part of the overall campaign against al Qaida." That is because financial intelligence is extremely reliable; money trails don't lie. At times, our best course is not to take public action, but to continue to trace the network both upstream to the ultimate donors and downstream to the operational cells.

On some occasions, we decide that the best approach is to share intelligence with other countries and urge them to take action against the relevant actors. We have found that almost all countries will take such requests very seriously, especially when the information concerns al Qaida.

At other times, we have determined that the best course is for the Treasury to take public action. We have a powerful Executive Order that allows us to designate terrorists and their supporters, freezing any assets they have under U.S. jurisdiction and preventing U.S. persons from doing business with them. We have used this authority against key terrorist entities, facilitators, donors, and terrorist-supporting charities, ranging from Bayt al-Mal and Yousser Company, which are financial institutions that functioned as Hizballah's unofficial treasury in Lebanon, to Adel Abdul Jalil Batterjee, a Saudi-based donor to al Qaida.

When it comes to al Qaida and the Taliban, there is a UN Security Council resolution, UNSCR 1267, which provides for designations similar to our Executive Order designations. There are other Security Council resolutions dealing with terrorist financing more generally, but for Hamas, Hizballah and other terrorist organizations we have designated, there is no comparable UN list. We are still grappling with this challenge. We nevertheless have found that our unilateral designations are followed voluntarily by many banks around the world that have decided they simply do not want to do business with these actors.

The disruptive impact of these actions is significant. Beyond the direct effect on the designated individual or entity, designations can also deter other would-be financiers. The terrorist operative who is willing to strap on a suicide belt may not be susceptible to deterrence, but the individual donor who wants to support violent jihad may well be. Terrorist financiers typically live public lives with all that entails: property, occupation, family, and social position. Being publicly identified as a financier of terror threatens an end to that "normal" life.

Designations have also been an effective tool in combating terrorist abuse of charities. Historically, al Qaida and other terrorist groups have set up or exploited some charities, preying on unwitting donors trying to fulfill their religious obligation of charitable giving or seemingly engaging in humanitarian activity to garner support from communities in need. Indeed, many terrorist-supporting charities have gone to great lengths in attempting to obscure their support for violence.

Through a combination of public designations and law enforcement and regulatory actions against corrupt charities, both at home and abroad, we have exposed and taken out key organizations and deterred or disrupted others. We have thus far designated approximately 50 charities worldwide as supporters of terrorism, including several in the United States, putting a strain on al Qaida's financing efforts.

There is also increased awareness among charities around the world of the danger of terrorist abuse. In that regard, our active engagement with the charitable sector has been just as important as our actions against specific charities that have supported terrorism. This is particularly important because we want humanitarian assistance to reach those who are truly in need through channels safe from terrorist exploitation.

We have issued guidance to assist charities in mitigating the risk of exploitation by terrorist groups. We have engaged in a comprehensive outreach campaign to the charitable sector and the Arab/Muslim-American communities to explain the threat, provide guidance, and address questions regarding Treasury enforcement actions. Internationally, we have worked through organizations like the Financial Action Task Force – or the "FATF," the world's premier standard-setting body on combating terrorist financing and money laundering – to develop and implement standards and best practices on preventing terrorist financing through charitable organizations. This effort has made it much more difficult for al Qaida and other terrorist groups to raise money through ostensibly mainstream charities while also helping well-intentioned donors support worthy causes.

The real value of all of our counter-terrorist financing efforts is that they provide us with another means of maintaining persistent pressure on terrorist networks. Terrorist networks and organizations require real financing to survive. The support they require goes far beyond funding attacks. They need money to pay operatives, support their families, indoctrinate and recruit new members, train, travel, and bribe officials. When we restrict the flow of funds to terrorist groups or disrupt a link in their financing chain, we can have an impact.

With respect to the terrorist group that poses the greatest threat to the United States, al Qaida, we have made real progress. We have disrupted or deterred many of the donors on which al Qaida used to rely. At the very least, these donors are finding it far more difficult to fund al Qaida with the ease and efficiency provided by the international financial system. The same applies to many of the charities that al Qaida previously depended upon as a source of funds. To the extent we can force terrorists and their supporters out of the formal financial system, we force them into more cumbersome and riskier methods of raising and moving money, subjecting them to a greater likelihood of detection and disruption. In this regard, we are also pursuing important efforts to facilitate the interdiction of cash couriers, for example by working with DHS to identify and interdict them. The Department of Homeland Security's Customs and Border Protection is playing a leading role in this global effort.

Along with our allies around the world, we have disrupted many of al Qaida's most important facilitation networks. Consider this relatively recent quote from an interview by a high-ranking al Qaida official, Mustafa Abu-al-Yazid, also known as Shaykh Sa'id:

"As for the needs of the Jihad in Afghanistan, the first of them is financial. The Mujahideen of the Taliban number in the thousands, but they lack funds. And there are hundreds wishing to carry out martyrdom-seeking operations, but they can't find the funds to equip themselves. So funding is the mainstay of Jihad. . . . And here we would like to point out that those who perform Jihad with their wealth should be certain to only send the funds to those responsible for finances and no other party, as to do otherwise leads to disunity and differences in the ranks of the Mujahideen."

Al Qaida's expression of concern about its financial difficulties is not limited to this one comment; this concern has recently been echoed elsewhere in al Qaida's upper ranks. This, in part, is the impact of being forced out of the formal financial system. Al Qaida has had no choice but to turn to less reliable methods of raising, storing, and moving money, giving rise to opportunities for fraud and distrust within its ranks.

The overall impact of all of our efforts has been substantial: as DNI McConnell recently testified, over the last year to 18 months we have seen that the core leadership of al Qaida has had difficulty raising funds and sustaining itself.

That does not mean that I am satisfied; there are still tough issues that need to be tackled. One of our greatest challenges will be to foster the political will required to deter terrorist financiers more consistently and effectively. It has proven difficult to persuade officials in some countries to identify and to hold terrorist financiers publicly accountable for their actions. This lack of public accountability undermines our ability to deter other donors. Those who reach for their wallets to fund terrorism must be pursued and punished in the same way as those who reach for a bomb or a gun. We have made some progress in this area, but we have a long way to go. So long as that is the case, even when we are successful in disrupting terrorist facilitators and financial conduits, our successes may well be short-lived.

Stemming the violence in Iraq continues to be a significant challenge, but TFI is contributing to the effort. Our intelligence work has been particularly useful in helping to restrict the flow of funds fueling the Iraqi insurgency. The Treasury and Defense Departments established in late 2005 a Baghdad-based interagency intelligence unit, known as the Iraq Threat Finance Cell (ITFC), to enhance the collection, analysis, and dissemination of timely and relevant financial intelligence to combat the insurgency. The ITFC has made significant contributions to our war fighters. Senior U.S and Coalition military commanders have come to rely on the cell's strategic and tactical analysis to help combat the Iraqi insurgency and disrupt terrorist, insurgent, and militia financial networks.

The presence of al Qaida in Iraq is representative of another trend that poses a significant challenge for us. In the years since September 11, al Qaida has continued to merge with regionally-based terrorist groups to support its cause. Although these partners, which include groups based in Africa, the Middle East and elsewhere, may have had long-standing objectives of using terrorist tactics against governments and regimes, their affiliation with al Qaida brings with it the potential that their personnel and resources could be used to engage in attacks globally including against the United States. Our challenge is to stay in front of this trend by working to understand these groups' operations, organizational structure and, of course, their financial networks, as quickly as they are evolving. By focusing on the financing of these nodes, we can better understand the relationship among them and identify potential vulnerabilities.

We are also not yet where we need to be with respect to State Sponsors of Terrorism, particularly Iran and Syria. These states not only provide support and safe haven to terrorists, but also a financial infrastructure that terrorists can use to move, store, and launder their funds. Iran poses the biggest problem in this area, using its Qods Force to provide weapons and financial support to the Taliban and terrorist organizations. We have designated individuals or entities in both Iran and Syria for supporting terrorism-related activities, and, as in other areas, we find that responsible financial institutions take these actions into account and adjust their business accordingly.

Finally, there is only so much that the United States can do alone. We have good cooperation from many other governments and the private sector on counter-terrorist financing. The work of the UN Security Council in implementing Security Council Resolution 1267 and the FATF in setting international standards has been instrumental. But there are still challenges. Legal authorities and operational capacity to combat terrorist financing on a national level remain uneven. Some countries still have not criminalized terrorist financing; others have taken this step, but have yet to use the authority. Most importantly, countries need to develop and apply intelligence as a basis of disrupting terrorist financing networks through law enforcement as well as through the use of targeted financial measures. Even some of our best partners still lack the political will or national authorities to consistently and aggressively disrupt terrorist financing networks. This is particularly true when it comes to terrorist groups beyond al Qaida or when there is need to rely on intelligence as a basis for financial action.

2. Targeting Proliferators and their Supporters

We are applying the lessons we have learned in combating terrorist financing to respond to the threat of WMD and missile proliferation. Targeted financial action against proliferation networks has the potential to be particularly effective for two reasons. First, while terrorist organizations are likely to use informal networks or cash couriers, proliferation networks often engage in ostensibly legitimate commercial transactions and therefore tend to depend upon access to the formal financial system, where transparency and our controls are greatest. Second, many in the proliferation chain are motivated by profit, rather than ideology, making them more susceptible to deterrence if we can credibly threaten to publicly expose or isolate them.

Recognizing this, President Bush issued Executive Order 13382 in June of 2005, adding targeted financial measures to the array of options previously available to the U.S. government to combat proliferation. This order authorizes the Treasury and State Departments to target key nodes of WMD and missile proliferation networks, including their suppliers and financiers, in the same way we do with terrorists. We have used it to designate a number of banks, entities, and individuals supporting proliferation activities in Iran, North Korea, and Syria.

In the Iran context, UN Member States are implementing targeted financial measures against entities and individuals identified by the Security Council in a series of Chapter VII UN Security Council resolutions for their involvement in Iran's nuclear and missile programs. Beyond that, most governments do not yet have a national-level designation authority similar to ours as a tool to stem proliferation. Nonetheless, U.S. designations in this area gain worldwide recognition, particularly among financial institutions. My colleagues and I have traveled worldwide explaining our actions to, and sharing information with, foreign government officials and private sector representatives to help them understand the nature of the threat. The result is that our actions jeopardize designated proliferators' access to the international financial system and put their commercial partners on notice of the threat they pose. Those who continue to do business with them do so at the risk of tainting their reputations or even being designated themselves.

We also continue to work bilaterally and multilaterally to raise awareness of the problem of WMD proliferation finance and to encourage the creation of authorities like those we have under our Executive Order. We have been working closely with our G-7 Finance Ministry counterparts, in particular, to determine what steps can be taken to isolate proliferators from the international financial system through multilateral action. One of the most promising avenues is the recent and ongoing work of the FATF to study the threat of proliferation finance and assess the types of actions countries can take to prevent and disrupt proliferators' financial activities. This work has been strongly and unanimously endorsed by the G7, and we hope it will lead to international standards and best practices on proliferation finance, much like we already have on terrorist financing and money laundering. The Treasury and State Departments are also working to encourage the more than 85 countries that participate in the Proliferation Security Initiative (PSI) – aimed at stopping shipments of weapons of mass destruction, their delivery systems, and related materials to state and non-state actors of proliferation concern – to use financial measures to combat proliferation support networks.

3. Combating the Illicit Financial Conduct of Rogue Regimes

States engaged in illicit conduct pose a particular challenge. They hide behind a veil of legitimacy, disguising their activities, such as weapons sales or procurement, through the use of front companies and intermediaries. In some cases, they intentionally obscure the nature of their financial activities to evade detection and avoid suspicion. We have had important successes countering the illicit financial activity of both North Korea and Iran by using a combination of financial measures, fueled by financial intelligence, to target their conduct in a way that is persuasive both for other governments and the private sector.

North Korea

Confronted with North Korean conduct ranging from WMD and missile proliferation-related activities to the counterfeiting of U.S currency and other illicit financial behavior, the Treasury Department took two important public actions. First, we targeted a number of North Korean proliferation firms under E.O. 13382. Second, we acted under Section 311 of the USA PATRIOT Act to protect our financial system from abuse by Banco Delta Asia, a Macau-based bank that, among other things, knowingly allowed its North Korean clients to use the bank to facilitate illicit conduct and engage in deceptive financial practices.

Much of the real impact of these actions came from the information we made public in conjunction with the actions and the information we shared with governments and banks around the world. The private sector's reaction was dramatic. Since the information pointed to the North Korean regime's involvement in the illicit conduct, many of the world's private financial institutions terminated their business relationships not only with designated entities, but also with North Korean clients altogether. Banks in China, Japan, Vietnam, Mongolia, Singapore and across Europe decided that the risks associated with this business far outweighed any benefit. The result has been North Korea's virtual isolation from the global financial system. That, in turn, put enormous pressure on the regime – even the most reclusive government depends on access to the international financial system. This effort was valuable both in securing the integrity of the international financial system and in providing the State Department with leverage in its diplomacy with North Korea.

In addition to these public actions, we have continued to work with the U.S. Secret Service to counteract North Korea's counterfeiting of U.S. currency. The Secret Service is continuing to investigate North Korea's counterfeiting activities and the high-quality counterfeit bills produced by North Korea, known as the "Supernote," continue to surface.

Iran

Dealing with Iran – a country that is much more deeply integrated into the international financial system than North Korea – has presented an even more complex challenge. Iran poses a number of threats. Among them are the regime's continued pursuit of nuclear capabilities in defiance of UN Security Council resolutions and its provision of financial and material support to terrorist groups. The combination of these dangerous activities has an extraordinarily lethal potential. Iran uses its global financial ties to pursue both policies, and it engages in an array of deceptive financial conduct specifically designed to avoid suspicion and evade detection by regulators and law-abiding financial institutions. By combating Iran's illicit financial activities with a strategy that combines targeted financial measures with an unprecedented level of outreach around the world, the Treasury is playing an integral role in the U.S. and multilateral strategy for dealing with Iran.

Iran's financial conduct underlies its proliferation and terrorism activities. Iran uses its state-owned banks for its nuclear and missile programs and for financing terrorism. It also uses front companies and intermediaries to engage in ostensibly innocent commercial transactions that are actually related to its nuclear and missile programs. These front companies and intermediaries enable the regime to obtain dual-use technology and materials from countries that would typically prohibit such exports to Iran.

We have also seen how Iranian banks request that other financial institutions take their names off of transactions when processing them in the international financial system. This practice is intended to evade the controls put in place by responsible financial institutions and has the effect of threatening to involve them in transactions they would never engage in if they knew who, or what, was really involved. This practice is even used by the Central Bank of Iran.

Over the past year and a half, I and other senior Treasury officials have met with our finance ministry and central bank counterparts from around the world to discuss the importance of ensuring that the international financial system is not tainted by Iran's abuse. We have also met with scores of banks to share this information and to discuss the risks of doing business with Iran.

We have taken targeted financial action under our proliferation and terrorism Executive Orders against key Iranian banks, entities and individuals facilitating the regime's dangerous conduct. Among these designations, we have acted against state-owned Bank Saderat, which has been used by the regime to funnel money to terrorist organizations. We have also designated three other Iranian state-owned banks – Bank Sepah, Bank Melli, and Bank Mellat – for facilitating the regime's proliferation activities and designated the Qods Force under our terrorism Executive Order for providing material support to the Taliban and terrorist organizations. The State Department has designated other key entities of proliferation concern, including the Islamic Revolutionary Guard Corps (also known as the Iranian Revolutionary Guard Corps) and the Ministry of Defense and Armed Forces Logistics.

These U.S. efforts have been accompanied by international action. The State Department's intensive diplomatic efforts have resulted in three UN Security Council resolutions imposing sanctions on Iran for its pursuit of nuclear capabilities and ballistic missiles. The most recent resolution, UNSCR 1803, calls upon UN member states to exercise vigilance over their own financial institutions' activities with all financial institutions domiciled in Iran, and their branches and subsidiaries abroad. This provision makes special mention of the risks posed by Bank Melli and Bank Saderat. And, in February, the FATF issued its second statement on Iran, sending a clear message to governments and financial institutions worldwide about the threat Iran poses to the international financial system.

In response to Resolution 1803 and the FATF's warning, Treasury's Financial Crimes Enforcement Network (FinCEN) issued an advisory on March 20 to U.S. banks warning them of the risks of doing business with Iran and identifying Iranian state-owned and private banks and their branches and subsidiaries abroad. We also warned financial institutions about the conduct of the Central Bank of Iran, both in obscuring the true parties to transactions and in helping Iranian proliferation and terrorist-supporting entities avoid sanctions.

The overall result has been just the type of mutually-reinforcing cycle of governmental and private sector action that I previously described. In reaction to U.S. and multilateral actions, the world's leading financial institutions have largely stopped dealing with Iran, and especially Iranian banks, in any currency. Foreign-based branches and subsidiaries of Iran's state-owned banks are becoming financial pariahs – threatening their viability – as banks and companies around the world resist dealing with them. This represents a substantial success in protecting the integrity of the financial system from Iranian illicit conduct while simultaneously providing leverage to support the multilateral effort to reach a negotiated solution on Iran's nuclear program.

Combating other Threats

Our use of targeted financial measures is not limited to combating terrorism, proliferation, and the illicit financial conduct of Iran and North Korea. We are also using these tools in a variety of other contexts, including against corruption, narcotics trafficking, and abusive and oppressive regimes. In all of these situations, we can help put pressure on specific bad actors and try to rally the private sector to isolate them from the international financial system. Of course, these financial measures cannot alone solve these types of intractable problems. They are just one component of broader U.S. and, in some cases international, strategies to address them.

Combating Corruption

Corruption is one of the newer areas where we are increasingly relying on targeted financial measures. Corruption erodes democracy, the rule of law and economic well-being around the world. It taxes the poor, deprives legitimate businesses of opportunity and breeds criminality and mistrust. To address this threat, the President announced a strategy in August 2006 to combat high-level corruption, or "kleptocracy." The Treasury's charge in this strategy is to ensure that the international financial system is not misused by kleptocrats seeking to hide or move their ill-gotten gains. We also have targeted financial authorities aimed at exposing and disrupting corrupt officials' financial networks in countries such as Belarus, Burma and Syria.

In addition to the use of targeted financial measures to combat corruption, we are also working to increase transparency in the U.S. domestic and international financial systems, ensuring that an appropriate level of due diligence is applied to the financial dealings of foreign officials in positions of public trust, otherwise know as "Politically Exposed Persons," or PEPs.

Addressing Human Rights Abuses and Oppressive Regimes

In the past several years, we have learned that targeted financial measures can play a helpful role in reinforcing broader strategies to address human rights abuses and the conduct of brutal and oppressive regimes. Our efforts span across the crisis in Darfur to human rights violations and other oppressive activities in Zimbabwe, Burma, and Belarus. In the context of Darfur, for example, we have used the precision of targeted financial measures to focus on those who foment violence and human rights abuses. Our designations have included Sudanese individuals, including government and rebel leaders, elements of the logistical support network that arm those committing atrocities, and companies tied to the regime. These actions supplement an already comprehensive country sanctions program and have played an important role in exposing ongoing atrocities and bringing a new element – the financial sector – into the fight to bring them to an end. In the context of Burma, we have designated key financial operatives of the Burmese regime and their business networks.

Combating Narcotics Trafficking

No discussion of the success of targeted financial measures would be complete without mention of the Treasury Department's counternarcotics sanctions program. This program has been in place since 1995, when President Clinton issued an Executive Order targeting the activities of significant foreign narcotics traffickers in Colombia, with the objective of isolating and incapacitating the businesses and agents of the Colombian drug cartels. Designations under this order continue today and span multiple industries, including such enterprises as drugstore chains, construction firms, agricultural businesses, and department stores. This program was the model in 1999 for the Foreign Narcotics Kingpin Designation Act ("Kingpin Act"), which provides a statutory framework for the President to impose sanctions against foreign drug kingpins and their organizations on a worldwide scale. Targets under the Kingpin Act have been identified in Mexico, the Caribbean, Middle East, and Southeast Asia.

This program has achieved many successes. Among them is the historic September 2006 plea agreement between the U.S. government and Miguel and Gilberto Rodriguez-Orejuela, the brothers who ran the infamous Cali Cartel in Colombia, which was responsible for importing tons of cocaine into the United States during the past two decades. According to the plea agreement, the Rodriguez-Orejuela brothers admitted smuggling over 30 metric tons of cocaine into the United States, generating an illicit fortune in excess of one billion dollars. Treasury, Justice, and other law enforcement agencies had for years worked to uncover and immobilize the hidden assets of the Cali Cartel, with the Office of Foreign Assets Control (OFAC) designating hundreds of front companies and individuals in Colombia and 10 other countries. In the end, the Rodriguez-Orejuela brothers were willing to plead guilty and spend the rest of their lives in jail just to make their family members eligible to be removed from OFAC's list.

B. SAFEGUARDING THE INTEGRITY OF THE FINANCIAL SYSTEM

Our efforts to combat threats to our national security using our financial authorities are most effective when they build on a foundation of strong systemic safeguards in the financial sector. Indeed, one of the Treasury's core missions is to ensure that these safeguards are part of our own domestic financial system and to encourage the adoption of similar safeguards worldwide. The common thread that runs throughout these initiatives is the goal of bringing greater transparency to the international financial system.

Transparency is, in and of itself, a powerful safeguard against the kinds of abuse of the financial system that I have described today. It is critical to enabling financial institutions and law enforcement, regulatory and other authorities to identify sources and conduits of illicit finance so that they can take steps to protect themselves, contributing to the overall safety, soundness, and security of the international financial system. Their efforts, in turn, deny terrorist organizations, proliferators and other criminals access to the financial system, forcing them to adopt costlier and riskier alternative financing mechanisms. We work to promote security by:

Understanding how illicit actors abuse the financial system and ensuring that the U.S. financial system is protected by a comprehensive, efficient, and rigorously enforced anti-money laundering/counterterrorist financing (AML/CFT) regime;

Strengthening and expanding international AML/CFT standards;

Taking protective actions against threats and systemic vulnerabilities; and

Partnering with the private sector.

I would like to share with you some of the actions we are taking to meet each of these objectives.

1. Understanding How Illicit Actors Abuse the Financial System and Ensuring the Protection of that System

The first step in safeguarding the financial system is to understand where it is vulnerable and the threats it faces. The Treasury Department has worked for many years to improve its understanding of illicit finance, and, in 2006, we coordinated the first U.S. government-wide Money Laundering Threat Assessment. The assessment brought together the expertise of regulatory, law enforcement and investigative officials from across the government to investigate the current and emerging trends and techniques used to raise, move and launder illicit proceeds. Following the assessment, the Treasury joined with the Departments of Justice and Homeland Security to craft the 2007 National Money Laundering Strategy, which is mapped explicitly to the vulnerabilities identified in the threat assessment.

The Treasury is working with other agencies to ensure that we are appropriately addressing these threats. Highlights of this effort include FinCEN's ongoing efforts to analyze Bank Secrecy Act (BSA) filings to provide geographic threat assessments, such as the 43 State-specific reports provided to State regulators last year, analysis of Suspicious Activity Report (SAR) filings related to the districts of individual U.S. Attorney offices, and the ongoing analytical work in the area of mortgage fraud following FinCEN's first published report on that topic in November 2006. FinCEN also continues its coordination with the IRS and law enforcement agencies to identify potentially unregistered money services businesses and to target those businesses with outreach, education, and, where appropriate, enforcement efforts.

In addition to taking these specific steps, we are constantly examining our regulatory system to ensure it is as efficient and effective as possible. In that regard, on June 22, 2007, Secretary Paulson announced the first in a series of ongoing initiatives to promote the efficiency and effectiveness of the AML/CFT regulatory framework. FinCEN has been working with the Federal Banking Agencies and other government authorities, and in the coming months will be taking public steps in the areas previewed by the Secretary, including discussing the results of our efforts with the banking regulators to enhance risk-scoping in the bank examination process; proposing a clearer and more tailored regulatory definition of money services businesses; and proposing a restructured set of regulations to enable covered industries to focus more quickly on rules that apply specifically to them. Moreover, FinCEN continues to provide feedback to the financial industry on the usefulness to law enforcement of reported information and through analytical studies, guidance, and advisories to help financial institutions better target their risk control activities.

Strong enforcement of our money laundering and sanctions laws also plays an important role in protecting the financial system from abuse. The Department of the Treasury works with its other financial regulatory colleagues to administer and promote understanding of, and compliance with, these laws. Most enforcement in this area is civil, involving the banking regulators, OFAC, or FinCEN. In cases of serious violations, however, criminal enforcement may be warranted.

In the summer of 2005, the Department of Justice amended the United States Attorneys' Manual to require that all money laundering prosecutions of financial institutions be coordinated with, and approved by, the Criminal Division in Washington. The Manual contains a similar provision for cases under the International Emergency Economics Power Act – or IEEPA – which is one of the principal statutory authorities for OFAC's sanctions programs. These provisions promote consistency and uniformity in the use of these statutes and help ensure that unintended consequences from relevant cases are minimized. In that regard, they were specifically designed to enable Justice to consult with other agencies, including the Treasury Department. In enforcement actions involving violations of the BSA, Justice and the Treasury attempt to act concurrently whenever possible to promote consistency and avoid multiple actions against the same financial institution at different times for similar and related conduct.

The continued consultation between the Justice and Treasury Departments is vitally important given the complexities surrounding potential criminal charges against banks and other financial institutions, including the potential impact of such cases on the U.S. financial system. Under Assistant Attorney General Alice Fisher's leadership, the right atmosphere has been created for that consultation. In the end, the U.S. government must strike a delicate balance. We need to ensure the proper respect for the laws that safeguard the integrity of our financial system, but do so in a way that (1) allows our civil regulatory system to function effectively and (2) ensures that we maintain our position of leadership in the global financial system. This requires the exercise of well-informed and wise prosecutorial discretion. Consultation between the Treasury and Justice is an important part of that process.

2. Strengthening and Expanding International AML/CFT Standards

Given the global nature of the financial system, focusing only on the U.S. financial system and its AML/CFT regime is not sufficient. Safeguarding the U.S. financial system requires global solutions and effective action by financial centers throughout the world. We work toward this objective through multilateral bodies that set and seek to ensure global compliance with strong international standards.

The Treasury Department primarily advances this strategic objective through FATF, which articulates standards in the form of recommendations, guidelines, and best practices. The FATF standards have been recognized by more than 175 jurisdictions and have been integrated into the work of international organizations such as the United Nations, the World Bank and the International Monetary Fund. The FATF seeks global implementation of its standards through a number of mechanisms. Partnership with the IMF, World Bank and FATF-Style Regional Bodies ensures that every country in the world is assessed against the same standards using the same methodology. AML/CFT is one of twelve core standards used by the IMF to evaluate financial sector stability and is the sole required standard for all countries. As of September 2007, the IMF had conducted 50 assessments -- four of which were done jointly with the World Bank -- of country compliance with AML/CFT standards. These assessments highlight the key deficiencies for countries seeking to improve their AML/CFT standards. We have seen steady progress in legislation by countries to address their deficiencies identified in their assessments. Assessments also highlight deficiencies in a way that is useful to the private sector in assessing risk.

In some cases, implementation of AML/CFT standards is a question of political will. In other cases, however, countries need help to comply with the standards. In such cases, the Treasury has worked through its Office of Technical Assistance and other agencies to provide technical assistance to support the development of legal authorities and operational capacity that will enable countries to meet these standards.

While we work to ensure the current standards are being implemented, we also have consistently engaged the FATF to expand and strengthen these international standards to address the systemic vulnerabilities that terrorists and other criminals exploit. Most recently, we have successfully engaged the FATF to adopt a new international standard to combat the illicit use of cash couriers, and we have enhanced the international standard for combating terrorist abuse of charities.

Not only does this investment in foreign capacity building make it more difficult for illicit actors to hide and thrive, it also opens up new avenues to share information across borders. For this purpose FinCEN is the designated financial intelligence unit (FIU) for the United States and has played a leading role in fostering the sharing of financial intelligence among the FIUs of 106 countries that are members of the Egmont Group.

One new and promising initiative that touches on these important issues is the Merida Initiative – a U.S.-proposed multi-year cooperation initiative with the governments in Mexico and the countries of Central America. For Fiscal Year 2008, the Administration has requested $500 million for Mexico and $50 million for Central America to fulfill U.S. obligations under the initiative. This would be the first tranche of a potential $1.4 billion multi-year package. The assistance proposed falls into three broad areas: counternarcotics, counterterrorism, and border security; public security and law enforcement; and institution-building and the rule of law. A key part of the effort will be to modernize the Mexican financial intelligence unit's ability to respond more effectively to the evolving nature of money laundering. Overall, this initiative would complement existing U.S.-Mexico and Central America cooperation in countering the cross-border movement of billions of dollars in drug proceeds and in restricting the placement of these illicit proceeds into the U.S. financial system.

3. Taking Protective Action against Systemic Vulnerabilities

Although it is important to focus on improving transparency and ensuring adequate AML/CFT controls are in place on a global level, there are also times when specific, discrete vulnerabilities are not adequately addressed in the international financial system. In those cases, we need to take action to warn the financial industry of the risks and to protect ourselves from the threat those vulnerabilities pose to our financial system.

In that regard, Section 311 of the USA PATRIOT Act – which I mentioned briefly in the context of our efforts on North Korea – is an important and extraordinarily powerful tool. Section 311 authorizes the Treasury to designate a foreign jurisdiction, foreign financial institution, type of account or class of transactions to be of "primary money laundering concern," thereby enabling the Treasury to impose any one or combination of a range of special measures that U.S. financial institutions must take to protect against illicit financing risks associated with the designated target. We are the only country in the world that has an authority to take such protective action.

The Treasury has utilized Section 311 against both jurisdictions and financial institutions that posed a serious money laundering concern. When we have designated an entire jurisdiction – such as the Ukraine or Nauru – we have done so as part of, or in response to, a multilateral action, such as a FATF determination that these countries were "non-cooperative" on AML/CFT issues. One of the things that makes the Section 311 authority unique, however, is that it also allows us to finely target our actions so that we can protect ourselves from the threat that an individual financial institutions poses. This gives us enormous flexibility in determining how best to apply this authority to achieve the desired impact.

Our use of Section 311 has been extremely effective. Not only have our Section 311 designations had a significant effect in protecting the U.S. financial system, but they also have spurred actions by other countries that have the result of protecting the broader international financial system. In some instances, designation under Section 311 has facilitated the development of rehabilitative measures by a financial institution or jurisdiction that effectively addressed the underlying systemic vulnerability to the extent that withdrawal of the 311 designation was warranted.

4. Partnership with the Private Sector

Finally, we know that it is not sufficient to work only in partnership with governments on strengthening AML/CFT standards and identifying and closing specific vulnerabilities to the financial sector. The private sector brings a unique and invaluable insight into how the international financial system works and how we can be effective in achieving our objectives. We have forged important partnerships with both the domestic and international private sector to tap into and better utilize their expertise.

On the domestic side, Congress established the Bank Secrecy Act Advisory Group (BSAAG) in 1992 to enable the financial services industry and law enforcement to advise the Secretary of the Treasury on ways to enhance the utility of BSA records and reports. Since 1994, the BSAAG has served as a forum for industry, regulators, and law enforcement to communicate about how SARs and other BSA reports are used by law enforcement and how recordkeeping and reporting requirements can be improved. Under the chairmanship of the Director of FinCEN, the BSAAG meets twice a year in plenary and through multiple subcommittees over the course of the year. It has become an increasingly active group in suggesting priorities and to promote the efficiency and effectiveness of BSA rules and regulations.

On an international scale, we collaborated effectively with the private sector on the issue of "cover payments." Cover payment transactions occur typically with respect to foreign correspondent banking, where the actual movement of funds is made through one or more intermediary banks that "cover" the payment amount, but the intermediaries do not know on whose behalf they are settling a given transaction. It became increasingly clear to many banks that this practice, which developed over time for a variety of commercial reasons, is inconsistent with international AML/CFT standards, in particular with the purpose behind FATF Special Recommendation VII requiring that originator information remain with the funds transfer throughout the payment chain.

Industry representatives raised with the Treasury Department the issue of vulnerabilities of cover payments – together with a proposal on how to rectify the situation in the most efficient way. In April 2007, the Clearing House Association – a provider of payment services owned by the U.S. affiliates of almost two dozen major banks – and the Wolfsberg Group – an association of 12 global banks – proposed an amendment to the global bank messaging standards to incorporate all relevant transaction information. That proposal was refined and endorsed by national bank groups in January 2008, and SWIFT, the Society for Worldwide Interbank Financial Telecommunication, will introduce the new message standards in November 2009. In addition to the technical changes, these groups of leading global banks announced payment message standards that they would follow to further enhance transparency in international payments, and thereby help avoid abuse by individuals and organizations that these banks would not accept as their own customers, such as money launderers and terrorist financiers. The Treasury Department, together with the Federal Banking Agencies, has engaged with their counterparts through the Basel Committee on Banking Supervision, FATF and the Egmont Group to promote a consistent global approach to ensuring compliance with these emerging global best practices.

The Treasury has also spearheaded an important initiative, the Private Sector Dialogue (PSD), to facilitate a dialogue between U.S. financial institutions and their counterparts in key regions on AML/CFT issues. Our goal for these dialogues, which focus on the Middle Eastern and North African and Latin American banking and regulatory communities, is to raise awareness of domestic and regional money laundering and terrorist financing risks, international AML/CFT standards and regional developments, and U.S. government policies and private sector measures to combat terrorist financing and money laundering. These dialogues are also helping us to assess the impact of these international standards and U.S. laws and regulations and to strengthen development and implementation of effective AML/CFT measures, particularly in regions of strategic importance and jurisdictions that lack fully-functional AML/CFT regimes.

CONCLUSION

Over the past four years, I believe that, with your active support, we have transformed the Treasury Department into an important part of our country's national security architecture. We have greatly improved our ability to analyze and use financial intelligence. We have further developed and implemented strategies for combating terrorist financing and other pressing threats to our national security, including through the innovative use of targeted financial measures against specific bad actors. These strategies, particularly in the cases of North Korea and Iran, have provided valuable leverage in difficult diplomatic negotiations. We have also made important strides in strengthening the systemic safeguards in the financial system both here in the United States and around the world. But our work is not nearly complete. We continue to face significant challenges as we move forward with these efforts, including fostering and maintaining the political will among other governments to take effective and consistent action.

I look forward to continuing to work with this Committee as we tackle these challenges.

Opening Statement by Secretary Henry M. Paulson, Jr.
on the Department of the Treasury FY 2009 Budget Request
before the Senate Committee on Appropriations
Subcommittee on Financial Services and General Government

Washington -- Chairman Durbin, Senator Brownback, Members of the Committee: Thank you for the opportunity to discuss the Treasury Department's proposed fiscal year 2009 budget. Our budget request reflects the Department's continued commitment to promoting a healthy U.S. economy, fiscal discipline and national security. The Department has broad responsibility in federal cash management, tax administration and plays an integral role in combating terrorist financing and advocating the integrity of the U.S. and global financial systems.

Our spending priorities for the 2009 fiscal year fall into six main categories. I will briefly describe the priorities and then take your questions.

U.S. Economic Steward

Treasury has an important role to play as steward of the U.S. economy, and our offices provide technical analysis, economic forecasting and policy guidance on issues ranging from federal financing to domestic and global financial systems.

Those functions are especially critical now as the U.S. economy, through a combination of a significant housing correction, high energy prices and capital market turmoil has slowed appreciably. Our long term economic fundamentals are solid, and I believe our economy will continue to grow this year, although not as rapidly as in recent years.

In response to economic signals, early this year the Administration and the Congress worked together to quickly pass, on a bipartisan basis, the Economic Stimulus Act of 2008. And I would like to thank this subcommittee for approving funds for the IRS and the FMS to administer the stimulus check rebate program under that Act.

As you know, the stimulus payments to households and the incentives to businesses in the Act, together, are estimated to lead to the creation of half a million jobs by year-end. This will provide timely and effective support for families and our economy, and it wouldn't be possible without your leadership.

Strengthening National Security

Treasury's Office of Terrorism and Financial Intelligence (TFI) uses financial intelligence, sanctions, and regulatory authorities to track and combat threats to our security and safeguard the U.S. financial system from abuse by terrorists, proliferators of weapons of mass destruction and other illicit actors.

To continue and build on our efforts to combat these threats, we are requesting an $11 million increase for TFI, including $5.5 million for the Financial Crimes Enforcement Network to ensure effective management of the Bank Secrecy Act.

Efficient Management of the Treasury Department

The budget request emphasizes infrastructure and technology investments to modernize business processes and improve efficiency throughout the Treasury Department. We will continue to make information technology management a priority, and have taken several significant steps to strengthen our systems and oversight.

Fiscal Discipline

Treasury is committed to managing the nation's finances effectively, ensuring the most efficient use of taxpayer dollars and collecting the revenue due to the federal government.

Enforcing the Nation's Tax Laws Fairly and Efficiently

The Internal Revenue Service, of course, plays an integral role in this. The budget requests a 4.3 percent increase in IRS funding.

As in the past three budget requests, we are proposing to increase IRS enforcement funding as a Budget Enforcement Act program integrity cap adjustment. IRS enforcement efforts have yielded record revenue collections. With the requested funding, the IRS will collect an estimated $55 billion in direct enforcement revenue in 2009.

The budget also includes a number of legislative proposals intended to target the tax gap and improve tax compliance, with an appropriate balance between enforcement and taxpayer service. These proposals are estimated to generate $36 billion over the next ten years.

International Programs

We will continue to focus efforts on supporting a stable and growing global economy, through on-going dialogue and initiatives with developing economies throughout Asia, Latin America and Africa.

In addition we are asking your colleagues on the Foreign Operations Subcommittee to support key objectives of the President's international assistance agenda. This includes funding for the multilateral development banks --- notably new replenishments for the World Bank's International Development Association (IDA) and the African Development Fund.

Also included as a Foreign Operations priority is $400 million request for the first installment of a $2 billion clean technology fund that, with additional funding from the United Kingdom, Japan and other donors, will help finance clean energy projects in the developing world and make strides towards addressing global climate change.

Conclusion

Overall, the budget request reflects a prudent and forward-leaning approach to fulfilling the Treasury Department's core responsibilities to support our economy, managing the government's finances and ensuring financial system security. I thank you for your past support and consideration of our work, and look forward to working with you during your deliberations.

Thank you and I welcome your questions.

Under Secretary for International Affairs David H. McCormick
Testimony before the House Committee on Financial Services

Subcommittee on Domestic and International Monetary Policy, Trade and Technology and Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises

Washington - Chairman Gutierrez, Chairman Kanjorski, Ranking Member Paul, Ranking Member Pryce, Members of the Committee, good afternoon. I very much appreciate the opportunity to appear before you today to discuss sovereign wealth funds. This is a timely hearing on a very important topic. At Treasury, we have been increasingly focused on sovereign wealth funds for more than a year now. I am pleased to be able to share with the Committee some of our views.

History and Context

Although the term "sovereign wealth fund" was coined just a few years ago, the funds it describes are not new. Sovereign wealth funds have existed in various forms for decades in places as diverse as the central Pacific, Southeast Asia, Europe and the Persian Gulf. At the turn of the century, there were about 20 sovereign wealth funds worldwide managing total assets of several hundred billion dollars.

Today, what is new is the rapid increase in both the number and size of sovereign wealth funds. Twenty new funds have been created since 2000, more than half of these since 2005, which brings the total number to nearly 40 funds that now manage total assets in a range of $1.9-2.9 trillion. Private sector analysts have projected that sovereign wealth fund assets could grow to $10-15 trillion by 2015. Two trends have contributed to this ongoing growth. The first is sustained high commodity prices. The second is the accumulation of official reserves and the transfers from official reserves to investment funds in non-commodity exporters. Within this group of countries, foreign exchange reserves are now sufficient by all standard metrics of reserve adequacy. For these non-commodity exporters, more flexible exchange rates are often necessary, and Treasury actively pushes for increased flexibility.

So what are sovereign wealth funds? At the Department of the Treasury, we have defined them as government investment vehicles funded by foreign exchange assets, which manage those assets separately from official reserves. Sovereign wealth funds generally fall into two categories based on the source of the foreign exchange assets:

Commodity funds are established through commodity exports, either owned or taxed by the government. They serve different purposes, including stabilization of fiscal revenues, intergenerational saving, and balance of payments sterilization. Given the recent extended sharp rise in commodity prices, many funds initially established for fiscal stabilization purposes have evolved into savings funds. In the case of commodity funds, foreign currency typically accrues to the government and does not increase the money supply and create unwanted inflationary pressure.

Non-commodity funds are typically established through transfers of assets from official foreign exchange reserves. Large balance of payments surpluses have enabled non-commodity exporting countries to transfer "excess" foreign exchange reserves to stand-alone funds. In the case of non-commodity funds, foreign exchange assets often derive from exchange rate intervention, which then increases a country's money supply. Monetary authorities take additional steps to lower the money supply and stave off inflation by issuing new debt, but there may be a cost associated with this if the cost of the new debt is more than the returns that the government earns on its foreign exchange assets.

In contrast to traditional reserves, which are typically invested for liquidity and safety, sovereign wealth funds seek a higher rate of return and may be invested in a wider range of asset classes. Sovereign wealth fund managers have a higher risk tolerance than their counterparts managing official reserves. They emphasize expected returns over liquidity, and their investments can take the form of stakes in U.S. companies, as has been witnessed in recent months with increased regularity.

However, sovereign wealth fund assets are currently fairly concentrated. By some market estimates, a handful of funds account for the majority of total sovereign wealth fund assets. Roughly two-thirds of sovereign wealth fund assets are commodity fund assets ($1.3-1.9 trillion), while the remaining one-third are non-commodity funds transferred from official reserves ($0.6-1.0 trillion).

To get a better perspective of the relative importance of sovereign wealth funds, it is useful to consider how they measure up against private pools of global capital. Total sovereign wealth fund assets of $1.9-2.9 trillion may be small relative to a $190 trillion stock of global financial assets, or the roughly $62 trillion managed by private institutional investors. But sovereign wealth fund assets are currently larger than the total assets under management by either hedge funds or private equity funds and are set to grow at a much faster pace.

In sum, sovereign wealth funds represent a large and rapidly growing stock of government-controlled assets, invested more aggressively than traditional reserves. Attention to sovereign wealth funds is inevitable given that their rise clearly has implications for the international financial system. Sovereign wealth funds bring benefits to the system but also raise potential concerns.

Benefits

A useful starting point when discussing the benefits of sovereign wealth funds is to stress that the United States remains committed to open investment. On May 10, 2007, President Bush publicly reaffirmed, in his Statement on Open Economies, the U.S. commitment to advancing open economies at home and abroad, including through open investment and trade. Lower trade and investment barriers benefit not only the United States, but also the global economy as a whole. The depth, liquidity and efficiency of our capital markets should continue to make the United States the most attractive country in the world in which to invest.

In 2006, there was a net increase of $2.5 trillion in foreign-owned assets in the United States, while U.S. net international investment abroad increased by $2.2 trillion. International investment in the United States fuels U.S. economic prosperity by creating well-paid jobs, importing new technology and business methods, helping to finance U.S. priorities, and providing healthy competition that fosters innovation, productivity gains, lower prices, and greater variety for consumers. Over five million Americans –

4.6 percent of the U.S. private sector – are employed by foreign-owned firms' U.S. operations. Over 39 percent of these five million jobs at foreign-owned firms are in manufacturing, a sector that accounts for 13 percent of U.S. private sector jobs. These five million jobs pay 25 percent higher compensation on average than jobs at other U.S. firms. Another roughly five million jobs are indirectly supported by foreign investment. Additionally, foreign-owned firms contributed almost six percent of U.S. output and 14 percent of U.S. R&D spending in 2006. Foreign-owned firms re-invested over half of their U.S. income – $71 billion – back into the U.S. economy in 2006. A disproportionate 13 percent of U.S. tax payments and 19 percent of U.S. exports are made by foreign-owned firms. Without international investment, Americans would be faced with painful choices regarding taxes, spending on government programs, and their level of savings and consumption. Another benefit of FDI is that foreign investors' economic interests become more dependent on the health of the U.S. economy – giving the investor an incentive to support U.S. economic interests.

As many observers have pointed out, sovereign wealth funds have the potential to promote financial stability. They are, in principle, long term, stable investors that provide significant capital to the system. They are typically not highly leveraged and cannot be forced by capital requirements or investor withdrawals to liquidate positions rapidly. Sovereign wealth funds, as public sector entities, should have an interest in and a responsibility for financial market stability.

Potential Concerns

Yet, sovereign wealth funds also raise potential concerns.

First, transactions involving investment by sovereign wealth funds, as with other types of foreign investment, may raise legitimate national security concerns. The Committee on Foreign Investment in the United States (CFIUS), which is chaired by Treasury, conducts robust reviews of certain investments that could result in foreign control of a U.S. business to identify and resolve any genuine national security concerns. The Foreign Investment and National Security Act (FINSA) became effective on October 24, 2007, and strengthened the CFIUS process. CFIUS is able to review investments from sovereign wealth funds, just as it would other foreign government-controlled investments, and it has and will continue to exercise this authority to ensure national security. CFIUS reviews are of course limited to identifying and resolving genuine national security concerns.

Separately, Treasury is also considering non-national security issues related to potential distortions from a larger role of foreign governments in markets. Through inefficient allocation of capital, perceived unfair competition with private firms, or the pursuit of broader strategic rather than strictly economic return-oriented investments, sovereign wealth funds could potentially distort markets. Sovereign wealth funds may also indirectly invest abroad through domestic state-owned enterprises. However, such action by a SWF is more likely to be viewed as a direct extension of government policy. Clearly, both sovereign wealth funds and the countries in which they invest will be best served if investment decisions are made solely on commercial grounds.

The investment policy issues I have just described – both the national security and non-national security issues – have the potential to provoke protectionist responses from recipient country governments. It is my view that protectionist sentiment stems partly from a lack of information and understanding of sovereign wealth funds, which in turn is partly due to a lack of transparency and clear communication on the part of many of the funds themselves. Further, concerns about cross-border investment by state-owned enterprises are often misdirected at sovereign wealth funds as a group. Better information and understanding on both sides of the investment relationship is therefore needed.

Finally, sovereign wealth funds may raise concerns related to financial stability. Sovereign wealth funds can represent large, concentrated, and often non-transparent positions in certain markets and asset classes. Actual shifts in their asset allocations can cause market volatility. In fact, even perceived shifts or rumors can cause volatility as the market reacts to what it perceives sovereign wealth funds to be doing.

Policy Response

Treasury has taken a number of steps to help ensure that the United States can continue to benefit from open investment while addressing these potential concerns.

First, we are aggressively implementing reforms that strengthen the CFIUS process, reflected in FINSA and Executive Order 11858, issued by the President on January 23. We are proceeding steadily through a vigorous drafting process for new regulations which will become effective later this Spring following public notice and comment. One of the reforms codified by FINSA, which we have already implemented, is an elevated level of accountability within CFIUS for review of foreign government-controlled transactions. I want to be clear that CFIUS has – as early as 1989 – and will continue to review the investment transactions of sovereign wealth funds, based on the consideration of genuine national security concerns, just as it does for other foreign government-controlled investment. FINSA protects our national security while keeping investment barriers low and reaffirming investor confidence and the longstanding U.S. open investment policy. CFIUS will continue to vigorously implement this law.

Second, we have proposed that the international community collaborate on the development of a multilateral framework for best practices. The International Monetary Fund, with support from the World Bank, should develop voluntary best practices for sovereign wealth funds, building on existing best practices for foreign exchange reserve management. These would provide guidance to new funds on how to structure themselves, reduce any potential systemic risk, and help demonstrate to critics that sovereign wealth funds can be responsible, constructive participants in the international financial system.

Here, I would note that the logic of voluntary best practices for sovereign wealth funds is to create a dynamic rise to the top. International agreement on a set of best practices will create a strong incentive among funds to hold themselves to high standards. Sovereign wealth funds themselves are increasingly aware that the increase in the number and size of these funds has, rightly or wrongly, raised reputational issues for them all.

Third, we have proposed that the Organisation for Economic Co-operation and Development (OECD) should identify best practices for countries that receive foreign government-controlled investment, based on its extensive work on promoting open investment regimes. These should have a focus on avoiding protectionism and should be guided by the well-established principles embraced by OECD and its members for the treatment of foreign investment.

We have already seen meaningful progress along these lines. On May 12-13 of last year, Treasury hosted a G-20 meeting of Finance Ministry and Central Bank officials on commodity cycles and financial stability, which included perhaps the first multilateral discussion of sovereign wealth funds among countries with these funds and countries in which they invest. Following a period of extensive direct bilateral outreach with sovereign wealth funds, Secretary Paulson hosted a G-7 outreach meeting on October 19, 2007 with Finance Ministers and heads of sovereign wealth funds from eight countries (China, Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore, and the United Arab Emirates) to build support for best practices.

On October 20, 2007, the International Monetary and Financial Committee – a ministerial level advisory committee to the IMF – issued a statement calling on the IMF to begin a dialogue to identify best practices for sovereign wealth funds. On November 15-16, 2007, the IMF hosted a roundtable meeting for sovereign asset and reserve managers. In response to the IMFC statement, the IMF added a special session on policy and operational issues relating to SWFs for official sector delegates. This marks the beginning of an important process in the IMF. IMF Managing Director Dominique Strauss-Kahn opened the roundtable meeting and underlined that some form of agreement on best practices for the operations of SWFs could help maintain an open global financial system.

A separate dialogue is well underway in the OECD on investment policy issues with regard to SWFs, building on the discussions on Freedom of Investment, National Security, and "Strategic" Industries. Later this month, the OECD Investment Committee will discuss an interim report on broader investment issues that will also cover SWFs. The OECD expects to issue a "special statement" regarding investment policy principles and sovereign investment at its June Ministerial.

Fourth, Treasury has taken a number of steps internally and within the U.S. Government to enhance our understanding of sovereign wealth funds. Treasury has created a working group on sovereign wealth funds that draws on the expertise of Treasury's offices of International Affairs and Domestic Finance. Treasury's new market room is ensuring vigilant, ongoing monitoring of sovereign wealth fund trends and transactions. Through the President's Working Group on Financial Markets, chaired by Secretary Paulson, we continue to discuss and review sovereign wealth funds. We have also engaged sovereign wealth funds directly on numerous occasions, at numerous levels within our government and at numerous forums.

Treasury is actively coordinating with Congress through staff briefings and committee hearings. As you may know, I testified on these issues before the Senate Banking Committee in November. Also, in June and December of last year we provided Congress with updates on our sovereign wealth fund-related work in an appendix to the Report on International Economic and Exchange Rate Policies, and we will continue to provide updates on a semi-annual basis.

The Treasury Department will continue its work on sovereign wealth funds through sound analysis and focused bilateral and multilateral efforts to help ensure the United States shapes an appropriate international response to this issue, addresses legitimate areas of concern, and together with other countries, remains open to foreign investment.

Prepared Testimony of Treasury Tax Legislative Counsel Michael Desmond before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means

-- Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee:

Thank you for the opportunity to discuss with you today the Federal tax treatment of certain derivative products, including prepaid forward contracts. With the growing complexity and sophistication of our financial markets, the tax treatment of derivatives plays an increasingly important role in the efforts of the Treasury Department and the Internal Revenue Service ("IRS") to administer the nation's tax laws, and we appreciate this Subcommittee's focus on these issues.

The tax treatment of prepaid forward contracts is of continuing interest to the Treasury Department. Last December, we issued Notice 2008-2 (the "Notice"),[1] announcing that we are considering the subject and requesting public comments with respect to a number of specific issues. The period for submitting formal comments remains open, and the Notice has generated significant discussion on this important issue.

Although it is premature to offer any conclusions or positions with respect to how we might move forward with respect to the issues raised by the Notice, we look forward to continuing to work with this Subcommittee as you consider proposals that would affect the tax treatment of derivatives and, in particular, proposals to change the tax law with respect to prepaid forward contracts. To that end, it may be productive to describe the context in which we have seen this issue arise and some of the challenges we see in addressing it. It may also be helpful to provide some background regarding the Notice in order to clarify the context in which we are considering the issue and to develop a mutual understanding of the issues presented.

General Background Regarding Forward Contracts

Historically, forward contracts developed as a means for parties to hedge against the risk of price fluctuations in ordinary business operations. For example, a manufacturer might enter into a forward contract on steel that is used as a component in its production process to hedge against the risk that the price of steel will rise. For similar reasons, an airline might enter into a forward contract on jet fuel to hedge against the risk of fuel price increases. By fixing the price at which some asset will be acquired (or sold) in the future, a forward contract can reduce the risk of adverse price changes and, thereby, reduce the cost of doing business. Forward contracts, however, are not solely used in hedging transactions. Parties can (and do) use forward contracts to speculate on the future value of a reference asset.

A traditional forward contract is an agreement in which one party (in the "long position") agrees to purchase, and the other party (in the "short position") agrees to sell and deliver, a specific asset (the "reference asset") at a specific time for a specific price (the "forward price"). Generally, the party in the long position will profit from an increase in the price of the reference asset, while the party in the short position will profit from a decrease in the price.

Parties to a forward contract often settle their obligations under the contract with a single, net, cash-settlement payment (rather than through physical delivery of the reference asset and payment of the full forward price). In typical "cash-settled" contracts, at the time the contract settles, the forward price set forth in the contract is compared to the then-current (or "spot") price of the reference asset. If that spot price is less than the forward price, then the long position pays the difference; if that spot price is more than the forward price, then the short position pays the difference.

The forward price for a nonperishable commodity or a financial instrument generally equals the reference asset's spot price at the time the contract is executed, plus the "cost to carry" (or hold) the asset for the term of the contract. "Cost to carry" represents interest (and other costs[2]) that a party would have to pay if it were to borrow to purchase and "carry" the reference asset during the term of the arrangement.[3] Consequently, the forward price implicitly includes a component that is calculated by reference to the time value of money – that is, interest. If the time value of money were not properly factored in to the forward price, arbitrageurs would be able to earn risk-free profits.[4]

Some contracts (referred to as "prepaid forward contracts") require the party in the long position to pay the purchase price upon execution of the contract, rather than on the later delivery date. In these circumstances, the amount paid typically reflects only the spot price of the asset to which the contract refers (plus any warehousing or similar expenses), but does not reflect a time value component. Again, if this were not the case, arbitrageurs could earn a risk-free profit.

General Background Regarding Taxation of Derivatives

The Internal Revenue Code and Treasury regulations contain a number of specific rules governing the Federal tax treatment of stock, debt, options, traditional forward contracts, futures contracts, certain swaps, and various other financial instruments. Different rules may apply to identical instruments in different contexts. Thus, for example, a forward contract may be taxed differently if it is executed by an investor,[5] a trader,[6] a dealer,[7] or a business hedger.[8] An identical forward contract may also be taxed differently depending on whether it is executed by a domestic or a foreign person,[9] or whether it derives its value from certain reference assets (such as foreign currency).[10] In addition, a single forward contract may involve different types of taxpayers as counterparties on opposite sides of the same contract. Thus, a single forward contract often generates asymmetrical tax consequences for the parties.

The resulting set of complex rules reflects various policy choices that Congress and the Treasury Department have made over the years with respect to the timing of income and loss, the character (capital or ordinary) of income and loss, and the source (domestic or foreign) of income and loss.

Financial innovation challenges the current system of taxing derivatives, because the system generally approaches new financial transactions by attempting to assign them to various categories (of the nature described above) for which there are clearly established rules. These categories are often colloquially referred to as "cubbyholes." Absent clear guidance as to which category a new transaction might fit in to, taxpayers are left to deal with uncertainty in structuring their affairs and the IRS is presented with difficulties in administering the tax law.

Unavoidably, this "cubbyhole" approach results in different tax consequences for economically equivalent transactions. For example, if a "triple-A" rated company issues preferred stock that is required by its terms to be redeemed on a specific date, that stock may be economically indistinguishable from that company's subordinated debt with the same maturity date. For both the company and its investors, however, these two transactions are taxed differently. Financial innovation amplifies this phenomenon (that is, different tax treatment of economically equivalent transactions) by increasing the number of situations in which it materializes. A single "hybrid" instrument that cannot be easily classified under the existing taxonomy may combine traditional instruments such as stock and debt. Alternatively, combinations of separate transactions may produce net cash flows that replicate a traditional instrument, thus creating a "synthetic" version of the traditional one, but with different tax consequences.

The following three examples illustrate this phenomenon in the specific context of prepaid forward contracts:

Example 1. On date 1, X (a hypothetical domestic investor) buys a share of stock of ABC Inc. for $100. Two years later (on date 2), X sells the stock for its fair market value of $125.

Example 2. On date 1, X buys a "zero coupon bond"[11] (the "bond") for $100. The bond was issued by Corp Q on date 1 and matures in two years (on date 2) for $112, reflecting an interest rate of approximately 6%. On date 1, X also enters into a cash-settled forward contract to purchase a share of stock of ABC Inc. from Y in two years (on date 2) for $112. Two years later (on date 2), the fair market value of a share of stock of ABC Inc. is $125. On date 2, X receives a total of $125, consisting of $112 from Corp Q in redemption of the bond, and $13 from Y in settlement of the forward contract.

Example 3. On date 1, X enters into a cash-settled prepaid forward contract to purchase a share of stock of ABC Inc. in two years (on date 2). Pursuant to the contract, X pays Y $100 on date 1. In exchange, Y agrees to pay X on date 2 the fair market value on that date of a share of stock of ABC Inc. The contract does not require Y to own or acquire any stock of ABC Inc. Two years later (on date 2), the fair market value of a share of stock of ABC Inc. is $125. On date 2, X receives $125 from Y in settlement of the forward contract.

Aside from their tax consequences, these transactions are economically equivalent. In each case, X paid $100 on date 1 and received $125 on date 2, for an economic return of $25. However, on an after-tax basis, these transactions differ considerably.

In Example 1, X pays tax on its entire $25 economic return on a deferred basis (on date 2) at the long-term capital gains rate. This result follows from the current realization-based system of taxation.

In Example 2, X accrues $12 (attributable to the bond) into taxable income on a current basis and pays tax on these accruals in years 1 and 2 at ordinary income rates. X pays tax on the $13 attributable to the forward contract on a deferred basis at long-term capital gain rates. This result follows from the respect the current tax system generally affords to the separate transactions (the bond and the forward) and the specific tax rules that apply once each is assigned to a separate category.

What do these principles say about the manner in which Example 3 (the prepaid forward contract) should be taxed? In particular, does current law require X to bifurcate (or does it prevent X from bifurcating) the single contract into separate economic components for tax purposes? As a matter of market practice, investors in X's position in Example 3 typically do not bifurcate. Instead, they generally attempt to assign the transaction to only one of the traditional categories for which the tax system has prescribed rules. Investors in X's position often conclude that the transaction is not indebtedness under common law tax principles. They emphasize that, unlike traditional debt, which guarantees a return of principal, there is a meaningful likelihood that a significant portion of the $100 amount advanced may not be repaid because the value of ABC Inc. stock may go down. Furthermore, investors in X's position often conclude that their counterparty in the transaction is not acting as their agent, holding ABC Inc. stock on their behalf, stressing that X cannot be sure whether its counterparty (Y) even owns stock of ABC Inc. during the term of the transaction.

Having concluded that neither the debt nor the agency characterization is proper, investors in X's position generally assert that the transaction should be treated as a forward contract, taxed only upon realization. This result in Example 3 is consistent with the result in Example 1 (where tax is not paid until realization), but not with the result in Example 2 (where the investor is required to pay tax on accrued but unpaid income), even though all three examples involve economically equivalent transactions.

Notice 2008-2

The Treasury Department and the IRS have been aware for some time of the difficult issues raised with respect to the tax treatment of prepaid forward contracts. In 1993, in a preamble to regulations dealing with certain swap transactions, the Treasury Department and IRS first announced that they were studying the tax treatment of prepaid forward contracts and requested public comments. Specific projects to address prepaid forward contracts were placed on the administrative guidance "business plan" in 1993 and again in 2001. To date, however, published guidance has not been issued.[12]

In 2007, the Treasury Department and IRS became aware of an instrument that was beginning to be offered to retail investors in the capital markets that purported to be a prepaid cash-settled forward contract with respect to foreign currency. The offering materials filed with the Securities and Exchange Commission (SEC) suggested that for Federal tax purposes the instrument did not require current income inclusions by investors and had the potential of generating long-term capital gains. In response, Revenue Ruling 2008-1, 2008-2 I.R.B. 248 ( Jan. 14, 2008 ), was released in December 2007, holding that these instruments are foreign-currency-denominated debt under general tax principles, and that investors must accrue currently interest income.

In 2006, we also learned of recent significant growth in the number of prepaid forward contracts being offered to retail investors with respect to reference assets other than foreign currency. Language in the offering documents filed with the SEC with respect to these instruments suggested that they are not debt under general tax principles. In the retail space, these instruments are sometimes referred to as exchange traded notes ("ETNs"). Typically, ETNs differ from the simple situation described in Example 3, above, in that they reference large portfolios of stocks and/or commodities rather than a single stock or asset. These portfolios are periodically redefined and, in the case of stock indices, may pay dividends which are credited to the contract, but are not currently paid to the holder of the contract. These features present unique questions as to whether deferral of tax is appropriate.

Because of the large number of taxpayers potentially affected and their relative level of sophistication, the migration of prepaid forward contracts into the portfolios of retail investors served as an occasion for us to revisit the core issue related to prepaid forward contracts -- whether or not a current accrual of income should be required. We issued the Notice to inform the public that we are continuing to examine this issue and to solicit comments. As the popularity of prepaid forward contracts grows, more taxpayers are affected by the current lack of clarity and need guidance regarding how to compute their tax liability. We were also mindful of the fact that the market segment into which these transactions is expanding is one that is, perhaps, less capable of appreciating the risks associated with this uncertainty.

Although it would be very desirable for us to clarify this area, we have reached no conclusion about how to proceed, about what result should be reached, or about whether we are able to reach that result with administrative guidance.

Thank you Mr. Chairman, Ranking Member English and Members of the Subcommittee for providing an opportunity for us to participate in today's hearing on this important subject. I would be pleased to respond to your questions.

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[1] 2008-2 I.R.B. 252 ( Jan. 14, 2008 ).

[2] For example, the "cost to carry" includes any warehousing, insurance, and similar expenses that a party would have to pay if it were to hold (or "carry") the asset during the term of forward contract. These costs arise more frequently in the context of forward contracts on commodities.

[3] Any expected cash yield on the asset underlying the forward contract (for example, dividends on stock) is typically subtracted from the forward price. (Because it is a benefit, rather than a cost, of holding the asset over the term of the contract, it is like a negative "cost to carry.")

[4] For example, if the forward price were too high (i.e., if it were in excess of the spot price plus the cost to carry, including this time value component), an arbitrageur could borrow at market interest rates to purchase the reference asset at its spot price today and simultaneously take the short position on the forward contract. Similarly, if the forward price were too low (i.e., if it were below the spot price plus the cost to carry, including this time value component), an arbitrageur could short sell the reference asset today (i.e., borrow the asset and sell it in the market for its current price) to generate cash proceeds to purchase a bond paying market interest rates and simultaneously take a long position on the forward contract.

[5] If an investor executes a traditional forward contract with respect to an asset that is a capital asset for that investor, the contract is treated as an "open transaction" for tax purposes -- that is, it has no tax effect until the transaction is ultimately settled. See, e.g., Lucas v. North Texas Lumber Co., 281 U.S. 11 (1930). If the forward contract is settled by physical delivery of the reference asset, the seller (that is, the short position) recognizes capital gain or loss at the time it delivers the asset. The amount of gain or loss is determined by reference to the seller's basis in the asset and the forward price received. Likewise, the buyer (that is, the long position) takes a basis in the asset equal to the forward price it pays, and realizes capital gain or loss upon its ultimate disposition of the asset. If, instead, the forward contract is cash settled (that is, the "losing" party makes a cash payment), the recipient recognizes capital gain and the payor recognizes a commensurate amount of capital loss at the time the payment is made. See section 1234A. Special rules change these results in certain circumstances (e.g., if the forward contract is part of a straddle (section 1092), a conversion transaction (section 1258), a constructive sale (section 1259), or a constructive ownership transaction (section 1260)).

[6] A "trader" that elects to have section 475(f) apply must "mark to market" the forward contract (that is, treat the position as if it is sold for its fair market value at the end of each tax year) and treat the resulting gain or loss as ordinary (rather than capital) in character.

[7] A "securities dealer" must "mark to market" forward contracts with respect to securities (that is, treat the position as if it is sold for its fair market value at the end of each tax year) and treat the resulting gain or loss as ordinary (rather than capital) in character. A "commodities dealer" may elect this treatment. See section 475.

[8] A "hedger" must match the timing of the gain or loss recognition on the forward contract with the timing of the gain or loss recognition on the item being hedged. See Treas. Reg. §1.446-4. The gain or loss is typically ordinary, so long as appropriate identifications are made. See section 1221(a)(7).

[9] For example, foreign persons are taxed at graduated rates on net income that is "effectively connected" with a U.S. trade or business. See sections 871(b) and 882. In the absence of a U.S. trade or business, foreign persons are generally taxed at a flat 30-percent rate on certain gross income from U.S. sources. See sections 871(a) and 881. Tax treaties often change these results. If the foreign person is a "controlled foreign corporation," the tax consequences to U.S. shareholders depend on a number of complicated variables, such as whether the asset underlying the forward contract is a commodity, and whether it is a hedging transaction.

[10] In certain circumstances, a forward contract on foreign currency is "marked to market." See section 1256. Gain or loss on these contracts is typically ordinary in character, but, in certain circumstances, taxpayers can elect to treat the gain or loss as capital. See section 988.

[11] A zero-coupon bond is a debt security that does not pay interest on a current basis but instead, is issued at a discount to its nominal (or "face") value. (The discount generally reflects the prevailing market interest rate.) For U.S. tax purposes, all holders of bonds that are originally issued with such a discount (such as X, in Example 2) must generally accrue the "original issue discount" into income as interest over the term of the bond. Thus, the holders will have an income tax liability based on this accrued income even though they do not have any current cash flow from the bond. See section 1272.

[12] The IRS and Treasury Department have addressed a very different tax issue in connection with a transaction called a "variable prepaid forward contract." That transaction involves a situation similar to Example 3, except that X plays the role of seller, not buyer, of ABC Inc. stock under a contract. Because X separately owns appreciated ABC Inc. stock, the key tax issue presented is whether the contract and other aspects of the transaction amount to a current sale (or constructive sale) of the stock. (There are meaningful differences between the simplified prepaid forward contract described in Example 3 and typical variable prepaid forward contracts that bear on this key tax issue.) Revenue Ruling 2003-7, 2003-1 C.B. 363 ( Feb. 3, 2003), holds that no such sale results from the arrangement described in the ruling. A matter of current controversy between the IRS and certain taxpayers is whether particular transactions are within the scope of the revenue ruling.

Opening Statement by Secretary Henry M. Paulson, Jr.
on the Department of the Treasury FY 2009 Budget Request
before the House Committee on Appropriations
Subcommittee on Financial Services and General Government

Washington -- Chairman Serrano, Representative Regula, Members of the Committee: Thank you for the opportunity to discuss the Treasury Department's proposed fiscal year 2009 budget. Our budget request reflects the Department's continued commitment to promoting a healthy U.S. economy, fiscal discipline and national security. The Department has broad responsibility in federal cash management, tax administration and plays an integral role in combating terrorist financing and advocating the integrity of the U.S. and global financial systems.

Our spending priorities for the 2009 fiscal year fall into six main categories. I will briefly describe the priorities and then take your questions.

U.S. Economic Steward

Strengthening National Security

Efficient Management of the Treasury Department

Fiscal Discipline

Treasury is committed to managing the nation's finances effectively, ensuring the most efficient use of taxpayer dollars and collecting the revenue due to the federal government.

Enforcing the Nation's Tax Laws Fairly and Efficiently

The Internal Revenue Service, of course, plays an integral role in this. The budget requests a 4.3 percent increase in IRS funding.

International Programs

We will continue to focus efforts on supporting a stable and growing global economy, through on-going dialogue and initiatives with developing economies throughout Asia, Latin America and Africa.

In addition we are asking your colleagues on the Foreign Operations Subcommittee to support key objectives of the President's international assistance agenda. This includes funding for the multilateral development banks – notably new replenishments for the World Bank's International Development Association and the African Development Fund.

Conclusion

Thank you and I welcome your questions.

Remarks by Secretary Henry M. Paulson, Jr.
U.S. Housing and Mortgage Market Update
before the National Association of Business Economists

Washington - Good morning. Thank you, Tom. It is a pleasure to be with you. Last week we had several significant data releases updating us on the status of the housing market correction. And just this morning, we are reviewing data released by the HOPE NOW alliance, marking the results of their efforts through January to reach and assist struggling borrowers who want to keep their homes. Industry efforts are making progress, and I will walk through these results in a moment.

I have said before that housing poses the biggest downside risk to our economy, and most forecasters expect a prolonged period of adjustment. It is an appropriate time to take a comprehensive look at the state of our housing and mortgage markets and their impact on the economy. I will do that today. My careful review has led me to three main conclusions.

Three Conclusions

First, many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93 percent of American homeowners – 51 million households - pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2 percent are in foreclosure.

Most of the proposals I've seen would do more harm than good --- bailing out investors, lenders or speculators who, instead of getting a free-pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout. I believe our efforts are best focused on helping homeowners who want to stay in their homes.

Second, this is a shared responsibility of industry, government and homeowners. We in government are working to expand options through the FHA, and we've worked with the industry to reach as many homeowners as possible to let them know that help is available. There is more that government and industry can do, and our efforts will continue to evolve. Homeowners have responsibilities as well. If borrowers won't ask about solutions, there is only so much that can be done on their behalf.

Third, the current public discussion often conflates the number of so-called "underwater" homeowners – that is, those with mortgages greater than the value of their house – with projections of foreclosures. Let's be precise: being underwater does not affect your ability to pay your mortgage, nor create a government responsibility for assistance. Homeowners who can afford their mortgage should honor their obligations --- and most do.

Obviously, being underwater is not insignificant to homeowners in that position. But negative equity does not necessarily result in foreclosure. Most people buy homes as a long-term investment, as a place to raise a family and put down roots in a community. Homeowners who can afford their payments and don't have to move, can choose to stay in their house. And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.

We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief. People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000.

Let me walk through my perspective on today's markets, which has led to these conclusions.

Current Housing Market Data

Recent housing data confirmed the ongoing housing correction. Existing single-family home sales fell to a 10-year low in January. At current sales rates there is now a 10.1 month supply of existing homes on the market, as compared to 4.5 months worth of inventory in a more normal market.

Similarly, new January data reported a 9.9 month supply of new homes currently on the market, more than twice the average supply during the first half of this decade. We also know that foreclosures add to inventories of unsold homes; by some estimates, more than half of properties go back on the market shortly after foreclosure.

Clearly, we have an overhang of supply. Working through the excess means that home prices will stagnate or fall, and we are seeing that now. The OFHEO index for purchased homes showed a 1.3 percent price decline in the fourth quarter of 2007 and is down 0.3 percent over the past year. The Case-Shiller composite index for the 20 largest metropolitan areas is down 9.1 percent over the past year; prices were down on an annual basis in 17 of the 20 metropolitan areas surveyed.

Of course, there is no national housing market, but instead a compilation of regional markets. The housing correction, and the run up to the correction, unfolded differently in different regions.

In recent years, many markets witnessed steep home price appreciation that was clearly unsustainable. For example, from 2002 to 2006, home prices in Bakersfield, California rose 122 percent. During that same time frame, prices rose 94 percent in Las Vegas, Nevada, and 107 percent in Miami, Florida. Not surprisingly, many areas that saw the biggest price increases are now seeing the biggest price declines.

Other markets experiencing high foreclosure rates today are those facing broader economic difficulties. Cities like Detroit, Michigan and Cleveland, Ohio didn't experience the large price appreciation, and current price declines in these markets have been triggered by weak local economic conditions.

Falling prices have impacted millions of homeowners. A recent Moody's report estimates that 8.8 million homeowners today have zero or negative equity.

While these equity considerations clearly impact homeowners' financial situation, they are not the primary concern in the effort to prevent avoidable foreclosures. And preventing avoidable foreclosures is the linchpin of our efforts to minimize the impact of the housing correction on the broader economy.

A greater determining factor in foreclosures of homeowners who want to stay in their home is the homeowner's ability to make the monthly mortgage payment, whether or not they have equity in their home. Those struggling to make their monthly payments may have had a change in life circumstance that reduces their ability to pay, or be facing a resetting adjustable rate that they cannot afford.

Essentially, these are the homeowners we are aiming to help – they want to stay in their homes, but have a mortgage product problem or an income problem.

Two-pronged Approach to Rising Foreclosures

We have a two-pronged policy approach that focuses on these two sources of rising foreclosures. First, we worked with Congress to enact a broad stimulus plan to support the economy, to maintain and create jobs so there will be fewer who suffer that income loss. The stimulus package will put $150 billion into the economy and create more than 500,000 new jobs this year. We expect to deliver stimulus payments to over 130 million households starting in May, with the bulk of those dollars distributed by the first week in July. The boost from consumer spending and business investment will add strength to our economy while the housing and credit market adjustments proceed.

Second, a private sector alliance – HOPE NOW – has adopted a broad set of tools focused on assisting struggling borrowers who want to keep their homes. This morning they released data demonstrating the results of their efforts through the month of January.

HOPE NOW Results

HOPE NOW announced that since July more than 1 million struggling homeowners received a work-out – either a loan modification or a repayment plan that helped them avoid foreclosure. Of those, 638,000 were for subprime borrowers. This data does not include refinancings, which also provide borrowers with affordable, long-term mortgages.

According to today's information, HOPE NOW's progress is accelerating. In January, there were 167,000 work-outs, up 11 percent from December. Loan modifications alone increased 19 percent from December to January. By comparison, foreclosure starts increased just 5 percent during the same period. I am encouraged that the number of borrowers receiving help is rising faster than the number entering foreclosure.

Focus on Subprime Borrowers

One of the tools of HOPE NOW is the American Securitization Forum's fast-track framework for subprime ARM borrowers that was announced in December.

Why are we focused on this small group of borrowers? Because they represent a disproportionate share of foreclosures.

Even when both the economy and the housing market are strong, many foreclosures occur. For example, between 2001 and 2005, foreclosure starts averaged more than 650,000 per year. Based on data through the third quarter of last year, we are on track for about 1.5 million foreclosure starts in 2007 and some analysts see as many as 2 million foreclosure starts in 2008.

While subprime mortgages make up only 13 percent of outstanding mortgages, about 50 percent of the foreclosure starts in the third quarter 2007 were subprime loans. And more astonishing is the fact that, while subprime ARMs are only 6.5 percent of mortgages, they represent 40 percent of third-quarter 2007 foreclosure starts.

These numbers presented a volume problem - that the time-intensive process of examining the financial situation of every subprime borrower would overwhelm the available resources, and as more borrowers called for help some who, in a normal market, would get a modification or refinance would instead go into foreclosure simply because no one could respond to them in time.

The new protocol announced in December is designed to address this volume problem by streamlining some borrowers into refinancing or modification, so that resources are available for more difficult situations.

The SEC signed off on this protocol on January 8th. Although it is complex, some servicers were able to implement it right away, while others required more time to work through the legal, operational and accounting issues. Overall, more than half of the HOPE NOW servicers had implemented the protocol by the end of January.

Those of you who know me know that I am not a patient person. I certainly would have liked to see more servicers implement the protocol faster, and I want to praise those industry leaders who acted quickly. They met their commitments, and that is welcome. I am pleased that as of today, all of the HOPE NOW members who service subprime mortgages have the protocol in place, ahead of the rising volume of resets in the coming months. Having the protocol in place industry-wide should also mean – and I will monitor this – accelerated results for subprime borrowers in the coming months.

Given the time it took to implement the ASF framework, HOPE NOW concluded it was too soon to have meaningful results specific to this fast-track plan. Instead, the results are included in the aggregate HOPE NOW reporting on subprime workouts.

In January, HOPE NOW members – through the ASF protocol and other workout programs – modified 45,000 subprime loans, up 16 percent from December. I expect those numbers to increase further, now that the ASF protocol is in place industry-wide. Transparency of the ASF protocol results is critical. I understand that tracking results is complicated – every borrower is unique and attributing particular outcomes to particular causes is difficult. Still, enough of the servicers were following the ASF framework in February that I will press HOPE NOW to break out the ASF protocol results when their February data is released, so that we can all assess its effectiveness.

It is important that everyone who agreed to this protocol follows through on their commitment. I won't look kindly on industry free riders. My measure of success will be that a borrower who has made all the payments at the initial rate, but can't afford the reset and reaches out for help, avoids going into foreclosure.

Of course, the single most significant factor that has benefited all ARM borrowers is the recent decline in short-term interest rates, which are very significantly mitigating the effects of mortgage resets. A typical subprime mortgage resetting in December might have increased from 8.5 to 10.8 percent; in today's lower interest rate environment it may reset only to 9 percent. This means on a $200,000 mortgage, the typical monthly payment will increase by about $70, instead of growing by more than $300. Market participants estimate that as many as half the borrowers who at December rates would have been fast-tracked for a modification instead did not face a significant ARM reset in January. Lower rates, rather than loan modifications, helped these borrowers avoid foreclosure.

Outreach Efforts

As we continue to urge lenders to streamline the modification and refinance process, we must also continue to urge struggling homeowners to reach out for help.

Before the creation of HOPE NOW, servicers were sending letters to delinquent borrowers and getting only a 2 to 3 percent response rate. The alliance now sends out letters on HOPE NOW letterhead, and gets closer to a 20 percent response. They've sent over 1 million letters to struggling borrowers who had previously avoided contact, and the higher response rate means almost 200,000 borrowers have reached out for help.

That's a big improvement, but it also means that more than 80 percent of at-risk homeowners aren't responding - aren't taking any responsibility. For any government or industry initiative to be effective, homeowners must actively engage with their lenders and demonstrate that they want to keep their homes. The earlier they do so, the more flexibility their lender will have. If borrowers don't ask for help, they will have to bear the consequences --- which may very well mean losing their homes when that could have been prevented.

Conclusion

As the HOPE NOW alliance continues to report results, we will evaluate progress and make adjustments. We will also continue to listen to new ideas. I believe we have the right program in place – an evolving private sector effort to reach borrowers and find affordable mortgage solutions wherever possible. We will continue to pursue FHA modernization and GSE reform in Congress, to expand access to affordable mortgages. And I will continue to focus on the broader effort to keep our economy strong as we weather this necessary housing correction.

Thank you.

Remarks by Treasury Assistant Secretary for International Affairs Clay
Lowery at the Annual Conference of the Institute of International Bankers

Global Financial Stability and Systemic Risk: The Current Financial Market Turmoil

Washington – Thank you for your kind introduction. I'm pleased that you have invited me to speak at today's forum. In 2006 I spoke at an IIB Dialogue in Singapore on "Promoting a More Open Global Financial System," and I'm glad to be back today – particularly given how calm everything is in the markets.

Today I will briefly review the U.S. and global economic situation and some of the factors contributing to today's financial turmoil. I will then describe some of the lessons we have learned so far and the steps the U.S. and the international financial community is taking to address the issues we face.

Economic overview

The U.S. economy is fundamentally sound, diverse and resilient. Economic growth over the past four years has averaged 2.9 percent. More than 8 million jobs have been created since August 2003. However, following several years of what, in retrospect, was unsustainable home price appreciation, the U.S. economy is undergoing a significant and necessary housing correction, which is weighing on near-term economic growth. Headwinds also are coming from higher energy prices and stress in the financial markets.

Looking beyond the U.S., global economic growth remains solid, in the vicinity of 4 percent, which is still well above the 3 ¼ percent average of the 1980s and 1990s, though not as robust as the 5 percent numbers of recent years. Much of the global slowdown is concentrated in G-7 economies, though emerging markets are likely to experience some dampening of their growth prospects as well. However, many parts of the emerging market world are still expected to grow in excess of 5 percent in 2008, with some, especially developing Asia, likely to grow in excess of 8 percent.

Underlying Weaknesses that Contributed to the Current Financial Market Turmoil

In the context of these global economic conditions, let me turn to the current financial market turmoil. I know that this has been a roller-coaster ride for you and the financial institutions you represent. Likewise, here at Treasury, we have been very much engaged in monitoring and analyzing the turmoil, both domestically and internationally.

Let me spend some time this morning giving you our perspectives on the underlying weaknesses that contributed to the turmoil and what the U.S. Administration is doing to address the problems. I will then turn to the international response that we have been working in cooperation with many other countries to craft. Of course, we are still in the midst of the turmoil, so it is premature to draw final lessons and make final recommendations.

There are a variety of ways to categorize the weaknesses, but let me try to take a lesson from a key observer of the international financial system – David Letterman – and give you my top ten list. Unlike Mr. Letterman, this will not be in any particular order.

Underwriting standards were seriously eroded during the housing boom. On the positive side, securitization brought new capital to sub-prime borrowers and helped them buy homes they otherwise would not have been able to own. However, some mortgage originators encouraged excessive borrowing, or with disadvantageous loan terms.

Risk management practices did not keep pace with market developments. Risk managers for loan originators, securitization issuers, and investors did not properly evaluate all of the risks, including the liquidity risks, concentration risks, and reputation risks.

Investors did not perform appropriate due diligence for their investments. Some investors relied completely on external credit ratings to determine the risk rather than assessing risk themselves. Many investors misunderstood or ignored the different risk characteristics between structured products and corporate bonds. Some investors did not realize that credit ratings provide only a probability of default risk, and not other risks.

Disclosure throughout the securitization process was inadequate. Loan originators did not sufficiently or clearly disclose their terms to borrowers. Securitization issuers did not disclose adequate information for investors to judge the quality of mortgage loans underlying residential mortgage-backed securities and more complex products. And purchasers of often complex securities did not demand adequate information or perform appropriate analysis on the contents of what they were buying.

Credit rating agencies failed to adequately communicate risks. Credit rating agencies did not make it sufficiently clear that there are differences in the meaning of ratings between corporate bonds and structured finance products. The agencies also had not adequately considered the potential weaknesses in the underlying data and in their assumptions and models used to arrive at their credit rating decisions.

Misaligned incentives encouraged excessive risk-taking. The originate-to-distribute business model encouraged mortgage originators and securitization issuers to produce complex products to satisfy investors' increased demand for yield. The lucrative income stream from originations and securitizations encouraged some to incur risks.

The treatment of off-balance sheet exposures encouraged excessive risk-taking, leading to the creation of conduits and SIVs that we all know about so well now. Off-balance sheet exposures were generally opaque, which made risk analysis difficult for investors.

The liquidity assumptions of borrowers, securities issuers, and investors often were unfounded. Many borrowers had not considered the possibility that the housing market could decline. Mortgage originators and securitization issuers had assumed that a liquid market for the underlying mortgages and securitizations would continue unabated.

The valuation of complex securities proved to be more challenging than expected for many market participants. The application of fair-value accounting to liquid securities is not especially difficult--or at least, so I'm told, for accountants. However, the possibility that such securities could become substantially less liquid, or could even cease trading, in times of market stress was not fully considered in advance.

And finally, weaknesses in supervisory frameworks have been exposed. Supervisors in some countries did not have the tools they needed to adequately regulate financial institutions or deal with weak and failing banks.

United States policy response

With this long list of ten weaknesses I have just identified, it does suggest we might want to do something about it. So what should we do?

In the United States, I would say that we are doing three things that also helps feed into a fourth.

First, we have made adjustments to the macroeconomic policy mix to support the broad U.S. economy while the inevitable corrections take place in the housing and credit markets. The President and Congress responded with a bipartisan fiscal stimulus package totaling more than $150 billion, while the Federal Reserve has made adjustments in liquidity support and monetary policy.

Second, the Administration has supported a number of initiatives – both private sector led and public sector initiatives – in response to the housing correction, designed to prevent as many foreclosures as possible.

Third, the President's Working Group on Financial Markets – the PWG – an interagency policy coordination group chaired by Secretary Paulson and consisting of the Fed, the SEC, and the CFTC, is actively engaged in a comprehensive review of policy issues related to recent financial market turmoil. This review includes approaches to strengthen risk management practices at financial institutions, improve market discipline in the securitization process, and improve the issuance and use of credit ratings.

International plan

This is a summary of the actions that the U.S. Administration has supported so far. But the current financial market turmoil is not just a U.S. problem.

Indeed, the financial market turmoil has spread globally. We at the Treasury Department are closely tracking write-downs and losses that international financial firm have publicly disclosed. By our count, it now tallies over $200 billion. Only about half of this is reported by U.S. financial institutions; European institutions report another $75 billion and the rest is accounted for by banks in Asia, Canada, and elsewhere.

Last August, as the turmoil spread to Europe, we realized that we needed not just a U.S. response, but a global response. And what better mechanism to address the situation than the Financial Stability Forum – known as the FSF? And if you are keeping count, it is the work of the FSF that I consider the fourth step that we are taking.

The FSF was formed by the Group of Seven finance ministers and central bank governors in 1999 after the Asian financial crisis. The FSF is a unique body. It brings together supervisors, central banks, finance ministries, the IMF and World Bank, and international regulatory groups. Together, the members of the FSF assess international financial system vulnerabilities, identify actions needed to address these vulnerabilities, and help coordination among authorities responsible for financial stability. In short, the FSF is the coordination link between the global phenomenon of capital markets and the national system of regulatory entitities.

In October 2007, the G7 tasked the FSF to analyze the causes of the financial turbulence and recommend actions to address them. At last month's meeting in Tokyo, the FSF presented an interim report to the G7 finance ministers and central bank governors. The interim report identified six main policy directions.

The first area is supervisory framework and oversight. The FSF interim report recommended that the Basel Committee on Banking Supervision assess the need for changes to the Basel II capital framework in light of the turmoil. The FSF also asked the Basel Committee to recommend strengthened industry and supervisory practices for liquidity risk management. Basel II and accounting practices provided incentives for the use of off-balance sheet vehicles, and the Basel Committee has agreed to review these.

Second, the FSF said that the underpinnings of the originate-to-distribute model need to be strengthened. This should include origination and underwriting standards and transparency. The FSF is encouraging the development of market-based approaches to incentives in the originate-to-distribute model.

Third, the FSF concluded that investors relied excessively on credit ratings. The credit rating agencies (the CRAs) must improve the information they provide to investors in structured financial products. Authorities should also review the role of credit ratings in their regulations and guidance to ensure that investors do not overly rely on them instead of performing their own due diligence. An IOSCO working group is updating its Sound Practices for credit rating agencies to address structured finance.

Fourth, the FSF report said that market transparency should be improved. Financial institutions should disclose more useful information on risk exposures and values. Valuation methods and data, particularly for illiquid markets, are a concern. Market-led enhancements to market transparency and disclosure are needed, although the FSF noted that more prescriptive approaches are possible if these improvements are not forthcoming. Transparency is also an area of active work for the Basel Committee, the International Accounting Standards Board (IASB), and IOSCO.

Fifth, supervisory and regulatory responsiveness to risks should be strengthened, with an increased bias to turning analysis into action. Skills of supervisors should keep pace with industry developments, and supervisors should clearly communicate concerns about risk management to financial institutions. International organizations should improve their decision-making processes. IOSCO is working on aspects of this area.

Finally, the FSF report said that authorities' ability to respond to crises should be strengthened. Central banks are reviewing lessons from recent experiences to identify improvements in their operational frameworks, communications with markets, and coordination between central banks. Authorities also are considering their structures for dealing with failing banks internally, and cross-border. The Committee on the Global Financial System (CGFS) is evaluating these issues.

These are just the highlights from the FSF's interim report. The G7 finance ministers and central bank governors in Tokyo in February welcomed the report and the solid progress that the FSF is making. The chairman of the FSF, Mario Draghi, is doing an excellent job and providing great leadership to a complex area. The FSF will gather again this month and the final report is scheduled to be released at the April G7 meetings here in Washington.

In addition to the FSF, the European Commission, UK Prime Minister Gordon Brown, and German Finance Minister Peer Steinbrück have been offering proposals. The leaders of four major European countries and the President of the European Commission also met and issued a joint communiqué with a variety of suggestions. These ideas largely cover areas that are within the six overarching policy directions identified by the FSF and its framework.

These efforts underscore that the questions raised by the current market turmoil are complex. And given that volatility in the markets continues, the diagnosis, recommendations and ultimately solutions to those problems will need to be nuanced, probably won't be complete upon first draft, and must not impair future capital market efficiency or innovation. These are global issues that require bilateral and multilateral cooperation and we will continue to work closely with the G7 and the FSF on a wide range of issues to ensure that policy responses are coordinated

Paulson Statement on Andean Trade Preference Act Signing

"Today's signing of the Andean Trade Preference Act is an important bridge as we work with Congress to pass the Colombia Free Trade Agreement and as we implement the Peru Free Trade Agreement.

"I thank all the members of Congress who supported this bipartisan legislation, and I look forward to working with Congress to further enhance opportunities for American workers and American businesses by passing the Free Trade Agreements with Colombia and Panama.

"The Colombia FTA will not only create jobs in the United States and give American companies important access to markets in Colombia, but will also be an important stabilizing force for democracy and economic progress in the region."

Preliminary Report on Foreign Holdings Of U.S. Securities At End-June 2007

Preliminary data from a survey of foreign portfolio holdings of U.S. securities at end-June 2007 are released today on the U.S. Treasury web site at (http://www.treas.gov/tic/fpis.html). A revised table on Major Foreign Holders of Treasury Securities, where estimates through end-December 2007 are based in part on survey data, is also released at (http://www.treas.gov/tic/ticsec2.html, on line 4). Final survey results, which will include additional detail as well as possible revisions to the preliminary data, will be reported on April 30, 2008. The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System. The next survey will be for end-June 2008, and preliminary data are expected to be released by February 27, 2009.

Complementary surveys measuring U.S. holdings of foreign securities are also carried out annually. Data from the most recent survey, reporting on securities held on year-end 2007, are currently being processed. Preliminary results are expected to be reported by August 29, 2008.

Overall Preliminary Results

The survey measured foreign holdings of U.S. securities as of June 30, 2007, to be $9,772 billion, with $3,130 billion held in U.S. equities, $6,007 billion in U.S. long-term debt securities¹ (of which $1,472 billion are holdings of asset-backed securities (ABS)² and $4,535 billion are holdings of non-ABS securities), and $635 billion held in U.S. short-term debt securities. The previous survey, conducted as of June 30, 2006, measured foreign holdings of $2,430 billion in U.S. equities, $4,733 billion in U.S. long-term debt securities, and $615 billion in short-term U.S. debt securities (see Table 1).

1. Long-term debt securities have an original term-to-maturity of over one year.
2. Asset-backed securities are backed by pools of assets, such as pools of residential home mortgages or credit card receivables, which give the security owners claims against the cash flows generated by the underlying assets. Unlike most other debt securities, these securities generally repay both principal and interest on a regular basis, reducing the principal outstanding with each payment cycle.

Table 1. Foreign holdings of U.S. securities, by type of security, as of recent survey dates

(Billions of dollars)

Type of Security	June 30, 2006	June 30, 2007

Long-term Securities	7,162	9,136
Equity	2,430	3,130
Long-term debt	4,733	6,007
Asset-backed	980	1,472
Other	3,753	4,535
Short-term debt securities	615	635

Total	7,778	9,772
Of which: Official	2,301	2,823

Table 2. Foreign holdings of U.S. securities, by country and type of security, for the major investing countries into the U.S., as of June 30, 2007

(Billions of dollars)

	Country or category	Total	Equities	Long-term debt		Short-term
				ABS	Other	debt
#1	Japan	1,197	220	133	768	76
2	China (Mainland)¹	922	29	217	653	23
3	United Kingdom	921	421	160	316	24
4	Cayman Islands	740	279	236	186	38
5	Luxembourg	703	235	104	320	44
6	Canada	475	347	23	83	22
7	Belgium	396	25	56	313	3
8	Ireland	342	81	75	101	85
9	Switzerland	329	174	41	99	15
10	Netherlands	321	185	64	59	13
11	Middle East Oil Exporters²	308	139	18	107	44
12	Germany	266	100	51	105	11
13	Bermuda	238	90	53	80	15
14	France	221	132	36	48	6
15	Singapore	175	108	13	52	3
16	Australia	165	87	8	62	9
17	Russia	148	0	0	109	39
18	Korea, South	138	5	13	105	15
19	Hong Kong	138	31	24	75	9
20	Taiwan	121	11	27	80	3
21	Norway	109	56	26	22	5
22	British Virgin Islands	108	67	2	32	7
23	Mexico	107	19	2	74	13
24	Brazil	106	1	0	103	2
25	Sweden	99	60	4	32	4
	Country Unknown	214	0	1	211	2
	Rest of the World	762	228	87	342	106
	Total	9,772	3,130	1,472	4,535	635
	of which: Official	2,823	266	280	2,021	256

1. Excludes Hong Kong, Macau, and Taiwan, which are reported separately.
2. Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates.

Treasury Designates Members of Abu Ghadiyah's Network

Facilitates flow of terrorists, weapons, and money from Syria to al Qaida in Iraq

Washington - The U.S. Department of the Treasury today designated four individuals facilitating and controlling the flow of money, weapons, terrorists, and other resources through Syria to al Qaida in Iraq (AQI), including to AQI commanders.

"Since the fall of Saddam Hussein�fs regime, Syria has become a transit station for al Qaida foreign terrorists on their way to Iraq," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence. "Abu Ghadiyah and his network go to great lengths to facilitate the flow through Syria of money, weapons, and terrorists intent on killing U.S. and Coalition forces and innocent Iraqis."

Today�fs action was taken pursuant to Executive Order 13224, which targets terrorists and those providing financial or material support to terrorism. Any assets these designees have under U.S. jurisdiction will be frozen, and U.S. persons are prohibited from engaging in business or transactions with the designees.

Identifier Information

BADRAN TURKI HISHAN AL MAZIDIH
AKAs: Al-Mazidih, Badran Turki al-Hishan
Abu Ghadiyah
Al Mezidi, Badran Turki Hishan
Hishan, Badran Turki
Hisham, Badran al-Turki
Al-Turki, Badran
Al-Sha�fbani, Badran Turki Hisham al-Mazidih
Abu �eAbdallah
Abu Abdullah
Shalash, Badran Turki Hayshan
Abu �eAzzam
DOB: 1977
Alt. DOB: 1978 or 1979
POB: Mosul, Iraq
Residence: Zabadani, Syria

Syria-based Badran Turki Hishan Al Mazidih, also known as Abu Ghadiyah, runs the AQI facilitation network, which controls the flow of money, weapons, terrorists, and other resources through Syria into Iraq. Former AQI leader Abu Mus�fab al-Zarqawi appointed Badran as AQI�fs Syrian commander for logistics in 2004. After Zarqawi�fs death, Badran began working for the new AQI leader, Abu Ayyub Al-Masri. As of late-September 2006, Badran took orders directly from Masri, or through a deputy.

Badran obtained false passports for foreign terrorists, provided passports, weapons, guides, safe houses, and allowances to foreign terrorists in Syria and those preparing to cross the border into Iraq. Badran received several hundred thousand dollars from his cousin Saddah „Ÿ also designated today „Ÿ and used these funds to support anti-U.S. military elements and the travel of AQI foreign fighters. Badran has also been using AQI funds for his personal use.

As of the spring of 2007, Badran facilitated the movement of AQI operatives into Iraq via the Syrian border. Badran also directed another Syria-based AQI facilitator to provide safe haven and supplies to foreign fighters. This AQI facilitator, working directly for Badran, facilitated the movement of foreign fighters primarily from Gulf countries, through Syria into Iraq.

GHAZY FEZZA HISHAN AL MAZIDIH
AKAs: Hishan, Ghazy Fezzaa
Abu Faysal
Shlash, Mushari Abd Aziz Saleh
Abu Ghazzy
DOB: 1974 or 1975
Residence: Zabadani, Syria

Ghazy Fezza Hishan Al Mazidih is Badran�fs cousin and a member of his AQI facilitation network. As of March 2006, Ghazy was Badran�fs "right-hand man." As second-in command, Ghazy worked directly with Badran, managed network operations, and acted as the commander for Badran�fs AQI network when Badran traveled. As of late-September 2006, Ghazy and Badran were planning to facilitate an AQI attack against Coalition forces and Iraqi police in Western Iraq. Ghazy and Badran planned to use rockets to attack multiple Coalition forces outposts and Iraqi police stations, in an attempt to facilitate an AQI takeover in Western Iraq.

AKRAM TURKI HISHAN AL MAZIDIH
AKAs: Al-Mazidih, Akram Turki Hishan
Abu Jarrah
Abu Akram
Al-Hishan, Akram Turki
DOB: 1974 or 1975
Alt. DOB: 1979
Residence: Zabadani, Syria

Akram Turki Hishan Al Mazidih is Badran�fs brother and a member of his AQI facilitation network. As of early 2006, AQI leaders Akram and Badran directed AQI operations near Al Qa�fim, Iraq. In late-November 2006, Akram smuggled weapons from Syria for use in Iraq. As of late-September 2005, Akram acted on behalf of AQI by ordering the execution of AQI�fs enemies. Akram also ordered the execution of all persons found to be working with the Iraqi Government or U.S. Forces, and at least one of Akram�fs orders resulted in the execution of two Iraqis in Al Qa�fim, Iraq.

SADDAH JAYLUT AL-MARSUMI
AKAs: Al-Marsumi, Sa�fda Jalut Hassam
Jalout, Saddaa
Jaloud, Sa�fdaa
DOB: 1955 or 1956
Citizenship: Syrian
Residence: Al Shajlah Village, Syria
Alt. Residence: As Susah Village, Syria
Alt. Residence: Baghuz, Syria

As of the spring of 2006, Saddah Jaylut Al-Marsumi, Badran�fs cousin, was an AQI financier who worked with Badran and other AQI facilitators to transport several unidentified Syrian suicide bombers into Iraq on behalf of AQI. Saddah also facilitated the financing and smuggling of AQI foreign fighters from Syria into Iraq. As of early 2006, Saddah transferred several hundred thousand dollars to a hawala in Iraq, where Badran received the funds and used them to support anti-U.S. military elements and the travel of AQI foreign fighters.

Treasury Releases Social Security Papers on Common Ground

To build on the discussions that Secretary Paulson has had with members of Congress in both parties, Treasury will release a series of issue briefs that will discuss Social Security reform, focusing on the nature of the problem and those aspects of reform that have broad support.

Paulson Statement on Treasury Social Security Papers on Common Ground

Issue Brief 1: Social Security Reform: The Nature of the Problem

Issue Brief 2 : Social Security Reform: A Framework for Analysis

Issue Brief 3 : Social Security Reform: Benchmarks for Assessing Fairness and Benefit Adequacy

Job Creation Continues:
Job Growth: 18,000 new jobs were created in December, the 52nd straight month of job gains. The United States has added 1.3 million jobs in the past 12 months and about 8 and a half million jobs since August 2003. Employment increased in 47 states and the District of Columbia over the year ending in November. (Last updated: January 18, 2008)

Low Unemployment: The unemployment rate rose to 5.0 percent in December from 4.7 percent in November. Unemployment rates have declined in 12 states and the District of Columbia over the year ending in November. (Last updated: January 18, 2008)

There Are Many Signs of Economic Strength:
Economic Growth: Real GDP growth was 4.9 percent in the third quarter of 2007, supported by strong gains in business investment and exports. (Last updated: December 20, 2007)

Business Investment: Business spending on commercial structures and equipment rose solidly in the third quarter. Healthy corporate balance sheets bode well for continued investment growth. (Last updated: December 20,2007)

Exports: Strong global growth is boosting U.S. exports, which grew by 10.3 percent over the past 4 quarters. (Last updated: December 20, 2007)

Inflation: Core inflation remains contained. The consumer price index excluding food and energy rose 2.3 percent over the 12 months ending in October. (Last updated: December 14, 2007)

Tax Revenues: Tax receipts rose 6.7 percent in fiscal year 2007 (FY07) on top of FY06’s 11.8 percent increase. As a share of GDP, FY07 receipts exceeded their 40-year average. (Last updated: October 12, 2007)

Americans Are Keeping More of Their Hard-Earned Money:
Real after-tax income per person increased 2.1 percent over the past 12 months (ending in November). (Last updated: December 21, 2007)

Pro-Growth Policies Will Enhance Long-Term U.S. Economic Strength:
We are on track to make significant further progress on the deficit.The FY07 budget deficit was down to 1.2 percent of GDP, from 1.9 percent in FY06. Much of the improvement in the deficit reflects strong revenue growth, which in turn reflects the continued strength of the U.S. economy. Looking ahead, higher spending on entitlement programs dominates the future fiscal situation; we must squarely face up to the challenge of reforming these programs.

Table 1. Total Receipts, Outlays, and Deficit (in billions of dollars)
	Receipts	Outlays	Deficit
FY 2009 Actual	2,104	3,520	-1,416
Percentage of GDP	14.9%	25.0%	10.0%
FY 2010 Estimates
2011 Budget	2,165	3,721	-1,556
2011 Mid-Session Review	2,132	3,603	-1,471
FY 2010 Actual	2,162	3,456	-1,294
Percentage of GDP	14.9%	23.8%	8.9%


	December 21, 2007
A. Official reserve assets (in US millions unless otherwise specified)	Euro	Yen	Total
(1) Foreign currency reserves (in convertible foreign currencies)			69,665
(a) Securities	14,102	11,215	25,317
of which: issuer headquartered in reporting country but located abroad			0
(b) total currency and deposits with:
(i) other national central banks, BIS and IMF	14,084	5,511	19,595
ii) banks headquartered in the reporting country			0
of which: located abroad			0
(iii) banks headquartered outside the reporting country			0
of which: located in the reporting country			0
(2) IMF reserve position	4,340
(3) SDRs	9,372
(4) gold (including gold deposits and, if appropriate, gold swapped)	11,041
--volume in millions of fine troy ounces	261.499
(5) other reserve assets (specify)	0
--financial derivatives
--loans to nonbank nonresidents
--other
B. Other foreign currency assets (specify)
--securities not included in official reserve assets
--deposits not included in official reserve assets
--loans not included in official reserve assets
--financial derivatives not included in official reserve assets
--gold not included in official reserve assets
--other