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LIBRARY
ROOM 5030
MAY
U, 1997
I
~ ASURY DEPARTMENt
ROOM
fi~~"
. Uol997
Treas.
HJ
10
.A13P4
v.361
u.s.
Department of the Treasury
PRESS RELEASES
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFlCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASmNGTON, D.C .• 20220. (202) 622-2960
ADV 9:30 A.M. EDT
Remarks as prepared for delivery
June 3, 1996
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
ATF CEASEFIRE/BOSTON POLICE AWARDS CEREMONY
BOSTON, MASSACHUSETTS
As we've heard this morning, the ATF prides itself on its working relationship
with other law enforcement agencies. We're working together on the GREAT program
here in Boston, which helps youngsters stay away from gangs and guns and drugs. And
our office here helped bring a conviction in the death of officer Jerry Hurley who was
killed defusing a bomb a few years ago. I must tell you almost always when I'm involved
in a law enforcement event, local authorities make a point of telling me about their
relationship with A TF.
One of the areas where there's a great deal of cooperation is working on gunrunning cases. I think probably one of the better examples is the conviction of the
Georgia resident who ran 32 semiautomatic pistols into Boston in three months, with a
dozen later recovered in crimes up to and including murder. And just two weeks ago
there was the highly publicized seizure of Chinese-made assault weapons in California by
ATF and the Customs Service.
Another area where ATF has worked very closely with local authorities has
already been mentioned. That's the Ceasefire program, where the ATF and the private
sector have developed an important capacity to investigate firearms crimes. We've found
that the Ceasefire system can have an important impact in solving crimes, and it has a
ripple effect in a region if surrounding jurisdictions ask for assistance with this ballistics
technology.
The technical people can get into the fine points, but the Ceasefire computer
system can do in a few hours what otherwise might be undoable or take a vast amount of
valuable time. Very simply put, it can help you find the ballistic equivalent of a needle
in a haystack. And if you can tie bullets or shell casings from different crimes to a
particular gun, and you find someone with that weapon, that significantly increases the
chances you've found a criminal responsible for several crimes. I know the system here
has already linked seemingly unrelated crimes together to a single weapon.
RR-11l2
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2
This is an excellent program, and we're delighted to be working together with the
Boston Police Department on it.
Having said that, I want to point out that we've been seeing some very
encouraging figures lately about crime -- not just here in Boston but across the country.
There are a great many reasons that these numbers are coming down. First and
foremost is the very good job being done by local law enforcement. But I think without
question measures taken by this administration are helping provide a secure environment
for raising families in America.
Since 1993 we've seen the Brady Law enacted to require a waiting period for
handgun purchases. The assault weapons ban also has been enacted. And as you know,
ATF has the responsibility for implementing both these laws. There is also the very
tough crime bill that put additional police officers on the streets to help implement
community policing. We also have the anti-terrorist bill that was just enacted. And
finally, the Justice Department and the Treasury Department have implemented a policy
change with respect to using the proceeds of asset and property seizures to enable local
law enforcement authorities to pay for more cops on the beat.
To wind up, I'm delighted to have this opportunity to talk about Ceasefire, which
is making a real contribution to fighting crime.
Thank you.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OFPUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
ADV
12:15 P.M. EDT
REMARKS AS PREPARED FOR DELIVERY
JUNE 3,1996
REMARKS OF lREASURY SECRETARY ROBERT E. RUBIN
BOSTON COLLEGE INTERNATIONAL ECONOMIC FORUM
BOSTON, MASSACHUSETTS
You're focussing on international economic issues, and in many respects the
developments in that arena are becoming among the most important factors in economic
life in the United States.
I want to talk today about American leadership with respect to the global
economy, and in particular, the role you can play in that leadership.
We have a very difficult situation with respect to American I;adership in the
international economic arena. On the one hand, America's economic self-interest and
our national security interests absolutely require us to be actively and energetically
engaged internationally.
In fact, one of the things that has so struck me in the course of my three and onehalf years in the administration is how in so many economic and national security issues,
the only country in the world able to provide leadership is the United States, and if we
don't act nothing will happen. On the other hand, very large numbers of Americans
have experienced wage stagnation over the past 15 years, very large numbers feel greater
job insecurity, and too often they blame the global economy and view the global
economy not as a source of opportunity but a threat. You and I know that is absolutely
the wrong perception.
I'm not going to deal in my remarks with domestic economic policy. But clearly
part of the solution to negativism is to have economic conditions that restore the belief
on the part of the vast preponderance of the American people that the economy will
work for them, and that forward-looking international economic policies -- like trade and
open markets -- will also work for them.
RR-1113
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2
I believe that achieving such conditions requires fiscal discipline, and within that context,
heavy emphasis on education, training and technology, and then independently of the
budget, pension and health care portability, and other reforms.
So one part of reversing the negative attitude about the global economy is a
policy challenge. But there's also the challenge of explaining the importance of
leadership and engagement in the global economy to Americans at a time when there
are so many powerful voices of protectionism and economic isolationism.
Developing the constituency for American leadership and engagement is
enormously in the interests of all Americans. You all know as well as anyone that we
are now in a global economy and there can be no turning back. The Luddites couldn't
stop the industrial age any more than isolationists wiU prevent increasing globalization.
But the isolationists can make it extremely difficult to win the kind of public support and
congressional support that forward-looking policies require. I can tell you having spent a
great deal of time on the Hill, on broad array of economic issues, that they not only can
but they are. NAFf A, GAIT and the Mexico support packages are sound agreements
and policies for this country. But most observers would teU you that today you couldn't
get NAFfA through Congress. They'd tell you you couldn't get GAIT through
Congress. They'd tell you that the Mexico support program would likely be overridden
in Congress today.
Let me just stop for a moment and say there is no question about the President's
commitment to engagement and leadership in the international economy. He has taken
action after action, very often against the current political winds. One clear example is
NAFfA. Let me teU you a story that makes the same point in the context of another
issue. I went into the Oval Office one Monday night in January of last year and told the
President, "Mr. President, we believe that within two or three days, Mexico is likely to
default, and that has enormous consequences for the United States, but the polls are
running 80 percent against assisting Mexico." And his response was that we had to act
because it's the right thing to do.
Having said that, I can remember someone asking me what surprised me about
serving in government. My answer was the difficulty getting a message across, even when
you have access to the press the way one does at the top levels of government. I can tell
you that the President has used the bully pulpit powerfully, and that is absolutely critical,
but we need to have more.
Those who understand our nation's self-interest is at stake in fully engaging in the
international economy and in exerting the leadership of the United States in the
international economy must join together in creating the support amongst the public and
Congress for the kinds of forward-looking international economic policies that are .
required for America to succeed in the global economy of the 21st Century.
3
I'd like to focus now on three specific areas of our international approach. First,
trade. Second, the important role that promoting development in the developing and
transitional economies can play in our future. And finally, I want to discuss how the
administration is actively working to strengthen the international financial system.
On trade, the President has been for free markets, reducing trade barriers, and
opening markets abroad -- as evidenced by NAFfA, GAIT, and the financial services
agreement with Japan. His record is clear and substantial.
Going forward, we have a powerful trade agenda. We're looking at developing
free trade throughout this hemisphere by 2005, and that's something I spoke with my
counterparts about at a hemispheric meeting of finance ministers two weeks ago in New
Orleans. We're also looking at developing a free trade regime throughout Asia and the
Pacific region by 2020. While obviously we need to maintain strong trade relations with
Europe, we must fully energize our public and private sector focus on the rising
importance of Asia. Our exports to the region are up 65 percent in five years. We now
send one-third more across the Pacific than the Atlantic, and in about 15 years there are
estimates that the Asian economy could be larger than ours and Europe's combined. As
we work on the broader trade agreements, in the meantime we're working bilaterally and
multilaterally wherever possible to facilitate trade. However, for us to be able to move
forward requires public and congressional support.
The most immediate trade issue is China. The President h~ now extended MFN
status for China. There may well be a vigorous congressional debate over this issue.
And there are many issues we need to work through where there are significant
differences with China. But let me add one more word about the importance to the
United States of extending MFN. While we are on the Atlantic coast today, we also are
very much an Pacific nation. I was in Kyoto about two months ago for a meeting of
finance ministers from throughout Asia, and it was clear from my discussions with my
counterparts that the outcome of MFN is central not only to our relationship with China,
but to our position throughout the whole of east Asia.
Having said that, my second point is that it is enormously in our economic and
national security interests to support development and reform in the developing and
transitional economies. It is unpopUlar, but it is not charity. We do it through our
bilateral aid, but we also do it very powerfully through the international financial
institutions such as the World Bank, the regional development banks, and the
International Monetary Fund. Our contributions are enormously leveraged because of
the contributions of all other donors and the tremendous influence we have on the
policies of these institutions. I can tell you from my own involvement, both here and in
visits around the world, that the World Bank and the other institutions are vital in
promoting the economic growth that creates greater markets for our goods, and that
contributes to democracy and political stability which furthers our national security.
4
However, these institutions have no natural political constituency in the United
States. And at a time when they are contributing so critically to our interests, they are
also subject to enormous reductions in congressional funding. Those reductions in tum
are threatening both our influence in the policies of the institutions, and even the very
institutions themselves because as we reduce our funding, others will tend to do the
same, and switch their foreign aid to a bilateral basis. Diminishing our support for these
institutions greatly diminishes out ability to shape the future economies of developing
and transitional economies in ways that will benefit all Americans.
Too often even those who are focussed on supporting trade and global
engagement have not focussed on the need to extend that support to these absolutely
vital institutions.
The final point I would make today is to highlight the substantial accomplishments
in the past two years in strengthening the global financial markets against shock.
I recall two years ago at the G-7 Summit in Naples, President Clinton outlined a
vision of making the international financial institutions more reflective of the times -making them as modern as the markets is the phrase we've used. Then, a year later at
the Halifax Summit, the President proposed a series of specific measures. And now, as
we go to the Lyon Summit at the end of this month, the G-7 leaders will be able to
report that almost all those measures have been put into place. I might add that the
President's vision at Naples was somewhat prescient because about six months later the
crisis arose in Mexico, and that crisis in turn served to focus global attention on the very
real need for the kinds of measures that are now being put into place.
These are programs that I believe will be of immense importance in preventing
international financial crises and, if they occur, providing an effective multilateral
response. They haven't received very much public attention, but I believe over time they
will be vastly more important to our economy, as opposed to what does make the
headlines on a day-in, day-out basis.
This includes a new disclosure regime implemented by the IMF that has the
potential for effects similar to the disclosure system that is at the heart of our regulatory
structure in this country. It also includes a mechanism for providing greatly increased
official multilateral resources if a crisis does occur. There are reforms to improve
cooperation amongst regulators to follow the activities of international financial firms.
In addition, there is an approach that promotes burden sharing with the private sector in
the case of financial crises. And, there are reforms affecting the World Bank and the
regional development banks.
5
Let me close with this thought. Fifty years ago this country rose to the challenge
of the post-war era and created the institutions that have seen us through to this point.
At that time, people of vision, successful and respected in their communities, recognized
that was the right course and worked to create public and political support.
Today, that understanding is not fully shared by the American public or the
Congress. Just as people in government and business rose to the challenge then to carry
the message of involvement to the American public, something the President does now
at each opportunity, it must be done on a broad scale now by all of us in government
and, I believe, by all of you and those like you throughout the country who understand
our stakes in international engagement.
We have much to gain from that engagement, and much more to lose by staying
on the sidelines.
Thank you.
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
June 3, 1996
Contact:
Jon Murchinson
(202) 622-2960
UPDA TED SCHEDULE FOR MEETINGS ON INFLATION-PROTECTION SECURITIES
The following is an updated schedule for the Treasury Department's information
meetings and press roundtables on plans to issue inflation-protection securities. Press wishing
to attend must call the appropriate contact listed for each city. All times are local and subject
to change.
DATE AND TIME
EVENT AND LOCATION
PRESS CONTACT
June 4
10 a.m.
Investor Meeting
Federal Reserve Bank
600 Atlantic Avenue
Boston, Massachusetts
Thomas L. Lavelle
(617) 973-3647
June 5
10 a.m.
Investor Meeting
Federal Reserve Bank
230 South LaSalle Street
Chicago, Illinois
Suzanne Heffner
(312) 322-5108
June 5
2:30 p.m.
Press Roundtable
U.S. Embassy
24 Grosvenor Square
London, WIA
Dennis Wolf
(011) 44-171-499-5261
June 6
2 p.m.
(new time)
Investor Meeting
U.S. Embassy
24 Grosvenor Square
London, WIA
Dennis Wolf
(011) 44-171-499-5261
-MORERR-II14
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DATE AND TIME
EVENT AND LOCATION
PRESS CONTACT
June 6
9 a.m.
(new time)
Investor Meeting
Federal Reserve Bank
10 1 Market Street
San Francisco, California
Sandra Conlan
(415) 974-3231
June 10
12: 15 p.m.
Press Roundtable
U . S. Embassy
10-5 Akasaka 1-chome
Minato-ku, Tokyo 107
Emi Yamauchi
(011) 813-3224-5271
Investors wishing to attend should call the Bureau of Public Debt, (202) 219-3350, or
the U.S. Treasury Attache in London, (011) 44-171-408-8069, or Tokyo, (011) 813-32245486. To receive the Advance Notice of Proposed Rulemaking from Treasury's automated
fax system call (202) 622-2040 and request document 1080.
-30-
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
June 3, 1996
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $14,555 million of 13-week bills to be issued
June 6, 1996 and to mature September 5, 1996 were
accepted today (CUSIP: 9127943F9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.07%
5.09%
5.09%
Investment
Rate
5.21%
5.23%
5.23%
Price
98.718
98.713
98.713
Tenders at the high discount rate were allotted 44%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$55,203,906
Accepted
$14,554,786
$50,289,071
1,466,880
$51,755,951
$9,639,951
1,466,880
$11,106,831
3,402,955
3,402,955
45,000
$55,203,906
45,000
$14,554,786
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.08
RR-1115
98.716
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 3, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $14,694 million of 26-week bills to be issued
June 6, 1996 and to mature December 5, 1996 were
accepted today (CUSIP: 9127943R3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.20s;,
5.21s;,
5.21s;,
Investment
Rate
5.41s;,
5.43s;,
5.43s;,
Price
97.371
97.366
97.366
$1,200,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 16s;,.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.17 - - 97.386
RR-11l6
Received
$59,820,740
Acce:gted
$14,694,257
$52,519,551
1,271,889
$53,791,440
$7,393,068
1,271,889
$8,664,957
3,400,000
3,400,000
2,629,300
$59,820,740
2,629 1 300
$14,694,257
D E P .\ R T \1 E
~
T
0 F
THE
T REA S II R Y
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W•• WASIDNGTON, D.C•• 20220. (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
CONTACT:
June 4, 1996
TREASu~Y/S
Office of Financing
202/219-3350
WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury billa
totaling approximately $31,000 million, to be issued June l3,
1996. This offering will result in a paydown for the Treasury of
about $2,875 million, as the maturing bills total $33,872 million
(including the lO-day cash management bill issued on June 3, 1996,
in the amount of $7,Ol1 million).
Federal Reserve Banks hold $6,745 million of the maturing
bills tor their own accounts, which may be refunded within the
offering a~o~t at the wei3hted average discour.t rate of accepted
competitive tende=s.
Federal Reserve Banks hold $3,873 million as agents for
foreign and internationa~ monetary authorities, which may be
refunded within the offering amount at the weig~ted average
discount rate of accepted competitive tenders. Additional amounts
may be issued for such arcounts if the aggregate amc~nt of new
bids exceecs the aggregate amount of maturing bills.
Tenders for tr-e bills will be received at Federal
Reserve Banks and Branches a~d at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and cond~tions set forch in the Uniform
Offering Circular (31 CPR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
0=
Detai~s about each
the ~ew securities are g~ven in the
attached offerir.g highlights.
000
At.tachment
RR-llli
HIGHLIGHTS OF TREASURY OFFERINGS OF WEBKLY BILLS
TO BE ISSUED JUNE 13, 1996
June 4, 1996
Offering Am0une, .
. .
. .
Description of Of{ering:
Term and type of security
COS IP number
Auct.ion date
Issue date
Maturity date
Original issue date
CUrrently outstanding .
Minimum bid amount
Multiples . . . . . .
$15~500
million
91-day bill
912794 3G 7
June 10, 1996
June 13, 1996
$15,500 million
182-day bill
91.2794 2B 9
March 14, 1996
$12,747 million
$10,000
June 10, 1996
June 13, 1996
December 12, 1996
December 14, 1995
$18,792 million
$10,000
$ 1,000
$ 1,000
September 12, 1996
The fol19wing rules apply to all securities mentioned above:
Submission of Bigs:
Noncompetitive bids
Competitive bids
Maximum Re~Qgnized Big
§t a Single yield
Maximum Awaxd . . . .
Re~eipt of Tender~:
Noncompetitive tenders
Competitive tenders
Payment TermS . . .
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
35~
of public offering
35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment w~th tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
Contact: Calvin Mitchell
(202) 622-2920
FOR IMMEDIATE RELEASE
June 5, 1996
MEDIA ADVISORY
TIME CHANGE
Treasury Secretary Robert E. Rubin, Labor Secretary Robert B. Reich, Health and
Human Services Secretary Donna E. Shalala and Commissioner of Social Security
Shirley S. Chater will discuss the results of the Medicare and Social Security Trustees annual
meeting and annual reports at a press briefing at 2 p.m. (originally scheduled for 2:45 p.m.)
today, Wednesday, June 5, in room 4121 of the Main Treasury building, 1500 Pennsylvania
Avenue, N.W. Cameras should be in place by 1:30 p.m.
Media without Treasury, White House, State, Defense or Congressional press
credentials planning to attend should contact the Office of Public Affairs at (202) 622-2960,
with the following information: name, social security number and date of birth, by noon
today, June 5. This information can be faxed to (202) 622-1999.
-30RR-1l18
Fur press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
'IREASURY
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C.• 20220. (202) 622-2960
ADV 2 P.M. EDT
Remarks as prepared for delivery
June 5, 1996
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
MEDICARE/SOCIAL SECURITY TRUST FUND TRUSTEES REPORT
Today, as trustees, we are reporting again that which we have said for many years:
the Medicare Hospital Insurance Trust Fund must be strengthened. We said it in 1993,
in 1994, in 1995, and we're saying it again this year.
As trustees who also serve as members of the administration, we have worked
with the President write an effective proposal to strengthen Medicare and balance the
budget without damaging the program that delivers quality health care to elderly
Americans. A year ago the President offered a plan to strengthen Medicare, and we
want to work with Congress to get this job done without further delay.
Let me now deal with some of the specifics of the trustees report. With regard to
the OASDI trust fund, the estimated depletion date has moved from 2030 to 2029. The
trustees have again noted that the long-term deficit in these trust funds must be
addressed in a timely fashion. Social Security is the most successful retirement program
ever devised by the federal government. Along with Medicare, it is principally
responsible for cutting the incidence of poverty among the nation's elderly in half. The
trends we report today can and should be dealt with on a bipartisan basis over time.
Now, let me turn now to Medicare. The trustees have been saying for several
years that we need to act to extend the Hospital Insurance Trust Fund. This information
is public and has been confirmed by a variety of reputable sources induding the
Congressional Budget Office. The trustees report again shows rapidly rising costs for the
supplementary Medical Insurance Trust Fund, which also must be addressed.
The Medicare problem must he dealt with. Both the President and Congress have
made proposals to address the HI trust fund issue, and there is dearly a need for a
responsible near-term solution to the issue. Today, as trustees, we are recommending
the enactment at the earliest possible date of legislation that will extend the life of the
trust fund while a longer-term solution is sought.
RR-1119
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2
We are also recommending the establishment of a national advisory group to
examine the Medicare program and contribute to developing a long-term solution to
Medicare's financing needs.
Having said that, I want to close with just a word not as a trustee but as Treasury
Secretary. The administration acted in 1993 to preserve the financial integrity of the HI
fund for three additional years, and last year the President proposed measures that if
adopted would extend the fund to the middle of the next decade. Congress can and
should address this problem. There is, I believe, enough common ground to prudently,
responsibly and cooperatively strengthen and extend Medicare on a timely basis, leaving
for another forum discussion of long term changes in Medicare.
-30-
o
EPA R T 1\1 E N T
0 F
THE
T REA S lJ R Y
NEWS
ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622·2960
STATEMENT OF VALERIE LAU
INSPECTOR GENERAL, U.S. DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
JUNE 6,1996
RR-1120
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*
STATEMENT OP VALERIB LAU
INSPBCTOR G.NKRAL, U.S. DEPARTMENT OF THB TRBASURY
BEFORB THB SEHATB COMMITTEB ON GOVERNMENTAL AFPAIRS
JUNB " 199'
-----------~----~-------------------~-----------------------~---HR. CKAIRkAH AND MEMBERS OP THB COMMITTEB:
I AM PLEASED TO KAVB THIS OPPORTUNITY TO ASSIST IN YOUR REVIEW OF
INTERNAL RBVBNUB SBRVICE (IRS) FINANCIAL MANAGEMENT ISSUES.
AS THB INSPBCTOR GENERAL FOR THE DEPARTMENT OF THE TREASURY, I
HAVE GBNERALLY APPROACHBD IRS ISSUES THROUGH THB LENS OF THB
OVERSIGHT FUNCTION.
THB INSPECTOR GENERAL ACT OF 1978, AS
AMENDED, BSTABLISHBD A STATUTORY INSPBCTOR GENERAL FOR THB
DEPARTMENT OF THB TREASURY IN APRIL 1989.
WITH RESPECT TO IRS,
THE ACT PROVIDED MY OFFICE WITH OVERSIGHT AUTHORITY FOR THB IRS
CHIEF INSPECTOR'S OFFICB, WHICH PERFORMS THB PRIMARY ROLB OF
AUDITING INTERNAL IRS MATTERS.
ADDITIONALLY, MY OFFICE BAS THE
AUTHORITY TO DIRBCTLY AUDIT IRS ISSUES THAT WARRANT OUR
ATTENTION.
SO FAR, I BELIEVB,THB WORK UNDERTAKEN OR IN PROCESS BY THE CHIEF
INSPECTOR AND THB GENERAL ACCOUNTING OFFICE (GAO) HAVE PROVIDED
EXTENSIVB COVERAGB OP IRS' FINANCIAL MANAGEMBNT ACTIVITIES.
I
RAVE BEEN CAREPUL THEREFORE TO AVOID DUPLICATING AUDIT EFFORT.
ACCORDINGLY, I HAVB DIRECTED MY OFFICE'S EFFORTS TO THOSE AREAS
IN NEED OF INSPBCTOR GENERAL OVERSIGHT.
TODAY I WILL DISCUSS POUR EFFORTS.
FIRST, MY OFFICE BAS VERIFIED
THE RELIABILITY OP THB SELF EVALUATION PROCESS UNDER THB FEDERAL
MANAGERS' FINANCIAL INTEGRITY ACT (FMFIA) OF 1982.
SECOND, WE
RAVE ASSESSBD THB EFFECTIVENESS OF THE DEPARTMENT'S OVERSIGHT OF
THE TAX SYSTEM MODERNIZATION EFFORT (TSM).
THIRD, WE HAVE
REVIEWED THE CORRBCTlVE ACTIONS TAKEN BY IRS TO PREVENT AND
DETECT IRS EMPLOYBE BROWSING OF TAXPAYER FILES.
FOURTH, I HAVE
FOSTERED PARTNERSHIP ARRANGEMENTS WITH THE CHIEF INSPECTOR IN
1
COHDUCTIBG
JOI~
AUDITS, AND WITH GAO IN AUDITING IRS' PUTURB
PIHANCIAL STATBKBNTS.
PIRST, PKPIA. AS YOU ARB AWARB, THB ASSURANCBS PROVIDBD TO THB
PRBSIDBNT ABO THB CONGRBSS THROUGH THB PXPIA PROCBSS ARB BASBD ON
MANAGBHBHT'S SELP EVALUATION. THUS, I HAVE TAXBlI STBPS TO HBLP
ASSURB THB SBCRB'l'ARY OP THB TREASURY, AND ULTIMATBLY THB
PRBSIDBHT ABO TBB CONGRBSS, THAT THBSB SBLP EVALUATIONS ARB
ACCOMPLISBIBG THB OBJBCTIVBS OP THB ACT, AND THAT THB RBSULTS ARB
CLASSIPIBD PROPBRLl ABO THB CONCLUSIONS ARB RBPORTBD ACCURATBLY.
THB FHFIA RBQUIRBS PBDERAL AGENCIES '1'0 CBRTIFY COMPLIANCB WITH
THB APPLICABLB PROVISIONS OF SECTION 2, CONCERNING THE ADEQUACY
OF SYSTBHS OF IHTERNAL MANAGEMENT CONTROLS, AND SECTION 4,
ADDRESSING COMPLIANCB WITH GOVERNMENTWIDB REQUIREMENTS FOR
FINANCIAL MANAGBHENT SYSTEMS. CONTINUING MATERIAL WEAKNESSES IN
IRS' SYSTBHS OF INTERNAL MANAGEMENT CONTROLS AND NONCONFORMANCE
IN ITS FINANCIAL ACCOUNTING SYSTEMS HAVE RESULTED IN THE
COKKISSIONBR'S QUALIFIED REASONABLB ASSURANCB THAT IRS COMPLIES
WITH THB RBQUIRBKBNTS OP THB FMFIA.
SEEING TO IT THAT THESB WEAKNESSES HAVE BEEN CLASSIFIED PROPERLY
IN THB ANNUAL RBPORTS TO THE PRESIDENT AND THE CONGRESS BAS
RBQUIRBD SOHE ASSERTIVENESS BY THE IRS CHIEP INSPECTOR'S OFFICE,
WHICH I HAVE SUPPORTBD. LET ME EXPLAIN. MANAGEMENT'S
CONCLUSIONS COBCERNING PKFIA COMPLIANCB ARB BASED ON SELF
EVALUATIONS WHICH, BY THEIR NATURE, ARE NOT EXACT AND EXPOSE THE
PROCESS TO SUBJBCTIVITY. IN ITS FISCAL YEAR 1995 ASSURANCE
LETTER TO THB SBCRETARY, IRS PROVIDED QUALIFIED REASONABLB
ASSURANCB POR SBCTION 2 BY REPORTING CONTINUING WORK ON
PREVIOUSLY IDBBTIPIBD MATERIAL WEAKNESSES AND TWO NEW MATERIAL
WEAKNESSES CONCBRHING ASPECTS OF THE LOW INCOME HOUSING CREDIT
AND THB TAX IXBKPT BOND PROGRAMS.
2
HOWEVER, IRS CHARACTERIZED THB PROBLEMS IT IS FACING WITH TSM AS
AN AREA OP CONCBRB, WBILB THB CHIEF INSPECTOR'S OFFICB
RECOKNBHDBD TSM BB CLASSIFIED AS A MATERIAL WEAKNESS. THE DEGREB
OF DIFFBRDCB BBTWBD AN AREA OF CONCERN AND A MATERIAL WEAltlfBSS
COULD BB TaB DBCIDING FACTOR IN WHETHER-OR NOT REASONABLE
ASSURANCB UNOBR FMPIA CAN BB PROVIDED TO THB PRESIDENT AND THB
CONGRBSS, AS .BLL AS ITS DEGREE OF MATERIALITY DRAWING MORE
SCRUTINY III ftB BUDGBT PROCESS.
THE CHIBP IIISPBCTOR CONSIDERED TSM A MATERIAL WEAKNESS BECAUSE
IRS BAS IIOT BFFBCTIVBLY DEMONSTRATED CONTROLS OVER THREB AREAS:
MODElUfIZA~IOIi PROGRAM MANAGEMENT, INFORMATION SYSTEMS
INFRASTRUCTURB, AND FINANCIAL MANAGEMENT. 1fJIILE IRS MANAGEMENT
BAS TAKEN A NUMBER OF CORRECTIVE ACTIONS TO RESOLVE THESE
PROBLEMS, THB FIXES HAVE NOT YET TAXEN HOLD.
ONE YEAR EARLIER, A SIMILAR DISAGREEMENT OVER CLASSIFYING TSM AS
A MATERIAL WBAKHBSS OCCURRED WITH THE FISCAL YEAR 199. ASSURANCE
LETTER. III THAT INSTANCE, THB DEPARTMENT DID NOT REPORT TSM AS A
MATERIAL WEAKNBSS, BUT DID INCLUDE A STATEMENT IN THE ASSURANCE
LETTER NOTING MY OFFICB'S POSITION THAT TSM WAS A MATERIAL RISX
REQUIRING CLOSB NONITORING BY SENIOR DEPARTMENTAL AND IRS
MANAGEMENT. THIS ISSUE WAS ALSO HIGHLIGHTED IN MY APRIL 1995
SEMIANNUAL REPORT TO CONGRESS. WITH THE 1995 FMFIA CYCLE,
HOWEVER, I AX PLBABED TO REPORT THAT OUR POSITION ON THB TSM
CLASSIFICATION WAS ACCEPTED BY THE SECRETARY. TSM IS IDENTIFIED
AS A MATERIAL WBAKIIESS IN THE DEPARTMENT'S FISCAL YEAR 1995 FMFIA
ASSURANCB LBTTER.
SECOND, WE RAVE ADDRESSED TSM BY REVIEWING THE EFFECTIVENESS OF
~HB DEPARTMENT'S OVERSIGHT OF TSM.
WE ACCOMPLISHED OUR OBJECTIVE
BY ASSESSING THB DEPARTMENT'S POLICY, PROCEDURES AND
DOCUKEHTATION PERTAINING TO THE OVERSIGHT OF TSM AND APPROVAL OF
BUDGET REQUBSTS. .B ALSO ASSESSED THB DEPARTMENT'S ROLB IN
HONITORIMG CORRBCTIVE ACTIONS ON TSM PROBLEMS REPORTED BY GAO AND
3
THB CHIBP IHSPBCTOR'S OFFICE.
THIS REVIEW WAS CONDUCTED DURING
THB PBRIOD SBPTBKBBR 1994 THROUGH APRIL 1995 AND COVERED GAO AND
IRS REPORTS ISSUBD FROM 1989 THROUGH 1994.
IN SUHMARY, OUR OCTOBBR 1955 REPORT ON THIS REVIEW CALLED FOR
IMPROVEMENTS IN THB DEPARTMENT'S OVERSIGHT OF TSM.
FIRST, WB
RECOMKEHDBD THAT TSM OVERSIGHT RESPONSIBILITIES BE PROPERLY
ALLOCATED HONO VARIOUS DEPARTMENTAL OFFICES.
UP TO THB TID OF
OUR REVI", TSM WAS BEING VIEWED PRIMARILY AS AN INFORMATION
SYSTBMS IHITIATIVB.
ACCORDINGLY, THE OFFICB OF INFORMATION
RESOURCES KAHAGBMBHT WAS CONDUCTING MOST OF THE WORK.
IN RESPONSB TO THIS RECOMMENDATION, THE ASSISTANT SECRETARY FOR
MANAGEMENT AND CHIEF FINANCIAL OFFICER DESIGNATED AN EXECUTIVE
DIRECTORATB TO COORDINATE THE ACTIVITIES OF THE VARIOUS
DEPARTMENTAL OFFICES RESPONSIBLE FOR OVERSEEING TSM.
SECOND, INDEPENDENT MANAGEMENT REVIEWS NEED TO BE PERFORMED.
WE
RECOMMBNDED THAT THB REVIEWS BE PRIORITIZED BY THOSE SYSTEMS
SCHEDULED FOR BUDGET APPROVAL, AS WELL AS ITS OVERALL PURPOSE AND
COST.
THBSB REVIEWS SHOULD ALSO BE COORDINATED WITH THE CHIEF
INSPECTOR AND GAO.
THE ASSISTANT SECRETARY BAS COMMITTED TO
DEVBLOPING AN INFORMATION RESOURCES MANAGEMENT REVIEW SCHEDULE
WITHIN 60 DAYS OF RBCEIVING BUREAU OPERATIONAL INFORMATION
RESOURCES MANAGEMENT PLANS, AND THE OFFICE OF INFORMATION
RESOURCBS KAHAGBMBHT WILL ADVISE THE CHIEF INSPECTOR OF REVIEWS
RBLATED TO TSM.
THIRD, WE CONCLUDBD THAT TSM PROBLEMS REPORTED BY SOURCES SUCH AS
GAO, THB IRS CHIEF INSPECTOR AND OTHERS NEED TO BE USED MORE
EFFECTIVELY TO ENSURE THAT RECURRING WEAKNESSES RAVE BEEN
CORRECTED PRIOR TO APPROVING ADDITIONAL TSM INITIATIVES.
IN THIS
REGARD, THB DBPARTMBNT HAS COMMITTED TO ESTABLISHING AND
MAINTAINING A LIBRARY AND A COMPUTERIZED LISTING OF ALL TSMRELATED RBPORTS, REVIEWS AND ANALYSES.
4
THIS INFORMATION WILL BE
AVAILABLB TO DBSK OFFICERS AND OTHER DEPARTMENTAL OFFICES PRIOR
TO THB ANNUAL BUDGBT REVIEW, AND IT WILL BB USED IN THB
DEPARTKBHT'S REVIEW PROCESS.
GAO CRITIQUBD IRS' BFFORTS TO MODERNIZE
T~\x
PROCESSING IN ITS
JULY 1995 RBPORT TITLBD, "MANAGEMENT AND TECHNICAL WEAKNESSES
MUST BB CORRBCTBD II' MODERNIZATION IS TO SUCCBED".
THB REPORT
DESCRIBBD SERIOUS RBHAINING MANAGEMENT AND TECHNICAL WEAKNESSES,
AND MADB OVER A DOZO RECOMMENDATIONS FOR IMPROVEMENT.
THE MODERNIZATION
INI~IATIVE
WAS ALSO INCLUDED IN GAO'S FEBRUARY
1995 OVERVIEW OF GOVBRHMENT HIGH RISK AREAS.
GAO REPORTED THAT
THE OVERALL DBSIGN OF TSM IS STILL INCOMPLETB AND IRS IS
CONTINUING TO AUTOMATB EXISTING PROBLEM PLAGUED FUNCTIONS WITH
LIMITED UNDERSTANDING OF WHETHER OR HOW DIFFERENT SYSTEMS WILL
EVENTUALLY CONNECT TO IMPROVE TAX ADMINISTRATION.
MOVING FROM TSM BACK TO THE ISSUE OF FINANCIAL MANAGEMENT, THE
IRS COMMISSIONER CAN _OT PROVIDE REASONABLE ASSURANCE THAT THE
OBJECTIVES OF SBCTION 4 HAVE BEEN ACHIEVED DUB TO CONTINUED
WEAKNESSES IN IRS' REVENUE ACCOUNTING SYSTEMS.
THESE SYSTEMS DO
NOT MEET TODAY'S ACCOUIITING STANDARDS FOR FINANCIAL MANAGEMENT
SYSTEMS, NOR DO THEY PROVIDE AN ADEQUATE TRANSACTION TRAIL.
THESE WEAKNESSES, WHICH INCLUDE THE AUDITORS' INABILITY TO
RECONCILB REVENUB AND VALIDATE ACCOUNTS RECEIVABLE ESTIMATES, LED
TO GAO DISCLAIMING AM OPINION ON IRS' FISCAL YEAR 19'4 FINANCIAL
STATEKDI'1'S.
IN THIS REGARD, SEVERAL OF THE MAJOR PROGRAM AREAS
IN THE TSM BUDGBT ADDRESS REVENUE ACCOUNTING ISSUES.
SUCCESSFUL
COMPLETION OF THESB TASKS ASSOCIATED WITH THESE PROGRAM AREAS
SHOULD HELP ADDRBSS TBE FINANCIAL STATEMENT DISCLAIMER.
GAO IS NOW WRAPPING UP ITS REVIEW OF THE FISCAL YEAR 1'95
FINANCIAL STATBMBN'l'S.
THIS SUMHER MY OFFICE WILL FORM A
PARTNERSHIP WITH GAO AHD THE CHIEF INSPECTOR'S OFFICE TO REVIEW
5
THE FISCAL YEAR 1996 FINANCIAL STATEMENTS.
I HAVE EVERY
CONFIDENC. THAT THIS COMBINED EFFORT WILL CONTRIBUTE TO CONTINUED
PROGRESS IN RBSOLVING IRS' FINANCIAL MANAGEMENT PROBLBKS.
THIRD, W. CONDUCTID A POLLOW UP REVIEW OF IRS ACTIONS TO CORRBCT
PROBLEMS WITH BKPLOYEI BROWSING OF TAXPAYER INFORMATIOM.
IN
199., WB REPORTBD TO THB CHAIRMAN OF THIS COMMITTEB THAT THB
CHIEF INSPECTOR'S BFFORTS FOR CORRECTING THIS PROBLEM BAD BEEN
EXTENSIVE.
LATER, WE FOLLOWED UP ON THE ACTIONS TAKEN TO
IMPLEMENT OUR RBCOMMENDATIONS.
A MARCH 1996 REPORT TO THE IRS
COMMISSIONER SUMMARIZES THE SERVICE'S PROGRESS IN IMPLEMENTING
THE INTEGRATED DATA RETRIEVAL SYSTEM (IDRS) ACTION PLAN.
IN SUMMARY, W. FOUND THE CHIEF INSPECTOR'S OFFICE HAD
SUCCESSFULLY COMPLETED THE TEN IDRS ACTION ITEMS ASSIGNED TO IT
FOR HELPING CONTROL MISUSE OF THE SYSTEM.
WE ALSO FOUND THAT THE
IRS HAD SUCCESSFULLY INITIATED SEVERAL PROACTIVE FUNCTIONS TO
HELP PREVENT IDRS ABUSES.
BUT, THE NEW SYSTEMS DEVELOPED TO
BETTER CONTROL IDRS MISUSE WERE NOT ALWAYS EXECUTED IN ACCORDANCE
WITH REQUIRED PROCEDURES.
FOR EXAMPLE, TWO SYSTEMS DEVELOPED TO
BETTER CONTROL IDRS MISUSE HAD NOT FULLY MET REQUIRED PROCEDURES
FOR SYSTEMS SECURITY CERTIFICATION AND ACCREDITATION BEFORE THE
SYSTEKS WERB PUT INTO USE.
WITHOUT SUCH CERTIF I'CAT ION , IRS HAD
MORE LIMITED ASSURANCE THAT THESE SYSTEMS WERE NOT VULNERABLE TO
SECUIRTY RISKS AND POSSIBLE INCREASED MISUSE •
. ALSO, WE FOUND THAT HIGHER LEVEL POSITION SENSITIVITY AND
BACKGROUND INVESTIGATIONS SHOULD HAVE BEEN REQUIRED FOR PERSONS
WORKING ON SENSITIVE IDRS-RELATED SYSTEMS.
MOREOVER, THE
CORRECTIVB ACTIONS NECESSARY FOR IMPLEMENTING AUDIT
RECOMMENDATIONS WERB SOMETIMES REPORTED CLOSED BEFORE ALL
CORRECTIVB ACTIONS WERB COMPLETED.
IRS MANAGEMENT AGREED WITH OUR RECOMMENDATIONS AND DESCRIBED THE
CORRECTIVB ACTIONS THEY ARE TAKING, OR HAVE PLANNED, TO RESOLVE
6
THB IDBNTIFIBD PROBLEMS. WE CONCUR WITH IRS' ACTIONS AND BBLIBVB
THAT WBBH THBY ~B FULLY IMPLEMENTED, THB PROPOSED ACTIONS WILL
HELP CORRECT THB RBPORTBD DEFICIENCIES.
fOURTH, WB HAVB BBEN WORKING CLOSELY WITH THB CHIEF INSPECTOR'S
OFFICB BY FORKING PARTNERSHIP ARRANGEMENTS ON AUDITS OP PROGRAMS,
ACTIVITIBS AND FUNCTIONS THAT INVOLVB IRS AND OTHER TREASURY
BUREAUS. POR BXAMPLB, n RECENTLY COMPLETED AN ANALYSIS OF THB
INTERNAL CONTROLS OVO THB PROCESSING AND ISSUANCB OF INCOMB TAX
REFUNDS. THB SCOPB OF WORK ON THIS ASSIGNMENT INCLUDED IRS AND
THE FINANCIAL KANAGBMENT SERVICB'S OPERATIONS FOR ISSUING RB;UNDS
TOTALING MORB THAN $96 BILLION FOR FISCAL YEAR 1994.
WE ARB CURRENTLY PERFORMING A JOINT PROJECT WITH THE CHIEF
INSPECTOR'S OFFICE IN ASSESSING THE IRS ROLE AS EXECUTIVE AGENT
FOR THB DEPARTMENT'S DIGITAL TELECOMMUNICATIONS SYSTEM. AS PART
OF THIS ASSIG~ENT, WB ARE FOCUSING ON FINANCIAL MANAGEMENT
ISSUES SUCH AS INVENTORY VALUATION AND REVENUE AND EXPENSE
RECOGNITION THAT WILL DIRECTLY AFFECT THE IRS FINANCIAL
STATEMENTS. THBSB ASSIGNMENTS REPRESENT THE MOST EFFICIENT USB
OF OUR PERSONNEL RBSOURCES AND THE EXTENSIVE BODY OF KNOWLEDGE
OUR TWO OFFICBS HAVB ACCUMULATED ON THE MAJOR ISSUES CONFRONTING
IRS.
MR. CHAIRMAN, THIS CONCLUDES MY PREPARED STATEMENT.
7
DEPARTIVIENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C •• 20220 - (202) 622-2960
ADV 9:30 a.m. EDT
Remarks as prepared for delivery.
June 6, 1996
RECORD TESTIMONY OF TREASURY SECRETARY ROBERT E. RUBIN
COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Committee:
I am pleased to once again appear before the Ways and Means Committee in my role as
Managing Trustee and Chairman of the Medicare Boards of Trustees. The Boards report
annually to the Congress on the financial status of two separate Medicare trust funds -- the
Hospital Insurance (or ill) Trust Fund and the Supplementary Medical Insurance (or SMI) Trust
Fund.
One of the most important things our country has done over the past 30 years has been to
work to reduce poverty and deprivation among senior citizens and disabled persons, and thereby
also reduce the burden on and the anxiety of their children. Medicare has effectively provided a
reliable source of medical care coverage for aged and disabled Americans. There are few issues
of greater concern to working families than the cost of retirement and the problem of providing
health care to the elderly.
As we have said for many years, the exhaustion date for Medicare is close. We should
act. We must act. The best solution before the Congress to fix Medicare has been offered by
President Clinton in his balanced budget proposal. We should pass that plan now, and then work
together on a bipartisan basis to develop a long-term solution that the program needs and the
country deserves.
The trustees include the members of the cabinet directly concerned with Social Security
and Medicare, plus two members representing the broader public interest. As the trustees have
reported for a number of years, this year's reports confirm that the costs of the SMI program
continue to rise rapidly and that the HI Trust Fund will be exhausted about a year after the tum
of the century. We note that as of December 1995 the HI trust fund had a balance of $130
billion, but that it is projected to be depleted in the year 2001. All of the trustees met yesterday
and agree with the report.
RR - 1121
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
2
This is, obviously, not news to this committee. We provided a similar report a year ago,
when the exhaustion date was projected to be 2002, and the year before, when we projected it to
be 2001. Secretary Shalala and I also testified before your committee on this subject three
months ago. Finally, the Congressional Budget Office produced its own independent projection
last month, with an exhaustion date of 2001.
As we have in the past, we strongly urge prompt enactment of legislation to address the
HI Trust Fund shortfall. Although the President and the Congress have made proposals that
address this issue, there are structural and policy differences between them. However, there
should be sufficient common ground to agree on legislation to extend the life of the trust fund.
We also note that this is only a first step in the longer-term process of review and reform.
There are important changes underway in our health care system. These changes will affect both
the quality and cost of medical care, and they will affect our decisions concerning Medicare.
There are also significant demographic shifts ahead as the baby boom generation begins to retire
in 2010 and the rates of retirees to working Americans begins to rise more steeply. We as
trustees have recommended the creation of an advisory group to review these complex issues and
help fashion solutions.
From the very beginning, this Administration has clearly recognized the importance of
maintaining the solvency of the HI trust fund. The President's 1993 deficit reduction plan
extended the trust fund exhaustion date by three years.
Last year, the Administration proposed additional measures to extend the HI trust fund.
The President has advocated since June of 1995 reducing Medicare spending growth per
beneficiary with savings scored by the Congressional Budget Office at $116 billion through
2002 and guaranteeing the solvency of the trust fund for more than a decade. The reforms give
seniors more choices among private health plans, attack fraud and abuse, cuts the growth of
provider payments but holds the Part B premium to 25 percent of program costs.
Medicare financing is a complex interaction of demographics and the rapidly rising costs
that affect all parts of our health care system. We need to carefully reform Medicare. The
Administration believes that the growth of federal health care expenditures, including Medicare,
needs to be reduced in order to control the budget. But reducing this growth must be done by
carefully weighing trade-offs and reforming these programs in the context of its impact on the
health care delivery system. You can reach a balanced budget by preserving what is right about
Medicare and still produce savings, or you can cut Medicare the wrong way at the cost of
irreversibly damaging this important program.
Arbitrary attempts to resolve the financing crisis may restore solvency to the HI Trust
Fund, but will create and intensify other problems. Specifically, we are concerned that excessive
reductions in Medicare, largely through reduced payments to hospitals, and particularly in
combination with deep Medicaid cuts may shift costs to the private sector and reduce quality of
care for Medicare beneficiaries.
3
The Trustees have again provided the Congress, as they have for the last several years,
with early and continued warning. It is time to act. Although the exhaustion date is now
believed to be five, instead of six, years away, there still is more than enough time to extend it. It
is better to do part of the job now, and do it right to avoid a hasty, unworkable solution that may
have to be undone in the future.
Financial Status of the Medicare Trust Funds
As noted, the 1996 Trustees report projects the HI Trust Fund will be exhausted in 2001,
one year sooner than projected last year. This worsening largely reflects
program cost increases.
Over the long term, the 75-year actuarial deficit (interpreted as the amount of payroll tax
increase or benefit reduction needed now to balance the trust fund over the next 75 years) was
increased from last year's estimate of3.52 percent to 4.52 percent of payroll.
The increase is largely the result of larger projected increases in the complexity of cases,
a more rapid projected growth rate in home health care and skilled nursing facility costs, and the
permanent effects of the higher than expected level of spending since the last report. The III
program remains substantially out of long-run actuarial balance, and that problem is not
addressed by either of the current Congressional budget resolutions or the Administration's
proposal.
The Trustees also continue to project rapid growth in Supplemental Medical Insurance
program costs well into the future. Over the next five years, outlays are expected to increase 63
percent in the aggregate and 55 percent per enrollee. During the same period, the program is
expected to grow about 28 percent faster than the overall economy.
Combined HI and SMI costs are expected to increase from 2.7 percent of GDP in 1996 to
8.8 percent in 2070 -- more than tripling -- due to anticipated demographic changes and
projected increases in costs per beneficiary. Because of this rise in long-term program costs and
the expected exhaustion of the HI fund in 2001, the Board of Trustees recommends effective
Medicare reform, but again, we believe that this must be done with a careful weighing and
balancing of all impacts and all considerations and in the context of the rapidly changing health
care sector.
Medicare Financing and Health Care Reform
When the Hospital Insurance program faced financing problems in the past, Congress
and the Executive Branch have been able to cooperate on making modest changes in the program
that slowed the rate of cost increases.
4
The program has experienced financial difficulty since its inception in 1966 because of
rapidly rising hospital costs, higher-than-expected utilization, and program expansion. During
the 1990s, program expenditure increases were below those of the previous decade, reflecting a
comparatively moderate rise in overall health care inflation and utilization.
Much can be done to strengthen the Medicare program. Taking steps to extend health
insurance coverage to the uninsured population, and developing, through insurance reform, a
competitive health care market will create a more efficient system. This increased efficiency
will slow the growth in overall health care spending and provide long-tenn savings to the
Medicare program.
In closing, the Administration has proposed steps to strengthen the III Trust Fund
problem and address the rising costs in the rest of the Medicare program in a thoughtful manner,
and produce effective, acceptable solutions that will stand the test of time. Although we donlt
have bipartisan agreement on some of the structural changes that many members of the Majority
are advocating, last year there was agreement on a significant number of Medicare proposals that
would strengthen the Part A trust fund.
The President's balanced budget plan contains savings proposals that our actuaries
estimate would extend the solvency of the Hospital Insurance Trust Fund through 2006, long
enough to give us time to work together on longer term solutions. As we have done in the past,
the Clinton Administration remains ready to work with the Congress to achieve the security that
is so important to elderly Americans.
I will be happy to answer any questions you may have.
PUBLIC DEBT NEWS
Department of the Treasury •
Burtau of the Public Debt • Washington, DC 20239
FOR RELEASE AT 3:00 PM
June 6, 1996
Contact: Peter Hollenbach
(202) 219-3302
PL""BLIC DEBT A.'i~OCI\CES ACTMTY FOR
SECURITIES I~ THE STRIPS PROGRAM FOR MAY 1996
Treasury's Bureau of the Public Debt armounced activity figures for the month of May 1996,
of securities v.ithin the Separate Trading of Registered Interest and Principal of Securities
program (STRIPS).
Dollar Amounts in Thousands
$880,811,348
Principal Outstanding
(Eligible Securities)
Held in Unstripped Form
$655,122,466
Held in Stripped Fonn
$225,688,882
Reconstituted in t-v1ay
$14,677,650
The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures
are included in Table VI of the Monthlv Statement of the Puhlic Debt. entitled "Holdings of
Treasury Securities in Stripped Form."
Information about "Holdings of Treasury Securities in Stripped Form" is now available on the
Department of Commerce's Economic Bulletin Board (EBB). The EBB, which can be
accessed using personal computers, is an inexpensive service provided by the Department of
Commerce . For more infurmation concerning this service call 202-482-1986,
000
PA-224
RR-11 22
T~.9;.: y: " "CI.;I~I~:; Cf= TQe: .. c:: IRY SE(;i.I~IT~ES IN S7R:F"'ED =~r.\l MAY 31
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EPA R T 1\<1 E N T
0 F
THE
IREASURY ~rIJ}
omCE OF PUBUC AFFAIRS. 1500
PENNSYLV~'I,/IA
T REA S l' R Y
NEW S
---
AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622·2960
STATEMENT OF JAMES E. JOHNSON
ASSISTANT SECRETARY
(ENFORCEMENT)
PENNSYL VANIA A VENUE HEARING
BEFORE THE HOUSE COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
DISTRICT OF COLUMBIA SUBCOMMITTEE
FRIDAY, JUNE 7, 1996
RR-1123
For-{lress releases, speeches. Pll~C schedules and official bio,e;raphies. call
our ].J-/Wllr fax
line at (202) 622·2040
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C.
ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY
STATEMENT OF JAMES E. JOHNSON
ASSIST ANT SECRETARY
(ENFORCEMENT)
PENNSYLVANIA AVENUE HEARING
BEFORE THE HOUSE COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
DISTRICT OF COLUMBIA SUBCOMMITTEE
FRIDAY, JUNE 7, 1996
MR. CHAIRMAN, AND MEMBERS OF THE SUBCOMMITTEE, THANK YOU
FOR INVITING ME TO TESTIFY TODAY ABOUT THE DECISION TO PROTECT THE
PRESIDENCY, THE WHITE HOUSE, VISITORS, DIGNITARIES AND PEDESTRIANS
BY RESTRICTING VEHICULAR TRAFFIC FROM THE SEGMENT OF
PENNSYLV ANIA AVENUE IN FRONT OF THE WHITE HOUSE COMPLEX. AS
TREASURY ASSISTANT SECRETARY FOR ENFORCEMENT, I HAVE OVERSIGHT
RESPONSIBILITY FOR THE TREASURY'S LAW ENFORCEMENT BUREAUS,
INCLUDING THE CUSTOMS SERVICE, ATF. THE FEDERAL LAW ENFORCEMENT
TRAINING CENTER AND. OF COURSE, THE UNITED STATES SECRET SERVICE.
WE WILL BE AS INFORMATIVE AS POSSIBLE IN ADDRESSING THE LAW
ENFORCEMENT AND SECURITY MATTERS THAT RELATE TO THE RESTRICTING
OF VEHICULAR ACCESS TO THIS PORTION OF PENNSYLVANIA AVENUE. I MUST
POINT OUT, HOWEVER, THAT THERE ARE SENSITIVE ISSUES ABOUT WHITE
HOUSE SECURITY THAT WE CANNOT DISCUSS IN THIS FORUM. WE WOULD BE
HAPPY, HOWEVER, TO BRIEF YOU ON THESE ISSUES DURING CLASSIFIED
EXECUTIVE SESSIONS.
BASED UPON HIS STATUTORY AUTHORITY, SECRETARY OF THE
TREASURY RUBIN ISSUED AN ORDER ON MAY 19, 1995 DIRECTING THE UNITED
STATES SECRET SERVICE TO PROHIBIT VEHICULAR TRAFFIC ON SEGMENTS OF
PENNSYLV ANIA AVENUE AND SOUTH EXECUTIVE AVENUE, AND ON STATE
PLACE. THE BASIS FOR THE SECRETARY'S DIRECTIVE WAS THE FINDING OF
THE WHITE HOUSE SECURITY REVIEW ("REVIEW") THAT "THERE IS NO
ALTERNATIVE TO PROHIBITING VEHICULAR TRAFFIC ON PENNSYLVANIA
AVENUE THAT WOULD ENSURE THE SAFETY OF THE PRESIDENT AND OTHERS
IN THE WHITE HOUSE COMPLEX FROM EXPLOSIVE DEVICES CARRIED BY
VEHICLES NEAR ITS BOUNDARIES." THAT DECISION, WHICH WAS MADE FOR
SECURITY REASONS AND IMPLEMENTED TO PROTECT PUBLIC ACCESS TO THE
WHITE HOUSE. WAS CORRECT ONE YEAR AGO. SECRETARY RUBIN,'THE
2
DEPARTME~T
OF THE TREASURY, AND THE UNITED STATES SECRET SERVICE
REMAIN FULLY COMMITIED TO THAT DECISION TODAY.
OVERVIEW
OVER AN EIGHT MONTH PERIOD, THE WHITE HOUSE SECURITY REVIEW
EVALUATED THE OVERALL SECURITY OF THE WHITE HOUSE COMPLEX. THE
REVIEW FOCUSED UPON THE IMPORTANT GOAL OF PROTECTING THE
PRESIDENT AND THE FIRST FAMILY, THE EMPLOYEES AND THE NUMEROUS
VISITORS AND TOURISTS WHILE THEY ARE IN AND AROUND THE WHITE HOUSE
COMPLEX. THE REVIEW WAS FULLY AWARE OF THE IMPORTANCE OF
PRESERVING THE WELCOMING ENVIRONMENT OF THIS NATIONAL TREASURE.
BASED UPON THE EVIDENCE THEY ANALYZED, THE REVIEW CONCLUDED
THAT IT HAD NO RECOURSE OTHER THAN TO RECOMMEND RESTRICTING
VEHICULAR ACCESS FROM THE SEGMENT OF PENNSYLVANIA AVENUE IN
FRONT OF THE WHITE HOUSE COMPLEX. THE INDEPENDENT NONPARTISAN
ADVISORY COMMITTEE OF THE REVIEW. COMPOSED OF SIX DISTINGUISHED
AMERICANS, SCRUTINIZED THE METHODS AND THE CONDUCT OF THE
REVIEW, AND UNANIMOUSLY AGREED THAT THE FACTS COMPELLED ONLY
ONE RECOMMENDATION: VEHICULAR ACCESS TO PENNSYLVANIA AVENUE
MUST BE RESTRICTED IN ORDER TO PRESERVE THE SECURITY AND PUBLIC
.
ACCESSIBILITY OF 'THE WHITE HOUSE. FACED WITH THIS OVERWHELMING
INFORMATION. IT IS MY UNDERSTANDING THAT THE PRESIDENT
3
RELUCTANTJ--Y AGREED TO THE SECRETARY'S RECOMMENDATION.
WITHIN THE CONTEXT OF UPHOLDING OUR VITAL, STATUTORILYIMPOSED DUTY TO PROTECT THE PRESIDENT AND THE WHITE HOUSE
COMPLEX, MAINTAINiNG PUBLIC ACCESS WAS AN IMPORTANT CONCERN
THROUGHOUT THE REVIEW. THE REVIEW CONSIDERED HOW THE REROUTING
OF TRAFFIC AROUND THE WHITE HOUSE COMPLEX WOULD AFFECT THE
CITIZENS WHO LIVE AND WORK WITHIN THE DISTRICT OF COLUMBIA. PRIOR
TO THE ANNOUNCEMENT OF THIS ACTION, THE REVIEW BRIEFED KEY
MEMBERS OF CONGRESS ON THE RESULTS OF THE WHITE HOUSE SECURITY
EVALUATION. THE REVIEW OFFERED TO ADDRESS THE CONCERNS OF
DISTRICT OF COLUMBIA OFFICIALS REGARDING TRAFFIC, AMONG OTHER
ISSUES.
BACKGROUND ON THE WHITE HOUSE SECURITY REVIEW
THE REVIEW WAS ESTABLISHED BY SECRETARY OF THE TREASURY
LLOYD BENTSEN ON SEPTEMBER 12, 1994, FOLLOWING THE CRASH OF A SMALL
PLANE ONTO THE SOUTH GROUNDS OF THE WHITE HOUSE. SECRETARY
BENTSEN DIRECTED THEN-TREASURY UNDER SECRETARY RONALD K. NOBLE
AND SECRET SERVICE DIRECTOR ELJA Y B. BOWRON TO CONDUCT AN
INVESTIGATION SO EXHAUSTIVE IN ITS SWEEP THAT "NO STONE WOULD BE
LEFT UNTURNED .. , HAVING SERVED AS AN ASSISTANT DIRECTOR OF THE
4
REVIEW, I K~OW FIRST HAND THE AMOUNT OF WORK AND CAREFUL
ANALYSIS THAT CULMINATED WITH THIS ACTION.
THE REVIEW EXAMINED THE PLANE CRASH, AS WELL AS A NUMBER OF
OTHER INCIDENTS, INCLUDING THE OCTOBER 29, 1994 SHOOTING ON THE
NORTH GROUNDS OF THE WHITE HOUSE. IN ADDITION, THE REVIEW
EXAMINED THE DANGERS POSED TO THE WHITE HOUSE COMPLEX BY EITHER
AIR OR GROUND ASSAULT.
SECRETARY BENTSEN APPOINTED A NONPARTISAN ADVISORY
COMMITIEE COMPOSED OF SIX DISTINGUISHED AMERICANS TO ENSURE THAT
THE REVIEW'S WORK WAS THOROUGH AND UNBIASED. THESE ADVISORS
WERE ROBERT CARSWELL, FORMER DEPUTY SECRETARY OF THE TREASURY;
WILLIAM COLEMAN, FORMER SECRETARY OF TRANSPORTATION; CHARLES
DUNCAN, FORMER SECRETARY OF ENERGY AND DEPUTY SECRETARY OF
DEFENSE: GENERAL DAVID JONES, FORMER CHAIRMAN OF THE JOINT CHIEFS
OF STAFF: DR. JUDITH RODIN, PRESIDENT OF THE UNIVERSITY OF
PENNSYL VANIA: AND JUDGE WILLIAM WEBSTER, FORMER DIRECTOR OF THE
CIA AND THE FBI. THE MEMBERS OF THE ADVISORY COMMITTEE, WITH THEIR
DIVERSE BACKGRQUNDS, BROUGHT EXPERTISE AND CRITICAL INSIGHT TO THE
WORK OF THE REVIEW. FURTHERMORE, THE ADVISORY COMMITTEE WAS
ASKED TO EVALUATE THE REVIEW ON BEHALF OF THE GROUP MOST
INTERESTED IN BALANCING THE SECURITY AND ACCESSIBILITY OF THE WHITE
HOUSE COMPLEX--THE AMERICAN PEOPLE.
s
OVERSIGHT OF THE METHOD AND CONDUCT OF THE REVIEW ALSO WAS
PROVIDED BY THE DEPARTMENT OF THE TREASURY'S OFFICE OF INSPECTOR
GENERAL. THE INSPECTOR GENERAL DETERMINED THAT THE REVIEW WAS
CONDUCTED IN A THOROUGH AND IMPARTIAL MANNER.
THE REVIEW IS THE MOST COMPREHENSIVE ANALYSIS OF WHITE HOUSE
SECURITY EVER CONDUCTED. EXPERTS FROM EIGHT FOREIGN COUNTRIES
WERE CONSULTED AND THREE FORMER PRESIDENTS WERE INTERVIEWED TO
BRING ADDITIONAL PERSPECTIVE TO THE REVIEW. THE REVIEW
INTERVIEWED OR RECEIVED BRIEFINGS FROM MORE THAN 300 INDIVIDUALS
FROM AT LEAST TEN GOVERNMENT AGENCIES, AND ANALYZED MORE THAN
1,000 DOCUMENTS. WE ALSO CONSULTED MORE THAN TWENTY TECHNICAL
AND PUBLIC ACCESS EXPERTS. THE REVIEW PRODUCED A CLASSIFIED REPORT
OF MORE THAN 500 PAGES, AS WELL AS A PUBLIC REPORT.
THE REVIEW RETAINED TEN TECHNICAL CONSULTANTS TO STUDY
OPTIONS FOR IMPROVING THE SECURITY OF THE WHITE HOUSE. THE REVIEW,
WORKING WITH THE SECRET SERVICE. THE SECURITY CONSULTANTS, AND
THE ADVISORY COMMITTEE, CAREFULLY STUDIED ALL POTENTIAL
ALTERNATIVES SHORT OF CLOSING THE STREET TO VEHICULAR TRAFFIC.
INDEED A NUMBER OF THE ADVISORS WERE INITIALLY OPPOSED TO CLOSING
PENNSYL VANIA AVENUE TO VEHICULAR TRAFFIC. AFTER HEARING ALL OF
6
THE TECHNICAL EVIDENCE. THE ADVISORS UNANIMOUSLY CONCLUDED THAT
NONE OF THE ALTERNATIVES WOULD PROVIDE THE NECESSARY PROTECTION.
THE THREAT
NONE OF US WILL EVER FORGET EITHER THE PHYSICAL DESTRUCTION
CAUSED BY THE BOMBINGS OF THE WORLD TRADE CENTER IN NEW YORK CITY
AND THE MURRAH FEDERAL BUILDING IN OKLAHOMA CITY. OR THE MASSIVE
LOSS OF LIFE AND INJURIES SUFFERED IN THOSE AIT ACKS. IN THE
OKLAHOMA CITY BOMBING, WHICH OCCURRED JUST A LITTLE OVER A YEAR
AGO, OVER 300 BUILDINGS WERE DAMAGED; THERE ALSO WERE AT LEAST
TEN COLLAPSED STRUCTURES. ALL OF THIS OCCURRED WITHIN A FIVE-BLOCK
RADIUS OF THE MURRAH BUILDING.
THE ECONOMIC IMPACT OF THE BLAST ON OKLAHOMA CITY EXCEEDS
$400 MILLION. IF YOU INCLUDE THE FEDERAL GOVERNMENT'S LOSSES. THE
TOTAL INCIDENT LOSS APPROACHES $700 MILLION. SEVEt\l THOUSAND
RESIDENTS OF OKLAHOMA CITY WERE LEFT WITHOUT A WORKPLACE AND
ALMOST FrVE HUNDRED WERE LEFT HOMELESS.
AS DIRECTOR BOWRON WILL CONFIRM IN A FEW MOMENTS. THERE
STILL ARE INDIVIDUALS HERE IN THE UNITED STATES WHO WOULD TARGET
OUR WORKPLACES AND NATIONAL SYt\1BOLS SUCH AS THE WHITE HOUSE. WE
ARE WELL t\. WARE OF THEIR ABILITY TO INFLICT CATASTROPHIC DAMAGE.
ALTHOUGH I CANNOT DISCUSS IN THIS FORUM THE SPECIFIC SENSITIVE
INFORMATION THAT LED THE REVIEW TO RECOMMEND PROHIBITING
VEHICULAR TRAFFIC ON THE SEGMENT OF PENNSYLVANIA AVENUE IN FRONT
OF THE WHITE HOUSE, I CAN DIRECT YOU TO PUBLICLY AVAILABLE
INFORMATION THAT ILLUSTRATES THE EXTENT OF THE THREAT.
FOR EXAMPLE -- IN A SPEECH THAT WAS LATER INTRODUCED AS
EVIDENCE DURING HIS TRIAL, SHEIK OMAR ABDEL-RAHKMAN, LEADER OF
THE GROUP OF NEW YORK CITY BOMBING CONSPIRATORS WHO WERE
CONVICTED OF THE 1993 WORLD TRADE CENTER BOMBING. SAID THAT HIS
GOAL HAD BEEN TO DESTROY HIS ENEMIES
... BY MEANS OF DESTROYING AND EXPLODING THE STRUCTURE OF THEIR
CIVILIZED PILLARS SUCH AS THE TOURISTIC INFRASTRUCTURE WHICH THEY
ARE PROUD OF AND THEIR HIGH WORLD BUILDINGS WHICH THEY HAVE THEIR
STATUES WHICH THEY ENDEAR AND THE BUILDINGS IN WHICH GATHER THEIR
LEADERS ..,
[N SHORT. THE THREAT [S REAL. WE CAN ALL [MAGINE THE
DEVASTATING EFFECT THAT AN OKLAHOMA CITY -LIKE BLAST WOULD HAVE
ON AND AROUND THE WHITE HOUSE. SINCE MA Y 1995, ALMOST 800,000
VISITORS HAVE TOURED THE WHITE HOUSE. AN AVERAGE OF 2.300 V[SITORS
EACH DAY. THIS NUMBER DOES NOT [NCLUDE. HOWEVER. THE FORE[GN
DIGNITARIES AND OTHER OFFICIAL VISITORS TO THE WHITE HOUSE. AND IT
8
ALSO
pOES.~OT
INCLUDE THE COUNTLESS MEN, WOMEN AND CHILDREN WHO
STROLL THE PUBLIC AREAS IMMEDIATELY ADJACENT TO THE WHITE HOUSE
GROUNDS EACH YEAR.
HAVING IDENTIFIED THE THREAT, WE THEN HAD TO DETERMINE WHAT
TO DO.
CONSULT ATIONS
FOR SECURITY REASONS, WE COULD NOT SEEK A FULL PUBLIC DEBATE
ON THIS ISSUE PRIOR TO RESTRICTING VEHICULAR ACCESS TO PENNSYLVANIA
AVENUE. ON THE EVENING OF MAY 19, 1995, THE REVIEW CONSULTED THE
PRESIDENT, WHO RELUCTANTLY PROVIDED FINAL CONCURRENCE WITH
SECRETARY RUBIN'S DECISION. WE THEN IMMEDIATELY NOTIFIED MAYOR
BARRY, COUNCIL CHAIRMAN DAVID CLARKE, AND YOU, CHAIRMAN DAVIS.
THE FOLLOWING WEEK, WE MET WITH MR. CLARKE AND MEMBERS OF THE
COUNCIL OF THE DISTRICT OF COLUMBIA. AT WHICH TIME WE PROVIDED
MORE DETAILED SECURITY INFORMATION. AND WE HAD THE OPPORTUNITY
TO LISTEN CAREFULLY TO THEIR CONCERNS. THAT SAME WEEK WE MET
ALSO WITH MAYOR BARRY AND CITY ADMINISTRATOR MICHAEL ROGERS, AND
HELD A SIMILAR FRANK AND OPEN DISCUSSION OF THE ISSUES. WE THEN
CONDUCTED FURTHER OUTREACH BY MEETING WITH REPRESENTATIVES
FROM THE FEDERAL CITY COUNCIL. THE D.C. CHAMBER OF COMMERCE. AND
9
THE GREATER WASHINGTON BOARD OF TRADE.
THE REVIEW HAD ALREADY FULLY INVESTIGATED THE HISTORICAL
SIGNIFICANCE OF PENNSYLVANIA AVENUE TO THE DISTRICT OF COLUMBIA
AND THE PRESIDENTIAL PARK. TO ENSURE THAT THOSE CONCERNS WERE
PROPERLY ADDRESSED, THE REVIEW CONSULTED THE FOLLOWING EXPERTS:
HAROLD ADAMS, ARCHITECT; MAXINE GRIFFITH, URBAN DESIGNER AND
MEMBER OF THE NEW YORK CITY URBAN PLANNING COMMISSION; NICHOLAS
QUENNELL, LANDSCAPE ARCHITECT; WILLIAM SEALE. FORMER WHITE HOUSE
HISTORIAN; VINCENT SCULLY, ARCHITECTURAL HISTORIAN; JOHN CARL
WARNECKE, DESIGNER OF THE LAFAYETTE SQUARE PROJECT FOR FORMER
FIRST LADY JACQUELINE KENNEDY ONASSIS; GEORGE WHITE, ARCHITECT OF
THE CAPITOL; AND WILLIAM HOLLINGSWORTH WHYTE,·URBAN PLANNER.
EACH OF THE EXPERTS AGREED THAT PUBLIC ACCESS WOULD BE ENHANCED
THROUGH STRATEGIC PLANNING.
FURTHERMORE, THE REVIEW RECOGNIZED THAT THE CITIZENS WHO
LIVE AND WORK WITHIN THE DISTRICT OF COLUMBIA HAVE A UNIQUE AND
IMPORTANT STAKE IN THE WHITE HOUSE AND ITS SURROUNDING STREETS.
TO ENSURE THAT THE REVIEW CONSIDERED THEIR CONCERNS, WE MET WITH
NUMEROUS INDIVIDUALS PRIOR TO THE SECRETARY'S ORDER TO ADDRESS
THESE ISSUES: MEMBERS OF THE BLOOMINGDALE CIVIC ASSOCIATION:
10
REPRESENT..s\ TIVES FROM THE UNITED STATES CHAMBER OF COMMERCE AND
THE ASSOCIATION OF D.C. CIVIC ASSOCIATIONS; LAWRENCE REUTER, THE
GENERAL MANAGER OF THE WASHINGTON METROPOLITAN AREA TRANSIT
AUTHORITY (WMATA); ENGINEER REPRESENTATIVES FROM WMATA AND THE
DISTRICT OF COLUMBIA DEPARTMENT OF PUBLIC WORKS; LARRY KING,
DIRECTOR, DEPARTMENT OF PUBLIC WORKS; CHIEF FRED THOMAS,
METROPOLITAN POLICE DEPARTMENT; REGINALD GRIFFITH, EXECUTIVE
DIRECTOR AND HARVEY GANTf, CHAIRMAN, OF THE NATIONAL CAPITAL
PLANNING COMMISSION; GEORGES JACQUEMART, TRANSPORTATION PLANNER
AND TRAFFIC ENGINEER; AND MEMBERS OF THE COMPREHENSIVE DESIGN
PLAN FOR THE WHITE HOUSE. IN ADDITION. ROBERT L. MORRIS,
CONSULTANT IN TRAFFIC AND TRANSPORTATION, CONDUCTED A STUDY ON
•
THE FEASIBILITY OF REROUTING
TRAFFIC AROUND THE WHITE HOUSE.
IN ADDITION, THE REVIEW S;OUGHT THE ADVICE AND SUPPORT OF
CONGRESS REGARDING THIS IMPORTANT DECISION. PRIOR TO THE
SECRETARY'S ORDER, THE REVIEW CONSULTED WITH HOUSE AND SENATE
LEADERSHIP AND WITH THE APPROPRIATE COMMITfEE MEMBERS WITH
OVERSIGHT RESPONSIBILITY FOR THE SECRET SERVICE. TO CONTINUE THIS
IMPORTANT DISCUSSION, THE SECRET SERVICE MET WITH MEMBERS OF THIS
COMMITTEE TO DISCUSS THESE ISSUES, INCLUDING YOU, MR. CHAIRMAN,
CONGRESSWOMAN NORTON, CONGRESSMAN HERR. CONGRESSMAN CLINGER,
11
AND
CONG~SSMAN
GUTKNECHT.
LEGAL AUTHORITY
THE SECRETARY'S ORDER WAS BASED ON HIS AUTHORITY UNDER 18
U.S.C. SECTION 3056 AND RELATED STATUES, THEIR LEGISLATIVE HISTORIES ,
AND RELEVANT COURT DECISIONS.
LEGAL OPINIONS THAT DISCUSS THE
SECRETARY'S AUTHORITY WERE PROVIDED BY TREASURY'S GENERAL
COUNSEL AND THE OFFICE OF LEGAL COUNSEL AT THE DEPARTMENT OF
CONCLUDED THAT 18
JUSTICE. THE LAWYERS FROM BOTH DEPARTMENTS
...
U.S.C. SECTION 3056 GRANTS TO THE TREASURY SECRETARY THE BROAD
AUTHORITY TO TAKE ACTIONS SUCH AS THIS ONE THAT ARE NECESSARY AND
PROPER TO PROTECT THE PRESIDENT.
THE OFFICE OF LEGAL COUNSEL AT THE DEPARTMENT OF JUSTICE STATED IN
ITS OPINION THAT "SECTION 3056 GRANTS THE SECRETARY BROAD
AUTHORITY TO TAKE ACTIONS THAT ARE NECESSARY AND PROPER TO
PROTECT THE PRESIDENT. IN LIGHT OF THE RECOMMEND,\. TIONS OF THE
WHITE HOUSE SECURITY REVIEW AND THE UNITED STATES SECRET SERVICE'S
UNIQUE EXPERTISE AND SPECIAL RESPONSIBILITY IN THIS MA TIER, WE AGREE
WITH [THE] CONCLUSION THAT SECTION 3056 AUTHORIZES THE ACTIONS
CONTEMPLATED BY THE SECRETARY."'
12
PUBLIC ACCESS CONSIDERATIONS
THE REVIEW WAS CONCERNED NOT ONLY WITH PROTECTING THE
PRESIDENCY, BUT ALSO WITH PRESERVING THE PUBLIC'S ACCESS TO THE
WHITE HOUSE DESPITE THE NECESSITY OF IMPLEMENTING ADDITIONAL
SECURITY MEASURES. FOR THAT REASON, THE REVIEW CONSULTED A
NUMBER OF ARCHITECTS, HISTORIANS, AND URBAN PLANNERS WHO
UNIFORMLY ENDORSED THE IDEA OF CONVERTING THIS STRETCH OF
PENNSYLVANIA AVENUE INTO A PEDESTRIAN MALL. THEY CONSISTENTLY
OPINED THAT A PEDESTRIAN PLAZA IN FRONT OF THE WHITE HOUSE
COMPLEX WOULD ENHANCE THE PUBLIC ENJOYMENT OF THIS NATIONAL
LANDMARK BY CREATING A FRIENDLIER, OPEN ENVIRONMENT. DISTRICT OF
COLUMBIA AND NATIONAL TRAFFIC EXPERTS CONSULTED BY THE REVIEW
CONFIRMED THAT, WITH PROPER IMPLEMENTATION, THE ADJACENT
THOROUGHFARES WOULD ACCOMMODATE THE DIVERTED TRAFFIC.
TRAFFIC ISSUES
I UNDERSTAND THAT FEDERAL HIGHWAY ADMINISTRATOR SLATER
WILL TESTIFY LATER TODAY ON ISSUES RELATING TO THE REROUTING OF
TRAFFIC FROM PENNSYLVANIA IN FRONT OF THE WHITE HOUSE. I WOULD
.
LIKE TO SPEND JUST A MOMENT ON THE PROCESS WE FOLLOWED AT
TREASURY TO NOTIFY AND WORK WITH DISTRICT OF COLUMBIA ENTITIES AS
13
WE MOVED-TOWARD IMPLEMENTING THE SECRETARY'S ORDER.
PRIOR TO RESTRICTING VEHICULAR ACCESS TO PENNSYLVANIA
AVENUE, THE SECRET SERVICE MET WITH REPRESENTATIVES FROM THE
DISTRICT OF COLUMBIA DEPARTMENT OF PUBLIC WORKS (DPW) AND THE
METROPOLITAN POLICE DEPARTMENT (MPD) TO INFORM THEM THAT TRAFFIC
REROUTING WAS A DISTINCT POSSIBILITY. THE SECRET SERVICE, DPW, AND
MPD CONSTRUCTED A SHORT-TERM PLAN TO MANAGE TRAFFIC IN THE EVENT
THE REROUTING OCCURRED. AFTERWARD, THE TREASURY DEPARTMENT
FULLY REIMBURSED THE MPD FOR THE COSTS IT INCURRED IN ASSIGNING
OFFICERS TO WORK OVERTIME TO DIRECT TRAFFIC.
IMMEDIATELY AFTER THE REROUTING WAS MADE DEFINITE, THE
DEPARTMENT OF TRANSPORTATION AND THE FEDERAL HlGHWAY
ADMINISTRATION (FHWA) JOINED IN THE TRAFFIC MANAGEMENT EFFORTS,
OFFERING THE EXPERTISE OF THEIR ENGINEERS AND RESOURCES TO
ALLEVIATE THE ECONOMIC IMPACT ON THE CITY.
14
I UNDFRSTAND THAT DECISIONS REGARDING THE IMPACT OF THE
RESTRICTING OF VEHICULAR TRAFFIC FROM THE SEGMENT OF
PENNSYLVANIA AVENUE IN FRONT OF THE WHITE HOUSE IN AMONG A BROAD
RANGE OF FEDERAL/DISTRICT ISSUES THAT IS BEING CONSIDERED BY THE
PRESIDENT'S INTERAGENCY TASK FORCE ON THE DISTRICT OF COLUMBIA.
THE TASK FORCE WAS CREATED LAST YEAR TO DEVELOP OPTIONS FOR
EXECUTIVE BRANCH AGENCIES TO ASSIST THE DISTRICT IN ITS FISCAL
RECOVERY EFFORTS. I HAVE BEEN INFORMED THAT THE TASK FORCE WILL
REVIEW THE IMPACT OF THE PENNSYLVANIA AVENUE DECSION AND
DETERMINE WHAT MAY BE NEEDED TO MITIGATE ITS IMPACT IN THE
CONTEXT OF THESE AND OTHER ISSUES. THE DEPARTMENTS OF
TRANSPORTATION AND TREASURY ARE CURRENTLY ACTIVE TASK FORCE
MEMBERS, AND I UNDERSTAND THAT GSA AND INTERIOR HAVE PARTICIPATED
IN TASK FORCE ACTIVITIES.
TREASURY. WITH THE ASSISTANCE OF THE FEDERAL HIGHWAY
ADMINISTRATION, IS WORKING TO COMPLY WITH ALL REQUIREMENTS OF THE
NATIONAL ENVIRONMENTAL POLICY ACT (NEPA), AND HAS PAID ALL COSTS
ASSOCIATED WITH THAT ENDEAVOR. IN ADDITION, TREASURY COORDINATED
WITH THE ADVISORY COUNCIL ON HISTORIC PRESERVATION AT THE TIME OF
THE SECRETARY'S ORDER AND CONTINUES TO ADDRESS HISTORIC
PRESERVATION ISSUES IN CONNECTION WITH OUR NEPA WORK.
15
PENNSYL VANIA A VENUE IN THE FUTURE
AS YOU MAY KNOW, THE PROCESS OF PLANNING THE PEDESTRIAN
PLAZA IS BEING UNDERTAKEN BY AGENCIES OTHER THAN TREASURY. I WILL
NOT COMMENT ON THESE AREAS EXCEPT IN THE FOLLOWING TERMS.
I UNDERSTAND THAT THE DEPARTMENT OF THE INTERIOR AND THE
NATIONAL PARK SERVICE ARE SPEARHEADING THE EFFORT TO DEVELOP BOTH
SHORT-AND LONG-TERM DESIGNS FOR THAT SEGMENT OF PENNSYLVANIA
AVENUE IN FRONT OF THE WHITE HOUSE. THE NATIONAL PARK SERVICE IS
NOW WORKING WITH A PREEXISTING GROUP. THE COMPREHENSIVE DESIGN
PLAN FOR THE WHITE HOUSE, TO DEVELOP THOSE PLANS.
I HAVE BEEN INFORMED THAT ON MAY 22. 1996. THE COMPREHENSIVE
DESIGN PLAN ANNOUNCED THEIR DESIGN ALTERNATIVES FOR PENNSYLVANIA
AVENUE. I UNDERSTAND THAT DESIGN ALTERNATIVES RESULT FROM THE
COLLABORATIVE EFFORTS OF SEVERAL ENTITIES INCLUD[NG CONGRESS AND
DISTRICT OF COLUMBIA OFFICIALS.
I UNDERSTAND THAT THE PROPOSED PEDESTRIAN PLAZA WILL
MAINTAIN THE DISTINCTIVELY AMERICAN ACCESS TO OUR LEADERS WHO
RESIDE IN THE WHITE HOUSE. OF ALL EXECUTIVE MANSIONS AROUND THE
WORLD THAT WERE STUDIED. ONLY AT THE WHITE HOUSE [S THE PUBUC
16
GIVEN ACCliSS WHILE THE PRINCIPAL RESIDENT IS THERE. THE PEDESTRIAN
PLAZA CONCEPT IS CONSISTENT WITH L'ENFANTS' AND PRESIDENT
WASHINGTON'S VISION FOR THE WHITE HOUSE, AND IT IS SIMILAR TO AN IDEA
THAT PRESIDENT AND MRS. KENNEDY ENDORSED A GENERATION AGO. AT
THE SAME TIME, THE PLAZA WILL SIGNIFICANTLY REDUCE THE SECURITY
RISK POSED TO THE WHITE HOUSE AND NEARBY AREAS BY AN EXPLOSIVELADEN VEHICLE.
WE ALL BELIEVE THAT THIS EFFORT WILL BE TO MAKE THE SEGMENT
OF PENNSYLVANIA AVENUE IN FRONT OF THE WHITE HOUSE A BEAUTIFUL
,
AND INVITING PEDESTRIAN AREA. PENNSYLVANIA AVENUE WILL CONTINUE
TO BE THE SITE OF THE PRESIDENTIAL INAUGURAL PARADE; AND EMERGENCY
AND OFFICIAL VEHICLES WILL CONTINUE TO HAVE ACCESS TO THIS AREA.
WE WILL CONTINUE OUR EFFORTS TO COORDINATE WITH ALL INTERESTED
PARTIES TO MAKE THE AREA BENEFICIAL TO THE PRESIDENT AND THE FIRST
FAMILY; TO THE CITIZENS OF THE DISTRICT OF COLUMBIA AND THE
METROPOLITAN WASHINGTON AREA; AND TO ALL THOSE WHO EITHER VISIT
OR HOPE TO VISIT THE "PEOPLE'S HOUSE.
17
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASlllNGTON, D.C.• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
June 10, 1996
STATEMENT BY TREASURY SECRETARY ROBERT RUBIN
MEETING WITH AFRICAN AMERICAN MINISTERS ON CHURCH FIRES
We had a productive and candid meeting today with ministers from the
southeastern United States whose churches have been victims of the awful string of
arsons in the last few years. The ministers met yesterday with Attorney General Reno,
and I am pleased to have had an opportunity to meet with them today and to hear their
concerns.
President Clinton made it clear in his Saturday morning radio address that this
Administration will do everything in our power to get to the bottom of these fires. Few
crimes are as sensitive or important as the torching of our places of worship. We must
never let our country return to the violence of the 1950s and 1960s that was used to
intimidate civil rights activists. ATF was not around then, but it is today. Therefore, we
will not be satisfied until 100 per cent of the arson cases are solved, and the perpetrators
brought to justice. Whatever it takes, however long, and whomf.'ver is responsible.
I expressed my commitment to the high-level task force -- which will be led by
Assistant Treasury Secretary for Enforcement James Johnson and Assistant Attorney
General Patrick, and will include ATF Director John Magaw and FBI Director Louis
Freeh. We will continue our extensive efforts to bring the perpetrators of these crimes
to justice.
We discussed the new ATF security packet which will be distributed to churches
throughout the region. Furthermore, as the President announced Saturday, ATF now
has a toll-free number to collect information on the fires. The number is 1-888-ATFFIRE.
-30RR-1l24
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 10, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $15,727 million of 13-week bills to be issued
June 13, 1996 and to mature. September 12, 1996 were
accepted today (CUSIP: 9127943G7).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.14%'
5.16\"
5.16%-
Investment
Rate
5.28%'
5.30\"
5.30%-
Price
98.701
98.696
98.696
Tenders at the high discount rate were allotted 40\".
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.15 - 98.698
RR-1l25
Received
$53,797,577
Accepted
$15,726,581
$48,669,732
1,423,065
$50,092,797
$10,598,736
1.423,065
$12,021,801
3,294,780
3,294,780
410,000
$53,797,577
410,000
$15,726,581
UBLIC DEBT NEWS
Bureau of the Public ~bt • Washington, DC 20239
Department of the Treasury •
FOR IMMEDIATE RELEASE
June 10, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $15,574 million of 26-week bills to be issued
June 13, 1996 and to mature December 12, 1996 were
accepted today (CUSIP: 9127942B9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.33%"
5.35%
5.34%"
Investment
Rate
5.55%"
5.58%
5.57%"
Price
97.305
97.295
97.300
Tenders at the high discount rate were allotted 13%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
R~~~i~~d.
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
RR-1l26
A~~~~t~d.
$57,839,574
$15,574,277
$50,634,845
1,213,029
$51,847,874
$8,369,548
1,213,029
$9,582,577
3,450,000
3,450,000
2,541,700
$57,839,574
2,541,700
$15,574,277
I
D E P .\ R T \1 E
~
T
0 F
THE
T REA S II R Y
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W•• WASIDNGTON, D.C•• 20220 • (202) 622-2960
Contact: Rebecca Lowenthal
(202) 622-2960
FOR IMMEDIATE RELEASE
June 11, 1996
TREASURY TO WORK WITH CONGRESS
O~
PREPAID TUITION PLANS
The U.S. Treasury Department and the Internal Revenue Service are studying statesponsored prepaid tuition plans and intend to work with Congress to develop legislation
clarifying the tax treatment of these plans to encourage parents to save for their children's
education.
The President's budget for fiscal year 1997 already includes a provision allowing 1RAs
to invest in state~sponsored prepaid tuition plans.
At least 12 states currently sponsor plans designed to help residents save for the cost
of higher education. Other states have passed or are considering legislation creating similar
plans. Although the terms of the plans vary, the typical plan allows residents to purchase a
contract to save for college. The contract can be redeemed for tuition or credits, or the
payment on the contract can be linked to the change in the price of college. If the beneficiary
of the contract does not attend a covered po st· secondary institution, many of the plans return
to the purchaser the initial purchase price of the contract.
Treasury also announced that final Treasury regulations issued June 11 that address the
treatment of certain financial instruments will not apply to contracts issued pursuant to a state·
sponsored prepaid tuition plan. In addition, pursuant to Revenue Procedure 96·34, also issued
today, the IRS will not issue private rulings on state-sponsored prepaid tuition plans while
they are being studied.
-30RR-1127
D EPA R T 1\1 E N T
0 F
THE
T I~ E A SUR Y
NEWS
omCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622.2960
EMBARGOED UNTIL 2:30 P.M.
June 11, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $27,000 million, to be issued June 20,
1996. This offering will result in a paydown for the Treasury of
about $13,650 million, as the maturing bills total $40,652 million
(including the 36-day cash management bill issued on May 15, 1996,
in the amount of $13,045 million) .
Federal Reserve Banks hold $6,849 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,629 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional amounts
may be issued for such accounts if the aggregate amount of new
bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, .D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-1l28
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
,@
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JUNE 20, 1996
June 11, 1996
Offering Amount .
$13,500 million
$13,500 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 Z8 0
June 17, 1996
June 20, 1996
September 19, 1996
September 21, 1995
$32,825 million
$10,000
$ 1,000
182-day bill
912794 3S 1
June 17, 1996
June 20, 1996
December 19, 1996
June 20, 1996
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of-accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlllNGTON, D.C. - 20220 - (202) 622-2960
June 11, 1996
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the month of
May 1996.
As indicated in this table, U.S. reserve assets amounted to $83,469 million at the end
of May 1996, down from $83,710 million in April 1996.
End
of
Month
Total
Reserve
Assets
Gold
Stock 1/
Special
Drawing
Rights 2/3/
Foreign
Currencies
4/
Reserve
Position
in IMF 2/
1996
April
83,710
11,052
10,963
46,578
15,117
May
83,469
11,052p
11,037
46,153
15,227
1/
Valued at $42.2222 per fine troy ounce.
2/ Beginning July 1974, the IMF adopted a technique for valuing the SDR based on a
weighted average of exchange rates for the currencies of selected member countries. The
U.S. SDR holdings and reserve position in the IMF also are valued on this basis
beginning July 1974.
3/ Includes allocations of SDRs by the IMF plus transactions in SDRs.
4/ Includes holdings of Treasury and Federal Reserve System; beginning November 1978,
these are valued at current market exchange rates or, where appropriate, at such other
rates as may be agreed upon by the parties to the transactions.
p
Preliminary
RR-1129
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Arson and Explosives Division
Church Threat
Assessment Guide
1996
DIRECTOR'S MESSAGE
The burning of churches is a particularly heinous crime because those who would attack
our churches seek to strike at our most fundamental liberties and sources of personal support.
Historically, churches have served as places of sanctuary, centers of the community, and
symbols of freedom. ATF is committed to fully applying our investigative resources to
determine the cause of those fires and arrest those responsible for the arsons.
One aspect of this commitment is the dissemination of the Church Threat Assessment guide.
It contains valuable information on the steps that may be taken to prevent fires at churches,
the steps to follow after an incident has occurred, the toll free telephone number, 1-888-ATFFIRE, and the telephone numbers of ATF offices for providing authorities information about
any acts of violence, or threats of violence, directed at churches nationwide.
We must all work together to solve and prevent these despicable crimes. With your continued
assistance and support, and your cooperation in applying the recommendations contained
within this booklet, churches and congregations will be better protected from this type of
violence.
Director
CHURCH THREAT ASSESSMENT GUIDE
The following is a guide to assessing church vulnerability to arson and bombing attacks.
It should not be considered all inclusive. Your local Bureau of Alcohol, Tobacco and
Firearms (ATF) office, police or sheriff's department should be contacted for additional
guidance concerning a specific plan for your church.
ARFAS
OF VUlNERABILllY
• Churches located in isolated or rural areas.
• Churches left unattended for extended periods of time.
• Churches with unsecured doors and/or uncovered windows leave weak points for
forced entry by intruders.
• The absence of an adequate burglar alarm system provides a determined criminal
with additional time for criminal activity.
• Heavy shrubs and outside vegetation, and/or the absence of sufficient perimeter
lighting, provides security for criminals, not victims.
AmRMATIVE ACTIONS TO REDUCE VULNERABILllY
1.
Install perimeter floodlights outside the building.
Criminals can conceal their presence and activity from witnesses at night. Adequate
lighting that illuminates all points of entry (doors, windows, skylights, etc.) discourages them. Interior lights in areas visible through exterior windows should be left on
during all hours of darkness. Exterior lights should have protective screens over them
to prevent vandalism. All lights should be checked weekly for serviceability. Relatively inexpensive motion activated and/or timing equipment may be purchased to
automatically turn lights on and off.
2.
Install an adequate burglar alarm system.
Alarms should be installed by reputable local companies that can service and properly maintain the equipment. Please note that some municipalities or police departments have enacted burglar alarm standards and will not respond to false alarms by
inferior systems that frequently cause false alarms. Check with your local police or
sheriff's department.
3.
Install entrance/exit doors with interior hinges and hinge pins to prevent an intruder
from removing the door. Solid wood or sheet metal faced doors provide extra integrity that a hollow core wooden door cannot. Metal security grates or screens that
cover the entire door and frame also provide added security.
A steel door frame that properly fits the door is as important as the construction of the
door.
With the proper foundation of a sufficient door and frame, the most obvious consideration, door locks, can be addressed. Long throw dead bolts of hardened steel are
excellent deterrents to forced entry. Many standard locks are easy to pick or break
open.
4.
Install burglar-proof bars on screens, and large roof vents to prohibit access through
them. However, it should be noted that aesthetic or fire safety considerations often
preclude their use. Local ordinances should be researched BEFORE costly security
renovations are undertaken.
Windows are common points of entry for criminals, regardless of their height from
the ground. Burglars can open unlocked windows, break glass and unlock locked
windows, saw through metal or wooden frames, or pry entire window frames from
exterior walls.
5.
Heavy shrubs and vines should be kept low to the ground to reduce their potential to
conceal criminals or incendiary or explosive devices. Large trees or vines should be
removed to prevent criminals from climbing to upper windows, large vents, or onto
the roof.
6.
Participate in formal Neighborhood Watch type programs conducted by your local
law enforcement agency.
7.
Meet with your neighbors and security personnel assigned to your neighboring
businesses. Explain your situation and ask them to keep an eye on your church.
8.
Educate personnel on methods to deal with telephoned threats and conducting
bomb searches. Develop a written protocol for threats and keep it posted.
9.
Document any strange or threatening phone calls. Talk with the phone company
about tracing your lines or installing Caller ID to identify your callers if you are receiving threats.
10. If a suspicious package or letter is received, immediately call your local police or
sheriff's department. Do not touch or manipulate the object in any manner. Be alert
for letters or packages that display an excessive amount of postage, contain grease
stains, or have unfamiliar or missing return addresses. (See the "SUSPECT LETTER AND
PACKAGE INDICATORS" page)
11. Keep the handling of threatening correspondence, once identified, to an absolute
minimum. Place envelopes, letters or the packages in clear plastic bags and do not
compress the bag. Store them in another location until they can be turned over to
law enforcement.
12. On a rotating basis, have a member of the congregation, who is at least ] 8 years of
age, check on the church daily. EvaJuate the need for a security guard for nights and
weekends.
13. Obtain as detailed a physical description as possible of any suspicious person(s)
noticed in or around your facility, including a description of vehicles and license
numbers. (Refer to enclosed worksheet. "Suspect Description")
14. Duplicate all documents, computer disks, and records that are stored at the church.
Complete a comprehensive inventory of aJ] furniture and equipment, to include selial
numbers and value. Evaluate insurance coverage frequently.
] 5. Remove aJI potential fire hazards from the church grounds, such as trash, lawn
clippings and debris. Store aJI combustible materials in a locked room, shed, etc.
CAUTIONARY NOTES:
A. DO NOT allow watch persons to sleep inside the church
B. The carrying of firearms, nightsticks, mace, or any type of weapon while
conducting surveillance or participating in church watch programs should not
be permitted.
C. DO NOT approach a suspicious person, challenge anyone, or otherwise place
yourself in jeopardy. If a suspicious situation is found, report it to the nearest
law enforcement agency. Take detailed, legible notes of the activity, which
may be used later for court or police purposes ..
D. DO NOT pursue vehicle or suspects.
E. Remember, you do not possess police powers and you are liable as an
individual for civil and criminal charges should you exceed your authority.
The key is to OBSERVE and REPORT.
F. DO NOT allow anyone to check on the church after having consumed alcohol.
Do not allow anyone to stand watch and consume alcohol.
G. If possible, conduct the watch patrol in pairs.
H. Conduct watches in a random fashion and not in an observable pattern.
Please realize that a perfect security system does not exist and that some of these
recommendations mayor may not be practical for a place of worship. However,
these suggestions can reduce the potential for an arson, bombing, or burglary at your
church. Many of the listed security measures are quite expensive and may be beyond the
means of many churches. Local police crime prevention sections are excellent sources
for security evaluations and suggestions. They will assist you in prioritizing your needs
within your budget constraints.
We realize these recommendations are not all inclusive. We welcome your ideas for
improving this assessment and also the descriptions of any measures you have taken, not
contained within this guide, that should be shared with other congregations. Please
contact ATF through our ToJ) Free number, 1-888-ATF-FIRE, to provide this information.
SDSPEC'I'
DESCRII'I'ION
FILL OUT AS BEST YOU CAN
GIVE TO THE FIRST POLICE OFFICER ON THE SCENE
RACE
AGE
I HEIGHT IWEIGHT I WEAPON TYPE
HAT (color, type)
HAIR
GLASSES TYPE
~
J......R-ro::::----i TIE
COMPLEXION
SHIRT
SCARS/MARKS
COAT
TATIDOS
TROUSERS
SHOES
[ AUlD UCENSE, MAKE, COWR [ DIRECTION OF TRAVEL
ADDITIONAL INFORMATION:
,
(fi~
f.l.:Y
WARNING!
Suspect Letter and Package Indicators
MAilED FROM FOREIGN COUNTRY
"<1-0
~~9
EXCESSIVE OR NO POSTAGE
0
NO RETURN
ADDRESS
" ..
RESTRICTIVE
MARKINGS
...
_c.;
II. ~ ",
STRANGE ODOR
ij}. ~ l~ :~
G ENER Al GU N -=--'
FT. 01 XON N.Y N
SpeciAL
o Eli veRY
~
,U;,
1 35078
LOPSIDED PACKAGE
RIGID OR BULKY ENVELOPE
ADDRESS:
- BADLY TYPED OR WRITTEN
- MISSPEllED
- TITLE WITH NO NAME
- WRONG TITLE WITH NAME
PRECAUTIONS:
1. Never accept mail, especially packages,
while in a foreign country.
2. Make sure family members and clerical staff
know to refuse all unexpected mail at home
or office.
PROTRUDING
WIRES
OilY STAINS ON WRAPPER
3. Remember -IT MAY BE A BOMB - Treat it as
suspect.
FOR MORE INFORMATION ON BOMB SECURITY OR BOMB THREATS, CONTACT YOUR LOCAL ATF OFFICE.
ATF I 3324.1 (6/95)
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
ARSON AND BOMBING RESPONSE NUMBERS
ATF NATIONAL ARsON HOTLINE
(OPERATIONAL 24 HOURS A DAY)
TOll FREE 1-888-ATF-FIRE
ATF NATIONAL BOMB HOTLINE
(OPERATIONAL 24 HOURS A DAY)
TOll FREE 1-888-ATF-BOMB
ATF NATIONAL COMMUNICATIONS CENTER
(OPERATIONAL 24 HOURS A DAY)
TOll FREE 1-800-800-3855
ATF ARSON AND ExPLOSIVES DIVISION
(HEADQUARTERS - WASHINGTON, D.C.)
202-927 -7930
ATF LAW ENFORCEMENT FIELD OFFICES
ATLANTA FIELD DIVISION: •••••••••••••••.••••••••••••••••••••••.•..•••..•••••••...•••..•••••••••••••
404-331-6526
Atlanta, GA. (ARSON II GROL"P) ..................................................................................... 404-331-6436
Macon, GA ...................................................................................................................... 912-474-0477
Savannah, GA .................................................................................................................. 912-652-4251
BALTIMORE FIELD DIVISION: .••••...••••••••••••.•••••••••••••••••••.••••••••••••••••••••••••••••••
410-962-0897
Baltimore, MD. (GROUP I) ............................................................................................... 410-962-4115
Hyattsville, MD ................................................................................................................. 301-436-8313
Wilmington, DE ................................................................................................................ 302-573-6102
BIRMINGHAM FIELD DIVISION: ..•.••.•...•••..••••••••.••••..•••••..•..••.•.••••••••.•••.••••••••••
205-731-1205
Birmingham, AL ............................................................................................................... 205-731-1 111
Gulfport, MS .................................................................................................................... 601-863-4871
Huntsville, AL.................................................................................................................. 205-539-0623
Jackson, MS ...................................................................................................................... 601-965-4205
Mobile, AL ....................................................................................................................... 334-441-5338
Montgomery, AL .............................................................................................................. 333-223-7507
Oxford, MS ...................................................................................................................... 601-234-3751
BOSTON FIELD DIVISION: •••••••••••••.•••••••••••••••••••.••••••••••••••••••••••••••••••••••••••••••
617-565-7042
Boston (GROL'P VARSON) ................................................................................................. 617-565-7050
Burlington (\VILLSTON,vr.) ............................................................................................. 802-463-3238
Hartford, CT..................................................................................................................... 203-240-3185
New Haven, CT................................................................................................................ 203-773-2060
Portland, ME .................................................................................................................... 207-780-3324
61 7-565-7042
BOSTON FIELD DIVISION (CONTINUED): •••.••.•.•••••••••••••••.••••••••••.•..••••..•.....•....
Concord, NH .................................................................................................................... 603-225-154 i
Providence, RI. ................................................................................................................. 401-528-4366
Springfield, MA ................................................................................................................ 413-785-0007
Worchester, MA ................................................................................................................ 508-793-0240
704-344-6125
CHARLOTTE FIELD DIVISION: ••••••••••••••••••••••••••••••••••••••••••••••.••••••••..••••.••.•••••.
Charlotte, NC. (GROUP l) ................................................................................................. 704-344-6126
Charlotte, NC. (GROUP lI) ............................................................................................... 704-344-61 19
Charleston, SC .................................................................................................................. 803-727-4275
Columbia, SC ................................................................................................................... 803-765-5723
Fay~tteville, NC ................................................................................................................. 910-483-3030
Greenville, SC ................................................................................................................... 864-232-3221
Greensboro, NC ................................................................................................................ 910-5474224
Raleigh, NC ..................................................................................................................... 919-856-4366
Wilmington, NC ................................................................................................................ 910-343-4936
CLEVELAND FIELD DMSION: .......................................................................
216-522-7210
Cincinnati, OH ................................................................................................................. 513-684-3354
Cleveland, OH ........................................................................................................ 216-522-3080/3786
Columbus, OH ................................................................................................................. 614469-6717
Toledo, OH ...................................................................................................................... 419-259-7520
Youngstown, OH .............................................................................................................. 216-747-8285
CHICAGO FIELD DMSION: ...........................................................................
312-353-6935
Chicago, IL. (ARsON GROUP) .......................................................................................... 312-886-5441
Oakbrook, IL. .......................................................................................................... 708-268-0986/1274
Springfield, IL. .................................................................................................................. 217492-4273
Merrillville, IN .................................................................................................................. 219-791-0702
DALLAS FIELD DMSION: ............................................................................
214-767-2250
Dallas, TX. (ARSON GROUP) ........................................................................................... 214-767-0530
Fort Worth, TX ................................................................................................................ 817-334-2771
Lubbock, TX ................................................................................................................... 806-798-1030
Oklahoma, TX ................................................................................................................ 405-297-5060
Tyler, TX ......................................................................................................................... 903-592-3927
Tulsa, OK ........................................................................................................................ 918-581-7731
DETROIT FIELD DIVISION: ...........................................................................
313-393-6019
Detroit, Ml. (ARsON GROUP) ........................................................................................... 313-393-6036
Flint, MI. .......................................................................................................................... 810-766-50 10
313-393-6019
DETROIT FIELD DIVISION (CONTINUED): .......................................................
Grand Rapids, ML ........................................................................................................... 616-456-2566
713-449-2073
HOUSTON FIELD DIVISION: •••••.•••••.••••.••••••••.••.••••.•••..•••....••••••••...••••.••••.•••...
Austin, TX ...................................................................................................................... 512-349-4545
Beaumont, TX ................................................................................................................. 409-835-0062
Corpus Christi, TX .......................................................................................................... 512-888-3392
EI Paso, TX .................................................................................................................... 915-534-6449
Houston, TX (ARSON GROUP) ........................................................................................ 713-449-2093
McAllen, TX ................................................................................................................... 210-687 -5207
San Antonio, TX ............................................................................................................. 210-805-2727
Waco, TX ........................................................................................................................ 817-741-9900
KANSAS
CITY FIELD DIVISION: ••••••••••••••••••••••••.••••••••.••••••••••••••••......•..•••.••••• 816-421-3440
Colorado Springs, CO ....................................................................................................... 719-473-0166
Des Moines, IA ................................................................................................................ 515-284-4372
Denver, CO. (ARSON/ExpLOSIVES GROUP) ...................................................................... 303-866-1173
Kansas City, MO. (ARSON GROUP) ................................................................................. 8 16421-3231
Omaha, NE ...................................................................................................................... 402-221-3651
Springfield, MO ................................................................................................................ 417 -8644707
Wichita, KS ...................................................................................................................... 316-269-6229
Los ANGELES FIELD DIVISION: ••••••••.••••••••••••••••.•••••••••••••••••••••.••••••••••.••••••••.
213-894-4812
Los Angeles, CA. (ARSON GROUP) ................................................................................. 213-894-4840
Long Beach, CA ............................................................................................................... 310-980-3434
Riverside, CA ................................................................................................................... 909-276-6031
San Diego, CA ................................................................................................................. 619-557-6663
Van Nuys, CA .................................................................................................................. 818-756-4350
LOUISVILLE FIELD DIVISION: ..•••••.•...•••...•..•..••.•....•••••.•••.•••••••••••..•.•••••.•••••••.
502-582-5211
Ashland, Kl'..................................................................................................................... 606-329-8092
Bowling Green, Kl'........................................................................................................... 502-781-7090
Ft. Wayne, IN ................................................................................................................... 219-424-4440
Indianapolis, IN ................................................................................................................ 317 -226-7464
Lexington, KY': .................................................................................................................. 606-233-2771
Louisville, KY. (FIELD OFFlCE) ......................................................................................... 502-582-5213
MIAMI FIELD DIVISION: ..............................................................................
305-597-4800
Jacksonville, FL ................................................................................................................. 904-232-2228
Ft. Lauderdale, FL ........................................................................................................... 954-356-7369
Ft. Myers, FL ................................................................................................................... 813-334-8086
MIAMI FIELD DIVISION (CONTINUED): ..........................................................
305-597-4800
Hato Rey San Juan, PRo ................................................................................................... 809-766-5084
Miami, FL. .............................................................................................................. 305-597-4778/4807
Orlando, FL ..................................................................................................................... 407-648-6 J36
Pensacola, FL ................................................................................................................... 904-435-8485
St. Croix, VI ..................................................................................................................... 809-692-9435
St. Thomas, VI ................................................................................................................. 809-774-5757
Tallahassee, FL ................................................................................................................. 904-942-9660
Tampa, FL ........................................................................................................................ 8 J 3-228-2184
West Palm Beach, FL ........................................................................................................ 407-835-8878
NASHVILLE FIELD DMSION: ••••••••••••••••••••••••••••••••••••••••..•••••••••••••.•.•••••• ••••••••
615-781-5364
Chattanooga, TN .............................................................................................................. 423-855-6422
Knoxville, TN ................................................................................................................... 423-545-4505
Memphis, TN ................................................................................................................... 901-766-2904
NEW ORLEANS FIELD DMSON: .•••.•.••••.•.•...••••.••.•••.•.••••.••..•.....•......•.•..•.•.•.••
504-589-2350
Baton Rouge, LA ............................................................................................................. 504-389-0485
Little Rock, AR ................................................................................................................ 50 J -324-6 J 81
New Orleans, LA. (ARSON GROUP) ....................................................................... 504-589-2314/2563
Shreveport, LA ................................................................................................................. 318-676-3301
NEW YORK FIELD DIVISION: •••••••••••••••••..••••••••••••••••••••.•••••••••.•••.••••••••.•••••••••
212-264-4658
Albany, NY....................................................................................................................... 5 18-431-4182
Buffalo, NY....................................................................................................................... 716-551-4041
Melville, NY...................................................................................................................... 5 16-694-8372
New York (ARsON GROUP) .............................................................................................. 718-896-6400
Newark, NJ. (ARSO~ GROUP) .......................................................................................... 201-357-4070
Rochester, NY................................................................................................................... 716-262-2110
Syracuse, NY. ................................................................................................................... 3 \ 5-448-0889
PHILADELPHIA FIELD DMSION: •.••••.•••••..••.•.•.••••••••••..•.•....••...•••.•.....•.••••••••••
215-597-7266
Atlantic City, NJ ................................................................................................................ 609-625-2228
Camden, NJ ...................................................................................................................... 609-968-4884
Harrisburg, PA ................................................................................................................. 717-782-3884
Philadelphia, PA. (ARsON GROUP) .................................................................................. 215-597-9080
Pittburgh, PA. (ARSON GROUP) ....................................................................................... 4\2-644-2911
Reading, PA ..................................................................................................................... 610-320-5222
Trenton, NJ ....................................................................................................................... 609-989-2155
Wheeling, 'W\I. .................................................................................................................. 304-232-4170
PHOENIX FIELD DIVISION: •.•••.•••••.•••.•••••••.••.•.•••••••.•••....•..•.•••.•.•...••••.. : •..•.••..
602-640-2840
Albuquerque, NM ............................................................................................................. 505-766-2271
Phoenix, AR.(FIELD OFFICE) ........................................................................................... 602-640-2025
Tucson, AR ............................................................................................................. 520-670-4725/4882
SAN FRANCISCO FIELD DMSION: .................................................................
415-744-7001
Bakersfield, CA ................................................................................................................ 805-861-4420
Fresno, CA ....................................................................................................................... 209-487-5393
Las Vegas, NV ................................................................................................................. 702-388-6584
Reno, NV ........................................................................................................................ 702-784-5251
Oakland, CA .................................................................................................................... 510-637-3431
Sacramento, CA ................................................................................................................ 916-498-5100
Salt Lake City, UT............................................................................................................ 801-524-5853
San Francisco, CA. (ARSON GROUP) ................................................................................ 41 5-744-7012
SEATTLE FIELD DvISION: ............................................................................
206-220-6440
Agana, GUAM ................................................................................................................ 671-472-7129
Anchorage, AK ................................................................................................................. 907-271-5701
Billings, MT...................................................................................................................... 406-657-6886
Boise, lD ........................................................................................................................... 208-334-1983
Cheyenne, ~.................................................................................................................. 307-772-2346
Helena, MT...................................................................................................................... 406-441 -1101
Honolulu, HI. ................................................................................................................... 808-541-2670
Portland, OR..................................................................................................................... 503-326-2171
Seattle, WA. (ARSON GROUP) .......................................................................................... 206-220.:6450
Spokane, WA .................................................................................................................... 509-353-2862
Yakima, WA ...................................................................................................................... 509-454-4403
ST. LOUIS FIELD DIVISION: .........................................................................
314-425-5560
Cape Girardeau, MO ........................................................................................................ 573-335-3163
Fairview Heights, IL. ......................................................................................................... 618-632-9380
St. Louis, MO. (FIELD OFFICES) ............................................................................. 314-425-5563/5551
ST. PAUL FIELD DIVISION: ..........................................................................
612-290-3092
Fargo, NO .........................................................................................................................
Milwaukee, WI. .................................................................................................................
Sioux Falls, SO .................................................................................................................
St. Paul, MN. (FIELD OFFICE) ...........................................................................................
701-239-5176
414-297-3937
605-330-4368
612-290-3459
WASHINGTON FIELD DIVISION: ....................................................... 202-219-7751
Bristol, VA ........................................................................................................................ 540466-272i
Falls Church, VA. (ARSON GROUP) .................................................................................. 703-285-2551
Norfolk, VA ...................................................................................................................... 80444 1-3 190
Richmond, VA .................................................................................................................. 804-560-0005
Roanoke, VA .................................................................................................................... 540-857-2300
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlllNGTON. D.C. - 20220 - (202) 622-2960
Remarks as prepared for delivery
June 13, 1996
STATEMENT OF RAYMOND M. KELLY
NOMINEE FOR UNDER SECRETARY OF THE
TREASURY FOR ENFORCEMENT
SENATE FINANCE COMMITTEE
RR-1130
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
PREPARED STATEMENT OF RAYMOND M. KELLY
NOMINEE FOR UNDER SECRETARY OF THE TREASURY FOR ENFORCEMENT
STATEMENT OF RAYMOND W. KELLY
.
MR. CHAIRMAN, SENATOR MOYNIHAN AND MEMBERS OF THE COMMITTEE.
THANK YOU FOR GIVING ME THIS OPPORTUNITY TO APPEAR BEFORE YOU
TODAY AS YOU CONSIDER MY NOMINATION AS UNDER SECRETARY OF THE
TREASURY FOR ENFORCEMENT.
I ALSO WANT TO THANK PRESIDENT CLINTON AND SECRETARY RUBIN FOR
THEIR EXPRESSION OF CONFIDENCE IN ME WITH THIS NOMINATION.
(WITH ME TODAY ARE MY WIFE VERONICA AND SON JAMES. MY OTHER SON,
GREGORY, A MARINE CORP CAPTAIN AND PILOT, UNFORTUNATELY COULD
NOT BE HERE).
NEARLY ALL OF MY PROFESSIONAL LIFE HAS BEEN INVOLVED WITH LAW
ENFORCEMENT. MOST OF IT WITH THE NEW YORK CITY POLICE
DEPARTMENT WHICH I JOINED WHEN I WAS STILL IN COLLEGE AND LEFT 32
YEARS LATER AS POLICE COMMISSIONER, HAVING SERVED IN NEARLY EVERY
RANK AND IN 25 SEPARATE COMMANDS.
SHORTLY AFTER I LEFT THE POLICE DEPARTMENT FOR THE PRIVATE SECTOR,
I WAS ASKED BY THE STATE DEPARTMENT TO BE DIRECTOR OF THE
INTERNATIONAL POLICE MONITORS IN HAITI. THERE, I WAS GRAPHICALLY
REMINDED OF HOW THE INTEGRITY OF THE POLICE IS FUNDAMENTAL TO
THE FUNCTIONING OF A DEMOCRACY. OUR FIRST RESPONSIBILITY IN HAITI
WAS NOT SO MUCH TO MAKE SURE THE PUBLIC UPHELD THE LAW, BUT TO
MAKE SURE THE POLICE DIDN'T BREAK IT.
THAT CHALLENGING EXPERIENCE NOT WITHSTANDING, TO ME, NEW YORK
WAS, AND REMAINS TODAY, ONE OF THE MOST COMPLEX POLICING
ENVIRONMENTS IN THE WORLD. AND FOR THAT REASON, IT PUTS
EXTRAORDINARY DEMANDS ON INDIVIDUAL POLICE OFFICERS, THEIR
SUPERVISORS AND THE DEPARTMENT'S EXECUTIVE CORPS.
BUT THE RESULTS WERE JUST AS REWARDING AS THE ENVIRONMENT WAS
DEMANDING. WE HELPED KEEP THE PUBLIC SAFE, AND WE HELPED BRING
TO JUSTICE THOSE WHO BROKE THE LAW. I CAN'T THINK OF A BETTER
DEFINITION OF JOB SATISFACTION, WHETHER IN THE SERVICE OF MY
HOMETOWN OR OUR NATION.
2
AS POLICE COMMISSIONER, I FREQUENTLY WORKED CLOSELY WITH MANY OF
THE SAME TREASURY AGENCIES THAT I AM NOW BEING CONSIDERED TO
OVERSEE AS UNDER SECRETARY FOR ENFORCEMENT.
THIS IS A PARTICULAR PRIVILEGE FOR ME BECAUSE OF THE LONG
EXPERIENCE THE NEW YORK CITY POLICE DEPARTMENT HAS IN WORKING
WITH THE CUSTOMS SERVICE, THE SECRET SERVICE, AND THE BUREAU OF
ALCOHOL, TOBACCO AND FIREARMS.
MUCH OF OUR MUTUAL COOPERATION AND COORDINATION BECAME
ROUTINE OVER THE YEARS. BUT SOMETIMES THE ROUTINE GAVE WAY TO
TRAGEDIES, SUCH AS OUR JOINT EMERGENCY RESPONSE TO, AND
INVESTIGATION OF, THE WORLD TRADE CENTER BOMBING.
HUNDREDS, IF NOT THOUSANDS OF FEDERAL AND LOCAL LAW
ENFORCEMENT PERSONNEL PLAYED ROLES IN SAVING LIVES THE DAY THE
WORLD TRADE CENTER WAS BOMBED, AND IN SAVING COUNTLESS OTHERS
WHO SURELY WOULD HAVE DIED HAD THE TERRORISTS BEEN ALLOWED TO
RETURN TO BOMB AGAIN IN NEW YORK.
TREASURY, OF COURSE, PLAYED A SPECIAL ROLE IN THE DARK AND
DANGEROUS RUBBLE BENEATH THE WORLD TRADE CENTER. AN ATF BOMB
EXPERT FOUND THE CLUE THAT WOULD BREAK THE CASE WIDE OPEN.
IT IS PRECISELY THAT KIND OF EXPERTISE - - BE IT EXPERTISE IN COMBATING
DRUG SMUGGLING OR MONEY LAUNDERING OR ARSON OR
COUNTERFEITING - - THAT THE ENFORCEMENT ARMS OF THE TREASURY
DEPARTMENT USE MORE EFFECTIVELY THAN ANYONE ELSE TO ADDRESS
PROBLEMS TOO BIG OR TOO COMPLEX FOR LOCAL OR EVEN STATE
JURISDICTIONS ALONE.
TREASURY'S LAW ENFORCEMENT PERSONNEL CONSTITUTE A WEALTH OF
EXPERTISE PROBABLY UNEQUALED IN THE WORLD. THEY HAVE USED IT TO
SA VE THE LIVES OF ORDINARY AMERICANS, TO SAFEGUARD OUR LEADERS
AND OUR ECONOMIC INSTITUTIONS. THEY HAVE A LOT TO BE PROUD OF. AS
UNDER SECRETARY, I WOULD CONVEY THAT PRIDE AND MAKE CERTAIN
TREASURY'S ENFORCEMENT PERSONNEL WERE RECOGNIZED FOR THEIR
OUTSTANDING WORK.
AT THE SAME TIME, I WOULD MOVE TO QUICKLY CORRECT ANY FAILURES
WITH A THOROUGH AND FRANK ASSESSMENT OF WHAT WENT WRONG, AND
THEN TAKE PROMPT ACTION TO CORRECT IT.
3
I HAVE BEEN IN LAW ENFORCEMENT TOO LONG TO BELIEVE THAT THINGS
WON'T EVER GO WRONG. I ALSO KNOW THAT THE ONLY WAY TO PROCEED
WHEN MISTAKES ARE MADE IS TO ADMIT THEM, TAKE CORRECTIVE ACTION
AND MOVE ON.
THERE IS REALLY NO OTHER CHOICE FOR LAW ENFORCEMENT. TOO MUCH IS
AT STAKE. THE PEOPLE, THROUGH CONGRESS, HAVE INVESTED
EXTRAORDINARY AUTHORITY IN U.S. LAW ENFORCEMENT AGENTS. THEY
RANGE FROM AUTHORITY TO CONFISCATE PROPERTY, TO TAKE A PERSON
INTO CUSTODY, TO USE DEADLY FORCE.
THESE ARE AWESOME RESPONSIBILITIES.
THE EXTRAORDINARY POWERS ENTRUSTED TO LAW ENFORCEMENT MUST BE
EXERCISED WITH THE UTMOST CARE AND RESPECT FOR THE DEMOCRACY
FROM WHICH THEY ARISE. THEY DEMAND THE HIGHEST STANDARDS OF
PROFESSIONAL CONDUCT FROM THOSE WHO TAKE AN OATH TO UPHOLD THE
CONSTITUTION OF THE UNITED STATES.
I HAVE BEEN HELD TO THOSE STANDARDS AS A POLICE OFFICER, AS A
POLICE COMMANDER AND AS POLICE COMMISSIONER. I HAVE DEMANDED
THEM FOR EVERYONE WHO HAS EVER REPORTED TO ME, AND GIVEN THE
OPPORTUNITY TO SERVE, I WILL DO SO AS UNDER SECRETARY FOR
ENFORCEMENT.
AGAIN, MR. CHAIRMAN, MEMBERS OF THE COMMITTEE, THANK YOU FOR
THIS OPPORTUNITY, AND NOW I'LL BE HAPPY TO ANSWER ANY QUESTIONS
YOU MAY HAVE.
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
June 14, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Treasury will auction approximately $19,250 million
of 52-week Treasury bills to be issued June 27, 1996. This
offe~ing will result in a paydown for the Treasury of about $75
million, as the maturing 52-week bill is currently outstanding in
the amount of $19,322 million.
In addition to the maturing 52week bills, there are $26,699 million of maturing 13-week and 26week bills.
Federal Reserve Banks hold $11,329 million of bills for
their own accounts in the maturing issues. These may be refunded
at the weighted average discount rate of accepted competitive
tenders'.
Federal Reserve Banks hold $9,259 million of the maturing
issues as agents for foreign and international monetary authorities. These may be refunded within the offering amount at the
weighted average discount rate of accepted competitive tenders.
Additi0nal amounts may be issued for such accounts if the
aggregate amount of new bids exceeds the aggregate amount of
maturing bills.
For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $1,52S'million of the maturing 52-week issue.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D.C. This offering of Treasury securities
is governed by the' terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by
the Treasury to the public of marketable Treasury bills, notes,
and bonds.
Details about the new security are given in the attached
offering highlights.
000
Attachment
RR-1l31
Fl»" press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
,
HIGHLIGHTS OF TREASURY OFFERING OF 52-WEEK BILLS
TO BE ISSUED JUNE 27, 1996
June 14, 1996
Offering Amount .
$19,250 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Maturing amount.
Minimum bid amount
Multiples .
364-day bill
912794 2R 4
June 20, 1996
June 27, 1996
June 26, 1997
June 27, 1996
$19,322 million
$10,000
$1,000
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000
at the average discount rate of
accepted competitive bids
(1) Must be expressed as a discount rate
with two decimals, e.g., 7.10%
(2) Net long position for each bidder
must be reported when the sum of the
total bid amount, at all discount
rates, and the net long position are
$2 billion or greater.
(3) Net long position must be determined
as of one half-hour prior to the
closing time for receipt of
competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders .
Payment Terms .
Prior to 12:00 noon Eastern Daylight
Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight
Saving time on auction day
Full payment with tender or by charge
to a funds account at a Federal
Reserve bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
June 17, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,588 million of 13-week bills to be issued
June 20, 1996 and to mature September 19, 1996 were
accepted today (CUSIP: 912794Z80).
RANGE OF ACCEPTED
.COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.07%
5.09%5.08%
Investment
Rate
5.21%
5.23%5.22%
Price
98.718
98.713
98.716
$100,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 7%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
$66,871,746
AcceEted
$13,587,526
$61,866,094
1. 466,342
$63,332,436
$8,581,874
1. 466,342
$10,048,216
3,449,310
3,449,310
90,000
$66,871,746
90,000
$13,587,526
5,00 -- 98.736
RR-1l32
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-204.0
"
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASlllNGTON, D.C.• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
June 17, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,532 million of 26-week bills to be issued
June 20, 1996 and to mature December 19, 1996 were
accepted today (CUSIP: 9127943S1)
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.25·%'
5.27%
5.27%
Investment
Rate
5.47%'
5.49%
5.49%
Price
97.346
97.336
97.336
Tenders at the high discount rate were allotted 12%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Receiyed
$54,649,932
Accepted
$13,532,100
$47,201,110
1,192,222
$48,393,332
$6,083,278
1. 192,222
$7,275,500
3,400,000
3,400,000
2,856,600
$54,649,932
2,856,600
$13,532,100
5.26 - 97.341
RR-1133
For press releases, speeches, public schedules an~ official biographies, call our 24-hour fax line at (202) 622-204-0
~
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
EMBARGOED UNTIL 2:30 P.M.
June 18, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,000 million, to be issued June 27,
1996. This offering will result in a paydown for the Treasury of
about $700 million, as the maturing 13-week and 26-week bills are
outstanding in the amount of $26,699 million.
In addition to the
maturing I3-week and 26-week bills, there are $19,322 million of
maturing 52-week bills. The disposition of this latter amount
was announced last week.
Federal Reserve Banks hold $11,329 million of bills for
their Q1.vn accounts in the three maturing issues. These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $9,272 million of the three
maturing issues as agents for foreign and international monetary
authorities.
These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders. Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $7,744 million of the original 13-week and
26-week issues.
Tenders for the bills will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. This offering of Treasury securities is
governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-1l34
For press releases, speeches, public schedules and official biographies, call our 24.1zour fax line at (202) 622-2040
,
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JUNE 27, 1996
June 18, 1996
Offering Amount .
$13,000 million
$13,000 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 3H 5
June 24, 1996
June 27, 1996
September 26, 1996
March 28, 1996
$13,545 million
$10,000
$ 1,000
182-day bill
912794 3T 9
June 24, 1996
June 27, 1996
December 26, 1996
June 27, 1996
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlllNGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
June 19, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION 2-YEAR AND S-YEAR NOTES
TOTALING $31,250 MILLION
The Treasury will auction $18,750 million of 2-year notes
and $12,500 million of 5-year notes to refund $27,452 million of
publicly-held securities maturing June 30, 1996, and to raise
about $3,800 million new cash.
In addition to the public holdings, Federal Reserve Banks
hold $2,177 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts
of the new securities.
The maturing securities held by the public include $3,053
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
B0th the 2-year and 5-year note auctions will be conducted
in the single-price auction format. All competitive and noncompetitive awards will be at the highest yield of accepted
competitive tenders.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms
and conditions set forth in the Uniform Offering Circular (31 CFR
Part 356) for the sale and issue by the Treasury to the public of
marketable Treasury bills, notes, and bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-1l35
Fur press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC OF
2-YEAR AND 5-YEAR NOTES TO BE ISSUED JULY 1, 1996
June 19, 1996
Offering Amount .
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Yield .
Interest payment dates
Minimum bid amount
Multiples .
Accrued interest
payable by investor
Premium or discount .
$18,750 million
$12,500 million
2-year notes
AG-1998
912827 Y3 0
June 25, 1996
July I, 1996
July I, 1996
June 30, 1998
Determined based on the
highest accepted bid
Determined at auction
December 31 and June 30
$5,000
$1,000
5-year notes
K-2001
912827 Y4 8
June 26, 1996
July I, 1996
July I, 1996
June 30, 2001
Determined based on the
highest accepted bid
Determined at auction
December 31 and June 30
$1,000
$1,000
None
Determined at auction
None
Determined at auction
The followinq rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Accepted in full up to $5,000,000 at the highest accepted yield
Competitive bids
(1) Must be expressed as a yield with three decimals, e.g., 7.123%
(2) Net long position for each bidder must be reported when the
sum of the total bid amount, at all yields, and the net long
position is $2 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Maximum Recognized Bid
at a Single yield
35% of public offering
35% of public offering
Maximum Award .
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders
Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms .
Full payment with tender or by charge to a funds account at a
Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
Contact:
FOR IMMEDIATE RELEASE
June 19, 1996
Michelle Smith
(202) 622-2960
TREASURY SECRETARY RUBIN TO DISCUSS CPCOMING G-7 MEETINGS AT
NATIONAL PRESS CLuB THURSDAY
Treasury Secretary Robert E. Ruhin \-vill previe\\ the upcoming G-7 meetings at a
National Press Cluh luncheon in Washington. D.C. at 1230 pm on Thursday, June 20,
1996.
Secretar~
Rubm will discuss the G- Ts initiatives to r.;trengthen and improve the
effectiveness of internatilmal financial instirutions: develupment issues: international capital
markets: and the importance of [he G-7 process to [he l'nited States. A question and answer
period \,'ill follc'\\ his remarks.
The G-7 meetings will take place in Lyon. France. from June 27-29. President
Clinton will lead the U. S. delegation to the meetings. \\hich will include leaders from the
G-7 nations (Canada. France. Germany Great Britain. Italy. Japan, and the United States).
:'-iational Press Club members and non-members interested in attending the luncheon
must call Chad Tavlor. ~atlonal Press Cluh ReservatInns Desk <ll 120.2) 662-7539 before
10 am on Thursdav for reservations.
-3U-
RR-1136
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY (fi1'~:
\~.~~
...
,,<,~~,I
TREASURY
NEW S
~J789~. . . . . . . . . . . . . . . . . . . . . . . . . .. .
............................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622·2960
ADV 2:30 pm EDT
Text as prepared for delivery
June 20, 1996
RECORD TESTIMONY OF TREASURY SECRETARY ROBERT E. RUBIN
SENATE APPROPRIATIONS SUBCOMMITTEE ON TREASURY,
POSTAL SERVICE AND GENERAL GOVERNMENT
INTRODUCTION
Senator Shelby, Senator Kerrey, members of the Subcommittee:
I appreciate the opportunity to testify on the Department's fiscal year 1997 request.
With me today is George Munoz, our Assistant Secretary for Management and Chief Financial
Officer.
The responsibilities of our Department cover areas as diverse as law enforcement,
revenue collection, financial management and regulation, international economic affairs, and
manufacturing currency and coins. Treasury is one of the principle agencies that advises the
President on policies that maintain a healthy economy, create jobs and increase incomes. In
addition, our bureaus are among those that carry out these policies. We are proud of our
record with regard to the economy -- unemployment has dropped to 5.6 percent, 9.7 million
new jobs have been created in 40 months, inflation is at a near 30-year low, and the deficit is
now forecast to fall for four straight years. I knew of Treasury's reputation for excellence
during my 26 years on Wall Street and two years at the White House. After a year and a half
as Treasury Secretary, I can tell you that the highly-capable and dedicated professionals at
Treasury are serving the American public very well , and my first priority as Secretary is to
maintain the excellence of the institution.
RR-1l37
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040
-2-
OVERVIE\V OF THE FISCAL YEAR 1997 BUDGET
In view of our roles and missions, Treasury's fiscal year 1997 budget strikes an
appropriate balance between the competing goals of adequately funding our priorities and
fairly contributing to balancing the Federal budget. Our request emphasizes the
administration's top funding priorities in areas such as tax systems modernization and border
protection, while at the same time stressing the principals of reform and reinvention, which
allow us to address old problems with new solutions.
Treasury originally requested $11.4 billion in operating funds for fiscal 1997. Since
then, there have been two changes. First, Congress decided to leave CDFI funding
responsibility at VA/HUD. We had requested $125 million in our budget for CDFI which is
no longer in our request. Second, we informed this subcommittee and the House
subcommittee that our Tax Systems Modernization request of $850 million could be reduced
by $186 million to $664 million under the new management baseline. While that brings our
request to $11.1 billion, we know that this morning you received your 602(b) allocations, and
the Treasury share is likely to be below our revised budget request. We recognize that, but
want to discuss some of the key priority areas of our request in revenue collection and law
enforcement. I want to emphasize that, throughout the budget formulation process, we asked
our bureaus to limit their requests to essential activities -- particularly in light of the House
markup this week that has the potential for severe and negative impacts on our tax
administration system. I would also like to add at this moment a request for your support of
the President's request this week for supplemental appropriation action to address acts of arson
against African-American churches. The request would support the ability of the Bureau of
Alcohol, Tobacco and Firearms to investigate and solve these crimes.
My testimony today will not only outline our request and highlight some of our
accomplishments, but also report on Treasury's stewardship and management of its bureaus.
I'd like to summarize our fiscal 1997 request, starting with the Internal Revenue Service and
TSM. We've attached a more detailed presentation of our fiscal 1997 request to my remarks.
-3-
IRS continues its Tax Systems Modernization effort. Deputy Secretary Summers
came to Congress earlier this year to discuss Treasury's concerns with IRS's Tax Systems
Modernization program. The General Accounting Office, the National Research Council, and
this Committee have criticized IRS's fundamental ability to modernize itself. While we share
some of those same concerns, we are pursuing a number of strong corrective actions.
Specifically, we have:
•
Articulated the vision for TSM as contained in our recent report to Congress.
•
Put in place a new management team. Established a single point of
accountability and budget control in the person of the Associate Commissioner
for Modernization. We have also appointed a new Chief Information Officer,
who has successfully implemented a tax systems modernization program for
New York State.
•
Established an investment review process in accordance with GAO Strategic
Information Management (SIM) best practice guidelines, through which we are
subjecting all information systems investments to a disciplined review process.
•
Re-scoped our entire budget request from $6.7 billion in five years to less than
$4 billion.
•
Leveraged technical and management skills by increasing reliance on the private
sector for systems engineering, design, development and integration so that by
the end of FY 1997, 68 percent of TSM labor dollars will go to outside
contractors.
•
Significantly increased Departmental oversight of TSM through a restructured
joint Treasury/IRS Modernization Management Board, which the Deputy
Secretary chairs.
•
Used expert consultants experienced in large scale government systems
management and development efforts to augment our efforts.
-4 -
As part of our review of funding requirements, in correspondence to you on June 6,
1996, we have reduced our requirements for FY 1997 in the TSM area from the original
request of $850 million to $664 million. The revised level for FY 1997 is proposed in
addition to the actual slow-down that has already occurred within the FY 1996 enacted budget
of $695 million, an amount that is over $300 million less than the Administration's original
FY 1996 request. The revised $664 million is based on an updated assessment of where we
are in the modernization process and reflects a deferral of some program development as IRS
shifts from in-house work to contractors. It stems from a review of the entire TSM project in
terms of four basic risk categories: maintenance and operations; investment in program
management, engineering and infrastructure; roll-out of proven projects; and incremental
investment in the development of new TSM capabilities_
We need to ensure effective stewardship in Treasury of the limited dollars that you
have to appropriate and demonstrate clear accountability for the investments we undertake.
Treasury will approve funding for only those projects that present a favorable business case
and appropriate readiness reviews, regardless of the TSM funding level in FY 1997. The
Investment Board will manage the investment decision making process which the Deputy
Secretary will oversee through the Modernization Management Board.
On that final point, I would like to add that the IRS has made progress in reducing the
burden on taxpayers and improving customer service, although much remains to be done as we
work smarter with scarcer resources. More taxpayers can file electronically or over the phone
and take advantage of direct deposit for tax returns. Taxpayers calling the IRS will find their
calls answered more frequently, with more satisfactory service. Information and forms can
even be downloaded directly from the IRS Internet home page. Moreover, the IRS has been
working with small businesses to reduce the paperwork involved in record keeping. They have
also reduced the time and effort involved in resolving account and collections issues.
The
ms will continue to protect tax revenue and maintain fairness.
The
$359 million increase requested for IRS tax law enforcement will, by IRS estimates, result in
$1.5 billion in added revenue collections in fiscal 1997. Over the seven-year budget period,
this initiative will result in a 4-to-1 return of revenues collected and deposited into the General
Fund versus the cost of the initiative. Under the pay-go scoring rules of the Budget
Enforcement Act, these revenues must be used for deficit reduction and cannot support new
spending or tax cuts. This proposal adds staff and improves systems to increase telephone and
correspondence compliance activities. It is a strategy that emphasizes account resolution early
in the process, which is more cost-effective, and less intrusive and burdensome than face-toface enforcement actions by revenue agents and revenue officers.
- 5-
Customs will continue to strengthen protection of the Southwest Border. The total
request for this initiative is $65 million, including $41 million for 657 new agents, inspectors,
and other staff at the border. The remainder of these funds are requested from the Violent
Crime Reduction Fund to equip the new border personnel for their jobs and for technology
improvements. This initiative combats drug smuggling while making inspections less intrusive
and vehicle processing quicker and more effective. We have seen how effective the Customs
Service can be on the border through the results of Operation Hard Line. Because of
Operation Hard Line, in the past year on the southwest border, cocaine seizures are up 19
percent, heroin seizures almost 110 percent, marijuana seizures are up 25 percent, and there
has been a doubling of drug seizures in commercial cargos. As you are aware, as our
enforcement actions hit smugglers hard in one area, they often tend to shift entry areas, so we
have now heightened our watch on the atlantic and caribbean to counter smuggling there.
Project gateway is having some important successes.
Treasury also will continue its support of Community Development Financial
Institutions. The President's budget request includes $125 million for the Community
Development Financial Institutions Fund (CDFI). This initiative will help create a nationwide
network of diverse, specialized, private financial institutions that will bring needed investment
capital to distressed urban and rural communities. These institutions include community
development banks, credit unions, loan funds, venture capital funds, and micro-enterprise loan
funds. This effort is grounded in private sector market discipline while it leverages large
amounts of private capital. The effect of these investments will encourage renewed and
healthy private market activity in distressed communities, promote entrepreneurship, revitalize
neighborhoods, generate tax revenues, and empower local residents.
The Financial Management Service will continue to improve and modernize its
fmancial systems and services to government agencies. These efforts include the
expansion of Electronic Funds Transfer and Electronic Benefits Transfer; continued
standardization of government-wide data in financial systems, which improves tracking and
accountability; and the establishment of a debt management operations center to assist efforts
at other government agencies with delinquent debt collections.
-6-
ACCOl\1PLISIThlENTS
As I mentioned at the outset, Treasury has responsibilities that range from domestic and
international economic policy, to law enforcement and manufacturing our money. We collect
97 percent of the revenues taken in by the federal government. We have 40 percent of the law
enforcement personnel in the government. While I've mentioned a few of our accomplishments
so far, I'd like to highlight some others and talk about some of the innovations now under way
within the Treasury Department. Among the other highlights over the last year were:
•
The indictment of over 70 members of the Cali cocaine cartel through the
efforts of the Customs Service and other law enforcement agencies;
•
ATF's quick effort in uncovering important evidence from the Oklahoma City
Federal Building bombing site;
•
The Federal Law Enforcement Training Center's new training involving
improved federal guidelines for the use of force in law enforcement; and
•
The increased targeting of IRS investigators to key money laundering cases.
This effort, in particular, led to 117 arrests of major drug traffickers worldwide.
Perhaps the most visible of our more recent efforts is the new $100 note being
produced by the Bureau of Engraving and Printing and introduced into circulation earlier this
year. It is the first of five notes to be redesigned with anti-counterfeiting protections to stay
ahead of the technology curve. The smooth roll out of this note serves to maintain confidence
in our currency as well as economic stability in countries where U. S. currency is a preferred
medium of exchange.
Our fiscal bureaus continue to improve their services. The U. S. Mint is now entirely
under a revolving fund, which enables more business-like operations and better financial
management.
The Office of the Comptroller of the Currency streamlined its bank examination
procedures and reduced the volume of information banks need to produce in advance. The
Bureau of Public Debt completed its consolidation in Parkersburg, West Virginia and
continues to enjoy increased savings and efficiency.
-7-
Since this time last year, our Tax Policy division presented seven new international tax
treaties to the Senate for its advice and consent. We have completed negotiations on five
additional treaties and are actively negotiating ten new treaties. These treaties will strengthen
tax fairness and promote the international exchange of tax data. Some of these treaties also
contain important features to aid in countering the new wave threat of money laundering. We
are currently holding discussions about money laundering in our international economic forums
and Treasury enforcement functions are now routinely being incorporated in this area.
Our International Affairs division performed some critical work with regard to
strengthening financial markets following the Mexico crisis, work endorsed by global leaders
at the G-7 Halifax Summit and now being replicated in important regional forums. In
addition, they have been working diligently on the goal of opening financial markets and
encouraging development and reform in the developing and transitional economies.
STEW ARDSHIP OF RESOURCES
If I could turn now to the manner in which Treasury has used the resources entrusted to
us. The Department has used two tools to improve its stewardship of public resources:
Reinvention, and Performance-Based Management. I'd like to summarize our efforts in these
areas.
Treasury is an active, award-winning participant in the effort to reinvent
government. Last year, the Administration began the second stage of the National
Performance Review. The goals were to improve customer service, lower costs, and increase
efficiency. Last year, the Department worked with its bureaus to generate a set of wideranging proposals to meet those goals. I want to highlight three key reinvention efforts: Debt
Collection Management, the Federal-State Tax Partnership and a consolidation of
administrative functions.
•
Last June, the President announced the Debt Collection initiative to improve
the collection of non-tax receivables and reduce the cost of delinquent debt
collection.
•
The Federal/State Tax Partnership allows business taxpayers in 31 states to
file one return for both their federal and state submission.
•
The Department is beginning to study and design consolidating administrative
functions. In looking to the future, this budget requests funds for the first stage
of this effort -- a reengineering of human resources functions Treasury-wide.
-8-
Performance-Based .Management has changed our management focus from inputs and
processes to an emphasis on outcomes and program results. Treasury has embraced this
management style in three ways: strategic planning, innovative resource management, and
improved accountability.
Strategic planning is critical to effective resource management. However, just a
few years ago, most Treasury bureaus had no strategic plan. Today, we have a coordinated,
Department-wide planning process. This effort coincided with the passage of the Government
Performance Review Act. Treasury has already requested each bureau to develop a five-year
strategic plan this Spring -- one year earlier than the law mandates.
Good strategic planning also includes regular reporting on annual performance. Last
year, we began to replace our workload measures with program measures. This year, our
budget improves this set of program performance targets. Good measures are not always
available and ours are not perfect. However, we believe that we have made progress and will
continue to look for improvements. The Committee's staff has already been helpful in the
early development stages. We welcome your continued feedback.
Next year, our budget request will also contain a report on our performance against the
previously proposed targets. Including the report on program performance in the budget
document is one of the key steps we are taking to integrate the entire process of resource
management in the Department.
•
Treasury is taking advantage of innovative resource management tools.
The Government Management Reform Act, or GMRA, provided agencies with
the authority to create franchising- new mechanisms for delivering common
administrative products and services on a competitive and self-sustaining basis.
Services provided under franchising will achieve greater efficiency and qUality.
•
Treasury is improving its accountability for its use of resources. We are
participating in a GMRA pilot program to prepare an "Accountability Report. "
This report summarizes and combines a variety of financial management
reports, required by many different laws, into a single, streamlined, easy-to
read document. Our goal is to have this one report fulfill the reporting
requirements of the underlying statutes.
The Department continues to improve its financial management. Of the eleven
financial statement audits of Treasury entities conducted for FY 1994 pursuant to the Chief
Financial Officers Act, eight received unqualified audit opinions. This is one more than we
received for FY 1993, and five more than we received two years ago.
-9-
This year, Treasury is implementing a major element of a Treasury-wide integrated
financial management system. The Treasury Information Executive Repository (TIER) is a
computer database that will house our Treasury-wide General Ledger and allow bureaus to
directly transmit account information electronically to the Department.
CONCLUSION
In closing, I'd like to review the main points and leave you with a few thoughts before
I take your questions. First, given the breadth of responsibilities of the Treasury Department,
the budget we have submitted strikes a balance between adequately funding our priorities and
fairly contributing to deficit reduction. Second, with Deputy Secretary Summers' and
Commissioner Richardson's leadership, the IRS will strengthen and focus its modernization
efforts to produce real benefits to taxpayers. I would urge you, however, to recognize that,
just as it has taken many years to get us where we are today, all of TSM's problems will not
be solved overnight. Third, Treasury is, I believe I can fairly say, a leader among government
agencies in innovation and improving customer service. Fourth, we are integrating
enforcement policies into our more traditional functions. And finally, Treasury is absolutely
committed to using the monies entrusted to us wisely, to reinventing our operations to make
them more efficient, and to a strategic planning process that gives our Department a better
look at where we are headed not one or two but five years down the road so we can make the
best use of our resources and the strengths of our individual components.
Again, I appreciate this opportunity to come before you and share our successes and
our plans. I would be happy to address any questions you may have.
###
D EPA R T·M E N ,T
0 F
THE
lREASURY ((."."j)
\~~f
..........1I..1I....................~~/789
T REA SUR Y
NEW
S
•
•
OFFICE OF PlJBUCAFFAIRS -1500 PENNSYLVA!'HAAVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960
ADV 2:30 P.M. EDT
Remarks as prepared for delivery
June 20, 1996
ORAL TESTIMONY OF TREASURY SECRETARY ROBERT E. RUBIN
SENATE APPROPRIATIONS SUBCOMMITIEE ON
TREASURY, POSTAL SERVICE AND GENERAL GOVERNMENT
Chairman Shelby, Senator Kerrey, members of the Subcommittee: I appreciate
the opportunity to testify on our fiscal ye~lr 1997 request. With me is George Munoz, our
Assistant Secretary for Management and Chief Financial Officer. and he will join me in
responding to your questions.
During my 26 years on Wall Street and two years at the White House, I knew of
Treasury's reputation for excellence. After 17 months as Treasury Secretary, I can tell
you that the American people are well-served by the highly capable and dedicated
professionals at Treasury, and my first priority as Secretary is to maintain the excellence
of the institution.
In my written testimony, I spell out the balance we have struck between the
President's investment priorities and his strong commitment to deficit reduction. I will
speak for a few minutes about a few of our top priorities, and then, given the actions
taken by the House subcommittee on Tuesday, I will focus my remarks on the need for
adequate funding for reform and modernization at the Internal Revenue Service.
Treasury originally requested $11.4 billion in operating funds for fiscal 1997. Our
revised request, as you know, is $11.1 billion. We know that you have received your
602b alloca!ions, and the Treasury allocation is below our revised budget request, but I
will be discussing our key priorities in the context of the President's request.
We have made it a priority for Customs to strengthen protection of the Southwest
Border. We've requested $()S million, for (1'57 new personnel at the border and for
equipment and technology improvements. Operation Hardline has already shown real
results. As smugglers respond to our successes by shifting to other locations, we have
implemented Project Gateway in the Atlantic and Carihbean region.
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In the area of economic empowerment, Treasury strongly supports the Community
Development Financial Institutions Fund. The President asked for $125 million in the
Treasury budget under this subcommittee's jurisdiction. As you are aware, this item is
now in the V A/HUD subcommittee. We strongly urge that it be fully funded. It will
help build a nationwide network of private sector community financial institutions to
bring investment capital to distressed urban and rural communities.
Let me also note that the Financial Management Service will continue to
modernize, including expansion of Electronic Funds Transfer and Electronic Benefits
Transfer, standardization of government-wide data in financial systems, and
establishment of an operations center to assist with debt collection.
Let me also take a moment to say that I have the highest esteem for the law
enforcement officers of Treasury. They perform a difficult and dangerous mission every
day. I have heen heartened hy the support that the Bureau of Alcohol. Tobacco, and
Firearms has received in their efforts to investigate the church fires. As you know, we
have transmitted to Congress a request for a $12 million supplemental to support A TF's
church fires investigations: a similar amount is included in the House mark.
As you undouhtedly know, earlier this week, the House Treasury-Postal
subcommittee laid down its mark for FY 1997. Given the severity of the proposed cuts, I
will focus my remarks now on the Internal Revenue Service and TSM. We have grave
concern over cuts of this magnitude. While we are still studying the mark, preliminary
conclusions are possible.
First, let me comment on ongoing operations. The mark may require the IRS to
reduce or layoff thousands of federal employees, and it targets more than half of those
reductions in IRS's information systems personnel. That would jeopardize the IRS's
ability to maintain vital systems to process over 200 million tax returns and over 80
million refunds annually, to provide telecommunications to support telephone customer
services and the autumated technologies to facilitate tax examination and collection.
These cuts go to the heart of the IRS's ability to provide taxpayers with the services that
they have a right to expect, from improved telephone access -- now at a too low rate of
38 percent -- to prompt payment of refunds -- coming on the heels of a solid filing
season. The House mark also contains a number of measures that interfere with
effective management of the IRS. To take but one example, the mark requires that the
Department of Defense be responsible for contracting decisions on tax information
systems.
3
Second. these reductions may not only jeopardize our ability to maintain all IRS
systems nationwide for ongoing operations. but also might deny the IRS even minimal
resources to continue with necessary modernization. Let me be clear: we know that
there are serious problems with TSM. and we have begun to put this program on track.
But deeply cutting IRS personnel who are responsible for these improvements is no way
to get there. I have had private sector experience overseeing the restructuring of a badly
flawed system, and let me say, even if one relies heavily on outside contractors, it is
critical to have them managed internally by adequate numbers of knowledgeable people.
While Members are familiar with TSM, let me emphasize that modernizing the
tax system is about much more than simply replacing computer systems. It is about
developing a set of new technologies that did not exist when the current system was built.
and it will take fundamental change in work practices and in the ways that the IRS
interacts with taxpayers. We expect these efforts. over the long run, to lead to major
improvements in taxpayer service, compliance, and IRS productivity.
The beginning of solving any prohlem is recognizing that y,)U have a problem.
Over the past year, Treasury has spent a lot of time understanding and evaluating the
problems of TSM. These prohlems developed over a long period of time and they will
not be solved quickly. But we are committed to solving them. The GAO has raised
many concerns, and we and they hoth recognize that there is a lot that needs to be done.
That is why, even before the GAO reported its observations, we informed this
subcommittee and the House subcommittee that we would reduce our fiscal 1997 funding
request by $186 million, from $850 million to $664 million, as we refocus TSM.
We have restructured our oversight process and I have asked Deputy Secretary
Summers to manage TSM as if he were. a board chairman overseeing a major long-term
capital investment program. Treasury's oversight will include involvement in all major
strategic and investment decisions. We are pursuing a vigorous program of corrective
actions. We anticipate a greater use of outside contractor~. And we have hired a highly
experienced chief information officer, Arthur Gross, wh, J has -;uccessfully led a similar
modernization effort in New York.
TSM is contributing to important improvements in taxpayer services. TSM
initiatives enable millions of Americans to receive around-the-clock. automated tax
information, download tax forms from the internet, and file taxes from computers and
over a touch-tone telephone, not by longhand. But with the provisions of the House
mark requiring a "fencing off' of TSM funding, these ongoing programs would be in
jeopardy.
4
Third, cuts of this magnitude will undermine the IRS's ability to protect tax
revenue and maintain fairness. The increase of $359 million in the President's budget
would beef up IRS tax law enforcement. The IRS estimates ~his increase would result in
$ 1.5 billion in additional tax collected in fiscal 1997, for deficit reduction. By contrast,
cuts of the magnitude described in the House mark would mean lost revenues of $3.2
billion.
Moreover, this revenue loss would not just be to the federal government.
Countless states rely on information-sharing on audits and re-adjustments made by the
IRS in collecting revenues owed to them under state tax law. These cuts may reduce
these information flows and thus cut state revenue significantly.
In sum, deep cuts to the IRS may do grave damage to our ability to collect
revenue, enforce the tax laws, and continue to provide the services that taxpayers have a
right to expect. We need to work together to remedy this situation, ;md to provide
adequate support for an IRS that will work for all Americans. I urge you to fund the
IRS at a level necessary to maintain an efficient and functioning IRS. Let me also say
that we look forward to working closely with the National Commission nn the IRS, as we
reform and modernize it.
Treasury is committed to using the monies entrusted to us wisely, to reinventing
our operations to make them more efficient, and to strategic planning that gives our
Department a better look at where we are headed years down the road.
Let me refer you to my written testimony for a further elaboration of our top
priorities and accomplishments, including the Department's important work in economic
policy, law enforcement, tax policy, international finance and opening markets, new
currency, financial services and other matters.
Again, I appreciate this opportunity to appear hefore you today. Assistant
Secretary Munoz and I would be happy to take your questl< ,ns.
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D EPA R T MEN T
0 F
THE
TREASURY
1789
T REA S U R'Y
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASlllNGTON, D.C.• 20220 • (202) 622-2960
ADV 1 P.M. EDT
Remarks as 'prepared for delivery
June 20, 1996
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
THE NATIONAL PRESS CLUB
In less than a week. the President. Secretary Christopher and I leave for the G-7
leaders meeting in Lyon. Lyon offers a prism for seeing in a different way the enormous
changes that have taken place over the past several years and are taking place that will
profoundly affect the economic and national security future of our country.
First. we've had a sea-change improvement in our economy which is not only
important in itself. but has dramatically increased our capacity to provide leadership in
the world on international economic issues.
Second. the G-7 process has heen re-energized and contributed significantly to
America's ability to deal with what economic changes that some have described as the
most significant since the industrial revolution.
Third, and finally, as America's economic prospects and security interests are
increasingly bound-up in the success of the global economy. we must remain vigilant
against those forces of isolation, protectionism and retreat which would pull us back from
the world, dimilish our credibility and leadership, and reverse the advances we have
made in making our nation stronger economically.
This is a time of historic change in the world economy. Financial markets and
trade have hecome glohalized in ways and to degrees not imaginable fifteen or twenty
years ago. There is a new economic consensus around the world in favor of market
economies. People are striving for capitalism and democracy. Economies throughout
Asia have emerged as powerhouses. Latin American economies are reforming and
playing increasingly important roles. Technology is changing rapidly. and there are
enormous practical advances in using technology.
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2
In response to this time of historic change, the G-7 countries have led in
reforming the international financial institutions to deal with risk in capital markets and
to bring a new approach to development and reform. Moreover, the G-7 has rallied the
world around a market-based economic structure and sound economic policies.
Let me be clear: the G-7 has been absolutely indispensable in advancing the
long-term economic interests of the American people. We must remain fully engaged as
leader in the G-7 process and in the international arena more generally.
It is worth focusing for a moment on the economic context in which the United
States goes to Lyon. I can remember in years' past that presidents went to summits and
found their ability to exert leadership limited by our vast budget deficits and perceived
unwillingness to address them, and because we had lost our competitive edge in a wide
array of industries. Tokyo was this president's first summit. I was there and it was
remarkable how different this all was. The President's deficit reduction program was on
the threshold of being enacted by Congress and interest rates had reacted very favorably.
The President was able to stand tall as a leader, and you could see the other leaders at
the summit regarded him as the clear leader on economic issues.
Although many factors have contributed to our economic success in the past three
and one-half years, in my view there is simply no argument that the President's
leadership on deficit reduction has been the key and absolutely indispensable element.
To be sure, problems still remain. We need to do more to raise incomes and
wages, though over the past year wage stagnation has started to reverse. We need to do
more to improve and expand education. We need to do more to bring America's inner
cities into the mainstream. And we must do these things as we complete the progress
toward balancing the hudget.
But today, in contrast to five years ago, America is hack as the international
economic power, healthy and strong. In many ways, the U.S. economy is, once again, the
economy the world is looking at. In under four years, our ecnnomy has created nearly
ten million new jobs. Unemployment has fallen to S.h percent from 7.3 percent three
and one-half years ago. Inflation is near a 30-year low. We have enjoyed solid growth.
Interest rates remain helow the levels when the President first took office. And the
deficit will have been cut in half and more than in half as a percentage of our economy
by the end of this year.
Our situation looks even more favorahle when you match our performance against
that of our Summit partners. Our economy has created 7 times more jobs that all the
other G-7 nations combined. Business investment in the United States grew 28 percent
in real terms over the past three years while investment was falling in Japan and
continental Europe. Our government sector hudget deficit is the lowest among the G-7
in proportion to GDP.
3
Our progress putting our house in order and our strong economic performance
has given President Clinton great credibility and leverage as we lead the world to
policies that produce greater growth and security for all.
President Clinton has grasped the opportunities that the G-7 process provides to
use the international fora strategically and comprehensively to advance America's
economic interests. From the beginning of the Administration, the President understood
that we could best realize our objectives if the G-7 process had the energy and credibility
to address serious economic issues.
Through the G-7, there has been a major push on international trade to complete
the Uruguay Round and to create the World Trade Organization. Through the G-7 we
have led a major effort to mobilize conditioned support to spur reform in the former
Soviet Union. In these areas, the G-7 has heen successful.
The United States has also led through the G-7 to spearhead substantial changes
in how the international financial institutions respond to the glohalization of financial
markets and in their approach to development and reform.
Recognizing the challenge of dealing with these issues, the President two years
ago in Naples launched a fundamental re-examination of the roles and missions of our
international financial institutions -- the World Bank. the regional development banks,
the International Monetary Fund. and others.
At the Halifax Summit a year later, the G-7 endorsed a set of U.S. proposals in
response to that mandate. We are now putting in place the hroad elements of the
strategy outlined in Halifax.
First, we have strengthened the international capacity to prevent future financial
crises and to deal effectively with crises that occur.
The IMF has put in place a set of strong disclosure standards. which will help
provide early warning of impending prohlems and allow governments and investors to
react accordingly. I helieve had this provision heen in place at the time Mexico got in
trouble, global investors and markets might well have stopped that situation way before
it reached crisis levels.
The international regulatory community has agreed on ways to enhance regulatory
cooperation, including an important initiative to provide a consistent approach to
supervising activities of financial firms that operate across national houndaries.
We are working to strengthen hanking systems in emerging markets to reduce one
potential source of future crises.
4
We have reached agreement on a proposal to increase the resources available to
the IMF in financial crises, building the General Agreements to Borrow, which raises a
substantial share of the total from new participants.
And we have outlined specific proposals to change the way a future country debt
crisis would be handled, with a view to putting more responsibility on market
participants, that is, on private sector creditors, to prepare for and share the cost of
problems.
Together, these changes will make the lJ..S. economy and the international
financial system more resistant to crises, and they will help see that the United States
does not bear a disproportionate share of the financial responsibility for dealing with
cnses.
Second, in addition to the proposals for strengthening the capital markets, we
have made important progress in improving the effectiveness of the international
financial institutions to promote development and .economic reform. In the context of
the global economy, the global financial markets and the new consensus for market
economies, they will now be focussed on doing a hetter joh in channeling assistance to
the underpinnings for a sllccessful market economy, including poverty alleviation,
education, health and women's issues. In addition. they will also focus on dealing with
post-conflict situations in areas such as Bosnia and the Middle East.
These accomplishments are critical to our economy and national security.
From Naples to Halifax. to Lyon and into the future, these actions mean the
American economy will be less prone to shocks from crisis abroad. They mean that
when there are crises, America does not assume a disproportionate share of the
responsibility for responding. They mean that our national security is enhanced by
economic growth and the greater likelihood of political stahility. They mean more
growth in the developing world arid therefore more exports hy the United States, which
increases johs and increases standards of living.
If I might expand for one moment on the economic significance of all this. More
than 40 percent of our exports go into developing economies. More than a third of the
real growth in our GOP in this decade is attrioutahle to exports. In 1994, the United
States sold $40 hillion in goods to countries who have graduated from the International
Development Association's economic reform programs. That same year, we sold more
than $20 hill ion to countries currently in IDA programs.
5
Despite the critical contributions these institutions make to our economy and our
national security, there is no domestic American constituency for them. They are not
well appreciated by the pUblic. They are opposed by the voices of isolationism and
protectionism. They are not adequately funded by Congress. As a result we are falling
further and further behind in our obligations, and our commitment to pay our obligations
is being called into question. And that has the potential if not remedied to undermine
our ability to lead in these institutions, to undermine the institutions themselves, and to
more broadly undermine our ability to lead internationally. Great nations should not act
this way.
There are polls that show some AmeriCans believe we spend 15 percent of our
budget on foreign assistance, when in truth the number is well under 1 percent. We
spend less per capita -- sometimes two-thirds less --- than many developed nations. We
are dead last among OECD nations in foreign aid as a percentage of GDP. Again, this
is no way for a great nation to behave. And this is why the Clinton Administration has
been and is committed to restoring the bipartisan coalition crit·ical to international
engagement.
In closing, over the past four years we have taken steps to greatly strengthen our
economy, and a strong economy has given us great credibility in forums like the G-7.
We have used the increased credibility to address changes in the global financial markets
and focus the international financial institutions on new approaches to promoting
development and reform to reflect the enormous changes in the world economy.
When the President and Secretary Christopher and I go to these international
meetings -- from economic summits to our regional summits -- it is to continue the job of
making our country economically strong and secure by strengthening the global economy.
Over the long haul, the G-7 is making a difference not just for America but for the world
as well.
If you look across the last half century, the Americ.tn record is one to be proud of
-- the Marshall Plan and the defeat of communism. That record is a great tribute to the
generation that came before us. If we keep on the path I have described today and the
President has pursued, this generation will not be put in the position of having to
apologize to our children for failing to seize this opportunity to IT)ake the global economy
work to the henefit of all Americans.
Thank you.
DEPARTMENT
TREASURY
OF
THE
TRKASURY
,
NEWS
~/78~9~. . . . . . . . . . . . . . . .. .
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OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR RELEASE UPON DELIVERY
Expected at 10:30 a.m. EDT
June 20, 1996
STATEMENT OF
DONALD C. LUBICK
ACTING ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Madam Chairman and Members of the Subcommittee:
I am pleased to be here today to present the views of the
Department of the Treasury on issues relating to the
classification of workers as employees or independent
contractors. This is a significant and complex issue that merits
careful study. We commend the Members of this Subcommittee for
holding hearings on this important subject.
Background
Whether workers are classified as employees or as
independent contractors is significant for both Federal income
tax purposes and Federal employment tax (i.e., Social security,
Medicare, Federal unemployment insurance and withholding)
purposes.
Income, Social Security and Medicare taxes on
employees are collected mainly by employers through the
withholding system, whereas the same taxes on independent
contractors are collected mainly through self-assessment under
the estimated tax system.
Independent contractors can offset
income by deductions for business expenses that generally are not
as readily available to employees (except to the extent that the
employee itemizes deductions and business expenses and other
miscellaneous itemized deductions exceed 2 percent of adjusted
gross income).
In contrast, certain fringe beneflts provided by
a business to employees are eligible for greater tax preferences
than are available to independent contractors, although
independent contractors can adopt tax-qualified self-employed
retirement plans that can be similar to employer-sponsored plans
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
-
2 -
for employees. The classification of workers as employees or
independent contractors is also significant under a variety of
Federal and state labor and worker protection laws that cover
only employees, such as unemployment insurance, workers'
compensation, wage and hour requirements, and family and medical
leave requirements.
Most workers are classified as employees or independent
contractors based on the traditional common-law test for
determining the employer-employee relationship.l This test
focuses on whether the employer has the right to control not only
the result of the worker's services but also the means by which
the worker accomplishes that result.
The common-law control test is, by its nature, a test that
depends on the specific facts and circumstances of each
situation.
In an effort to administer this facts and
circumstances standard better, the Internal Revenue Service (IRS)
has derived from the case law a variety of factors that should be
considered, with more or less weight being accorded to particular
factors depending on the factual context.
In the vast majority
of cases, the classification of a worker under the common-law
standard is clear. However, because the control test is
inherently a factual determination, there are cases in which the
correct status of a worker is less obvious. 2 The uncertainty in
these cases has been perpetuated by the long-standing statutory
prohibition on the issuance of regulations or revenue rulings
regarding the proper classification of workers.
-The Internal Revenue Code (Code) does contain special rules
for classifying certain categories of workers.
Briefly, these
include mandatory independent contractor classification of
certain licensed real estate agents, direct sellers, and sittingservice placement agents (sections 3506 and 3508 of the Code);
and mandatory employee classification of corporate officers and
certain agent-or commission-drivers, life insurance salesmen,
home workers, and traveling salesmen (section 3121(d) of the
Code) .
-Cases in which there is intentional misclassification of an
employee as an independent contractor should be distinguished
from the classification issue generally.
In these cases, there
is no real question as to whether the workers are employees or
independent contractors. Rather, the parties involved may use
misclassification as a guise to avoid the costs of Federal and
State mandates designed to protect employees or as a method to
avoid full reporting of income and to evade taxes.
-
3 -
Current tax law does not consistently favor status as either
an employee or an independent contractor.~ However, in
particular circumstances one of the classifications may be
advantageous to a service provider, the service recipient, or
both. A company's costs may, for example, be lower if its
workers are classified as independent contractors rather than
employees to the extent the company can pay independent
contractors less than the sum of the cash compensation, the costs
of the company's portion of Social Security and Medicare taxes,
unemployment insurance, workers' compensation, other fringe
benefits that the company incurs for employees, and the overhead
costs of withholding and recordkeeping.
In addition, the income
and employment tax provisions of the Code may favor
classification as an independent contractor where a worker has
significant unreimbursed business expenses. This is primarily
because independent contractors face significantly fewer
restrictions on their ability to deduct trade or business
expenses than employees, as noted earlier. 4 Conversely, employee
status may be advantageous for workers with few business expenses
who benefit from the tax advantages accorded to fringe benefits,
especially those that are more cheaply obtainable or only
obtainable through an employer, such as employer-provided group
health insurance, workers' compensation insurance, or
unemployment insurance.
Workers who are classified as independent contractors may
also have greater opportunities than employees to avoid full
compliance with the tax laws. As previously noted, employees are
subject to withholding, and the amount of their wage income is
reported with great precision to the IRS.
Independent
contractors may find it easier to omit some of their income on
their tax returns without detection. Underreporting of income
becomes more difficult when an independent contractor's gross
3 Pr ior to 1984, compensation earned by independent
contractors was subject to lower rates for Social Security and
Medicare taxes than wage income. This disparity was believed to
create an incentive for misclassification. The differences were
actually less significant than they appeared, however. Although
tax rates were lower for self-employment income than for wages,
an independent contractor could not deduct self-employment taxes
while an employer could deduct its portion of Social Security and
Medicare taxes in computing its taxable income for income tax
purposes.
4Also , the estimated tax system used .to collect income,
Social Security, and Medicare taxes from lndependent contractors
largely avoids the overwithholding that can resul~ when an
employee incurs large business expenses, has net lncome that
fluctuates during the year, or is employed for only part of a
year.
- 4 -
income is reported to the IRS on information returns, although
the worker can incorporate and avoid information reporting
because of the current law rule which excludes payments to
corporate independent contractors from reporting. Moreover, even
independent contractors that report 100 percent of income have
greater opportunities to overstate deductible business expenses.
Clearly, some taxpayers have made use of these opportunities, and
this has resulted in significant amounts of noncompliance.
Recent Legislative
Histor~
Since the late 1970s, Congress, Treasury, and the Internal
Revenue Service have considered numerous proposals aimed at
resolving issues associated with the classification of workers as
employees or independent contractors. To date, legislation
dealing with classification issues has focused primarily on
relieving employers of what has been viewed as the excessive
penalties associated with honest errors in the misclassification
of employees as independent contractors.
Prior to statutory changes, when the IRS reclassified a
worker as an employee, the employer was generally held liable for
the full amount of unwithheld income taxes and the unwithheld
employee share of Social Security and Medicare taxes for all
years open under the statute of limitations.
In addition, the
employer remained liable for the employer share of Social
security, Medicare and Federal unemployment insurance taxes, plus
interest on these amounts.
Penalties also could be assessed.
The employer's liability for underwithholding was abated to the
extent that the employer could demonstrate that the misclassified
worker had paid income, Social Security and Medicare taxes on the
compensation received.
Data to support the determinations were
often difficult to obtain, however, especially if the worker was
no longer providing services to the employer.
Section 530.
In response to a number of large retroactive
employment tax assessments in the 1970s, Congress provided
certain employers with general statutory relief from IRS
reclassification of workers from independent contractors to
employees.
section 530 of the Revenue Act of 1978 prohibits the
IRS from correcting erroneous classifications of workers as
independent contractors for employment tax purposes, including
prospective corrections, as long as the employer has a reasonable
basis for its treatment of the workers as independent
contractors.
A reasonable basis includes reliance on (i)
judicial precedent, published rulings, letter rUlings or
technical advice memoranda; (ii) a past IRS audit (although not
necessarily an employment tax audit) in which there was no
assessment attributable to the employment tax treatment of the
worker or of workers holding substantially similar positions;
(iii) a long-standing recognized practice of a significant
segment of the industry in which the worker was engaged; or (iv)
- 5 -
any other reasonable basis for the employer's treatment of the
worker.
The relief provided by section 530 is not available unless
the employer consistently treats the worker, and any other worker
holding a substantially similar position, as an independent
contractor (sometimes referred to as the "substantive
consistency" test) and complies with the statutory requirements
for payments to independent contractors. For example, section
530 relief is not available if the employer has failed to comply
with the information reporting requirements associated with its
treatment of the worker as an independent contractor.
section 530 applies solely for purposes of the employment
tax provisions of the Code.
It has no legal effect on an
employer's treatment of a worker as an employee for income tax
purposes.
Further, it does not affect the worker's own tax
treatment for any purpose.
Consequently, section 530 can result
in the receipt of less than the appropriate amount of employment
taxes for some workers.
This is because these workers are
simultaneously treated as employees for their own tax purposes,
and thus are subject only to the employee share of Social
Security and Medicare taxes, and are treated as independent
contractors by their employers, which pay no employment taxes
with respect to these workers. As a result, an amount equal to
the employer portion of Social Security and Medicare taxes is not
paid.
Section 530 also has no impact on determinations of
employment status for other purposes, such as eligibility for
workers' compensation and unemployment insurance.
section 530 was enacted as a one-year "stopgap" measure
until Congress could devise a less contentious standard for
classifying workers.
It was extended several times and finally
extended indefinitely in 1982.
section 530 prohibits the IRS from issuing any regulations
or revenue rulings regarding the proper classification of
workers.
As a result, the IRS has not been able to issue any
generally applicable guidance in this area for close to 20 years.
section 3509.
In the Tax Equity and Fiscal Responsibility
Act of 1982, Congress added section 3509 to the Code in order to
mitigate employers' liabilities for retroactive employment tax
assessments where section 530 relief was not available.
section
3509 generally limits an employer's liability for failure to
withhold income, Social Security, and Medicare taxes on payments
made to an employee whom it has misclassified as an independent
contractor.
Under section 3509, an employer is liable for 1.5 percent of
the wages paid to the employee, in lieu of the inc~me tax~s that
were not withheld, plus 20 percent of the employee s portlon of
-
6 -
the Social Security and Medicare taxes on those wages.
If the
employer has not complied with the information reporting
requirements associated with the treatment of the worker as an
independent contractor, however, these percentages are doubled to
3.0 and 40 percent, respectively.
In addition, the employer's
liability under section 3509 cannot be reduced by any selfemployment or income taxes paid by the misclassified worker.
Section 3509 also does not relieve the employer of its liability
for 100 percent of the employer portion of Social Security and
Medicare taxes.
The relief provided by section 3509 is not
available if the employer has intentionally disregarded the
withholding requirements with respect to the employee.
The rules of section 3509 were developed in an attempt to
place employers and the Federal Government in approximately the
same financial position, on average, in which they would have
been if the amount of taxes actually paid by the misclassified
employees had been determined and used to abate the employers'
liabilities, without the need actually to determine those
amounts.
Thus, section 3509 has no effect on an employer's own
liability for Federal or State unemployment insurance taxes or
the employer portion of Social security or Medicare taxes. Also,
in return for limiting the employer's liability for failure to
withhold employee taxes, section 3509 prohibits the employer from
reducing its own liability by recovering any tax determined under
the section from the employee, and, as discussed above, ~ives it
no credit for any taxes ultimately paid by the employee.
section 1706.
In the mid-1980s, some employers in the
technical services industry complained that the relief granted
under section 530 created an unfair advantage for certain of
their competitors. They noted that section 530 affects different
taxpayers differently, depending on whether they satisfy the
statutory conditions for relief.
In particular, employers that
have consistently misclassified their employees as independent
contractors are entitled to relief under section 530, while other
employers in the same industry (that, for example, have sometimes
taken more conservative positions on classification issues) are
not entitled to relief because they cannot satisfy the
consistency requirements of section 530. The crux of the
employers' complaints was that certain taxpayers in the industry
=Under section 3509, as under prior law, the full amount of
the misclassified worker's gross compensation is subject to tax,
even though, if the worker had always been treated as an
employee, the employer would presumably have negotiated to reduce
wages to reflect the employer's liability for its portion of
Social Security and Medicare taxes, unemployment insurance, and
any fringe benefits provided by the employer at its option.
-
7 -
achieved unfair cost savings by treating the service providers as
independent contractors. 6
As a result of these complaints, in section 1706 of the Tax
Reform Act of 1986, Congress excluded from the ambit of section
530 taxpayers that broker the services of engineers, designers,
drafters, computer programmers, systems analysts and "other
similarly skilled workers engaged in a similar line of work II
effective for payments made after December 31, 1986.
secti~n
1706 applies exclusively to multi-party situations, i.e.
those
involving (i) technical services workers, (ii) a busines~ that
uses the workers, and (iii) a firm that supplies the workers to
the business. The effect of section 1706 is to deny section 530
relief solely to the firm that supplies the workers.
section
1706 did not affect the application of section 3509 to such
firms.
Recent Administrative Initiatives
The IRS has recently announced several administrative
initiatives to improve the current situation in the worker
classification area.
In March of this year, the IRS released to the public for
advance comment new training materials for IRS examiners. The
training materials are intended to ensure that examiners make
legally correct determinations about whether workers are properly
classified as employees or independent contractors under the
common-law standard. The materials emphasize to examiners that
they must approach the issue of worker classification in a fair
and impartial manner, and remind examiners that either worker
classification -- independent contractor or employee -- can be a
valid and appropriate business choice. These new training
materials also demonstrate how the application of the common-law
standard has evolved to reflect the changing nature of business
relationships. The materials (including the opportunity provided
for taxpayers and all other interested parties to comment on a
draft of the materials) and the IRS training program based on the
6As explained above, however, misclassification of an
employee as an independent contractor does not necessarily result
in any cost savings. However, cost savings could be achieved if,
for example, the client is able to pay the independent contractor
less than the sum of the cash compensation, its portion of Social
Security and Medicare taxes, unemployment insurance, workers
compensation, the cost of other State and Federal protections,
fringe benefits that it would have paid to an employee, and the
overhead costs of withholding and recordkeeping. Cost savings
also could be achieved if the worker accepts a lower payment as
an independent contractor because he intends to evade taxes by
underreporting income or overstating deductions.
-
8 -
new materials will help promote both consistency and additional
clarity concerning IRS application of the common-law
classification standard.
The IRS training document also addresses in detail the
application of section 530 of the Revenue Act of 1978.
It makes
clear to examiners that section 530 should be actively considered
during an examination.
In fact, the materials state that
examiners are required to explore the applicability of section
530 even if not raised by the taxpayer, in order to correctly
determine the taxpayer's tax liability.
Another recent initiative taken by the IRS is a
classification settlement program that allows businesses to
resolve worker classification cases earlier in the examination
process, reduce taxpayer costs, and ensure the proper application
of the provisions of section 530. 7 Businesses that have
misclassified their workers as independent contractors, have
filed Form 1099 information returns, but have failed to meet all
of the other requirements for relief under section 530, can
settle the matter with IRS examiners by reclassifying their
workers prospectively and paying only limited tax assessments. 8
This reduces the risk that tax assessments could be applied for
multiple years.
Participation by businesses in the settlement program is
entirely voluntary, and businesses declining to participate
retain all rights that exist under the IRS's current procedures.
The program is intended to simulate the results that would be
obtained under current law if businesses accepting the offers had
instead exercised their right to administrative or judicial
appeal.
In addition, the IRS has recently announced procedures for
allowing businesses, at their option, to resolve employment tax
The program is scheduled for a two-year test period during
which time it will be evaluated.
"If the business meets the section 530 reporting consistency
requirement but the business either clearly does not meet the
section 530 substantive consistency requirement or clearly cannot
meet the section 530 reasonable basis test, the assessment would
be limited to one year of employment tax liability (as limited by
Code section 3509).
If the reporting consistency requirement is
met and the business has a colorable argument that it meets the
substantive consistency requirement and the reasonable basis
test, the assessment would be limited to 25 percent of one year's
income tax withholding, Social Security and Medicare tax
liability for the year (as limited by Code section 3509), plus
the Federal unemployment insurance tax liability for the year.
-
9 -
issues more quickly by appealing these issues to the IRS Appeals
function even while an examination on other issues is still in
progress.
The appeals procedure runs for a one-year test period
during which time it will be evaluated.
Further, we are working with IRS to develop administrative
guidance on the often difficult issue of whether a taxpayer has
satisfied section 530 by virtue of reliance on a long-standing
recognized practice of a significant segment of the industry in
wh'ich the worker was engaged. The guidance is expected to
provide that, in defining a significant segment of an industry,
no fixed percentage is appropriate for all cases because the
determination is part of a facts and circumstances analysis
involving a number of variables. However, depending on the
facts, less than a half of the industry may constitute a
significant segment of the industry.
In addition, the guidance
is expected to make clear that, while determination of whether a
practice is ulong-standing" is based on facts and circumstances,
a practice will be presumed to be «long-standing" if it has been
in effect for 10 years or more, and that an industry with a
"long-standing" practice can include an industry that was
established after 1978 (when section 530 was enacted).
We believe that these initiatives represent a significant
response to concerns expressed by taxpayers, particularly small
businesses, in the worker classification area. We would urge
that these initiatives be given a chance to work, especially in
conjunction with the legislative changes proposed on page 13
below to eliminate past employment tax liability in certain cases
where taxpayers have a reasonable argument that they meet the
requirements of section 530, and to provide easier access to an
independent determination by the Tax Court.
Legislative Proposals
Concerns Regarding Proposed Changes to Classification
Standards.
The Subcommittee will be examining legislative
proposals to change the Federal tax rules for determining whether
a worker is an employee or an independent contractor.
In
particular, the Subcommittee has requested comments on H.R. 1972
and H.R. 582.
These bills would provide new standards under
which workers would be classified as independent contractors.
Under these bills, where the standards were not met, the current
common-law classification test would still apply.
At the outset, we note that worker classification is a
difficult and long-standing issue that has far-reaching
implications.
Fundamental issues, including issues beyond the
collection of income and employment taxes, may be affected by
legislative changes altering the standard for determining whether
a worker is an employee or an independent contractor.
- 10 Accordingly, in evaluating possible legislative proposals in
this area, we believe it is helpful to bear in mind a number of
important (albeit sometimes conflicting) principles and
objectives. Among these is the principle that absent good cause,
government generally should not interfere in the legal
relationship between workers and service recipients. At the same
time, legislative changes should not impair the ability of
government to collect the proper amount of income and employment
taxes in a reasonable and efficient manner.
In addition, an
effective system of government should attempt to promote
certainty and fairness in the application of the law.
Consistency of worker classification for various Federal and
state law purposes, and for businesses entering into similar
relationships with workers, are also important considerations, in
part because consistency reduces compliance burdens for
businesses.
Further, much of the existing legal system that is
in place to protect workers against certain types of risks
applies only to workers who are classified as employees.
For
that reason, it is important that any legislation altering the
status of workers be analyzed carefully to determine its
potential impact on worker protections.
Under current law, worker classification in the Internal
Revenue Code directly affects income, Social Security and
Medicare taxes.
However, it also affects other issues such as
the availability of employer-provided pensions and group health
insurance.
For example, under current law, tax-qualified
retirement plans sponsored by a business are permitted to cover
only the business's employees. Legislation that resulted in the
conversion of employees into independent contractors for Federal
tax purposes would reduce the number of people eligible to save
for retirement in tax-qualified employer-provided pension,
401(k), and other retirement plans. These reclassified workers
would be free to establish their own tax-favored retirement
plans.
However, with automatic employer contributions, employee
savings through payroll deduction, employer matching
contributions, employer education programs, and economies of
scale, employer-sponsored plans have proven to be a particularly
effective means of promoting retirement savings for workers,
especially for middle- and lower-income workers who might be less
likely to save outside the workplace.
In addition, converting
employees into independent contractors could result in fewer
people receiving the benefits of lower-cost group health coverage
through their employers.
In evaluating any proposed legislation, it is also important
to consider whether a new statutory standard under Federal tax
law would lead to similar changes in coverage under other Federal
and State laws, such as the laws that provide unemployment
insurance, workers' compensation, minimum wage and maximum hour
protections, workplace health and safety standards, and family
and medical leave protections to workers who are classified as
-
11 -
employe~s:
This might occur, for example, if businesses that
reclasslfled workers as independent contractors under a new
Federal employment tax standard also treated those workers as
independent contractors for purposes of other laws that are based
on employee status.
Broader reclassification under these other
statutory provisions could also result from subsequent efforts,
in the interest of simplification, to eliminate inconsistencies
between the classification standards under those state and
Federal non-tax laws and a new Federal employment tax
classification standard by conforming them to the new standard.
These potentially sweeping implications should be explored
carefully and thoroughly before enactment of any new statutory
classification standard for Federal tax purposes.
As a general matter, experience suggests that it is
difficult to devise one simple, specific statutory definition or
safe harbor that applies appropriately to the many varied
existing worker relationships and occupations. Moreover,
specific statutory rules, by contrast to regulations and rulings,
are not easily adapted to the changes that are constantly taking
place in an area as complex and dynamic as the American work
place.
Legislative proposals to replace current worker
classification rules with new standards raise a number of serious
concerns.
First, in an effort to achieve simplicity and
objectivity in this area, some proposals would prescribe "safe
harbor" criteria for classification as an independent contractor
that are easily satisfied and that could result in large-scale
shifting of workers from employee to independent contractor
status.
For example, requirements that workers have significant
training in order to constitute independent contractors could be
automatically satisfied by large classes of workers with
licenses, professional degrees, vocational training, or various
types of technical training. Requirements that workers have made
themselves available to work for others could be satisfied
through low-cost advertisement or registration by employees who
have no intention of working for anyone other than their
employers.
Second, under some proposals, worker status is easily
recharacterized without altering the underlying relationship
between the worker and the employer. For example, it is not
difficult for an employer to structure an artificial arrangement
that would appear to meet a requirement that an individual be
able to realize a profit or loss to be considered an independent
contractor. An employer could require the employee to purchase
or rent certain tools and supplies used in generating the
employer's product, but could protect the employee from loss by
directly compensating the ~mployee through a commensur~te p~y
increase.
This could permlt an employee to appear to reallze a
profit or loss" without changing the nature of the employer-
-
12 -
relationship or the tasks that the employee would
undertake, particularly if the worker purchases supplies and
rents equipment from which the worker could "walk away" if
employment terminates.
By similar means, an employer can fairly
easily restructure payments to make it appear that an employee
will incur significant unreimbursed expenses.
The employer can
require the worker to furnish certain tools and supplies while
the employer provides a corresponding increase in the payments
made to the worker that is not characterized as a reimbursement.
The requirement that the worker and service recipient enter into
a written agreement concerning worker classification also would
fail to prevent inappropriate recharacterization of employee
status, particularly where workers do not have as much bargaining
power as the business.
e~ployee
Third, in the interest of simplification, some legislative
proposals sacrifice clarity, using terms that sound easy to apply
in the abstract but would leave serious ambiguities regarding
their interpretation.
For example, proposals may require that a
worker make "significant" investment in tools, equipment, or
training to constitute an independent contractor.
Yet what is
"significant" is not objectively determinable, and may vary among
occupations and industries.
Such provisions would only replace
the current standards with new standards that also have inherent
ambiguities.
Fourth, by permitting workers to become independent
contractors by meeting alternative criteria, many proposals would
allow taxpayers to apply criteria that, while appropriate in
certain contexts, are inappropriate for the occupation or
industry being considered. Thus, the problems identified above
are exacerbated when one or two criteria alone become
determinative in classifying workers.
In a well-meaning attempt
to craft a "one-size fits all" solution, legislators may craft a
standard that is too loose for many occupations and industries.
For example, some might argue that it is appropriate to determine
whether an architect, working full-time on a building project for
an employer, is an independent contractor based on whether the
architect has significant investment in training and has
performed or offered to perform sUbstantial services for others
in the past year.
However, these same broad statutory standards
could then be applied to employees in fields with high turnover
and significant training requirements, such as certain nurses
working in hospital settings, to shift numerous employees to
independent contractor status.
In summary, many legislative proposals establish standards
that are easily satisfied or manipulable, lack clarity, and would
impose alternative requirements that allow taxpayers to pick and
choose elements in a manner inappropriate to the occupation or
industry involved.
While most workers are readily classified as
employees or independent contractors, there will always be a
-
13 -
class of cases that are less obvious. The formulation of
objective, mechanical standards to resolve these cases has proven
to be an elusive goal because classification under the common-law
control standard looks to the realities of the situation and
therefore is inherently fact-sensitive.
Moreover, in light of
the significant worker protections that hinge on status as an
employee, it is important to consider carefully the risk that new
statutory classification standards could result in significant
shifts of workers from employee to independent contractor status.
Proposals for statutory Modifications Relating to section
530 and Tax Court Jurisdiction. Perhaps the greatest problem for
business in this troubled area is not the possibility that an
employer treating its employees as independent contractors will
be required to reclassify them as employees for the future, but
the risk of sUbstantial employment tax liability and penalties
for previous years, even where the employer had a reasonable
argument and belief that it was entitled to section 530
protection.
To address this problem, we propose that Congress permit
businesses that fail to meet the requirements of section 530 and
misclassify workers as independent contractors to reclassify
their workers prospectively with no employment tax liabilitr for
prior years, provided that they satisfy certain conditions.
To
qualify for this relief, the business would have to meet the
section 530 reporting consistency condition, and have a
reasonable argument that it meets the section 530 sUbstantive
consistency and reasonable basis requirements.
This "reasonable
argument" standard is intended to provide relief to taxpayers who
fall just short of meeting those section 530 requirements. Of
course, as under current law, if workers are correctly classified
as independent contractors, or if the taxpayer meets section 530,
then the business would not be required to reclassify the workers
as employees.
Under the proposal, a taxpayer that believes the IRS has
erred in its case would be given an expanded opportunity to
obtain an independent review of the IRS decision. United States
Tax Court jurisdiction would be enlarged to cover worker
classification determinations for employment tax purposes. Of
course, the Tax Court would have the authority described above to
determine whether misclassified workers should be reclassified on
a prospective basis only.
Access to the Tax Court would permit disputes to be resolved
more quickly and at lower cost than in Federal district court.
T his suggested legislative change builds on the relief
provided under the IRS's Classification Settlement Program,
described above.
9
- 14 -
The Tax Court provides simplified procedures that might be
adapted for small business cases.
Tax Court judges have
considerable experience in resolving tax cases involving similar
issues, and many small cases are currently resolved without
requiring the business to retain counsel. We believe that the
expanded Tax Court jurisdiction would provide a business with
increased access to an independent judicial resolution if the
business believed its determination, rather than the IRS
position, was correct.
These legislative proposals -- to eliminate past employment
tax liability in certain cases where taxpayers fall just short of
meeting section 530, and to increase a small business's access to
an independent, third-party determination -- should further help
taxpayers to resolve worker classification problems in a fair and
cost-effective manner. We believe that, in combination with the
administrative steps described earlier, they would provide
significant relief to small businesses from the most serious
problems relating to worker classification.
In addition, we believe that it may be possible to improve
understanding of the common-law classification standard through a
revenue ruling or other guidance. The recently revised IRS
training materials take an important step in this direction by
emphasizing that the true common-law test is the right to "direct
and control" and that the "20 factors" that are often referred to
in connection with this test are relevant only insofar as they
provide evidence bearing on whether the test is satisfied. We
think that it would be helpful to taxpayers for this message to
be communicated through more formal guidance (such as a revenue
ruling), and we also believe that such guidance could help
taxpayers focus on factors -- likely five or fewer -- that are
most relevant to their particular situations. At present,
section 530 precludes the issuance of a revenue ruling or
regulations to provide this clarification. We would be pleased
to explore with Congress the possibility of amending section 530
at least to the extent necessary to permit pUblication of such
guidance.
Proposals for statutory Modifications Relating to
Information Reporting. We believe that any proposal in this area
should attempt to improve compliance with regard to independent
contractors.
Under current law, service-recipients engaged in a
trade or business are required to report, on Form 1099, payments
in the course of such trade or business to any individual
independent contractor of $600 or more during a calendar year.
This information-reporting system is one of the most effective
tools for enforcing proper reporting of income by independent
contractors, because taxpayers are more likely to report a
payment on their income tax return if they know the payment
already has been reported to the IRS by the payor.
- 15 The penalty on a service-recipient for failure to file the
information return, however, is only $50 (unless the failure is
due to intentional disregard of the reporting requirement). We
believe this relatively minor penalty, last increased in 1982,
contributes to substantial noncompliance with these reporting
requirements.
In recent years, many experts in this area have
proposed substantially increasing this penalty. The
Administration's fiscal year 1997 budget proposes to increase the
general penalty for any failure to file an information return to
the greater of $50 per return (the current penalty) or 5 percent
of the total amount required to be reported.
Increasing the
penalty in proportion to the amount of the unreported payment
balances the need to have a stronger incentive to comply with the
reporting rules with the concern that the penalty not be unduly
harsh. The proposal includes limits on the penalty to ensure
that the increase will not be imposed on those firms that have
very substantially complied with the reporting requirements,
i.e., where the failure is likely due to inadvertence or
administrative error in a firm that has made a serious attempt to
fully comply with the rules.
Specifically, under the proposal
the penalty will not apply if the failure is corrected by August
1 of the year the return is due.
In addition, the penalty will
be limited to $50 per failure, as under current law, if the
taxpayer properly reported at least 97 percent of all amounts
required to be reported for that period. We note that the Tax
Section of the New York State Bar Association has made a similar
proposal. (See the 1995 Report on Proposed Reforms to
Administration and Enforcement of Employment Tax and Income Taxes
on Individual Workers.)
In addition, under current law, a service-recipient is not
required to file an information return with respect to payments
made to a corporation for services rendered. The Administration
believes that corporations doing business with the Federal
government should report as income their payments from the
Federal government.
Accordingly, the Administration's fiscal
year 1997 budget would generally require Federal agencies to
report payments of $600 or more to corporations for services
rendered, with appropriate exceptions as prescribed in
regulations.
Conclusion
Worker classification is a difficult and complex issue that
has far-reaching implications.
Legislative changes that would
result in the reclassification of workers from employee to
independent contractor status could affect a variety of
protections for these workers.
It is important to explore these
potential consequences thoroughly before enacting any new
statutory classification standard for Federal tax purposes. At
the same time, we believe that Congress should consider proposals
to eliminate retroactive employment tax liabilities in certain
-
16 -
cases where an employer has a reasonable argument that it meets
the requirements of section 530, and to permit taxpayers to
resolve disputes with IRS in a simpler and more cost-effective
manner.
The Treasury Department appreciates the ongoing efforts by
the Members of this Subcommittee and others to address this
subject. We would be pleased to explore these issues further
with the Subcommittee.
Madam Chairman, this concludes my formal statement.
I will
be pleased to answer any questions that you or other Members may
wish to ask.
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622·2960
"The Twenty-First Century American Economy"
Lawrence H. Summers
Deputy SecretarY of the Treasurv
The International Courl'cil of Shopping'Centers
Washington, IX
June 20. 1996
Introduction
Good afternoon. It is a pleasure to be here among a group that has \vorked so hard to
build America's future. My subject today is the American economy of the twenty-fIrst
century. More than anything else, the success of the United States in the 21 st Century will
depend on our ability to generate rapid and inclusive economic growth. That has been and
must continue to be the primary goal of national economic policy.
The Importance of Growth
No matter what problem. opportunity or challenge you \vish to discuss. the solution
comes back to gro\Vth. It comes back to gro'Wth because:
•
•
•
•
Gro\Vth means more families able to achieve their Americn dream of a higher and
rising standard of living.
Growth means more jobs at higher wages.
Growth provides the wherewithal for us to fu11111 our public mission--be it solving the
problems of the inner-city or tacing the demographic challenge of retiring baby
boomers.
Gro\Vth detennines our international strength. Ultimately. it was the strength of the
American economic machine that \\on us the Cold War. And continued economic
strength is essential if we are to continue to lead the \\mld peacefully into the 21 st
CenturY.
No Urnits to Growth
The potential for the American econom: to grm\ is unhounded. As the President has
said, we live in an Age of Possibility. America is the \\odd's leader in innovation in almost
RR-1141
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040
2
any post-industrial activity that you can name. Think of Microsoft or McDonald's or Visa or
Federal Express or Disney or Wal-Mart.
We cannot and will not accept any "speed limit" on American economic growth. It is
the task of economic policy to grow the economy as rapidly, sustainablyand inclusively as
possible. Of course, the maintenance of low inflation must be a crucial objective of economic
policy. But we have nothing to fear and everything to gain from increases in growth arising
from productivity growth or the expansion of the economy's capacity to produce. For the
long run, over the 21st Century, it will be our ability to raise productivity growth and expand
capacity that will determine how we fare economically as a nation.
No one can say how fast the economy will grow with the right policies over the next
ten years. Of course, we must be conservative in prearing our budget forecasts. But we must
not be conservative in setting our vision.
I want to talk today about President Clinton's growth strategy. Before I do, I want to
highlight the progress we have made so far. We are enjoying the first investment-led, low
inflation recovery since John F. Kennedy was President.
•
•
•
Since the beginning of the Administratio~ this economy has created over 9.7 million
new jobs.
Real wages are starting to rise for the first time in years. In 1994, mean family
income rose by 2.3% after several years of negative change.
Investment in equipment is at an all time high as a share of GOP.
In short, our growth strategy is working.
Twentieth Century Economics
Our growth strategy is rooted in the principles of 21 st century economics. Some of
these principles are eternal verities. Others reflect changing economic conditions.
The first principle is that we can only reap what we sow.
•
•
Continued growth in our nation's standard of living depends on continued investment
in our future. While this principal is as old as the bible, it has at times been forgotten.
Ultimately, economic growth can only come from expanding our nation's productive
capacity. This depends on capital.
Capital takes many forms. It is equipment and buildings. highly trained workers and
networks of idea generators. It is physical capitaL human capitaL intellectual capital
and social capital.
The second principle that must govern our strategy for growth is that a nation's people
are its most important resource.
•
No longer does economic success depend on what lies in or below the ground--on
3
•
•
what a country can grow or what it can mine.
In a world where capital can move, where technology can move and where the very
notion of a national company is being lost, a nation's most important resource is its
people. America's people are our only uniquely national resource.
If one looks at the tremendous economic success of Asian countries over the last few
decades, it probably has many roots. But none is more fimdamental than those
countries' commitment to universal education and the reverence for learning that they
have instilled in their people.
The third principle is that in the 21st Century, nations will either grow together or stagnate
apart.
•
•
•
Trade means more and better jobs. Roughly 11 million Americans hold jobs that are
supported by exports and those jobs are good jobs paying 15% more than average.
Trade also spurs our producers to be more efficient and provides more products to
consumers at lower cost. No nation can survive as an island unto itself
When the history of our era is told, I believe that the end of the Cold War will be the
second most important story. More important is the fact that this is the period when 3
billion people around the world boarded the escalator to modernity. Growth around
the world is creating huge new markets for American products. In the 1950s only
about 2% of growth was attributable to exports. In the 1990s, over one-third of real
economic growth came from exports.
American leadership is necessary to promote economic refonn, to open markets, and
to safeguard the fimctioning of international fmancial markets.
The fourth principal is that the 21st Century economy will be information-based not massbased Prosperity will bubble up; it will not trickle down.
•
•
•
In the 20th Century, it was the mass of products that detennined their value--the tons
of wheat or size of cars. In the 21 st Century, it will be the knowledge imbedded in
them. This puts a premium on flexibility and innovation.
Think of the difference between steel and semiconductors or between chemical
production and biotechnology. Indeed, the entire sector of information services will be
entirely free of mass.
No example proves this principle better than the experience of the former Soviet
Union. Their production in terms of machine tonnage was indeed tremendous, but in
terms of value it was minuscule. They were measuring success with the metrics of the
past, not the metrics of the future.
1be Administrntion's Five-Part Strntegy for Growth
These principles, based on experience and a vision of the capacity for America to
grow, have guided us in formulating a five part strategy to develop the t\venty-frrst century
economy.
The frrst element of our strategy for growth is the promotion of investment and savings.
4
•
•
•
As a result of the Administration's 1993 budget deal and the faster economic growth it
stimulated, the deficit has been cut in half. From an all-time high of $290 billion in
FY 1992, the deficit was reduced to $164 billion last year, and is on track to come in
below $130 billion this year. That's in nominal dollars.
Now we have to finish the job. The President has proposed balancing the first
balanced presidential budget since the 1970s. It is based on spending reductions, it
includes tax cuts, it takes place in seven years and it is based on Congressional
forecasts. It is the right way to balance the budget.
Having reduced our rate of government dis-savings, we must now turn our attention to
personal savings. To this end, the President has introduced reforms of IRAs and a
new pension plan for small businesses that will include pension portability.
•
And let me mention here a new product the treasury may soon offer: inflation
protection securities. These bonds will offer protection from inflation; and it is
possible to conceive of loan instruments where re-payment is backloaded to
correspond to inflation.
The second element of growth is investment in people.
•
Improved quality of primary and secondary education will allow more people to excel,
to create, to innovate. That's why we have insisted on adequate fimding for Head
Start, and have developed the bipartisan Goals 2000 program, which encourages states
to set high educational standards. Under the Congressional leadership's budget, up to
20,000 children in 1997 would be denied the opportunities of Head Start.
•
Higher education will be the key to success in the 21st century. Already, those with a
college degree make almost twice as much as who only completed high school. Our
tuition tax credit will go a long way toward making 14 years of school as universal as
the first 12 are today.
•
And because what you learn in college may not be enough for your whole career, we
have proposed skill grants to pursue lifelong learning.
The third element of our growth strategy is a coordinated attack on closed markets and an
effort to open up the world economy.
•
We have put the American government behind the American exporter. Our actions
include helping U.S. bidders in global competitions, removing bureaucratic obstacles to
exporting and promoting U.S. exports abroad.
•
We stood up for NAFTA and got it passed. It is a good agreement that has been good
for us, good for Canada, and good for Mexico.
•
To date, we have negotiated 21 trade agreements with Japan in sectors ranging from
cellular telephones to rice.
•
The President has sketched out a bold vision of free trade in the Americas and free
trade in the Pacific.
Fourth, government has a major role to play in technology and fostering innovation.
Historically, science and technology have enjoyed bi-partisan. broad based support.
•
In fact, today's most exciting technologies were engineered by the US government.
The Internet was developed by the Defense Department, and managed by the National
5
•
•
Science Foundation. Today, the value of the top 10 Internet companies exceeds $16
billion dollars.
The Mid-Atlantic region is one that has benefited tremendously from federal
investment in technology. Think of the boom in software finns near Dulles airport,
the development of biotechnology along Route 270 or the technology enclave along
the Philadelphia-Princeton corridor. Much of this development owes its genesis to
federal investment in technology.
We have fought to protect basic research and development fimding. In addition, we
have forged technology partnerships with private industry through the Advanced
Technology Program and the Manufacturing Extension Partnership to i"ncrease precompetitive research in promising civilian industrial technologies.
Fifth and finally, the 21st Century economy has to be flexible. Not only is it
important to provide for the ingredients for economic growth--training, investment, R&D and
open markets--but it is equally important for the economy to be able to use those ingredients
as effectively as possible.
•
•
v.
The Administration is working to remove the heavy hand of regulation from our
economy. Through Vice President Gore's reinventing government efforts, we have cut
100,000 workers from the federal payroll. We are cutting regulations where they are
no longer needed. The new telecommunications bill, for example overhauls outdated
laws in order to increase competition and cut prices to enable all Americans to enjoy
the benefits of the infonnation highway.
It is imperative that people have the security they need in a flexible economy.
Accordingly, the Administration has worked hard to make health insurance and
pensions more portable. Not only does portability enhance health and retirement
security, it enhances growth. Improved portability will encourage workers to make the
most of their skills and to take full advantage of new opportunities. We are very
hopeful that a compromise can be reached on the Kennedy-Kassebaum legislation,
which is an important first step in this direction.
Conclusion
Let me end where I began. The United States has no speed limit to growth. We have
the right strategy based on the principles of the 21 st Century economy, a strategy based on
what has worked around the world. It is not based on the naive idea that the public sector
can drive the economy fast by directing action, running deficits or printing money. Nor is it
a strategy based on the idea that somehow government abdi~tion will elim.inate all our
economic problems. It is a strategy that can make sure that like the TwentIeth Century, the
21st Century will also be an American century.
DEPARTMENT
OF
THE
TREASURY
~178~9~. . . . . . . . . . . . . . . . . . . . . ..
........................
OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
June 20·, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $19,413 million of 52-week bills to be issued
June 27, 1996 and to mature June 26, 1997 were
accepted today (CUSIP: 9127942R4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.55%'
5.57%5.56%'
Investment
Rate
5.B8%'
5.90%5.89%'
Price
94.388
94.368
94.378
Tenders at the high discount rate were allotted 7%".
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
$56,143,522
Accepted
$19,413,382
$48,836,496
979,526
$49,816,022
$12,106,356
979,526
$13,085,882
4,800,000
4,800,000
1. 527,500
1. 527,500
$19,413,382
$56,143,522
An additional $165,000 thousand of bills will be
issued to foreign official institutions for new cash.
RR-1l42
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . ..
............................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
June 21, 1996
Contact: Joyce McDonald, FinCEN
(703) 905-3770
Media Advisory
Global Money Laundering Problem to be Addressed at
Meeting of the Financial Action Task Force (FA TF)
The FA TF is a 26-nation organization created by the G-7 to address the global
problem of money laundering. It serves as the world leader in promoting the development of
effective anti-money laundering controls and cooperation in counter-money laundering
investigations among its membership and around the globe.
From June 25-28. the FA TF will hold a meeting in Washington. D.C.. attended by 200
delegates, The organization. which is based in Paris. France. is holding its first-ever meeting
in the United States. Since July 1995. the United States has held the Presidency of the FA TF
under the leadership of former Treasury Under Secretary for Enforcement Ronald K. Noble.
Treasury's Financial Crimes Enforcement Network (FinCEN) is serving as the lead agency
for coordinating the U. S. role within the FA TF.
This year. for the first time since it was created. the FA TF undertook a major
examination of its anti-money laundering standards. making significant revisions to adjust to
changing global money laundering trends.
The following is a schedule of events open to the media:
Monday. June 24
Background Briefing
Participants:
FA TF President Ronald K. Noble
FinCEN Director Stanley E. Morris
FA TF Secretary Patrick Moulette
Incoming FA TF President Fernando Carpentieri,
(Director General. Ministry of the Treasury. Italy)
(more)
RR-1143
Subject: Description of F ATF; its accomplishments under the
U.S. Presidency; and upcoming announcements planned for
Friday's news conference.
Time and Location: 10:00 a.m.
National Press Club, Lisagor Room
529 14th Street, N.W.
Washington, D. C.
Tuesday, June 25
Opening Remarks to the
Financial Action Task Force Plenary,
Deputy Secretary of the Treasury
Lawrence H. Summers
Time and Location: 9:30 a.m.
Renaissance Mayflower Hotel, Grand Ballroom
1127 Connecticut Avenue, N.W.
Washington, D.C.
Friday, June '8
Press Conference
Participants:
FA TF President Ronald K. Noble
FinCEN Director Stanley E. Morris
FA TF Secretary Patrick Moulette
Incoming FA TF President Fernando Carpentieri,
(Director GeneraL Ministry of the Treasury, Italy)
Subject: Accomplishments of the FATF;
announcement of revised 40 Recommendations;
and release of FA TF's annual report.
Time and Location: 1 :00 p.m.
Renaissance Mayflower Hotel. Grand Ballroom
1127 Connecticut Avenue, N. W.
Washington. D.C.
(Press credentials are requested. Cameras should be in place by 12:45 p.m.)
- 30 -
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
As Prepared for Delivery
Sunday, -June 23, 1996
REMARKS BY TREASURY SECRETARY ROBERT E. RUBIN
SECOND ANNUAL 14TH CONGRESSIONAL DISTRICT ISSUES CONFERENCE
SPONSORED BY CONGRESSWOMAN CAROLYN MALONEY
Good afternoon, and thank you Carolyn. It's always a pleasure to appear with my
Congresswoman.
We've had a great deal of opportunity to work together in the past four years -- on
capital access, on the debt limit and interstate banking and our agenda for the international
financial institutions. We've also worked closely on the legislation she sponsored and the
President has now signed to improve government debt collection. And of course, she was an
important part of the coalition which passed the president's economic plan -- a plan that has
halved the federal deficit in under four years and helped the economy create 9.7 million net
new jobs. As this conference demonstrates, she takes economic issues very seriously and is
an effective member of Congress as a result.
I'm glad to see the turnout this afternoon, because that's a sign that N ew Yorkers care
very deeply about the future of our city and the future of this region.
I've lived here most of my life, and I've had an interest in the affairs of New York for
quite some time. But my commitment to the problems of the inner city deepened about 14
years ago when I read a book called "The UndercIass." It described the inter-generational
cycle of poverty, despair and alienation that was then and still is a personal tragedy for so
many residents of the inner cities, and a central problem for our entire society.
RR-1144
Far press releases, speeches, public schedules and official biographies, call our 24~lQur fax line at (202) 622-2040
~
2
Recent reports show the seriousness of the problem. The Committee for Economic
Development reports that one third of the neighborhoods in our 100 largest cities are
distressed or in danger. The Organization for Economic Cooperation and Development in
Paris, the OECD, ranks us at the top of a list of 16 industrialized nations in income disparity.
That same study shows that poor U.S. children are poorer than the children in about all other
Western industrialized nations. That is not a formula for a healthy economy or social fabric
for any of us_
I believe, and more importantly the president believes, that unless we succeed in
bringing the residents of the inner cities into the economic mainstream, our economy will be
seriously impaired for all of us because of the social costs and lost productivity, and our
social fabric will be increasingly torn, again for all of us. It is critical that all Americans
understand that no matter where they live or work, they have a vital stake in reviving our
inner cities.
The problems of urban America are deep seated and were created over decades. The
solutions will take time. They will not come overnight.
Today, it is fashionable to say that government has no role to play, and that programs
to help the inner cities don't work. As Treasury Secretary, let me simply say that is purely
and unequivocally not so. It is true that failures are easy to see and that we still have much
to do. But it is also true that there are effective federal, state and local programs all across
America, and Americans need to know that. I've seen first-hand how these efforts can help
revive neighborhoods and empower individuals, and this Administration has worked hard to
ensure that effective actions are taken.
First, I'm speaking of what I would describe as human capital initiatives: Head Start,
the Jobs Corps, educational assistance and educational tax incentives, skills training, infant
and maternal health programs. It is a fundamental fact that investment in people can pay
dividends in terms of higher living standards and foregone public sector costs in later years.
Second, we need order on our streets. We need police, laws that prevent guns from
being in the hands of criminals, and prompt and credible justice. At Treasury, our bureau of
Alcohol, Tobacco and Firearms helps to shut down pipelines of guns coming into our cities.
And ATF runs a program called GREAT, or Gang Resistance, Education and Training, that
helps steer youngsters away from gangs and guns and drugs.
Third, the residents of the inner cities need to get jobs and earn a living wage. They,
like all working Americans, need an increase in the minimum wage. They need the Earned
Income Tax Credit that rewards work and helps families stay off welfare, not a tax increase,
as under the congressional majority's budget.
3
Fourth, our inner cities need access to private sector capital. If I might quote Robert
Kennedy, he said, "To ignore the potential contribution of private enterprise is to fight the
war on poverty with a single platoon, while great armies are left to stand aside."
I know markets, and private capital is indispensable for creating the kind of jobs and
growth communities need to put poverty behind them and prosperity before them. But I also
know markets well enough to know that capital doesn't flow equally everywhere it is needed.
We need to help get capital into places like this so that communities can get back on their
feet again. We have such programs, but they are under heavy political attack.
From Bedford-Stuyvesant and the South Bronx to South Chicago I have seen the
Community Reinvestment Act and the Low Income Housing Tax Credit making a tremendous
difference in neighborhoods that have been denied investment capital in the past. Loans to
creditworthy minority borrowers are on the rise around the country, and banks and other
financial institutions have pledged billions in community lending. Some 100,000 housing
units a year have been created nationwide by the tax credit.
Soon, Treasury's Community Development Financial Institutions Fund, CDFI, will
begin providing seed and expansion capital to community-based banks, credit unions,
community loan funds, and microenterprise lenders, and it is helping to marry volunteer
business mentoring with access to capital. In his most recent budget the President asked
Congress for an additional $125 million for the CDFI Fund because of its importance in
encouraging economic development and growth in distressed areas.
Let me say a few additional words about the concept of micro-lending, which has
worked well from Quezon City in the Philippines to Grameen Bank in Banglad~sh, and right
here in the United States. It is a concept that I believe holds serious potential for low-income
residents of our cities, and rural areas for that matter, if it is expanded.
Microlending -- small loans, often just a few hundred dollars to budding entrepreneurs
-- is centered in community-based banks, credit unions, community loan funds and other local
institutions. Despite the odds, loan repayment rates often exceed those in the commercial
sector.
The President has asked the Treasury Department to establish a Presidential Awards
program for microlending, and the First Lady and I launched this program last month. The
awards will recognize outstanding and innovative programs that provide access to credit,
technical help and entrepreneurial training.
Safe streets, education and health care, work that pays, and a well-capitalized and vital
private sector -- these are what it takes to revitalize communities across our country.
4
If I might draw upon Robert Kennedy a second time: Kennedy once remarked that
our nation has a peculiar genius to focus our resources, attention and effort to solve any
problem before us. That is what is required for our cities, and I would challenge each of you
today to respond to the challenges facing this city and this region. Gqvernment can provide
programs, and government can offer direction, but government alone cannot make the ultimate
difference. Particularly in a time of shrinking resources, it is incumbent upon all of us,
whether we're in government, finance, transportation, social services, or community
organizing, to do our part. For example, those of you in the business sector can become
partners in community development with investments of your expertise through business
mentoring -- or investment of your capital in CDFIs.
We in the Clinton Administration have tried to do our part. The President's economic
plan has helped the economy create 9.7 million new jobs, mostly in high paying sectors or
positions; and unemployment is down in the nation's largest central cities.
We have expanded Head Start, increased educational funding for poor children,
expanded school-to-work opportunities, and advanced safe and drug free schools. We have
helped local communities put more cops on the beat and take guns off the street. We have
expanded the Earned Income Tax Credit and the Job Corps, and opened up new job
opportunities through Empowerment Zones and Enterprise Communities. We've made the
low income housing tax credit permanent, reformed the CRA regulations and launched CDFI
to bring capital and credit to distressed areas of our nation, including the inner cities. The list
is extensive, and we have a strong agenda for the coming year, from a second round of
Empowerment Zones to a new brownfields tax credit to encourage environmental clean up in
distressed areas.
I want to close with a some words on the church fires that have been in the news of
late, and make a point that I think is very important, both as it relates to the fires and as it
relates to our cities.
As you well know, there have been a number of church fires, primarily at churches in
the south with predominantly black congregations. This is terrible and reprehensible.
Treasury's Bureau of Alcohol, Tobacco and Firearms is working on these investigations, and
is making real pmgress, although there is an enormous amount to do. There have been 11
arrests thus far, and we are determined not to rest until all cases are solved and all the
arsonists are brought to justice.
Last week I was with the President in South Carolina taking part in the dedication of a
replacement structure for the Mt. Zion AME Church which had been burned. The Pastor
repeated how his daughter had asked him, "Daddy. Why did those people burn our church?"
He answered: "They didn't burn our church, they burned a building. The church is inside
us."
5
That is the point we must take with us, both in overcoming the rash of church fires
and in rebuilding our cities. Ultimately, the answers we are looking for are inside us. And
together, I believe we can make a difference, not just for New York but for all Americans.
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DEPARTMENT
OF
THE
TREASURY
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OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
u.s. Policy Toward the International Monetary System
on the Eve of the Lyon Summit
Remarks to the Emerging Markets Traders Association
June 24, 1996
Lawrence Summers, Deputy Secretary of the Treasury
Introduction
Thank you for giving me the opportunity to address the New York financial
community.
I thought this was a fitting group to talk to about the G-7, since the G-7 message
over the past year has been not simply "it's the markets, stupid" but "it's the emerging
markets, stupid."
Although the roots of the G-7 process were in the field of international monetary
cooperation, it has come to be associated with a much broader mandate -- the drive for successive
multilateral trade rounds, the developing country debt crisis of the 1980s, the promotion of
stabilization and reform in Russia and the transition economies, and reconstruction in Bosnia.
These successful initiatives have for some time eclipsed the popular association
of the G-7 with monetary cooperation. Over the last several years, however, we have
seen a resurgence of interest in financial issues, monetary arrangements and exchange
market volatility. And this has been accompanied by nostalgia for a return to some lost
era of stability and revived interest in broader reform of the system.
In this context, I thought it would be useful to address the core monetary
mandate of this group and to outline our views on the major challenges facing the
international monetary system and our approach in the G-7 process to meeting these
challenges.
I want to focus on the two main elements of our approach:
First, on macroeconomic policy and exchange market cooperation among the
major industrial countries. Our approach of a strong focus on economic fundamentals
has produced a reasonably good record of economic achievements -- relative exchange
rate stability without inflexibility, and improved fundamentals in terms of low inflation,
increased fiscal discipline,smaller external imbalances.
RR-1l45
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
2
And, second, on cooperation among the G-7 to deal with broader challenges in
the international monetary system. We have begun to put in place a set of important
reforms to help ensure that our institutional arrangements to deal with new risks in the
global financial system are, to use Secretary Rubin's phrase, as "modern as the
markets."
Before I start, let me make it clear that I have nothing new to say on U.S.
exchange rate policy. We believe a strong dollar is in America's economic interest,
and exchange rates should reflect economic fundamentals.
Macroeconomic and Exchange Market Cooperation in the G-7
The G-7 process, as it has evolved over the past two decades, is anchored in
meetings of Finance Ministers, generally once a quarter. Three times a year, on every
occasion except at the annual G-7 economic Summit, the Central Bank Governors
participate in the meetings. These Ministerial meetings are supplemented by a more
intensive set of interactions among finance deputies, which now meet around eight to
ten times a year, frequently with senior officials from the seven central banks.
The Ministerial meetings customarily begin with a review of the main economic
policy challenges in the major industrial countries, and this "surveillance" exercise
remains the core issue on the agenda for every meeting. The Managing Director of the
IMF is normally invited to make a presentation on the economic outlook and to
participate in that part of the discussion. The Research Director of the IMF provides a
similar function for the G-7 finance and central bank deputies on selected occasions.
Our approach to the G-7 is based on the following main elements:
•
First, we have tried to focus the cooperative process more on economic policies
and the underlying economic fundamentals in each of our economies than on
explicit, formalized exchange rate arrangements.
This approach may convey less drama and excitement than the alternatives, but
it is based on the fundamental reality that the only path to enduring exchange
market stability is through the pursuit of sound economic policies. In view of the
fact that all the major sustained exchange rate misalignments of the floating rate
period, at least with the benefit of hindsight, have been the consequence of
some adverse policy mix or fundamental shift in one of the major countries, we
think the right starting point for the G-7 process is to focus on getting our policies
right.
As part of this approach, we have adopted a series of innovations to the G-7
process over the past several years. We have sought to include the central
3
banks more systematically into our discussion on surveillance of the economic
outlook. We have invited the IMF to provide a more regular, confidential
assessment of the economic outlook. We have focussed the Deputies and
Ministerial discussions on key risks to the outlook and the policy requirements in
that context. These are not revolutionary, but they are practical and of significant
value to the effectiveness of our dialogue.
•
Second, we have been more selective in our use of the tool of exchange market
intervention.
Our view is that intervention is more effective when it is least expected, when it is
used in the context of supportive monetary or other economic policy actions
within the G-7, and when it conveys a strong signal of a common approach
among the principal monetary authorities. Intervention is less effective when it is
widely telegraphed and anticipated, when its perceived as a substitute for action
on the fundamentals, and when employed in the face of strong market pressure
in the other direction.
I think it is worth pointing out that during the successful G-7 effort to reverse the
potentially damaging moves in the major currencies of early 1995, the U.S.
monetary authorities intervened on only four occasions, less often than during
any other year over the past decade. This does not mean that we would not be
more active if the circumstances warranted, only that sometimes less is more.
•
Third, we have tried to make the G-7 process more effective by making it less
formal, reducing the distraction of artificial, but consuming, debates about
communique language, and less public.
We've produced fewer communiques, but when we chose to send a formal
coordinated signal -- as we did in April 1995 when we called for an "orderly
reversal" of exchange rate movements -- we made sure it meant something. By
avoiding the overly strident locomotive debates of the past, we've made it easier
to work constructively on collective approaches to common problems.
The Record
This approach has produced a good record of accomplishment by the G-7
Ministers and Governors over the last several years.
First, the G-7 strategy of focussing on the sound policies necessary for sustained
growth and exchange market stability has contributed to a general improvement in our
fundamentals.
Let me start with the United States.
•
We are now in the sixth year month of an expansion which has been
4
driven to a significant degree by rapid export growth. Exports have contributed
than one third of the increased output over this period of time.
The President's commitment to fiscal discipline has cut the deficit in half,
to the lowest level in the G-7.
This combination of strong and credible policies has been rewarded by the
markets, and has helped produce the first investment led, low inflation U.S.
recovery in a generation. Long-term interest rates are lower than when the
President took office, despite the strength of the expansion.
We have also seen over this period a general improvement in the underlying
fundamentals across the G-7, which reflects first and foremost the remarkable
consensus that now exists on the importance of non-inflationary pOlicies and fiscal
discipline.
Inflation is now lower on average in the G-7 than it has been for more than
a generation.
Significant progress has been achieved toward more sustainable fiscal
positions in most of the G-7.
External imbalances have fallen or are on a path to fall to levels that are
more sustainable and present less of a risk to exchange market stability. The
Japanese surplus, which many identified as the major asymmetry in the world
economy three years ago, has been cut from a level of 3.5 percent of GOP and
riSing to less than two percent and still falling.
As this record suggests, the G-7 process has at times played an important part in
influencing the policy debate in each of the major countries, despite the limits on the
potential for coordination imposed by the fact that we live in a world of sovereign
governments with democratically elected legislatures. This is true of the deficit
reduction effort in the United States. It's true of the increased acceptance in
Continental Europe of the need for structural reforms to increase flexibility, which was
encouraged by the Detroit and Lille conferences on employment. And it's true of the
adoption by Japan of growth-oriented policies and more liberal trade policies.
It is also true that many economic problems remain in the G-7. Private savings
are still too low in the United States. Europe is still structurally too rigid. And Japan
faces a series challenge in strengthening its financial system. It is difficult, however, to
see these problems as failures of the G-7 process. They are domestic problems with
domestic solutions.
The G-7 process has also produced greater stability among the major currencies,
largely because of the achievements in strengthening our fundamentals.
5
If you look a graph of the trade-weighted dollar over the last fifteen years, you'll
see the mountain of the dollar's appreciation of the mid-1980s has been followed by
years of small foot hills and valleys of variability. By some measures, volatility among
the major currencies has fallen by one-third to one half over this period. Trade, direct
investment, and capital flows have continued to expand rapidly despite the fact that we
now exist in a flexible exchange rate system among the major currencies.
Finally, our police-centered approach has also proven effective in addressing
potentially damaging misalignments in exchange markets. In the fourteen months since
. the April 1995 G-7 communique called for an orderly reversal of the preceding moves in
each of the major currencies, a combination of greater credibility in the policy stances of
the major countries, important policy shifts in Japan and Germany, and a series of
concerted exchange market operations helped bring the trade-weighted dollar, mark
and yen back to levels prevailing in 1993 and 1994. Implied volatilities have fallen to
the levels we have not seen in some time, indeed to the lowest levels in almost ten
years for $/DM. The cloud of uncertainly and crisis has receded. The outlook in all our
economies has improved.
The False Promise of Greater Coordination
There are those who argue that the next frontier for the G-7 is to move to a more
formalized system of exchange rate arrangements for the major currencies. But just as
we have to come to recognize in recent years that more effective government is not a
matter of more government or more programs, more effective G-7 cooperation need not
and should not mean more formalized processes of policy coordination and exchange
rate management. I do not believe that a more formalized process of exchange rate
management would be desirable or feasible in the present economic environment.
The arguments·on the other side of this debate rest on essentially three
propositions, each of which I believe is mistaken.
•
First, there are those who maintain that by simply wishing exchange rates
into a band we can keep them there with adroit use of smoke and mirrors at no
real cost. This was a debatable proposition twenty years ago. In today's capital
markets, it's not remotely credible. What evidence there is of intervention's
efficacy comes from cases here it was a surprise and a signal of policy intention.
•
Second, there are those who that maintain that we should be prepared to
devote economic policy to the achievement of a specific exchange rate objective.
Even if this were desirable it would be difficult given that the speed with which
exchange rates move and the time in which legislatures take to act essentially
render fiscal policy unavailable for this purpose. Moreover, for large economies
for whom external trade is a relatively small share of output, directing monetary
policy at an exchange rate objective would entail real costs, costs in the form of
misguided macroeconomic policies, and costs in the loss of flexibility to respond
to unanticipated shocks.
6
Would it have made sense, for example, to have forced the Fed to ease in
late 1984 to contain the dollar's rise despite the inflation risks still evident
then? Would Europe and Japan have preferred to have been forced to
tighten monetary policies at that time to prevent a fall in the value of their
currencies that was driven by a clash of fiscal and monetary policies in the
United States? Would it have made sense to have forced the Fed to
tighten in early 1995 to contain the dollar's fall despite the sharp slowdown
in growth at that time?
I am aware of no evidence on balance that a more exchange rate attentive
monetary policy would have produce a better record of output and price
stability than the monetary policy that was in fact pursued. And there is at
least a body of econometric evidence that suggests the opposite.
•
A third common argument among the proponents of more formalized
exchange rate and policy commitments is the need for a source of external
discipline. Yet, at no time during the post war period has there been a greater
acceptance of the fundamental importance of sound monetary policy and fiscal
discipline as there is now.
I think it is also easy to forget in the nostalgia for past eras of greater
stability and fixed rates the degree to which the constraints of those past
systems imposed real and sometimes absurd burdens on policy makers.
It was only a generation ago that people sat in my office at the Treasury
writing an extraordinary volume of memoranda for President Kennedy on
the accounting of trivially small balance of payments transactions, while
designing ways regulate capital flows that did serious damage to U.S.
financial markets for a decade. There was even a time when President
Kennedy was said to have had to review drafts of the Survey of Current
Business.
It's also worth remembering that one of the major problems that arose
under the Bretton Woods system was the pressure for protection that
were engendered by misaligned exchange rates. I would dare to suggest
that far more exchange rate have become misaligned historically as a
byproduct of the quest for stability than as a consequence of speculative
pressures.
It's tempting in defending the system of flexible exchange rates against its critics
to invoke the Churchillian defense of democracy -- far from perfect but better than the
known alternatives. I believe our record supports this view -- that the current system is
the best system for the American economy and the best system for the world economy.
Of course the international monetary system has to constantly adapt to change.
The principles that I have outline above can guide us as we work with Europe in
7
developing new modalities for international economic policy cooperation in a post-EMU
Europe. The United States has been a strong and consistent supporter of European
integration. A prospering, integrated Europe is as important to our economic and
strategic interests today as it was fifty years ago. Successful monetary union in Europe
would be good for the world and good for America.
Addressing New Challenges in the Global Capital Markets
While we expect to see substantial continuity in the key elements of the present
exchange rate system among the major currencies, the international community faces a
variety of new challenges with respect to global capital markets.
The most dramatic of these changes arise from the rapid growth and rapid
integration of the emerging markets into the world economy and the international
financial system.
Growth rates in emerging market economies long ago surpassed those of
the G-7.
Net private capital flows to developing countries have risen dramatically
over the last 10 years from about $25 billion in 1986 to over $165 billion in
1995.
The composition of flows to emerging markets has changed
fundamentally from the world of the early 1980s when syndicated bank
loans were the predominant form of private finance to developing
countries, to the world of 1995 where foreign direct investment accounted
for over one-half of private flows and funds raised in security markets
comprised another one-third.
The New Policy Consensus
Sometimes lost in the novelty of these changes is the fundamental reality that
policies matter. The United States and the G-7 have been active in helping to forge a
new consensus about the macroeconomic policy requirements for financial stability and
the appropriate macroeconomic policy response to the too much of a good thing
problem of managing capital inflows. This consensus, drawing on the experience of
Mexico and that of other emerging markets, has the following key elements:
Sound policies matter. In a world of capital mobility, the difference
between having the right and the wrong polices has never been greater. The
right policies mean sound monetary and fiscal policies aimed at achieving
sustainable growth with low inflation, strong fiscal positions, strong and
sustainable current account positions, high levels of domestic savings, open
trade policies, and structural reforms that reduce the risks that inflows are
misallocate.
8
Exchange rate flexibility is a good thing. Although there may be a case for
the use of fixed exchange rates as nominal anchors in certain circumstances -such as countries trying to restore price stability after a period of hyperinflation,
as a general rule, it's a good idea to give the exchange rate regime the flexibility
to adjust, whether its to absorb part of the effects of a large and sustained capital
inflow or to accommodate some shift in economic fundamentals, domestically or
externally. Experience has shown that exchange rates, once fixed, are difficult to
unfix, and very few countries have orchestrated a smooth and successful exit.
Capital controls cannot substitute for good policies, and they are unlikely
to be a helpful complement. Despite the theoretical appeal of speed bumps to
dampen inflows, taxes or other measures to transform short-term presumably
volatile money into long-term secure investment, and other silver bullets, the
experience of these measures in practice still suggests that the economic
distortions and macroeconomic costs induced by controls are more costly than
the potential benefits. To us, the most reasonable exception to this general rule
is the limited case where inadequate prudential regulation of the banking system
may justify, for a transitional period, the maintenance for prudential reasons of
capital controls on flows into banks.
The fact that private capital has returned to the emerging markets in substantial
amounts is a tribute not just to the success of the Mexican support package, but also to
the increase in confidence produced by this new policy consensus.
Strengthening the Financial System
While strong policies are the critical determinant of financial stability in this new
age of capital mobility, we also believe it is important to ensure the international
community is adequately equipped to deal with the risks.
The international community, galvanized by the Mexican crisis and led by the
G-7, has adopted a program of institutional reforms to strengthen the system in
response to these challenges.
Early Warning and Prevention
First. we have initiated a series of reforms to improve early warning and
prevention mechanisms to reduce the risk of future crises, the most important of which
is the adoption by the IMF of strong standards for the public disclosure of economic and
financial data and a new focus on strengthening supervisory standards in the financial
systems in emerging markets.
For some of the same reasons that strong disclosure standards make U.S.
capital markets the deepest and most effective in the world, we think the international
financial system would benefit from better access to better information on the
9
underlying financial conditions of major emerging market borrowers. Better information
alone won't prevent crises, but it can help reduce the risk that wishful thinking and
bandwagon enthusiasm would sustain the unsustainable, and thereby magnify the
intensity of a crisis when it occurs. A significant number of major emerging market
economies have already signed up for these standards. It would not surprise me if
countries that chose not to be as forthcoming paid a penalty for that decision in the
price they pay for capital they raise internationally.
Stronger Surveillance
The IMF has also strengthened is surveillance procedures to improve the
prospects for early intervention to address potential problems. And, recognizing the
reality that in many new entrants to the global capital markets weak banking systems
are a potential source of macroeconomic vulnerability, there is a new consensus on the
importance of strengthening supervisory systems and the regulatory infrastructure
necessary for a well functioning capital market in emerging economies. There has
already been considerable work done on identifying appropriate guidelines for bank
capital and supervisory regimes. The real challenge lies in making those standards
operational, in training supervisors to implement them, and in adopting complementary
changes that have to occur in bankruptcy regimes, accounting systems, and the
examination infrastructure.
The Market's Role in Facilitating the Resolution of Crises
The third key element of the post-Mexico consensus for strengthening the
system is to encourage a set of changes in the market that might help facility the
resolution of future sovereign liquidity crises without necessarily requiring the
mobilization of official finance.
In April 1996, the G-10 endorsed a report stating:
we are unlikely to be willing to provide substantial amounts of official
financial assistance to deal with all sovereign liquidity crises;
public money should not be readily available to guarantee private sector
investments;
the public sector will not want to intervene without private investors
absorbing some costs; and
it is in the interests of both lenders and borrowers to take steps now to
prepare to deal with a future crisis.
The specific recommendations in the report include changes to sovereign bond
contracts designed to facilitate consultation and cooperation between sovereign debtors
and their private creditors in the event of crisis, and changes to the IMF's lending policy,
10
which in effect. make clear that there will be occasions when we will support IMF
lending without lifting the burden on private creditors in the workout process.
I think it is important for investors to realize that sovereign, dollar-denominated
paper trading at 500 basis point spreads over U.S. Treasuries carries risk, and that it is
not the responsibility of the IMF or the U.S. Treasury insulate them from that risk. To
assume otherwise would be a mistake.
The Financial Safety Net
The final element in this broad strategy for dealing with the changes in the
financial system is to expand the resources available to the IMF in crisis.
However successful the above changes may be in preventing future crisis and
encouraging market based alternatives to official intervention, we believe it would be
prudent to ensure that, if things fall apart in the future, we have the option of calling on
adequate financial resources to avert a threat to the stability of the international
monetary system.
In Halifax, the G-7 endorsed a doubling of the amount of resources available
under the $25 billion General Arrangements to Borrow, in part by including a new group
of countries with the financial capacity to support the system. Late last month, we
reached an agreement in principle with some 24 countries on a framework for new
supplemental extraordinary financial arrangements for the IMF. The arrangements,
modeled on the existing GAB, contain very strong conditions for activation, with greater
burden sharing than in the existing GAB. It involves no cost to the U.S. budget. As
Secretary Rubin has said on many occasion, the United States cannot be the lender of
last resort to the world economy. We think this is a prudent step that will help ensure
that the United States does not have to bear a disproportionate burden of any future
financial crises.
These institutional changes are good for the system, and we believe they will
make the world less prone to shocks and better able to absorb those that occur.
Conclusion
One of the paradoxes of the present is, that while we are in a period of almost
unprecedented prosperity, the forces of liberalization and integration that have provided
so much of that prosperity are also viewed as responsible for many of the problems
plaguing the industrial world.
Our challenge, and the challenge for the G-7, is to continue to find ways to
maximize the benefits of these changes in the world economy and the international
financial markets. while continuing to find ways to effectively address the challenges
they bring.
UBLIC DEBT NEWS
Department of the
Treas~ry
• Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 24, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,080 million of 13-week bills to be issued
June 27, 1996 and to mature September 26, 1996 were
accepted today (CUSIP: 9127943H5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.08%
5.10%
5.10%
Investment
Rate
5.22%
5.24%
5.24%
Price
98.716
98.711
98.711
$5,100,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 26%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
4.95 - 98.749
RR-1146
Received
$58,271,744
Accepted
$13,079,752
$51,486,012
1,391,997
$52,878,009
$6,294,020
1,391,997
$7,686,017
3,629,235
3,629,235
1, 764,500
$58,271,744
1, 764,500
$13,079,752
5.09 - 98.713
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 24, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,126 million of 26-week bills to be issued
June 27, 1996 and to mature December 26, 1996 were
accepted today (CUSIP: 9127943T9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.21%
5.23%
5.23%
Investment
Rate
5.43%
5.45%
5.45%
Price
97.366
97.356
97.356
Tenders at the high discount rate were allotted 26%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.22 -
RR-1l47
97.361
Received
$50,760,274
Accepted
$13,125,977
$42,666,382
1, 109,592
$43,775,974
$5,032,085
1,109,592
$6,141,677
2,900,000
2,900,000
4,084,300
$50,760,274
4,084,300
$13,125,977
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
~178~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
....................................
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
Financial Action Task Force Plenary Session
Lawrence H. Sunnners, Deputy Secretary
United States Treasury
Washington, OC
June 25, 1996
Good morning. FATF President Noble, Director General Carpentieri, former President
Verwoerd, distinguished guests. I am honored to address this plenary session of the Financial
Action Task Force. An old crimefighting adage holds that to find the crook follow the
money. There is no question in my mind that money laundering is the life blood of narcotics
trafficking, organized crime and international terrorism. You stand at the front lines of that
battle and I want to commend you for it.
Before discussing the challenges we face, I would like to say a few words on the
progress we have already made. In 1989 when the Financial Action Task Force was founded,
only a handful of countries had criminalized money laundering. Seven years later, the
organization has grown to 26 country members, 25 of which have taken the step of
criminalizing the laundering of money. But at the very moment that the world economy is
expanding and integrating, creating vast new opportunities for business, so the technology and
capacity at the disposal of criminals is greater than ever before.
My topic today is whether four years from today. in the year 2000, we will look back
on the actions we take as sufficient or whether we will have failed to meet our obligations.
For I believe that we stand at the threshold of a tremendous global opportunity. I am
convinced that when the history of our era is told that the end of the Cold War will be the
second most important story. The most important story will be that this was the period when
3 billion people boarded the escalator to modernity. Throughout the worlel nations are
~~Oeralizing, modernizing alld opening their doors tc il1ternati "3:
I~ creating a new level
of global prosperity.
LI
1
Yet at the very moment that we face this great opportunity. we also face a grave new
threat--not from a single superpower--but from criminals. terrorists and other bad guys who
may strike anywhere at any time.
•
Think of the ability of organized crime in some regions to openly flout elected
officials and make a mockery of the rule of law.
RR-1148
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
2
•
Think of the threat to our fInancial and political system that terrorists in possession of
a nuclear weapon would pose.
These new groups, dependent on money laundering tor their survival represent the new
threat to the world's political and economic security.
President Clinton recognized these stakes when he chose the occasion of the 50th
anniversary of the United Nations last October to highlight the problem of money laundering.
He observed that criminal enterprises are moving vast sums of ill-gotten gains through the
international fmancial system with absolute impunity. He said "We must not allow them to
wash the blood off profIts from the sale of drugs from terror or organized crime."
Over the last few years, the FATF has helped shut the door on money laundering
through traditional fmancial institutions in its 26 member countries. But far more work
remains to be done, some of it to extend the work of the FATF to other regions and some of
it within the FATF itself.
Extending Enforcement to Other RegiOffi
While the twenty-six countries that belong to the FATF have made significant progress
towards shutting down money laundering and by some estimates. raised its cost, other
countries are still open for business.
Concerted action is needed to extend the principles of the FATF to other regions, in
particular, Latin American and Asia.
Recognizing this need, President Clinton issued an order for the United States to
identifY and put on notice nations that tolerate money laundering, and assist them in bringing
their banks and fmancial systems into conformity with international anti-money laundering
standards.
This task was taken up at the Summit of the Americas Ministerial Conference on
Money Laundering in Buenos Aires last December. chaired by Secretary Rubin and attended
by Ministers from 29 of the 34 nations of the Western hemisphere. The ministers issued a
communique which outlines concrete steps that each country in the hemisphere agreed to take
to combat money laundering. The FATF's efforts provided the toundation for the ministers's
commumque.
Secretary Rubin built on this effort at his meeting with the hemisphere'S [mance
ministers last month in New Orleans. We have also undertaken similar initiatives as part of
the Asia PacifIc Economic Council--APEC--tOcusing on anti-money laundering controls in
that part of the world.
Anticipating the Future Within the FATF
There are other challenges that FATF itself must tace. Quite frankly, I am concerned
about the proliferation of flew technologies that threaten the progress we have made.
3
•
•
•
I am concerned when I hear about the potential of money launderers to utilize
encrypted e-cash. While to some extent electronic transfer of fimds will enhance the
electronic trail, we must be vigilant that e-cash does not make it easier to launder
money.
I am concerned about the ability of money launderers to use smart card technologies
to transfer fimds around the world. While smart cards have been used for smaller
amounts of money so far, the potential exists to use this technology for larger
transactions.
I am also concerned about the challenges posed by the very volume of currency
transactions. A decade ago, daily trading currency equaled about $200 billion. Today
it is six times that amount, making tracing illegal transactions more difficult.
In addition, I am concerned about the ability of criminals other than drug dealers to
continue to launder money.
•
Extending the crime of money laundering to include non drug cases will make it
harder for terrorists, those who deal in human lives and every other serious criminal,
to profit from their crimes. Ignoring the non drug dimension of money laundering is
tantamount to sanctioning the serious crimes it supports.
Finally, mandating reporting of suspicious transactions by tinancial institutions would
reduce the likelihood of inconsistent compliance.
•
I have no doubt that the vast majority of financial institutions take their responsibility
to root out potential criminal conduct seriously. Still, a voluntary system is less
effective than a mandatatory one.
At this plenary session you will have the opportunity to anticipate the future as you
update the FATF 40 Recommendations.
Without action to anticipate these new technologies in a world where traditional
financial institutions can be entirely by-passed, many of t"1e entorcement measures that we
have so strenuously put in place may prove inadequate.
•
•
As you look to improve the 40 Recommendations. I know that you are looking beyond
banks to new technology issues and their impact (' . 11l"'lCY la1.mdering.
And as you move to extend the money laundering offense beyond drugs and to
establish mandatory suspicious transaction reporting requirements. I believe that you
will close loopholes that the bad guys use.
Four years from now as we cross the millennium. I hope we can look back on the
actions taken here and see that the right choices were made. There are two possible
scenarios. In one, the criminals, using new technologies and migrating to outlaw countries
gain the upper hand. The system of financial institution based controls proves inadequate as
more fmancial transactions move outside the financial institutions.
4
In another scenario, you anticipate these trends and foreclose those options for the
criminals and terrorists. The principles of the FATF, meanwhile are extended to other regions
to create a seamless global enforcement web.
I am convinced that the second scenario will happen if you take the right actions here
and we continue our work together. In a time of exponential change, incremental action is not
enough. I urge you to look forward as you weigh the matters before you.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 25, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $18,790 million of 2-year notes, Series AG-1998,
to be issued July 1, 1996 and to mature June 30, 1998
were accepted today (CUSIP: 912827Y30).
The interest rate on the notes will be 6 1/4%. All
competitive tenders at yields lower than 6.300% were accepted in
full.
Tenders at 6.300% were allotted 17%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.300%, with an equivalent price of 99.908. The median yield
was 6.280%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 6.240%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$48,032,181
Accepted
$18,790,031
The $18,790 million of accepted tenders includes $1,585
million of noncompetitive tenders and $17,205 million of
competitive tenders from the public.
In addition, $2,018 million of
high yield to Federal Reserve Banks
international monetary authorities.
of tenders was also accepted at the
Reserve Banks for their own account
securities.
RR-1l49
tenders was awarded at the
as agents for foreign and
An additional $1,177 million
high yield from Federal
in exchange for maturing
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
~17~. . . . . . . . . . . . . ..
. . . . . . . . . . . . . . . .
OFFICE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 _ (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
June 25, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $29,000 million, to be issued July 5, 1996.
This offering will provide about $1,250 million of new cash for
the Treasury, as the maturing weekly bills are outstanding in the
amount of $27,743 million.
Federal Reserve Banks hold $7,006 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,501 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Adqitional amounts
may be issued for such accounts if the aggregate amount of new
bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Un~form .
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-llSO
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JULY 5, 1996
June 25, 1996
Offering Amount .
$14,500 million
$14,500 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .
90-day bill
912794 3J 1
July 1, 1996
July "5, 1996
October 3, 1996
April 4, 1996
$13,590 million
$10.,000
$ 1,000
lSl-day bill
912794 3U 6
July 1, 1996
July 5, 1996
January 2, 1997
July 5, 1996
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTMENT
I
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASillNGTON, D.C .• 20220. (202) 622-2960
Contact: Joyce McDonald, FinCEN
(703) 905-3770
FOR IMMEDIATE RELEASE
June 27, 1996
Media Advisory
Global Anti-Money Laundering Standards Updated at Meeting
of Financial Action Task Force (FATF)
At a news conference tomorrow, the FATF, a 26 member organization created by
the G-7 to address the international prohlem of money laundering, will release revised
standards for countries to follow to combat the laundering of criminal proceeds around the
world. The standards, known as the 40 Recommendations, were revised to adjust to
changing global money laundering trends as well as technological advances in the financial
services industry.
The news conference takes place on Friday, June 28 at 1:00 in the Renaissance
Mayflower Hotel's Grand Ballroom, 1127 Connecticut Avenue, NW in Washington.
In addition to the release of the 40 Recommendations, F ATF also will disseminate
the results of a "typologies exercise" which highlights new money laundering methods and
patterns of activities used by criminals. This is the first time the typologies report will he
made public.
The release of the revised recommendations will conclude FATF's annual meeting,
which was held for the first time in the United States. Since July 1995, the U.S. has held
the Presidency of FATF under the leadership of former Treasury Under Secretary for
Enforcement Ronald K. Nohle.
Participants at the news conference will include FATF President Noble; the
Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) Director
Stanley E. Morris; FATF Secretary Patrick Moulette; and incoming FATF President
Fernando Carpentieri, Italy's Director General and Ministry of the Treasury.
Press credentials are requested. Cameras should he in place by 12:45 p.m.
###
RR-1151
G7 Finances Ministers report
to the Heads of State and Government
on international monetary stability
LYON, 28 June 1996
The dramatic increase in trade and capital flows in the world has deepened
economic and financial integration among all countries, and it creates a more
complex financial environment, with a greater diversity of capital flows, creditors
and borrowers. This process of globalisation creates new opportunities but also
challenges for our countries and the international community, especially with regard
to our international monetary and financial system.
In this context, the Heads of State and Government concluded at the Halifax
summit that : "Close consultation and effective cooperation on macroeconomic
policies among the G7 are important elements in promoting sustained noninflationary growth avoiding the emergence of large external imbalances, and
promoting greater exchange market stability", that "we have a shared interest in
ensuring the international community remains able to manage the risks inherent in
the growth of private capital flows, the increased integration of domestic capital
markets, and the accelerating pace of financial innovation" and that "closer
international cooperation in the regulation and supervision of financial institutions
and markets is essential to safeguard the financial system and prevent an erosion of
prudential standards."
In our discussions in Halifax last year we concluded. more specifically, that:
•
the most important foundation for exchange rate stability is the maintainance of
sound macroeconomic policies aimed at achieving sustained non-inflationary
growth and avoiding the emergence of large external or internal imbalances;
•
Ilexibility in exchange rates of the major currencies is a basic feature of the system
because unanticipated events occur, economic fundamentals change, and national
financial and economic developments are sufficiently different that they require
that policies be able to respond to them;
•
exchange market intervention can be effective and even decisive in specific
circumstances. but those circumstances are difficult to detennine in advance·,
•
there is no effective regulatory structure or tax mechanism that will produce greater
exchange rate stability without major costs in terms of other economic objectives.
These conclusions remain valid today.
Our overriding objective is to promote sustained non-inflationary growth. In this
context, the G7 can best promote greater stability in exchange markets through the
pursuit of appropriate macroeconomic policies along with close cooperation in the
exchange markets where appropriate.
For the past two decades, the international monetary system has been based on a
flexible exchange rate system among major currencies. There are circumstances
when it is appropriate to allow exchange rates among major currencies to fluctuate
rather than to adjust monetary and fiscal policies in a manner inconsistent with the
needs of the economy.
Experience since 1973 suggests that major exchange rate adjustments have been
caused by clearly identifiable changes or distortions in the underlying economic
fundamentals or in macroeconomic policies. Efforts to preserve an exchange rate
that is inconsistent with underlying fundamentals are likely to introduce distortions
to and constraints on central instruments of economic management. At the same
time, financial authorities cannot be indifferent to exchange rate fluctuations that do
not appear justified on the basis of macro-economic policies or fundamentals and as
a consequence could adversely affect output or prices. There are circumstances
where close co"peration in exchange markets can reinforce sound economIc
policies and enhance stability in exchange markets.
The G7 has an important responsibility in promoting an effective and stable
monetary system by advancing policies that will strengthen our capacity to manage
risk and prevent crises and improve our ability to respond to such events when they
occur. Towards this objective. we have adopted a number of initiatives over the
past several yeai::> and improvements were initiated at Halifax. This paper reviews
the main initiatives. and proposes. where appropriate, further improvements.
•
More effective macro-economic surveillance in the G7 meetings
It is important to pursue sound domestic economic policies aimed at achieving
sustained non-inflationary growth and at avoiding the emergence of excessive
external imbalances. Such policies arc also a necessary condition for more
exchange rate stability and for avoiding -or reducing- exchange rate misalignment.
The dramatic deepening in economic integration increases the need for sound
economic policies but also the potential gains from cooperation on macro-economic
policies. The G7 surveillance process provides a framework for identifying and
fonnulating appropriate responses to risks for our economies and for the stability of
the international financial and monetary system.
• Surveillance has been improved by the G7 in the past years, and some
encouraging results have been reached in this informal framework:
•
we have already achieved some important progress in articulating common
economic policy objectives: we have agreed on the critical importance of
reducing inflation and have made great progress to this end; we agreed on
the medium-term strategy for fiscal consolidation, which we will continue
to pursue vigorously to increase national savings, and to reduce external
imbalances. Increased convergence should improve the outlook for
sustained exchange rate stability and low long-term interest rates In our
countries;
•
in the aftennath of the Mexican crisis, G7 have encouraged an important
enhancement of IMF surveillance. which is being implemented (see
below) .
• We have adopted a number of steps to improve the effectiveness of the G7
surveillance process. Building on these improvements, we would support the
following additional steps:
•
concentrate the discussion on potential risks to the outlook in the G7 and
the appropriate policy response to those challenges. More attention could
also be paid to medium-tenn economic and structural issues;
•
focus more attention on potential risks outside the G7 that could affect the
international monetary and linancia! system. based in part nn a
presentation by the IMF Managing Director;
•
strengthen cooperation at the Deputies Ieve! in preparation Cor Ministerial
meetings with appropnate involvement of centra! hank ueputies and the
IMF staff.
• Continuing G7 close cooperation in exchange markets
Exchange raLe misalignments can heighten uncertainty in the global
economy and can be detrimental to growth and trade. When exchange rates appear
to move out of line with underlying fundamentals, close monitoring is necessary
and coordinated responses may be required.
• The "orderly reversal" in key exchange rates since April 1995 is a positive and
promising development. Several factors lie behind it. Most important were changes
in economic policies and fundamentals, but the signals given to the markets by the
G7 in 1995, through communiques and -under appropriate circumstancesconcerted intervention. were helpful in providing impetus to bringing exchange
rates better in line with fundamental trends.
• We should continue our close cooperation
foundation, taking into account the fact that:
In
exchange markets on this
•
a clear and consistent articulation of a common G7 view can have a
stabilizing influence and help reinforce the credibility of our
commitment to cooperate in the exchange market when circumstances
warrant;
•
interventions can be effective in certain circumstances, especially when
they reinforce changes in policies and/or underlying fundamentals that
lead to changes in market expectations about future exchange rates;
•
the instrument of intervention must be used judiciously given its
imr1ir.ations for monetary policy and the amount that the authorities can
mobilize relative to the size of international capital markets.
Nevertheless, these factors do not impede our joint ability to send a
clear message to the markets. if and when appropriate:
•
interventions are more likely to be effective when they are concerted
and reflect a common assessment:
•
an Important condition for success
intervention.
IS
the appropriate timing of
•
Better prudential safeguards in international financial markets
The globalisation of financial markets and the substantial increase in crossborder capital flows have created a more complex tinancial environment.
Comprehensive and effective financial regulation, market-reinforced prudential
supervision and enhanced international cooperation among regulators are among
the keystones for maintaining stability of the international financial and monetary
system.
• Industrial countries have been cooperating in the development of prudential
frameworks for many years. The BISlBasie Committees have taken important
steps to develop international standards for prudential supervision of banks and to
strengthen payments and settlements systems which link international markets.
IOSCO has undertaken similar work for prudential regulation of securities firms
and markets. In recent years, banking and securities regulators have increased their
contacts at the international level to address supervisory concerns that cut across
markets.
•
•
We recognise the substantial recent and ongoing cooperative work
between the Basle and IOSCO Committees on derivatives to promote
improved risk management, a common reporting framework and
improved disclosure practices ;
We welcome the publication in December 1995 of the Basle Committee
capital adequacy standards for bank's exposure to market risk, which
will be a very useful complement to existing prudential ratios.
-
• Nevertheless. the changes in the structure of global finance and the emergence of
new participan~s and markets require the supervisory response, including
international cooperation. to evolve continually. We welcome the Basic and
IOSCO Committees' reports on prudential regulation and supervisory cooperation.
These reports should pave the way for continuing progress on current initiatives
and expanding efforts in the following directions:
•
Enhance cooperation across markets to strengthen superviSIon of
financial institutions. In this context, we welcome the joint efforts of the
Basle and !OSCO Committees to enhance their collaborative
arrangements and the work of the Joint rorum of banks. securities and
insurance supervisors. Suitable arrangements should be established
within \vhich that cooperation can be better organised. It would be
useful to clarify the role and responsibilities of the relevant supervisors
to foster an appropriate degree of cooperation in the supervision of
internationally-active financial institutions. and to establish a more
comprehensive network of bilateral arrangements hetween authorities.
•
Strengthen prudential standards in. and supervisory cooperation with,
emerging markets. Effective prudential regulation and supervision must
cover all important financial marketplaces, particularly those which are
experiencing high growth rates and/or substantial capital flows. The
Basle and IOSCO Committees are performing work in this area which
reinforces bilateral and regional efforts underway. Because emerging
markets are growing in significance, these Committees, and other
appropriate fora should be encouraged to strengthen their outreach to
and cooperation with emerging market supervisors in order to promote
high prudential standards. The International Financial rnstitutions
should give more attention to promoting effective regulatory and
supervisory structures in emerging markets ;
•
Encourage private sector efforts to enhance market transparency.
Notwithstanding past or future regulatory activities, primary
responsibility for risk management rests with market participants.
Regulators should encourage -and where necessary exert pressure to
induce- private sector efforts to enhance market transparency in order to
strengthen market forces' capacity for sound and responsible risk taking
and control;
•
Improve reporting and disclosure of derivatives activities. Effective
monitoring of derivatives activities is crucial. and requires closer
cooperation among supervisors. rn this regard. we welcome the global
market survey conducted in the spring of 1995 by the BIS, and the
follow-up action which is being planned. We also look forward to the
conclusion this year of a joint Basle/IOSCO approach to reporting
st:mo::lrds for derivatives exposure Jnd to further progress in improving
derivatives disclosure practices:
•
Enhance cooperation among exchanges. We look forward to
implementation of the recommendations in the Windsor Declaration for
increasing cooperation among futures exchanges and regulators. We
also note with approval the development of information sharing
arrangements among securities exchanges and welcome conclusion of
an infonnation sharing arrangement among major futures exchanges
and relevant regulator,r" authorities. We also look ror,vard to the IOSCO
studv or methods to identify large firm exposures that may have an
dTc~t on the market and to protect market participants from potential
defaults by finns.
~
• Strengthening of our collective ability to respond to financial crises
The increased integration of global capital markets, the change in magnitude
and composition of capital flows, and the increase in the diversity and number of
creditors and borrowers present new opportunities and challenges to the financial
system. At Halifax, Heads proposed a range of initiatives to strengthen the global
financial system, with particular attention to the IMF's role. We strongly welcome
their implementation:
•
Improvement of the early warning system is being implemented: the
IMF's surveillance capabilities have been enhanced ; the IMF has
established standards for timely publication of economic and financial
data, and subscription on a voluntary basis is underway.
•
In order to better respond to crises, an emergency financing mechanism,
aiming at faster procedures, has been set up in the IMF ;
•
We welcome the agreement in principle reached on a doubling of the
resources currently available to the IMF under the General
Arrangements to Borrow. These arrangements will include a broader
group of countries with the capacity to support the international
monetary system. We welcome this sharing of monetary
responsibilities, thereby adapting our cooperation to new economic
circumstances;
•
We welcome the report of the G-I 0 Working Party on the Resolution of
Sovereign Liquidity Crises:
•
We fully support the ongoing II th review of IMF quotas to ensure that
the lMF continues to have sufficient resources to meet its ongoing
responsibilities. We believe it is important for the IMF to remain a
quota based institution with the resources necessarY to fulfill its
important role in the global linancial system.
DEPARTMENT
OF
THE
TREASURY
~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
..............................
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
June 28, 1996
Contact: Joyce McDonald
FinCEN
(703) 905-3770
FATF UPDATES ANTI-MONEY LAUNDERING STANDARDS
The Fmancial Action Task Force (FATF), a Z6-nation organization created by the G-7 to
address the global problem of money laundering, today issued revised standards for countries to
follow in combating the laundering of criminal proceeds. The revisions to the Standards, known
as the 40 Recommendations, were made to adjust to changing global money laundering trends as
well as technological advances in the financial services industry. This is the first update to the
recommendations since they were issued in 1990.
The United State's bas held the Presidency of the FATF since July 1995 under the
leadership of former Treasury Under Secretary for Enforcement Ronald K. Noble. The 40
Recommendations were revised as part of the 1995-1996 round of discussions that concluded
with a meeting this week in Washington, D.C. Following the session, Secretary of the Treasury
Robert E. Rubin stressed the impprtance ofFATF' s 'work:
"For all countries to succeed and enjoy the benefits of a. global economy, strong alliances
must be bullt to combat money laundering. Drug traffickers and terrorists depend on money
laundering for cash. The 40 Recommendations relea.sed by the FATFwill go hand4in-hand with
the work being done in Lyon, France today in developing ways to fight crime and terrorism
around the world."
The major changes to the 40 Recommendations relate to the following issues:
•
the extension of money laundering predicate offenses to serious crimes beyond drug
trafficking (Recommendation 4);
• the mandatory reporting of suspicious transactions by financial institutions (Recommendation
15);
• the inclusion ofnon-financial businesses as part of counter money laundering measures
(Recommendation 9);
• the focu~ of attention on the money laundering unplications of emerging cyberpayment
technologies (Recommendation 13)~ and
(more)
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
•
a new statement of support for more effective investigative techniques in following the illicit
proceeds from the street to the kingpin of the criminal organization (Recommendation 36).
The annual report highlights the efforts ofFATF dwing the U.S. Presidency. In addition
to updating the recommendations, FATF conducted the first-ever meeting of the Financial
Services Forum. At this meeting, international financial industry experts discussed ways to
promote better cooperation bet:\\'een law enforcement agencies and the financial sector.
Representatives at the Forum also suggested changes to the 40 recommendations which in part
have been included in the revisions.
"In 1990, when the original 40 Recommendations were issued, the FATF established itself
firmly in the forefront of the battle against money laundering. Today, it remains in the forefront
by adapting to ever-changing money laundering methods," said FATF President Noble. "This
ability to look beyond immediate problems and assess future contingencies in the fast-paced world
of global finance would not be possible Without the cooperation and insight of all the FATF
members. I appreciate their support of the U.S. FATF Presidency and wish them continued
success."
In addition to the revised 40 Recommendations released as part of its annual report, FATF
also disseminated the results of a "typologies exercise" which highlights new money laundering
methods and patterns of activities used by criminals. This is the first time the typologies repon
has been made public.
Copies ofFATF's annual and typologies reports are available from the Treasury's
Financial Crimes Enforcement Network (FinCEN) which has coordinated the p.S. role within the
FATF this year. FinCEN's Office of Communications can be reached at (703) 905-3770.
-30-
UBLIC DEBT NEWS
Department of the Treasl\ry • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 26, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $12,501 million of 5-year notes, Series K-2001,
to be issued July I, 1996 and to mature June 30, 2001
were accepted today (CUSIP: 912827Y48).
The interest rate on the notes will be 6 5/8%. All
competitive tenders at yields lower than 6.674% were accepted in
full.
Tenders at 6.674% were allotted 50%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.674%, with an equivalent price of 99.795. The median yield
was 6.660%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 6.620%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$29,389,768
Accepted
$12,500,648
The $12,501 million of accepted tenders includes $657
million of noncompetitive tenders and $11,844 million of
competitive tenders from the public.
In addition, $750 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,000 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange for maturing
securities.
RR-1l53
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
~~178~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
..............................
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR ThfMEDIATE RELEASE
June 28, 1996
'CONTACT: Darren McKinney
(202) 622-2011
KELLY SWORN IN AS UNDER SECRETARY FOR ENFORCEMENT
Former New York City Police Commissioner Raymond W, Kelly was sworn in as the
Treasury Department's Under Secretary for Enforcement on Thursday,
Under Secr~tary Kelly will be responsible for overall operation of the Department's
several enforcement bureaus including the Bureau of Alcohol, Tobacco and Firearms, U.S,
Customs Service, U.S. Secret Service and the Federal Law Enforcement Training Center.
Kelly brings to the position more than 30 years' worth of experience and commitment
to public service. Following combat service with the Marine Corps in Vietnam, Kelly rose
through the ranks of the New York Police Department to ultimately serve as Police
Commissioner. His leadership was critical in the successful investigation of the World Trade
Center bombing in 1993 and in directing the largest increase in uniform ranks in the
department's history. His retirement from the commissioner's post in January of 1994 capped
a 25-year career that included service in every rank and 25 commands,
More recently, Kelly served as director of the International Police Monitors of the
Multinational Force in Haiti from October 1994 through March 1995, While there, he and
monitors helped establish Haiti's interim public security force, President Clinton awarded
Kelly a commendation for "exceptionally meritorious service" for his work in Haiti, and
Chairman of the Joint Chiefs of Staff Gen, Shalikashvili awarded him the Commander's
Medal for Public Service,
t~1e
Kelly is an attorney with law degrees from St 10hn's University and New York
UnIversity, where he has lectured on the law, public policy and crisis management. He;s a
graduate of Manhattan College and holds a master's in public administration from the
Ken!ledy School of Governmen~ at Harvard U:1iversit)'Kelly's nomination was co:-:fmned Wednesday by the Senate,
RR-1154
-30-
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
1REASURY {.) NEW S
178q
omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON. D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July I, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $14,630 million of I3-week b;lls to be issued
July 5, 1996 and to mature October 3, 1996 were
accepted today (CUSIP: 9127943Jl).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.09%'
5.13%5.U%'
Investment
Rate
5.23%5.27%5.26%'
Price
98.728
98.718
98.720
Tenders at the high discount rate were allotted I9%-.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Received
$52,"97,543
Accepted
$14,630,190
Type
Competitive
Noncompetitive
Subtotal, Public
$46,943,474
1,403,431
$48,346,905
$8,87",121
1,403,431
$10,279,552
Federal Reserve
Foreign Official
Institutions
TOTALS
944,208
$52,697,543
944,208
$14,630,190
TOTALS
An additional $133,892 thousand of bills will be
issued to foreign official institutions for new cash.
5.10 - 98.725
RR-1155
5.11
98.723
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
July 3, 1996
MEDIA ADVISORY
Due to rain, Treasury Secretary Robert E. Rubin's address to employees returning to the
Main Treasury building following last week's fire, scheduled for 10 a.m. this morning, has
been postponed. The press availability with a senior Treasury official has also been
postponed.
Secretary Rubin will address staff on Hamilton Place adjacent to the Treasury building on
Monday, July 8, at 10 am, weather permitting.
-30-
RR-1156
For press releases, speeches, public schedules and official biographies, call our 24.Jzour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY~.
178')
TREASl'RY
NEW S
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. !'I.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 1, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $14,582 million of 26-week bills to be issued
July 5, 1996 and to mature January 2, 1997 were
accepted today (CUSIP: 9127943U6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.20%
5 22%5.22%'
Investment
Rate
5.41%
5 43%5.43%'
Price
97.386
97 376
97.376
Tenders at the high discount rate were allotted 37%-,
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED
'in thousands)
Receiyed
$48,650,110
Accepted
$14,582,469
$40,647,272
1,310,246
$4].,3: 7 ,:;;'3
$6,579,631
1,310,246
$7,83;',3 7
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Pub':':'c
?eder:.:..l Reserve
?oreign Official
i:nstitutions
TOTALS
""1
3,6>:, =:':
3.:192,592
$48,650/110
3,092.592
$14/582/469
Al. additional $439,1)08 thousand :::;f biLs
--~ De
issued to foreign official institutions for new cash.
5.21 -- 97.381
RR-llS 7
DEPARTMENT
OF
TREASURY
THE
TREASURY
NEWS
EMBARGOED UNTIL 2:30 P.M.
July 3, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION $10,000 MILLION OF 10-YEAR NOTES
The Treasury will auction $10,000 million of 10-year notes
to refund $7,004 million of publicly held securities maturing
July 15, 1996, and to raise about $3,000 million new cash.
In addition to the public holdings, Federal Reserve Banks
hold $721 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts
of the new securities.
The maturing' securities held by the public include $170
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
The 10-year note being offered today is eligible for the
STRIPS program.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms and
conditions set forth in the Uniform Offering Circular (31 CFR
Part 356) for the sale and issue by the Treasury to the public
of marketable Treasury bills, notes, and bonds.
Details about the new security are given in the attached
offering highlights.
000
Attachment
RR-1l58
For press releases, speeches, public schedules and official biographies, call our 24·hour fax line at (202) 622·2040
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC
OF 10-YEAR NOTES TO BE ISSUED JULY lS, 1996
July 3, 1996
Offering Amount .
Description of Offering:
Term and type of security
Serles
CUSIP number
Auctlon date
Issue date
Dated date
Maturlty date
Interest rate
Yleld
Interest payment dates
Mlnlmum bld amount
Multlples .
Accrued lnterest payable
by lnvestor .
Premium or discount
STRIPS Information:
Minimum amount required
Corpus CUSIP number
$10,000 mlllion
10-year notes
C-2006
912827 YS S
July 9, 1996
July lS, 1996
July lS, 1996
July lS, 2006
Determined based on
the average of accepted
competitive bids
Determined at auction
January lS and July lS
$1,000
$1,000
None
Determined at auction
Determined at auction
912820 BT 3
STRIPS Information:
Due dates and CUSIP numbers
for additional TINTs:
912833
January lS, 1997
MAS
MC 1
July 15, 1997
ME 7
January 15, 1998
July lS, 1998
MG 2
January 15, 1999
MJ 6
ML 1
July 15, 1999
MN 7
January 15, 2000
July lS, 2000
MQ 0
January 15, 2001
MS 6
July 15, 2001
MU 1
January 15, 2002
MW 7
July lS, 2002
MY 3
January 15, 2003
NA 4
July lS, 2003
NC 0
January 15, 2004
NE 6
July lS, 2004
NG 1
January 15, 2005
NJ 5
July lS, 2005
NL 0
January 15, 2006
NN 6
July 15, 2006
NQ 9
The following rules apply to the security referred to above:
Submission of Bids:
Noncompetitive bids
Accepted in full up to $S,OOO,OOO at the average
yield of accepted competitive bids.
Competitive blds
(1)
Must be expressed as a yield with three
decimals, e.g., 7.160~.
(2)
Net long position :.or each bidder must be
reported when the sum of the total bid amount, at
all yields, and the net long position is $2 billion
or greater.
(3)
Net long posltion must be determined as of one
half-hcur prior to the C:"2Sl.0 tlme for receipt of
competltive tenders.
Maximum Recognized Bid
3S% cf public offering
at a Single Yield
3S% of public offering
Maximum Award .
Receipt of Tenders:
Noncompetltlve tenders
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Competitive tenders
Prior to 1:00 p.m. Eastern Daylight Saving time
on auc::ion day
Payment Terms .
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
o
federal financing
WASHINGTON, D.C. 20220
bonkNEWS
July 8, 1996
FEDERAL FINANCING BANK
Charles D. Haworth, Secretary, Federal Financing Bank (FFB)
announced the following activity for the month of May 1996.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $64.9 billion on May 31, 1996,
posting a decrease of $1,148.4 million from the level on
April 30, 1996. This net change was the result of a decrease in
holdings of agency debt of $558.6 million, in agency assets of
$580.0 million, and in agency guaranteed loans of $9.9 million.
FFB made 12 disbursements during the month of May.
FFB also
received 9 prepayments in May.
Attached to this release are tables presenting FFB May loan
activity and FFB holdings as of May 31, 1996.
RR-1159
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Page 2 01 3
FEDERAL FINANCING BANK
MAY 1996 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
5/1
5/1
5/1
5/10
5/13
5/24
5/28
5/30
5/31
$745.71
$733.01
$201,146.04
$140,938.00
$1,036,339.48
$122,523.60
$480,673.00
$209,079.00
$496,890.58
9/2/25
1/3/22
9/5/23
7/1/25
4/1/97
9/2/25
7/31/25
7/31/25
1/2/25
7.041%
7.043%
7.045%
7.190%
5.685%
7.035%
7.004%
7.103%
7.091%
5/17
$11,092,013.09
11/2/26
7.065% S/A
Yelm Telephone #407
5/17
Johnson County Elec. #203 5/29
$327,434.00
$3,547,000.00
12/31/14
12/31/96
6.832% Qtr.
5.483% Qtr.
Atlanta CDC Office Bldg.
Miami Law Enforcement
Oakland Office Building
HCFA Headquarters
Chamblee Office Building
Atlanta CDC Office Bldg.
Foley Square Courthouse
Foley Square Office Bldg.
Memphis IRS Service Cent.
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
GSA/PADC
rCTC Building
RURAL UTILITIES SERVICE
S/A is a Semi-annual rate:
Qtr. is a Quarterly rate.
Page 3 of 3
FEDERAL FINANCING BANK
(in millions)
Program
May 31. 1996
April 30. 1996
$ 2,008.3
6,946.8
0.0
0.0
8,955.0
$ 2,008.3
7,205.3
0.0
300.0
9,513.6
Agency Assets:
FmHA-ACIF
FmHA-RDIF
FmHA-RHIF
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Utilities Service-CBO
Small Business Administration
sUb-total*
595.0
3,675.0
21,015.0
8.1
23.8
4,598.9
0.1
29,915.9
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration +
DOl-Virgin Islands
DON-Ship Lease Financing
Rural utilities Service
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
DOT-Section 511
sub··total*
3,335.8
81.0
1,626.8
2,324.8
20.2
1,382.8
16,944.3
0.0
331. 0
13.1
26,059.8
Agency Debt:
Export-Import Bank
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sub-total*
grand-total*
*figures may not total due to rounding
+does not include capitalized interest
$ 64,930.7
$
Net Change
FY '96 Net Change
5/1/96-5/31/96
10/1/95-5/31/96
$
0.0
-258.6
0.0
-300.0
-558.6
$
-498.0
-6,261.8
-3,200.0
-7.264.7
-17,224.5
1,175.0
3,675.0
21,015.0
8.1
23.8
4,598.9
0.1
30,495.9
-580.0
0.0
0.0
0.0
0.0
0.0
0.0
-580.0
-875.0
0.0
-685.0
0.0
0.0
0.0
0.0
-1,560.0
3,351.3
81.0
1,626.8
2,319.7
20.2
1,382.8
16,940.4
0.0
333.9
13.5
26,069.6
-15.5
-0.1
0.0
5.1
0.0
0.0
3.9
0.0
-2.9
-0.4
-9.9
-157.2
-8.1
-61. 7
58.0
-0.8
-49.3
-331.3
-5.5
-24.8
-1. 4
-582.1
=========
=========
66,079.1
$ -1,148.4
$-19,366.6
DEPARTMENT
OF
TREASURY
NEWS
lREASURY
__
THE
----------~17~~~--------
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR RELEASE AT NOON EDT
July 8, 1996
REMARKS OF ROBERT E. RUBIN
SECRETARY OF THE TREASURY
THE WIDTE HOUSE
ruL Y 8, '1996
Thank you, Under Secretary Kelly.
Mr. ·President, today we begin a ~rime prevention program to interrupt the flow of
guns before they reach young hands and eradicate young lives.
In neighborhoods across our couD:tI'Y, illegal firearms are passed from criminals to
kids. Too often, police deparunents are :able to focus only on violent crimes already
committed with these weapons.
In 17 American cities, we are starting the Youth Crime Gun Interdiction Initiative, a
plan aimed at preventing gun violence. Under this plan, we will learn how guns are
getting to young people and we will disrupt those flows.
Treasury and its Bureau of Alcohol, Tobacco and Firearms -- the federal
government's lead organization in enforcing our federal firearms statutes -- welcome
the President'S mandate for action because our society has such a profound social
interest in stopping gun violence.
But Treasury has another perspective as well: Anti-crime policy is good economic
policy. To address the problems of the inner cities, and to bring their residents into
the economic mainstream, public safety and economic development must be acted on
as mutually reinforcing.
In this initiative that we begin today, as in so many other areas of law enforcement,
our country benefits enormously from the good cooperative relationship between the
Justice Department and Treasury. It is my pleasure to introduce my partner in this
cooperative spirit and in this initiative, the senior law enforcement official of the
United States, Attorney General Janet Reno.
-30RR-1160
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
~178~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
..............................
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR RELEASE AT NOON EDT
July 8, 1996
REMARKS OF RAYMOND W. KELLY
UNDER SECRETARY FOR ENFORCEMENT
DEPARTMENT OF THE TREASURY
JULY 8,1996
THE WHITE HOUSE
Mr. President, Mr. Vice President, Secretary Rubin, Attorney General Reno, we are here
today to focus on what our government can do to prevent young people from gaining
illegal access to frrearms.
Certainly, an illegal market exists, fed by a number of channels. There are criminal
chains of gun transfers, including illegal sales, re-sales, and purchases, as well as thefts.
These weapons pass along the links of the chain, until they land in the hands of
adolescents.
We must and we will break that chain.
As Under Secretary for Enforcement at the Treasury Department, overseeing the Bureau
of Alcohol, Tobacco and Firearms, one of my greatest responsibilities is to ensure that
the firearms laws of this country are enforced as effectively as possible. There is no more
serious aspect of this mandate than preventing the illegal transfer of weapons to youths.
Fireanns are deeply implicated in the threat to our children. From 1980 to 1994,
homicides of juveniles in which a firearm was involved nearly tripled.
Mr. President, the Brady Law and other reforms you have spearheaded in our system of
licensing firearms dealers are making it more and more difficult for criminals to buy
guns from legitimate gun dealers.
But criminals always have and always will try to get guns illegally. And such weapons
often will fall into the hands of kids.
RR-1l61
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
In St. Louis, for example, juveniles used a TEC-9 to fire on S1. Louis patrol officers.
The officers recovered and traced one of the firearms, and identified the licensed dealer
who had received the firearm for retail sale. The dealer had bought and illegally
disposed of about 450 weapons, which were routinely supplied to St. Louis street gangs.
The dealer was convicted and sentenced to seven years imprisonment.
We must build more of these cases to stop the illegal flow of guns to kids and to put
behind b.ars those who illegally traffic in weapons to them. That is what brings us here
today. ATF, the Justice Department, and state and local law enforcement are embarking
on a new enforcement strategy, focusing on identifying illegal gun markets and
prosecuting those who traffic in them.
Mr. President, Mr. Vice President, Mr. Secretary, Attorney General Reno, we know that
the illegal chain of weapons transfers can be broken. Today's announcement once again
reflects our commitment to work together to combine our ideas and energies to solve
this problem. Together, we will make a difference.
It is now my pleasure to introduce the Secretary of the Treasury, Robert E. Rubin.
-30-
UBLIC DEBT NEWS
Department of the Treasury - Bureau of the Public Debt - Washington, DC 20239
FOR IMMEDIATE RELEASE
July 8, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $14,580 million of 13-week bills to be issued
July 11, 1996 and to mature October 10, 1996 were
accepted today (CUSIP: 9127943K8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.19%
5.21%
5.21%
Investment
Rate
5.33%
5.35%
5.35%
Price
98.688
98.683
98.683
Tenders at the high discount rate were allotted 63%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
AcceQt~d
Received
$43,456,701
$14,580,471
$37,873,729
1,376,263
$39,249,992
$8,997,499
1,376,263
$10,373,762
3,207,320
3,207,320
999 1 389
$43,456,701
999 1 389
$14,580,471
An additional $16,011 thousand of bills will be
issued to foreign official institutions for new cash.
5.20 - 98.686
RR-1162
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 8, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $14,~91 million of 26-week bills to be issued
July 11, 1996 and to mature, January 9, 1997 were
accepted today (CUSIP: 9127942K9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.38%
5.41%
5.41%
Investment
Rate
5.61%
5.64%
5.64%
Price
97.280
97.265
97.265
Tenders at the high discount rate were allotted 40%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
$46,226,893
AcceQted
$14,591,393
$38,258,142
1.340.140
$39,598,282
$6,622,642
1.340.140
$7,962,782
3,500,000
3,500,000
3.128,611
$46,226,893
3.128.611
$14,591,393
An additional $50,189 thousand of bills will be
issued to foreign official institutions for new cash.
5.39 -- 97.275
RR-1l63
5.40 -- 97.270
D E P :\ R T "
E :\ T
0 F
TilE
T R E .\ S l R Y
NEWS
omCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20%%0. (20%) 6%%·%960
FOR IMMEDIATE RELEASE
July 9, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 10-YEAR NOTES
Tenders for $10,005 million of 10-year notes, Series C-2006,
to be issued July 15, 1996 and to mature July IS, 2006
were accepted today (CUSIP: 912827Y5S).
The interest rate on the notes will be 7~. The range
of accepted bids and corresponding prices are as follows:
Low
. High
Average
Yield
7.00S%"
7.0l9%7.0l6%-
Price
99.964
99.865
99.886
Tenders at the high yield were allotted
86~.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$26,617,501
Accepted
$10,004,896
The $10,005 million of accepted tenders includes $385
million of noncompetitive tenders and $9,620 million of
competitive tenders from the public.
In addition, $800 million of tenders was awarded at the
average price to Federal Reserve Banks as agen~s for foreign and
international monetary authorities. An additional $721 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
The minimum par amount required for STRIPS is S200,000.
Larger amounts must be in multiples of that amount.
RR-1164
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED JULY 18, 1996
July 9, 1996
Offering Amount .
$14,000 million
$14,000 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 Z9 8
July 15, 1996
July 18, 1996
October 17, 1996
October 19, 1995
$29,051 million
$10,000
$ 1,000
182-day bill
912794 3V 4
July 15, 1996
July 18, 1996
January 16, 1997
July 18, 1996
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, aL all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award .
J5% of
Receipt of Tenders:
Noncompetitive tenders
competitive tenders
Payment Terms .
~ublic
offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
n
EPA R T 1\1 E ;\i T
0 F
THE
T R E :\ S l' R Y
17SQ
OmCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVEN\.JE, N.W.• WASHINGTON, D.C. • 20220. (202) 622·2960
:CNTAC~:
EMBARGOED UNTIL 2:30 P.M.
July 9, 1996
Office ot ~inanc1ng
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $28,000 million, to be issued July 18,
1996.
This offering will provide about $5,300 million of new cash
for the Treasury, as the maturing weekly bills are outstanding in
the amount of $22,704 million.
Federal Reserve Banks hold $7,172 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $3,807 million as agents for
foreign and international mo~etary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional amounts
may be issued for such accounts if the aggregate amount of new
bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury b~:ls, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
At:.ac:c.mer.:.
RR-1165
-
PUBLIC DEBT NEWS
epartment of the Treasury • Bureau of the Public Debt • \Vashington, DC 20239
FOR RELEASE AT 3:00 PM
July 5, 1996
Contact: Peter Hollenbach
(202) 219-3302
PUBLIC DEBT A.NNOUNCES ACTIVIn- FOR
SECURlTIES IN THE STRIPS PROGRA..M: FOR JUNE 1996
Treasury's Bureau of the Public Debt announced activity figures for the month of June 1996,
of securities within the Separate Trading of Registered Imerest and Principal of Securities
program (STRIPS).
Dollar
Amount~
in Thousan..ds
$880,811,348
Principal Outstanding
(Eligible Securities)
Held in Unstripped Form
$653,775,348
Held in Stripped Form
$227,036.000
Reconstitu.ted in June
$12,261,564
The accompanying table gives a breakdo\\ll of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures
are included in Table VI of the Monthlv Statement of the Puhlic Debt, entitled lIHoldings of
Treasury Securities in Stripped Form."
Information about "Holdings of Treasury Securities in Stripped Form" is now available on the
Department of Commerce's Economic Bulletin Board (EBB). The EBB, which can be
accessed using personal computers, is an inexpensive service provided by the Department of
Commerce. For more information concerning Ll.lis service call 202-482·1986.
000
,":'3,_= JI •• r<O,-DIN;:;S OF -;-REJ>.S,:C.' s::~:O:-;-,=~
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7-7/8'10 Nelle C·2001 ....
05/~5/02 .....
~, ,7'~.3S7
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021,5103, .. ,
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S·718% No:e r:;·2COS" ...
5·5/6~b Note A-2Q06 .. ""
~·ila% Note B-2006"" ..
~ 1 ·5i6 % Bond 2004 ...... ,
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5-3/6% Bond :::.0;)06" ...
~'.3'4% BO!'1d ;;C09.14,.
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10·5ISo:. Send 2015 ..
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9-119~'" Sone 201 B.....
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8-718% Bond 2019 ......
8·1/6% SOrld ~O~g .....
8-,12% Bond 2C20 ........
6.3/4 % Sot'ld 2020 ..
S.:l/4'h BoriC 20Z0
i-7fSa;., Son: ~~~~"
0·1/8% Bond 2':2'
6·1/3% 6Ct1o 2~;'
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S%
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~C::
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DEPARTMENT
OF
THE
TREASURY
......................1I......~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220 • (202) 622-2960
For Release at 8: 15 A.M. MDT
July 10, 1996
REMARKS OF THE HONORABLE ROBERT E. RUBIN,
SECRETARY OF THE TREASURY
AT THE SOUTHWEST BORDER CONFERENCE
EL PASO, TE.XAS
JUtY 10, 1996
Thank you General McCaffrey. It's a pleasure to be at this very imponant gathering with
you, Anomey General Reno, and the nation's Southwest border officials.
I am pleased to serve as cO-Ghair of this conference. It represents the joint view of all law
enforcement officials - at the federal, state, and local levels - on the importance of the anti-drug
mission and the need to constantly re-assess our methods to effectively combat the national
problem of drug abuse.
1 think this conference is panicularly useful because it gives those of us in Washington
who set federal policy the opportunity to hear from those who are closest to many of these issues.
specifically you who work at or near the Southwest border. I look forward to hearing your views
on those matters that work. well -- as well as those that ma.y not - and to build on our current
efforts.
RR-1l67
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
The gravity of this problem can not be overstated. Drugs poison our youth, lead to
violence throughout our society, and adversely affect our economy. Our government has no
greater priority for public safety and public health than stopping the smuggling, trafficking, and
use of illicit narcotics.
It is the determined policy of the United States Government to fight drugs, and to bring to
bear the greatest possible weight of resources and expertise to ~ae that fight successfully. The
Defense Department, Treasury, Justice, the Coast Guard, ONDCP, and other agencies as well, are
joined in a partnership to get at every facet of this problem. What I would like to do this morning
is discuss the substantial role played by the Treasury Department's bureaus in interdiction. money
laundering investigations and other law enforcement effons - all aimed at fighting drugs.
Let me also say that while I'll be focusing on Treasury, the key to effective enforcement is
cooperation, both among federal agencies and between the federal agencies and state and local
authorities. This Conference symbolizes that coordination, and the continued role played by the
O~~CP
in accomplishing it. As part of that discussion, I will also stress demand reduction and
the need for sound economic policies to better pursue anti-narcotics goals, both within the United
States and in Mexico, our neighbor on the Southwest border.
Now, as to interdiction, I joined my colleagues here When the President announced the
National Strategy in Miami in April. There, the President again reaffirmed the Administration's
commitment to interdiction at the border. Based on this commitment, interdiction is a principal
mission of the Treasury Deparunent. and remains the number one priority of the U.S. Customs
Service.
This priority is reflected most notably in Customs' Operation Hard Line, an initiative that
is putting additional agents and inspection resources on the front lines here at the Southwest
border.
Thus far, $55 million have been allocated to Hard Line. allowing for more inspections, as
well as greater collection and use of intelligence to build complex anti-smuggling cases. This
allocation has financed enhanced technology, including a second truck x-ray system right here in
E1 Paso, as well as the construction of stronger physical barriers, such as border \Vide installation
of jersey baniers and pneumatic bollards.
The results of Hard Line to date are impressive: In just one fiscal year, Hard Line has
increased Customs' seizures of illicit narcotics by 24 percent on the southwest border. It has also
resulted in an over 50 percent decrease in instances of "port running," the practice used by
smugglers to run right through a Customs inspection site rather than submitting to a secondary
inspection that would reveal their contraband.
The Administration and Customs are building on this success. The President's FY 97
budget includes an additional $65 million for Hard Line. These funds will pay for more x-ray
equipment for examination of cargo, more and better targeted examination of passenger vehicles,
and more agents for the collection of intelligence and the building of cases against trafficking
3
organizations. By the end of 1997, 657 additional Customs agents and inspectors will be on the
job to better stop the smuggling of narcotics across the Southwest border.
Additional resources for Customs means that it can interdict more drugs in current threat
areas. and constantly assess new and emerging smuggling threats. Let me give you an example.
This spring, based on advice from DEA, FDA, and Customs, Trea.>1Jl)' prohibited the importation
of Rohypnol before the influx of that drug became epidemic. As the people of this state know
well, Texas was one of the states most affected by the use ofRohypnol, which is often introduced
into the country over the Southwest border from Mexico. Now this drug is prohibited from
imponation into the country, even under the guise of personal use. and that is an imponant
protection for our nation's young people.
So we're making progress on interdiction, panicularly at the Southwest border, and we are
committed to moving even funher ahead. However, we remain aware, as General McCaffrey has
pointed out repeatedly, that interdiction remains but one part of the comprehensive Strategy
needed to fight drugs. Treasury contributes to those other elements of the National Strategy, as
well.
We have a powerful program to combat money laundering, because hitting traffickers in
the pocketbook and preventing them from laundering drug profits is an effective way to
undermine the activ1ties of the trafficking organizations themselves.
4
For one thing, the money trail can lead to prosecution of the upper levels of the
trafficking organizations. Drug lords can kee'p themselves far removed from street-level deals, but
they cannot divorce themselves from their profits. In addition, denying traffickers access to their
profits robs them of the benefit of their trafficking and thereby creates an enonnous problem for
drug traffickers.
Treasury calls on several of its bureaus and offices in this anti-money laundering fight,
including Customs and the IRS Criminal Investigation Division, which conduct sophisticated antimoney laundering investigations, and the Financial Crimes Enforcement Network, called
FINCEN, which is a technology sophisticated expert unit, which collects and disseminates critical
financial information in connection 'Ofwith such investigations. But I want to stress that the V.S.
anti-money laundering effort is an interagency one. involving the resources of ONDCP, the
Departments of Treasury, State, and Justice, and local and state law enforcement.
I also want to take a moment on the enforcement efforts against the traffickers by Treasury's
Bureau of Alcohol. Tobacco and Firearms. ATF attacks armed drug traffickers through its
enforcement of our nation's federal firearms and explosives laws. The majority of arrests made by
ATF's Achilles program were for narcotics-related charges, and the bureau remains a vital
panicipant in Organized Crime Drug Enforcement Task Forces C"OCDETF') and High Intensity
Drug Trafficking Areas ("HIDTA's").
Let me also say that ATF has been doing a powerful job pursuing other aspects of its anti5
crime mission, as we have seen with the recent Viper's militia case in Arizona. its close work with
the FBI on the Oklahoma City and World Trade Center investigations. and its role investigating
and trying to stop the recent upsurge in the African American church fire burnings.
Now that I've described some of our effons at interdiction and other counter-narcotics
matters that you pursue at on the US side of the border, I would like to briefly address issues
relating to the effons of Mexico. I know that those of you who have worked tirelessly on all of
these counter-narcotics issues have at times expressed concern over this issue.
But I also strongly believe that we are seeing real change in Mexico due greatly to the
leadership of President Zedillio in coming to grips v."ith the law enforcement issues, but also due
to the strengthening of US-Mexico relations that occurred in the wake ofNAFfA and the US
financial assistance package last year. Let me deal with each of those issues in turn.
As to the enforcement issues, we are heartened by President Zedillo and Attorney General
Lozano's commitment to anti-narcotics matters. Over the last year, this commitment has
manifested itself in a new law criminaIizing money laundering. the expulsion of a leading narcotrafficker to the United States, and the record number of eradicated hectares of cenain narcotics
crops.
Our dialogue with Mexico reflects our mutual understanding that, notwithstanding
improved efforts, some of the problems associated with narcotics crossing from Mexico into the
6
United States persist. While we are pleased by some of the recent measures, we view them as a
starting point for even more vigorous actions - within Mexico and in coordination with the U.S. - to stop the flow of drugs across our Southwest border.
We're fortunate to have Gen. McCaffrey lead our High Level Contact Group to further
our anti·narcotics discussions with Mexican authorities. Treasury is a full participant, with
ONDCP. Justice, Defense, and the State Depanment, on such work. We look forward to
maintaining our close inter-agency working relationship with these Departments as we look to
build on current efforts by and with Mexico.
However, just as our own anti-narcotics fight depends in great pan on a healthy
underlying economy and society, Mexico's counter.drug efforts in the future also depend on its
remaining financially stable and economically strong. Instability and poverty would render
:Mexico less able to enforce its laws and more susceptible to the corrupting influence of drug
traffickers. Had we not provided assistance and had Mexico defaulted on its obligations in late
1994 and early 1995, we would be facing an even more serious drug problem today.
The same general link. can be drawn between our own economic conditions and counterdrug efforts, particularly with respect to demand reduction efforts at home. As to the importance
of demand reduction, let me reiterate what General McCaffrey and Attorney General Reno have
consistently emphasized: while law enforcement is critical, and we need to promote it with the .
utmost vigor, demand reduction, including treatment and early prevention, is our greatest long
7
tenn hope for freeing the American people from the scourge of drugs. Treasury works directly on
this front through such initiatives as Project Outreach and the ATF G-dllg Resistance Education
and Training CG.RE.A T.") program.
However, while stressing to our youth the need to reject drug use, we must also help them
move toward those things - education. hard work, responsibility
_e
that will help them build
productive lives. And we can best do that by pro~iding growth and opportunity for all of our
citizens. In short, economic OPPOItunity is critical to combating drugs.
The Administration's record on this issue is strong. Over the last four years, the
unemployment rate has fallen from 7.6 to 5.3 percent, and nearly 10 million additional jobs have
been created. Moreover, through the President's expansion of the earned income tax credit, a tax.
cut has been provided for 15 million of our nation's working poor. In addition, the President has
proposed other policies to enhance opportunity, such as a targeted middle income tax cut and a
fifteen hundred dollar education based tax cut.
So, we're making progress on many fronts. However, we must continue to build on such
progress. Conferences like this, which reflect our continuing cooperative work with ONDCP,
Justice, and the other federal agencies, will help us do so.
Of course, this commitment to productive collaborative relationships at the border also
extends to state and local officials. Through formal programs or informal sharing of infonnation
8
and processes, each of the Treasury bureaus will ensure that they continue to work closely with
state and local officials who represent most of the n~ion!s law enforcement officers, make the
majority of arrests, and deal daily with the c~e and social destruction connected with the drug
problem.
The problem of drugs in our society is not going to be solved quickly. And while there are
some who ·have said that it is beyond our ability to solve, conferences such as this reflect our joint
view that such pessim;sts are wrong. Working together, we are making a difference, at the
Southwest border and throughout society. And by working together, we will continue to do so.
Thank you.
9
TABLE OF CONTENTS
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INTRODUCTION
I.
FANNIE MAE, FREDDIE MAC, AND THE HOUSING CREDIT MARKET.
A.
17
17
SECONDARY MORTGAGE MARKET OPERATIONS OF FANNIE MAE AND
FREDDIE MAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
20
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
23
GOVERNMENT SPONSORSHIP OF FANNIE MAE AND FREDDIE MAC ..
25
A.
........
25
1.
Benefits of Government Sponsorship . . . . . . . . . . . . . . . . . ..
25
2.
Constraints of Government Sponsorship . . . . . . . . . . . . . . . "
28
C.
B.
C.
BENEFITS AND CONSTRAINTS OF GOVERNMENT SPONSORSHIP
ESTIMATING THE VALUE OF GOVERNMENT SPONSORSHIP . . . . . . . . . . .
29
1.
Benefits Related to Securitizing Mortgages . . . . . . .
29
'")
Benefits Related to Retaining Mortgages in Portfolio .
31
3.
Benefits That Reduce the GSEs' Operating Costs . . . . . . . . ..
33
4.
Estimating the Gross and Net Value of Government Sponsorship
33
THE GSEs' CURRENT BUSINESS OPERATIONS AND PROFITABILITY . . . . ..
35
1.
Mortgages Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . ..
35
2.
Sources of Income, and Growth of Retained Portfolio . . . . . . ..
36
3.
The Profitability of Fannie Mae and Freddie Mac
..........
39
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
40
THE GSES' PUBLIC PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
D.
III.
13
THE CREATION AND EVOLUTION OF FANNIE MAE AND FREDDIE MAC;
A HISTORICAL OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
B.
II.
......................................
TABLE OF. CONTENTS
1.
SUMMARY ....
. 1
INTRODUCTION
13
FANNIE MAE, FREDDIE MAC. AND THE HOUSING CREDIT MARKET.
17
A.
B.
c.
II.
THE CREATION AND EVOLUTION OF FANNIE MAE AND FREDDIE MAC:
A HISTORlCAL OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
SECONDARY MORTGAGE MARKET OPERATIONS OF FANNIE MAE AND
FREDDIE MAC .
20
SUMMARY ...
23
GOVERNMENT SPONSORSHIP OF FANNIE MAE AND FREDDIE MAC
25
A.
BENEFITS AND CONSTRAINTS OF GOVERNMENT SPONSORSHIP
25
1.
Benefits of Government Sponsorship . . .
25
Constraints of Government Sponsorship.
28
ESTIMATING THE VALUE OF GOVERNMENT SPONSORSHIP
29
B.
Benefits Related
4.
c
D
III.
to
Securitizing Mortgages ....
29
Benefits Related to Retaining Mortgages in Portfolio
31
Benefits That Reduce the GSEs' Operating Costs ..
33
Estimating the Gross and Net Value of Government Sponsorship
33
THE GSEs' CURRE)'.;T BUSINESS OPERATIONS AND PROFITABILITY
35
1.
Mortgages Outstanding . . . . . . . . . . . . . , . . . . .
35
Sources of Income, and Growth of Retained Portfolio
36
The Profitability of Fannie Mae and Freddie Mac
39
Sl'\1\1ARY ...
THE GSES' PUBLIC PURPOSE
40
. , . , "
43
1lI
5.
C.
The Tension Between Profit and Public Purpose
. .. . . . . . .
81
BALANCING THE GSEs' PUBLIC PURPOSE AND THE BENEFITS OF
GOVERNMENT SPONSORSHIP . . . . . . . . . . . . . . . . . . . . .. . . . . . .
81
SUMMARY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
83
BIBLIOGRAPHY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
85
D.
ll1
5.
C.
The Tension Between Profit and Public Purpose
. . . . . ..
81
BALANCING THE GSEs' PUBLIC PURPOSE AND THE BENEFITS OF
GOVERNMENT SPONSORSHIP
81
SUMMARY
83
BIBLIOGRAPHY
85
D.
v
LIST OF FIGURES
FIGURE 1.1:
Secondary Market Operations of Fannie Mae and Freddie Mac . . . . . ..
21
FIGURE III.l: Share of Total Non-Conforming and B-C Credit Closed-End (Fixed
Amortization Schedule) Mortgage Originations Securitized. . . . . . . .
48
FIGURE IV.l: Quarterly Changes in Average Mortgage Rates . . . . . . . . . . . . . . .
74
LIST OF FIGURES
FIGURE 1.1:
Secondary Market Operations of Fannie Mae and Freddie Mac . . .
21
FIGURE II!. 1 : Share of Total Non-Conforming and B-C Credit Closed-End (Fixed
Amonization Schedule) Mongage Originations Securitized.
48
FIGt'RE IV.1: Quanerly Changes in Average Mongage Rates . . . . . . . .
74
SUMMARY
Created by Congress to provide stability and liquidity to the secondary mortgage
market, the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac) are privately owned companies known as
government-sponsored enterprises (GSEs). Like other GSEs i , Fannie Mae and Freddie Mac
have corporate charters granted by the federal government. To promote a public purpose,
those charters limit Fannie Mae and Freddie Mac to a particular line of business -- operating
in the secondary mortgage market -- and provide various government benefits that lower their
operating costs and enable them to borrow at rates much lower than other financial
institutions.
As a result of over three generations of U.S. government policy supporting
homeownership, the United States now has the strongest housing finance market in the
world. To make housing available to more Americans, Congress made an explicit judgment
to direct credit toward home mortgages. One way it sought to do so was by creating
intermediaries such as Fannie Mae and Freddie Mac that would buy and resell mortgages.
Fannie Mae and Freddie Mac have played critical roles in building a liquid secondary market
for home mortgages. This system has helped make homeownership possible for millions.
Despite this enormous progress. many low- and moderate-income and minority
families continue to face substantial barriers to homeownership. President Clinton has made
increased homeownership a national priority, and with the help of his National
Homeownership Strategy, the homeownership rate has reached 65.1 percent this year, the
highest level in fifteen years. Both GSEs have made, and continue to make, important
contributions toward meeting the national goal of increased homeownership.
Fannie Mae and Freddie Mac are privately owned. Their stock trades actively on the
New York Stock Exchange, and had a total market value of over $48.7 billion at the end of
1995. Last year they paid a total of $957 million in common stock dividends. As a result,
in part, of their government sponsorship. Fannie Mae and Freddie Mac can participate in the
mortgage market at lower costs and in ways that other private financial institutions cannot.
Clearly Fannie Mae and Freddie Mac must serve their shareholders, but they must also
comply with their federal charters. This ambiguity of responsibility, characteristic of GSEs,
continually raises issues of accountability: To what extent is a particular GSE responding to
its federal mandate and to what extent to the need to generate returns for its stockholders?
What tradeoffs does it make between these objectives?
In the Federal Housing Enterprises Financial Safety and Soundness Act of 1992,
Congress recognized these issues, and recognized that many of the circumstances that had led
I The other GSEs include the Federal Home Loan Bank System, the Farm Credit System, the Student
Loan Marketing Association, and the College Construction Loan Corporation. See U.S. Department
of the Treasury (1990,1991) for more information on GSEs.
SUM;MARY
Created by Congress to provide stability and liquidity to the secondary mortgage
market, the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac) are privately owned companies known as
goverrunent-sponsored enterprises (GSEs). Like other GSESI, Fannie Mae and Freddie Mac
have corporate charters granted by the federal goverrunent. To promote a public purpose,
those charters limit Fannie Mae and Freddie Mac to a particular line of business -- operating
in the secondary mortgage market -- and provide various goverrunent benefits that lower their
operating costs and enable them to borrow at rates much lower than other financial
Institutions.
As a result of over three generations of U. S. goverrunent policy supporting
homeownership, the United States now has the strongest housing finance market in the
world. To make housing available to more Americans, Congress made an explicit judgment
to direct credit toward home mortgages. One way it sought to do so was by creating
intermediaries such as Fannie Mae and Freddie Mac that would buy and resell mortgages.
Fannie Mae and Freddie Mac have played critical roles in building a liquid secondary market
for home mortgages. This system has helped make homeownership possible for millions.
Despite this enormous progress, many low- and moderate-income and minority
families continue to face substantial barriers to homeownership. Pres~dent Clinton has made
increased homeowners hip a national priority, and with the help of his National
Homeownership Strategy, the homeownership rate has reached 65.1 percent this year, the
highest level in fifteen years. Both GSEs have made. and continue to make, important
contributions toward meeting the national goal of increased homeownership.
FannIe Mae and Freddie Mac are privately owned. Their stock trades actively on the
l'-:ew York Srock Exchange, and had a total market value of over $48.7 billion at the end of
1995. Last year they paid a total of $957 million in common stock dividends. As a result,
In pan. of theIr goverrunent sponsorship. Fannie Mae and Freddie Mac can participate in the
mongage market at lower costs and in ways that other private financial institutions cannot.
Clearly Fannie Mae and Freddie Mac must serve their shareholders. but they must also
comply with their federal chaners. This ambiguity of responsibility, characteristic of GSEs,
continually raises issues of accountability: To what extent is a particular GSE responding to
Its federal mandate and to what extent to the need to generate returns for its stockholders?
What tradeoffs does it make between these objectives?
In the Federal Housing Enterprises Financial Safety and Soundness Act of 1992,
Congress recognized these issues, and recognized that many of the circumstances that had led
I The other GSEs Include the Federal Home Loan Bank System, the Farm Credit System, the Student
Loan Marketing ASSOCIatIOn. and the College ConstructIOn Loan Corporation. See U.S. Depanment
of the Treasury (1990.1991) for more information on GSEs.
3
the government's full faith and credit. In addition to giving the GSEs the advantages
mentioned above, federal law gives special status to GSE securities. It permits national
banks to hold them in unlimited amounts. It makes them lawful investments for federal
fiduciary and public funds and lawful collateral for public deposits. It authorizes the
Secretary of the Treasury to purchase up to $2.25 billion of each GSE's obligations (and thus
extend credit to the GSE). In addition, GSE securities are eligible collateral for loans from
Federal Reserve Banks and Federal Home Loan Banks, and the Federal Reserve buys and
sells such securities in its open market operations. The federal government does not
guarantee GSE securities -- in fact, federal law requires a disclaimer of any U. S. obligation.
Investors nonetheless believe that federal sponsorship provides a de facto guarantee -because they believe that Congress would not permit either GSE to fail. This perception, in
tum, enables Fannie Mae and Freddie Mac to borrow at rates lower than any private
financial institution.
Third, the two GSEs hold less capital than comparable fully private firms, without
incurring higher borrowing costs. At the end of 1995, the two GSEs had a combined $1.4
trillion in mortgage-backed securities outstanding, mortgages in portfolio. and other assets,
but only $16.8 billion in capital. The two GSEs had an average capital-to-assets ratio of 3.9
percent. That ratio falls to 2.75 percent if one allocates capital, at the minimum rate
currently required by the GSEs' safety and soundness regulator, to the $972 billion in
mortgage-backed securities that the GSEs have guaranteed but do not carry on their balance
sheets. By contrast, FDIC-insured savings institutions, which invest predominantly in
mortgage-related assets, had an average capital-to-assets ratio of 7.8 percent.
We estimate the benefits of federal sponsorship are worth almost $6 billion annually
to Fannie Mae and Freddie Mac. Of this amount, reduced operating costs (i.e., exemption
from SEC filing fees and from state and local income taxes) represent approximately $500
million annually and the borrowing cost advantage over $5 billion annually. These estimates
are broadly consistent with the magnitudes estimated by the Congressional Budget Office and
General Accounting Office. As we discuss below, Fannie Mae and Freddie Mac appear to
pass through part of these benefits to consumers through reduced mortgage costs and retain
part for their own stockholders.
These three types of benefits aid Fannie Mae and Freddie Mac in both aspects of their
business -- securitizing mortgages and retaining mortgages in portfolio. The benefits
currently involve no direct government payments to the two GSEs and under current rules
are not reponed in the federal budget. Nonetheless, they have real economic value to the
GSEs and involve real costs for the government to provide, a conclusion readily accepted by
economic and financial experts. While fully private firms frequently pay fees to third-party
guarantors to provide credit enhancement for their securities, the GSEs receive at no cost to
them a package of benefits that makes the credit standing of their securities superior to
anything available in the marketplace.
3
the government's full faith and credit. In addition to giving the GSEs the advantages
mentioned above, federal law gives special status to GSE securities. It permits national
banks to hold them in unlimited amounts. It makes them lawful invesonents for federal
fiduciary and public funds and lawful collateral for public deposits. It authorizes the
Secretary of the Treasury to purchase up to $2.25 billion of each GSE's obligations (and thus
extend credit to the GSE). In addition, GSE securities are eligible collateral for loans from
Federal Reserve Banks and Federal Home Loan Banks, and the Federal Reserve buys and
sells such securities in its open market operations. The federal government does not
guarantee GSE securities -- in fact, federal law requires a disclaimer of any U. S. obligation.
Investors nonetheless believe that federal sponsorship provides a de facto guarantee -because they believe that Congress would not permit either GSE to fail. This perception. in
tum, enables Fannie Mae and Freddie Mac to borrow at rates lower than any private
financial institution.
Third. the two GSEs hold less capital than comparable fully private firms, without
incurring higher borrowing costs. At the end of 1995, the two GSEs had a combined $1.4
trillion in mortgage-backed securities outstanding. mortgages in portfolio, and other assets,
but only $16.8 billion in capital. The two GSEs had an average capital-to-assets ratio of 3.9
percent. That ratio falls to 2.75 percent if one allocates capital. at the minimum rate
currently required by the GSEs' safety and soundness regulator, to the $972 billion in
mortgage-backed securities that the GSEs have guaranteed but do not carry on their balance
sheets. By contrast. FDIC-insured savings institutions. which invest predominantly in
mongage-related assets, had an average capital-to-assets ratio of 7.8 percent.
We estimate the benefits of federal sponsorship are worth almost $6 billion annually
[0 Fannie Mae and Freddie Mac.
Of this amount. reduced operating costs (i.e., exemption
from SEC filing fees and from state and local income taxes) represent approximately $500
TllIllion annually and the borrowing cost advantage over $5 billion annually. These estimates
are broadly consistent with the magnitudes estimated by the Congressional Budget Office and
General Accounting Office. As we discuss below. Fannie Mae and Freddie Mac appear to
pass through pan of these benefits to consumers through reduced mortgage costs and retain
pan for theIr own stockholders.
These three types of benefits aid Fannie Mae and Freddie Mac in both aspects of their
business -- securitizing mortgages and retaining mortgages in portfolio. The benefits
currently In\'olve no direct government payments to the two GSEs and under current rules
are nO! reroned in the federal budget. Nonetheless, they have real economic value to the
GSEs and involve real costs for the government to provide, a conclusion readily accepted by
economic and financial experts. While fully private firms frequently pay fees to third-party
guarantors to provide credit enhancement for their securities, the GSEs receive at no cost to
them a package of benefits that makes the credit standing of their securities superior to
anything available in the marketplace.
5
Most discussions of pass-through focus on the differences between the market rates
for the fixed-rate conforming mortgages that Fannie Mae and Freddie Mac can and do
purchase, compared to non-conforming mortgages (generally larger "jumbo" mortgages) that
can be purchased only by other private financial institutions. Some comparisons have been
made based upon the advertised on-offer rates for the two types' of mortgages. These
comparisons typically show a rate advantage for conforming mortgages. Other studies have
compared the Federal Housing Finance Board's data on mortgages that actually have closed
and have found average rates on jumbo loans lower than on conforming loans.
However, raw comparisons may mislead, because other factors could affect the price
differential between conforming and jumbo loans; the size and terms of the mortgages, their
geographic location and credit quality, or the depth and liquidity of the market for larger
versus smaller homes may have independent effects. After attempting to control for some of
these factors statistically, recent studies suggest that the GSEs reduce interest rates on
fixed-rate conforming, conventional mortgages by roughly 20 to 40 basis points. It is
unclear how much of such a differential results from pass-through of GSE benefits rather
than from such other factors as the GSEs' technical and managerial efficiency; furthermore,
the differential may change over time. A plausible estimate of 30 basis points, the midpoint
of this range, suggests that in 1995 the GSEs passed through approximately $4 billion of
pre-tax benefits.
This calculation necessarily omits certain factors. It does not include the value of the
stability the GSEs may give the conforming, conventional mortgage market. Nor does it
place a value on the extent to which the GSEs make affordable housing finance more
available than it otherwise would be (an issue discussed below).
It is even more difficult to estimate with certainty how modifying or ending
government sponsorship would affect mortgage interest rates. Although some increase seems
likely, certain factors suggest that the increase in rates might be less than the pass-through
estimate given above. Fannie Mae and Freddie Mac currently have no effective competition
in the conforming, conventional secondary mortgage market except each other. Nonetheless,
many financial institutions compete vigorously in other s~condary markets, for both
mortgages and other types of obligations. Depending upon how changes were undertaken,
competition from other financial institutions could moderate the effects of privatization.
These issues have, however, received very little analysis; further research is necessary before
definitive conclusions can be drawn.
Supporting Affordable Housing
Last year, the Department of Housing and Urban Development (HUD) released the
Administration's blueprint for increasing homeownership, the National Homeownership
Strategy: Panners in the American Dream. Many of the nation's critical unmet housing
needs today differ from those of the past. Mortgages are now widely available, and so the
Administration and Congress have focused on the needs of borrowers who continue to find
5
Most discussions of pass-through focus on the differences between the market rates
for the fixed-rate conforming mortgages that Fannie Mae and Freddie Mac can and do
purchase, compared to non-conforming mortgages (generally larger "jumbo" mortgages) that
can be purchased only by other private financial institutions. Some comparisons have been
made based upon the advertised on-offer rates for the two types of mortgages. These
comparisons typically show a rate advantage for conforming mortgages. Other studies have
compared the Federal Housing Finance Board's data on mortgages that actually have closed
and have found average rates on jumbo loans lower than on conforming loans.
However. raw comparisons may mislead, because other factors could affect the price
differential between conforming and jumbo loans; the size and terms of the mortgages, their
geographic location and credit quality, or the depth and liquidity of the market for larger
versus smaller homes may have independent effects. After attempting to control for some of
these factors statistically, recent studies suggest that the GSEs reduce interest rates on
fixed-rate conforming, conventional mortgages by roughly 20 to 40 basis points. It is
unclear how much of such a differential results from pass-through of GSE benefits rather
than from such other factors as the GSEs' technical and managerial efficiency; furthermore,
the differential may change over time. A plausible estimate of 30 basis points, the midpoint
of this range. suggests that in 1995 the GSEs passed through approximately $4 billion of
pre-tax benefits.
This calculation necessarily omits certain factors. It does not include the value of the
stability the GSEs may give the conforming. conventional mortgage market. Nor does it
place a value on the extent to which the GSEs make affordable housing finance more
availahle than it otherwise would be (an issue discussed below).
It is even more difficult to estimate with certainty how modifying or ending
government sponsorship would affect mortgage interest rates. Although some increase seems
likely. certain factors suggest that the increase in rates might be less than the pass-through
estimate given above. Fannie Mae and Freddie Mac currently have no effective competition
in the confonning. conventional secondary mortgage market except each other. Nonetheless.
many financial institutions compete vigorously in other secondary markets, for both
mortgages and other types of obligations. Depending upon how changes were undertaken.
competition from other financial institutions could moderate the effects of privatization.
These issues have. however, received very little analysis; further research is necessary before
definitive conclusions can be drawn.
Supporting Affordable Housing
Last year. the Department of Housing and Urban Development (HUD) released the
Administration's blueprint for increasing homeownership, the National Homeownership
Slralegy: Panners in the American Dream. Many of the nation's critical unmet housing
needs today differ from those of the past. Mortgages are now widely available, and so the
Administration and Congress have focused on the needs of borrowers who continue to find
7
underserved areas (as defined in HUD's 1995 final rule on GSE housing goals) from 22.9
percent in 1993 to 31.2 percent in 1995, while Freddie Mac's activity increased from 21.3
percent to 25.1 percent during the same period. Although this improved performance
obviously results in pan from HUD's oversight and encouragement, it is not possible to
ascertain the extent to which it represents a response to that oversight, to the affordable
housing activities of mortgage originators, or to diversification of the GSEs' business
activities as their basic market becomes more saturated. For example, the majority of
single-family mortgages that counted toward meeting the HUD goals in 1995 (64 percent or
more for each goal and each GSE) went to borrowers who made downpayments of at least 20
percent. Since a lack of funds for downpayments constitutes one of the main impediments to
homeownership in lower-income communities, it is unclear to what extent the goals have
stimulated mortgage originators to make loans that they would not otherwise have made.
However, affordable housing loans often entail higher marketing, servicing, and credit costs
than other GSE-purchased loans, so these historical loan-to-value (LTV) ratios may
understate the GSEs' effect on affordable housing. It is too early to evaluate fully whether a
trend toward more flexible underwriting practices will increase the availability of higher LTV
loans and spur additional mortgage originations to low- and moderate-income homebuyers.
HUD reports that it designed the affordable housing goals to be achievable under
economic conditions more adverse than the recent period of high affordability, and notes that
they may become binding constraints as market conditions change. The goals may
themselves be revised periodically to encourage the GSEs to increase their affordable housing
activities beyond what the fully private sector might otherwise do.
Ending government sponsorship would in all probability have some effect on the
GSEs' contributions to affordable housing. Without being able to estimate the extent to
which the GSEs undertake affordable housing activities because of federal requirements,
rather than for other reasons, one cannot estimate how rescinding or revising HUD's goals
would affect their activities. As HUD and the GSEs gain more experience with the goals,
we should have better understanding of the effects of these programs.
Expanding opportunities for homeownership should remain one of our highest
priorities. The actions of GSEs and other financial institutions in this crucial area will merit
continued attention from HUD and Congress.
Implications of the Status Quo
Effect on Treasury Borrowing Costs
Together, Fannie Mae and Freddie Mac have over $1.4 trillion in debt and
mongage-backed securities outstanding -- an amount equal to nearly two-fifths of the
Treasury securities held by the public. Since GSE securities may be substituted for Treasury
securities for many purposes (as discussed above), and since they benefit from investors'
perception that the federal government implicitly stands behind them, those securities
7
underserved areas (as defined in HUD's 1995 final rule on GSE housing goals) from 22.9
percent in 1993 to 31. 2 percent in 1995, while Freddie Mac's activity increased from 21. 3
percent to 25.1 percent during the same period. Although this improved performance
obviously results in part from HUD's oversight and encouragement, it is not possible to
ascertain the extent to which it represents a response to that oversight, to the affordable
housing activities of mortgage originators. or to diversification of the GSEs' business
activities as their basic market becomes more saturated. For example. the majority of
single-family mortgages that counted toward meeting the HUD goals in 1995 (64 percent or
more for each goal and each GSE) went to borrowers who made downpayments of at least 20
percent. Since a lack of funds for downpayments constitutes one of the main impediments to
homeownership in lower-income communities. it is unclear to what extent the goals have
stimulated mortgage originators to make loans that they would not otherwise have made.
However. affordable housing loans often entail higher marketing. servicing, and credit costs
than other GSE-purchased loans. so these historical loan-to-value (LTV) ratios may
understate the GSEs' effect on affordable housing. It is too early to evaluate fully whether a
trend toward more flexible underwriting practices will increase the availability of higher LTV
loans and spur additional mortgage originations to low- and moderate-income homebuyers.
HUD reports that it designed the affordable housing goals to be achievable under
economic conditions more adverse than the recent period of high affordability, and notes that
they may become binding constraints as market conditions change. The goals may
themselves be revised periodically to encourage the GSEs to increase their affordable housing
activities beyond what the fully private sector might otherwise do.
Ending government sponsorship would in all probability have some effect on the
GSEs' contrihutions to affordable housing. Without being able to estimate the extent to
which the GSEs undertake affordable housing activities because of federal requirements,
rather than for other reasons. one cannot estimate how rescinding or revising HUD's goals
would affect their activities. As HUD and the GSEs gain more experience with the goals,
we should have hetter understanding of the effects of these programs.
Expanding opportunities for homeownership should remain one of our highest
prIOrIties. The actions of GSEs and other financial institutions in this crucial area will merit
continued attention from HUD and Congress.
Implications of the Status Quo
Effect on Treasury Borrowing Costs
Together. Fannie Mae and Freddie Mac have over $1.4 trillion in debt and
mongage-backed securities outstanding -- an amount equal to nearly two-fifths of the
Treasury securities held by the pUblic. Since GSE securities may be substituted for Treasury
securities for many purposes (as discussed above), and since they benefit from investors'
perception that the federal government implicitly stands behind them, those securities
9
the financial markets, there is no perfect guarantee that they will always be safe, sound, and
profitable entities. Recognizing this, Congress recently established HUD's Office of Federal
Housing Enterprise Oversight (OFHEO) as the two GSEs' federal safety and soundness
regulator. OFHEO's establishment is a positive development that we expect to have a
salutary effect on the two GSEs' safety and soundness. Such regulation is necessary, in part
because the very nature of government sponsorship attenuates the normal market discipline
that investors would otherwise exercise in purchasing securities issued by a fully private
firm.
OFHEO's mission is unquestionably important. Overseeing the GSE's safety and
soundness diminishes the likelihood of financial difficulties that could raise any question of
government assistance. The stringency and effectiveness of OFHEO's regulatory policies
will therefore be critical.
Further Analysis Required
As noted above, further analysis of many of these issues is necessary for any
infonned conclusions. Research on both the current conforming mortgage market and the
affordable housing market would help clarify both the risks and benefits of any action by
Congress.
There should also be detailed analysis of the operational and market implications of
any particular action that Congress considers. If Congress decided to maintain the GSE
status of Fannie Mae and Freddie Mac, but sought to increase the public benefits they
provide or reduce the government benefits they receive, it could pursue a wide range of
options. Illustrative of the many options that have been suggested are: strengthening the
affordable housing goals by requiring Fannie Mae and Freddie Mac to increase their market
shares or to direct more activity to targeted areas or borrowers; requiring the GSEs to
subsidize affordable housing directly, through programs analogous to the Federal Home Loan
Banks' Affordable Housing Program; requiring increased involvement in financing
multifamily mortgages: requiring more directed assistance (both educational and financial) to
lower-income borrowers. state and local governments, and non-profit organizations; limiting
the size of the GSEs' retained mortgage portfolios: freezing or reducing the conforming loan
limit: removing certain benefits of GSE status, such as the exemption from registering
securities with the SEC; and requiring periodic estimation and public disclosure of the value
of the government benefits that the GSEs receive. These options need further analysis before
a decision can be made on whether or how to adjust government sponsorship.
Conclusions
Fannie Mae and Freddie Mac have succeeded in developing a liquid secondary
mortgage market for conforming, conventional mortgages. Congress. while recognizing the
important benefits provided by the GSEs' activities, has asked whether it is now both feasible
and advisable to change their status.
9
the financial markets. there is no perfect guarantee that they will always be safe, sound. and
profitable entities. Recognizing this. Congress recently established HUD's Office of Federal
Housing Enterprise Oversight (OFHEO) as the two GSEs' federal safety and soundness
regulator. OFHEO's establishment is a positive development that we expect to have a
salutary effect on the two GSEs' safety and soundness. Such regulation is necessary, in part
because the very nature of goverrunent sponsorship attenuates the normal market discipline
that investors would otherwise exercise in purchasing securities issued by a fully private
firm.
OFHEO's mission is unquestionably important. Overseeing the GSE's safety and
soundness diminishes the likelihood of financial difficulties that could raise any question of
government assistance. The stringency and effectiveness of OFHEO's regulatory policies
will therefore be critical.
Further Analysis Required
As noted above. further analysis of many of these issues is necessary for any
informed conclusions. Research on both the current conforming mortgage market and the
affordable housing market would help clarify both the risks and benefits of any action by
Congress.
There should also be detailed analysis of the operational and market implications of
any particular action that Congress considers. If Congress decided to maintain the GSE
status of Fannie Mae and Freddie Mac. but sought to increase the public benefits they
provide or reduce the government benefits they receive. it could pursue a wide range of
options. Illustrative of the many options that have been suggested are: strengthening the
affordable housing goals by requiring Fannie Mae and Freddie Mac to increase their market
shares or to direct more activity to targeted areas or borrowers; requiring the GSEs to
suhsidize affordable housing directly. through programs analogous to the Federal Home Loan
Banks' Affordahle Housing Program; requiring increased involvement in financing
multifamily mortgages: requiring more directed assistance (both educational and financial) to
lower-Income horrowers. state and local governments. and non-profit organizations; limiting
the size of the GSEs' retained mortgage portfolios; freezing or reducing the conforming loan
limit: removing cenain benefits of GSE status. such as the exemption from registering
securities with the SEC; and requiring periodic estimation and public disclosure of the value
of the government benefits that the GSEs receive. These options need further analysis before
a dccision can he made on whether or how to adjust government sponsorship.
Conclusions
Fannie Mae and Freddie Mac have succeeded in developing a liquid secondary
mortgage market for conforming. conventional mortgages. Congress. while recognizing the
important benefits provided by the GSEs' activities. has asked whether it is now both feasible
and advisahle to change their status.
11
important risk, as would any potential negative consequence for the availability of credit for
affordable housing. Potential benefits could include increased market competition, more
efficient credit allocation, reduced U.S. government borrowing costs, and reduced potential
risk to taxpayers.
Although the analysis undertaken in this report and others is substantial, we believe
firm conclusions regarding the desirability of ending or modifying government sponsorship of
Fannie Mae and Freddie Mac are premature. The GSEs' experience under the 1992 Act is
relatively short, and many of the most important issues could benefit from further study.
Furthermore, should Congress decide to act, there are several possible approaches, each with
different implications that should be analyzed and reviewed.
Fannie Mae and Freddie Mac are important institutions participating in markets that
affect the homeownership of millions of Americans. Ultimately no change will be made
without rigorous public discussion and a broad consensus. We hope this report is helpful to
that process.
*
*
*
Chapter I reviews the legislative history of Fannie Mae and Freddie Mac and
describes their business operations. Chapter II examines the benefits and constraints of
government sponsorship in relation to the two GSEs' business operations. Chapter III
discusses the GSEs' activities, both in the general secondary mortgage market and in
financing affordable housing. Chapter IV considers potential effects -- both for housing
finance and for the GSEs themselves -- of ending the GSEs' government sponsorship and
provides a brief review of issues for further study that could alter the federal government's
relationship with the GSEs.
11
important risk, as would any potential negative consequence for the availability of credit for
affordable housing. Potential benefits could include increased market competition, more
efficient credit allocation, reduced U.S. government borrowing costs. and reduced potential
risk to taxpayers.
Although the analysis undertaken in this report and others is substantial, we believe
firm conclusions regarding the desirability of ending or modifying government sponsorship of
Fannie Mae and Freddie Mac are premature. The GSEs' experience under the 1992 Act is
relatively short. and many of the most important issues could benefit from further study.
Furthermore, should Congress decide to act. there are several possible approaches, each with
different implications that should be analyzed and reviewed.
.
Fannie Mae and Freddie Mac are important institutions participating in markets that
affect the homeownership of millions of Americans. Ultimately no change will be made
without rigorous public discussion and a broad consensus. We hope this report is helpful to
that process.
*
*
*
Chapter I reviews the legislative history of Fannie Mae and Freddie Mac and
describes their business operations. Chapter II examines the benefits and constraints of
government sponsorship in relation to the two GSEs' business operations. Chapter III
discusses the GSEs' activities. both in the general secondary mortgage market and in
financing affordable housing. Chapter IV considers potential effects -- both for housing
finance and for the GSEs themselves -- of ending the GSEs' government sponsorship and
prondes a brief review of issues for further study that could alter the federal government's
rela!lonshir with the GSEs.
13
INTRODUCTION
Two private companies created by the federal government supplement the flow of
credit to the residential mortgage market. The Federal National Mortgage Association
(Fannie Mae), established in 1938, and the Federal Home Loan Mortgage Corporation
(Freddie Mac), established in 1970, purchase mortgages originated by banks, savings
associations, mortgage bankers, and other lenders. Combined, the two enterprises .had
approximately $1.4 trillion in assets and outstanding mortgage-backed securities at the end of
1995.
Fannie Mae and Freddie Mac are known as government-sponsored enterprises
(GSEs). J GSEs are privately owned financial intermediaries with federal charters that limit
their corporate activity to a specific credit function. The government has created GSEs to
overcome perceived shortcomings in various credit markets, mainly those for housing,
agriculture, and higher education loans. As financial intermediaries, the GSEs raise funds in
the capital market to make or purchase loans, issue pass-through securities, or guarantee the
liabilities of others.
The federal government does not guarantee or stand behind the liabilities of any GSE.
Nonetheless, capital-market investors believe that the federal government implicitly backs the
GSEs, enabling the GSEs to operate under favorable terms. The GSEs also receive other
substantial benefits from federal sponsorship, such as their securities having equal standing
with Treasury securities as permissible investments for national banks.
Shortly after the savings and loan debacle, Congress requested several government
studies on the extent to which GSEs pose risks to the taxpayers. Although the reports
identified no immediate problems with the GSEs' safety and soundness or federal oversight,2
they focused attention on the need to strengthen the federal government's oversight of Fannie
Mae and Freddie Mac. At the time, these two GSEs -- huge institutions with capital ratios
lower than most financial firms -- lacked a true safety-and-soundness regulator.
Partially in response to these reports, Congress enacted the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992 [P.L. 102-550], which created the
Office of Federal Housing Enterprise Oversight (OFHEO). As the safety and soundness
I Other GSEs include the 'Federal Home Loan Bank System (FHLBank System), the Farm Credit
System (FCS), the Federal Agricultural Mortgage Corporation (Farmer Mac), the Student Loan
Marketing Association (Sallie Mae), and the College Construction Loan Insurance Association
(Connie Lee).
, See U.S. Department of the Treasury (1990, 1991), U.S. General Accounting Office (1990, 1991),
and Congressional Budget Office (1991).
13
INTRODUCTION
Two private companies created by the federal government supplement the flow of
credit to the residential mortgage market. The Federal National Mortgage Association
(Fannie Mae), established in 1938, and the Federal Home Loan Mortgage Corporation
(Freddie Mac), established in 1970, purchase mortgages originated by banks, savings
associations, mortgage bankers, and other lenders. Combined, the two enterprises had
approximately $1.4 trillion in assets and outstanding mortgage-backed securities at the end of
1995.
Fannie Mae and Freddie Mac are known as government-sponsored enterprises
(GSEs). I GSEs are privately owned financial intennediaries with federal charters that limit
their corporate activity to a specific credit function. The government has created GSEs to
overcome perceived shortcomings in various credit markets, mainly those for housing.
agriculture. and higher education loans. As financial intennediaries. the GSEs raise funds in
the capital market to make or purchase loans. issue pass-through securities, or guarantee the
liabilities of others.
The federal government does not guarantee or stand behind the liabilities of any GSE.
Nonetheless. capital-market investors believe that the federal government implicitly backs the
GSEs. enabling the GSEs to operate under favorable tenns. The GSEs also receive other
substantial benefits from federal sponsorship. such as their securities having equal standing
with Treasury securities as pennissible investments for national banks.
Shonly after the savings and loan debacle. Congress requested several government
studie5 on the extent to which GSEs pose risks to the taxpayers. Although the repons
Identified no immediate problems with the GSEs' safety and soundness or federal oversight,2
they focused attention on the need to strengthen the federal government's oversight of Fannie
Mae and Freddie Mac. At the time. these two GSEs -- huge institutions with capital ratios
lower than most financial finns -- lacked a true safety-and-soundness regulator.
Panially in response to these repons. Congress enacted the Federal Housing
EnterprIses Financial Safety and Soundness Act of 1992 [P.L. 102-550], which created the
Office of Federal Housing Enterprise Oversight (OFHEO). As the safety and soundness
I Other GSEs include the Federal Home Loan Bank System (FHLBank System), the Fann Credit
System (FCSl. the Federal Agricultural Mortgage Corporation (Fanner Mac). the Student Loan
MarketIng Association (Sallie Mae). and the College Construction Loan Insurance Association
(ConnIe Lee)
: See CS Department of the Treasury (1990. 1991). U.S. General Accounting Office (1990. 1991),
and Congressional Budget Office (1991 )
15
This report considers the following questions: To what extent have Fannie Mae and
Freddie Mac accomplished their public purposes? Do public policy reasons exist for
continuing the benefits and constraints that GSE status imposes on Fannie Mae and Freddie
Mac? What would be the broader potential effects of ending the government's sponsorship
of Fannie Mae and Freddie Mac? What would be the consequences of maintaining the status
quo?
15
This report considers the following questions: To what extent have Fannie Mae and
Freddie Mac accomplished their public purposes? Do public policy reasons exist for
continuing the benefits and constraints that GSE status imposes on Fannie Mae and Freddie
Mac? What would be the broader potential effects of ending the government's sponsorship
of Fannie Mae and Freddie Mac? What would be the consequences of maintaining the status
quo?
17
CHAPTER I
FANNIE MAE, FREDDIE MAC, AND THE
HOUSING CREDIT MARKET
Fannie Mae has undergone several significant changes over the course of its history,
but its primary public purpose remains the same: providing liquidity to housing finance by
maintaining an active presence in the secondary mortgage market. Freddie Mac serves the
same basic public purpose. The federal government saw a need for such institutions because
of market imperfections in the supply of credit to housing finance. Depression-era economic
conditions highlighted these imperfections, as did the inflation-driven problems of the
financial system during the 1960s through 1980s.
A.
THE CREATION AND EVOLlmON OF FANNIE MAE AND FREDDIE MAc: A
HISTORICAL OVERVIEW
Financial turbulence during the Great Depression overwhelmed the housing finance
system. At the time, the most common form of housing finance was a balloon mortgage,
which required a large downpayment and periodic interest-only payments over a relatively
short repayment period (generally between one and six years). When the full principal
became due at the end of that period, the lender (usually a bank or savings and loan) decided
whether to renew the loan. As the Depression deepened, borrowers often could not make
their balloon payments. lenders often could not refinance loans. and home prices fell. The
cumulative result was a precipitous drop in new financing activity and a collapse of home
construction.
In 1932. Congress responded by creating the Federal Home Loan Bank System to
support the local institutions that specialized in housing finance -- savings associations and
savings banks. The Federal Home Loan Banks were designed to provide liquidity for longterm mortgages that replaced balloon mortgages. Using their mortgage portfolios as
collateral. member institutions could fund greater lending activity by borrowing money from
their regional Federal Home Loan Banks.
To encourage mortgage lending by shielding lenders from default risk, the
government created the Federal Housing Administration (FHA) in 1934. The FHA provided
mortgage default insurance and promoted the long-tenn fully amortizing mortgage. FHA
insurance also expanded access to credit by facilitating lower downpayments.
But lenders remained reluctant to tie up their funds in illiquid long-term mortgages, a
problem the government addressed in 1938 by creating Fannie Mae to support a secondary
market in FHA-insured mortgages. Fannie Mae raised funds in the national capital markets
and purchased FHA-insured mortgages nationwide, primarily from banks and mortgage
bankers. It also resold such mortgages to other investors. Fannie Mae's activities made the
17
CHAPTER I
FANNIE MAE, FREDDIE MAC, AND THE
HOUSING CREDIT MARKET
Fannie Mae has undergone several significant changes over the course of its history,
but its primary public purpose remains the same: providing liquidity to housing finance by
maintaining an active presence in the secondary mortgage market. Freddie Mac serves the
same basic public purpose. The federal government saw a need for such institutions because
of market imperfections in the supply of credit to housing finance. Depression-era economic
conditions highlighted these imperfections, as did the inflation-driven problems of the
financial system during the 1960s through 1980s.
A.
THE CREATIOJ\ M'D EVOLlITION OF FANNIE MAE AND FREDDIE MAC: A
HISTORICAL OVERVIEW
Financial turbulence during the Great Depression overwhelmed the housing finance
system. At the time. the most common form of housing finance was a balloon mortgage,
which required a large downpayment and periodic interest-only payments over a relatively
short repayment period (generally between one and six years). When the full principal
became due at the end of that period, the lender (usually a bank or savings and loan) decided
whether to renew the loan. As the Depression deepened, borrowers often could not make
their balloon payments. lenders often could not refinance loans, and home prices fell. The
cumulative result was a precipitous drop in new financing activity and a collapse of home
construction
In 1932. Congress responded by creating the Federal Home Loan Bank System to
support the local institutions that specialized in housing finance -- savings associations and
savings banks. The Federal Home Loan Banks were designed to provide liquidity for longteml mortgages that replaced balloon mortgages. Using their mortgage portfolios as
collateral. member institutions could fund greater lending activity by borrowing money from
their regional Federal Home Loan Banks.
To encourage mortgage lending by shielding lenders from default risk, the
government created the Federal Housing Administration (FHA) in 1934. The FHA provided
mortgage default insurance and promoted the long-term fully amortizing mortgage. FHA
insurance also expanded access to credit by facilitating lower downpayments.
But lenders remained reluctant to tie up their funds in illiquid long-term mortgages, a
problem the government addressed in 1938 by creating Fannie Mae to support a secondary
market in FHA-insured mortgages. Fannie Mae raised funds in the national capital markets
and purchased FHA-insured mortgages nationwide, primarily from banks and mortgage
bankers It also resold such mortgages to other investors. Fannie Mae's activities made the
19
for housing fmance. 3 When interest rates on alternative investments exceeded the Regulation
Q ceilings, depositors had an incentive to move their funds out of depository institutions.
This "disintermediation" process disrupted the flow of credit to fmance housing. Regulatory
restrictions on depository institutions' geographic and portfolio diversification also
contributed to uneven regional flows of housing credit.
In response to the credit crunch of 1969-70 and to regional disparities in mortgage
credit availability, Congress adopted two changes in 1970. First, Congress permitt,ed Fannie
Mae to begin purchasing "conventional" mortgage loans (that is, non-FHA, non-VA
mortgages). Second, Congress created the Federal Home Loan Mortgage Corporation
(Freddie Mac) within the Federal Home Loan Bank System (which was owned cooperatively
by thrift institutions) to provide a secondary market for conventional loans, many of which
were held by savings and loans. By fostering a secondary market in conventional mortgages,
Congress sought to make mortgage credit more available, mitigate the effect on savings and
loans of Regulation Q-related credit crunches, and improve the regional distribution of
housing finance credit.
Fannie Mae responded to its new powers by rapidly building its mortgage portfolio,
which soon exceeded that of even the largest savings and loan institution. 4 Indeed, Fannie
Mae's balance sheet looked much like that of a savings and loan, with its assets nearly all in
long-term, fixed-rate mortgages and its liabilities relatively short-term. When interest rates
soared in the late 1970s and early 1980s, Fannie Mae encountered some of the same
difficulties as did savings and loans, and by 1981 had a negative net worth of almost $11
billion.
Freddie Mac's initial business strategy differed from Fannie Mae's, Instead of
competing with its thrift-institution owners by holding mortgages in portfolio, Freddie Mac
followed Ginnie Mae's lead and focused on securitizing mortgages. 5
The Federal Reserve Board's Regulation Q. adopted pursuant to a 1933 Act of Congress, limited the
interest rates banks paid on deposits. In 1966. Congress authorized the Federal Home Loan Bank
Board to impose similar limits on the interest rates savings and loan institutions paid on deposits
(although in practice the limits for savings and loans were slightly higher than those for banks). The
remainder of this report will use "Regulation Q" to refer to both the Federal Reserve's limits on
banks and the Federal Home Loan Bank Board's limits on savings and loans.
1
4
Weicher (1994. p.55).
~ A basic description of securitization follows in the next section. Ginnie Mae does not actually
securitize or purchase mortgages but facilitates the securitization of FHA and VA mortgages by
guaranteeing the timely payment of principal and interest on the underlying pool of FHA and VA
mortgages that make up mortgage-backed securities issued by approved private sector entities. Ginnie
Mae's guarantee carries the full faith and credit of the United States. In what follows in this study,
the term "securitize" or "purchase" in relation to Ginnie Mae will refer to this guarantee function.
19
for housing finance. 3 When interest rates on alternative investments exceeded the Regulation
Q ceilings, depositors had an incentive to move their funds out of depository institutions.
This "disintermediation" process disrupted the flow of credit to fmance housing. Regulatory
restrictions on depository institutions' geographic and portfolio diversification also
contributed to uneven regional flows of housing credit.
In response to the credit crunch of 1969-70 and to regional disparities in mortgage
credit availability, Congress adopted two changes in 1970. First, Congress permitted Fannie
Mae to begin purchasing "conventional" mortgage loans (that is, non-FHA, non-VA
mortgages). Second, Congress created the Federal Home Loan Mortgage Corporation
(Freddie Mac) within the Federal Home Loan Bank System (which was owned cooperatively
by thrift institutions) to provide a secondary market for conventional loans, many o(which
were held by savings and loans. By fostering a secondary market in conventional mortgages,
Congress sought to make mortgage credit more available, mitigate the effect on savings and
loans of Regulation Q-related credit crunches, and improve the regional distribution of
housing finance credit.
Fannie Mae responded to its new powers by rapidly building its mortgage portfolio.
which soon exceeded that of even the largest savings and loan institution. 4 Indeed, Fannie
Mae's balance sheet looked much like that of a savings and loan, with its assets nearly all in
long-term, fixed-rate mortgages and its liabilities relatively short-term. When interest rates
soared in the late 1970s and early 1980s, Fannie Mae encountered some of the same
difficulties as did savings and loans, and by 1981 had a negative net worth of almost $11
billion.
Freddie Mac's initial business strategy differed from Fannie Mae's. Instead of
competing with its thrift-institution owners by holding mortgages in portfolio, Freddie Mac
fol1owed Ginnie Mae's lead and focused on securitizing mortgages. s
. The Federal Reserve Board's Regulation Q. adopted pursuant to a 1933 Act of Congress, limited the
Interest rates hanks paid on deposIts In 1966, Congress authorized the Federal Home Loan Bank
Board (0 Impose similar Iim~ts on the interest rates savings and loan institutions paid on deposits
(although If1 practice the hmIts for savmgs and loans were slightly higher than those for banks). The
remalf1der of thiS report will use "Regulation Q" to refer to both the Federal Reserve's limits on
hanks and the Federal Home Loan Bank Board's limits on savings and loans.
J
Welcher (199'+. p.55).
< A baSIC description of securitization follows in the next section.
Ginnie Mae does not actually
seCUritize or purchase mortgages but facilitates the securitization of FHA and V A mortgages by
guaranteeing the timely payment of pnnclpal and mterest on the underlying pool of FHA and VA
mortgages that make up mortgage-backed securItIes Issued by approved private sector entities. Ginnie
Mae' s gu~rantee ca~:les ~.he full fa!.th and credit of the United St.ates In what follows in this study,
the term seCUrItize or purchase In relatlon to GInnIe Mae wIll refer to this guarantee function.
21
Figure 1.1: Secondary Market Operations of Fannie Mae and Freddie Mac
Investors
Securities
Guarantee
Portfolio
Lending
GSE Debt Securities
Issued to Finance
Mortgages
GSE-Guaranteed
Mortgage Backed
Securities Issued
GSE
Fannie Mae and
Freddie Mac
Buy Mortgages
Lenders
Thrifts, Banks,
Mortgage Bankers,
Credit Unions
Borrowers
Homeowners and
Apartment
Owners
Source: GAO (1990, p. 26).
21
Figure 1.1: Secondary Market Operations of Fannie Mae and Freddie Mac
Investors
Securities
Guarantee
Portfolio
Lending
GSE-Guaranteed
Mortgage Backed
Securities Issued
GSE Debt Secuntles
Issued to Fmance
Mortgages
GSE
Fannie Mae and
Freddie Mac
Buy Mortgages
Lenders
Thrifts, Banks,
Mortgage Bankers,
Credit Unions
Borrowers
Homeowners and
Apartment
Owners
Source GAO (1990. p. 26).
23
depository institutions, which fund their mortgage portfolios primarily by taking deposits, the
two GSEs fund their portfolios by issuing an array of debt securities.
C.
SUMMARY
Fannie Mae and Freddie Mac serve a public purpose: providing stability and liquidity
to the secondary market for conforming home mortgage loans, including affordable housing
loans. As secondary market institutions, Fannie Mae and Freddie Mac purchase conforming
residential mortgage loans from banks, thrifts, mortgage banks, and other mortgage loan
originators. The GSEs finance these purchases by securitizing groups of mortgages or by
holding the mortgages in portfolios funded by issuing debt securities. Securitization involves
pooling groups of mortgages and issuing securities backed by the pooled mortgages to
investors. Mortgage-backed securities represent interests in the underlying mortgages, and
use borrowers' monthly payments of interest and principal to pay the investors. The GSEs
guarantee these payments and, in return, collect a guarantee fee. To help the GSEs pursue
these activities while keeping within their public mission, government sponsorship confers a
range of benefits and constraints, discussed in Chapter II.
23
depository institutions, which fund their mortgage portfolios primarily by taking deposits. the
two GSEs fund their portfolios by issuing an array of debt securities.
C.
SUM\tARY
Fannie Mae and Freddie Mac serve a public purpose: providing stability and liquidity
to the secondary market for conforming home mortgage loans, including affordable housing
loans. As secondary market institutions, Fannie Mae and Freddie Mac purchase conforming
residential mortgage loans from banks, thrifts, mortgage banks, and other mortgage loan
originators. The GSEs finance these purchases by securitizing groups of mortgages or by
holding the mortgages in portfolios funded by issuing debt securities. Securitization involves
pooling groups of mortgages and issuing securities backed by the pooled mortgages to
investors. Mortgage-backed securities represent interests in the underlying mortgages, and
use borrowers' monthly payments of interest and principal to pay the investors. The GSEs
guarantee these payments and, in return, collect a guarantee fee. To help the GSEs pursue
these activities while keeping within their public mission, government sponsorship confers a
range of benefits and constraints. discussed in Chapter II.
25
CHAPTERD
GOVERNMENT SPONSORSHIP OF FANNIE MAE AND FREDDIE MAC
In establishing Fannie Mae and Freddie Mac, Congress imposed a set of constraints in
their charters that limit them to certain business activities and keep them focused on housing.
Government sponsorship also includes a range of benefits to Fannie Mae and Freddie
Mac that assist them in these efforts. These include exemption from costs that other
financial institutions must bear, an ability to borrow at costs lower than other financhll
institutions, and the freedom to operate with less equity capital than a comparable fully
private firm. These benefits are not reported in the federal budget because they do not take
the form of direct payments to either GSE. Nonetheless, the benefits are extremely valuable.
This chapter describes the benefits, and attempts to quantify them and to assess what portion
of them the two GSEs pass through to consumers in the form of lower mortgage rates and
what portion the GSEs' shareholders retain.
A.
BENEFITS AND CONSTRAINTS OF GOVERNMENT SPONSORSHIP
Although they are federally chartered, Fannie Mae and Freddie Mac receive no funds
from the federal government and the government does not guarantee their securities.
However. government sponsorship does provide a set of benefits that would command a high
price if offered to fully private firms. Thus. while the GSEs pose no direct budgetary cost to
taxpayers. taxpayers provide the GSEs with benefits that have substantial value. an estimate
of which is provided in Section B.
Government sponsorship also involves certain constraints -- most significantly, those
limiting the firms' operations to the specific areas pennitted by their charters. Thus, the
GSEs forego the opportunity to invest their shareholders' capital in activities outside the
boundaries of their charters.
1.
Benefits of Government Sponsorship
Government sponsorship provides Fannie Mae and Freddie Mac with three types of
benefits that help them fulfill their public mission. First. it lowers their operating costs and
makes their securities more liquid and more attractive to investors .. Second, it enables them
to operate with relatively less capital than other market participants. Third, it enables their
debt securities and mortgage-backed securities to receive preferential treatment in financial
markets. These benefits help to support the GSEs' securitization and portfolio-holding
activities.
25
CHAPTER II
GOVERNMENT SPONSORSHIP OF FANNIE MAE AND FREDDIE MAC
In esrablishing Fannie Mae and Freddie Mac, Congress imposed a set of constraints in
their charters that limit them to certain business activities and keep them focused on housing.
Government sponsorship also includes a range of benefits to Fannie Mae and Freddie
Mac that assist them in these effons. These include exemption from costs that other
financial institutions must bear, an ability to borrow at costs lower than other financial
institutions, and the freedom to operate with less equity capita) than a comparable fully
private finn. These benefits are not reponed in the federal budget because they do not take
the fonn of direct payments to either GSE. Nonetheless, the benefits are extremely valuable.
This chapter describes the benefits, and anempts to quantify them and to assess what portion
of them the two GSEs pass through to consumers in the form of lower mortgage rates and
what portion the GSEs' shareholders retain.
A.
BE!'IEFJTS
Ac,n
CONSTRAINTS OF GOVERNMEl'.'T SPONSORSHIP
Although they are federally chartered. Fannie Mae and Freddie Mac receive no funds
from the federal government and the government does not guarantee their securities.
However. goverrunent sponsorship does provide a set of benefits that would command a high
price if offered to fully private firms. Thus. while the GSEs pose no direct budgetary cost to
taxpayers. taxpayers provide the GSEs with benefits that have substantial value. an estimate
of which is provided in Section B.
Government sponsorship also involves certain constraints -- most significantly, those
limillng the firms' operations to the specific areas permitted by their chaners. Thus. the
GSEs forego the opportunity lO invest their shareholders' capital in activities outside l,he
houndanes of their charters.
1.
Benefits of Gonrnment Sponsorship
Government sponsorship provides Fannie Mae and Freddie Mac with three types of
oenefit5 that help them fulfill their public mission. First. it lowers their operating costs and
mak.es their securities more liquid and more attractive to investors. Second, it enables them
In operate with relatively less capiral than other market participants. Third, it enables their
debt securities and mortgage-backed securities to receive preferential treatment in financial
markets. These benefits help [0 support the GSEs' securitization and portfolio-holding
acu\'itles.
27
saving associations have a financial incentive to sell and/or securitize
mortgages rather than hold them as portfolio investments. 1
Government sponsorship also enables the GSEs to operate with less capital than a
comparable fully private firm, without incurring higher borrowing costs. How much capital
such a firm would hold is speculative, because no fully private firm just like Fannie Mae and
Freddie Mac exists. Depository institutions are currently the GSEs' principal competitors for
portfolio funding of residential mortgages. The regulatory capital requirements for
mortgages currently imposed on Fannie Mae and Freddie Mac are low relative to those
imposed on FDIC-insured depository institutions. At the end of 1995, the two GSEs had an
average capital-to-assets ratio of 3.9 percent. That ratio falls to 2.75 percent if one allocates
capital. at the minimum rate currently required by the GSEs' safety and soundness regulator,
to the $972 billion in mortgage-backed securities that the GSEs have guaranteed but do not
carry on their balance sheets. By contrast, FDIC-insured savings institutions, with
investments predominantly in mortgage-related assets, had an average capital-to-assets ratio
of 7.8 percent. Although the differences may largely, or completely, reflect broad
differences in the average credit and interest rate risk exposures of GSEs and depository
institutions, the differences would provide a substantial competitive advantage to the GSEs
even over depository institutions with essentially equal risks. Both depository institutions and
the GSEs fund their mortgage portfolios using a mix of capital and debt, and capital is
generally a more expensive funding source than debt. By having lower relative capital
requirements than depository institutions, while simultaneously having an advantage in
issuing debt as described below. the GSEs can finance a given mortgage or group of
mortgages in their portfolio with less capital -- and hence at lower cost -- than can depository
institutions.
The third type of benefit associated with GSE status is the preferential treatment that
financial markets accord to debt and mortgage-backed securities issued by Fannie Mae and
Freddie Mac relative to securities issued by potentially higher-capitalized, fully private, but
otherwise comparable firms.
By law. all GSE-issued securities carry a disclaimer stating that the security is not
guaranteed by. or otherwise an obligation of. the federal government. Yet the market prices
for those securities. and the fact that the market does not require that those securities be
rated by a national rating agency, suggest that investors believe the government implicitly
guarantees those securities. This perception of an implicit guarantee -- growing out of the
numerous ties between the GSEs and the federal government -- enables Fannie Mae and
I
Federal Home Loan Mortgage Corporation (1993. p. 9).
27
saving associations have a fmancial incentive to sell and/or securitize
mortgages rather than hold them as portfolio investments. 1
Goverrunent sponsorship also enables the GSEs to operate with less capital than a
comparable fully private finn, without incurring higher borrowing costs. How much capital
such a flnn would hold is speculative, because no fully private firm just like Fannie Mae and
Freddie Mac exists. Depository institutions are currently the GSEs' principal competitors for
portfolio funding of residential mortgages. The regulatory capital requirements for
mortgages currently imposed on Fannie Mae and Freddie Mac are low relative to those
imposed on FDIC-insured depository institutions. At the end of 1995. the two GSEs had an
average capital-to-assets ratio of 3.9 percent. That ratio falls to 2.75 percent if one allocates
capital. at the minimum rate currently required by the GSEs' safety and soundness regulator,
to the $972 billion in mortgage-backed securities that the GSEs have guaranteed but do not
carry on their balance sheets. By contrast. FDIC-insured savings institutions. with
investments predominantly in mortgage-related assets, had an average capital-to-assets ratio
of 7.8 percent. Although the differences may largely. or completely. reflect broad
differences in the average credit and interest rate risk exposures of GSEs and depository
institutions. the differences would provide a substantial competitive advantage to the GSEs
even over depository institutions with essentially equal risks. Both depository institutions and
the GSEs fund their mortgage portfolios using a mix of capital and debt. and capital is
generally a more expensive funding source than debt. By having lower relative capital
requirements than depository institutions, while simultaneously having an advantage in
issuing debt as described below. the GSEs can finance a given mortgage or group of
mortgages in their portfolio with less capital -- and hence at lower cost -- than can depository
Institutions.
The third type of benefit associated with GSE status is the preferential treatment that
financial markets accord to debt and mortgage-backed securities issued by Fannie Mae and
Freddie Mac relative to securities issued by potentially higher-capitalized, fully private. but
otherwise comparable firms.
By la\\. all GSE-issued securities carry a disclaimer stating that the security is not
~uaranreeJ hy. or otherwise an obligation of. the federal goverrunent. Yet the market prices
tor rhuse seCUrIties. and the fact that the market does not require that those securities be
rated by a national rating agency, suggest that investors believe the goverrunent implicitly
guaranrees those securities. This perception of an implicit guarantee -- growing out of the
numerous ties between the GSEs and the federal goverrunent -- enables Fannie Mae and
: Federal Home Loan Mortgage CorporatIOn (1993. p. 9).
29
•
The Treasury Department has statutory authority to approve the GSEs' new debt
issues, and has used this authority to coordinate new debt issues of the GSEs to
prevent market congestion.
•
The GSEs are subject to regulatory oversight and will be .subject to risk-based capital
requirements .
B.
ESTIMATING TIlE VALUE OF GOVERNMENT SPONSORSHIP
The benefits that Fannie Mae and Freddie Mac receive from government sponsorship
have real economic value, and thus provide an in-kind subsidy. The GSEs also pass through
benefits of such sponsorship to the homebuying public in the form of lower mortgage interest
rates. How do the benefits that the GSEs receive compare in value to the benefits they pass
through to the public? Relying on the best data available to us, we present a conservative
estimate of the most significant governmental benefits that the GSEs receive and an estimate
of those they confer (lower interest rates on fixed-rate, conforming, conventional singlefamily mortgages).
As estimated here, the gross value (that is. the value before considering any passthrough to homebuyers) includes the value of GSE benefits related to mortgage securitization,
the retained mortgage portfolio, and reduced operating costs. From the gross value of these
benefits. we subtract an estimate of the value passed on to homeowners to arrive at the net
subsidy retained by the GSEs. These estimates reflect the value of GSE benefits based on
the GSEs' current operations and do not imply that the GSEs' would operate in the same way
they do today if Congress ended their government sponsorship. Nor do these estimates
imply how a change in their government sponsorship would affect the GSEs' future
operations or profitability.
1.
Benefits Related to Securitizing Mortgages
Investors pay a premium (accept a lower yield -- effectively a lower interest rate) to
purchase Fannie Mae and Freddie Mac mortgage-backed securities in comparison to
securities with comparable asset-backing issued by non-GSEs (private conduits).6 This
advantage to the GSEs derives primarily from investors' perception that the government
implicitly guarantees such securities even though no formal guarantee exists. An estimate of
the value of the GSE benefits relating to mortgage-backed securitization should at least equal
the extent to which investors are willing to accept lower yields because of that perception.
Goodman and Passmore (1992, p. 5) found a yield difference of 45 to 60 basis
points between the GSEs' mortgage-backed securities and AA-rated private mortgage-backed
securities. Based in part on this result and other sources, CBO (1996) cited a range of 25 to
Hermalin and Jaffee (1996) provide a theoretical analysis of the premium investors are willing to
pay for the GS Es' mortgage-backed securities.
6
29
•
The Treasury Department has statutory authority to approve the GSEs' new debt
issues. and has used this authority to coordinate new debt issues of the GSEs to
prevent market congestion.
•
The GSEs are subject to regulatory oversight and will be subject to risk-based capital
requ irements.
B.
ESTIMATING THE VALUE OF GoVERNMENT SPONSORSHIP
The benefits that Fannie Mae and Freddie Mac receive from government sponsorship
have real economic value. and thus provide an in-kind subsidy. The GSEs also pass through
benefits of such sponsorship to the homebuying public in the form of lower mortgage interest
rates. How do the benefits that the GSEs receive compare in value to the benefits they pass
through to the public? Relying on the best data available to us, we present a conservative
estimate of the most significant governmental benefits that the GSEs receive and an estimate
of those they confer (lower interest rates on fixed-rate. conforming, conventional singlefamily mortgages).
As estimated here. the gross value (that is. the value before considering any passthrough to homebuyers) includes the value of GSE benefits related to mortgage securitization.
the retained mortgage portfolio. and reduced operating costs. From the gross value of these
benefits. we subtract an estimate of the value passed on to homeowners to arrive at the net
subsidy retained by the GSEs. These estimates reflect the value of GSE benefits based on
the GSEs' current operations and do not imply that the GSEs' would operate in the same way
they do today if Congress ended their government sponsorship. Nor do these estimates
Imply how a change in their government sponsorship would affect the GSEs' future
operations or profitability.
1.
Benefits Related to Securitizing Mortgages
Investors pay a premium (accept a lower yield -- effectively a lower interest rate) to
purchase Fannie Mae and Freddie Mac mortgage-backed securities in comparison to
secumies with comparable asset-backing issued by non-GSEs (private conduits). This
advantage to the GSEs derives primarily from investors' perception that the government
Implicitly guarantees such securities even though no formal guarantee exists. An estimate of
the value of the GSE benefits relating to mortgage-backed securitization should at least equal
the extent to which investors are willing to accept lower yields because of that perception.
(1
Goodman and Passmore (1992. p. 5) found a yield difference of 45 to 60 basis
points between the GSEs' mortgage-backed securities and AA-rated private mortgage-backed
securities. Based in part on this result and other sources. CBO (1996) cited a range of 25 to
, Hermalm and Jaffee (1996) provide a theoretical analysis of the premium investors are willing to
pay for the GSEs' mortgage-backed securities.
31
yield advantage in the market. 8 This estimate is necessarily only approximate. A more
precise estimate would require extensive gathering and analysis of market data on outstanding
mortgage-backed securities. Even then, the inherent structural differences between GSEissued mortgage-backed securities and privately issued mortgage-backed securities would
continue to complicate such comparisons. And, the size of the GSEs' advantage may change
over time in response to changing market conditions and growing market acceptance of
privately issued mortgage-backed securities.
2.
Benefits Related to Retaining Mortgages in Portfolio
To finance their retained mortgage portfolios, Fannie Mae and Freddie Mac issue debt
securities. Investors purchase these securities in the bond market at interest rates much lower
than those paid by institutions with similar risks and more capital. The perception of an
implicit guarantee makes them appear safer to investors, and some of their characteristics as
GSE securities enhance their liquidity -- in essence lowering the GSEs' borrowing costs.
One way to estimate these benefits is to compare the GSEs' borrowing costs to those of large
high-quality financial firms with large portfolios of residential mortgages. Such firms
(primarily large thrifts and commercial banks) are typically rated about A.
Using market price data reported by Bloomberg Financial Services, we examined
yield spreads between the two GSEs' debt securities and similar securities of fully private, Arated financial firms. Bloomberg adjusts its data for the specific characteristics of the bonds
and reports average yield spreads for various maturity ranges. 9 Comparing yield differences
on intermediate and long-term securities outstanding over the period from
, Fannie Mae criticized such estimates for exceeding the guarantee fee it charges customers. Yet the
yield difference being measured here reflects the price advantage at which the GSEs sell their
securities. not the guarantee fee they retain. Also. the 35 basis points is a gross subsidy, which does
not consider any possible pass-through to homebuyers. The estimated net subsidy associated with
securitization (described later in this section) is the 35 basis point estimated yield advantage minus the
pass-through of GSE benefits in the form of reduced mortgage interest rates. Thus. based on the
assumptions made here if the GSEs lowered mortgage interest rates by 30 basis points. then the net
subsidy retamed by the GSEs in securitizing mortgages would be 5 basis points.
In comments provided to the Treasury, Freddie Mac stated that a funding advantage of 30 basis points
m issuing mortgage-backed securities was reasonable. but this was not a fair measure of their GSE
benefits since their securities also benefit from a liquidity advantage. Any liquidity premium accruing
to the GSEs' mortgage-backed securities however. reflects to some (probably large) degree, liquidity
advantages derived from their GSE status.
Bloomberg Financial Services reports the market value ?f bonds caJcula.ted using the Bloomberg Fair
Value Model. According to Bloomberg, "Bloomberg Fair Value (BFV) IS the mo~el level or
calculation that provides an indication of a bond's ma.rket valu~, bas~d on the tradmg levels of other
debt in its sector. as defined by issuer type and perceived credit quality. To account for embedded
options BFV quantifies the value of any options and dependi~g o~ option type, adds or subtracts th~m
from the value. effectively allowing you to compare bonds WIth different structures on an equal basiS.
This model-predicted value is free of short-term supply and demand considerations."
Q
31
yield advantage in the market. 8 This estimate is necessarily only approximate. A more
precise estimate would require extensive gathering and analysis of market data on outstanding
mortgage-backed securities. Even then, the inherent strucrural differences between GSEissued mortgage-backed securities and privately issued mortgage-backed securities would
continue to complicate such comparisons. And, the size of the GSEs' advantage may change
over time in response to changing market conditions and growing market acceptance of
privately issued mortgage-backed securities.
2.
Benefits Related to Retaining Mortgages in Portfolio
To finance their retained mortgage portfolios, Fannie Mae and Freddie Mac issue debt
securities. Investors purchase these securities in the bond market at interest rates much lower
than those paid by instirutions with similar risks and more capital. The perception of an
implicit guarantee makes them appear safer to investors, and some of their characteristics as
GSE securities enhance their liquidity -- in essence lowering the GSEs' borrowing costs.
One way to estimate these benefits is to compare the GSEs' borrowing costs to those of large
high-quality financial finns with large portfolios of residential mortgages. Such finns
(primarily large thrifts and commercial banks) are typically rated about A.
Using market price data reported by Bloomberg Financial Services, we examined
yield spreads between the two GSEs' debt securities and similar securities of fully private, Arated financial finns. Bloomberg adjusts its data for the specific characteristics of the bonds
and reports average yield spreads for various maturity ranges. 9 Comparing yield differences
on intennediate and long-tenn securities outstanding over the period from
• FannIe Mae criticized such estimates for exceeding the guarantee fee it charges customers. Yet the
Yield difference being measured here reflects the price advantage at which the GSEs sell their
securJues. not the guarantee fee they retain. Also. the 35 basis points is a gross subsidy. which does
not consider any possible pass-through to homebuyers. The estimated net subsidy associated with
securJuzauon (described later in this section) is the 35 basis poim estimated yield advantage minus the
r3s~-through of GSE benefits in the form of reduced mortgage interest rates. Thus. based on the
as~umruon:, made here if the GSEs lowered mongage imerest rates by 30 basis points. then the net
subSidy retained by the GSEs in securitizing mongages would be 5 basis points.
In comments prOVIded to the Treasury. Freddie Mac stated that a funding advantage of 30 basis points
In Issumg mortgage-backed seCUrilJes was reasonable. but thiS was not a fair measure of their GSE
benefits slnc.e their securities also benefit from a liquidity advantage. Any liquidity premium accruing
to the GSEs mongage-backed SeCUrilIeS however. reflects to some (probably large) degree. liquidity
ad\antages derived from their GSE status.
',Bloomberg Fmancial Services repons th: market value of bonds calculated using the Bloomberg Fair
\ alue Model. Accordmg to Bloomberg. Bloomberg Fair Value (BFV) is the model level or
.:aiculallon that provides an indication of a bond's market value. based on the trading levels of other
debt In ItS sector. as defined by issuer type and perceived credit quality. To account for embedded
options BFV quantifies the value of any options and depending on option type, adds or subtracts them
from the value. effectively allowing you to compare bonds with different structures on an equal basis.
ThiS model-predIcted value IS free of shan-term supply and demand considerations."
33
such as their current competitors in portfolio mortgage funding. The GSEs' competitive
advantage is also reflected in the fact that they operate with relatively less capital than fully
private flrms that finance whole mortgages in their portfolio. In fact, whether measured
using current regulatory capital requirements or actual capital levels, the GSEs operate with
considerably less capital than do other private fmancial firms.11 A company's debt holders
look to the company's capital level and the relative riskiness of its activities in judging the
risk of their investment. Other things being equal, a firm's borrowing costs are inversely
related to its capital level.
GSE status attenuates this normal disciplining function of the marketplace. reducing
the GSEs' borrowing costs without requiring commensurately higher levels of capitaL Since
capital is more costly than debt. operating with relatively less capital than private firms adds
to the GSEs competitive advantages in funding a portfolio of mortgages.
3.
Benefits That Reduce the GSEs' Operating Costs
Several GSE benefits. such as the exemption from SEC registration. directly reduce
Fannie Mae' sand Freddie Mac's operating expenses relative to other firms. In addition, the
GSEs' income is exempt from state and local income taxes. Although we did not attempt to
identify and value every aspect of GSE status that may reduce the GSEs' operating costs. the
SEC registration exemption and the state and local income tax exemption are the most
significant. GAO (1996-B, p. 7) estimated that in 1995 the state and local income tax
exemption saved the GSEs a combined $367 million. and the SEC registration exemption
saved the GSEs $102 million. Rounded off. the GSEs' combined operating cost subsidies
totaled roughly $500 million last year. Among other things. this estimate does not include
any operating-cost subsidies that may arise from use of the Federal Reserve's book-entry
system. Nor does it include savings from issuing securities without obtaining private rating
agency ratings.
4.
Estimating the Gross and Net Value of Government Sponsorship
The cumulative value of GSE status to Fannie Mae and Freddie Mac may be
estimated hy combining the value of the benefits they receive in securitizing mortgages,
funding mortgages in portfolio. and operating at lower costs. The GSEs' so-called gross
subsidy measures these benefits before considering the extent to which the GSEs pass them
on to homebuyers in the form of lower mortgage rates. The pre-tax net value of the benefits
retained by the GSEs is the gross subsidy minus the projected reduction in mortgage rates
resulting from the GSEs' operations.
Our analysis assumes that in 1995. government sponsorship gave the GSEs: (1) a 35
basis point advantage in securitizing mortgages: (2) a 55 basis point advantage in issuing
II See Stanton (1996. pp. 80-83) for comparisons between the GSEs and other financial firms, and
between the GSEs and other major providers of mortgage credit.
33
such as their current competitors in portfolio mortgage funding. The GSEs' competitive
advantage is also reflected in the fact that they operate with relatively less capital than fully
private firms that finance whole mortgages in their portfolio. In fact. whether measured
using current regulatory capital requirements or actual capital levels, the GSEs operate with
considerably less capital than do other private financial finns.ll A company's debt holders
look to the company's capital level and the relative riskiness of its activities in judging the
risk of their investment. Other things being equal, a finn's borrowing costs are inversely
related to its capital level.
GSE status attenuates this normal disciplining function of the marketplace, reducing
the GSEs' borrowing costs without requiring commensurately higher levels of capitaL Since
capital is more costly than debt, operating with relatively less capital than private firms adds
to the GSEs competitive advantages in funding a portfolio of mortgages.
3.
Benefits That Reduce the GSEs' Operating Costs
Several GSE benefits, such as the exemption from SEC registration. directly reduce
Fannie Mae's and Freddie Mac's operating expenses relative to other firms. In addition, the
GSEs' income is exempt from state and local income taxes. Although we did not attempt to
identify and value every aspect of GSE status that may reduce the GSEs' operating costs, the
SEC registration exemption and the state and local income tax exemption are the most
significant. GAO (1996-B. p. 7) estimated that in 1995 the state and local income tax
exemption saved the GSEs a combined $367 million. and the SEC registration exemption
saved the GSEs $102 million. Rounded off. the GSEs' combined operating cost subsidies
totaled roughly $500 million last year. Among other things. this estimate does not include
any operating-cost subsidies that may arise from use of the Federal Reserve's book-entry
system. Nor does it include savings from issuing securities without obtaining private rating
agency ratings.
4.
Estimating the Gross and Net Value of Government Sponsorship
The cumulative value of GSE status to Fannie Mae and Freddie Mac may be
estimated hy comhining the value of the benefits they receive in securitizing mortgages,
funding mortgages in portfolio. and operating at lower costs. The GSEs' so-called gross
suhsidy measures these benefits before considering the extent to which the GSEs pass them
on to homehuyers in the form of lower mortgage rates. The pre-tax net value of the benefits
retained by the GSEs is the gross subsidy minus the projected reduction in mortgage rates
resulting from the GSEs' operations.
Our analysis assumes that in 1995. government sponsorship gave the GSEs: (1) a 35
hasis point advantage in securitizing mortgages: (2) a 55 basis point advantage in issuing
II See Stanton (1996, pp. 80-83) for comparisons between the GSEs and other financial finns
and
.
hetween the GSEs and other major providers of mortgage credit.
35
produces an estimated range of benefits passed through to homebuyers of $2.6 billion to $5.1
billion.
Although estimates such as that presented above do give a general sense of the
magnitude of the subsidies involved, no single point estimate should be viewed as a firm
indicator of the benefits the GSEs receive or pass through. The calculations described above,
for example, omit important elements of both benefits received and benefits passed through.
The estimates do not place a value on the added stability the GSEs may give the conforming,
conventional mortgage market. Nor do they place a value on the extent to which the GSEs
may make affordable housing finance more available through consumer education activities,
outreach efforts, and special products.
By the same token, the estimates do not include such other benefits to the GSEs as the
use of the book-entry system maintained by the Federal Reserve or the ability to issue
securities without obtaining private rating-agency ratings. The estimates also credit the GSEs
for passing through lower rates on all the mortgages they purchase (including adjustable-rate
mortgages and multifamily mortgages), not just on fixed-rate mortgages l6 . And the estimates
do not include any additional competitive advantage that may result from government
sponsorship.
Nevertheless. these estimates do provide a foundation for assessing how Fannie Mae
and Freddie Mac work within the overall secondary mortgage market.
C.
THE
GSEs' CURREI'! BUSINESS OPERATIONS AND PROFITABILITY
Although valuing the benefits of government sponsorship involves uncertainties. our
estimates suggest that those benefits are substantial. a conclusion consistent with a basic
review of the financial performance of Fannie Mae and Freddie Mac. In addition to enabling
the GSEs to fulfill their public purpose. government sponsorship appears to shape their
operations and opportunities in significant ways.
1.
Mortgages Outstanding
Fannie Mae and Freddie Mac are two of the largest financial companies in the United
States. Table II.l shows each GSE's outstanding mortgage-backed securities and retained
portfolio from 1989 through 1995. At the end of 1995. the two GSEs held some or all of the
credit risk for more than $1.3 trillion in mortgages -- 34 percent of the $3.9 trillion in total
outstanding residential mortgage debt in the country and 2.7 times the $491 billion of
mortgages and mortgage-backed securities held by OTS-regulated savings associations.
Ie We estimate that for single-family mortgages originated in 1994, the GSEs financed 83 percent of
the conforming. conventional fixed-rate mortgages and 17 percent of the conforming, conventional
adjustable-rate mortgages. The fully private sector financed 17 percent of the fixed-rate, and 83
percent of the adjustable-rate conforming, conventional mortgages originated that year.
35
produces an estimated range of benefits passed through to homebuyers of $2.6 billion to $5.1
billion.
Although estimates such as that presented above do give a general sense of the
magnitude of the subsidies involved, no single point estimate should be viewed as a firm
indicator of the benefits the GSEs receive or pass through. The calculations described above,
for example, omit important elements of both benefits received and benefits passed through.
The estimates do not place a value on the added stability the GSEs may give the conforming,
conventional mortgage market. Nor do they place a value on the extent to which the GSEs
may make affordable housing finance more available through consumer education activities,
outreach efforts, and special products.
By the same token, the estimates do not include such other benefits to the GSEs as the
use of the book-entry system maintained by the Federal Reserve or the ability to issue
securities without obtaining private rating-agency ratings. The estimates also credit the GSEs
for passing through lower rates on all the mortgages they purchase (including adjustable-rate
mortgages and multifamily mortgages), not just on fixed-rate mortgages 16. And the estimates
do not include any additional competitive advantage that may result from government
sponsorship.
Nevertheless, these estimates do provide a foundation for assessing how Fannie Mae
and Freddie Mac work within the overall secondary mortgage market.
C.
THE GSEs' CL'RRE~'T BUSI/'Io'ESS OPERATIONS AND PROFITABILITY
Although valuing the benefits of government sponsorship involves uncertainties, our
t:stimates suggest that those benefits are substantial. a conclusion consistent with a basic
review of the financial perfonnance of Fannie Mae and Freddie Mac. In addition to enabling
the GSEs to fulfill their public purpose, government sponsorship appears to shape their
operations and opportunities in significant ways.
1.
Mortgages Outstanding
Fanme Mae and Freddie Mac are two of the largest financial companies in the United
States Table 11.1 shows each GSE's outstanding mortgage-backed securities and retained
portfolio from 1989 through 1995. At the end of 1995, the two GSEs held some or all of the
credit risk for more than $1.3 trillion in mortgages -- 34 percent of the $3.9 trillion in total
outstanding residential mortgage debt in the country and 2.7 times the $491 billion of
mortgages and mortgage-backed securities held by OTS-regulated savings associations.
i' \ \ ' e e?tlmate that for smgle-family mortgages originated in 1994, the GSEs financed 83 percent of
the contormmg. conventIOnal fixed-rate mortgages and 17 percent of the conforming, conventional
adjustable-rate mortgages. The fully private sector financed 17 percent of the fixed-rate, and 83
rercent of the adjustable-rate conforming, conventional mortgages originated that year.
37
percent in 1992 to over 55 percent by 1995 Y Fee income from guaranteeing mortgagebacked securities still makes up a substantial portion of total income but may diminish in
importance if Fannie Mae and Freddie Mac pursue portfolio growth as the key to expanding
profits. Other income, consisting primarily of REMIC fees, tends to fluctuate greatly from
year to year in response to originations and investor demand for these products.
Table II.2: Fannie Mae and Freddie Mac Percentages of Total Revenue by Sources of
Income
1995
1994
1993
1992
Net Interest Income
72.2%
69.7%
67.5%
67.3%
Guarantee Fee Income
25.7%
26.7%
25.6%
27.3%
Other Fee Income
2.1 %
3.6%
6.9%
5.5%
Net Interest Income
55.6%
48.6%
40.4%
38.9%
Guarantee Fte Income
43.1 %
48.5%
52.9%
57.6%
1.5%
2.9%
6.7%
3.5%
Fannie Mae
Freddie Mac
Other Fee Income
Source Fannie Mae and Freddie Mac Investor/Analyst Reports
Table 11.3 presents summary statistics that indicate the GSEs' increased focus on
building their retained portfolio. For both Fannie Mae and Freddie Mac. the retained
portfolio growth rate in recent years has exceeded the outstanding mortgage-backed securities
growth rate. The growth in Freddie Mac's retained portfolio is especially marked. In 1995,
P A better standard for gauging the importance of different business activities would be percentages
of net income by income source. Considering only total revenue by income source ignores the
allocation of costs among various business activities. For example. managing the interest rate risk
associated with the retained portfolio of Fannie Mae and Freddie Mac may require greater resources
than managing the credit risk associated with the outstanding portfolio of mortgage-backed securities.
Fannie Mae does report statistics similar to Table 2.2 based on net income by line of business. In
1995 (before special contributions to the Fannie Mae Foundation). portfolio investment made up 57.7
percent of net income. credit guarantees made up 40.8 percent. and fee-based services made up 1.4
percent. Freddie Mac only recently (first quarter of 1996) adopted reporting practices that allow
calculations of the percentage of net income by income source, and it told us that this information was
not publicly available for previous time periods.
37
percent in 1992 to over 55 percent by 1995 Y Fee income from guaranteeing mortgagebacked securities still makes up a substantial portion of total income but may diminish in
importance if Fannie Mae and Freddie Mac pursue portfolio growth as the key to expanding
profits. Other income, consisting primarily of REMIC fees, tends to fluctuate greatly from
year to year in response to originations and investor demand for these products.
Table 11.2: Fannie Mae and Freddie Mac Percentages of Total Revenue by Sources of
Income
1995
1994
1993
1992
Net Interest Income
72.2%
69.7%
67.5%
67.3%
Guarantee Fee Income
25.7%
26.7%
25.6%
27.3%
Other Fee Income
2.1 %
3.6%
6.9%
5.5%
Net Interest Income
55.6%
48.6%
40.4%
38.9%
Guarantee Fee Income
43.1 %
48.5%
52.9%
57.6%
l.5%
2.9%
6.7%
3.5%
Fannie Mae
Freddie Mac
Other Fee Income
Source FannIe Mae and Freddie Mac Investor! Analyst Reports
Table II. 3 presents summary statistics that indicate the GSEs' increased focus on
huilding their retained portfolio. For both Fannie Mae and Freddie Mac, the retained
plmfoiIo growth rate in recent years has exceeded the outstanding mortgage-backed securities
growth rate. The growth in Freddie Mac's retained portfolio is especially marked. In 1995,
I" A better standard for gauging the importance of different business ~ctivities would be percentages
of net mcome by mcome source. Consldenng. only total revenue by mcome source ignores the
allocation of costs among vanous busmess aCtiVIties. For example, managing the interest rate risk
associated with the retained portfolio of Fannie Mae and Freddie Mac may require greater resources
than managing the credit risk associated with the outstanding portfolio of mortgage-backed securities.
Fannie Mae does report statistics similar to Table 2.2 based on net income by line of business. In
1995 (before special contributions to the Fannie Mae Foundation), portfolio investment made up 57.7
percent of net Income. credit guarantees made up 40.8 percent. and fee-based services made up 1.4
percent. Freddie Mac only recently (first quarter of 1996) adopted reporting practices that allow
calculations of the percentage of net mcome by mcome source. and it told us that this information was
not publicly available for previous time periods.
39
mortgage market. However, new product development could be achieved with a much
smaller retained mortgage portfolio.
The recent history of Freddie Mac suggests that the former explanation rather than the
latter may better explain the growth in its retained mortgage portfolio. Before 1989, the
thrift industry held Freddie Mac's stock and Freddie Mac securitized almost all the
mortgages it purchased. By all accounts, Freddie Mac succeeded in accomplishing its
mission of developing a liquid secondary market. Freddie Mac began to pursue an
aggressive strategy of building its retained portfolio after Congress changed its corporate
structure in 1989 to one resembling Fannie Mae's.
3.
The Profitability of Fannie Mae and Freddie Mac
The special benefits of GSE status outlined earlier in this chapter have not only aided
Fannie Mae and Freddie Mac in fulfilling their mission of developing a secondary market,
but also helped them dominate certain sectors of the mortgage market, contributing to their
profitability. Table I1.4 compares the after-tax returns on equity for Fannie Mae, Freddie
Mac, other financial firms, and the market return as measured by the S&P 500. 18 By this
measure, Fannie Mae and Freddie Mac have outperformed much of the market. The
comparison suggests that, if other market participants are earning normal profits, Fannie Mae
and Freddie Mac are earning above-normal (i.e., economic) profits. 19 Hermalin and Jaffee
(1996, pp. 250-253) discuss other measures of economic performance that support the
conclusion that Fannie Mae and Freddie Mac earn above-normal market returns. One
explanation for such added profits is the cumulative effect of the subsidies the enterprises
receive from their government sponsorship. Another explanation is the efficiency of the two
enterprises. perhaps aided by economies of scale in their operations.
" It should be noted that the average return on equity for the S&P 500 in Table 11.4 is pre-tax and the
other measures are after-tax. Thus, if the S&P 500 measure were measured on an after-tax basis, the
performance of Fannie Mae and Freddie Mac relative to the market would be even better.
14 Higher returns to equity do not necessarily imply excess or economic profits if the business risks
are greater. However. given that Fannie Mae and Freddie Mac have had relatively ~table returns on
equity and consistently lower credit losses than other mortgage lenders, and th~t theIr mongagebacked securities and debt securities receive preferential regulatory treatment, It would seem
implausible that the return on equity differentials from Table 1l.4 could be explained by risk.
39
mongage market. However, new product development could be achieved with a much
smaller retained mongage portfolio.
The recent history of Freddie Mac suggests that the fonner explanation rather than the
latter may better explain the growth in its retained mongage portfolio. Before 1989, the
thrift industry held Freddie Mac's stock and Freddie Mac securitized almost all the
mongages it purchased. By all accounts, Freddie Mac succeeded in accomplishing its
mission of developing a liquid secondary market. Freddie Mac began to pursue an
aggressive strategy of building its retained portfolio after Congress changed its corporate
structure in 1989 to one resembling Fannie Mae's.
3.
The Profitability of Fannie Mae and Freddie Mac
The special benefits of GSE status outlined earlier in this chapter have not only aided
Fannie Mae and Freddie Mac in fulfilling their mission of developing a secondary market,
but also helped them dominate cenain sectors of the mortgage market, contributing to their
profitability. Table II.4 compares the after-tax returns on equity for Fannie Mae, Freddie
Mac. other financial finns, and the market return as measured by the S&P 500. 18 By this
measure. Fannie Mae and Freddie Mac have outperfonned much of the market. The
comparison suggests that, if other market participants are earning nonnal profits, Fannie Mae
and Freddie Mac are earning above-nonnal (i.e .. economic) profits. 19 Hennalin and Jaffee
(1996. pp. 250-253) discuss other measures of economic perfonnance that suppon the
conclUSIOn that Fannie Mae and Freddie Mac earn above-normal market returns. One
explanatIon for such added profits is the cumulative effect of the subsidies the enterprises
recei\'e from their government sponsorship. Another explanation is the efficiency of the two
enterprises. perhaps aided by economies of scale in their operations .
. It should be noted that the average return on equity for the S&P 500 in Table II.4 is pre-tax and the
other measures are after-tax. Thus. If the S&P 500 measure were measured on an after-tax basis the
'
rerformance of Fanme Mae and Freddie Mac relative to the market would be even better.
I, Higher returns to equity do not necessarily imply excess or economic profits if the business risks
are greater However. given that Fannie Mae and Freddie Mac have had relatively stable returns on
eLjul[Y and conSIStently lower credIt losses than other mongage lenders, and that their mortgagebacked seCUritIes and debt securttIes receIve preferentlal regulatory treatment, it would seem
Imrlausible that the return on eqUity differentIals from Table II.4 could be explained by risk.
41
Fannie Mae and Freddie Mac perform a valuable function in our nation's housing
markets at no explicit budgetary cost to the taxpayers. The government benefits granted to
the GSEs do, however, have a real, uncompensated opportunity cost. A baseline estimate
suggests that these benefits amounted to almost $6 billion last year. Based on estimates that
the GSEs lower mortgage interest rates on conforming, conventional fixed-rate mortgages by
20 to 40 basis points, the GSEs provided benefits to home buyers of $2.6 billion to $5.1
billion. A midpoint (baseline) estimate of the benefits provided to home buyers is about $4
billion. While no point estimate can avoid uncertainty in measuring governmental benefits
received and public benefits conferred, estimates such as these convey a general order of
magnitude for considering the value of the subsidies involved.
Despite constraining their business activities, GSE status has helped make Fannie Mae
and Freddie Mac large and profitable. Together, at the end of 1995, their retained portfolio
and outstanding mortgage-backed securities exceeded $1. 3 trillion, which was 2.7 times more
than the entire OTS-regulated thrift industry's holdings of mortgages and mortgage-backed
securities. A comparison of the GSEs' profitability to other firms suggests that GSE benefits
enabled Fannie Mae's and Freddie Mac's shareholders to earn increased profits.
41
Fannie Mae and Freddie Mac perform a valuable function in our nation's housing
markets at no explicit budgetary cost to the taxpayers. The government benefits granted to
the GSEs do. however. have a real, uncompensated opportunity cost. A baseline estimate
suggests that these benefits amounted to almost $6 billion last year. Based on estimates that
the GSEs lower mortgage interest rates on conforming, conventional fixed-rate mortgages by
20 to 40 basis points, the GSEs provided benefits to home buyers of $2.6 billion to $5.1
billion. A midpoint (baseline) estimate of the benefits provided to home buyers is about $4
billion. While no point estimate can avoid uncertainty in measuring governmental benefits
received and public benefits conferred, estimates such as these convey a general order of
magnitude for considering the value of the subsidies involved.
Despite constraining their business activities. GSE status has helped make Fannie Mae
and Freddie Mac large and profitable. Together. at the end of 1995, their retained portfolio
and outstanding mongage-backed securities exceeded $1.3 trillion. which was 2.7 times more
than the entire OTS-regulated thrift industry's holdings of mongages and mortgage-backed
securities. A comparison of the GSEs' profitability to other firms suggests that GSE benefits
enabled Fannie Mae's and Freddie Mac's shareholders to earn increased profits.
43
CHAPTERll
THE GSES' PUBLIC PURPOSE
Traditionally, the government has established GSEs when it perceives the need to
correct a specific market failure. For example, Congress created the Farm Credit System, a
cooperative lending system, in 1916 to help make credit more available for farmers,
Similarly, Fannie Mae was created in 1938 to help establish a secondary market for the new
federally guaranteed home mongage loans and to reinvigorate a housing finance market that
the Great Depression had brought to the brink of collapse. However, both capital markets
and financial institutions have changed dramatically since that time, making it appropriate for
Congress to periodically evaluate whether and on what basis government sponsorship remains
justified.
In this chapter, we consider two ways in which Fannie Mae and Freddie Mac advance
public policy. The first is by panicipating in the secondary market for residential mongages,
the purpose for which Congress originally established them. The second is by carrying out
the series of affordable housing initiatives directed by Congress in 1992. In each case, we
compare the effons of Fannie Mae and Freddie Mac with those of private financial
institutions.
A.
THE CCRREl'T STRUCTURE OF THE HOUSING FINANCE MARKET
Before we can assess the private market characteristics that mayor may not make
continued government sponsorship desirable. we need to review the current characteristics of
the mongage market.
We focus our research here and in the rest of the chapter on the single-family
mongage market because that is where Fannie Mae and Freddie Mac are most active. In
1994. the two GSEs purchased approximately 57 percent of single-family conventional
conforming mongages. compared with only 14 percent of multifamily originations. 1 We
recognize. however, that multifamily loans represent a relatively large share of the GSEs'
affordable housing loans, which are described in more detail in Section B.2
I Of the two GSEs. Fannie Mae is much more active in the multifamily market.
Freddie Mac left the
multifamily market in the early 1990s because of sustained losses. but has recently re-entered the
market.
c HUD (l996-C) also comments on the limited role Fannie Mae and Freddie Mac currently play in
finanCing multifamily housing. In addition, W~cht~r e~. al. (1996, p. 366) ~onc\ude ~hat concerns
about multifamily finance should not be detenmnatlve m evaluatmg the merIts of endmg the two
GSEs' government sponsorship.
44
Government involvement has helped create some clear dividing lines in today's
mortgage market. Table III. 1 shows the dollar value of single-family mortgage originations
in 1994 for both confonning and nonconfonning loans. The table also divides the
confonning mortgage market into four segments: (1) the FHA/VA market (with the vast
majority of these loans guaranteed by Ginnie Mae); (2) Fannie Mae purchases; (3) Freddie
Mac purchases; and (4) loans not sold in the government-sponsored secondary market.
Table III.l: Distribution of Single-Family Mortgage Loan Originations, 1994
(Dollars in billions)
Volume
Share
$643.6
84%
FHA/VA
$143.1
19%
F annie Mae Purchases
$162.5
21 %
Freddie Mac Purchases
$123.4
16%
Loans not Sold in the Government
Sponsored Secondary Markee
$214.6
28%
Non-Confonning Loans}
$125.1
16%
Tmal
$768.7
100%
Confonning Loans I
Source
HUO (1996-0) and Mortgage Market Swtistical Annual for 1995.
l C onfomllng loans are defined as loans below the conforming loan limit of $203,150 in 1994.
- ConformIng loans not sold in (he government sponsored secondary market include adjustable rate
mortgages. affordahle housing mortgages, and B-C credit mortgages .
. The estImate for originations of non-conforming loans is obtained from Inside Mortgage Finance,
as\ull1Ing that non-conforming loans account for 20 percent of the conventional (non-FHAIV A)
l11JrKe(
HL10 (1995-B) reports a similar estimate of 19 percent for the share of non-conforming
I(lam In the conventional market.
The Fannie Mae/Freddie Mac portion of the confonning loan market is commonly
referred to as the" A" credit market. Conventional mortgages that do not meet the two
GSEs' underwriting standards include certain affordable housing loans and the small but
growmg portion of the conventional mortgage market made up of "B" and "c" credit loans-loans made to borrowers with credit history problems.
45
Loans not sold into the government-sponsored secondary market may be held in
portfolio by financial institutions, securitized by private-sector secondary-market companies,
or held by individuals or other investors. Financial institutions' portfolio holdings also
include adjustable rate mortgages and mortgages that do not meet the two GSEs'
underwriting standards.
B. SYSTEM-WIDE IMPERFECI10NS IN THE HOUSING FINANCE MARKET
The financial system generally, and the housing finance system in particular, have
undergone enormous change since the creation of Fannie Mae and Freddie Mac. Today's
housing finance market does not suffer from the problems that prevailed thirty years ago.
Regulatory and statutory factors that contributed to inefficiency in this market are no
longer an issue. In the early 1980s, the federal government phased out Regulation Q and
permitted depository institutions to offer adjustable rate mortgages, which addressed the
fundamental problem of funding long-term assets with short-term liabilities. In 1994,
Congress repealed restrictions on interstate banking and branching that had long inhibited
geographic diversification.
Mongage securitization, which began with Ginnie Mae's creation of the first
mongage-backed security. has also made the mortgage market more liquid and linked it to
the capital markets. Ginnie Mae, Fannie Mae, and Freddie Mac have each contributed to the
growth of mongage securitization. Fully private institutions have successfully replicated
these effons. Other segments of the mongage market and the asset-backed security market
demonstrate the ability of today' s capital markets and private financial institutions to maintain
liquid secondary markets without government suppon. In addition, the sheer size of the
mongage market. together with the panicipation of large national and regional firms, gives
the market substantial stability.
1. The Capability of the Private Sector Secondary Market
One way to assess the private sector's ability to perform the secondary market
function currently undenaken by Fannie Mae and Freddie Mac is to look at the development
of other secondary mortgage markets and at overall trends in asset securitization. This helps
provide a sense of the extent to which other financial markets have developed and the private
sector's capacity to sustain a secondary market.
Today a wide array of financial assets -- from credit card receivables to aircraft
leases -- are securitized without GSE or other government support. Financial institutions -such as commercial banks, investment banks, private mongage insurers, mongage banks,
and finance companies -- have worked together in developing these markets, which have
grown dramatically over the past decade. These secondary markets share at least two
common characteristics. First, somewhat uniform underwriting standards are necessary for
rapid market development, since individual assets (i.e., loans) must be combined into one
46
security. Second, credit rating agencies must be able to evaluate the credit risk of the pool
of assets underlying the publicly issued securities.
Secondary markets for jumbo/non-conforming and B-C (lower credit quality)
mortgages are well developed. Table III.2 compares the securitization rates in the nonconforming market and the conventional, conforming market. 3 These two segments of the
conventional secondary mortgage market have very different market structures. The
conventional, conforming secondary market for A-credit mortgages, consisting of Fannie
Mae and Freddie Mac, is what economists call a duopoly.4 By contrast, during 1994 the
jumbo/non-conforming market had 37 active corporate participants. 16 of which issued over
$1 billion of private-label mortgage-backed securities. The three largest companies were GE
Capital Mortgage Services ($10.5 billion issued), Prudential Home MSCI ($7.2 billion
issued), and Countrywide/CWMBS ($5 billion issued).5
The annual securitization rates in Table III.2 (calculated by dividing the mortgagebacked securities issued by the estimated dollar value of mortgages originated in each
market) provide an estimate of how much of the business volume the secondary market
sec uri tizes.
The Jumho'non-conforming market consists primarily of loans above the conforming loan limit but
the a\'allahle data may mclude a small proportlon of loans below the conforming loan limit that do not
meet the underwriting standards of Fannie Mae and Freddie Mac.
J See Hermalm and Jaffee (1996) for a technical description of how Fannie Mae and Freddie Mac
constitute a duopoly in their market and the characteristics of various types of duopoly market
structures
Complete historical statistics on the private label mortgage-backed securities market can be found in
the Morrgage Market Statistical Annual for 1995.
<
47
Table III.2: Comparison of Mortgage-Backed Securities Issued and Securitization Rates for
Conforming and Jumbo Mortgages I
(Dollars in billions)
Non-FHA/V A Conforming Loans
Jumbo/Non-Conforming Loans 2
Year
MBS Issuance 3
Securitization Rate
MBS Issuance3
Securitization Rate
1989
$142.6
47.2%
$14.2
15.7%
1990
$170.5
57.6%
$24.4
26.6%
1991
$205.4
53.0%
$39.8
35.4%
1992
$372.4
58.2%
$74.4
41.6%
1993
$430.2
62.6%
$97.3
48.2%
1994
$247.7
51.9%
$62.9
46.3%
Source: Morrgage Market Statistical Annual for 1995 (pp. 161-62).
I Conventional (non FHA/V A) conforming originations and jumbo/non-conforming originations are
estimated by Inside Mortgage Finance. The starting point is data from HUD on the dollar value of
total originations. from which FHA/V A origination dollar volume is subtracted to obtain conventional
onginations A 20 percent rule is applied (0 the dollar volume of conventional originations to
calculate the dollar share of the jumbo/non-conforming market. This estimate was based on a 1990
National Association of Realtors Survey and has recently received support from HMDA data. HUD
(1995-8) reports a similar estimate of 19 percent for the dollar share of non-conforming loans in
conventlonal market originations.
: The Jumbo/non-conforming private label issues of mortgage-backed securities include some
conforming loans that do not meet the underwriting standards of Fannie Mae and Freddie Mac. Since
this is a small portion of the market the 20 percent estimate for originations would not be changed
substantlally and the same general trend pattern would be evident.
; \'lftually all securitized conforming loans were securitized by the GSEs. Securitization rates do not
include mortgages sold in the secondary market to the GSEs or another entity that were not pooled
and resold as mortgage-backed securities.
The securitization rate for jumbo/non-conforming mortgages increased from
approximately 15 percent of originations in 1989 to almost 50 percent by 1994. By contrast,
the securitization rate for non-FHA/VA conforming loans varied between 47 percent and 62
percent during this period. The rapid growth of secondary market activity in the jumbo/nonconforming market reflects the private sector's growing ability to operate a liquid secondary
market. That such growth occurred while home prices were weak in the regions with the
48
largest concentration of jumbo loans -- the Northeast and California -- suggests that the
private secondary market can operate despite difficult economic circumstances.
Primary lenders searching for profitable market opportunities have increased
originations of B-C loans made to higher risk borrowers -- most of whom have a history of
significant credit problems -- spurring the development of a secondary market for these
loans. Unlike jumbo mortgages, which Fannie Mae and Freddie Mac cannot legally
purchase, B-C loans stretch underwriting criteria beyond the limits currently acceptable to
Fannie Mae and Freddie Mac. (The GSEs' charters limit them to purchasing investment
grade loans.) Figure 111.1 presents estimates for securitization rates in the B-C market and
projections through the year 2000. The B-C secondary market has grown from virtually
6
nothing in 1988 to approximately 10 percent to 15 percent of B-C originations in 1995.
Figure lILt: Share of Total Non-Confonning and B-C Credit Closed-End (Fixed
Amortization Schedule) Mortgage Originations Securitized
20.00/0
~--~~---+---r--~--~-4---+--~--4---+-~~~
15.00/0
~--~~---+---r--~--~-4---+--~--4-
10.00/0
~--r--1---+--~--+---~~--~
5.0% +--+--f---l--4--+0.0%
+--+--~
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Source. Historical data (1989-1995) are from Asset Sales Report (New York, New York).
PrOjections from 1996 to 2000 were done by David Olson Research (Columbia, Maryland).
~ Estimates of the securitization rate in the B-C credit market may vary by what is included in the BC origination pool. .The Mortgage Market Statistical Annual for 1995 (p.350) reports a securitization
rate of 14.9 percent In 1994.
49
Surveys by America's Community Bankers have also documented increased activity in
the jumbo and B-C credit markets. Private secondary market organizations accounted for
approximately 32 percent of the dollar volume of secondary market loan sales by thrifts in a
1994-95 survey, up from 28 percent in the 1993-94 survey and 17 percent in 1992-93. In
1994-95. private conduits bought 11 percent of the dollar volume of thrifts' originations sold
in the secondary market. surpassing Freddie Mac (at about 10 percent). for the first time.
As indicated earlier, the private sector has recently also developed secondary markets
in other financial instruments. Table III.3 compares the percentages of outstanding debt in
the home mortgage market with that in other securitized financial markets. (A better
measure would be the securitization rate as presented in Table 111.2. but data on originations
in some of these asset categories are not available. 7) While the percentages of outstanding
debt that have been securitized in other financial markets remain below that in the home
mortgage market. they have grown rapidly since 1989. These other markets are still
relatively young, and standardization of the underlying assets may never reach the degree of
uniformity of certain other segments of the home mortgage market.
, The securitization rate is a flow variable measuring the amount of originations that are transformed
into another security in a given year. The percentage of outstanding debt th~t has been securitized
measures the outstanding stock of asset-backed securities relative to outstandmg stock of debt at a
given time.
50
Table III.3: Share of Home Mortgage, Revolving Credit, Automobile, and Commercial Real
Estate Debt Securitized
(Percentage of total debt outstanding)
1989
1990
1991
1992
1993
1994
1995-
Home Mortgage Debt
(1-4 Family)l
36.8
39.9
43.7
46.6
47.5
48.7
48.4
Revolving Credit
11.2
19.1
24.5
27.6
26.5
26.8
30.5
Automobile Credit
6.3
8.6
11.0
13.1
14.0
11.0
11.0
Commercial Real Estate
0.6
0.7
0.9
2.1
3.6
5.2
5.3
Source: Federal Reserve Board (I995-A), Federal Reserve Bulletin (various issues, Table 1.55)
I The calculation of outstanding MBS for this category is obtained by adding Flow of Funds
outstanding levels for federally related home mongage pools (Ginnie Mae, Fannie Mae, and Freddie
Mac) to the private label issuance of MBS recorded in the Flow of Funds.
C Shares for 1995 are calculated through the end of the second quaner.
Securitization of commercial real estate loans. small business loans, and distressed
assets has also become more common. Table III.3 shows that the percentage of outstanding
securitized commercial real estate debt has increased from under 1 percent in 1989 to over 5
percent in 1995. Small business asset-backed securities are also being issued, although they,
still account for less than 1 percent of outstanding small business debt. 8 According to
Fanozzi and Modigliani (1992. p. 312). asset-backed securities based on boat loans.
recreational vehicle loans. computer leases. senior bank loans, and accounts receivable have
Jb() appeared in the market.
These rapidly growing secondary markets -- operating without government
sponsorship -- are more competitive and involve loans with more diverse credit quality and
norrower characteristics than the A-credit mortgages Fannie Mae and Freddie Mac purchase.
!\umerous finns of varying size vie for profitable business, with large market leaders like
G E Capnal. Countrywide, and Citicorp assuming prominent roles in the financial system and
mortgage markets. The success of these markets suggests that Fannie Mae, Freddie Mac,
and other firms may be able to adequately maintain liquid, regionally responsive secondary
mortgage markets without government sponsorship.
, For details on the small business market. see Feldman (1995).
51
Given the characteristics of secondary markets operating without government
sponsorship, what explains the lack of direct competition to Fannie Mae and Freddie Mac in
the conventional, conforming secondary market? One possible explanation is that the
competitive advantage of GSE status, described in Chapter TI, inhibits competitors from
entering this market: the premium investors are willing to pay for GSE securities and the
cost advantages of government sponsorship may enable the GSEs to price below the level at
which potential competitors find it profitable to enter the market.
Another possible explanation for the lack of direct competition to Fannie Mae and
Freddie Mac involves possible economies of scale in their business operations, and an
attendant cost structure low enough so that other firms do not fmd it profitable to enter the
market. Economies of scale exist where average total costs (per unit) decline as output
increases. But such economies seem an unlikely explanation here because other segments of
the mortgage market do not have a highly concentrated market structure.
If. however, economies of scale did explain the lack of direct competition to Fannie
Mae and Freddie Mac, ending government sponsorship need not affect their market share or
mortgage rates. Even without such sponsorship, the two firms' favorable cost structure
would probably enable them to compete effectively in the secondary market. Any economic
benefits resulting from economies of scale that accrue to certain borrowers would continue,
and borrowers in other segments of the market could also benefit if restrictions on other
activities were lifted. 9
2. Withstanding Tight Credit Markets
Another concern warranting attention is whether a secondary market without GSE
support would excessively retreat from funding mortgages when credit is tight. lO The overall
size of the mortgage market, the number and size of national and regional participants in
various aspects of that market, and the technical capability to link that market with the capital
markets should mitigate this concern.
As illustrated by Table III.4, home mortgage debt outstanding falls only slightly short
of outstanding publicly held U.S. Treasury securities. In 1995, the mortgage-backed
securities market was: just under 50 percent of the size of the U.S. Treasury security
market: almost 65 percent of the size of the private bond market; and considerably larger
than the tax-exempt and open market (commercial) paper markets. These other large
Anv resulting market structure that has a small number of firms, even if this is the result of
economies of scale, should be evaluated for possible anti-competitive issues.
Q
Ifl Some studies have questioned whether the GSEs have been able to exert a significant countercyclical impact. For example, Kaufman (1988) provides evidence that the. counter-cyclical impact
provided by Fannie Mae diminished in the eighties as a result of changes In the financial system and
their operating procedures.
52
financial markets suggest that government sponsorship is not necessary to promote active.
liquid markets.
Table III.4: Size of the Home Mortgage Market Relative to Other Financial Markets
(Billions of dollars of debt outstanding, year end)
1989
1990
1991
1992
1993
1994
1995~
CS Treasury Securities
(puhlicly held)
2227.0
2465.8
2757.8
3061.6
3309.9
3465.6
3556.7
Total Home Mortgage
Deht (1-4 Family)
2407.8
2616.3
2780.0
2959.6
3149.6
3344.8
3431.8
Corporate and Foreign
Bonds
1581.3
1695.8
1856.3
2026.4
2301.5
2438.4
2568.9
Securitized Home
Mortgage Deht'
885.6
1043.7
1214.4
1380.2
1497.2
1628.9
1660.1
Tax Exempt Secunlles
and Loam
991.2
1039.9
1108.6
1139.7
1215.2
1185.2
1164.6
Open Market Paper
579.2
609.9
565.9
579.0
580.0
623.5
673.8
Source
Federal Reserve Board. (1995-A)
SecurIllzed home mortgage debt is a subset of rotal mortgage debt. The calculation of securitized
hlll11t: mOrlgage deb! (1-4 family) is obtained by adding Flow of Funds outstanding levels for federally
related home mortgage pools (Ginnie Mae. Fannie Mae and Freddie Mac) to the private label issuance
()f MBS recorded in the Flow of Funds.
: Deht outstandmg for 1995 is through the end of the second quarter.
The mOr1gage market derives stability not only from its large size but from the many
n;.Hlonal and regIOnal mongage originators, servicers, and insurers operating over broad
geographICal regions and devoting significant capital to market development. In 1994, eight
companle~ exceeded S10 billion in origination volume. ten companies exceeded $50 billion in
~er\lcIng \olume. and six companies exceeded $10 billion in mortgage insurance volume.!!
The top eIght mOr1gage originators in 1994 were Countrywide. Norwesl. Prudential. Chase
Chemtcal. Fleet. GE Capital. and GMAC. The top ten mortgage servicers in 1994 were
Countrywide. GE Capital. Flee!. Prudential. Norwest. Chase Manhattan, GMAC, Chemical, Bank of
Amenca. and Home Savings of America. The top six private mortgage insurers in 1994 were GE
Capnal. Mortgage Guaranty Insurance Corporation. PMI Mortgage Insurance Company. United
Guaramy Corporation. Republic Mortgage Insurance Company. and Commonwealth Mortgage
i
~1anha([an.
53
Having made the enormous comminnents -- of capital, workforce development, and
technological resources -- needed to compete in the residential mortgage market, firms with a
primary business in that market are unlikely to abandon it when faced with cyclical
downturns. While such cyclical fluctuations may deter marginal firms, those invested in the
market for the long-term will seek to preserve or even build their market share.
3. Weathering Regional Economic Downturns
Another concern for policymakers is the mortgage market's ability to weather regional
fluctuations. Fannie Mae and Freddie Mac often use the phrase "being in all markets at all
times" to refer to their capability to provide liquidity to regional housing finance markets
during regional economic downturns. Although the GSEs' charters do not establish any
specific requirement to operate in all markets at all times, the charters do suggest a
responsibility to maintain a nationwide presence.
In the past, technological and information constraints, limits on interstate banking and
branching by insured depository institutions, and other aspects of our financial system
constrained mortgage credit flows across regions. Today, however, these problems have
faded as regulatory and market changes have greatly enhanced credit flows. Investors.
originators, and private mortgage insurance companies can now diversify regional risk in the
secondary market.
By statute, OFHEO must prescribe a stress test that increases the amount of capital
required for a given book of business as economic conditions worsen. 12 If the GSEs continue
to operate at or near their regulatory minimum capital requirements, their ability to maintain
or expand purchasing activity during a general or regional economic downturn could be
limited. 13
Similarly. while the GSEs may continually offer to purchase mortgages. even from
distressed regions. their pricing may reflect risk differentials. Each GSE offers a "posted
price" at which it will purchase any qualifying mortgage. However, the GSEs make the bulk
Assurance Company. The Mortgage Market Statistical Annual for 1995 contains complete details on
market share rankings.
I~
The OFHEO stress test, by law. initially assumes that the GSEs take on no new business once the
"stress period" begins [P.L. 102-550. Sec. 13?I(a)(3)(A)]. Thus. it does not assume that th~ GSEs
will continue (0 provide liquidity during a period of severe market stress. On the contrary. It assumes
they will do no new business.
J) "[OFHEO's] risk-based capital standard. which will be based on a stress test approach. will
automatically respond (0 changes in either of the Ente~ris~s' fu~ure risk ~rofile .. For ex.ample, if
house prices fall. causing homeowners to hav~ les~ equI~y In t~elr propertIes a~d l~creasIng. the
probability of their defaulting in the future, thiS Will be Immediately reflected In higher capital
requirements." (OFHEO. 1996-B. p.4.)
54
of their mongage purchases using negotiated prices, which are generally less than the posted
price. Negotiated prices would presumably be adjusted to reflect changing risk
characteristics of the underlying loans. Furthennore. any mortgage purchases made by a
GSE in a distressed region or during an economic downturn must still satisfy the GSEs'
underwriting standards. For example. mongages with loan-to-value ratios exceeding 80
percent must have private mortgage insurance.
C. AFFORDABLE HOUSING NEEDS
How does the ability of Fannie Mae and Freddie Mac to finance affordable housing
compare to that of other private market panicipants and existing government agencies? In
the 1992 Act, Congress expanded the two GSEs' public purpose to include explicit
requirements that the secondary mongage market adequately serve underserved segments of
the mongage market, making affordable housing an additional topic for consideration when
evaluating GSE status. The government has encouraged numerous initiatives to promote the
flow of credit to underserved borrowers and communities and, as set forth in HUD's recent
report, The National Homeownership Strategy: Panners in the American Dream (1995-A),
an important government role in this mission still exists. Comparing the GSEs' achievements
against certain affordable housing goals and the activities of other mortgage market
participants provides insight into the value of GSE status to the public purpose of affordable
housing.
1. The GSEs' Achievement of HUD's Affordable Housing Goals
One measure of the GSEs' contributions to affordable housing is their performance
under affordable housing goals established by HUD.14 Charged by Congress with ensuring
that Fannie Mae and Freddie Mac meet their affordable housing requirements and the unrnet
needs of credit markets and underserved borrowers, HUD imposes housing goals based on
the percentage of loans purchased from various types of targeted borrowers and
communities. I"
This housing goal framework can help expand the GSEs' participation in financing
affordahle housing and meeting other unmet credit needs. HUD has implemented the goals
consistently and fairly. The goals have the following advantageous characteristics:
•
The goals have a solid analytical and policy foundation.
IJ In the follOWIng discussion. affordable housing goals refer to all three housing goals even though
[he old eenrral elly goal and the new underserved area goal are not based on borrower income.
H U D was [he primary regulator of Fannie Mae from 1968, and of Freddie Mac from 1989 until
1992. when Congress established OFHEO. HUD first issued affordable housing regulations for
Fanme Mae In 1978.
I'
55
•
These broad-based perfonnance goals are easily understood, provide appropriate
flexibility, and do not seek to fine-tune the GSEs' activities or otherwise interfere
with their daily operations.
•
The goals can be used to target, to an important public purpose, the activities of the
two dominant players in the conventional mortgage market.
•
HUD set the goals to cover a four-year period, at levels attainable under varying
economic conditions, including higher interest rates and less favorable market
conditions than those prevailing in 1993-95.
•
The goals represent reasonable benchmarks that the GSEs may exceed. They do not
ratchet up or down based on annual changes in the GSEs' perfonnance.
Table III.5 provides an overview of the goals and the GSEs' recent performance
under the goals. In 1995, Fannie Mae satisfied all three interim housing goals, and Freddie
Mac satisfied all but the central city goal. Fannie Mae's 1995 performance also exceeded all
three of the goals that became effective in 1996, even at the fully phased-in levels that will
apply in 1997 and 1998. Freddie Mac's 1995 performance would have satisfied two of the
final 1996 goals, falling short (by less than a percentage point) only on the low- and
moderate-income goal. The proportion of overall GSE activity meeting affordable housing
goals has increased over the past few years, possibly due to the HUD goals and to CRAdriven increases in affordable housing lending generally and as a share of all mortgages
originated.
56
Table 111.5: Overview of the GSEs' Affordable Housing Goals and Perfonnance l
(in percentage points)
Goal~
1993
1994
1995
1996 Goals
1997-1999
Goals
HUD's Marke
Size Estimate
Low- and Moderate Income
Fannie Mae
34.1
45.1
42.8
Freddie Mac
30.0
38.0
39.6
Fannie Mae
22.9
29.0
31.2
Freddie Mac
21.3
24.2
25.2
Fannie Mae
10.0
16.7
15.8
Freddie Mac
7.2
11.4
13.2
40.0
42.0
48-52
21.0
24.0
25-28
12.0
14.0
20-23
Geographic
Special Affordable
Source HUD (1996-A. Table 3-2)
Percentages of dwelling units in properties whose mortgages were purchased by the GSEs that
qual ified for each goal In 1992-1995. and goals for 1996-1999. Perfonnance has been measured
hased on the structure of the goals for 1996-1999.
2 Abbreviated definitions of the goals:
Low-Mod
Households with incomes less than or equal to area median income (AMI).
GeographIc:
Metro census tracts with median income less than or equal to 120 percent of
AMI. County definitIons are used in non-metropolitan areas.
Srecial Affordable
Households with incomes less than or equal to 60 percent of AMI or less than
or equal to 80 percent of AMI and located in low-income areas.
I
In evaluating this progress. it is imponant to consider the characteristics of the loans
that count toward the goals. 16 For the most pan. Fannie Mae and Freddie Mac met the
central city housing goal by purchasing loans made to borrowers whose incomes exceeded
the median MSA income. In 1994 (1995). for Fannie Mae, 55 percent (51 percent) of the
loans purchased that counted toward satisfying the interim central city goal had borrower
The follOWing Information on the characteristics of Fannie Mae's and Freddie Mac's loan purchases
that satisfied the interim housing goals may be found in Fannie Mae (l996-A. 1995) and Freddie Mac
}o
(1996-A. 1995)
57
income greater than 100 percent of the median MSA income, and 42 percent (38 percent)
had borrower income greater than 120 percent of the median MSA income. For Freddie
Mac, 63 percent (59 percent) of the loans purchased that counted toward satisfying the
interim central city goal in 1994 (1995) had borrower income greater than 100 percent, and
49 percent (46 percent) had borrower income greater than 120 percent of the median MSA
income.
The majority of loans that counted toward meeting the interim affordable housing
goals had loan-to-value (LTV) ratios less than or equal to 80 percent -- that is. mortgages
made to borrowers who had made downpayments of at least 20 percent. In 1994. for Fannie
Mae (Freddie Mac). loans with LTV ratios less than or equal to 80 percent made up 78
percent (79 percent) of loan purchases that counted toward meeting the low-moderate income
goal. 71 percent (75 percent) that counted toward meeting the central city goal, and 73
percent (73 percent) that counted toward meeting the special affordable goal. In 1995, the
corresponding percentages for Fannie Mae decreased to approximately 64 percent, while
Freddie Mac's percentages remained about the same. The predominance of low LTV loans - which have less credit risk than high LTV loans -- suggests that the private sector could
finance the majority of Fannie Mae's and Freddie Mac's affordable housing business.
Beyond just meeting the HUn goals, the two GSEs have participated actively in
expanding opportunities for affordable housing and in developing products and services to
help meet the needs of low-income borrowers and communities. Fannie Mae. in particular.
has made a clear commitment to provide educational materials and technical assistance to
support lenders in affordable housing. The GSEs have also increased their underwriting
flexibility. improved homebuyer education programs. and entered into partnerships with local
governments and non-profit organizations to provide additional affordable housing assistance.
These secondary market developments may also reflect innovations by private mortgage
insurance companies and other mortgage market participants.
The GSE housing goals. combined with recent changes in underwriting standards and
new mortgage products for affordable housing. may lead the two GSEs to further increase
their affordable housing activities and serve a broader proportion of the affordable housing
market than they have in the past.. The GSEs could also become more active in financing
multifamily mortgages. and in directly assisting homebuyers through affordable housing
programs. We cannot project how the GSEs' contributions to affordable housing may change
in the furure since the GSEs already meet almost all of the housing goals. The GSEs'
contribution to affordable housing should receive close examination as Congress considers the
costs and benefits of their government sponsorship.
Finally. another aspect of the 1992 legislation that also deserves examination in any
evaluation of such sponsorship is the requirement that HUn oversee the GSEs' fair lending
practices. While the GSEs would remain subject to the Fair Housing Act even without such
sponsorship. the 1992 legislation authorized HUD to prescribe additional safeguards against
discriminatory lending practices. For example, HUD may review and comment on the
58
GSEs' underwriting and appraisal guidelines, analyze the GSEs' business practices to
ascertain whether those practices discriminate, and work with and through the GSEs to
identify and remediate discriminatory practices by lenders.
2. Affordable Housing Achievements: The GSEs Relative to the Market
HUD's housing goals provide one measure of the GSEs' affordable housing
performance. The relative share of the GSEs' mortgages that fund affordable housing
compared to other mortgage market participants would be another way to assess the GSEs'
role in mortgage lending for affordable housing. We evaluated the share of each secondary
market participant's loan purchases that can be classified as affordable housing loans, and the
distribution of affordable housing loans among all mortgage market participants.
As described in the last section, regulators generally promote affordable housing
finance by targeting borrower groups considered underserved by the market based on
household income, race, location, or some combination of these characteristics. Income
targets generally involve some comparison of borrower income to median MSA income. 17
Geographic targets focus on the racial and income characteristics of various census tracts or
on their classification as central city, urban, suburban, or rural. The remaining tables in this
section use various categories of targeted borrowers that fit the typical definitions of
underserved.
a. Share of Business from Targeted Borrower Groups
Table III.6 summarizes each secondary mortgage market participant's loan purchases
from selected targeted borrower groups. The percentages in Table III.6 are averages of
\'earl\' shares.
I" Fannie Mae and Freddie Mac can satisfy the low- to moderate-in~ome housing goal by purchasing
loans wlIh borrower Income less than 100 percent 0'£ medIan MSA Income. By contrast, for purposes
of [he CommunHY ReInvestment Act (CRA) regulations recently established for FDIC-insured
deposHory institutions. low- or moderate-income borrowers must have income that is less than 80
percent of medIan MSA income.
59
Table III.6: Percent of Secondary Market Participants' Loan Purchases From Targeted
Borrower Groups
(1991-94 averages of yearly shares, in percentage points)
< 100% of
Median MSA
Income
<80% of
Median MSA
Income
Black
Hispanic
Census Tracts
>80%
Minority
Low/Mod
Income Census
Tracts I
Ginnie Mae"
54.1
33.5
8.8
7.7
3.6
14.1
Farmers Home
Admin.
48.7
31.9
4.2
4.9
3.2
14.1
Commercial Banks
38.6
23.9
6.4
4.6
3.4
10.8
Other Purchasers'
36.3
22.6
6.0
5.3
3.5
11.0
Life Insurance
Companies
35.4
23.1
8.1
5.0
2.3
9.1
Savings and Loans
33.8
19.1
4.0
3.3
2.0
9.3
Fannie Mae
29.7
13.4
2.7
3.8
2.3
7.9
Affiliates'
29.4
16.4
4.1
2.9
1.9
8.3
Freddie Mac
29.2
13.1
2.1
3.9
2.2
8.0
Source HMDA Data summarized in Federal Reserve Board (l995-B, Table 4.41, p. A74), Canner
and Passmore 0995- A). Canner, Passmore and Smith (1994), and Canner and Smith (1992).
Low- or moderate-income census tracts are those in which median family income is less than 80
percent of the median family income of the MSA as a whole.
: Ginnie Mae does not actually securitize or purchase mortgages; it guarantees the timely payment of
principal and interest on mortgage-backed securities consisting of FHA and VA mortgages.
• Other purchasers include investment banks. private companies that securitize mortgages, and pension
funds
~ Affiliates include companies affiliated with the institution reporting the loan.
I
Table III.6 illustrates Ginnie Mae's clear lead in relative purchases of mortgages
made to targeted borrower categories. This lead is not surprising given that FHA/VA loans
-- targeted at lower-income borrowers -- represent the sole collateral for Ginnie Mae-
60
guaranteed mortgage-backed securities. 18 Other secondary market participants generally
make higher proportions of their loan purchases from targeted borrower groups than do
Fannie Mae and Freddie Mac. For example, loans from borrowers earning less than 80
percent of median MSA income account for 33.5 percent of Ginnie Mae volume, but only
13.4 percent for Fannie Mae and 13.1 percent for Freddie Mac -- smaller percentages than
those of each of the other secondary market participants. While analysis based on raw
HMDA data has various limitations, it still provides a broad overview of relative market
shares. 19
An examination of lending activity broken down by credit risk also suggests that
Fannie Mae and Freddie Mac do not provide a disproportionate share of credit to targeted
borrower groups. Institutions that take on credit risk (i.e., the risk that a borrower will fail
to make agreed-on payments) playa critical role in the mortgage lending process. Whena
mortgage bank originates an FHA-guaranteed loan, the FHA holds the credit risk; when a
depository institution originates a conventional loan and holds the loan in portfolio, it holds
the credit risk; when Fannie Mae purchases a conventional loan, it holds the credit risk.
A study of 1994 lending activity by Canner and Passmore (1995-A) identifies the
entities bearing the credit risk in the overall mortgage market and in various subsections of
the market. 20 The analysis in that study makes adjustments to incorporate private mortgage
insurance companies. In keeping with their charters, Fannie Mae and Freddie Mac typically
require such insurance on any mortgage with a loan-to-value ratio above 80 percent.
Depository institutions also hold and purchase loans with private mortgage insurance. Thus,
for loans with private mortgage insurance, the insurance company holds some of the risk,
and other entities hold the rest.
Canner and Passmore (l995-A) split the mortgage market by loan size and borrower
characteristic to estimate who holds the credit risk on mortgages made to targeted borrower
groups Tahle III. 7 summarizes some of the results involving the relative share of targeted
horrower loans in the mortgage-credit-risk portfolios of mortgage-market participants. The
mongage-credll-risk portfolio consists of all the mortgages for which a risk holder bears the
I ' As nOled pre\lously. Ginnie Mae does not actually securitize or purchase mortgages but guarantees
the llmely payment of prinCipal and Interest on mortgage-backed securities made up of FHA and VA
nl()rtgages In whal follows In this study. the term securitize or purchase in relation to Ginnie Mae
will refer [() thIS guarantee function.
Iv Raw HMDA data as presented in Table 111.6 includes home purchase. refinancing, home
11l1prOVement. and mobile home loans. The prevalence of these types of loans in a secondary market
parllcipant's purchases may affect targeted borrower purchase percentages. HMDA data also include
'1DI~ the Inillal sale of a mortgage in the secondary market.
:' SpeCifically. Canner and Passmore (1995-A) analyze owner-occupied home purchase mortgages
originated between January and October of 1994. Canner and Passmore perform various adjustments
to address limitations associated with analyzing raw HMDA data.
61
credit risk. The summary in Table ill.7 of loans falling within the FHA single-family loan
limit -- mortgages less than $77,197 (ranging up to a maximum of $152,362 in designated
high-cost areas) -- includes the vast majority of targeted borrower loans. Table III.7
indicates that 39.8 percent of all FHA-eligible loans originated in 1994 were made to lowerincome borrowers, 15.9 percent were made to African-American or Hispanic borrowers,
14.5 percent to lower-income census tract borrowers, and 9.8 percent to minority census
tract borrowers. The table also shows that 40.9 percent of the FHA-eligible loans (without
private mortgage insurance) held in depository institutions' portfolios were to lowe~-income
borrowers, while 35.5 percent of the FHA-eligible loans (without private mortgage
insurance) purchased by Fannie Mae and Freddie Mac were to lower-income borrowers.
62
Table 111.7: Relative Share of Targeted Borrower Loans in the Credit Risk Portfolios of
Mortgage Market Participants - 1994 (FHA-eligible loan size category)
(in percentage points)
Predominately
Minority Census
Tracts I
Lower Income
Borrowers I
African Amer.
or Hispanic
Borrowers
Lower Income
Census Tracts '
All
39.8
15.9
14.5
9.8
FHA Insured
45.1
25.7
17.8
13.3
VA Insured
40.3
19.6
14.0
9.1
Depository Inst. Portfolio
Holdings'
40.9
11.6
15.5
8.8
35.5
9.7
10.5
7.7
D~posi!Ory Inst. not Affiliated
with Mortgage Originator
34.9
8.8
10.7
7.1
Other Purchaser'
40.7
11.1
13.6
8.4
Affiliate troOl an Ind. Mortgage
42.5
13.5
13.2
9.3
440
13.8
16.9
8.1
Loan Purchaser 2
FannI~ Ma~
or Freddie Mac
C()mpan~
Affiliate fwm a Deposll()ry Insl
Source
Canner and Passmore (1995-A. Table 3. p. 1000) calculated from 1994 HMDA data.
Canner and Passmore define lower-income borrowers as having less than 80 percent of the median
MSA Income. lower-Income census tracts as having a median family income of less than 80 percent
of the MSA median family income. and predominately minority census tracts as having a minority
pnpulaIJon that IS larger than 50 percent of the tract's total population.
: The relatl\e shares for deposJlory instiruIJon portfolio holdings and loan purchaser categories are for
luam Without pmate mortgage insurance. Relative shares for loans with private mortgage insurance
are lower for these borrower categorIes
; The other purchaser category in this table includes investment banks. life insurance companies,
pension funds. and other pnvate companies that securitize mortgages.
According to these figures, Fannie Mae and Freddie Mac have a lower relative share
of loans to targeted borrower groups than do most of the other mortgage market participants.
The relati\'e lower-income market share of Fannie Mae and Freddie Mac (35.5 percent) is
also below the overall lower-income market share (39.8 percent) for FHA-eligible loans. a
pattern repeated in the other targeted borrower groups shown in Table III. 6. Canner and
63
Passmore (1995-B, p. 1006) suggest that the difference between Fannie Mae and Freddie
Mac and depository institutions in performance in targeted areas "may arise because Fannie
Mae and Freddie Mac, unlike depositories, generally have no interactions with borrowers and
are not located in the neighborhoods where the mortgages are originated; thus they lack the
opportunity to look beyond traditional measures of risk." This conclusion is also suggested
by the Federal Reserve Board (1993, p.4): "The additional information about the borrowers
and neighborhoods gained by being directly involved with borrowers and located in a
neighborhood may enable depository institutions to break the statistical links between
neighborhood characteristics and loan performance. "21
h. Share of Overall Market Serving Targeted Borrower Groups
The statistics just described indicate that Fannie Mae and Freddie Mac make a
relatively smaller portion of their mortgage purchases from targeted borrowers or locations
than do most other secondary market participants. The data also show that the two GSEs
incur a relatively smaller amount of credit risk from lending to targeted borrower groups
than do other mortgage market participants. Still these data only show that the two GSEs are
not market leaders in the share of their business devoted to such targeted borrower groups.
The data do not indicate how the GSEs' volume of loans to targeted borrower groups
compares to that of other mortgage market participants; it is quite possible to have a high
percentage of business in certain communities but an overall low volume of 10ans. 22 Also,
considering only secondary market participants (as in Table III.6) ignores depository
institutions that originate and hold mortgages in their own portfolio, which make up a
significant ponion of the market.
To analyze this issue, Canner and Passmore (l995-A) compare the overall market
allocation of the credit risk associated with lending to targeted borrower groups. Since our
analysis does not focus on the precise allocation of credit risk to private mortgage insurers,
we allocate the ponion of the credit risk held by the insurer to the partner entity. This
calculation gives a sense of various institutions' direct participation in lending to targeted
borrower groups. Table III.S summarizes the Canner and Passmore results for FHA-eligible
loans.
After doing a similar analysis. HUD (l995-C) concluded that non-GSE portfolio lenders (i.e ..
banks and thrifts) serve more credit-constrained borrowers than do the GSEs. "The apparent
borrower differences ... may be due to the portfolio lenders' greater knowledge of local markets. to
the portfolio lenders' flexibility in underwriting borrowers that they know to be good risks based on
long-term customer relationships, and to the funding by non-GSE portfolio lenders of certain types of
properties -- such as mobile homes -- which the GSE lenders will only fund under more restrictive
conditions." (p. 4-3) This conclusion is also consistent with that of the Federal Reserve.
21
For example in Table 111.5 the Farmers Home Administration has a high share of targeted
borrowers in its loan purchases but those purchases make up only a small percentage of total
purchases from these groups.
22
64
Table III.8: Summary of the Overall Allocation of the Credit Risk Associated with Lending
to Targeted Borrower Groups - 1994 (FHA-eligible loan size category)
(Percentage of the total number of loans in borrower categories)
Lower Income
Borrowers
Black or
Hispanic
Borrowers
Lower Income
Census Tracts
Predominate Iy
Minority
Census Tracts
FHA/V A Insured
34.3
47.8
36.3
38.9
Depository Instirutions 1
33.0
25.0
33.9
28.8
Fannie Mae and Freddie Mac'
21.1
17.0
18.5
20.4
Other Secondary Market Purchasers)
8.1
6.0
7.4
7.0
Independent Mortgage Companies'
3.6
4.1
3.8
4.9
Source: Canner and Passmore (1995-A. Table 4. p. 1004)
Note: Columns may not add exactly to 100 percent because of rounding.
1 The market share for depository institutions is obtained by adding depository institutions' holdings
(with and without private mortgage insurance. or PMI). purchases by a bank or savings association
not affiliated with a mortgage originator (with and without PMI). and purchases by an affiliate from a
derosIIory Institution or its subsidiary (with and without PMI).
: The market share for Fannie Mae and Freddie Mac is obtained by adding their purchases with and
without PMI
. The market share for other secondary market purchasers is obtained by adding their purchases with
Jnd wIlhout PMI ThIS category includes investment banks. life insurance companies. pension funds
and other private companIes that securitize mortgages.
~ The market share for independent mortgage companies is obtained by adding independent mortgage
comrany holdIngs (with and without PMI). and purchases by an affiliate from an independent
nllmgage comrany (with and without PMI)
In the FHA-eligible loan size category. FHA and VA hold the largest share of credit
fisk and depository institutions have the second largest share. In fact, FHA, and VA, and
depository Institutions bear well over 60 percent of the credit risk for FHA-eligible loans to
311 categories of targeted borrowers. Combined, Fannie Mae and Freddie Mac hold about 20
percent of the credit risk for each targeted group.
Depository institutions' portfolio holdings appear to contribute significantly to
affordable housing lending. a conclusion further supported by a 1995 Consumer Bankers
Association survey. which was described in Elmendorf and Brough (1995). The survey
reports that although 50 percent of the responding institutions sold some of their affordable
65
housing loans into the secondary market, the institutions retained an average of 77 percent in
their own portfolios. 23
In sum, a number of measures indicate that Fannie Mae and Freddie Mac finance a
smaller portion of loans to targeted borrowers than do FHA and 'VA, and insured depository
institutions. This result is consistent with HUD (1995-C) data comparing the GSEs'
affordable housing activities with FHA and other lenders. Table III. 9 shows these
comparisons across income, race/ethnicity, and location for home purchase mortgages
guaranteed by FHA or acquired by the GSEs in 1993. Because Congress designed FHA
specifically to support the affordable housing segment of the market, it is not surprising to
find that FHA serves relatively more low-income and other targeted borrowers than do the
GSEs, which provide general liquidity to a broad spectrum of the market.
:'., Affordable housing loans for the purpose of the Consumer Bankers Association survey we.re defined
as loans made through a program designed to increase purchase-money home m?rt~age lendmg to
minority or low- to moderate-income applicants. The Consumer Bankers ~ssoclatlOn has conducted
its survey. known as the Affordable Mortgage Program Survey, annually smce 1992.
66
Table III. 9: Distribution of Borrower and Census Tract Characteristics of FHA and GSE
Home Purchase Mortgages in Metropolitan Areas, 1993
(in percentage points)
Borrower and Census Tract Characteristics
FHA
All
GSE
Eligible-Only
Income of Borrower
80 % of Median or Below
42.0
IB.3
2B.O
81-100 % of Median
23.0
15.3
20.9
10 1-120 % of Median
16.0
15.7
17.6
121-150 % of Median
11.8
19.3
16.6
7.2
31.4
16.B
Under Median
65.0
33.6
4B.9
Over Median
35.2
66.4
51.0
Flrst-Ilme Homebuyer
66.8
30.7
35.0
Repeat Homebuyer
33.2
69.3
65.0
White
78.1
B7.6
86.9
Black
10.0
2.7
3.0
Hispanic
9.5
4.2
4.B
ASian
2.0
4.3
4.1
Other
0.4
1.2
1.2
RO <;; of '1edlan or Below
16.1
6.7
8.8
RI-IOO <;; of Median
29.7
IB.3
22.9
101-120 <;; of Median
29.9
27.7
30.6
121· ISO r:; of Median
19.0
29.0
26.0
15tl r:; of Median
5.3
18.3
11.7
lOr:; M monty or Less
43.1
57.3
56.4
+ ISO '7c of Median
Race/Ethntctty of Borrower
*lncomt: of Tract
~
-\1tnllrtt\ CompositIOn of Tract
1\-30 r:; MmorIty
34.8
30.5
30.1
3\-50 r:; Minority
10.3
6.5
6.8
- 50 r:; M monty
11.8
5.7
6.7
underserHd Areas
27.1
12.7
15.5
Served Areas
72.9
87.3
84.5
Source An AnalYSIS of FHA's Single-Family Insurance Program. (HUD, 1995-C, pp. 4-26).
67
D. SUMMARY
Over the last 30 years, the secondary mortgage market has developed rapidly, assisted
by the federal government's support for Fannie Mae, Freddie Mac, and Ginnie Mae. Both
Fannie Mae and Freddie Mac have been instrumental in developing new products that
increased the availability of mortgage credit under various economic circumstances.
Since the late 1980s the non-conforming mortgage market and other financi~l markets
have successfully replicated the GSEs' function of linking capital markets to individual credit
markets. These non-GSE secondary markets demonstrate private firms' ability to keep
secondary markets liquid without government support. In addition, the sheer size of the
mortgage market, together with the participation of large national and regional firms,
provides considerable stability to the market. These developments suggest that the secondary
market for conforming, conventional mortgages could operate efficiently and effectively were
Congress to end government sponsorship of Fannie Mae and Freddie Mac. Nevertheless, as
explained in the next chapter, a number of important uncertainties remain.
That chapter also considers the uncertainties concerning the GSEs' contributions to
affordable housing. While both Fannie Mae and Freddie Mac participate actively in
expanding opportunities for affordable housing, other market participants appear to be the
leaders in providing credit to targeted borrowers. Despite the best efforts of Fannie Mae and
Freddie Mac. the fact that those companies operate in the secondary market for mortgage
loans issued under relatively conservative underwriting guidelines may put them at a
disadvantage in actively promoting affordable housing loans. They may also lack the
advantages that have helped depository institutions succeed in this area: direct participation in
primary markets. local knowledge, and greater outreach in low-income communities because
of CRA.
Without government sponsorship. the GSEs would have fewer incentives to continue
serving various affordable housing markets. In addition, revitalized CRA regulations for
FDIC-insured depository institutions that have stimulated affordable housing finance may.
over the long run. stimulate more affordable housing activity by the GSEs and other market
participants. On the other hand. rescinding the affordable housing goals (or similar
obligations) attendant on GSE status would reduce the incentives for Fannie Mae and Freddie
Mac to purchase at least some affordable housing loans, particularly those with higher LTV
ratios or higher information and transaction costs. It could also limit certain other forms of
assistance currently provided. Even if the GSEs lost their government sponsorship and
reduced their affordable housing activity. the characteristics of their affordable housing loans
suggest that the private sector could readily finance most of these loans. Chapter IV
considers this from a broader perspective.
69
CHAPTER IV
POTENTIAL EFFECTS OF ENDING GOVERNMENT SPONSORSHIP
AND OF MAINTAINING THE STATUS QUO
Without government sponsorship, Fannie Mae and Freddie Mac would probably
continue to compete and prosper in the secondary mortgage market, and that market would
probably retain the liquidity and regional stability it now displays. Yet the broader potential
effects of ending such sponsorship remain uncertain. Nor can one know exactly how the
mortgage market would evolve if such sponsorship continues. What is certain is that U.S.
financial markets, and the housing finance market in particular, are undergoing dramatic
changes. many of them driven by advances in technology. While such changes can create
troubling uncertainties. they should ultimately benefit consumers and the economy. Mindful
of such changes. we attempt to evaluate some of the broad economic and social effects of
ending or retaining government sponsorship of Fannie Mae and Freddie Mac.
A.
RISKS OF ENDING GOVERNMENT SPONSORSHIP
We will consider here how ending government sponsorship could introduce
uncertainty into the mortgage market. increase mortgage costs, and reduce affordable housing
efforts. Fannie Mae and Freddie Mac have played a central role in developing the efficient.
liquid mortgage market we enjoy today. They have developed it so successfully that some
have asked whether the market could operate effectively without government sponsorship.
The two GSEs. in meetings with Treasury officials. have stated that they could restructure
themselves to operate without government sponsorship. but that losing such sponsorship
would raise mortgage costs.
1.
Effect on the Liquidity and Stability of the Mortgage Market
Despite the strength of the secondary mortgage market. precipitous change in the
GSEs' government sponsorship could pose potential risks for that market. Government
sponsorship enables the GSEs' debt and mortgage-backed securities to receive better than
AAA rates. A secondary market without GSE support would need to find other sources of
credit enhancement to raise similar sums. The private sector has successfully provided such
credit enhancements in other segments of the home mortgage market and in other markets
but, given the large volume of securities issued by Fannie Mae and Freddie Mac. ending
government sponsorship may at least cause some initial uncertainty.
In response to changing market conditions and the search for more efficient
structures, private asset-backed securities markets have greatly increased their capacity to
provide credit enhancement. They have developed structures ranging from pool insurance to
the currently more common division of debt into senior and subordinated instruments. Some
private companies specialize in providing credit enhancement to municipal bond issuers. In
70
the long run. one would expect financial markets to develop the capacity to provide the level
of credit enhancement necessary to accommodate the GSEs' volume of securities. Interest
rates on such securities might still rise without government sponsorship. but the market could
remain liquid and stable.
In the short run. the private market may have greater difficulty in providing the level
of credit enhancement necessary to absorb the GSEs' current volume of securities without an
increase in interest rates. This would certainly be the case if government sponsorship of
Fannie Mae and Freddie Mac ended abruptly. Given the GSEs' current importance to the
mortgage market. an abrupt end to government sponsorship would not be a prudent policy
choice.
Furthermore. any changes in government sponsorship need not be made in isolation.
Policymakers could consider changing other statutes and regulations to improve the liquidity
and stability of a fully private secondary mortgage market. Congress already took one such
step with the Secondary Mortgage Market Enhancement Act of 1984. The Act preempted
certain state investment laws. thereby allowing depository institutions and institutional
investors such as pension funds to purchase privately issued mortgage-backed securities as if
they were issued by a federal agency or a GSE. Federal banking regulators might consider
re-examining the risk-based capital treatment of privately issued mortgage-backed securities,
which have a 50 percent risk-weight versus the 20 percent risk-weight assigned to GSEissued mortgage-backed securities. 1
2.
Effect on Mortgage Interest Rates
Another concern is a potential increase in home mortgage rates for conforming,
comentional fixed-rate loans. It is difficult to estimate with certainty how modifying or
ending government sponsorship would affect mortgage interest rates. It appears that if
federal sponsorship were ended. mortgage rates in this segment of the market would rise,
though the effect is both hard to estimate and likely to be small relative to the normal
fluctuations in mortgage rates attributable to macroeconomic and credit market factors.
There is no theoretical or legal reason why the GSEs must pass through all, or even
part. of their subsidies to consumers. Hermalin and Jaffee (1996) explain how duopolists can
increase their profits through tacit cooperation.: They point out that reducing subsidies may
not increase mortgage rates if the GSEs priced just low enough such that other competitors
stay out of the market. In general. the GSEs' pricing strategy, and the threat of competitor
I
The OTS uses a 20 percent risk-weight for both GSE and privately issued mortgage-backed
SeCUrIlleS
: As HermalIn and Jaffee point out. "tacit" cooperation requires no actual collusion. Rather it is
possible for duopolists. acting independently and solely in their own individual interests. to ~ct as
(hey were colludIng
if
71
entry into the confonning loan secondary market, will detennine whether and how much of
the subsidy is passed through in lower mortgage rates and, in tum, how any reduction in
subsidies would affect confonning mortgage rates.
Empirical evidence of the GSEs' effect on confonning loan rates is also inconclusive.
The GSEs point to comparisons of mortgage offer rates in weekly newspapers as evidence of
a pass-through. A review of such rates in the weekly Washington Post real estate section
shows that lenders' quotes on confonning rates generally running 25 to 50 basis points below
their quotes on jumbo rates. although the difference recently diminished.
One concern about this comparison is that offer rates can and do differ from the rates
at which loans are actually closed. Table IV.l presents national averages on closed fixedrate mortgages for both confonning and non-confonning loans. 3
Table IV ..
l' National Averages on Fixed-Rate Mortgages
Year
Confonning
Effective Rate
(percent)
1983
12.86
12.4
-46
1990
10.38
10.56
18
1991
9.66
9.75
9
1992
8.49
8.6
11
1993
7.48
7.46
-2
1994
8.19
7.78
-41
1995
8.18
8.16
-2
Jumbo
Effective Rate
(percent)
Jumbo
Differential
(basis points)
Sources: Mortgage Interest Rate Survey (MIRS) conducted by the Federal Housing Finance Board
(Federal Home Loan Bank Board prior to 1989). 1983 estimates. from GAO (1984). include both
fixed- and adjustable-rate mortgages.
The GAO (1984) first reported that the 1983 national average rate of jumbo loans was less
than that of confonning loans. During the 1990s, the differential on national averages
The effective rate adjusts the contract rate for initial fees. MIRS data amortize the initial fees over a
ten year time period to obtain the effective rate.
.1
T2
between conforming and jumbo loans has varied in size and sign. For the three-year period
1993-95. however, jumbo loans bore lower average effective rates than conforming loans.
Relying on national averages of closed rates to analyze the GSEs' effect on the
interest rates of mortgages below the conforming loan limit also has shortcomings. Simple
averages of mortgage rates across time cannot fully capture factors that could cause mortgage
rates to vary according to loan characteristics such as loan size or credit quality. In addition,
annual national averages do not account for such factors as any regional differences in
mortgage rates or the timing of mortgage closures.
Several research papers, including one prepared for the interagency group (Cotterman
and Pearce. 1996),4 use econometric models to control for various factors that may affect the
mortgage-rate differential between conforming and jumbo loans, such as geographic location,
time of loan closing. loan size. and default risk. By controlling for such factors, an
econometric model attempts to isolate the GSEs' effect on conforming mortgage rates. The
Cotterman and Pearce paper. which builds on earlier work, estimates that closed conforming
fixed-rate mortgages have had interest rates roughly 25 basis points (in 1993) to 60 basis
points (in 1989) below the rates on jumbo mortgages. Of this range, Cotterman and Pearce
view the core range of the differential as 25 to 40 basis points. A sample of their estimates
is presented in Table IV.2. The Cotterman and Pearce estimates are similar to those found
by other researchers. For example. ICF (1990) found that conforming loans had interest
rates 23 basis points less than jumbo loans. Hendershott and Shilling (1989) found a 30 basis
point differential. s Fannie Mae (l996-C, p. 218), in written comments on a preliminary
draft of Cotterman and Pearce. identified a 20 to 35 basis point differential as reasonable and
consistent with earlier findings using similar data. 6 Therefore. in Chapter II we assumed 20
{() .+0 hasis points as a reasonable range for the possible pass-through of the GSEs'
gO\ernmental henefits.
Tahle IV.2 also shows that the differential declined in recent years. This decline
corresponds with the rapid growth of securitization in the jumbo market. These researchers
Jisp found that "stacking" -- i.e .. the concentration of a large number of mortgages -- at the
(()nformmg loan limit declined during the same period. Although the Cotterman and Pearce
results are the best econometric evidence currently available. they involve a relatively simple
• See alSt' Hendershot[ and Shilling (1989) and ICF (1990). Shilling (1996) and Cook (1996)
c\lmment on Cot[errnan and Pearce. Herrnal in and Jaffee (1996) also offer insights into this issue as
d(l comments on their paper from White (1996) and Kaufman (1996).
'
'Both Hendershott and Shilling (1989), and I~F(1990), rep<?rted smaller differentials for jumbo
I(:ans that were close [0 the conforming loan lImit .. For the tIme peri~d covered by these studies, this
etrect wa~ partIcularly Important SInce the conforming loan lImit was Increasing regularly.
Cotterman and Pearce (1996), in a preliminary draft of their paper, concluded that the conforming
Illan dIfferential had a core range of 20 to 35 basis POInts.
o
73
model,7.8 and include no data after 1993. Given the rapid fall in the conforming loan
differential that they estimate between 1989 and 1993, an update of their analysis would be
particularly useful.
Table IV.2: Estimated Differences in Rates Between Jumbo Loans and Conforming Loans,
By Lender 1989-1993
(in percentage points)
California
Year
S&Ls
Total for 11 States
Mortgage
Companies
S&Ls and
Mortgage
Companies
S&Ls
Mortgage
Companies
S&Ls and
Mortgage
Companies
1989
-0.45
-0.51
-0.50
-0.31
-0.59
-0.59
1990
-0.34
-0.35
-0.36
-0.35
-0.36
-0.38
1991
-0.48
-0.46
-0.47
-0.33
-0.49
-0.43
1992
-0.17
-0.38
-0.32
-0.21
-0.30
-0.30
1993
-0.19
-0.28
-0.25
-0.28
-0.23
-0.24
Source: Cotterman and Pearce (1996, p. 125. Table 6)
In the face of conflicting data on offer rates and closed rates, theoretical uncertainty
over how much the GSEs pass through their benefits by lowering mortgage rates, and the
problems associated with estimating the effects of government sponsorship, we cannot make
definitive statements about the degree to which reducing or eliminating government
sponsorship would affect conforming mortgage rates. Further study is needed to estimate
more precisely the GSEs' effects on mortgage rates below the conforming loan limit.
The information currently available indicates that the potential increase in mortgage
rates would be small relative to the normal fluctuations in mortgage rates attributable to
No doubt due to data limitations. the Cotterman and Pearce model includes information on relatively
few of the variables that should affect loan rates. A more complete analysis would also model the
joint determination of loan approval or disapproval, amount. and interest rate.
7
The relationship between loan rate and loan size appears particularly complex, both theoretically and
empirically. Consequently. a simple measure or estimate of the difference between conforming and
jumbo mortgage rates masks a more complicated relationship between mortgage rates and mortgage
size.
R
74
changes in macroeconomic and credit market conditions. Figure IV.l shows quarter-toquarter changes in average mortgage rates between 1991 and 1995. As the figure indicates.
mortgage rates regularly change by considerably more than any change that could reasonably
be expected from ending government sponsorship. To provide a benchmark for assessing the
effect of a rise in mortgage interest rates, consider the following example. The medianpriced home in the U.S. in 1995 was $112,900 and the average mortgage rate on a 30-year.
fixed-rate mortgage was 7.95 percent. 9 Assuming the homebuyer made a 20 percent
downpayment. a 20 basis-point increase in mortgage rates would increase the monthly
payment by $12 per month. Assuming the homebuyer is in the 28 percent marginal tax
bracket and pays state taxes at a marginal rate of 5 percent (net of the federal deduction). the
after-tax cost of a 20 basis point increase would be $8 per month.
Figure IV.l: Quarterly Changes in Average Mortgage Rates
eo
70
eo
~
40
XI
-- • - •
20
\0
BASIS
POllorTS
~
0
•-
.10
·20
.JO
~
-•
•
-
•••
-!oO
.«J
·70
.aD
.go
fci>.1
Source
f~fl
HUO (1996-0)
In summary. it is not clear to what extent interest rates for fixed-rate confonning.
conventional mortgages would increase if Congress ended the government's sponsorship of
Fannie Mae and Freddie Mac, although such rates probably would rise. To the extent that
observed differences in rates between confonning and jumbo mortgages reflect economic
factors such as credit risk, or technical efficiencies achieved by the GSEs, ending such
sponsorship may have almost no effect on mortgage rates. But to the extent that lower
Q
See HUO (1996-D).
75
confonning mortgage rates reflect a current pass through of at least some of the GSEs'
governmental subsidies, as we assumed in Chapter II, then ending such sponsorship could
lead to a slight increase in mortgage rates. If ending the GSEs' government sponsorship
increased secondary mortgage market competition, however, that could in the long-run
mitigate or even offset any such rate increase.
3.
Effect on Affordable Housing Efforts
Congress has created a role for the GSEs in affordable housing, to which they have
responded by substantially increasing their purchases of loans to lower-income homebuyers
and on properties in under-served communities. Of course, the GSEs' affordable housing
goals are only one of a set of government initiatives to promote affordable housing. The
Community Reinvestment Act (CRA), for example, increases the incentives for primary
lenders to make affordable housing loans.
While predicting future contributions by the GSEs and others to affordable housing is
difficult, it may help to consider the challenges that the GSEs face relative to other
participants in the affordable housing market. First, the GSEs do not make loans directly to
homebuyers. Although they can offer products designed for affordable housing, they must
rely on primary lenders to bring them such loans. Also, the GSEs have a number of active
competitors in the affordable housing market, including the FHA, which focuses directly and
primarily on affordable housing, and portfolio lenders, which have the advantage of better
local knowledge.
The challenges faced by the GSEs are heightened by the fact that today's critical
housing priorities center not on the general operation of the nation's credit markets but on
the needs of certain borrowers that continue to find homeownership beyond their grasp. Last
year, the Administration established the goal of increasing the U.S. homeownership rate to a
historic high -- 67 percent of all households. HUD released a blueprint for achieving this
goal. the National Homeownership Strategy: Panners in the American Dream. 10 The strategy
includes 100 action items for increasing homeownership rates nationwide. It also identifies a
lack of funds for downpayments and insufficient income -- not credit availability -- as the two
main financial barriers to homeownership among the targeted borrower groups. As the
National Strategy report points out, "obtaining sufficient funds to purchase a home for many
low- and moderate-income households will require government and nonprofit financial
support" (HUD. 1995, p. 4-11). For the country to meet today's critical housing needs,
public policy attention should focus on the action items outlined in the HUD strategy.
Again. the GSEs face challenges in helping to solve this problem. For the GSEs to buy a
mortgage, they must first obtain mortgage originations that meet their underwriting standards
(recognizing that the GSEs have recently modified some of their underwriting standards to
boost their purchase of affordable housing loans). Also, for most affordable housing loans, a
HUD (1995). At the end of 1992. the national homeownership rate was 64.1 percent. By the end
of 1995. the rate had increased to 65. 1 percent.
III
76
private mortgage insurance company must take the first-loss risk before the GSEs may
purchase the loans. II
Despite these challenges, Fannie Mae and Freddie Mac have contributed to promoting
affordable housing finance. It is unclear whether the two companies need government
sponsorship to continue their current effons; knowing that would require more information
on whether the GSEs' affordable housing efforts generate returns significantly below those of
comparable lines of business. As described in the previous chapter, the majority of affordable
housing loans purchased by the GSEs meet standard underwriting criteria. Freddie Mac
states that "the corporation purchases most single-family and multifamily mortgages in
support of affordable housing through its standard mortgage purchase programs and under
the same credit standards as its other mortgage purchases" (Freddie Mac, 1996-A, p. 4), but
this statement does not preclude some extraordinary effons aimed at small groups of
homebuyers.
Therefore, ending govenunent sponsorship would leave at risk some smaller subset of
the GSEs' purchases of affordable housing loans. This subset, typically referred to as
community lending loans, consists of loans that target various groups of borrowers through
flexible underwriting (lower debt or income ratios. and reduced down payments). HUD
(l996-A) has reported that the GSEs purchased some 97,000 such loans, worth a total of
S7.5 billion. in 1995. Community lending comprised 7 percent of Fannie Mae's total owneroccupied single-family purchases and 1 percent of Freddie Mac's.12
Another area of concern is how ending the GSEs' govenunent sponsorship would
affect homeownership opportunities. A study by Wachter et. al. (1996) predicts that it would
reduce the overall homeownership rate. especially among first-time homebuyers and targeted
horrower groups. These results must. however, be kept in perspective. In particular, the
\\' achrer analysis could overstate the effects of ending govenunent sponsorship for several
reasons, some of which are presented below. 13 The Wachter analysis did not cons.ider the
abIlity of households to use adjustable-rate mortgages and assumed that ending government
sponsorshIp would cause:
•
Oownpayment requirements to increase. This may not be a likely occurrence,
however. Since the fully private sector offers low downpayment mortgages enhanced
through private mortgage insurance companies .
. One promiSing development that may lower the .cost of buying a. home for all potential homebuyers
IS new technology that reduces the cost of onglnatlng and underwrItmg mortgages. Fannie Mae and
FreddIe Mac are aCIlvely involved in developing such technology, as are fully private firms.
: Hl'D (1996-.'\) reports that in 1995 the community lending purchases of Fannie Mae were 86 374
(S6.550 billIon) and Freddie Mac's were 10.869 (S935 million).
'
I;
Yezer (1996) also discusses issues related
to
the Wachter et. al. (1996) analysis.
77
•
A 50 basis point increase in mortgage rates. Such an increase exceeds those
suggested by other research cited earlier in the chapter. Even if rates rose that much,
it is unclear it could have such a broad effect on homeownership.
Although Wachter et. al. (1996) raise many important questions about ending government
sponsorship and about overall housing policy, more research is necessary to determine the
effect on homeownership rates.
The federal government has in place a specialized system for insuring and securitizing
affordable housing loans -- FHA and Ginnie Mae. It also recently established the
Community Development Financial Institutions (CDFI) fund to leverage public and private
capital for community development activities including affordable housing projects. These
government entities may be best equipped to target subsidies to specific borrower groups.
Their current and future activities need to be considered when evaluating the effect that
ending government sponsorship of Fannie Mae and Freddie Mac might have on the
government's ability to achieve the goals laid out in the National Homeownership Strategy.
B.
RISKS OF MAINTAINING THE STATUS QUO
Just as government sponsorship has real value and involves real costs, maintaining
such sponsorship would involve risks that may benefit from further analysis. As described
here. these risks include the effect of government sponsorship on Treasury borrowing costs,
on other credit markets. on competition in the mortgage market and increased reliance on
GSEs. and on the potential risk to the taxpayers. They also include the tension between the
GSEs' public purpose and their responsibility to their shareholders.
1.
Effect on Treasury Borrowing Costs
In addition to the implicit subsidies covered earlier in this report, government
sponsorship may involve an explicit cost through increased Treasury borrowing costs. The
large number of variables that affect financial markets make it difficult to ascertain to what
extent GSE securities affect Treasury borrowing costs. However, the ways in which such
securities could affect those costs are clear. First, if the GSEs increase the total demand for
credit above what it would have been without government sponsorship, then the law of
demand suggests that the GSEs must be raising all interest rates, including those for Treasury
securities. While the GSEs issue a large volume of securities, any net additional demand for
credit created by their government sponsorship is probably fairly small.
Second. since GSE securities serve as substitutes for Treasury securities for many
purposes, and since they benefit from investors' perception that the federal government
implicitly stands behind them, those securities compete directly with Treasury securities in
the government securities market. To some extent, therefore, the considerable and growing
supply of GSE securities (relative to the supply of Treasury securities) tends to lower prices
in the government securities market and thereby increase the Treasury's borrowing costs.
78
Unfortunately. it is extremely difficult to estimate the amount of the increase.
Financial markets are both dynamic and complex; many factors affect their demand. supply.
and segmentation. When the Treasury previously attempted (Treasury 1990. 1991) to
estimate the effect of GSE borrowing on Treasury costs. it could not quantify those effects.
These estimation difficulties remain; nonetheless, further analysis seems appropriate.
Together, Fannie Mae and Freddie Mac had over $1.4 trillion in debt and mortgage-backed
securities outstanding at the end of 1995. Since the public holds $3.7 trillion of U. S.
government debt. each basis point of increase in such costs would raise annual budgetary
outlays by $370 million.
2.
Effect on Other Credit Markets
While the benefits of GSE status provide an important subsidy that promotes
homeownership, such a subsidy has economic costs. To the extent that the GSEs pass
through the benefits of government sponsorship. they reduce the price of, and increase the
demand for, mortgage credit relative to other types of credit. The economic effect of the
subsidy to mortgage credit -- absent increases in the savings pool or attracting capital from
abroad -- is to raise the price or reduce the amount of credit for other uses, such as small
business, exporters, rural communities. and other business and consumer borrowers.
Measuring such effects. however. is even more difficult than measuring the potential effects
on Treasury borrowing costs.
3.
Potential for Increased Reliance on the GSEs
Maintaining the current GSE status of Fannie Mae and Freddie Mac could, over time.
find the housing finance market increasingly reliant on the GSEs as sources of credit for
conforming, conventional mortgages. This increased reliance. coupled with the advantages
the GSEs receive from government sponsorship. could undermine the viability of portfolio
lenders operating in local markets. such as community banks and thrift institutions. If that
were to occur. borrowers who do not easily meet the GSEs' underwriting standards may lose
competitive local mortgage sources that may serve their needs better than national lenders.
FannIe Mae and Freddie Mac face pOlential competition from private-sector conduits
now active in the secondary mortgage markets not dominated by Fannie Mae and Freddie
Mac. One reason these firms do not now compete with the GSEs is that the benefits of
government sponsorship deter entry into the market for fixed-rate conforming. conventional
morH!a2:eS Ending government sponsorship would encourage more private sector
participation in the market for such mortgages. Increased competition would probably not
eliminate the benefits Fannie Mae and Freddie Mac have already brought to this market. such
as standardization of loan terms. On the other hand. continuing government sponsorship
prevents Fannie Mae and Freddie Mac from competing in other lines of business; free to
hrIng their considerable skills to bear in other markets. they would likely benefit consumers
in these other markets.
79
The potential for competition in GSE-dominated markets is evident in the evolution of
REMIC l4 securities. The private sector rapidly began issuing REMIC securities soon after
the Tax Reform Act of 1986 authorized them. In 1987, fully private issuers accounted for
almost all issuance of REMICs. Once the two GSEs were permitted to fully participate in
this market, they became the leading REMIC issuers. In 1993, the GSEs issued
approximately 98 percent of all REMICs. 15 If this concentration resulted from the GSEs'
economies of scale, better technology, or some other form of superior economic efficiency,
then privatization would probably not alter it. However, if it resulted from the beI?-efits of
government sponsorship, including a perceived implicit guarantee, privatization probably
would increase competition.
The limited competition faced by Fannie Mae and Freddie Mac - and the lack of
direct secondary market competition - may distort resource allocation and decrease financial
innovation. By removing the subsidies derived from their government sponsorship,
privatization would enable Fannie Mae, Freddie Mac, private conduits, and depository
institutions to compete more equitably in financing home mortgages.
4.
Effect on Potential Risk to the Taxpayer
Although Fannie Mae and Freddie Mac have developed a range of mechanisms to
hedge the risks of their portfolios and protect their financial integrity against movements in
the financial markets, there is no guarantee they will always be safe and sound entities. We
have no evidence of any current safety and soundness problems at Fannie Mae and Freddie
Mac.
The Shadow Financial Regulatory Committee recently highlighted questions regarding
potential taxpayer risk:
Whether or not a GSE actually becomes insolvent, taxpayers need to recognize
that Treasury back-up implicitly supplies risk capital that enhances the value of
private stakes in the firm. The availability of the implicit finance allows
enterprise managers to escape the market discipline of making other
arrangements to support their creditworthiness and promises to keep alive for
GSE shareholders a claim on the enterprise's future profits in difficult times.
This distorted arrangement for sharing risk makes private stakeholders willing
to trade upside earning potential for downside risks at terms that disadvantage
taxpayers. 16
14
See footnote 8 in Chapter I for a definition of REMIC.
I, Mortgage Market Statistical Annual for 1995.
I'
Shadow Financial Regulatory Committee (1996. p. 2).
80
Because one cannot know in advance whether. or to what extent. the government
would assist a financially troubled or failing GSE, managing any potential risk exposure is
necessarily more difficult than managing the risks of an explicit guarantee. When making an
explicit guarantee, the government can clearly define and limit its obligations, and other
parties can adjust their conduct accordingly. The government can also take specific steps to
minimize the risk of any claim against that guarantee -- for example, by regulating an entity
whose obligations are being guaranteed.
When there is no explicit guarantee, but merely a possibility that the government
might decide to provide assistance in the future, the nature and scope of any such assistance
is unknown. Efforts to manage an undefined potential risk are problematic.
.
In 1992, Congress sought to assure the safety and soundness of Fannie Mae and
Freddie Mac. and thus reduce any potential taxpayer risk, by establishing the Office of
Federal Housing Enterprise Oversight (OFHEO), an independent office within HUD.
Congress charged OFHEO with assessing and maintaining the safety and soundness of the
GSEs. OFHEO's regulatory duties include conducting examinations and establishing capital
standards. It has the enforcement powers needed to respond quickly if problems arise.
While still a new office. OFHEO's ongoing work in examining the two GSEs and developing
risk-based capital requirements for them do help bolster the GSEs' safety and soundness.
thereby making taxpayers better off. Creation of OFHEO is a positive development that we
expect to have a salutary effect on the two GSEs' safety and soundness.
OFHEO's responsibilities are unusual because it regulates only two entities -- entities
that comprise almost the entire secondary mortgage market for confonning. conventional
mortgages. This concentration of regulatory scope has both advantages and disadvantages.
OFHEO's structure provides a clear. focused safety and soundness mission. and strong
accountahility. Having only two institutions to regulate. OFHEO should be expert in the
GSEs' operations and risks. On the other hand. that structure may also present challenges in
the future. Since OFHEO oversees only Fannie Mae and Freddie Mac. it must continue to
work dilIgently to retain an appropriate ann's-length independence from its regulated entities
owr time. In light of its relatively narrow mission. OFHEO will also need to maintain a
\Ision of the housing finance system and the operations of financial markets that does not
hecome narrowed by its exclusive focus on two GSEs.
If Congress were to end the GSEs' government sponsorship, we assume it would do
so in a way that would remove any question of implicit taxpayer support and would thus
make clear that investors bear the risks associated with the two companies' operations, just as
they hear the risks of other fully private finns. Congress could then end safety and
soundness regulation and subject Fannie Mae and Freddie Mac to full market discipline.
81
5.
The Tension Between Profit and Public Purpose
When creating a GSE, Congress defines the problem (i.e., the market imperfection) it
seeks to overcome, provides benefits (subsidies), and imposes limitations on the GSE. But if
Congress wishes to revise those decisions in response to changing public needs, it no longer
has the same freedom of action: in addition to the usual constraints of the legislative
process, it must contend with the private interests of the GSE and its shareholders. Congress
must consider, and legislate, any such changes through a process in which the GSEs are
significant participants. As a private company, the GSE will act to fulflll its fiduciary
responsibilities by promoting and protecting the interests of its shareholders.
Clearly Fannie Mae and Freddie Mac must serve their shareholders, but they must
also comply with their federal charters. This ambiguity of responsibility, characteristic of
GSEs, continually raises issues of accountability: To what extent is a particular GSE
responding to its federal mandate and to what extent to the need to generate returns for its
stockholders? What tradeoffs does it make between these objectives?
C.
BALANCING THE GSEs' PuBLIC PuRPoSE AND THE BENEFITS OF
GOVERNMENT SPONSORSHIP
If Congress decided to maintain the GSE status of Fannie Mae and Freddie Mac, but
sought to increase the public benefits they provide or reduce the government benefits they
receive, it could pursue a wide range of options.
Illustrative of the many options that have been suggested are the following:
•
Holding constant, or decreasing, the conforming loan limit to focus the GSEs more
squarely on the market where affordability issues are most important;
•
Strengthening the affordable housing goals;
•
Requiring Fannie Mae and Freddie Mac to direct a portion of their earnings to
affordable housing, perhaps. along the lines of the Federal Home Loan Bank System's
Affordable Housing Program (the System, another housing GSE, must annually make
grams for affordable housing that amount to the greater of $100 million or 10 percent
of the System's earnings).
•
Requiring more directed assistance (both educational and financial) to lower-income
borrowers, state and local governments, and non-profit organizations, as described in
HUD's National Homeownership Strategy;
•
Charging user fees to recoup some of the benefits of government sponsorship;
82
•
Limiting the size of the GSEs' retained mortgage portfolio or requiring its divestiture
(as Congress directed in 1954); and
•
Ending certain benefits of government sponsorship, such as the exemption from SEC
registration.
Analysis of any of these options would be a necessary part of the ongoing evaluation
of the government's relationship with the GSEs in light of market developments. Also,
policymakers would need to consider how such options would affect the GSEs and other
government housing programs, especially FHA. Gradually decreasing the conforming loan
limit (currently $207,000) could encourage the GSEs to increase their activity in the segment
of the housing market most in need of assistance. Strengthening the affordable housing goals
could also focus more of the GSEs' efforts on targeted borrowers. The goals recently
published by HUD are actually below the relevant market shares for targeted borrower
groups. The percentages could be increased or the definitions further tightened to try to
better serve the public purpose. In addition, the goals could also place greater emphasis on
increasing the GSEs' involvement in financing multifamily mortgages.
Alternatively, one could require the GSEs to provide direct financial and technical
assistance to institutions and government agencies involved in affordable housing. Both
GSEs provide such assistance to various community organizations, but to better target public
benefits the government could have input on the level and scope of these activities. 17
Imposing user fees on the GSEs' debt and mortgage-backed securities could recoup
some of the GSEs' impl icit government subsidy and level the playing field for other
competitors. l~ Such fees could, however, create pay-as-you-go budget problems for any
future legislation to end government sponsorship. 19
Limiting the GSEs' retained mortgage portfolios (and thus requiring the GSEs to
securitize more of the mortgages they purchase) would substantially reduce the benefits of
government sponsorship retained by the GSEs' shareholders and would greatly reduce their
interest -rate fisk exposure.
I' For example, the Fannie Mae Foundation provides charitable support for various housing initiatives
and other projects Fannie Mae officials expect the foundation to spend between $50 and $70 million
annually In the next five (0 s:ven years. By contrast, t~e Federal Home Loan Bank System must
devote the greater of S I 00 mIllIon or 10 percent of net Income to its statutorily defined Affordable
Housing Program. If a similar 10 percent requirement had been applied to Fannie Mae and Freddie
Mac In 1995. 11 would have raised S3~ million (based on $3 billion in after-tax net income) to $450
million (hased on approxImately $4.5 billion In pre-tax net Income).
" For a detailed discussion of user fees, see Congressional Research Service (1996).
I"
The pay-as-you-go problem could be mitigated if there were a sunset date for the user fee.
83
Repealing some of the other benefits of government sponsorship, such as the
exemption from SEC registration, could also encourage competition from private firms and
provide a slightly better balance between the benefits received by the GSEs and the benefits
passed on to the housing finance market.
It should be stressed that none of these suggestions has received the detailed analysis
that would be required before a decision can be made on whether or how to adjust
government sponsorship.
D.
SUMMARY
The GSEs have made extraordinary contributions in pursuing their public goals.
Congress has asked whether it is now feasible and desirable to alter or eliminate government
sponsorship of Fannie Mae and Freddie Mac.
There seems little doubt that securitization and the secondary mortgage activities
pioneered by Ginnie Mae, Fannie Mae, and Freddie Mac are now well-established and that
the secondary market for conforming, conventional mortgages could operate efficiently and
effectively even if Fannie Mae's and Freddie Mac's government sponsorship were altered.
However, the broader potential effects of ending that sponsorship remain uncertain.
For example, the effect of any change upon the GSEs' affordable housing activities is
unclear. The experience under the housing goals is only a few years old, and it is premature
to judge how much of the GSEs' activity is driven by Congressional directive and HUn
oversight and how much by the basic requirement of Fannie Mae and Freddie Mac as
businesses to generate returns for their stockholders.
Altering government sponsorship could create the risk of a small increase in mortgage
rates for the portion of the market in which Fannie Mae and Freddie Mac participate. The
entry of new competitors into the market could mitigate this effect. Although we have
analyzed these effects and provided rough estimates. further research would be helpful.
As Congress considers these matters, we also believe there should be detailed analysis
of the operation and market implications of the various alternative approaches. A wide range
of suggestions has been made to reduce the benefits of government sponsorship or to increase
the public benefits provided by Fannie Mae and Freddie Mac.
Ending or modifying government sponsorship would entail risk, but would also have
benefits. The potential effect of privatization on mortgage interest rates or the availability of
credit for affordable housing represent important risks. Potential benefits could include more
active competition, more efficient credit allocation, reduced potential risk to taxpayers, and
reduced government borrowing costs. While preserving the status quo would eliminate any
uncertainty associated with ending government sponsorship, it has risks as well.
84
Fannie Mae and Freddie Mac are imponant institutions, and no change will occur
without careful analysis and public discussion. We believe the analysis presented here and
the additional work suggested can further such discussion.
85
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Mortgage Securitization." Working Paper #187. Washington, DC: Federal Reserve
Board.
Hendershott. Patric H., and James D. Shilling (1989). "The Impact of the Agencies on
Conventional Fixed-Rate Mortgage Yields." Journal of Real Estate Finance and
Economics. 101-115.
Hennalin. Benjamin E., and Dwight M. Jaffee (1996). "The Privatization of Fannie Mae
and Freddie Mac: Implications for Mortgage Industry Structure." In Studies on
Pri\'Qli-:.rng Fannie Mae and Freddie Mac. U.S. Department of Housing and Urban
Development. Office of Policy Development and Research. 225-302.
ICF. Incorporated (1990). "Effects of the Confonning Loan Limit on Mortgage Markets."
Final Report prepared for U.S. Department of Housing and Urban Development,
Office of Policy Development and Research (March).
Inside Mortgage Finance Publications, Inc. Mongage Market Statistical Annual for 1995.
Washington. D.C., (1995).
Kaufman. Herbert M. (1996). "The Jaffee-Hermalin Paper: A Discussion." In Studies on
Privari-:.ing Fannie Mae and Freddie Mac, U.S. Department of Housing and Urban
Development, Office of Policy Development and Research, 303-304.
88
____ (1988). "FNMA's Role in Deregulated Markets: Implications from Past Behavior."
The Journal of Money, Credit, and Banking, (November).
Office of Federal Housing Enterprise Oversight [OFHEO] (1996-A). Annual Repon to
Congress, (June).
_ _ _ (1996-B). Testimony of Aida Alvarez before the Senate Subcommittee on HUD
Oversight and Structure. (March 5).
____ (1995). Annual Repon to Congress, (June).
Shadow Financial Regulatory Committee (1996). Extending the Credit Reform Act to GSEs.
Statement No. 131. (February 12).
Shilling. James D. (1996). "Comments on the Ambrose-Warga and Cottennan-Pearce
Papers." In Studies on Privatizing Fannie Mae and Freddie Mac, V.S. Department of
Housing and Urban Development. Office of Policy Development and Research. 205210.
Standard & Poors. (1995). S&P Analysts' Handbook 1995 Annual Edition. New York, New
York.
Stanton. Thomas H. (1996). "Restructuring Fannie Mae and Freddie Mac: Supplementary
Analysis." In Studies on Privatizing Fannie Mae and Freddie Mac, V .S. Department
of Housing and Urban Development. Office of Policy Development and Research. 8083
l'. S. Depanment of Housing and Urban Development [HVD] (1996-A). Privatization of
Fannie Mae and Freddie Mac: Desirability and Feasibility. (July).
____ (1996-Bl. Srudies on Privatizing Fannie Mae and Freddie Mac. (May).
- - - - (1996-C). Testimony of Nicholas Retsinas before the Senate Subcommittee on
HUD O\'ersighl and StruClure. (March 5).
----
( 1996- D). US. Housing Markel Conditions. (March).
____ (1995-A). National Homeownership Strategy: Panners in the American Dream.
(May).
_ _ _ (1995-B). Federal Register. Volume 60. No.32, Feb. 13-17. (February 16).
p. 9208-9209.
89
_ _ _ (1995-C). An Analysis of FHA's Single-Family Insurance Program. (October).
_ _ _ (1987). 1986 Repon to Congress on the Federal National Mongage Association.
U. S. Department of the Treasury (1991). Repon of the Secretary of the Treasury on
Government-Sponsored Enterprises.
_ _ _ (1990). Repon of the Secretary of the Treasury on Government-Sponsored
Enterprises.
U.S. General Accounting Office [GAO] (1996-A). Housing Enterprises: Potential Impacts
of Severing Government Sponsorship. GAO/GGD-96-120.
- - - (1996-B). "FNMA and FHLMC: Benefits Derived from Federal Ties" (March 25
Letter to The Honorable Richard Armey). GAO/GGD-96-98R.
_ _ _ (1994). Housing Finance: Implications of Alternative Methods of Adjusting the
Conforming Loan Limit. (October).
_ _ _ (1991). Government-Sponsored Enterprises: A Framework for Limiting the
Government's Exposure to Risk. GAO/GGD-91-90.
_ _ _ (1990). Government-Sponsored Enterprises: The Government's Exposure to Risk.
GAO/GGD-90-97.
_ _ _ (1985). The Federal National Mongage Corporation in a Changing Economic
Environment. (April).
(1984). Letter from J. Dexter Peach. Director. United States General Accounting
Office. to The Honorable Steve Bartlett. United States House of Representatives.
regarding conforming loan limits. (April 5).
---
Wachter. Susan. James Follian. Peter Linneman. Roberto G. Quercia, and George McCarthy
(1996). "Implications of Privatization: The Attainment of Social Goals." In Studies
on Privatizing Fannie Mae and Freddie Mac. U.S. Department of Housing and
Urban Development. Office of Policy Development and Research, 337-377.
Weicher. John C. (1988). "The Future Structure of the Housing Finance System." In
ReSTructuring Banking and Financial Services in America, Haraf and Kushmeider
(eds . ). 3 10-311.
(1994). "The New Structure of the Housing Finance System." Review, Federal
Reserve Bank of St. Louis, (July/August), 53.
----
90
White, Lawrence 1. (1996). "Comments on the laffee-Hermalin Paper." In Studies on
Privatizing Fannie Mae and Freddie Mac. U.S. Department of Housing and Urban
Development, Office of Policy Development and Research, 305-313.
Yezer. Anthony M. (1996). "Comments on the Wachter et al. Paper." In Studies on
Privatizing Fannie Mae and Freddie Mac. U.S. Department of Housing and Urban
Development, Office of Policy Development and Research, 378-381.
DEPARTMENT
OF
THE
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
July 11, 1996
STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN
The report reminds us of the central facts of Waco -- that federal agents were
killed in Waco by people who violated gun and explosives laws, sexually abused children,
and started a terrible fire that killed scores of people. It does not mentio~ however,
that ATF was reformed, agents were disciplined, managers were replaced, and new
procedures were adopted to prevent a Waco-like tragedy from occurring again. By
failing to recognize these important facts and by blaming law enforcement, the report
fails to properly clarify the difference between the villains and the victims of Waco.
The report unfairly attacks former Treasury officials Bentsen, Altman and Noble,
the people who made sure that Waco was thoroughly and objectively investigated. These
men acted in the best tradition of public service on Waco.
It is time to put Waco behind us and focus on what really matters to the
American people -- fighting crime. ATF does critical work -- enforcing the law against
gangs and violent criminals, fighting the upsurge in church fires, and preventing
extremists from carrying out acts of terror. I continue to have the feeling that some of
those who criticize ATF are simply seeking to undermine public support for policies like
the Brady Act and the assault weapons ban.
-30-
RR-1168
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
NEWS
1500 PENNSYLVANL\ AVENUE, N.W.· WASHINGTON,D.C.· 20220· (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
July 12, 1996
CONTACT:
office of Financing
202/219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Treasury will auction appr'oximately $19/250 million
of 52-week Treasury bills to b~ issued July 25, 1996. ~his
offering will provida about $900 million of new cash for the
Treasury, as the maturing 52-week bill is currently outstanding
in the amount of $18,359 million.
In addition to the maturing
52-week bills, there are $23,172 million of maturing 13-week and
26-week bills.
Federal Reserve Banks ho2..d $11,183 million of bills for
their own accounts in t.he maturing issues.
These may be refunded
at the weighted average discount rate of accepted competitive
tenders.
Federal Reser-..re Banks hold $4,569 million of the mat.uring
issues as agents for forei~l and int~rnational monetary·authorities.
These may be refunded within th8 offering amount at the
'N'eighted average discount: ra\":Y of Zl.cc~pted competitive tenders.
Addit:onal amounts may be issued for such accounts if the
aggregate amount of new bids exceeds the aggregate amount of.
maturina bills.
For purpose:; of dl2tennining such additional
amounts~ foreian and intp.rn~tional ~onetary authorities are
,
considered
to hold $376 million oE the maturing 52-week issue.
-
Tenders for ~he bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debe, Washington, D.C.
Tbis offering of Treasury securities
is governed by the terms and conditions set forth in ~he Uniform
Offering Circular (31 CFR Part 356) for th~ sale an~ lssue by
the Treasury to th~ publ ic of m.).rk.et~ble Tr(~asury bl..lls, notes,
and bends.
Details abou~ th2 new ~cc~ri~y ar~ given in the attached
offering highlights.
(.lGo
Attachment.
RR-1169
DEPARTMENT
OF
THE
TREASURY
~~/7Rq~. . . . . . . . . . . . . .~~. .~". . . . . .. .
................................
Compiled ill the Office of Public A.ffairs
Offering Amount .
Sl9,).SO
.
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Ju 1 y 12
I
1996
milll.on
361-day bill
912791\
2S 2
Maturity date
Original issue date
Maturing amount . . .
Minimum bid amount
July 18, 1996
July 25, 1996
,July 21, 1997
July 2S, 1996
$18,359 million
$10,000
Multiples . .
.Sl,O()O
Submission of Bids:
Noncompetitive bids
Acccpt~d
1.;:
-:\..:11 up
t.O
$1,000,000
discount rate of
accepted competitive bids
(1) Must be ~xpressed as a discount rate
with two decimals, e.g., 7.10~
(2) Net long position for each bidder
must be reported when the sum of the
tOL~l bid amount, ac all discount
~ates, and the ~et long position are
$2 billion or greater.
(3) Net long position must be determined
as of one half-hour prior to the
closing t.ime for receipt of
competitive tenders.
3t the
Competitive bids
av~rage
Maximum Recoqni~ed Bid
at a Single Yield
35~
Maximum Award .
35% of public offering
Receipt of Tenders:
Noncompetitive te~ders
of public offering
Prior co 12:00 noon Eastern Daylight
time on auction day
?rior co 1:00 p.m. Eastern Daylight
Saving time on auction day
Savi~g
Compecitive
t2Gd~rs
Payment Terms .
.
.
Full payment with tender aT by charge
to a funds account at 3 Federal
R~serve bank on issue date
15()() PE:\:\SYL\A:\IA :\YE:\l"E. :\.W.· WASHL~GTO:\. D.C.· 20220. (202) 622-2960
D E P .-\ R T \1 E ' T
0 F
THE
TREASURY ~.'.~J
T- R E .\ S tRY
NEW S
~\:::?!~f
~178~q. . . . . . . . . . . . . ..
. . . . . . . . . . . . . . . .
OFFlCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE,
~.W .•
WASHINGTON, D.C .• 20220. (202) 622·2960
FOR IMMEDIATE RELEASE
July 12, 1996
STATEMENT OF TREASURY SPOKESMAN HOWARD SCHWSS
The Bureau of Alcohol, Tobacco and Firearms and the District of Columbia Fire
Marshal have informed Secretary Rubin the fire last month at the Main Treasury
building was accidental. ATF and the Fire Marshal said the fire started as a result of
renovation work that was taking place on the roof. Specifically, a propane torch being
used on the roof ignited the blaze.
We appreciate the efforts of the ATF and the D.C. Fire Marshal in making this
determination.
-30-
RR-1l70
D EPA R T 1\I E N T
0 F
THE
TREASURY.
T R E :\ S l: R Y
NEW S
178~
OrnCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, !'I.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 15, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $14,1~9 million of 13-week bills to be issued
July 18, 1996 and to mature October 17, 1996 were
accepted today (CUSIP: 912794Z98).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.1r.t
5.20%5.19%'
Investment
Rate
5.31%'
5.34%'
5.33%'
Price
93.693
98.1)86
98.688
Tenders at the high discount rate were allotted 1)%
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED lin thousands)
E.~~~iy~d
TOTALS
Type
('ompetitive
Noncompetitive
Subtotal, Public
Federal Reserve
fore:'gn Officia:"
-:-~et.i'::'cltiJr:.8
~OTALS
RR-ll71
8.~~s;;:Qts;;d
$54,371),271
$14,11)9,071
$49,231,1)15
1,468,064
S50,749,679
$3,574,415
1,468,064
S10,042,479
3,421,86J
3,42':",860
7~4,73~
7\)4,732
S::'4,::'6;',)7::'
5=C±f3;~,2::'
D EPA R T 1\1 E N T
0 F
THE
TREASURY ~(I)
T R E :\ S
r
R Y
NEW S
178<\
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
July 15, 1996
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $14,030 million of 26-week bills to be issued
July 18, 1996 and to mature January 16, 1997 were
accepted today (CUSIP: 9127943V4).
RANGE OF ACCEPTED
COMPETITIVE BIDS;
Low
High
Average
Discount
Rate
5.35%"
5 37%5.36%'
Investment
Rate
5.58%"
5.60%5.59%'
Price
97.295
97.285
97.290
Tenders at the high discount rate were allotted 5%The investment rate ie the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Receiyed
$51,711,078
Accepted
$14,030,028
$43,348,746
1,540,364
$44,889, llO
$5,667,696
1,540,364
$7,208,060
3,750,000
3,750,000
3,071,968
3.071,968
$51,7:.:", J73
S:"4,)30,028
All a(1d.:..t:..ona:;' $479,732 cn.ou8and of pi::'18 wil::' i:;~
issued to foreign offioial institutions ~=r new oasn
RR-ll72
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
OFFlCE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220 • (202) 622-2960
FOR IMMEDIATE RELEASE
July 16, 1996
STATEMENT BY TREASURY SECRETARY ROBERT RUBIN
ON THE PRESIDENT'S BROWNFIELDS TAX INCENTIVE
AND EMPOWERMENT ZONE PROPOSALS
Today, the Ways and Means Oversight Subcommittee will be considering tax
incentives to encourage cleanup and redevelopment of contaminated and economically
distressed sites. Earlier this year, President Clinton called for such an incentive in his State of
the Union address and included this initiative, fully paid for. in his FY 1997 budget.
The President's brown fields tax incentive will spur the cleanup and redevelopment of
thousands of contaminated sites, and together with the new Empowennent Zone and
Enterprise Community proposal, will help to rebuild neighborhoori<;, create jobs, and restore
hope to our nation's cities and distressed rural areas.
I thank Congressman Rangel for introducing H.R. 3747, containing the President's
brown fields tax incentive and Empowennent Zone proposals, and Senators Moseley-Braun,
Jeffords and D' Amato for introducing a companion measure. S. 1911, in the Senate. The
Administration strongly urges the Oversight Subcommittee to favorably consider these
proposals.
RR-1173
For press releases, speeches, public schedules and official biographies, call our 24-/lOur fax line at (202) 622-2040
Background
Under the President's brown fields tax incentive, environmental cleanup costs would be
fully deductible in the year in which they are incurred -- a significant incentive that would
reduce the cost of capital for these types of investment by more than half. The $2 billion
incentive is expected to leverage $10 billion in private investment, returning an estimated
30,000 brownfields to productive use. The incentive would be available in 40 of the existing
EPA Brownfields pilot areas, in areas with a poverty rate of 20 percent or more, in adjacent
industrial or commercial areas, and in Empowerment Zones and Enterprise Communities, both
existing ones and those that would be designated in the second round.
The Clinton Administration's Empowerment Zone and Enterprise Community program
was authorized by Congress in the Omnibus Budget Reconciliation Bill of 1993. This
program was designed as a competitive demonstration program for revitalizing distressed
communities pursuant to a strategic plan developed at the community level and supported by
local and state governments, the federal government, and the private sector. Over 500
communities that satisfied various poverty, population, and size criteria were nominated for
designation, with many communities hailing the application process itself for producing
tremendous benefits. On December 21, 1994, nine Empowerment Zones and 95 Enterprise
Communities were designated. Qualifying businesses in all of the designated areas became
eligible for a new category of tax-exempt financing, and businesses in Empowerment Zones
also became eligible for a significant federal wage credit and a capital investment incentive.
The Empowerment Zone and Enterprise Community proposal, which is an important
component of the President's Community Empowerment agenda, would authorize a second
round of designations, adding another 100 distressed urban and rural communities to the 104
designated in December 1994. The second round would build upon the solid successes of the
Erst round, and would also strengthen the tax incentives available to businesses in the
designated communities (including the brown fields tax incentive, additional section 179
expensing for small businesses, and new tax exempt bonds).
The Treasury Department will be submitting written testimony to the Subcommittee on
these matters.
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
~178~9~. . . . . . . . . . . . . . . . . . . . . . . . . ..
............................
OrnCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
July 16, 1996
Contact:
Dean DeBuck
(202) 874-4970
TREASURY TO HOLD ELECTRONIC MONEY CONFERENCE SEPTEMBER 19-20
The Department of the Treasury is presenting an electric money and banking
conference to examine the role of the government in the technological revolution that is
sweeping the financial services industry. The conference will be held on September 19-20 at
the Sheraton Washington Hotel in Washington, D.C.
Secretary Robert E. Rubin will present the keynote address on Thursday morning.
Featured speakers on September 19 include Federal Reserve Board Chairman Alan
Greenspan, Federal Trade Commission Chairman Robert Pitofsky and Citicorp Chairman
John S. Reed.
On Friday, September 20, Congressman Michael N. Castle of Delaware will open the
second day of the conference and Comptroller of the Currency Eugene A. Ludwig will
deliver the closing address. Secretary Rubin has designated the Comptroller to coordinate
electronic money issues and activities among Treasury bureaus.
The conference is titled "Toward Electronic Money and Banking: The Role of
Government." Topics for panel discussions will include:
-
Need for International Cooperation;
Consumer Issues;
Security and Authentication;
Payment System Issues;
E-Money Systems: Case Studies;
Privacy Issues;
Law Enforcement Perspectives; and
Electronic Money: Perspectives on Issuers.
-MORE-
RR-1174
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
The program is designed for a variety of interests from the private sector, including
hankers, non-hank financial service providers, technology providers, consumer groups and
scholars. Staff and policy-level officials from federal and state government agencies and
Congressional staff will also find the conference useful.
The registration fee is $495 (after August 12: $595). For more information, please
contact Phyllis Savoy at the Office of the Comptroller of the Currency by fax at
(202) 874-5436. Registration materials are also availahle bye-mail at
[e-money .conference@occ.treas.gov]. Conference program updates will be posted
periodically on the Treasury Department web site: http://www.ustreas.gov.
The Treasury Department will provide complimentary registration to accredited press.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
July
~6,
CONTACT:
~996
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
/
The Treasury will/auction two series of Treasury bills
totaling ~pproxim~tely.$27,OOO million, to be issued July 25,
1996. Th~s offer~ng w~ll provide about $3,825 million of new
cash for the Treasury, as the maturing 13-week and 26-week bills
are outstanding in the amount of $23,172 million. In addition to
the maturing I3-week and 26-week bills, there are $18,359 million
of maturing 52-week bills. The disposition of this latter amount
was announced last week.
Federal Reserve Banks hold $11,483 million of bills for
their own accounts in the three maturing issues. These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,332 million of the three
maturing issues -as agents for foreign and international monetary
authorities. These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders. Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills. For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $3,956 million of the original I3-week and
26-week issues.
Tenders for the bills will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. This offering of Treasury securities is
governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale a~d issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-1l75
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TRRASURY OFFERINGS OF WEEKLY BILLS
TO BB ISSUED JULy 25, 1996
July 16, 1996
Offering Amount . . . . .
$13,500 million
$13,500 million
91-day bill
912794 3L 6
July 22, 1996
July 25, 1996
October 24, 1996
April 25, 1996
$11,774 million
$10,000
$ 1,000
1B2-day bill
912794 3W 2
July 22, 1996
July 25, 1996
January 23, 1997
July 25, 1996
pesoriptiop of ,Qffering:
Term and type of security . .
CUSIP number
Auction date
. . . .
Issue date
Maturity date
Original issue date
Currently outstanding . . . .
Minimum bid amount
. . . .
Multiples . . . . . . . . . .
Tbe following rules apply to all seourities
Submission of Bide:
Noncompetitive bids
Competitive bids
Maximum Recognized Bid
at a Si~gle Yield
Maximum Award • . . . . .
Rgceipt of Tenders:
Noncompetitive
, tenders
Competitive tenders .
~ayment
Terms . . .
~nti9n~
$10,000
$ 1,000
abovet
Accepted in full up to $1,000,000 at the average
·"discount rate .0'£' 'acceptell··competit1ve bidlJ
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10t.
(2)
Net long position for each bidder must he
repor~ed when the Bum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
35\ of public offering
35\ of public offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
..............................
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
July 17, 1996
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the month of
June 1996.
As indicated in this table, U.S. reserve assets amounted to $83,455 million at the end
of June 1996, down from $83,468 million in May 1996.
End
of
Month
Total
Reserve
Assets
Gold
Stock 11
Special
Drawing
Foreign
Currencies
Rights1/JI
~I
Reserve
Position
in IMF 11
1996
May
83,468r
1l,05lr
11,037
46,153
15,227
June
83,455
11,050
11,046
46,077
15,282
11
11
JI
AI
Valued at $42.2222 per fine troy ounce.
Beginning July 1974, the IMF adopted a technique for valuing the SDR based on a
weighted average of exchange rates for the currencies of selected member countries. The
U.S. SDR holdings and reserve position in the IMF also are valued on this basis
beginning July 1974.
Includes allocations of SDRs by the IMF plus transactions in SDRs.
Includes holdings of Treasury and Federal Reserve System; beginning November 1978,
these are valued at current market exchange rates or, where appropriate, at such other
rates as may be agreed upon by the parties to the transactions.
r Revised
RR-1l76
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
TREASURY
THE
......................1I......~~/78~9~
TREASURY
NEWS
. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
OFFICE OF PUBliC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WM!HINGTON, D.C .• 20220 • (202) 622-2960
EMBARGOED UNTIL 2:30
~_M.
CONTACT:
July 17, 1996
Office of Financing
202/219-3350
TREASURY TO AUCTION 2 - YEAR AND 5 - YEAR NOTES
TOTALING $31 250 MILLION
J
The Treasury will auction $18,750 million of 2-year notes
and $12,500 million of 5-year notes to refund $27,768 million of
publicly-held securities maturing July 31, 1996, and to raise
about $3,475 million new cash.
In addition to the public holdings, Federal Reserve Banks
hold $1,517 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts
of the new securities.
The maturing securi~ie9 held by the public include $2,749
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
Both the 2-year and S-year note auctions will be conducted
in the single-price auction format. All competitive and noncompetitive awards will be at the highest yield of accepted
competitive tenders.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms
and conditions set forth in the Uniform Offering Circular (31 CFR
Part 356) for the sale and issue by the Treasury to the public of
marketable Treasury bills, notes,.and bonds.
Details about each of th~ new securities are given in the
attached offering highlights.
000
Attachment
RR-ll77
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC OF
2-YEAR AND 5-YEAR NOTES TO BE ISSUED JULy 31, 1996
July 17, 1996
offering Amount .
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
I~aturity date
Interest rate
Yieia ,
Interest
pay~en~
dates
Minimum bid amount
j,Iultiples.
Accrued interest
payable by i~v;stc~
Premium or discount ,
$18,750 million
$12,500 million.
2-year notes
AH-1996
912827 Y6 3
July 23, 1996
July 31, 1996
July 31, 1996
July 31, 1998
Determined based on the
highest accepted bid
Determined at auction
January 31 and July 31
$5,000
$1,000
5-year notes
L-2001
912827 Y7 1
July 24, 1996
July 31, 1996
July 31, 1~96
July 31, 2001
Determined based on the
highest accepted bid
Dete~mir.ed at a~ctio~
January 31 and July 31
None
Determined at auction
None
$1,000
$1,000
Determined at auction
The following rules apply to all securities mentioned above:
of Bids:
Noncompetitive bids
Accepted in full ~p to $5,000,000 at the highest accepted yield
competitive bids
(1) Must be expressed as a yield with, three decimals, e.g., 7.123%
(2) Net long position for each bidder must be reported when the
sum of the total bid amount, at all yields, and the net long
position is $2 billion or greater.
(3) Net long position muat be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Maximum ReQognized Bid
35% of public offering
at a Single Yield
Maximum Award .
35\ of public offering
Re~eipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders
. Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms .
Full payment with tender or by charge to a funds account at a
Federal Reserve Bank on issue date
Sub~is9ion
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220
Testimony of Lawrence H. Summers
Deputy Secretary
before the
Senate Committee on Commerce, Science, and
Transportation
July 18, 1996
Introduction
Chairman Pressler, Senator Hollings, Senator Stevens, Senator Inouye, members of the
Committee. I appreciate the opportunity to appear before you to discuss the proposed Natural
Disaster Protection and Insurance Act of 1996.
I would like particularly to thank Senator Stevens and Senator Inouye for their
leadership on this issue. The concerns that prompted this legislation and hearing are
bipartisan. Disasters make no distinctions on the basis of party affiliation or state boundaries,
and all of us recognize that the costs of natural disasters are too high, not only to federal, state
and local governments, but to businesses, homeowners, and residents throughout the nation.
The Clinton Administration is committed to ensuring that we respond quickly and
appropriately whenever and wherever disaster strikes. As a result, American communities
impacted by natural disasters receive our help faster than at any time in our history.
Responding to disasters is only one part of the equation -- the more difficult part is finding
what steps can be taken to reduce the overall costs natural disasters impart. We commend the
Committee for attempting to address this problem. Unfortunately, we believe that the
proposed legislation does not yet accomplish this goal.
We have four principal concerns with S.1043: (1) the bill does not significantly reduce
the costs of natural disasters, as the mitigation provisions are inadequate; (2) the bill introduces
a federal role in regulating the insurance industry, a significant change that warrants careful
study; (3) the bill provides a broad antitrust exemption for the reinsurance industry, without
yielding clearly defined benefits; and (4) the bill subjects the taxpayers to a major potential
liability through the auction of excess-of-Ioss contracts, an effort that requires a good deal
more work before enactment.
S.1043 does provide benefits to the insurance industry. However, legislation in this
area should be comprehensive and include effective mechanisms that will reduce the growth of
RR-1l78
federal disaster expenses as well as the overall impact and economic cost of catastrophic
occurrences.
Reducing the Costs of Catastrophic Events
Over the last decade, federal expenditures due to natural disasters have grown
substantially. Since Hurricane Hugo in September 1989, the federal government has expended
almost $34 billion for emergency assistance and rebuilding after major disasters, including
$9.5 billion for Hurricanes Andrew and Iniki, and Typhoon Omar in 1992; $7 billion for
Midwest floods in 1993; and $12 billion for the Northridge earthquake in 1994.
We need, as a nation, to do better. We have to address the total problem in the area of
natural disasters, and this requires addressing how we reduce the costs of disasters. As is true
in medicine, "an ounce of protection is worth a pound of cure." The principal strategy for
reducing the costs of natural disasters is pre-disaster mitigation. While insurance can, and
should, have an important role in encouraging mitigation, it is primarily a means of spreading,
not reducing, costs.
There are two reasons why the mitigation provisions of S.1043 are unlikely to
significantly improve what is already being done by states and localities. First, the bill
provides insufficient funds for pre-disaster mitigation. Meaningful mitigation efforts require
states and communities to invest resources in their critical infrastructure to better withstand
natural disasters. The funds provided in S.1043 through the hazard mitigation fund are much
too small to have any real effect. As you may know, the proposed hazard mitigation fund will
receive the unobligated FEMA Section 404 funds and a surcharge of no more than 5 % of the
proceeds of the excess-of-Ioss contracts. Our preliminary estimates indicate that under $20
million per year would be available to this fund, assuming that Treasury auctioned most of the
excess-of-Ioss contracts. On a pro rata basis, this small pool is unlikely to offer sufficient
incentives to states or localities to undertake the implementation of genuine mitigation
measures. As a point of reference, communities in the State of California currently spend over
$3 billion annually on fire protection alone.
Second, S.1043 will not encourage any new mitigation planning. States and localities
already undertake flood mitigation planning under the National Flood Insurance Reform Act of
1994, Section 409 planning under the Robert T. Stafford Disaster Relief Act of 1968,
mitigation planning funded through National Earthquake Hazard Reduction Act of 1977, and
mitigation planning through the Performance Partnership Agreements. The federal
government should continue to work with states to simplify, consolidate and focus the
mitigation planning already supported at the state and local level. FEMA is currently working
with states to clarify state mitigation roles and unify planning requirements.
Successful natural disaster strategies must begin first with concrete methods of reducing
the costs to society and governments. This bill, at best, touches on these issues and calls for a
2
study.
Federal Involvement in Setting Insurance Rates
S.1043 creates a loss costs commission within the Treasury Department, responsible for
providing loss costs estimates for natural disaster insurance. This commission would in
essence be charged with setting rates for the insurance industry, without any regulatory
oversight. It would effectively set a floor for hazard insurance rates within every state for
each of the natural disaster perils.
There are a number of problems with this proposal. The most significant is the
expansion of the federal role into the setting of insurance industry rates. I believe we must
proceed very carefully in considering any type of expansion. It may be that a convincing
argument can be made for increased federal involvement in the insurance industry. However,
I do not believe that the government should take ad hoc steps to regulate any industry -particularly one that is explicitly the subject of state regulation -- without full consideration of
the potential implications.
I am also concerned about the difficulty that a commission would face with setting loss
costs on a national basis. It is questionable whether the commission would be able to resolve
the contentious issues that would be likely to arise regarding the risk estimation models,
particularly questions that relate to the estimates of the frequency and costs of major disasters.
It is likely that communities at risk from earthquakes will dispute the estimated loss costs
ranges due to the "catastrophic" nature of the estimates, and the inherent difficulty and
uncertainty in predicting the occurrence of earthquakes. Similarly, communities at risk from
hurricanes face similar uncertainties with respect to long term weather forecasts. We know
that risk modeling is an area undergoing tremendous and dynamic development. With the
industry continuously creating new, more sophisticated models, the creation of a commission
might in fact have the unintended consequence of impeding the further development by the
private sector of effective models.
The commission's rate setting mechanism could prove to be unfair to states and to
consumers. While private insurance firms will have the option of adopting the loss costs
estimates in their rate filings with state regulators, state regulators will be required to treat the
loss costs as authoritative unless the regulator makes a finding that the costs are excessive,
inadequate or unfairly discriminatory. We believe that this structure may not allow state
regulators to properly challenge an inflated loss costs component of a rate application. If a
commission is needed at all, it should be structured in a manner that provides both regulators
and insurance companies with optional loss costs ranges based on publicly disclosed models.
This bill would not have that effect.
Finally, S.1043 would place a new administrative burden on the federal government.
Our estimates suggest that the staffing needs for the new commission will be about 75 full time
3
staff employees, a number which does not include the 11 part-time commissioners, and require
annual funding of at least $15 million. The bill would authorize only $5 million for the initial
expenses of the proposed commission.
Antitrust Exemptions for the Reinsurance Industry
S.1043 proposes a new antitrust exemption for natural disaster reinsurers. Such an
exemption is not needed to enable the private insurance industry to provide reinsurance in an
appropriate pro-competitive fashion. If natural market forces are insufficient to induce the
private insurance industry to provide this reinsurance, we do not see any additional incentive
that would be afforded through a broadened antitrust exemption, other than the prospect of the
extra profit to be gained by engaging in anticompetitive activity. This incentive would clearly
work to the detriment of the insurance-buying public.
The business of insurance already enjoys substantial antitrust immunity under the
McCarran-Ferguson Act, an exemption that has been highly controversial over the years.
However, there is an important exception to McCarran-Ferguson: the insurance industry is
prohibited from engaging in group boycotts. We see no reason to abandon this protection in
the context of reinsurance for natural disasters.
Excess-oC-Loss Contracts
We support the concept for federal excess-of-Ioss contracts to increase industry capacity
to insure against major disaster risks. These contracts would provide a fmancial instrument
that, if effectively used by the insurance industry, could increase the capacity of the primary
insurance and reinsurance markets to provide natural disaster coverage. Nevertheless, we
recognize that there are no assurances that the industry will transfer this capacity to consumers
in the form of increased coverage.
We believe that an excess-of-Ioss proposal without further exploration would be
premature. I have two concerns: First, experience suggests that for the federal government to
take on large responsibilities of the kind envisioned by S.1043, extraordinary caution is
needed. The amounts in question may be as high as $25 billion per year. It is conceivable
that they would be as large as $250 billion over a decade, an amount that approaches the costs
of the Savings and Loan bailout. While the contracts would be sold through an auction
mechanism, and the federal government should receive fair consideration. experience suggests
that without great care in the development and management of this program, there is a real risk
that the federal government will not be adequately compensated. Second, it is important that
benefits pass through to ensure more widely available hazard coverage for consumers. In this
area, we need to better understand the relationship between pricing and availability.
4
Conclusion
In conclusion, natural disaster losses affect us all. It is essential that we work together
to reduce their impact. But it is an extremely complex and multi-faceted problem. We look
forward to working with this Committee and others to push ahead toward actions -- whether
administrative or legislative, federal, state, local or private -- that will make natural hazards
less synonymous with natural disasters.
5
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 18, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $19,372 million of 52-week bills to be issued
July ~~/ 1996 and to mature July 24/ 1997 were
accepted today (CUSIP: 9127942S2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.47%
5.49%
5.49%
Investment
Rate
5.79%
5.81%
5.81%
Price
94.469
94.449
94.449
Tenders at the high discount rate were allotted 41%.
Tnt:: investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
$48,581,604
Accepted
$19,372,364
$42,425,495
929/809
$43,355,304
$13,216,255
929/809
$14/146/064
4/850/000
4,850,000
376/300
376/300
$19,372,364
An additional $795,200 thousand of bills will be
issued to foreign official institutions for new cash.
5.48 - 94.459
RR-1179
DEPARTl\1ENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 22, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,555 million of 13-week bills to be issued
July 25, 1996 and to mature October 24, 1996 were
accepted today (CUSIP: 9127943L6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.12%'
5.15%5.14%-
Investment
Rate
5.26%'
5.29%5.28%-
Price
98.706
98.698
98.701
Tenders at the high discount rate were allotted 12%".
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
E.~~~iy~Q.
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
8.~~~l;lt~Q.
$48,336,868
$13,554,560
$43,110,903
1,323,287
$44,434,190
$8,328,595
1,323,287
$9,651,882
3,232,500
3,232,500
670,178
$48,336,868
670,178
$13,554,560
An additional $89,822 thousand of bills will be
issued to foreign official institutions for new cash.
5.13 - 98.703
RR-llSO
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
CONTACT: Office of Financing
202-219-3350
FOR IMMEDIATE RELEASE
July 22, 1996
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,591 million of 26-week bills to be issued
July 25, 1996 and to mature January 23, 1997 were
accepted today (CUSIP: 9127943W2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.28%'
5.30%'
5.30%'
Investment
Rate
5.50%'
5.52%'
5.52%'
Price
97.331
97.321
97.321
Tenders at the high discount rate were allotted 18%'.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
$54,423,774
Accepted
$13,590,890
$46, SOl, 196
1.259,786
$47,760,982
$5,668,312
1.259,786
$6,928,098
3,400,000
3,400,000
3,262,792
$54,423,774
3,262,792
$13,590,890
An additional $436,108 thousand of bills will be
issued to foreign official institutions for new cash.
5.29
97.326
RR-1l81
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
OFFICE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
STATEMENT OF ROBERT E. RUBIN
SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE CAUCUS ON INTERNATIONAL NARCOTICS CONTROL
AND THE SENATE SUBCOMMITTEE ON INTERNATIONAL TRADE
July 23, 1996
Mr. Chainnan, thank you for the invitation to meet with you and your colleagues
this morning. I welcome the opportunity to address the critical issue of how drug trafficking
and money laundering may pose threats to our trade and our financial systems. Mr. Biden, I
would also like to thank you for your comminnent and leadership on the issue of combatting
drug trafficking and abuse.
Mr. Chairman, in lieu of my own testimony, I wish I could simply read the letter
you sent to me about this hearing. It captured in precise terms the great challenge we face
every day at Treasury. We believe American jobs, wages, and profits depend upon our
nation embracing the competitive pressures and possibilities of the international marketplace.
At the same time, we understand that changes in markets, technology, financial institutions,
and in the ways criminal enterprises do business make our country vulnerable to the trade in
illegal drugs and the laundering of criminal profits. You have identified the gravity of this
problem, and we share your concerns about it
Rapidly expanding commerce helps the American people, but more activity can
also provide greater opportunities to criminals to misuse the trade and financial systems that
facilitate the flow of goods and services between countries. As the volume of goods and
funds crossing our borders grows, governments must increasingly combat threats to trade and
national security. With the increased sophistication of financial systems, governments must
address the vulnerabilities of these systems in a world where it is easier than ever to transfer
money from one financial institution to the next, and from one country to the next.
Our government has no greater priority for public safety and public health than
stopping the smuggling, trafficking, and use of illicit narcotics, and the movement of illicit
financial gains from the illicit narcotic trade. Drugs poison our youth, lead to violence
throughout our society, and adversely affect our economy. Money laundering allows
criminals to hide and enjoy their illicit gains, while threatening legitimate financial
institutions. At the same time, however, money lalDldering can also be a vulnerability for the
traffickers. Criminals try to separate themselves from their illegal operations, but they cannot
separate themselves from their illegal profits. That means that money laundering gives us a
powerful vantage point from which we can address both the threats posed to our financial
system from illegal profits and the criminal activities that produce those profits.
The men and women who protect our borders face daily challenges from the
smuggling of weapons, technology, drugs, counterfeit commercial products, and unfit
agricultural products. The Departments of Defense, Treasury, Justice, State, ONDCP, and
other agencies as well, are joined in a partnership to address every facet of this problem, and
we are proud to work with the field general who coordinates these efforts, Barry McCaffrey_
RR 1182
Treasury has special expertise in the matters you are addressing today. Interdiction
is a principal mission of the Treasury Department, and remains the number one priority of our
bureau, the U.S. Customs Service. Treasury has also developed a powerful program to
combat money laundering, because hitting traffickers in the pocketbook and preventing them
from laundering drug profits is an effective way to undennine the trafficking organizations
themselves.
That program includes the Criminal Investigative Division of the IRS and Customs
which target money laundering operations in their own investigations and in Task Forces such
as the Organized Crime Drug Enforcement Task Forces and High Intensity Drug Trafficking
Areas. These operations are aided greatly by the Financial Crimes Enforcement Network
which serves as a central collection and dissemination point for financial infonnation crucial
to money laundering investigations.
Treasury also operates through international organizations such as the G-7, the
Summit of the Americas, and the Financial Action Task Force to develop common law
enforcement strategies, legislation and regulation against drug traffickers and money
launderers.
Now, let me give you a few examples of what Treasury has been doing in these
areas to combat drugs and money laundering:
First, Customs is focused on the interdiction problem in the Southwest and has
instituted Operation Hard Line. Because of Hard Line, Customs now has more agents, more
inspectional resources, more physical barriers against port running, and more secondary
inspections to stanch the flow of illegal drugs across the border. In a single year, this
operation has led to a 24% increase in narcotics seized at the border. Moreover, it has
resulted in an over 50% decrease in port running incidents.
Second, because traffickers are migrating from the Southwest to the Caribbean as a
major entry point for narcotics, Customs is implementing Operation Gateway in Puerto Rico
and the Virgin Islands. Cocaine seizures in Puerto Rico for the first half of FY96 have
increased by 46%, from 10,458 pounds in FY1995 to 15,284 pounds in FY96. During that
same period, heroin seizures in Puerto Rico have increased substantially as well.
Third, Treasury's bureaus are active participants in the Organized Crime Drug
Enforcement Task Forces and High Intensity Drug Trafficking Areas program. We are
making important progress through ini~atives such as the Customs-IRS anti-money laundering
Task Force, "Operation EI Dorado," and the Customs-DEA led "Operation Cornerstone,"
which helped lead to the indictment of four of the Cali cartel leaders.
2
Recently, Ray Kelly, the Treasury Department's distinguished Undersecretary for
Enforcement, and I visited with the men and women who run El Dorado in New York. This
operation is doing very impressive work. The Task Force focuses on money transmitters and
supplements the enforcement efforts of New York State financial authorities who can devote
only a handful of experts to track the illegal activities of hundreds of suspect firms and
individuals. In the last three years, they have seized literally tens of millions of dollars and
tons of illegal drugs.
Fourth, the Assistant Secretary of Treasury for Enforcement, Jim Johnson, is a
principal in the High Level Contact Group with Mexico. This group, coordinated by General
McCaffrey, meets directly with high level officials to urge even greater efforts by Mexico on
narcotics control and anti-money laundering matters. Treasury has the lead role with respect
to money laundering issues, and we use the group to stress the importance of Mexico
expanding the work it began with the criminalizing of money laundering. Just last week, a
Treasury delegation went to Mexico to discuss mandatory reporting requirements for banks
and other financial institutions which will make the Government of Mexico better able to
track illicit proceeds.
Fifth, the Summit of the Americas nations have targeted money laundering. Last
December, I chaired a ministerial conference in Argentina where the nations of the
hemisphere stated their support for legal, regulatory, and law enforcement measUres, including
the need to criminalize money laundering, to implement regulatory measures such as currency
transaction reports, and the creation of financial intelligence units to better disseminate
important fmancial information to investigatory authorities.
Sixth, two weeks ago, General McCaffrey, Attorney General Reno and I co-hosted
a southwest border conference in El Paso. At the conference, there were strong presentations
on the drug smuggling corridors along the borders each of the states, the importance of good
intelligence information, the critical role coordination plays among law enforcement agencies
at all levels of government, and the importance of even greater coordination with, and support
from, the Mexican authorities. In addition, there was great emphasis on money laundering
strategies and their great potential for attacking the operations of narco-traffickers.
Seventh, we are working with the Departments of State and Justice to respond to
President Clinton's call for international dialogue on money laundering problems through a
money laundering initiative. As directed by President Clinton last October, we have declared
a national emergency against the Cali Cartel, and have taken steps under the International
Economic Emergency Powers Act to block assets of companies owned by this group, and to
prohibit all economic transactions by U.S. persons with these parties. We have taken those
steps against 282 companies and persons either owned or controlled by or acting for or on
behalf of the Cali Cartel, and are continuing to review information to add more names to this
list.
3
Eighth, a group headed by the Comptroller of the Currency reviews issues arising
with the development of new forms of currency, including how the enhanced use of electronic
money relates to money laundering. FinCEN and the other law enforcement bureaus are
members of this group, and they are reviewing new means for tracking and reporting such
transfers so we can continue following all kinds of illicit proceeds.
As you can see, Mr. Chairman, Treasury is deeply engaged in the fight against
illegal drugs. We are standing against organized crime and international drug traffickers who
are intent on using every technological or market development to sell illegal narcotics and
launder illicit funds.
These are clearly crimes that involve the cutting edge of technology and which
search for weak links across national borders. They place at risk not only the soundness of
the financial system but the kind of society in which our children will grow up. Because
Treasury presides at the junction where trade, finance and enforcement meet, we are focusing
on this issue with great intensity -- using the unique assets Treasury has in the fmance and
enforcement areas, and collaborating effectively with our Cabinet and White House
colleagues, wherever and whenever we can.
The problem of drugs is not a partisan issue. We believe that hearings like this
advance our own understanding of the issue and our effectiveness in addressing it. We hope
to hear from you, formally and informally, about how we can wage this fight more
effectively. With the leadership of the President and the Congress, we will continue to work
aggressively against illegal narcotics, the profits they generate, and the organizations which
ply this very dangerous trade.
I thank you for providing the opportunity to discuss these problems today and I
look forward to working with you in the future.
4
DEPARTMENT
OF
TREASURY
THE
TREASURY
NEWS
omCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
STATEMENT OF LAWRENCE SUMMERS
DEPUTY SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE SUBCOMMITTEE ON INTERNATIONAL TRADE,
CAUCUS ON INTERNATIONAL NARCOTICS CONTROL
U.S. SENATE
July 23, 1996
Mr. Chainnan and members of the Subcommittee, thank you for inviting me to meet with
you this morning. I welcome this opportunity to address the vitally important issue of Treasury's
efforts to combat the scourge of drug trafficking and the laundering of the profits derived from
drug trafficking as they relate to trade and finance.
Treasury's Efforts to Combat International Drug Trafficking and Money Laundering
Increasing international trade is a fact of the global economy. As the Secretary has said,
while the expansion of trade provides many benefits to the American people, it also provides an
expansion of opportunities for those who will misuse the trade and financial systems that regulate
and facilitate the flow of goods and services between countries. The Treasury Department and its
bureaus have been entrusted with ensuring the soundness of our financial system and protecting
our borders. We are vigilant in our efforts to combat crime which threatens our nation's financial
security.
At Treasury, fighting international drug trafficking and money laundering is a top priority
and we utilize all of our resources and the expertise of all of the Treasury bureaus, to combat
these problems. For example:
•
The Customs Service actively pursues border interdiction, and anti-smuggling and money
laundering investigations.
!ill 1183
•
Agents of the Criminal Investigation Division of the Internal Rev· 'nue Service conduct
intense financial investigations to follow the trail of dirty money to its source.
•
The Secret Service utilizes its financial expertise in countering white collar crimes pursued
by the traffickers as ends in themselves and as means to hide other illicit assets.
•
ATF attacks drug distribution networks by disrupting their trafficking in illegal firearms
and uncovers money laundering activities during the course of its investigations into illegal
alcohol, tobacco, firearms and explosives schemes.
•
The Financial Crimes Enforcement Network (FinCEN) provides a wealth of financial
information and analytical skills to the investigating bureaus and local law enforcement.
We are applying a multifaceted approach to combat drug trafficking and money
laundering. We are working smarter and focusing our energies where they are most needed. Our
efforts include:
•
strengthening the physical barriers at our borders,
•
increasing our interdiction efforts at the borders,
•
applying more sophisticated techniques to reviewing the individuals and vehicles crossing
our borders,
•
upgrading our technology,
•
assigning an increased number of agents to problem areas along our borders,
•
increasing our efforts at interdiction efforts at sea,
•
pursing intensive investigations in coordination with other law enforcement agencies,
•
actively participating in anti-drug trafficking and anti-money laundering task forces,
•
promoting international cooperation and uniformity of anti-money laundering laws,
2
•
posting of Treasury agents to strategic posts outside the US, and
•
conducting training for law enforcement agents in other countries.
Drug Trafficking
In our anti-drug smuggling activities, much of our effort is directed at interdicting
narcotics at our border. As you know, the Southwest border is a principal entry point for
narcotics. The Customs Service has intensified its efforts to combat drug trafficking at the
Southwest border. A primary example of these efforts is "Operation Hard Line", a Customs
Service program to harden our border defense against drug smuggling by focusing on smuggling
in vehicles and commercial cargo, investigations, and intelligence support at ports of entry.
Operation Hard Line recently concluded its first year of operation on the Southwest border.
As a part of Operation Hard Line, Customs officials at ports of entry are increasing the
frequency of inspections of the lines of trucks and cars waiting to cross the border, increasing the
use of drug-sniffing canines, questioning more drivers, and increasing the use of instruments to
detect structural irregularities, such as empty spaces and false floors, which can provide a hiding
place for narcotics or cash, without having to climb into or dismantle the vehicle. Customs has
also strengthened Southwest border enforcement efforts by transferring 117 Special Agents to the
Southwest border. These additional agents will allow Customs and other anti-narcotics agencies
to enhance tracking of intelligence and leads that should reduce drug smuggling and trafficking
even further. Moreover, Customs has built physical enhancements, such as movable and
stationary barriers and tire-deflating devices, to deter "port runners" - those drug couriers who
would run over our law enforcement personnel and innocent civilians to evade inspections which
would reveal their contraband.
3
Thus far, $55 million have been allocated to Operation Hard Line, allowing for more
inspections, as well as greater collection and use of intelligence to build complex anti-smuggling
cases. This allocation has financed enhanced technology, such as truck x-ray systems, as well as
the construction of the stronger physical barriers.
The results of Operation Hard Line thus far are encouraging, and seizures along the
Southwest border in Fiscal Year 1995 increased dramatically from the previous fiscal year.
Overall, Customs reports that the total amount of drugs seized on the Southwest border in Fiscal
Year 1995, in pounds, is up 24 %. Operation Hard Line has also reduced the incidents of violent
port running by over 54 percent.
Seizures
Customs seizes more drugs than all other federal agencies combined. In fiscal year 1995
Customs seized over 85% of the heroin, 61 % of the cocaine, and 51 % of the marijuana seized by
all Federal agencies.
Every day, all along the border, shipments of drugs are cut off, thanks to the dedicated
men and women of the Customs service, the increased cooperation with other federal agencies,
and the additional support in terms of personnel, equipment and technology through Operation
Hard Line. For example:
•
Hidalgo, Texas, November 1995 - a tractor with a refrigerated trailer filled with broccoli
yielded 749 pounds of cocaine.
•
Nogales, Arizona, February 1996 - inspectors found 1,257 pounds of cocaine hidden in a
transformer.
•
Tecate, California, March 1996 - agents seized 4,200 pounds of marijuana in a phony UPS
4
truck.
•
Brownsville, Texas, April 1996 - follow up investigations on a previous big cocaine
seizure led to another 3,080 pounds in a tractor trailer.
•
Laredo, Texas, April 1996 - another 2,301 pounds of cocaine was found in a refrigerated
trailer by a drug sniffing canine and his handler.
•
Grande City, Texas, May 1996 - a refrigerated trailer yielded 2,039 pounds of cocaine.
•
San Ysidro, California, June 1996 - a Volvo was stopped with 44 pounds of heroin.
•
In Operation Cornerstone, one of the most comprehensive investigations into the
operations of the Cali Cartel, Customs and DEA uncovered six major smuggling routes
used by the Cartel to move hundreds of thousands of pounds of cocaine inside shipments
oflumber, concrete fence posts, frozen vegetables, and coffee into the US since the early
1980s. Operation Cornerstone has provided a unique understanding of how the Cali
Cartel conceals its drugs, smuggles them into the US, distributes them within the US,
collects and launders drug monies and provides a sophisticated system of facilitation and
support to the members of their organization in the US.
We are building on these successes. The President's Fiscal year 1997 budget includes an
additional $65 million for Operation Hard Line. These funds will pay for more and improved xray equipment for examination of cargo, more and better targeted examination of passenger
vehicles, automated license plate readers, and more agents for the collection of intelligence and
the building of cases against trafficking organizations. By the end of 1997, 657 additional
Customs agents and inspectors will be on the job to better stop the smuggling of narcotics across
the Southwest border. Customs will also receive 170 more support personnel from the National
5
Guard to assist in narcotics detection and anti-smuggling.
Line Release Program and Land Border Carrier Initiative
Commissioner Weise took another important step last October to strengthen the border
against smuggling by restricting participation in the Line Release Program. Line Release is a
program begun in 1987 to pre-screen shipments of companies with a clean record, but still subject
them to random full-scale inspections. Since last October, approval of new applicants for
participation in the Line Release Program has been restricted to importers who ship their cargo
using carriers who have agreed to become part of the Land Border Carrier Initiative. The Land
Border Carrier Initiative strengthened the Line Release Program by requiring participants to
provide information about the trucking companies and drivers they use, and to use only trucking
companies and drivers approved by Customs. The program is designed to encourage the carriers
to police their own facilities and conveyances thereby making them less vulnerable to narcotics
smuggling. The approval process essentially requires trucking firms to give background
information on themselves and their employers, to create, under the guidance of Customs, antismuggling safeguards at their warehouses and lots, and to open these facilities to unannounced
inspections by Customs officials. As of May, 1996, 525 carriers had signed up to participate in
the Land Border Carrier Initiative Program and to date 280 carriers have been certified by
Customs. As of July 1, 1996, all Line Release shipments entering at the Southwest border can
only be carried on Customs approved trucks.
The Line Release Program and Land Border Carrier Initiative are important examples of
how we are working more effectively in dealing with the increased trade volume to counter
smugglers and money launderers. By reviewing and evaluating shipments before the trucks even
6
reach the border, Customs is able to strategically target vehicles for inspection. This focus
developed by Commissioner Weise is an important example of how more resources can be
targeted at higher risk shipments as a result of strategic enforcement.
Operation Gateway
Treasury is also responding to the shift of certain smuggling efforts to other parts of the
country. In part because of enhanced enforcement at other locations, Puerto Rico and the Virgin
Islands have become major entry points for narcotics being smuggled into the US and for money
laundering into major Latin American banking networks. In response, a long term initiative called "Operation Gateway" - was initiated in March 1996. Operation Gateway encompasses all
areas of interdiction, including expanded marine and air enforcement, heightened cargo
examination and expanded small vessel searches. The program also calls for enhanced use of
technology, additional inspection and investigative support, and a joint collaborative effort by
Customs, the Coast Guard, the Defense Department, and the Department of Justice. Operation
Gateway involves the deployment of high speed vessels, the use of 2 additional helicopters, the
use of a portable x-ray system to examine cargo and baggage, and the assignment of additional
personnel to the island. Since March 1996, Customs has already seized 68.3 pounds of heroin
and 2,727 pounds of cocaine in Puerto Rico. This represents and increase of 68.3% and 307%
percent, respectively, over the same period in 1995.
Cooperation by Carriers
Customs is also promoting efforts by air, sea and land carriers to deter smugglers of illegal
drugs. Currently 3,500 carriers have signed agreements with Customs to share the burden of
stopping the flow of illegal drugs into this country by inspecting their own vehicles and notifying
7
Customs of any illegal cargo. During 1995 alone there were 93 documented instances in which
carriers alerted Customs to narcotics aboard their conveyances upon arrival in the US, or in which
carriers intercepted the narcotics prior to the carrier leaving for the US. Combined, these carrier
actions accounted for the seizure of25 pounds of heroin, 8,096 pounds of cocaine and 46,624
pounds of marijuana. These cooperating carriers saved themselves millions of dollars in possible
penalty actions by passing along information that they received or observations that they made.
Improved Targeting
The interdiction of drugs concealed in commercial shipments can be very labor intensive
and requires skill in sorting out the appropriate targets from the millions of shipments. Customs
has implemented and is preparing to implement a variety of programs which enhance targeting and
interdiction at cargo facilities while maintaining/enhancing processing times oflegitimate cargo.
In support of our automated systems, Customs employees are formed into multi-disciplinary
contraband targeting and intelligence units that constantly review commercial documentation and
research information in various databases. At the largest ports these cross-functional teams are
made up of agents, intelligence analysts and inspectors to identify targets and provide employees
with up to the minute information on smuggling threats. Later this year, Customs will place a
prototype advanced Automated Targeting System (ATS) at select high risk ports of entry. This
system will separate high risk shipments from legitimate ones.
Money Laundering
In addition to our efforts to stop smuggling at the border, Treasury's law enforcement
bureaus also attack traffickers and their organizations by following their illicit profits. Treasury
has enacted an aggressive and comprehensive anti-money laundering program which hits criminals
8
in the pocketbook. This prevents them from laundering drug profits and is an effective way to
undermine the activities of the trafficking organizations themselves.
In addition to taking away traffickers' profits, money laundering investigations are also
important because following the money trail can lead to prosecution of the upper levels of the
trafficking organizations. Drug lords can keep themselves far removed from street-level deals, but
they cannot divorce themselves from their profits. Denying traffickers access to their profits robs
them of the benefit of their trafficking.
To evaluate the success of anti-money laundering programs, one must first realize that
money laundering is a relatively new concept. It has only been criminalized in the United States
since 1986 when Congress enacted the money laundering law, 18 U.S.c. sections 1956 and 1957.
As a result of U.S. attention to the problem as well as global focus from the Financial
Action Task Force and other multilateral initiatives, more than 60 countries have criminalized
money laundering in the last 10 years.
The efforts of the Financial Action Task Force has resulted in the establishment of
Financial Intelligence Units (FIUs) in various nations around the world to protect the banking
community, to detect criminal abuse of its financial system and to ensure adherence to its laws
against financial crime. The Financial Crimes Enforcement Network is one model of an FIU and
others exist in such countries as Great Britain, France, Belgium, the Netherlands, Argentina and
Australia. Where five years ago, there were fewer than five FIUs in the world, today there are
more than 20 countries with financial intelligence units focused on money laundering issues. As
world policy efforts intensify in addressing international crime, Treasury, State and Justice are
assisting with the establishment of FlUs in countries such as Poland, Panama and Ecuador.
9
Many criminal organizations are desperate to move their cash out of the United States
because its just too risky to launder it here. Presently, the safest way for criminals to repatriate
criminal proceeds to Colombia is to sell their U.S. dollars to Colombian businesses. This
procedure of hiding their money is complicated, involves many steps and is therefore expensive.
According to reports, the cost oflaundering has risen from six percent in the mid 80's to more
than 20 percent today. We are having an effect on the day-to-day laundering operations.
Treasury is attacking money laundering on all fronts - through enforcement, intelligence,
and investigations.
Enforcement
Treasury's commitment to anti-money laundering enforcement is evidenced by the number
of agents assigned to investigate these cases and the number of cases successfully prosecuted.
Our efforts have met with great success. Treasury has cortunitted the full time equivalent of 2,821
personnel, including 1,100 agents, to investigating money laundering and, in the last six years, IRS
and Customs have successfully prosecuted more than 12,000 money laundering and currency
crimes. Since 1993, we have seized over $500,000,000 and have obtained the largest penalty ever
assessed against a bank for money laundering - $30 million. On average, every Customs agent
working money laundering investigations seized $600,000 per agent per year. In Fiscal year 1995
alone, the Treasury bureaus seized and forfeited over $200,000,000.
Thus, Treasury is using its resources in an efficient and coordinated way and our
systematic approach to financial crime enforcement is paying off. Let me give you a few
examples of our cases:
Operation EI Dorado is a task force of approximately 150 law enforcement officers in the
10
New YorklNew Jersey metropolitan area from Customs, IRS, Secret Service, I-llIS, New
York and New Jersey police, and federal and state prosecutors. The task force
investigates illicit proceeds that have entered the banking system disguised as normal
business earnings and the illicit proceeds that cannot be traced to their origin because
numerous financial transactions were conducted to disguise the paper trail. Investigations
include the narcotics smuggling cartels of South America, traditional organized crime,
African and European organized criminal organizations and terrorist groups. To date,
over $70 million in cash and assets have been seized, approximately 1000 kilograms of
cocaine have been seized and over 100 arrests have been made for money laundering.
•
Operation No Mas is an on-going Customs investigation which has resulted in the
dismantling of a criminal organization responsible for the importation of approximately
30,000 kilograms of cocaine and 6 million pounds of marijuana into the US. Thus far, this
investigation has resulted in the seizure of real estate in Florida, $3.5 million dollars, and
the freezing of $21 a million dollars in Swiss bank accounts. Through this investigation,
Customs exposed the infrastructure of unique drug smuggling organizations and their
ability to hide huge quantities of money in bank accounts throughout the world.
•
As a part of Operation Dinero, an undercover international money laundering
investigation, IRS and DEA established and operated an undercover bank to gain
knowledge of the illegal activities of the Cali Cartel. The operation resulted in 74 arrests
in the US, 43 arrests in Nova Scotia, Spain and Italy, seizures of 25 kilos of cocaine, 41
tons of hashish, 2,777 pounds of marijuana, over $38,000,000 in currency and over
$65,000,000 in property.
11
Intelligence
As part of our effort to obtain better intelligence leading to additional criminal
prosecutions we have recognized the need to improve the international tracking of the flow of
laundered money. To enhance this goal, Treasury has authorized FinCEN to use nearly $700,000
in asset forfeiture funds to upgrade and expand significantly our communications with, technical
assistance to, and training of the other financial intelligence units (FIUs) - the counterparts of
FinCEN - around the world. This network of anti-money laundering intelligence organizations
has been growing rapidly in the last year. There are now 20 FIUs around the world, with almost
an equal number of countries poised to create these units in the near future. The success of this
initiative will continue to increase the vulnerability of money launderers and decrease the havens
where they can hide and enjoy their ill-gotten gains.
Continuing Challenges
Despite these successes, we still face many challenges in the years ahead. For example,
the Bank Secrecy Act, which was enacted to make it more difficult for criminals to launder their
illegal profits, created reporting requirements for financial institutions and individuals. Financial
Institutions are required to report cash transactions over $10,000 and individuals are required to
report international transportation of currency and monetary instruments over $10,000.
Nevertheless, electronic money - such as "smart cards', electronic banking, and computer
transactions - does not expressly fall within the definition of "monetary instrument". This creates
a loophole to avoid reporting requirements. Cash can be converted to a stored value card and
does not have to be reported. This allows for wholesale avoidance of reporting requirements and
the movement of digital currency across borders by money launderers. Likewise, money
12
transferred internationally through the Internet is not subject to reporting requirements. Although
wire transfers are not reportable, banks are required to maintain records of transfers. Audit trails
exist. Transfers through the Internet on the other hand can be completed without the use or
intervention of banks. As a result, there is no audit trail.
An added challenge lies in the fact that many countries lack the capacity to investigate
criminal cases with global implications, especially those requiring substantial technical proficiency.
The rise in use of computers and alternative payment technologies present new opportunities for
those intent on perpetrating electronic fraud. As commerce, banking and all other facets of
business and exchange are digitized, our ability to deal successfully in shutting down these
schemes will become crucial.
International Cooperation is Vital to our Success
The ease with which money can be moved internationally makes the laundering of money
easier for traffickers and smugglers. As a result, it is more necessary than ever to have all nations
actively involved in anti-money laundering efforts. The cash available, for example, to the cartels
or the "mob" organizations gives them an extraordinary opportunity to dominate fledgling sectors
of the legitimate economy as few legitimate firms or business people can. Financial fraud and
money laundering schemes have a major impact upon global financial systems. It is estimated thaI
transnational organized crime groups are responsible for billions in financial losses.
Therefore, the efforts of the international community must be focused on these potential abuses.
Treasury is actively engaged in the international arena. Our activities have included:
•
The Summit of the Americas communique (Buenos Aires) involved 34 governments of the
Western Hemisphere endorsing a coordinated multilateral plan committing hemisphere
13
governments to combat money laundering. The nations agreed on the need to criminalize
the laundering of the proceeds of drug trafficking and other serious crimes, authorize the
seizure and forfeiture of the proceeds of these crimes, promote regulatory efforts such as
requiring reporting of suspicious financial transactions; and create financial information
units, similar to Treasury's FinCEN.
•
As a follow-up to the Summit, in May 1996, the Secretary hosted a meeting of the finance
ministers of the western hemisphere at which, for the first time, money laundering was
included on the agenda. The Secretary further stressed the initiatives of the Summit.
•
Just weeks ago, the Financial Action Task Force completed an update of its 40
recommendations which had been issued in 1990 to ensure that the countermeasures
address today's money laundering threat. These new recommendations will serve as a
benchmark for the next century.
•
In March 1996, the Asia Pacific Economic Counsel (APEC) met and, for the first time,
discussed the importance anti-money laundering measures.
•
Interpol recently adopted resolutions aimed at thwarting international financial crimes,
including the first major anti-money laundering declaration in its history. This was done
with considerable US backing and leadership by Treasury's Office of Enforcement.
•
As previously mentioned, a global network of anti-money laundering Financial Intelligence
Units - the counterparts of Treasury's FinCEN - is being organized to facilitate the
exchanges of money laundering information and other financial data.
•
A coordinated effort employing modem technology and program management; the use of
multi-agency task forces to investigate these formidable groups; sharing investigative
14
infonnation and working on specific cases; and planning and organizing international
training seminars that lead to notable international law enforcement partnerships, is needed
and is being encouraged through a number of venues, including the G-7 nations.
•
A US government team of experts from federal regulatory, law enforcement, and foreign
affairs agencies is working with their counterparts in Russia to develop new laws,
regulations and investigative capabilities that will strengthen the framework for
international cooperation to prevent money laundering and financial fraud.
•
Treasury bureaus are actively involved in international training activities. Customs has
provided overseas anti-narcotics training, emphasizing containerized cargo, to Mexican
customs agents in Mexico City and four other large cities along the border. Customs also
provided anti-money laundering training in 16 countries in Europe, Asia, and Central and
South America. IRS has provided anti-money laundering and financial crimes training in
Russia, Belarus, the Ukraine, Argentina and at the International Law Enforcement
Academy (ILEA) in Budapest, Hungary. In the next two months they will be teaching
classes in Eastern Europe, Brazil and Budapest.
We recognize that we have to make concerted efforts to obtain cooperation with some
countries that are engaging in money laundering practices. Last October, President Clinton
directed that we work directly with countries to ensure cooperation against money laundering.
The Treasury Department is working with the State and Justice Departments to strengthen the
international dialogue on this topic.
As directed by President Clinton last October, we have declared a national emergency
against the Cali cartel, and have taken steps under the International Economic Emergency powers
15
Act to block assets of companies owned by this group, and to prohibit all economic transactions
by US persons with these parties. We have taken those steps against 282 companies and persons
either owned, controlled by, or acting for or on behalf of the Cali Cartel, and are continuing to
review information to add more names to this list.
The Southwest border has been an area of concern, and so our dealings with Mexico
deserve particular note. I strongly believe that we are seeing real change in Mexico due greatly to
the leadership of President Zedillo in coming to grips with the law enforcement issues, but also
due to the strengthening of US-Mexico relations that occurred in the wake ofNAFTA and the US
financial assistance package last year. Let me deal with each of those issues in tum.
As to the enforcement issues, we are heartened by President Zedillo' s, Attorney General
Lozano's, and Finance Minister Ortiz' commitment to anti-narcotics matters. Over the last year,
this commitment has manifested itself in a new law criminalizing money laundering, the expulsion
of a leading narco-trafficker to the United States, and the record number of eradicated acres of
certain narcotics crops.
Our dialogue with Mexico reflects our mutual understanding that, notwithstanding
improved efforts, some of the problems associated with narcotics crossing from Mexico into the
United States persist. While we are pleased by some of the recent measures, we view them as a
starting point for even more vigorous actions -- within Mexico and in coordination with the U.S. - to stop the flow of drugs across our Southwest border.
However, just as our own anti-narcotics fight depends in great part on a healthy
underlying economy and society, Mexico's counter-drug efforts in the future also depend on its
remaining financially stable and economically strong. Instability and poverty would render
16
Mexico less able to enforce its laws and more susceptible to the corrupting influence of drug
traffickers. Had we not provided assistance and had Mexico defaulted on its obligations in late
1994 and early 1995, we would be facing an even more serious drug problem today.
Conclusion
We at Treasury will continue to direct our efforts both nationally, through our regulatory
and investigative efforts, and internationally, through our cooperative relationships with our
trading partners and through forced bilateral discussions, to work toward eliminating drug
trafficking and money laundering.
Thank you.
17
D EPA R T 1\1 E N T
0 F
THE
T R' E A S ·U R Y
~~I'/,
-<-'/c:a~/
~~.~
TREASURY ~...•: i
~\.
...
I~·
~/..,.
NEWS
~178~q~. . . . . . . . . . . . . . . . . ..
......................
OFFICE Of PUBUC AFFAIRS • 1500 PENNSYLVANlAAVENl'E, N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960
FOR IMMEDIATE RELEASE
July 23, 1996
Contact:
Jon Murchinson
(202) 622-2960
TREASURY HOSTS INFLATION-PROTECTION SECURITY SYMPOSIUM
Deputy Treasury Secretary Lawrence H. Summers will chair a public symposium on
possible structures for Treasury's upcoming intlation-protection security.
The symposIum will be at J p.m. Wednesday. July :24. at the Treasury Department.
The rOOIi1 number for the sympoSIum will be announced. Invited partICIpants w; II include
members of the financial and academiC communities that replied to Treasury's May :20
request for comment.
Secretary Robert E. RubIn announced on f\1ay I h that Treasury Intends to issue
securities that prOVIde protectIon agaInst Intlatlon as a multI-year experIment. Intlation·
protection secunties are deSIgned to strengthen national savIngs by offerIng Americans an
investment that guarantees a return in excess of intlatJon. It is antiCIpated that all taxpayers
will benefit as these securities are expected to reduce Treasury's finanCing costs.
Due to space constraints this meeting is not open to cameras. Media without
Treasury or White House credentlals WIshing to attend -;hould contact the Office of Public
Affairs at (202) 622-2960. with the follOWing Informaunn: name. SOCIal Seeunty number and
date of birth. by ) p.m. today. ThIS Information can be faxed to (~02) 622-1999.
RR-1184
For press releases. speeches. public schedules and official hiographies. call our 2..J-hour fax line at (202) 622·2040
Department of the Treasury; Notice of Meeting
Qff:ce cf the Ass1stant Secretary for Financial
AGENCY:
Markets, Treasury.
ACTION:
Notice of Meeting.
TIME AND DATE:
PLACE:
3 : 00 p. m.,
Ju 1 y 24,
1996.
Room To Be Announced, Main Treasury Building,
Pennsylvania Avenue,
STATUS:
N.W., Washington,
D.C.
20220.
For
The meeting will be open to the public.
security reasons,
1500
1n order to be admitted to the Treasury
Building, you must call the contact person below.
The Department
MATTERS TO BE CONSIDERED:
hosti~g
a
S;~pOS1U~
"
d 1saavantages or
the Treasury 1S
dISCUSS the advantaaes and
t~
'-..:nder
ce~ta:~
CONTACT PERSON FOR
o~
INFORMATION:
~ORE
=:~slderation
Quest::~s
notice should be addressed to Al1son Shelton,
for
about this
F1nancial
Economist, Office of Federal Finance Policy Analysis, Office
of the Assistant Secretary for Financial Markets,
?erso~s
~:S~l~a
requested t: c:nta:t
::~ese
.....
~
SUPPLE~ENTARY
t~
'
~
--
......... -::::
atte~d
Ha~l~t:n
~
r"
'-'
~.
,.,
'-' u
......
!
the
at
are
2G=-~==-2624,
pr10r
19~6,
the Depart!':",ent
INFO~~~TION:
:reasury;
+- •• ..,._ r~
....... 0::::::
~eetlng
at 202-
~.:~_
anncunced its
States Government.
(ANPR)
An Advance Notice of Proposed Rulemaking
seeking comments on various structures was published
on May 20,
1996
(61 FR 25164)
and a series of meetings was
subsequently held by the Treasury to obtain public input on
the new inflation-protection security.
As a result of the comments received in response to the
ANPR and at the public meetings,
the Department is holding a
symposium to discuss and obtain comments and information on
the comparison between two different structures for an
inflation-protection security -- a Canadian-style and a
current pay structure.
The
~~easury
part ln the
.
.
.
,J.1SCUSS1C:-..
Written
below) .
has :nvited certain
sy~posiuD.
Xembers
co~ments
c~
::--.ese part:'::':=3.nts
:ne public
3~~
to take
co~men~~~s
''';:'~:'
~~v~:ej
from the public are 31so
cor..ment on
:0
~elcoDe
observe.
(see
The Treasury intends to seeK further comment on the
structure for Treasury inflation-protection securities and
other issues prlor to issuing final rules.
Possible Structures
The
Briefly,
Ca~aji3n-style
t~at
~3S
descr:ted in the ANPR.
the principal of a Canadian-style inflation-
protectic~
such
structure
security is
3j~usted
for :.nflatlon
::s real value remains constant.
(~ith
a lag)
-:-1".e semiannual
2)
Which lnvestor groups would find investments ln the
different structures appealing?
J)
How would the yield on the current pay structure
compare with the yields on other Treasury securities lbills,
notes,
4)
or bonds)?
If the current pay structure were strippable, would
there be sUbstantial market interest in the stripped
components?
5)
Would the preferred maturity sectors for the
current pay structure be different from those for the
Canadian-style
6)
structu~e?
What would te
t~e
test
~ay
t~
3~:t~:~
current pay
securit~es')
acceptej ::. ~ e 1 d?
rather than yield?
7)
Which
structu~e
would provide the
T~easury
with the
largest savings in financing costs?
Written
Cc~~er.ts
questions.
Govern~er.t
?c.:blic
W~~tten
c=~~ents
should be sent
securities Fegulatlons
999
Staf~,
t~:
the
6ureau of the
',.; a S :--1 1 n g ton,
D.C.
Service,
ForA Reading Room,
located at the Internal Revenue
Servlce building at Pennsylvania Avenue and 11th Streets,
N.W.,
Room 1621, until the Treasury Department Library
reopens.
Date:
-------
{-~((Jb(SC~~J
Darcy Bradbury
Assistant Secretary,
Financial Markets
[Blliing Code: 4810-39:
DEPARTMENT
OF
THE
TREASURY
,
~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
..............................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
July 23, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,000 million, to be issued August 1,
1996. This offering will result in a paydown for the Treasury of
about $1,575 million, as the maturing weekly bills are outstanding
in the amount of $27,580 million.
Federal Reserve Banks hold $6,933 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $5,397 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional amounts
may be issued for such accounts if the aggregate amount of new
bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-1l85
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED AUGUST 1, 1996
July 23, 1996
Offering Amount .
.
.
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstandin~
Minimum bid amount
Multiples . . . . . .
$13,000 million
$13,000 million
91-day bill
912794 3M 4
July 29, 1996
August 1, 1996
October 31, 1996
May 2, 1996
$13,638 million
$10,000
$ 1,000
182-day bill
912794 3X 0
July 29, 1996
August 1, 1996
January 30, 1997
August 1, 1996
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Competitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
Maximum Award . .
35% of public offering
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
UBLIC DEBT NEWS
Department a/the Treasury •
Bureau a/the PublIc Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 23, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $18,786 million of 2-year notes, Series AH-1998,
to be issued July 31, 1996 and to mature July 31, 1998
were accepted today (CUSIP: 912827Y63).
The interest rate on the notes will be 6 1/4%.
All
competitive tenders at yields lower than 6.288% were accepted in
full.
Tenders at 6.288% were allotted 68%.
All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.288%, with an equivalent price of 99.930.
The median yield
was 6.270%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield.
The low yield was 6.239%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TErmERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$40,760,811
Accepted
$18,785,774
The $18,786 million of accepted tenders includes $1,537
million of noncompetitive tenders and $17,249 million of
competitive tenders from the public.
In addition, $1,900 million of
high yield to Federal Reserve Banks
international monetary authorities.
of tenders was also accepted at the
Reserve Bar-ks for their own account
securities.
RR-1186
tenders was awarded at the
as agents for foreign and
An additional $817 million
high yield from Federal
in exchange for maturing
DEPARTMENT
OF
THE
TREASURY
TREASURY!.) NEW S
1I..................................1I~~178~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
OFFICE OF PUBUCAFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON. D.C.. 20220. (202) 622-2960
Statement of the Honorable Lawrence H. Summers
Deputy Secretary of the Treasury
Before the Subcommittee on Capital Markets. Securities.
and Government Sponsored Enterprises
Committee on Banl{ing and Financial Services
United States House of Representatives
July 24. 1996
RR-1187
For press releases. speeches, public schedules alld ojjicial biographies. call our 24-hour fax line at (202) 622-2040
GOVERNMENT SPONSORSHIP OF THE
FEDERAL NA TIONAL MORTGAGE ASSOCIATION AND THE
FEDERAL HOME LOAN MORTGAGE CORPORATION
Statement of the Honorable Lawrence H. Summers
Deputy Secretary of the Treasury
Before the Subcommittee on Capital Markets, Securities,
and Government Sponsored Enterprises
Committee on Banking and Financial Services
United States House of Representatives
July 24, 1996
SUMMARY
As a result of over three generations of U.S. government policy supporting
lOme ownership, the United States now has the strongest housing finance market in the
lorId. Today, homeownership rates in the United States are at their highest levels in
fteen years. Fannie Mae and Freddie Mac have played critical roles in building a liquid
econdary market for home mortgages, thereby helping make homeownership possible for
ullions of Americans. Through their affordable housing activities, they have also
ontributed to expanding home buying opportunities for low- and moderate-income
unilies.
Congress, while recognizing the important benefits provided by the GSEs'
Gtivities, has asked whether it is now both feasible and advisable to change their status.
The securitization techniques and other secondary mortgage activities originally
oneered by Ginnie Mae, Fannie Mae, and Freddie Mac are now well-established. They
'e practiced by many fully private fmns and are applied not only to non-conforming
iortgages but to many other types of obligations. For these reasons, there seems little
Jubt that the secondary market for conforming, conventional mortgages could operate
liciently and effectively even if Fannie Mae's and Freddie Mac's government
)onsorship were altered.
The more critical issue is whether the benefits of a change would be sufficient to
Itweigh the disruption and risks to the home mortgage market that it might entaiL
Government sponsorship provides benefits to Fannie Mae and Freddie Mac that
;e quite tangible, even though the federal budget does not report them. Any
uantification is, of course, uncertain. Taking into account the reduced bOlTowing and
perating costs associated with GSE status, we estimate these benefits to be on the order
f $6 billion in 1995.
These government benefits should, in tum, be compared to the benefits that Fannie
1ae and Freddie Mac provide, in reduced mortgage costs and in access to mortgages, that
'lOuld not otherwise be available. These benefits are even more difficult to estimate with
onfidence. One plausible estimate would be that Fannie Mae and Freddie Mac reduce
lverage mortgage costs by perhaps 30 basis points in their part of the market, for a total
avings to consumers of some $4 billion in 1995; however, there are many ways in which
uch an estimate could be refined.
..
11
but d(
technremo'
lSS-through estimates do suggest the effect the GSEs have on mortgage rates,
;tinguish between a pure pass-through of GSE benefits and the two firms'
managerial efficiency. Although ending government sponsorship would
lrmer, it may have no effect on the latter.
1995
consls
ning the estimates of a $4 billion pass-through with the $6 billion of the
ts of federal sponsorship, implies that the GSEs' shareholders retained in
income approximately $2 billion of GSE benefits. This estimate is generally
ill comparable estimates reported by CBO and GAO.
added
endin
afforo
activit
object
iSS-thrOUgh estimates do not include the extent to which the GSEs provide
hrough their affordable housing activities. It is uncertain to what extent
SEs' government sponsorship would affect those activities. With HUD's
using goals still relatively new, it is premature to judge how much of those
driven by those requirements, and how much by the basic business
Fannie Mae and Freddie Mac.
potent
nnpm
for af
more:
poten
; or modifying government sponsorship would entail risk, but would have
~fits. Its potential effect on mortgage interest rates would represent an
\., as would any potential negative consequence for the availability of credit
~ housing. Potential benefits could include increased market competition,
t credit allocation, reduced U.S. government borrowing costs, and reduced
to taxpayers.
GSE~
belie'spons
the IS
furthf
gh the analysis undertaken in this report and others is substantial, we
onclusions regarding the desirability of ending or modifying government
If Fannie Mae and Freddie Mac are premature. The GSEs' experience under
is relatively short, and many of the most important issues could benefit from
TABLE OF CONTENTS
The Secondary Mortgage Activities of Fannie Mae and Freddie Mac ........... 3
The Benefits of Federal Sponsorship ..................................... 3
The Contributions of Fannie Mae and Freddie Mac .........................
Providing Liquidity for Mortgage Lenders ............................
Savings on Mortgage Costs . .......................................
Supporting Affordable Housing ....................................
5
5
Implications of the Status Quo .........................................
Effect on Treasury Borrowing Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Effect on Other Credit Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Potential for Increased Reliance on the GSEs ........................
Potential Risk to Taxpayers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
10
10
11
11
11
6
7
Further Analysis Required ............................... . . . . . . . . . . . .. 12
Conclusions ........................................................ 13
GOVERNMENT SPONSORSHIP OF THE
FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE
FEDERAL HOME LOAN MORTGAGE CORPORATION
Statement of the Honorable Lawrence H. Summers
Deputy Secretary of the Treasury
Before the
Subcommittee on Capital Markets, Securities,
and Government Sponsored Enterprises
Committee on Banking and Financial Services
United States House of Representatives
July 24, 1996
Mr. Chainnan, Representative Kanjorski, Members of the Subcommittee. I
appreciate this opportunity to present the Treaswy's report on the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac).
Created by Congress to provide stability and liquidity to the secondary mortgage
market, Fannie Mae and Freddie Mac are privately owned companies known as
government-sponsored enterprises (GSEs). Like other GSES1, Fannie Mae and Freddie
Mac have corporate charters granted by the federal government. To promote a public
purpose, those charters limit Fannie Mae and Freddie Mac to a particular line of business
-- operating in the secondary mortgage market -- and provide various government benefits
that lower their operating costs and enable them to borrow at rates much lower than other
fmancial institutions.
As a result of over three generations of U.S. government policy supporting
homeownership, the United States now has the strongest housing finance market in the
world. To m~e housing available to more Americans, Congress made an explicit
judgment to direct credit toward home mortgages. One way it sought to do so was by
creating intermediaries such as Fannie Mae and Freddie Mac that would buy and resell
mortgages. Fannie Mae and Freddie Mac have played critical roles in building a liquid
The other GSEs include the Federal Home Loan Bank System, the Farm Credit System, the Student Loan
Marketing Association, and the College Construction Loan Corporation.
2
secondary market for home mortgages. This system has helped make homeownership
possible for millions.
Despite this enonnous progress, many low- and moderate-income and minority
families continue to face substantial barriers to homeownership. President Clinton has
made increased homeownership a national priority, and with the help of his National
Homeownership Strategy, the homeownership rate has reached 65.1 percent this year, the
highest level in fifteen years. Both GSEs have made, and continue to make, important
contributions toward meeting the national goal of increased homeownership.
Fannie Mae and Freddie Mac are privately owned. Their stock trades actively on
the New York Stock Exchange and had a total market value of over $48 billion at the end
of 1995. Last year they paid a total of $957 million in common stock dividends. As a
result, in part, of their government sponsorship, Fannie Mae and Freddie Mac can
participate in the mortgage market at lower costs and in ways other private financial
institutions cannot. Clearly Fannie Mae and Freddie Mac must serve their shareholders,
but they must also comply with their federal charters. This ambiguity of responsibility,
characteristic of GSEs, continually raises issues of accountability: To what extent is a
particular GSE responding to its federal mandate and to what extent to the need to
generate returns for its stockholders? What tradeoffs does it make between these
objectives?
In the Federal Housing Enterprises Financial Safety and Soundness Act of 1992,
Congress recognized these issues, and recognized that many of the circumstances that had
led to the establishment of Fannie Mae and Freddie Mac in their current forms had
changed. The Act directed the Treasury and three other agencies to report on the
desirability and feasibility of ending the federal government's sponsorship of Fannie Mae
and Freddie Mac, and thereby removing both the limitations and benefits of federal
sponsorship. Ifprivatized, Fannie Mae and Freddie Mac could operate as fully private
entities under state corporate charters. Their shareholders and management would
detennine the nature and scope of their business activities.
In response to this mandate, the Treasury conducted a broad review of the
government's relationship with Fannie Mae and Freddie Mac. We paid panicular
'"'
)
attention to how ending the federal government's sponsorship of Fannie Mae and Freddie
Mac might affect the cost of home mortgage credit and the efficiency of the mongage
credit market. \Ve also reviewed their affordable housing activities, to help assess
whether and how these might be affected.
The Secondary Mortgage Activities of Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac operate by purchasing confonning residential
mortgage loans -- mortgages that meet their specifications and are below a certain size
limit. The GSEs purchase these mortgages from banks, thrifts. mortgage banks. and other
mortgage loan originators. By doing so, they give these oliginators access to the broader
national capital market.
Fannie Mae and Freddie Mac [mance these purchases in two ways. First, they
pool mortgages and issue securities backed by the pooled mongages, in a process called
securitization. Mortgage-backed securities represent interests in the underlying
mortgages. The mortgage borrowers' monthly payments of interest and principal are used
to pay investors. The GSEs guarantee these payments and, in return, collect a guarantee
fee. Second, the GSEs purchase mortgages for their own portfolios, and fund them by
issuing debt securities to investors.
The Benefits of Federal Sponsorship
Federal sponsorship helps Fannie Mae and Freddie Mac undertake their activities
in several important ways. First, it reduces the GSEs' operating costs by: exempting
them from paying state and local corporate income taxes; exempting their securities from
registration with the Securities and Exchange Commission; and authorizing them to issue
and transfer securities through the Federal Reserve's book-entry system.
Second, government sponsorship permits the GSEs to borrow at rates better than
the highest-rated private finns -- and very close to the rates on Treasmy securities. which
carry the government's full faith and credit. In addition to the advantages mentioned
above, federal law gives special status to GSE securities. It permits national banks to
hold them in unlimited amounts. It makes them lawful investments for federal fiduciary
and pu
mds and lawful collateral for public deposits. It authorizes the Secretary of
the Tre
to purchase up to $2.25 billion of each GSE's obligations (and thus extend
credit t
}SE). GSE securities are also eligible collateral for loans from Federal
Reserv
"s and Federal Horne Loan Banks, and the Federal Reserve buys and sells
such se
~s
Investc
in its open market operations. The federal government does not guarantee
~s -- in fact, federal law requires a disclaimer of any U.S. obligation .
•etheless believe that federal sponsorship provides a de facto guarantee --
becaus
believe Congress would not allow either GSE to fail. This perception, in
turn, e
[mancI
Fannie Mae and Freddie Mac to borrow at rates lower than any private
GSE
.
Sl
.
mcum;
tri lli or.
assets,
ratio
01
mllllm'
billion
balanc
predor.
itution.
the two GSEs hold less capital than comparable fully private films, without
ner borrowing costs. At the end of 1995, the two GSEs had a combined $1.4
rtgage-backed securities outstanding, mortgages in portfolio, and other
'ly $16.8 billion in capital. The two GSEs had an average capital-to- assets
ercent. That ratio falls to 2.75 percent if one allocates capital, at the
~ currently required by the GSEs' safety and soundness regulator, to the $972
,1gage-backed securities that the GSEs guarantee but do not carry on their
s. By contrast FDIC-insured savings institutions, which invest
!
in mortgage-related assets, had an average capital-to-assets ratio of 7.8
percent
.imate the benefits of federal sponsorship are worth almost $6 billion
annuaJ
annie Mae and Freddie Mac. Of this amount, reduced operating costs (i.e.,
exemJ:
approx
)m SEC filing fees and from state and local income taxes) represent
y $500 million annually and the borrowing cost advantage over $5 billion
.ese estimates are broadly consistent with the magnitudes estimated by the
Congr
Fannie
II Budget Office and General Accounting Office. As we discuss below,
Lild Freddie Mac appear to pass through part of these benefits to consumers
throug
:ed mortgage costs and retain part for their own stockholders.
three types of benefits aid Fannie Mae and Freddie Mac in both aspects of
their b
; __ securitizing mortgages and retaining m0l1gages in portfolio. The benefits
curren
)lve no direct government payments to the two GSEs and under cunent rules
5
are not reported in the federal budget. Nonetheless, they have real economic value to the
GSEs and involve real costs for the government to provide, a conclusion readily accepted
by economic and fmancial experts. While fully private finns frequently pay fees to thirdparty guarantors to provide credit enhancement for their secUlities, the GSEs receive at no
cost to them a package of benefits that makes the credit standing of their securities
superior to anything available in the marketplace.
The Contributions of Fannie Mae and Freddie Mac
Providing Liquidity for Mortgage Lenders
Congress created Fannie Mae as a government corporation in 1938 to purchase
and resell mortgages, and thereby help provide liquidity to financial institutions that had
limited access to national capital markets. Freddie Mac was created in 1970 with a
similar purpose. Both organizations have, as intended, contributed strongly to the
development of a more open, effective, and liquid mortgage market.
Over the past 25 years, these two companies and the financial markets have
changed dramatically. Interest rate ceilings have been eliminated and limitations on
geographic expansion reduced. Mortgage lenders now have geographic diversification
and access to national (and international) capital markets.
One of the most important changes was the development of securitization itself.
The first mortgage backed security was created in 1970 by the Government National
Mortgage Association, Ginnie Mae. Since then, Ginnie Mae, Fannie Mae, and Freddie
Mac have each contributed to the development of mOltgage securitization. Today,
approximately 48 percent of outstanding single-family mortgage debt -- over $1.7 trillion
-- has been pooled and securitized. Mortgages securitized by Fannie Mae and Freddie
Mac represent approximately 62 percent of the dollar total.
This activity is no longer limited to GSEs or to government organizations like
Ginnie Mae; private companies securitized 46 percent of jumbo mortgages in 1994, a rate
comparable to the 52 percent of confonning mOltgages securitized by Fannie Mae and
Freddie 1\1ac. Private companies have also begun a secondary market in mOItgages with
6
substandard credit quality (commonly called B-C credit mortgages), as well as auto loans,
credit card loans, and a variety of other obligations.
Despite the development of private liquid secondary markets, ending the GSEs'
federal sponsorship would probably cause an increase in home mortgage rates for
confonning, conventional loans (as discussed below). Although the amount of any such
increase is difficult to determine, it should be smaller than the fluctuations in mortgage
rates attributable to nonnal variations in macroeconomic and credit market factors.
Savings on Mortgage Costs
One question is the extent to which Fannie Mae and Freddie Mac pass on the fruits
of government sponsorship to consumers in the form of reduced mortgage costs. The
GSEs can pass through those benefits by purchasing mortgages at higher prices (lower
mortgage rates) than they would without government sponsorship. Such a pass-through is
inherently difficult to measure. In preparing this report, we sponsored one study of this
issue and reviewed others.
Most discussions of pass-through focus on the differences between the market
rates for fixed-rate conforming mortgages that Fannie Mae and Freddie Mac can and do
purchase, compared to non-conforming mortgages (generally larger jumbo m0l1gages)
that can be purchased only by other private financial institutions. Some comparisons
have been made based upon the advertised on-offer rates for the two types of mortgages.
These comparisons typically show a rate advantage for conforming mortgages. Other
studies have compared the Federal Housing Finance Board's data on mortgages that
actually have closed and have found average rates on jumbo loans lower than on
confonning loans.
However, raw comparisons may mislead because other factors could affect the
price differential between conforming and jumbo loans; the size and telms of the
mortgages, their geographic location and credit quality, or the depth and liquidity of the
market for larger versus smaller homes may have independent effects. After attempting
to control for some of these factors statistically, recent studies suggest the GSEs reduce
rates on fixed-rate conforming, conventional mortgages by about 20 to 40 basis points. It
7
is unclear how much of such a differential results from pass-through of GSE benefits
rather than from such other factors as the GSEs' technical and managerial efficiency;
furthermore, the differential may change over time. A plausible estimate of 30 basis
points, the midpoint of this range, suggests that in 1995 the GSEs passed through
approximately $4 billion of pre-tax benefits.
This calculation necessarily omits certain factors. It does not include the value of
the stability the GSEs may give the conforming, conventional mortgage market. Nor does
it place a value on the extent to which the GSEs make affordable housing finance more
available than it otherwise would be (an issue discussed below).
It is even more difficult to estimate with certainty how modifying or ending
government sponsorship would affect mortgage interest rates. Although some increase
seems likely, certain factors suggest that the increase in rates might be less than the passthrough estimate given above. Fannie Mae and Freddie Mac cUlTently have no effective
competition in the conforming, co~ventional secondary mortgage market except each
other. Nonetheless, many fmancial institutions compete vigorously in other secondary
markets, for both mortgages and other types of obligations. Depending upon how
changes were undertaken, competition from other financial institutions could moderate
the effects of privatization. These issues have, however, received veIY little analysis;
further research is necessary before definitive conclusions can be drawn.
Supporting AffordabLe Housing
In 1995, the Department of Housing and Urban Development (HUD) released the
Administration's blueprint for increasing homeownership, the National Homeownership
Strategy: Partners in the American Dream. Many of the nation's CUlTent critical unmet
housing needs differ from those of the past. Mortgages are now widely available, and so
the Administration and Congress have focused on the needs of bOlTowers who continue to
fmd homeownership beyond their grasp. The Homeownership ,)'tralegy lists a series of
steps the public and private sectors should take to increase homeownership opportunities
for all Americans.
8
Both Fannie Mae and Freddie Mac have expanded their activities in these areas.
They have developed specialized mortgage products, increased underwriting flexibility,
improved homebuyer education programs, and entered into partnerships with local
governments and nonprofit organizations to provide additional affordable housing
assistance.
In 1992, Congress directed HUD to develop a set of housing goals to ensure that
the GSEs' mortgage purchases included loans to such targeted potential borrowers as
low-income households and residents of central cities and rural areas. HUD issued
interim requirements in October 1993. The final regulations, issued in December 1995,
established targets for the GSEs' purchases of mortgages from underserved areas, lowand moderate-income households, and very-low-income households. The final regulation
also established fair lending requirements, including a requirement that the GSEs assess
whether their underwriting standards, business practices, repurchase requirements,
pricing, fees, and other procedures could result in impermissible discrimination, and how
such standards and practices may affect purchases of mortgages for low- and moderateincome families.
Fannie Mae and Freddie Mac already meet or exceed HUD's affordable housing
goals in most respects. In 1995, Fannie Mae satisfied all three interim housing goals, and
Freddie Mac satisfied all but the central city goal. Still, under a variety of measures, the
GSEs' relative participation in financing affordable housing is less than that of FHA and
FDIC-insured depository institutions.
By the nature of their activities, Fannie Mae and Freddie Mac face challenges
relative to other market participants in promoting affordable housing. They do not make
any direct loans; they must rely on others to originate loans that they may then purchase
or help securitize. Current law allows them to purchase mortgages with less than a 20
percent downpayment only if the borrower obtains private mortgage insurance or if the
private sector or a government agency provides some other credit enhancement that limits
the GSEs' credit risk.
There is continuing innovation in the primary market (i.e., the market for
originating mortgages) and by private mortgage market participants, such as private
9
mortgage insurance companies, finance companies, and fDIC-insured depository
institutions. Fannie Mae and Freddie Mac can and do connibute to overcoming their
challenges in this area by working cooperatively with mortgage originators and mortgage
insurance companies to develop mortgage products for the underserved.
Since 1992, Fannie Mae and Freddie Mac have increased their holdings of
mortgages from low-income borrowers and underserved areas. For example, Fannie Mae,
which has most strongly emphasized lending in inner-city neighborhoods, increased its
activity in underserved areas (as defmed in HUD's 1995 fmal rule on GSE housing goals)
from 22.9 percent in 1993 to 31.2 percent in 1995, while freddie Mac's activity increased
from 2l.3 percent to 25.1 percent during the same period. Although this improved
performance obviously results in part from HUD's oversight and encouragement it is
impossible to ascertain the extent to which it represents a response to that oversight, to
the affordable housing activities of mortgage originators, or to diversification of the
GSEs' business activities as their basic market becomes more saturated. For example, the
majority of single-family mortgages that counted toward meeting the HUD goals in 1995
(64 percent or more for each goal and each GSE) went to borrowers who made
downpayments of at least 20 percent. Since a lack of funds for downpayments constitutes
one of the main impediments to homeownership in lower-income communities, it is
unclear to what extent the goals have stimulated mortgage originators to make loans that
they would not otherwise have made. However, affordable housing loans often entail
higher marketing, servicing, and credit costs than other GSE-purchased loans, so these
historicalloan-to-value (LTV) ratios may understate the GSEs' effect on affordable
housing. It is too early to evaluate fully whether a trend toward more flexible
underwriting practices will increase the availability of higher LTV loans and spur
additional mortgage originations to low- and moderate-income homebuyers.
HUD reports that it designed the affordable housing goals to be achievable under
economic conditions more adverse than the recent period of high affordability, and notes
that they may become binding constraints as market conditions change. The goals may
themselves be revised periodically to encourage the GSEs to increase their affordable
housing activities beyond what the fully private sector might otherwise do.
10
ng government sponsorship would in all probability have some effect on the
GSE.
ibutions to affordable housing. Without being able to estimate the extent to
whie
SEs undertake affordable housing activities because of federal requirements,
ratht
or other reasons, one cannot estimate how rescinding or revising HUD' s
goal~
. affect their activities. As HUD and the GSEs gain more experience with the
goal
ould have better understanding of the effects of these programs.
nding opportunities for homeownership should remain one of our highest
pnOI~he
actions of GSEs and other financial institutions in this crucial area will
men:
ued attention from HUD and Congress.
Impl
s of the Status Quo
.( on Treasury Borrowing Costs
±ler, Fannie Mae and Freddie Mac have over $1.4 trillion in debt and
mon
.cked securities outstanding -- an amount equal to nearly two-fifths of the
Trea:
;urities held by the public. Since GSE securities may be substituted for
Trea
:urities for many purposes (as discussed above), and since they benefit from
mve:
rception that the federal government implicitly stands behind them, those
secUI
mpete directly with Treasury securities in the govemment securities market.
To s,
ent, therefore, the considerable and growing supply of GSE securities
(relal
he supply of Treasury securities) tends to lower prices in the government
secur
rrket and thereby increase the Treasury's borrowing costs.
theless, it is extremely difficult to estimate by how much. Financial markets
and complex; many factors affect their demand, supply, and
are b
lamiC
segrr.
n. When Treasury previously attempted (TreasUly 1990, 1991) to estimate
the e~
GSE borrowing on Treasury costs, it could not quantify those effects. These
estirr.
ifficulties remain; nonetheless, further analysis seems appropriate. Since the
pubJi
$3.7 trillion of Treasury debt, each basis point of increase in such costs
woull
annual budgetary outlays by $370 million.
11
Effect on Other Credit Markets
While the benefits of GSE status provide an important subsidy that promotes
homeownership, such a subsidy has economic costs. To the extent that the GSEs pass
through the benefits of government sponsorship, they reduce the price of, and increase the
demand for, mortgage credit relative to other types of credit. The economic effect of the
subsidy to mortgage credit -- absent increases in the savings pool or attracting capital
from abroad -- is to raise the price or reduce the amount of credit for other uses, such as
small businesses, exporters, rural communities, and other business 'and consumer
borrowers. Measuring such effects is, however, even more difficult than measuring the
potential effects on Treasury borrowing costs.
Potential for Increased Reliance on the GSEs
Maintaining the GSE status of Fannie Mae and Freddie Mac could, over time, find
the housing fmance market increasingly reliant on the GSEs as sources of credit for
conforming, conventional mortgages. This increased reliance, coupled with the
advantages the GSEs receive from government sponsorship, could undermine the viability
of portfolio lenders operating in local markets, such as community banks and thrifts. If
that were to occur, borrowers who do not easily meet the GSEs' undelwriting standards
may lose competitive local mortgage sources that may serve their needs better than
national lenders.
In addition, greater reliance on the GSEs could increase lisk to financial markets
and taxpayers by further concentrating mortgage credit risk in just two companies -companies with relatively low capital-to-asset ratios, whose GSE status alters investors'
risk-reward calculus.
Potential Risk to Taxpayers
Although Fannie Mae and Freddie Mac have developed a range of mechanisms to
hedge the risks of their portfolios and protect their financial integrity against movements
in the fmancial markets, there is no perfect guarantee that they will always be safe, sound,
and profitable entities. Recognizing this, Congress recently established HUD's Office of
12
Federal Housing Enterprise Oversight (OFHEO) as the two GSEs' federal safety and
soundness regulator. OFHEO's establishment is a positive development that we expect to
have a salutary effect on the two GSEs' safety and soundness. Such regulation is
necessary, in part because the very nature of government sponsorship attenuates the
nonnal market discipline that investors would otherwise exercise in purchasing securities
issued by a fully private fInn.
OFHEO's mission is unquestionably important. Overseeing the GSE's safety and
soundness diminishes the likelihood of fInancial diffIculties that could raise any question
of government assistance. The stringency and effectiveness of OFHEO's regulatOIY
policies will therefore be critical.
Further Analysis Required
As noted above, further analysis of many of these issues is necessary for any
infonned conclusions. Research on both the current conforming mOItgage market and the
affordable housing market would help clarify the risks and benefits of any action by
Congress.
There should also be detailed analysis of the operational and market implications
of any action that Congress considers. If Congress decided to maintain the GSE status of
Fannie Mae and Freddie Mac, but sought to increase the public benefits they provide or
reduce the government benefIts they receive, it could pursue a wide range of options.
Illustrative of the many options that have been suggested are: strengthening the
affordable housing goals by requiring Fannie Mae and Freddie Mac to increase their
market shares or to direct more activity to targeted areas or bOlTowers; requiring the GSEs
to subsidize affordable housing directly, through programs analogous to the Federal
Home Loan Banks' Affordable Housing Program; requiring increased involvement in
fmancing multifamily mortgages; requiring more directed assistance (educational and
fmancial) to lower-income borrowers, state and local governments, and non-profit
organizations; limiting the size of the GSEs' retained mOItgage portfolios; freezing or
reducing the confonning loan limit; removing certain benefits of GSE status, such as the
exemption from registering securities with the SEC; and requiling periodic estimation and
public disclosure of the value of the government benefits that the GSEs receive. These
13
options need further analysis before a decision can be made on whether or how to adjust
government sponsorship.
Conclusions
Fannie Mae and Freddie Mac have succeeded in developing a liquid secondary
mortgage market for confonning, conventional mortgages. Congress, while recognizing
the important benefits provided by the GSEs' activities, has asked whether it is now both
feasible and advisable to change their status.
The securitization techniques and other secondary mortgage activities OIiginally
pioneered by Ginnie Mae, Fannie Mae, and Freddie Mac are now well-established.
They are practiced by many fully private finns and are applied not only to
non-confonning mortgages but to many other types of obligations. For these reasons,
there seems little doubt that the secondary market for confonning, conventional
mortgages could operate efficiently and effectively even if Fannie Mae's and Freddie
Mac's government sponsorship were altered.
The more critical issue is whether the benefits of a change would be sufficient to
outweigh the disruption and risks to the home mortgage market that it might entail.
Government sponsorship provides benefits to Fannie Mae and Freddie Mac that
are quite tangible, even though the federal budget does not rep0l1 them. Any
quantification is, of course, uncertain. Taking into account the reduced borrowing and
operating costs associated with GSE status, we estimate these benefits to be on the order
of $6 billion annually.
These government benefits should, in turn, be compared to the benefits that Fannie
Mae and Freddie Mac provide, in reduced mortgage costs and in access to mortgages, that
would not otherwise be available. These benefits are even more difficult to estimate with
confidence. One plausible estimate would be that Fannie Mae and Freddie Mac reduce
average mortgage costs by perhaps 30 basis points in their part of the market, for a total
savings to consumers of some $4 billion annually; however, there are many ways in
which such an estimate could be refined.
14
The pass-through estimates do suggest the effect the GSEs have on mortgage rates
but do not distinguish between a pure pass-through of GSE benefits and the two finns'
technical and managerial efficiency. Although ending government sponsorship would
remove the fonner, it may have no effect on the latter.
Combining the estimates of a $4 billion pass-through with the $6 billion of the
GSEs' benefits of federal sponsorship, implies the GSEs' shareholders retained in pre-tax
income approximately $2 billion of GSE benefits. This estimate is generally consistent
with comparable estimates reported by CBO (1996) and GAO (1996-A).
Not included in the pass-through estimates is the extent to which the GSEs provide
added value through their affordable housing activities. The extent to which their
affordable housing activities would be affected by ending government sponsorship is
unclear. With HUD's affordable housing goals still relatively new, it is premature to
judge how much of GSE activity is driven by HUD's administration of the requirements,
and how much by the basic business objectives of Fannie Mae and Freddie Mac.
Ending or modifying government sponsorship would entail risk, but would have
potential benefits. Its potential effect on mortgage interest rates would represent an
important risk, as would any potential negative consequence for the availability of credit
for affordable housing. Potential benefits could include increased market competition,
more efficient credit allocation, reduced U.S. government borrowing costs, and reduced
potential risk to taxpayers.
Although the analysis undertaken in this report and others is substantial, we
believe finn conclusions regarding the desirability of ending or modifying govemment
sponsorship of Fannie Mae and Freddie Mac are premature. The GSEs' experience under
the 1992 Act is relatively short, and many of the most important issues could benefit from
further study. Furthermore, should Congress decide to act, there are several possible
approaches, each with different implications that should be analyzed and reviewed.
Fannie Mae and Freddie Mac are important institutions participating in markets
that affect the homeownership of millions of Americans. Ultimately no change will be
made without rigorous public discussion and a broad consensus. We hope this report is
helpful to that process.
DEPARTMENT
OF
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OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. - 20220 - (202) 622-2960
Contact:
FOR IMMEDIATE RELEASE
July 24, 1996
Jon Murchinson
(202) 622-2960
MEDIA ADVISORY
Treasury Secretary Robert E. Rubin will announce proposed changes to the State and
Local Government Series Securities (SLGS) program at 11 :30 a.m. today before the Public
Finance Network at the National League of Cities, 1301 Pennsylvania Avenue, NW, 5th
floor.
Treasury has issued nonmarketable SLGS since 1972 as investments for the proceeds
of tax exempt bond issues that are subject to IRS regulations, such as yield restrictions and
arbitrage rebate. Investing in SLGS enables state and local governments to more easily
comply with tax regulations.
Media seeking site information should contact Randolph C. Arndt of the National
League of Cities at (202) 626-3158.
-30-
RR-1188
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
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TREASURY f~ .'W'iC~
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OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
ADV 11:30 A.M. EDT
Remarks as prepared for delivery
July 24, 1996
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
BEFORE THE PUBLIC FINANCE NETWORK
WASHINGTON, D.C.
Thank you very much for inviting me to speak here this morning. The Treasury
Department works with state and local governments in many ways, and we believe that
partnership is critical to improving the way our governments work. Today, I have the
pleasure to announce changes in Treasury's state and local government series securities -which is commonly, and unfortunately, called the "SLGS" program.
This is a highly technical subject, but I want to make three non-technical and
important points: First, these changes should make it easier, more convenient, and cheaper
for states and local governments to refinance tax exempt bonds issued to pay for projects that
matter to their citizens, from school construction and repair to strong bridges and pothole-free
roads.
Second, the changes are a good example of reinventing the federal government, saving
taxpayer dollars, eliminating unnecessary regulation and introducing new flexibility. We took
a common sense approach. In fact, when we started to look at updating these regulations, we
couldn't figure out why some of them were still there. Those regulations would be gone.
And third, the federal government needs to -- and is -- approaching its delivery of
services and products like a private sector company in a competitive market. Many in our
ranks have come from public and private finance, and we know how important it is to make
Treasury's financial products and services as modern, innovative and competitive as
America's most advanced financial markets. From the restructuring of our maturity mix to
our proposal to issue inflation-indexed securities, to today's announcement, we have strived to
be responsive and innovative.
-MORERR-1189
Far press releases, speeches, public schedules and official biographies, call our 24-hollr fax line at (202) 622-2040
11
2
The changes I am announcing are designed to make SLGS more attractive,
competitive, cost-effective securities. We propose to increase the maximum interest rate
payable by the Treasury on SLGS. In effect, we would cut our fee from 12.5 basis points to
5 basis points. For example, if a town wants to refinance a school bond issue to take
advantage of lower interest rates, the town would need to purchase Treasury securities to pay
off the old bonds. If the town purchases $10 million in 5-year SLGS, the lower fees I am
announcing today would mean that they could earn about $31,500 more over the life of the
investment on a present value basis. Put another way, the town would be able to sell $31,500
less in bonds to refinance their old, higher-interest rate debt than under our old rules.
But pricing is not the only issue. The changes would also make investments in SLGS more
flexible, useful and competitive.
--We would permit government bodies to purchase SLGS with funds subject to rebate
requirements, such as construction funds, as well as funds subject to yield restrictions.
--We would eliminate the so-called "all-or-nothing rule" and permit government
bodies to blend investments in SLGS with investments in securities purchased in the
secondary markets.
--We would eliminate the extensive certifications that are currently required, and rely
instead on enforcement of arbitrage laws under existing income tax regulations.
--We would shorten the time periods by more than half from subscription to purchase
for new issues of time and demand deposit SLGS and we also shortened noticed
periods for early redemptions of SLGS.
--We would permit investors in time deposit SLGS to rollover tht: proceeds of their
maturing SLGS (including interest) into new SLGS.
__ We would change the pricing formula for SLGS that are redeemed prior to maturity
to better reflect market prices, and allow market-priced redemption of SLGS at a
premIUm.
--And we would eliminate the cap on the amount of demand deposit securities that
can be purchased.
Our announcement today includes changes that state and local governments -- and
many of you -- have been seeking for years. I'm pleased to present these changes to you,
and I want to thank you for the comments you made in helping us to devel?p them. I hope
that they will help state and local governments better re-finance the strong mfrastructure and
solid services that their citizens have the right to expect. Thank you very much.
-30-
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
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..............................
OrnCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 24, 1996
Contact:
Jon Murchinson
(202) 622-2960
MEDIA UPDATE
The Treasury Department's public symposium on possible structures for inflationprotection securities will be at 1:30 pm today in room 3311. 1500 Pennsylvania Avenue,
NW.
Due to space constraints this meeting is not open to cameras. Media without
Treasury or White House credentials wishing to attend should contact the Office of Public
Affairs at (202) 622-2960, with the following information: name, Social Security number and
date of birth, by noon today. This information can be faxed to (202) 622-1999.
-30-
RR-1190
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
UBLIC DEBT NEWS
Department of the Treasurv •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 24, 1996
CONTACT: Office of Financing
202-21:1-3350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenderf:l for $12,510 million of 5-year notes, Serief:l L-2001,
to be issued July 31, 1996 and to mature July 31, 2001
were accepted today (CUSIP: 912827Y71).
The interest rate on the notes will be 6 5/8~.
All
competitive tenders at yields lower than 6.625% were accepted In
full.
Tenders at 6.625%- were allotted 9%-.
All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.625%, with an equivalent price of 100.000. The median yield
was 6.572%-; that is, 50%- of the amount of accepted competitive bids
were tendered at or below that yield.
The low yield was 6.537%-;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield
TENDERS RECEIVED AND ACCEPTED
TOTALS
Received
$27,060,703
In thousands
Accepted
$12,510,193
The $12,510 million of accepted tenders includes $512
million of noncompetitive tenders and $1:,:1:18 million of
competitive tenders from the public
In aadition, $:100 million of tenders was awarded at the
high yield to Federal Reserve Banks as agents for" foreign and
international monetary authorities.
An additional $700 million
of tenders was also accepted at the high yield from Federal
Reserve Bank"" fur their OW11 accuunt in exchange fur maturing
securities.
RR-1191
NEWS
TREASURY
omCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
TESTIMONY OF DAVID A. LIPTON
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
BEFORE THE SENATE COMMITTEE ON FOREIGN RELATIONS
July 25, 1996
Mr. Chainnan and members of the Committee. I greatly appreciate the opportunity to be here
today to discuss with you the concerns raised by Mr. Harry Wu and the Laogai Research
Foundation regarding World Bank-funded projects in the Xinjiang Autonomous Region of
China.
Mr. Wu has shown courage and dedication in his efforts to draw attention to human rights
abuses in China. The State Department's most recent human rights report to this Committee
documents China's human rights abuses. As that report details, Mr. Wu has personally been
a target of such abuses. Thus, when Mr. Wu issued allegations last October regarding the role
of the World Bank in China, the U.S. Government, including the Treasury Department,
reacted with great concern and immediate action. We pressed the World Bank for a prompt
and thorough investigation. The seriousness of the charges made by Mr. Wu regarding the
role of the World Bank in China demanded nothing less.
Therefore, I welcome this opportunity to discuss three key issues with you today:
•
United States policy on World Bank lending to China;
•
the Bank's overall strategy for economic development in China; and
•
the Tarim Basin project, and other Bank projects in Xinjiang.
United States Policy on World Bank Lending to China
U.S. policy on World Bank lending to China has been developed in the context of our overall
foreign and economic policy there, which in tum has been shaped by both realities and moral
imperatives. On the one hand, China has made dramatic progress in building a market
economy and a more vibrant society and has become an increasingly important political player
in regional and global affairs. On the other hand, on some critical issues, we and China have
deep differences.
RR-1192
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Accordingly. our policy to\vard China is guided by three tenets: First. we believe that
China's development as a secure. open and successful nation is profoundly in the interest of
the United States. Second. we support China' s full integration and its active participation in
the international community. And third. while we seek dialogue and engagement to manage
our differences with China. we will not hesitate to take the action necessary to protect our
interests.
Reflecting this approach. since the crackdown in Tiananmen Square in 1989. we have not
supported any World Bank lending to China unless it is directed specifically to programs
which serve basic human needs (BHN). In addition to meeting this key criterion. U.S.
support for BHN projects is also conditioned on their economic. financial. and environmental
soundness.
Other World Bank members. however. strongly support active and extensive World Bank
development assistance to China. Without their concurrence. we cannot succeed in confining
the Bank's role to BHN projects. But we can. and I believe we do. make a difference by
helping shape the Bank' s overall operations in China. holding individual projects to the
highest standards. and increasing the focus of non-BHN projects on reforming and opening
China's economy and society.
The United States has argued forcefully that continued Chinese access to the concessional
resources of the International Development Association (IDA) is not justified. It is true that
China still has large concentrations of extreme poverty -- indeed, an estimated 80-100 million
people are still destitute. Nevertheless, it is also true that China's economic progress has
greatly improved its international creditworthiness. i.e .. its ability to attract and to service
loans on commercial terms. In our view. the poorest and least creditworthy borrowers should
have first claim on IDA resources.
Our efforts have produced significant progress on this issue. although the pace has been
slower than we would have liked. In 1993. the IDA donors agreed that IDA assistance to
more creditworthy borrowers. including China be directed primarily to poverty-focused
activities or those that promote environmental sustainability. IDA lending to China has been
declining. Most recently. donors formally agreed to reduce IDA lending to China
significantly, to about $300 million annually for the next three years -- about 4 percent of
total IDA lending as opposed to 15 percent in the early 1990s -- and then to terminate IDA
lending altogether.
The World Bank's Country Assistance Strategy for China
The vast majority of the World Bank's fmancial and analytical support for economic
development and reform in China is now provided on market-based rather than concessional
terms. and is focussed on four major areas:
'"l
.J
•
support for market-oriented economic reforms vital to greater opportunity and
engagement for the millions of Chinese poor, with special emphasis on reform of the
financial system, state-owned enterprises, and the legal framework and institutions
needed in a market economy;
•
removal of infrastructure bottlenecks, and adoption of a regulatory framework to
attract foreign private investment in power, transport, and water supply;
•
direct alleviation of povertv, concentrating on basic education, health services, and
disease prevention, particularly in the poorest interior areas; and
•
environmental protection which, again, provides greatest benefit to the poor.
We continue to urge the Bank to sharpen its focus on improving the living conditions of the
absolute poor. We firmly believe that Bank operations and outreach to local communities will
materially improve the economic and political status of groups such as the Uygurs. We have
also strongly encouraged accelerated reform of state-owned enterprises, and eliminating
policies which distort market forces and economic efficiency and impede the roles of the
private sector and foreign investment.
Mr. Chairman, this Administration believes, as did others before it, that this kind of focussed
adjustment strategy tracks well with China's development needs, with the Bank's fundamental
mandate, and, most importantly, with long-term U.S. interests and objectives in China.
The Tarim Basin and Other Projects in Xinjiang
Let me turn now to the Tarim Basin project, about which Mr. Wu first raised his concerns.
The project was funded by a $125 million IDA credit approved by the Bank's Executive
Board in August 1991. It was explicitly designed to improve the income and well-being of
138,000 families, about 500,000 of China's poorest people, in Xinjiang, a remote and
drought-prone area where annual per capita income is below $100. Key elements of the
project support construction of irrigation, drainage and drinking water facilities, and promote
agricultural and livestock development. Project beneficiaries are almost exclusively
smallholder farmers of the Uygur ethnic minority, a particularly disadvantaged group.
\Vhen Mr. Wu made public his concerns about the project last October, the Bank moved
quickly, and with our strong support, to investigate the facts. We supported the Bank's
decision to conduct a detailed investigation of the project. The investigative team included a
senior Bank official with experience in China, a U.S.-trained Chinese-speaking lawyer, the
Deputy Chief Auditor of Hong Kong, and a retired former Dean of Hong Kong University.
The investigation included extensive travel within Xinjiang -- a region roughly 2 1/2 times the
size of Texas with a total population of about 13 million. Using materials prepared by Mr.
Wu, the Bank team prepared its own itinerary, conducted on-site inspections, reviewed the
project's procurement and contracting documentation. and interviewed approximately 1.000
Uygur people living and working in the project area. On the basis this investigation. the Bank
concluded that project benefits are going to the intended minority beneficiaries and reported
that it had uncovered no evidence of either forced labor or benefits to any prison farms or
penal institutions.
Mr. Wu has also focussed attention on the Xinjiang Production and Construction Corps
(XPCC) and its role in implementing World Bank projects. The XPCc. which is also called
the Xinjiang State Farms Organization. is engaged in a broad range of activities throughout
the region. It has commercial and civilian functions in areas such as agriculture and
irrigation. in which capacity it served as implementing agency for two Bank projects.
However. information provided by both Mr. Wu and the World Bank makes it clear that
XPCC is also engaged in prison management. On the question of military activities. the
Department of Defense has stated that while the XPCC maintains militia units and a military
structure. it is "clearly a civilian organization:'
A key focus of the World Bank's investigation was therefore to explore the precise role of the
XPCC in the two Xinjiang projects in which, unlike the Tarim Basin Project, the organization
was directly involved. In both cases the Bank's examination of project records and sites
found that only civilian or commercial units of the XPCC had been involved in
implementation. that there was no evidence that any project benefits had gone to prisons. and
that there was no evidence that XPCC-provided prison labor had been used on these projects.
Conclusion
Mr. Chairman. let me again emphasize that both the U.S. Government and the World Bank
have reacted to Mr. Wu's allegations with seriousness. We believe that the Bank mounted a
good-faith effort to investigate these concerns. and we accept the conclusion that the Bank
found no evidence to support any of the specific assertions. Mr. Wu is surely correct that
there are numerous penal institutions in the Tarim Basin. But there is no evidence that prison
labor was used in the project or that the XPCC was involved in any way. Moreover, the
distance of the prisons from the project rules out the possibility that they benefitted directly
from the project. Mr. Wu is also correct in identifying the multiple functions and activities of
the XPCC; however. no evidence was found that the XPCC employed prison labor in Bank
projects or that prisons it administered benefitted from Bank projects. The available evidence
indicates that the Bank has not knowingly engaged with anything but the commercial and
civilian functions of XPCC
That said, we fully recognize that the Bank's investigation has not been exhaustive. Because
Xinjiang is so vast. neither the Bank team, nor any investigative team, could be expected to
go everywhere and see everything.
5
Bank President Wolfensohn has reaffirmed the Bank's strong opposition to forced labor
practices in Bank projects and restated that the Bank would not support military activities. To
this end, the Bank has committed to ensuring that the commercial and civilian activities of
Chinese implementing agencies for Bank projects are completely separated from other
functions such as prison management. More broadly, the Administration is working actively
with each of the multilateral development banks to develop a screening process to
systematically incorporate worker rights issues into lending operations.
In conclusion Mr. Chairman, I want to restate the Administration's deep commitment to
improving the human rights condition and material living standards of the Chinese people.
We believe that the World Bank is a uniquely important instrument for constructive change in
China. And we will continue to incorporate concerns such as those raised by Mr. Wu in our
reviews of all World Bank projects.
DEPARTMENT
OF
THE
TREASURY (xJ.t .~".
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-~11111----
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TREASURY
NEW S
;:j17S-r,.'l. ._ _ _ _ _ _ _ __
OFFICE OF PUBUCAFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 25, 1996
UNITED STATES AND INDONESIA SIGN PROTOCOL
TO INCOME TAX TREATY
The Treasury Department announced today the signing, on July 24, 1996, of a
Protocol amending the United States-Indonesia Income Tax Convention. The Protocol was
signed in Jakarta by Secretary of State Warren Christopher and Indonesian Minister of
Foreign Affairs Alatas Ali Abdullah. The Protocol will be submitted to the United States
Senate for its advice and consent to ratification.
The principal shortcoming of the existing Convention (signed in 1988) is the high
level of withholding taxes permitted on dividend, interest and royalty payments. In many
cases the withholding rates significantly exceed those found in Indonesia's other recent
treaties, as well as in most U.S. tax treaties. These high rates present a substantial barrier to
the transfer of U. S. capital and technology into Indonesia and reduce the attractiveness of
Indonesia as a location for U.S. corporations to establish operations to serve world markets.
In addition, this competitive disadvantage to U. S. investors harms Indonesia by lessening
desirable competition for Indonesian investment opportunities. Therefore, the proposed
protocol reduces these withholding tax rates. Under the proposed Protocol, withholding rates
on direct investment dividends, interest payments, and royalty payments are reduced from 15
percent to 10 percent.
The Protocol will enter into force upon the exchange of instruments of ratification. It
will have effect for amounts paid or credited on or after the first day of the second month
following entry into force.
Copies of the Protocol are available from the Office of Public Affairs, Treasury
Department, Room 2315, Washington, D.C. 20220. Please refer all questions to
(202) 622-2960.
-30RR-1193
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
PROTOCOL AMENDING THE CONvENTION BETWEEN TIiE GOVE&\UvffiNT OF THE
UNITED STATES OF AMERICA AND THE GOVE&'iMENT OF THE REPUBLIC OF
INDONESIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND TIlE PREVENTION
OF FISCAL EVASION \VITH RESPECT TO TAXES ON INCOME, WITH A RELATED
PROTOCOL AND EXCHANGE OF NOTES SIGNED AT JAKARTA ON THE 11TH DAY
OF JULY, 1988
I
I)
Ii
The Government of the United States of America and the Government of the Republic of
Indonesia, desiring to conclude a protocol to amend the Convention between the Government of
me United States of America and the Government of the Republic of Indonesia for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income, with a related protocol and exchange of notes signed at Jakarta on the 11th day of July,
1988, have agreed as follows:
Article 1
1. Paragraph 2 of Article 11 of the Convention shall be deleted and replaced by the following:
"However, if the beneficial O'VVrler of the dividends is a resident of the other Contracting
State, the tax charged by the first-mentioned State may not exceed:
(a) 10% of the gross amount of the divi.dends if the beneficial owner is a company that owns
directly at least 25% of the voting stock of the company paying the dividends;
(b) 15% of the gross amount of the dividends in all other cases."
2. Paragraph 4 of Article II ofllie Convention shall be deleted and replaced by the following:
a
"Where company which is a resident of a Contracting State has a permanent establishment
in the other Contracting State, that other State may impose an additional tax in accordance
with its law on the nrofits attributaJle to the permanent esrahIisb..Jr_ent (~fter deducting
therefrom the company tax and other ta.xes on income imposed thereon in that other State)
and on interest payments allocable to the pennanent establishment, but the additional tax so
charged shall not exceed 10%."
1
!
.-\!'tide 2
Paragraph 2 and 3 of Article 12 of the Con.....ention shall be deleted and replaced by the following:
II
"(2) The rate of tax imposed by one of the Contracting States on interest derived from
sources within that Contracting Stare and beneficially owned by a resident of the other
Contracting State shall DOt exceed 1oo/. of the gross amount of such interest.
(3) Notwithstanding paragraphs 1 and :z~ interest arising in one of the two States shall be
taxable only in the other State to the ex-rent that such interest is derived by :
(i) The Government of the other State, including political subdivisions and local
authorities thereof, or
Oi) the Central Bank: of the other State; or
(Iii) a financial institution ovmed or controlled by the Government of the other State,
including political subdivisions and local authorities thereof"
Paragraph 2 of Article 13 of the Convention shall be deleted and replaced by the following:
"(2) The rate of tax imposed by a Contracting State on royalties derived from sources within
that Contracting State and beneficially owned by a resident of the other Contracting
State shall not exceed 10010 of the gross amount of royalties described in paragraph 3. \I
Article 4
This Protocol shall be an integral. and inseparable part of the Convention between the Government
of the United States of America and the Government of the Republic of Indonesia for the
Avoidance of Double Taxation and the Pre\-ention of Fiscal Evasion with Respect to Taxes on
Income, with a related protocol and exchange of notes signed at Jakarta on the lIth day of July,
1988.
i
2
I
J
Article 5
This Protocol shall be subject to ratification and instruments of ratification shall be exchanged as
soon as possible. It shall enter into force on the date of exchange of the instruments of
ratification. The provisions shall for the first time have effect for amounts paid or credited on or
after the first day of the second month next following the date on which the Protocol enters into
force.
.
.)
I
I
II
I!
In witness whereof, the Wldersigned, duly authorized thereto by their respective Governments,
have signed this Protocol.
Done at Jakarta, in duplicate, in the English language, t.hi514th day of July, 1996.
For the Government of
F or the Government of
the United States of America
the Republic 0y.mdonesia
()
I
r-
3~~tADOAJ
4
DEPARTMENT
OF
THE
TREASURY (fjI.~.··:···':·'r~
~ ~'IC. '"~
~
TREASURY
NE
L W S
~1789~. . . . . . . . . . . . . . . . . . . . . .. .
........................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C •• 20220. (202) 622-2960
Contact:
FOR IMMEDIATE RELEASE
July 25, 1996
Rebecca Lowenthal
(202) 622-2960
U.S. TREASURY DEPARTMENT HONORS FORMER SECRETARY LLOYD BENTSEN
The U.S. Treasury Department bestowed its highest honorary award, the Alexander
Hamilton Award, on former Treasury Secretary Lloyd M. Bentsen in a ceremony today, July
25 in Washington, D. C.
In presenting the award to Mr. Bentsen, Treasury Secretary Robert E. Rubin lauded
his long history of public service and contributions to Treasury. "In his two years at
Treasury, Lloyd Bentsen played a pivotal role in deficit reduction and he led successful
efforts to increase free and fair international trade and economic opportunity through the
North American Free Trade Agreement and the GATT agreement," Secretary Rubin said.
"During his tenure, interstate banking became a reality after years of unsuccessful legislation
and Treasury's law enforcement mission was strengthened. The Lloyd Bentsen Treasury
Department, like the man himself. was energetic, innovative, engaged and highly
successful." Mr. Bentsen was accompanied by his wife. B.A., at the ceremony in the
Andrew Mellon Auditorium.
Mr. Bentsen served as Treasury Secretary from January 1993 until December 1994,
following an exemplary career in the U. S. Senate that lasted 22 years. He has a long history
of public service, having served in the army during World War II. as Hidalgo County Judge
then Congressman in his native Texas. He was a businessman in Houston for 16 years
before running for Senate in 1970.
The award was named after the distinguished statesman Alexander Hamilton, who was
named the first Secretary of the Treasury in 1789. In today's ceremony, 564 Treasury
employees from across the country were honored for their accomplishments. The ceremony
has been held annually since 1964.
-30RR-1194
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
......................................
OrnCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASlllNGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 25, 1996
Contact:
Rebecca Lowenthal
(202) 622-2960
U.S. TREASURY DEPARTMENT HONORS THE LATE LEE F. JACKSON
The U.S. Treasury Department bestowed its highest honorary a ward. the Alexander
Hamilton Award, on the late Lee F. Jackson. who served as the U.S. Executive Director of
the European Bank for Reconstruction and Development (EBRD). in a ceremony today. July
25 in Washington. D.C.
Mr. Jackson. who was appointed by President Clinton to the EBRD post in August
1995, died in a plane crash April 3 while accompanying U. S. Commerce Secret<lry Ron
Brown on a trade mission to the former Yugoslavia.
In presenting the award to Mr. Jackson's parents. Luther and Nettie Jackson.
Treasury Secretary Robert E. Rubin said of his service. "Mr. Jackson demonstrated the
highest standards of dedication to public service throughout his career. As executive director
of the EBRD, he advanced vital U. S. policy interests while helping to support economic and
democratic transitions in Europe and the Former Soviet Union. Those of us who knew Lee
remember his energy and tremendous enthusiasm and we will miss him. "
Prior to joining the EBRD. Mr. Jackson served as Treasurer of the City of Boston.
Massachusetts. During his tenure. Boston achieved and maintained the highest bond ratings
in its history. despite a recession and cuts in state aid. Before coming to Boston. Mr.
Jackson worked as an investment banker in San Francisco and New York. working for
several firms where he financed infrastructure projects for cities. states and public
authorities. He began his career as an economist for the liS. Department of Energy's
Office of Hearings and Appeals. Mr. Jackson received an MBA from Stanford University
in 1983. and a BA. cum laude. in economics from Williams College in 1979. He was raised
in White Plains, New York.
The award was named after the distinguished statesman Alexander Hamilton, who was
named the first Secretary of the Treasury in 1789. In today' s ceremony at the Andrew
Mellon Auditorium, 564 Treasury employees from across the country were honored for their
accomplishments. The ceremony has been held annually since 1964.
-30RR-1195
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY ~.,
TREASURY
N EWS
1789r:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
OFFICE OF PUBUCAFFAIRS· 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR RELEASE UPON EMBARGO
July 25, 1996
Contact: Michelle Smith
(202) 622-2960
RUBIN ANNOUNCES $7 BILLION EARLY PAYMENT FROM MEXICO
Treasury Secretary Robert E. Rubin on Thursday announced that Mexico will repay
ahead of schedule $7 billion in early August under the United States emergency support
package.
Combined with earlier payments, Mexico will have repaid almost three-quarters of the
$12.5 billion it borrowed from the United States last year, leaving $3.5 billion in outstanding
support. To date, the United States has received more than $1.2 billion in interest.
"The U.S. emergency support program, combined with Mexico's continued,
disciplined adjustment efforts, is working and vital U.S. economic and security interests have
been protected," Secretary Rubin said. "With this $7 billion repayment, the American people
are being repaid well ahead of schedule for the loans we provided to Mexico.
"With nearly three-quarters of the debt about to be repaid, we can say that default has
been averted, the Mexican economy is beginning to recover and our exports to Mexico are
running at an all-time high. The strategy is working. "
Under the original agreement with the United States, all disbursements of funds under
the support program are backed by Mexican oil export proceeds which flow through an
account at the Federal Reserve Bank of New York.
"This substantial prepayment is good news for both the United States and Mexico.
The United States is being repaid a large part of our support earlier than scheduled, while
still maintaining more than adequate backing from oil export revenues," Secretary Rubin said.
"Mexico has been able to lower its borrowing costs and extend the maturity of its external
obligations, while deepening its access to private international capital markets."
The majority of Mexico's prepayment -- $6 billion -- will come from a new private
bank loan. This loan is backed by released oil export revenues which, in effect, is a partial
privatization of the U.S. oil facility. Mexico will fund the remaining $1 billion of the August
RR-1196
(More)
prepayment from other market financings, including proceeds of the recent Brady Bond
exchange and a Japanese yen-denominated issuance.
Secretary Rubin also welcomed Mexico's announcement that it will repay an
additional $1 billion of its International Monetary Fund obligations. "The IMF' continues to
playa valuable role in ensuring the ongoing success of this program," Secretary Rubin said.
In evaluating these transactions, Treasury emphasized the critical importance of
protecting vital U.S. interests, including those of U.S. taxpayers. Treasury has preserved
more than adequate coverage of the $3.5 billion in remaining Mexican obligations.
Moreover, the oil export proceeds will be released only when the prepayment has been made.
All of Mexico's peso-denominated dollar-indexed securities, or tesobonos, have been
redeemed, and Mexico has returned to the international capital markets to raise some $18.5
billion, including this latest issue, in the last 12 months. U.S. exports to Mexico are at an alltime high -- 16 percent higher in the first half of this year than last year and 11 percent
higher than the same period in 1994.
-30-
MEXICO PREPAYMENT: FACT SHEET
In early August, Mexico will prepay $7.0 billion of the remaining $10.5 billion in medium-term swaps
outstanding und~r the United States Emergency Support Package. The Administration's strategy of
support for MexIco has worked: default was averted, the Mexican economy has begun to recover, U.S.
exports to Mexico are at an all-time high, and Mexico will have repaid nearly three-quarters of its debt
to the U.S. well ahead of schedule. The balance of the U.S. swaps remain fully protected.
o
The majority of the prepayment - $6 billion - will come from a new private bank floating rate
note issue. This issue is backed by Mexican oil export revenues released from the U.S. oil
facility - in effect, a partial privatization of the U.S. oil facility.
o
Mexico will fund an additional $1 billion prepayment to the United States from other market
financings, including proceeds of the recent Brady Bond exchange and a Japanese yendenominated issuance. In early August, Mexico is also expected to make an early pc:.vment of $1
billion to the IMF.
o
Mexico has repaid $2 billion of short-term swaps, bringing their total borrowings down from a
peak of $12.5 billion in July 1995. With this upcomin2 payment. nearly three-Quarters of tbe
$12.5 bjJOon provided to Mexico as of July 1995 will be repaid after just one year.
In evaluating these transactions, the Department 0/ the Treasury has underscored the critical
importance o/protecting vital U.S. interests, including those 0/ U.S. taxpayers.
o
Because of the benefits to the U.S., Treasury is prepared to release its claim to some of Mexico's
oil export proceeds to facilitate the prepayment. These proceeds will be released only when the
associated prepayment has been made.
o
Treasury has preserved adequate coverage for Mexico's remaining obi igations: the share of oil
proceeds carved out will be less than the share of U.S. swaps prepaid. thereby preseryi02
adequate coyera2e of Mexico's remainin2 obli2ations.
The U.S.-led emergency financial support program/or Mexico - combined with Mexico's continued,
disciplined adjustment efforts - has achieved its objective: preserving American interests.
o
Vital United States economic and security interests have been protected.
o
Default was averted. All Tesobonos have been redeemed. Including this lat~st issue, Mexico has
returned to the international capital markets and raised over $18 billion in the past twelve
months. Mexico's reserves have increased almost three-fold from the low levels of early 1995.
o
Inflation has been brought under control. Domestic financial markets have stabilized. While the
effects of recession are still being felt in Mexico, economic growth has resumed.
o
U.S. exports to Mexico are running at all-time record levels this year, and the financial stability
of other emerging U.S. export markets has been preserved.
o
To date, in addition to capital repayments, the U.S. has received over $1.2 billion in interest
payments on our loans to Mexico, yielding net earnings of $450 million after subtracting our
borrowing costs.
The bottom line: this substantial prepayment is good news for both countries.
o
Mexico is able to lower its borrowing costs and extend the maturity of its external obligations,
while deepening its access to international capital markets.
o
The U.S. gets repaid nearly two-thirds of our outstanding support package ahead of schedule,
while maintaining adequate oil-backing for the remaining swaps.
DEPARTMENT
____________
OF
THE
~178_?c.....I
TREASURY
_ _ _ _ _ _ _ _ _ _ _•
OFFlCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
Contact: Calvin Mitchell
Jon Murchinson
202-622-2960
FOR IMMEDIATE RELEASE
Thursday, July 25, 1996
MEDIA ADVISORY
Treasury Secretary Robert E. Rubin will travel to Los Angeles Monday. July 29.
1996 to address the Town Hall on the CI inton Administration's economic pol icies as they
relate to urban America. The Secretary will detail current efforts of the Treasury to ensure
capital access to citizens of economically distressed areas in the United States. as well
preview new areas of policy development.
The Secretary will also participate in a press conference at the "LANCER" site in
South Central Los Angeles, a redevelopment project. along with officials from the James
Irvine Foundation. the Trust for Public Land, the California Center for Land Recycling
(CCLR) and the Concerned Citizens of South Central Los Angeles.
Town Hall is a non-profit. non-partisan forum in Los Angeles for the discussion
public issues with over 4.000 members from the business community, academia.
government. the media and the arts.
Dr
Media seeking site information regarding the Town Hall speech should contact
Rebecca Shehee at 213-628-8141, and Naomi Goldman at 310-826-8826 regarding the press
conference in South Central Los Angeles.
- 30 -
RR-1197
o
<D
federal financing
WASHINGTON, D.C.
20220
bankNEWS
July 26, 1996
FEDERAL FINANCING BANK
Charles D. Haworth, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of June 1996.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $63.7 billion on June 30, 1996,
posting a decrease of $1,277.1 million from the level on
May 31, 1996. This net change was the result of a decrease in
holdings of agency debt of $571.9 million, in agency assets of
$690.0 million, and in agency guaranteed loans of $15.2 million.
FFB made 18 disbursements during the month of June.
FFB also
received 15 prepayments in June.
Attached to this release are tables presenting FFB June loan
activity and FFB holdings as of June 30, 1996.
RR-1l98
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Page 2 of 3
FEDERAL FINANCING BANK
JUNE 1996 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Office Bldg.
HCFA Headquarters
Chamblee Office Building
HCFA Headquarters
Miami Law Enforcement
Oakland Office Building
Chamblee Office Building
Foley Square Office Bldg.
Foley Services Contract
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
6/4
6/4
6/6
6/6
6/6
6/13
6/14
6/21
6/24
$1,430.29
$164,900.00
$238,017.73
$753.31
$735.21
$51,228.91
$550,000.00
$608,700.00
$34,502.28
9/2/25
7/1/25
4/1/97
7/1/25
1/3/22
9/5/23
4/1/97
7/31/25
7/31/25
7.185%
7.186%
5.769%
7.136%
7.146%
7.354%
5.849%
7.282%
7.264%
6/19
$8,023,167.35
11/2/26
7.252% S/A
6/4
6/5
6/17
6/20
6/21
6/25
6/28
6/28
$69,000.00
$276,000.00
$3,185,000.00
$1,143,000.00
$350,000.00
$1,966,000.00
$300,000.00
$659,000.00
1/3/28
1/3/17
12/31/12
12/31/14
1/3/17
1/3/22
12/31/13
12/31/25
7.114%
7.072%
7.046%
7.123%
7.171%
7.187%
6.903%
7.030%
GSA/PADC
ICTC Building
RURAL UTILITIES SERVICE
Amelia Telephone #394
E. Nebraska Tele. #398
Horry Tele. Coop. #419
Molalla Tele. Co. #420
E. Nebraska Tele. #398
Farmers Telephone #399
Beaver Creek Coop. #391
WRECI Electric #353
S/A is a semi-annual rate:
Qtr. is a Quarterly rate.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 3 of 3
FEDERAL FINANCING BANK
(in millions)
Program
Agency Debt:
Export-Import Bank
Resolution Trust Corporation
Tennessee Valley Authority
u.s. Postal Service
sub-total*
Agency Assets:
FmHA-ACIF
FmHA-RDIF
FmHA-RHIF
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural utilities Service-CBO
small Business Administration
sub-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration +
DOl-Virgin Islands
DON-Ship Lease Financing
Rural utilities Service
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
DOT-Section 511
sub-total*
grand-total*
*figures may not total due to rounding
+does not include capitalized interest
Net Change
FY '96 Net Change
31. 1996
6/1/96-6/30/96
1011/95-6/30/96
$ 1,847.0
$ 2,008.3
6,536.2
0.0
0.0
8,383.2
6,946.8
0.0
0.0
8,955.0
$ -161. 3
-410.6
0.0
0.0
-571. 9
295.0
3,675.0
20,625.0
8.1
23.8
4,598.9
29,225.9
595.0
3,675.0
21,015.0
8.1
23.8
4,598.9
0.1
29,915.9
-300.0
0.0
-390.0
0.0
0.0
0.0
0.0
-690.0
-1,175.0
0.0
-1,075.0
0.0
0.0
0.0
010
-2,250.0
3,322.9
81.0
1,626.8
2,318.2
20.2
1,382.8
16,952.2
0.0
327.4
13.1
26,044.6
=========
$ 63,653.6
3,335.8
81. 0
1,626.8
2,324.8
20.2
1,382.8
16,944.3
0.0
331.0
13.1
26,059.8
==========
$ 64,930.7
-12.9
0.0
0.0
-6.6
0.0
0.0
7.9
0.0
-3.6
-170.1
-8.1
-61. 7
51.4
-0.8
-49.3
-323.3
-5.5
-28.4
-1.4
-597.3
June 30. 1996
..JL..1
Ha~
....Q&
-15.2
-659.3
-6,672.4
-3,200.0
-7.264.7
-17,796.4
$
=========
=========
$ -1,277.1
$-20,643.7
DE., A It T 1\'1 E N TO"
T II F.
T R' E A SUR Y
NEWS
oma OF PUBUC An'~ -1500 PENNSYLVANIA AVENUE, N. W. - WASHINCTON, D.C. -
20220 - (202) 622·!960
EMBARGO UNTIL 8:30 a.m., PDT
MONDAY, July 29,1996
As Prepared for Delivery
Remarks of
Treasury Secretary Robert E. Rubin
Town HalULA,
los Angeles, California
We're here this morning, to discuss the inner cities, a subject that I know you care a great deal
about, and I do too.
I'd like to start with a few personal comments, and then I'll outline the Administration's approach to
the inner cities, with a special focus on Treasury's capital access programs. Following that, 1'\1 respond to
questions or comments on anything you'd like.
As some of you know, I worked at a major investment banking firm for 26 years, on a Treasury
Secretary's traditional portfolio of issues: the economy, markets, international trade, banking and the like.
But today I'm here to speak about a different matter - the imperative to bring the residen1s of the inner city
into the economic mainstream.
I developed the view long ago that, unless we succeed in that endeavor, all of us - no matter
where we live or what our incomes - would be powerfully affected, in lost potential for our economy and in
a worsening of the conditions in which we live. Just thin\( of the enormous difference in costs borne by
taxpayers. in productivity. and in quality of life for all of us, if we can break the inter-generational cycle of
poverty and equip the urban poor to join the economic mainstream.
Being in the White House. and now serving as Secretary of the Treasury, has given me a rare
opportunity to act on these issues, but all of us, no matter what we do, can contribute meaningfully to this
vital endeavor. Our Chief of Staff at the Treasury. for example, tutors an inner city school kid, a trader I
know on Wall Street acts as a big brother to tvio kids, and others help rehabilitate houses, mentor small
businesses, volunteer in medical clinics, and the list of possibilities is endless.
Moreover, in addition to whatever else you do, your involvement is urgently needed to provide
political support for the p~ograms of the inner city, at a time when all of these programs - Head Start, Job
Corps, eRA, EITC, and all the rest -are under strenuous attack by too many in Congress.
RR-1199
- 2·
We need a true marshaling of national will and effort, and my hope - as I speak here and
elsewhere on these issues - is that the unexpected fact of a Secretary of the Treasury discussing the inner
cities as a critical economic concern for all of us, will reinforce those already involved and light a spark that
gets others involved.
Community leaders here in L.A., like Juanita Tate of Concerned Citizens for South Central lA,
know what it takes to rebuild our communities - investing in people to create a productiVe workforce, sate
streets and neighborhoods. and access to capital.
There are programs - federal, state and local- that work, but we must choose rigorously in this
era of scarce public resources and then apply effective programs on a scale commensunte with the
problem.
To start, however, success with our inner cities requires sustained economic growth that creates
jobs and through a high level of demand for labor, increases incomes. Too often I think that those focused
on the issues of the poor do not focus adequately on the imperative of a good economy for their purposes.
COnversely, I also think that too often those who are focused on creating a good economy do not
adequately recognize all else that is needed to overcome poverty.
Today, America is in the midst of a sustained economic recovery and has the strongest
fundamentals and best conditions we have seen in at least 30 years. The economy has created ten million
net new jobs, and the unemployment rate has dropped from 7.3 percent to 5.3 percent over the past three
and a half years. The average rate of growth during this period is 50 percent higher than during the prior
four years, the rate of inflation substantIally lower, and the rate of the new private sector investment that will
increase future productivity and growth vastly higher.
And all of this is no accident. While many factors have contributed. the key and indispensable
factorwas President Clinton's deficit reduction program enacted in 1993 that has now cut the deficit by
more than 50 percent, which, in turn, catalyzed the lower interest rates that drove and sustained the
recovery.
That stronger national economy has reached into urban America, and to low and moderate income
workers. Unemployment has dropped in America's ten largest central cities, including Los Angeles, and
1994 data ~ the latest available - shows real incomes of the lowest paid Americans have had some recent
improvement.
All of this is true. But what is also true. as all of you here today know too well, is that there are too
many people and too many places in our inner cities that are in trouble and that are not reached - or
reached far too little - by our improved economy.
The statistics tell us what we intuitively know. The Committee for Economic Development, a wellrespected business policy group. tells us that one third of the neighborhoods in our' 00 largest cities are
distressed or in danger. The Organization for Economic Cooperation and Development, the OECD, ranks
us atthe top of a list of 16· industrialized nations in income disparity. That same study shows that poor U.S.
children are poorer than the children in most other Western industrialized nations.
These are urgent' problems. And no matter what happens in the current debate over welfare
reform, we must ask and answer these questions: Where will the jobs come from, and how do you
produce the economic conditions necessary to create them?
I tend to think of the requisites for moving forward on the inner cities ~s falling into three categories.
- 3·
The first, and probably most important. is what could. broadly speaking, be called in"estment in
people. This includes education at all levels, from Head Start to adult sldlls and technical training, decent
housing, health care somewhere other than in the emergency room, and the earned income tax credit and
a higher minimum wage, so that work will lift workers above the poverty line and enable them to better eare
for the next generation. An important objective in the President's great budget battles of this year and last
has been to prloritlze these areas within the context of going to a balanced budget, rather than cutting
significantly in these areas to fund large tax cuts that disproportionately favor the most affluent, as did the
vetoed budget of the congressional majority
The second category is public safety. and, there too. there have been great political battles, this
time around the Pre~jdent's successful push to enact the Brady gun control law and the assault weapons
ban and our on-going fight against efforts to repeal the assault weapons ban.
The third is access to private sector capital. This has received relatively little public attention, but is
critical
to revitalizing America's distressed communities.
The last two decades have seen enormous innovations in finance. Information technology and
globaliZation are dramatically changing financial services. Ideas unknown on Wall Street a generation ago
are now commonly used to fuel everything from high tech firms to housing in the suburbs. Our financial
markets are today the broadest and deepest in the world.
But we still have a shortage of financial institutions and a shortage of credit for the creation of
housing and jobs In the inner city. As Robert Kennedy once said. "To ignore the potential contribution of
private enterprise is to fight the war on poverty with a single platoon. while great armies are left to stand
aside."
The Department of the Treasury has been deeply and energetically involved in bringing its broad·
based experience and expertise in capital markets to bear on the inner city. and we have pursued an eight
point program which I'd like to review with you.
Step one involves helping capital flow from mainstream financial institutions to creditWorthy
borrowers. The Community Reinvestment Act. or eRA. was put in place in 1977, to encourage regulated
banking- institutions to serve creditworthy borrowers in all parts of their communities.
In May 1995. with Treasury's leaderShip. the banking regulators released new eRA regulations that
eased the paperwork burden on banks while better promoting the results a\l of us want - more investment
capital to distressed communities.
During the last three years. according to nonprofit groups, finandal institutions have pledged oW'er
$96 billion to community development lending over the next decade. That's more than two-thirds of all
commitments made since CRA was enacted in 1977. While these are commitments. not loans made, this
is a good indication of what can happen when the private sector sees investment opportunities in America's
distressed communities.
During the last year, some in Congress have repeatedly tried to nullify CRA, in whole or in part.
That effort has been defeated thus far, with a vigorous defense. but the battle will. I suspect, be ongoing.
Tomorrow. the latest study under the Home Mortgage Disclosure Act is being released in
Washington. And for the second year in a row. lending to African-American. Hispanic, and low-income
borrowers Is rising. In fact, since 1993. lending to African Americans is up nearly 70 percent. Lending to
Hispanics is up nearly 48 percent. And lending in low- and mOderate-income neighborhoods is up over 25
percent. Much more needs to be done. But CRA, fair lending, a committed Administration and a sound
economy are making a real difference.
-4Step two. The President's 1993 economic plan made permanent the Low Income Housing Tax
Credit. As part of their budget last year, the congressional majority tried to repeal this credit. That was
explicitly listed as one reason for the President's veto of their budget The National Council of State
HousIng Agencies has estimated that the tax credit helps create over 100,000 units of affordable housing
every year by encouraging private sector investment in low-income neighborhoods.
The third step is following through on President Clinton's call in 1992 for a nationwide network of
community development banks. Two years later, his plan became law. Since then, Treasury has been
hard at work bringing that plan to life.
Within Treasury. we now have a community development fund, called CDFI. that will provide seed
and expansion capital to community-based banks. credit unions, community loan funds, micro-enterprise
lenders, even community venture capital.
Later this week. CDFI will make its first awards. Community-based financial institutions nationwide
will receive about $35 million to put capital into their communities. creating jobs and growth. We'll also
announce that mainstream financial institutions have joined a $15 million program to increase their lending
and support to community development institutions.
Over the next six years, the President's budget contains nearly $1.7 billion for CDFI funding, fully
paid for, because of the great promise it holds for empowering communities. But again. even the limited
funding so far has required a great struggle in the Congress, including vetoing last year's congressional
majority's budget bill, which would have provided no funding for CDFI. We must all work together to realize
the great potential for CDFI in the years ahead.
The fourth step is expanding micro-enterprise loans. Micro-enterprise lenders make very small
loans - for example, to a tailor for a sewing machine or to a mechanic to buy specialized tools. This spring,
the First lady and I launched a new Presidential Award for Micro-Enterprise Development, to be awarded
this fall.
The fifth step is a new tax incentive to clean up abandoned industrial properties in economically
distressed areas and put them back into productive use.
In his State of the Union Address, President Clinton called for adoption of what is called the
brownfields tax incentive. This $2 billion proposal, fully paid for in our budget. has been estimated to induce
over $10 billion In private sector investment to help clean up 30,000 brown fields sites.
Later today, to highlight the importance of expediting the revitalization of these properties, I will be
going to the Lancer site along the Alameda Corridor in South Central LA There, the IMne Foundation will
announce a $2 million grant to set up a new community-based organization in Los Angeles called the
California Center for Land Recycling -- "See Clear" .- to help communities link with the private sector to
clean up brownfields.,
Sixth, we've introduced legislation for a new round of Empowerment Zones and Enterprise
Communities, also fully paid for in the President's budget. The proposal contains new tax incentives to
bolster business investment and growth in 100 more distressed areas, with additional expensing for small
businesses and new tax-exempt bonds.
These initiatives all work together. L.A.'s community development bank was born out of your
Empowerment Zone. with S430 million from HUD, $210 million from the private sector, a~d ~ strong
partnership with the city and county of LA The banI< is scheduled to open tomorrow, whIch IS great news
for the city.
-5These six programs halle great power to rebuild housing, create jobs, and boost economic activity.
But the cost of progress is constant vigilance. We need to work vigorously to advance these programs, to
pass legislation where it's needed, and to protect these programs from on~oing attack. I want to tell you
about two other areas - steps seven and eight - where I think we can also make a real difference going
forward.
Seventh, while access to capital is critical, it often needs to be married with advice and mentoring
on matters ranging from building markets to managing a balance sheet The private sector can make an
enormous contribution here, by linking up on a pro bono basis with lenders, non-profit, and communities to
help inner city small businesses with accounting, business pl~ns, marketing, and the like.
Many bUSinesses are already involved, with real results. Just ask John Bryant of Operation Hope,
an organization dedicated to catalyzing business investment and mentoring here in Los Angeles. This is a
criticallyimportant area that I will be personally involved in pursuing over the coming years.
And number eight, which is still very much a work in progress: If we are able to pool community
development loans and resell them to private investors, we can, in effect. recycle a portion of available
capital back into inner city community development. After decades, that now happens in our housing
markets. Imagine. looking forward some years, what a secondary market for community development
lending would mean in terms of increased capital for growth and job creation in our inner cities. Now, thIs Is
a tough intellectual and practical challenge, but a joint Treasury/Commerce effort is underway. We hope
for some progress in the short term, and then to build on this in the years ahead. even if limited to private
placements. If, over the long haul. we can overcome these challenges, it would represent a true
breakthrough for community development.
So, in sum, equipping people for the mainstream economy, public safety, and increasing access to
capital. taken together, can help make a real break from the past and truly bring America's distressed
communities into the economic mainstream
These tasks are urgent and now, when America IS enjoying a durable economic recovery, is the
right time to mOlle vigorously ahead. The adage is right - fix the roof when the sun is shining.
Now, let me close where I started If we make the right decisions in our public and private sectors,
this country. with all of its many strengths, should have a robust economic future. But to realize that
poterrtial, we must, for all of our sakes, band together to overcome the problems of our inner cities and to
bring the residents of the inner cities into the economic mainstream. It won't be easy; it won't be quick; but it
can be done, and it must be done. again, for the benefit of all of us.
Thank you.
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OFnCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. - 20220 • (202) 6%2-%960
Contact:
FOR RELEASE AT 3 PM
July 29, 1996
Jon Murchinson
(202) 622-2960
TREASUR Y ANNOUNCES MARKET BORROWING ESTIMATES
The Treasury Department announced on Monday that its net market borrowing for the
July - September 1996 quarter is estimated to be $45 billion, with a cash balance of
$40 billion on September 30. The Treasury also announced that its net market borrowing for
the October - December 1996 quarter is estimated to be in the range of $50 billion to
$55 billion, with a cash balance of $30 billion on December 31, 1996.
In the quarterly announcement of its borrowing needs on April 29, 1996, Treasury
estimated net market borrowing for the July - September quarter to be in a range of
$55 billion to $60 billion, assuming a $40 billion cash balance on September 30.
Actual net market borrowing in the April - June quarter was a pay down of
$25.7 billion, while the end-of-quarter cash balance was $38 billion. On April 29, Treasury
estimated net market borrowing for the April - June quarter to be a pay down of $20 billion,
with a $35 billion cash balance on June 30. The improvement was primarily the result of
higher than estimated receipts.
The regular quarterly refunding press conference will be held at 1 p. m. on
Wednesday, July 31, 1996.
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______________________________________________________________________
__
For bress releases, speeches,>.~,
public
schedules and official biographies, call our 24~our fax line at (202) 622-2040
~G.
all.
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 29, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,045 million of 13-week bills to be issued
August 1, 1996 and to mature October 31, 1996 were
accepted today (CUSIP: 9127943M4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.18%
5.21%
5.20%
Investment
Rate
5.32%
5.35%
5.34%
Price
98.691
98.683
98.686
$20,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 24%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.15 - - 98.698
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Received
$42,562,166
AcceQted
$13,044,666
$36,928,210
1,375,541
$38,303,751
$7,410,710
1,375,541
$8,786,251
3,582,815
3,582,815
675,600
$42,562,166
675,600
$13,044,666
5.19 - - 98.688
UBLIC DEBT NEWS
Dcpartmcnt of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 29, 1996
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,158 million of 26-week bills to be issued
August I, 1996 and to mature January 30, 1997 were
accepted today (CUSIP: 9127943XO).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.32%
5.34%
5.34%
Investment
Rate
5.54%
5.57%
5.57%
Price
97.310
97.300
97.300
$20,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 11%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Received
$50,155,096
Accepted
$13,158,411
$41,330,160
1.338,536
$42,668,696
$4,333,475
1.338,536
$5,672,011
3,350,000
3,350,000
4,136,400
$50,155,096
4,136,400
$13,158,411
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.25 -- 97.346
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5.33 -- 97.305
DEPARTMENT
OF
THE
TREASURY
~~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .
..............................
OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
July 29, 1996
Contact: Michelle Smith
(202) 622-2960
STATEMENT BY TREASURY SECRETARY ROBERT RUBIN
ON PENNSYLVANIA A VENUE
"We closed Pennsylvania Avenue to vehicular traffic, with Senator Dole's support, when the
U.S. Secret Service said it was necessary to protect the President, the White House complex,
tourists and visitors. After losing Americans in Saudi Arabia and Atlanta to terrorism, I
know of no law enforcement reason that would cause us to change our position or relax our
vigilance in protecting the White House complex or the President. "
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PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 29, 1996
Contact: Peter Hollenbach
(202) 219-3302
BUREAC OF THE PUBLIC DEBT AlDS SAVINGS BONDS O\-VNERS
AFFECTED BY FLOODS IN ILLINOIS
The Bureau of Public Debt took action to assist victims of floods that struck northern
Dlinois by expediting the replacement or payment of United States Savings Bonds for owners
in the affected are'lS. The emergency procedures are effective immediately for paying
agents and owners in those areas of northern Illinois affected by the floods. These
procedures will remain in effect through August 31, 1996.
Public Debt's action waives the normal six-month minimum bolding period for Series EE
savings bonds pres(;'nted to authorized paying agents for redemption by residents of tbe
a..=t'ected ill ea. Mo~t financial institutions serve as paying agents for savings bonds.
The counties of Couk. DeKalb, DuPage, Grundy, Kane, Kendall, LaSalle, Ogle, Stephenson,
Will and Winneb;.tgo are included in the initial declaration. Should additional counties be
declared disaster areas tbe emergency procedures for savings bonds owners will go into
effect for those area5i.
The replacement of bonds lost or destroyed will also be expedited by Public Debt. Bond
owners should complete form PD-1048, available at most financial institutions or the
Federal Reserve Bank. Bond owners should include as much information as possible about
the lost bonds on the form. This information should include how the bonds were inscribed,
social security number, approximate dates of issue, bond denominations and serial numbers
if available. The colr.pleted form must be certified by a notary public or an officer of a
financial institution. Completed forms should be forwarded to Public Debt's Savings Bond
Operations Office located at 200 Third St., Parkersburg, West Virginia 26106-1328. Bond
owners should writt: the words "Floods" on the front of their envelopes to help expedite the
processing of claims.
oUO
PA-227
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oma OF PUBUCAFFAIRS • 1500 PENNSYLVANlAAVENVE, N.W•• WASHINGTON, D.C.. 20220. (lOt) 622·!960
Text as Prepared for Delivery
July 30, 1996
REMARKS TO THE TREASURY BORROWING ADVISORY COMMITIEE
OF THE PUBLIC SECURITIES ASSOCIATION
BY THE HONORABLE JOSHUA GOTBAUM
ASSIST ANT SECRET AR Y OF THE TREASURY FOR ECONOMIC POLICY
We are pleased to welcome you again on one of your quarterly visits. Secretary
Rubin and the rest of the Treasury team greatly value the insights that only practical market
experience such as yours can provide. We are fortunate to have the benefit of your advice.
Of course we don't always take it, but you may be sure that your views are always regarded
seriously.
There is always a risk. given the volatility of markets, in focusing too much on this
week's calendar or last week's results. Like you we await this week's calendar with special
interest (as I will di.cU5S in a second). but we should not lose sight of the larger picture: The
main point to make is that we continue to enjoy some of the best economic fundamentals in a
generation, Consumer demaild and business investment have been strong, unemployment is
down, job creation is strong, and inflation continues to appear subdued.
Althol!gh victory has many fathers, an important cause of this economic strength must
be renewed fiscal diSCIpline. A £ a result of the strong steps taken in 1993, the US budget
deficit has been cut by more than half. This year. we project it will fall to $117 billion,
1.6% of GDP, This is the smallest share of GDP since 1974. It is also by far the best
performance of any major industrial nation. We all recognize that this milestone is just that:
a marker of how far we've come and a reminder that we still have much to do,
Job growth is an essential indicator of the health of the economy. The basic
fundamentals are hardly in question. Since January 1993, 10 million jobs have been created
in this country. By way of contrast, employment growth in the other major industrial
countries taken together has been remarkable by its absence.
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RR-1205
For press J7'l-~t 8fJUd 'tJ, public schedules and official biographies, call our 24-huur fax line at (202) 622·2040
There have been contentious debates in recent years about the quality of U.S job
growth. Recently. the Council of Economic Advisors published a review of the data. It is
worthwhile reading. While there are plenty of unsettled statistical issues. the paper notes that
job growth has increasingly been in higher wage industries and categories. and
overwhelmingly full time jobs.
In such a period of rapid job growth. we must of course be watchful for inflationary
pressures. But. thus far. the evidence has been encouraging and the signs of acceleration
weak. The unemployment rate has fallen to 5.3 percent and remained below 6 percent for
more than a year and a half. but inflation still remains remarkably well behaved. Core
consumer prices have risen at a slower pace this year than last. Energy prices are beginning
to recede. Prices for consumer spending in the GDP accounts suggest even less inflation than
indicated by the CPI. Producer prices are tame.
Of course. one cannot drive looking exclusively in the rear-view mirror, so we should
not concentrate solely on the good statistical record of the past. Even fundamentals cannot
safely go unattended. The budget deficit, the job machinery and the control of inflation will
all require continuing attention. Things are going very well, but that certainly doesn't justify
complacency.
Now what can usefully be said about this week's statistical calendar. or more broadly
about the near term outlook? While this week's statistical calendar is obviously the focus of
current attention. the lesson this year would seem to me to be the dominance of the
fundamentals. not the primacy of the isolated statistic. Big blockbuster, market-moving
employment report!: have been followed by calmer periods, leaving interest rates pretty much
where they Stllrted. Whether or not that will be the case this week remains to be seen.
Looking out a little further, the official projection as developed for the Mid-Session
Budget Review calls for 2.t percent real growth over the four quarters of this year. The
so-called advance estimate of second-quarter growth will not be known until Thursday but the
market is looking for something around 4 percent. We then expect the economy to move at a
somewhat slower but sustainable pace in the second half of the year. Things do not always
work out as smoothly as expected, and recent history is nothing if not a reminder of quarterto-quarter variation, but with good fundamentals in place we expect the economy to stay on
track.
Those are our views but of course the reason we are here is to learn yours. We
appreciate your coming and look forward to the meeting.
DEPARTMENT
OF
THE
1I......................................~/78~9~
TREASURY
NEWS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 2:30 P.M.
July 30, 1996
CONTACT:
Office of Financing
202/219-3350
TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $26,000 million, to be issued August 8,
1996. This offering will result in a paydown for the Treasury of
about $4,150 million, as the maturing weekly bills are outstanding
in the amount of $30,153 million.
Federal Reserve Banks hold $7,948 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,405 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional amounts
may be issued for such accounts if the aggregate amount of new
bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000
Attachment
RR-1206
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED AUGUST 8, 1996
July 30, 1996
Offering Amount .
$13,000 million
$13,000 million
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .
91-day bill
912794 3N 2
August 5, 1996
August 8, 1996
November 7, 1996
May 9, 1996
$13,554 million
$10,000
$ 1,000
182-day bill
912794 2L 7
August 5, 1996
August 8, 1996
February 6, 1997
February 8, 1996
$18,900 million
$10,000
$ 1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
Competitive bids
Maximum Recognized Bid
at a Single Yield
Maximum Award .
.
.
.
Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .
35% of public offering
.
35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
.
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date
D 1· P \ I{ T \I t, '\ I
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oma OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINCTON, D.C. • !OlIO. (to.) 6ft-tHO
FOR lMMEDIATE RELEASE
July 30, 1996
Contact:
Jon Murchinson
(202) 622-2960
RUBIN TO AWARD $35.5 MILLION TO COMMUNITY DEVELOPMENT INSTITUTIONS
Treasury Secretary Robert E. Rubin will announce tomorrow, July 31, $35.5 million
in awards to 3 t community development organizations with operations in 46 states and the
District of Columbia. The event will take place at 11;30 a.trI. in the Office of Thrift
Supervision amphitheater. 1700 G Street N.W., Washington, D.C.
These funds represent the first awards of the Community Development Financial
Institutions (CDFD Fund. CDFIs are specialized private institutions that fill niches in lhe
market traditional fhancial institutions are not well positioned to serve. They provide a wide
range of financial products and services to underserved communities and inc1u<.le such diverse
institll!ion~ as community development banks, credit unions, loan funds, venture capital funds
aJ'ld micro enterprise fund5.
Representatives af 28 uf th~ 31 community development organizations will be
availaole to the pre~s a( the OTS amphith~.(er. The amphitheater will be open for camera set
IIp at 10:3{1 a.m.
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RR-1207
F()t' press t:'P!;;miQ,
liJrn:mes. ,,"Otic schedules ami official biof!mbhies. co11 oor 2~our fax Ii"~ n.t (2M I
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'IREASURY
OFFICE OFPUBUC AFFAIRS el500PENNSYLVANlAAVENUE, N.W. e WASHINGTON, D.C•• %0220 e (202)6%2-2960
EMBARGOED UNTIL 11: 30 AM
July 31, 1996
Contact:
Jon Murchinson
(202) 622-2960
RUBIN AWARDS $35.5 MILLION TO COMMUNITY DEVELOPMENT INSTITUTIONS
Treasury Secretary Robert E. Rubin today announced the selection of 31 community
development organiL1tions to receive $35.5 million in financial and technical assistance from
the Community Development Financial Institutions Fund. These funds will be leveraged with
significant private funds and are expected to reSUlt. over time, in at least 5350 million of
lending and investing in distressed urban and rural communities in 46 states and the District
of Columbia.
"In 1992. I called for the creation of a nationwide network of community development
hanks to help our communities help themselves. Local Community Development Financial
Institutions will help their neighbors create small businesses. restore housing and rebuild hope
in communities accross the country." President Clinton said. "The CDFI Fund is a prime
example of a public-private partnership striving to bring work :;md wealth back to America's
distressed communities ..,
"The CDF! Fund will facilitate the flow of capital to our nation's distressed
communities. helping to create jobs and revitalize neighborhoods in areas that have been left
behind. Secretary Rubin said.
U
Community Development Financial Institutions (CDFls) are specialized private
institutions that fill niches in the market traditional fmancial institutions are not well
positioned to serve. They provide a wide range of financial products and services to
underserved communities and include such diverse institutions as community development
banks. credit unions. loan funds. venture capital funds and microenterprise funds.
The CDFI Fund was developed as part of President Clinton'S initiative to support the
private sector's creation of a national network of financial institutions dedicated to community
development. The fund. which is part of the Treasury Department, represents a new
approach to community development that will leverage significant private sector and local
resources, promote self-sustaining CDFIs and catalyze new community lending and
investment activity by conventional financial institutions.
-30-
RR 1:20S
Forfrresl~""'~m, i/lHM", J1t,b"~ tchedules and
official biographies, call our 24-hour fax line at (202) 622·2040
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
COMMUNITY onlLO'MENT
FINANCIAL INSTITUTIONS FUND
CDFIs Selected for Funding
ACCION Texas
San Antonio, Texas
Appalbanc
Berea. Kentucky
Bethe:! Federal Credit Union
New York, New York
Boston Community Loan Fund
Boston, Massachusetts
Cascadia Revolving Fund
Seattle, Washington
Community Loan Fund of Southwestern Pennsylvania
Pittsburgh, Pennsylvania
Delaware Valley Community Reinvestment Fund
Philadelphia. Pennsylvania
Detroit Development Bancorporation
Detroit, Michigan
Douglass Bancorp
Kansas City, Kansas & Missouri
Enterprise Corporation of the Delta
Jackson, Mississippi
Cleveland, Ohio
Faith Community United Credit Union
FINCA
Washington, DC
Window Rock, Arizona
First American Credit Union
Illinois Facilities Fund
Chicago, illinois
London, Kentucky
Kentucky Highland8 Investment Corporation
New York, New York
Local Initiatives Support Corporation (for Rural LISC)
Louisville Community Development Bank Holding Company Louisville, Kentucky
Low !ncowe Housing Fund
San Francisco, California
Concord, New Hampshire
New Hampshire Community Loan Fund
New York, New York
Nonprofit Facilities Fund
Duluth, Minnesota
Northeast Ventures Corporation
Marks, Mississippi
Quitman County Federal Credit Union
Riclunond, Virginia
Richmond Neighborhood Housing Services
Sacramento, California
Rural Community Assistance Corporation
Santa Cruz, California
Santa Cruz Community Credit Cnion
Charlotte, North Carolina
Schooiworkers Federal Credit Union
Durham. North Carolina
Self-Help
Cleveland. Ohio
ShoreBridge Capital
Arkadelphia, Arkansas
Southern Development Bancorporation
Juneau, Alaska
Tlingit-Haida Regional Housing
Montpelier, Vennont
Vermont Community Loan Fund
July3!. 1996
DEPARTMENT OF THE TREASURY
•
WASHINGTON, D.C.
COMMUNITY O£VELO'NENT
FINANCIAL IN,TITUTIONI ruNO
Highlights of the First Round of CDFI Program Funding
Types and Amounts of Assistaace
•
The Fund is selecting 31 organizations for funding for a total of $35,469,500.
• This funding is broken down as follows:
Equity Investments $ 9.350.000
Grants
$18,690,000
Loans
$ 6,660,000
Technical Assistance $ 769,500
Organizational Divenity
•
4 community development banks or bank holding companies. one of which is
African-American.
•
•
•
•
•
•
•
6 community development credit unions.
12 community development loan funds focusing on housing, nonprofit facilities
and/or small busmess, including micro businesses.
3 community development venture capital organIzations. one of which is an inner-city
venture capital fund, whiie the remaining two serve rural areas.
2 microt'nterprise loan f ..lr:ds.
I Native-American regional hOU3ing organ.iz.ation.
2 multi-faceted CDFIs, each 'h'ith a credit union and one or more loan funds.
I national community deveiopment intennediary.
Geographic Reach
•
•
•
The CDFls selected are headquartered in 20 states plus the District of Columbia.
The CDFIs selected serve communities in 46 states plus the District of Columbia.
Approximately 50% of the organizations serve predominantly urban areas, 25% serve
predominantly rural areas, with the remainder serving a combination of both.
Impact and Innovation
• Of the 31 organizations selected, 12 represent startups (in existence two years or less)
•
or are launching major geographic expansions.
In addition, the CDFI funding will assist 8 other organizations in implementing
significant new programs, products or services.
Addressing Divene Needs
• The CDFIs selected provide a wide range of financial services and products to the
distressed urban and rural communities and low· income populations they serve.
These services and products include commercial loans and equity investments to start
or expand small businesses (including micro businesses), loans for firsHime home
buyers, loans to rehabilitate rental housing, loans for community facilities and
consumer loans.
Leverage
•
In the near term (two to three years) the $35.5 million of CDFI funds provided is
expected to leverage three to four times that amount in total capital raised for these
institutions. Over the long term, the $35.5 million of funding is expected to support
lending and investment of 10 to 20 times that amount.
EZlEe Linkage
• 24 of the COFIs selected serve Empowerment Zones and/or Enterprise Communities.
DEPARTMENT OF THE TREASURY
•
WASHINGTON, D.C.
COMMUNITY DrVILO~"[NT
FINANCIAL INSTITUTIONS FUND
Community Development Financial Institutions (CDFI) Fund Overview
The CDFI Fund was created as a bipartisan initiative as part of the Riegle Community
Development and Regulatory Improvement Act of 1994. The Fund's programs will
expand the availability of credit, investment capital. financial and other services in
distressed urban and rural communities. By stimulating the creation and expansion of a
diverse set of community development financial institutions (CDFls) and by providing
incentives to traditional banks and thrifts through the Bank Enterprise Awards (BEA)
Program, the Fund's investments work toward building private markets, creating healthy
local economies. promoting entrepreneurship, restoring neighborhoods, generating local
tax revenues, and empowering residents.
CDFIs provide a wide range of financial products and services -- such as mortgage
financing for first time home buyers, commercial loans and investments to start or expand
small businesses, loans to rehabilitate rental housing, and basic retail/consumer fmancial
services needed by low income households. CDFIs comprise a broad range of institution
types such as community development banks, community development credit unions,
community development loan funds, community development venture capital funds and
microenterprise loan funds.
CDFI Fund Initiatives
CDFI Pro~ram
The Community Development Financial Institutions (CDF!) Program represents a new
generation of community development initiatives. It uses limited public resources to
invest in and build the capacity of private, for profit and nonprofit financial institutions,
leveraging large amounts of private capital and taking full advantage of private sector
talent and creativity. The CDFI Fund invests in CDFIs in a variety of forms -- equity
investments, loans, grants, deposits and credit union shares - depending on market needs
and the ability of individual CDFls to raise private matching funds in comparable form.
BEA Pro2ram
This program provides incentives for traditional banks and thrifts to invest in CDFls and
to increase their lending and provision of financial services in distressed communities.
These activities will complement and support the conununity reinvestment efforts of
traditional banks and thrifts.
Trainina and Technical Assistance
The CDFI Fund intends to implement an ongoing program of training, technical
assistance and capacity building to facilitate, in conjtll1ction with the CDFI Program, the
long tenn growth of the industry, while maintaining high quality standards and market
discipline.
Secondal:y Market Initiative
The CDFI Fund is authorized to enhance the liquidity of CDFIs through the creation of a
secondary market for community development loans. This initiative has the potential to
dramatically leverage new sources of private capital in support of the CDFI industry.
ChroDology of Major Events
September 1294
President Clinton signs the Riegle Community Development and Regulatory
Improvement Act of 1994 into law. t\mong other things, the law establishes the
Community Development Financial Institutions (CDFl) Fund.
July 1995
The White House, Treasury and Congress negotiate a rescission agreement that changes
the Fund's status from an independent agency to a government corporation within
Treasury and preserves $50 million in fiscal year 1995 appropriations.
October 1995
The Fund publishes in the Federal Register its interim regulations and notices of funding
availability for the CDFI and SEA Programs.
January 1996
On January 29, the Fund receives over 268 applications for the CDFI Program requesting
more than $300 million in assistance. The Fund receives 50 applications for the BEA
Program. Review of applications begins.
July 1996
Treasury Secretary Rubin announces the selection of the CDFIs to receive $35.5 million
in assistance from the CDFI Fund.
DEPARTMENT
OF
TREASURY
THE
TREASURY
NEWS
~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1I
................................
ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED until 11:30 EDT
Remarks as prepared for delivery
July 31, 1996
Remarks of Treasury Secretary Robert E. Rubin
CDFI Fund Awards Announcement
Washington, D.C.
Thank you, Kirsten. Before we go further, I'd just like to say what a terrific job that
you and your staff have done. I think you really bring an entrepreneurial spirit and
hard-headed business sense to this project that is essential for the (OFI Fund and the
long-term health and growth of local community development financial institutions.
Earlier this week I gave a speech to the business community in Los Angeles. I told
them something that I've repeated to business people around the country, indeed, to anyone
who' Il listen. And it is something I've believed for a very long time: Simply put, the United
States will fall far short of its economic potential, for all of us, if we do not deal with the
problems of our distr~ssed rural communities and inner cities.
I said that I thought there were three essential ingredients to bringing jobs and growth
back to America's distressed areas: investing in education, making our streets safe, and
increasing access to private sector capital. And I explained eight ways in which the U.S.
Treasury has been bringing our broad expertise in capital markets to bear on the problems of
America's distressed communities. For, as Robert Kennedy once said. "To ignore the
potential contribution of private enterprise is to fight the war on poverty with a single platoon,
while great armies are left to stand aside."
From the low income housing tax credit, to CRA and community development
banking, to micro-loans, Empowerment Zones, and business mentoring, there are many ways
that we can help improve the flow of private capital. Today, we're here to focus on one
important approach: bringing new sources of community financial capital to distressed areas,
so neighbors can lend to neighbors right in their own communities.
In 1992, President Clinton called for the creation of a nationwide network of
community development banks. Two years later, his plan became law. Since then, the
Treasury Department has been hard at work oringing his plan to life.
RR-1209
FM press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Within Treasury, as you all know, we now have the Community Development
Financial Institutions Fund, or CDFI, that will provide seed and expansion capital to
community development banks, credit unions, loan funds, micro-lenders, and even venture
capital.
The CDFI Fund represents a new approach to community development. By leveraging
scarce public resources with private sector matching dollars to invest in local institutions, we
can take full advantage of private sector talent and creativity. By emphasizing market
discipline, we ensure the long-term viability of community development finance.
Today, we're here to announce the award winners for the first round of CDFI funding.
We'll be providing $35.5 million to 31 institutions around the country. The CDFIs we honor
here today deserve special recognition. They have come through an extremely competitive
and rigorous process that begin with 268 applicants and requests for funding roughly 10 times
the amount of funds available for the initial round.
The awards we announce today represent just the beginning of what we can
accomplish in the coming years through building local CDFls. We intend to fund many other
fine organizations in communities around the country in our second and future rounds. And
over the next six years, the President's budget contains nearly $1.7 billion for CDFI funding,
fully paid for, because of the great promise it holds for empowering communities. But as you
all know too welL we've been in a great struggle with some in Congress to ensure adequate
funding for CDFI going forward.
In the past, the federal government has too often prescribed a one-size fits all solution
to community development. The CDFl Fund's awards today exemplify an opposite approach:
we're funding CDFIs with the kind of capital they need, and we're funding CDFIs of a
myriad of type, size and approach, each designed to meet unique local needs and fill local
market niches. All these institutions are united by two central facts: high quality and the
drive and capacity to serve their communities.
Of the total awards, the Fund will be making equity investments of $9.4 million,
grants of $18.7 million, loans of $6.7 million, and technical assistance worth $770 thousand.
These funds are going into a great diversity of local institutions. We're funding four
community development banks, six credit unions, 12 loan funds, three venture capital funds, 2
micro-loan funds, 1 Native American housing fund, 2 multi-faceted CDFIs, and a national
community development intermediary.
The CDFIs together serve communities in 46 states and the District of Columbia.
About half focus on urban areas, a quarter on rural areas, and the rest serve both rural and
urban areas. Twelve of these organizations are startups or major geographic expansions.
Twenty-four of the CDFIs serve Empowerment Zones or Enterprise Communities.
These are federal dollars well invested. The CDFI Fund's seed and expansion capital
of $35.5 million is expected to leverage, in just the next two or three years, an additional
$140 million in private sector investment, and significantly more over time.
You should all be proud of the work you have done and are about to do.
We've heard from Kim Burse, President of the new Louisville community
development bank holding company. Her story should be an inspiration to all of us; there are
programs that work, and people who make them work, in communities all across America.
Now, with $2 million in CDFI funds, the bank has plans to bring in over $12 million from
the private sector. And working in Louisville's Enterprise Community, the bank will help
grow small businesses, rebuild housing, and restore hope.
We've also heard from Donna Fabiani of FINCA, about how micro-loans right here in
the Distric~ of Columbia can empower low-income individuals and promote self-employment.
We've seen micro-lending work around the world, and it can work here too. With the First
Lady's leadership, we can work together to bring micro-lending in this country to a broader
scale.
We've also heard from Jeff Wells of the Santa Cruz Community Credit Union, where
a $1 million grant from CDFI will help them offer the full range of financial services to the
communities they serve, including a major expansion to serve low-income residents of
Watsonville. I'm told that one of their first borrowers, Odwalla juice company, which started
with a $1200 loan in a home garage, went public two years ago.
All of you have fought long and hard to get here today. The CDFI Fund is an
important new tool that can help you bring financial capital into your communities, but at
bottom, what makes this all work is an active, engaged vibrant community, and people like
yourselves in local communities with the idealism and the pragmatism that it takes to rebuild
housing, create jobs, and restore hope to neighborhoods long left behind.
Now, let me close where I started. If we make the right decisions in our public and
private sectors, this country, with all of its many strengths, should have a robust economic
future. But to realize that potential, we must, for all of OUI sakes, band together to overcome
the problems of our distressed communities, and to bring all Americans into the economic
mainstream. It won't be easy; it won't be quick; but it can be done. and it must be done,
again, for the benefit of all of us.
Thank you.
-30-
D EPA R T MEN T
0 F
THE
i~iif
TREASURY ~~J
T REA S l; R.i:
NEWS
_ _ _ _ _ _ _ _ _ _..::i17Rq-::.. _ _ _ _ _ _ _ _ __
OmCE OF PUBUC AFFAIRS. [500 PENNSYLVANIA AVENl'E. N.W .• WASHINGTON, D.C.. 20220. (202) 622·2960
FOR IMMEDIATE RELEASE
CnlllaL'l
Jon :Ylurchinson
~()2-622-2960
July 3 L 1996
REMARKS BY DARCY BRADBl"RY
ASSISTANT SECRETARY FOR FINA~CIAL \IARKETS
Al:Gl:ST 1996 TREASlTRY Ql'ARTERLY ru:n''''DING
PRESS CO'FERE~CE
(jood ~lnCrnl1on.
will he~lI1 \\ nil t()da;. . -; rdundin~ ~ll1n()lmCl'melll Jnd the terms of
the reg.uIJr Treasury August midquarter refundin~. I \\ill JIs() Lbcuss rrcJsury financing
requirements for the balance of the current calendar Ljuarter Jnd (lllr estimated cash needs for
the October-December quarter.
I
We are offering S39.0 hill ion of notes and honds to refund $17.6 billion of
pri,ately held notes maturing on August IS and to raise approximately $21.'+ billion of cash.
I.
The three securities are:
First. a 3-vear note in the amount of '519.0 hIllinn. maturIng. lln August 15. 1999. This
note is scheduled tn he auctioned (m a yield hasls at 11)1\ rm. Eastern time on August
b.
Second. a 9 year II month note 111 the amount nf S I 00 hillion. maturing on July IS.
2006. This is a reopening of the ten-year note originall;. Issued in July. This note is
scheduled to he auctioned on a ;. leld hasis at IO() p.m. [~~lStern time on Wednesday.
August 7.
Third. a 30 ;. ear hond in the amount ()1' SI ().I) billion. maturing on August 15. 2()26.
This bond is scheduled tn he aUL'lioned nn a ;. leld hasis at I :()() p.m. Eastern time on
Thursday. :\ugust 8.
()n ."..rril II. rreasury ~ll1n()unccd that (1l1 .\ugust I ~ it would eall the go() hond
nf 1996-2()()1. 1hi:-; hnnd. nf \\hleh ~lrrro\lm~ltel;. ").7 hillinn h rrJ\Jtcl;. held. \\ill he reraid
from availahle funds. \\'e estimated In\rril th~lt the Trea~lIr: h -;a\ing ahout '555 - %5
million in hudget (lut1ays from this e~1iI.
")
RR-1210
Far press relea.ses. speeche~·. puhlic schedules and official biographies. call our ].J·hour fax line at (202) 622·]040
3.
As announced on \lnnday. july ,'2l). \\e esttmate a l1et market borrowin!! need
of $45.0 billion for the July-September quarter. The estimate J.ssullles J. 540 billion c-;sh
balance at the end of September. Including the securities in this rdundinu. \\e haw raised
$48.1 billion of cash from sales of marketable securities. See the attachm~ent for details.
4.
The Treasury \\ill need to pavdO\\I1 S3.1 hillion in market horrowin!! durin!!
the rest of the July-September quarter. This' financing can he :lccnmplished througl; regula~
sales of 13-. 26-. and 52-\\eek bills in August and Septemher and 2- and 5-vear notes in
August and September. ..\ cash management hill may be needed tn (o\er tl;e low point in the
cash balance in early September. The tentatiw auction cakndars k)r .\ugust. September. and
October are included in the chart package which was distrIbuted tllday.
:We estimate I'reasury net market hnrn)\\lng tll he' 111 ,\ r~lI1ge of '550 hillion
'555 hillion for the October-December quarter. assuming a s.~() \~IIII,)n cash halance on
December 31
to
i).
The Treasur: has [llihilshed pmposed changes 111 the -;ute and local gO\ernment
series securities pwgram (cnmnwnl: calkd'SLGS") f,)[ Cll111ment 111 the Federal
Regis ter.
The changes are Jeslgned [() make SLGS mure tk.\lhle. competitive. costeffective securities. We want to help state and local governments el)mply with yield
restrictions and arhitrage rebate requirements of the Federal tax laws. Among other things,
we propose to reduce the Treasury's fee on SLGS which will increase investors' yield. We
would eliminate the current so-called "all-or-nothing" rule and permit advance refunding
escrows to blend SLGS with securities acquired in the open market. We would also
eliminate the current cumbersome certifications and substantially decrease the notice period
to purchase SLGS. Copies of the proposed regulation. are availahle in the hack of the room.
and we are encouraging public comment.
7.
As you know. in May. Secretary Rubin announced Treasury's intention to
issue intlation-protectIon secuntles. At the same tlme. we puhllsheJ in the Federal Register
an Advance ~otice of Proposed Rulemaking seeking comments from market participants Oi1
what aspects llf intlation-protection securities would give them the hroadest market appeal.
We have had more than 30 meetlngs with Il1nre than 800 investors. dealers. and uther
interested parties since then. in Washington. ~ew Yurko Bl)StlJn. Chicag.o. San Francisco.
London. Tokyo. and. hy videoconference. Australia. We have received approximately 50
comment letters In response to the ANPR. Last week. \ve held a symposium to explore
further the l)ptions for structunng. principal and interest payments nn the intlation-protection
securities and We puhlished an addltillnal nutlee III the Federal Reg.ister reljuesting further
comment.
We are currently reviewing and evaluating the comments we have received. Based on
those comments and our own review, we have made two decisions:
First. a comment we received from many people was that it was important for these
new securities to be eligible for our stripping program from the day of issuance.
Accordingly, we focussed on that area and are now comfortable that we will be able
to make the new securities strippable as l)f their Issuance.
Secondly, we have also received numerous comments nn the importance of multiple
maturities. Accordingly, while \ve \l,: II I auction lme maturIty initially, we plan to
introduce a range of mammies as soon as the first maturIty IS esrabl ished.
We expect to conclude uur review of the comments and tl) announce our decisions
regarding all of the deSign details llf the intlation-protectloll seCUrI[Ies in September. At that
time, we will publish a draft fnr comment llt reVISluns to the L'nlftlrm Offering Circular.
describing the terms and conditions nf the new "ecunries and 110\\ [hey will he auctioned.
8.
The ~()\'emher mldquarter refundll1g pres-; cnnterence IS scheduled to he held
on Wednesdav. October 30.
-30-
ATTACHMENT
CASH RAISED
Including the securities announced in this refunding. we have raised S-+8.1 billion of
cash from sales of marketable securities.
This was accomplished as follows:
raised $5.3 billion from the
raised $7.7 hillion from the
July 1 anu July 31:
raised SI.8 hillion from the
raised 53.1 billion from the
2-year notes issued \)11 Julv
5-year notes issued on
anu Julv 31:
52-week hills issueu lulv 25:
sale of the IO-year note issueu
raised S8.8 hillion in cash in the reguIJr weekly hllis. Il1CluJln~
-\esterday:
raised S21 -+ hillion fwm the n\)tes and honus ~lI1n()unced ((lJa:
Julv 15 to refund the
maturing 7-year note:
those announced
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
1I....................................~jII78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1II
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
July 31, 1996
CONTACT: Office of Financing
202/219-3350
TREASURY AUGUST QUARTERLY FINANCING
The Treasury will auction $19,000 million of 3-year notes,
$10,000 million of 9-year 11-month 7% notes, and $10,000 million
of 30-year bonds to refund $17,596 million of publicly-held
securities maturing August 15, 1996, and to raise about $21,400
million new cash.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $3,074 million of the maturing
securities that may be refunded by issuing additional amounts of
the new securities.
The maturing securities held by the public include $1,628
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
The 8% Bonds of 1996-01 that were called for redemption on
April 11, 1996, are also being redeemed on August 15, 1996. This
bond, of which $727 million is publicly held, will be repaid from
available funds.
The 9-year 11-month note and 30-year bond being offered
today are eligible for the STRIPS program.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms and
conditions set forth in the Uniform Offering Circular (31 CFR
Part 356) for the sale and issue by the Treasury to the public
of marketable Treasury bills, notes, and bonds.
Details about the notes and bond are given in the attached
offering highlights.
000
Attachment
RR-1211
Fm- press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
AUGUST 1996 QUARTERLY FINANCING
July 31, 1996
Offering Amount
$19,000 million
$10,000 million
$10,000 million
3-year notes
Y-1999
912827 Y8 9
August 6, 1996
August 15, 1996
August 15, 1996
August 15, 1999
Determined based on the average
of accepted competitive bids
Determined at auction
February 15 and August 15
9-year l1-month notes (reopening)
C-2006
912827 Y5 5
August 7, 1996
Augyst 15, 1996
Jul y 15, 1996
July 15, 2006
30-year bonds
Bonds of August 2026
912810 EX 2
August 8, 1996
Augus t 15, 1996
August 15, 1996
August 15, 2026
Determined based on the average
of accepted competitive bids
Determined at auction
February 15 and August 15
$5,000
$1,000
None
Determined at auction
$1,000
$1,000
$5.89674 per $1,000 (from
July 15 to August 15, 1996)
Determined at auction
Determined at auction
Not applicable
Not appl icable
Not appl icable
$200,000
912820 BT 3
Not applicable
Determined at auction
912803 BH 5
August 15, 2026 --- 912833 PA 2
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Yield
Interest payment dates
Minimum bid amount
Multiples
Accrued interest payable
by investor
Premium or discount
7'1.
Determined at auction
January 15 and July 15
$1,000
$1,000
None
STRIPS Information:
Minimum amount required
Corpus CUSIP number
Due dates and CUSIP numbers
for additional TINTs
The following rules apply to all securities mentioned above:
5i.iDnil s SfOn 0 f B1 ds :
Noncompetitive bids
Competitive bids
Maximum
at a
Maximum
Receipt
Recornized Bid
Sing e yield
Award . . • . _
of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms • . • . .
Accepted in full up to $5,000,000 at the average yield of accepted competitive bids.
(1) Must be expressed as a yield with three decimals, e.g., 7.123%.
(2) Net long position for each bidder must be reported when the sum of the total bid amount,
at all yields, and the net long position is $2 billion or greater.
(3) Net long position must be determined as of one half-hour prior to the closing time
for receipt of competitive tenders.
35% of public offering
35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Full payment with tender or by charge to a funds account at a Federal Reserve Bank on issue date
DEPARTMENT
OF
THE
TREASURY
{,1 NEWS
,~ . . I''';,,<
TREASURY
_ _-
•
•
f
s.\~'.~-:
_ _ _ _ _'«~//,:"
~lJ~4c.. _ _ _ _ _ _ _•
OFFICE OF PUBUC AFFAlRS • 1500 PENNSYLVANIA AVENCE. ~.W .• WASHI:--;CTO;\;. D.C.. 20220. (202) 622-2960
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
July 31, 1996
CONTACT:
Office of Financing
2()2/219-3350
TREASURY AUGUST QUARTERLY FINANCING
The Treasury will auction $19,000 million Jf 3-year notes,
$10,000 million of 9-year 11-month 7% notes, a~d $10,000 million
of 30-year bonds to refund $17,596 million of publicly-held
securities maturing August 15, 1996, and to ra:se about $21,400
million new cash.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $3,074 million 0: the maturing
securities that may be refunded by issuing add:tional amounts of
the new securities.
The maturing securities held by the public include $1,628
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
The 8% Bonds of 1996-01 that were called for redemption on
April 11, 1996, are also being redeemed on August 15, 1996.
This
bond, of which $727 million is publicly held, will be repaid from
available funds.
The 3-year 11-month note and 30-year bond being offered
today are eligible for the STRIPS program.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms and
conditions set forth in the Uniform Offering Circular (31 CFR
Part 356) for the sale and issue by the Treasury to the public
of marketable Treasury bills, notes, and bonds.
Details about the notes and bond are given In the attached
offering highlights.
000
Attachment
RR-1211
Far pFJh-UIwes, speeches. public schedules and official biographies. call our 24-hour fax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
AUGUST 1996 QUARTERLY FINANCING
July 31, 1996
Offerlng Amount
$19,000 mill ion
$10,000 millIon
$10,000 mIllIon
3-year notes
Y-1999
912827 Y8 9
August 6, 1996
August 15, 1996
August 15, 1996
August 15, 1999
DetermIned based on the average
of accepted competitive bids
DetermIned at auction
February 15 and August 15
9-year 11-month notes (reopening)
[-2006
912827 Y5 5
August 7, 1996
August 15, 1996
J u I y 15, 1996
July 15, 2006
7%
30-year bonds
Bonds of August 2026
912810 EX 2
August 8, 1996
August 15, 1996
August 15, 1996
August 15, 2026
Determined based on the average
of accepted competitive bids
Determined at auction
February 15 and August 15
Descrlptlon of Offerlng
Term and type of security
Ser I es
CUSIP number
Auction date
Issue date
Dated date
Maturlty date
Interest rate
YIeld
Interest payment dates
MInImum bId amount
Multiples
Accrued interest payable
by Investor
Premium or discount
$5,000
$1,000
None
Determined at auction
January 15 and July 15
DetermIned at auction
$1,000
$1,000
$5.89674 per $1,000 (from
J u I y 15 to Augus t 15, 1996)
DetermIned at auction
DetermIned at auction
Not appll cable
Not appl icable
Not appl icable
$200,000
912820 BT 3
Not appl i cabl e
Determined at auction
912803 BH 5
August 15, 2026
912833 PA 2
$1,000
$1,000
None
Sf RIPS Informatlon:
Minimum amount required
Corpus CUSIP number
Due dates and CUSIP numbers
for additional TINTs
1he followlng rules apply to dll securltles mentIoned above
Submission af Bids.
Noncompetitive bids
Competitive bids
MaXImum
at a
Maximum
Receipt
Recarnlzed BId
Sing e YIeld
Award . . . . .
of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms . . . . .
Accepted in full up to $5,000,000 at the dverage YIeld of accepted competitIve bids.
(1) Must be expressed as a yield WIth three deCImals, e.g., 7.123%.
(2) Net long position for each bidder must be reported when the sum of the total bid amount,
at all yields, and the net long position is $2 billion or greater.
(3) Net long position must be determined as of one half-hour prior to the closing time
for receipt of competitive tenders.
35% of public offering
35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Full payment with tender or by charge to a funds account at a Federal Reserve Bank on issue date
REPORT TO THE SECRETARY OF THE TREASURY
FROMmE
TREASURY BORROWING ADVISORY COMMITTEE
OF mE
PUBLIC SECURITIES ASSOCL-\ nON
July 31, 1996
Dear Mr. Secretary
Since the Committee's last meeting on May I, 1996, economic expansion has proceeded at a
strong pace. Consumer spending rose briskly in the spring, reinforced by strength in employment and
income. Manufacturing output has accelerated, and more recently the industrial-sector strength has
broadened. While inflationary pressures have generally remained quiescent, signs of rising wage
pressures are becoming evident
During this period, interest rates on Treasury securities have increased uniformly by 20-30
basis points throughout the yield curve Monetary policy has remained unchanged since January,
although market participants perceive increased risks of the need for credit restraint Eurodollar rates
currently reflect expectations of a 25-50 basis point increase in the Federal Funds rate by year-end
While market participants expect a slowdown in economic activity, many are skeptical that the
slowdown will be decisive enough to forestall a modest tightening in monetary policy
Within this context, to refund the $17 6 billion of privately-held notes maturing on August 15,
1996 and to raise $21 A billion of cash, the Committee recommends that the Treasury auction $39 0
billion of the following securities:
•
$19.0 billion 3-year notes due August 15, 1999;
•
$10.0 billion re-opened 7 percent notes due July 15, 2006,
•
$100 billion 30-year bonds due August 15, 2026
Of the 18 Committee members present for the meeting, 16 voted in favor of this
recommendation. The other two members favored the issuance of $390 billion of securities
comprising $190 billion 3-year notes, $90 billion re-opened 7 percent notes due July 15, 2006 and
$11.0 billion 30-year bonds. While recognizing tradeoffs that are apparent from quarter to qUaI1er, the
majority preferred an approach which emphasized consistency in the sizes of the 10- and 30-year
issues. The minority view sought to take advantage of are-opened 10-year note to offer a somewhat
smaller amount of 10-year securities in order to issue a larger bond offering. This approach would
reflect the relative expensiveness of the 30-year maturity sector versus the 10-year sector and would
promote increased liquidity in the bond sector
The Committee voted unanimously to re-open the 7 percent notes due July 15, 2006 Such a
re-opening would likely improve liquidity in this issue -- the first irregular cycle offering of 10-year
notes. The Committee felt that if this issue was not re-opened, it may reduce the market's acceptance
of additional 10-year notes issued with July 15 and October 15 maturity dates
If the Treasury sought to issue a lesser amount of securities in the August refunding than the
Committee's recommendation., by a vote of 16-2 the Committee prefers reducing the 3-year note This
is consistent with the Committee's long-held emphasis on longer-dated securities, as well as our earlier
recommendation of a minimum size of $1 0 0 billion for 10- and 30-year securities.
With the aim of achieving a cash balance of $400 billion on September 30, the Committee
unanimously recommends that, for the remainder of the quarter, the Treasury meet its borrowing
requirement in the following manner:
•
Two 5-year notes totaling $12.5 billion each, to raise $60 billion of new cash;
•
Two 2-year notes totaling $18.75 billion each, to raise $06 billion of new cash;
•
Two I-year bills totaling $19 25 billion each, to raise $0 7 billion of new cash;
•
Weekly issuance of 3- and 6-month bills through the remainder of the quarter, to pay
down $19.4 billion of cash;
•
The issuance of intra-quarter cash management bills to cover the cash low point in
early September; and
•
Redemption on August 15 of the bonds called earlier, to reduce cash by $727 million.
Including the $21.4 billion raised in the rnid-quarter refunding as well as anticipated foreign
add-ons of $5.3 billion, the proposed financing schedule will raise a net amount of $13 .9 billion. This
amount, when added to the $31.1 billion already raised or announced in the quarter, will accomplish
the total net market borrowing requirement of $45 0 billion.
For the October-December quarter, the Treasury estimates a net borrowing requirement in the
range 0[$50-55 billion With a cash balance 0[$300 billion at the end of December. To accomplish the
anticipated net borrowing requirement, the Committee unanimously recommends the provisional
financing schedule attached to this report.
2
At the Treasury's request, the Committee considered a number of questions regarding the
potential terms and conditions of inflation-protection securities The Committee recognizes that the
Treasury's review of these questions builds upon an extensive body of research and analysis, both
prepared at Treasury and submitted as part of the public review and comment process. The Committee
commends the Treasury for the thoroughness of its efforts and encourages the Treasury to continue to
maintain an open dialogue with market participants as it moves toward final decisions on the plan to
issue such securities.
In considering the specific question raised by the Treasury as to the relative market attraction
of the so-called "Canadian-style" structure and a "current-pay" inflation floater, the Committee notes
that there are a number of theoretical advantages and disadvantages to each structure, which will have
different practical consequences for different segments of the investor marketplace. Since no one
structure is likely to be ideally suited to all potential investors, the issue is perhaps best approached
from the standpoint of which market segment is likely to provide the most significant, dependable longterm demand for inflation protected securities. In that regard, the Committee believes that pension
funds and insurance companies represent the segments with the greatest natural interest For these
types of investors, the current tax liability and duration risk issues raised by the Canadian model pose
fewer complications, while the reinvestment risk features of that model are relatively attractive. Also,
the treatment of deflation risk is likely to be somewhat less complex with the Canadian structure,
relative to the current pay model. Finally, there is the relative advantage of existing market experience
with the Canadian model.
An important consideration with either model would be features which would enhance
subsequent re-engineering via stripping. On this point, there were mixed views on the complexities of
stripping either model and a clear sense that more analysis would be important. In this regard, the
Committee noted favorably an idea advanced in comment letters that, were the Treasury to chose the
Canadian model, it consider establishing an exchange mechanism whereby coupons with the same
maturity date, but stripped from different inflation-indexed issues, could be exchanged on the basis of
index factors which would equate the coupons. The Committee would emphasize the importance of
enhancing stripping features of this security, as that would go a long way to providing market
mechanisms to adapt the security to changing patterns of market demand
The Committee also discussed the relative importance of devising a structure which would
promote liquid secondary markets for such securities. Any structural features which would enhance
secondary market liquidity, without diminishing investor interest, would be an obvious plus. However,
the Committee would stress that even under the best of circumstances, these instruments will not have
the degree of secondary market liquidity enjoyed by conventional US Treasury securities. What is
important is that they achieve adequate liquidity, given the needs of the investor base to which they will
have most appeal. Those investors will most likely regard these assets as core holdings to protect
against long-term inflation uncertainty risk, and as an attractive low-risk alternative to hol~~gs of
"real" assets. Thus, they are less likely to require the high liquidity typical of Treasury secuntles and
more likely to evaluate the liquidity of these instruments relative to that of substitute assets, which are
far less liquid than long-term Treasury securities
3
The Committee also considered the trade-offs between issuance in a range of sectors of the
yield curve relative to a more focused initial program designed to promote a reasonable degree of
market liquidity. Given the limited prospects for liquid secondary markets for these securities, and the
Committee's sense that the most promising sources of investor demand favor longer-term assets, the
Committee preferred an initial approach focused on issuance oflonger-term securities
As to specific maturity, on balance the Committee favored initial issuance of a 10-year rather
than 30-year security, with regular re-openings whenever feasible. The factors weighing in favor of 10year debt were the lower relative degree of risk in a 10-year security, particularly given uncertainties on
liquidity and duration risk; the increased degree of intermediate-term investment focus ror defined
contribution and 401 (k) investment plans, the prospects for some broader appeal to individual
investors; and the benchmark status of the 10-year sector for conventional Treasury debt securities. In
time, and depending upon market acceptance of the instrument, there could well be demand for
issuance of longer-term (20- to 30-year) inflation protection securities. .AJso, to the extent the
Treasury develops practical solutions to the structural issues which would facilitate stripping of these
securities, this would lessen the risk of longer-dated issuance by providing a market -based mechanism
for balancing supply and demand across maturity sectors.
Regarding auction techniques, the Committee was strongly in favor of the use of single price
auctions for these securities, as that technique works best in offerings where there is a significant
degree of bidder information risk. This would be especially the case for such a new type of Treasury
security The Committee also believes that a 10nger-than-norrna1 pre-auction when-issued trading
period would facilitate price discovery and contribute to improved auction participation. As concerns
the Treasury's right to award less than the full amount of securities being offered, the Committee notes
that the Treasury has such a right in all existing offerings and would naturally want to retain it for a
new type of security. That option would, of course, be reflected in the offering circular and other
materials introducing the new security. In as much as the Committee would expect that the Treasury
would only exercise that option in extreme and unusual circumstances, we see no need for the Treasury
to make special efforts to highlight this aspect of the offering terms and conditions.
In terms of the choice of inflation index to be used in the inflation-protection securities
program, the Committee unanimously reconunends the CPI-U index This index is the most widely
known inflation index and is generally accepted as a reasonable indication of inflation. It is similar to
indices which other countries use for inflation-linked securities. The CPI-U is also published monthly,
which reduces the lag time in adjusting the accrual of principal.
The Committee did not have a strong preference for a seasonally adjusted or non-seasonally
adjusted series. However, a finality in determining payment amounts is an important consideration.
Therefore, the Committee supports the Treasury's position that revisions of an index reported at an
earlier date should not be used for principal or interest calculations.
4
Mr Secretary, that concludes the Committee's report.
questions.
We welcome any comments or
Respectfully submitted,
(
\..
'-
Richard M Kelly
Chairman
5
)
Estimated Treasury Marketable Borrowing
(billions of doUal'S)
October-December 1996
Amount
Maturing
Amount
Offered
$3475
3600
$125
18.5
18.9
18.8
19.25
1925
1925
075
0.35
045
150
150
4037
432.75
2905
Oct 10-year
76
10.0
05
2.9
Oct 2-year
Oct. 5-year
184
8.5
1875
12.5
I5
0.5
1 85
45
190
100
10.0
12
03
36.7
39.0
15
3.8
Nov 2-year
Nov 5-year
187
9.6
18.75
12.5
15
05
1 55
34
Dec. ~-year
Dec.5-year
184
94
1875
12.5
15
05
1 85
36
Total coupons
1273
142.7S
80
2345
Total borrowing
531 0
57550
80
525
Foreign
Add-oDs
Cash
Raised
Treasun:: bills
Regular weekly bills
52~week
bills
October 17
November 14
Dec~mber 12
Cash management bills*
Total bills
Treasun:: couQons
Nov 3-year
Nov. lO-year
Nov 30-year
Refunding subtotal
*C ash management bills totaling $15 0 billion to be issued in early November and maturing on
January 23, 1997 Also assumes that intra-quarter cash management bills will be needed to cover
cash low points during the quarter.
MINUTES OF THE MEETING OF THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE PUBLIC SECURITIES ASSOCIATION
July 30 and 31, 1996
July 30
The Committee convened at 11:35 a.m. at the Treasury
Department for the portion of the meeting that was open to the
public.
All members were present, except Mr. Kessenich. The
Federal Register announcement of the meeting and a list of
Committee members are attached.
Deputy Assistant Secretary for Financial Federal Finance
Roger Anderson welcomed the Committee and the public to the
meeting.
Assistant Secretary for Economic policy Gotbaum
summarized the current state of the U.S. economy. Jill Ouseley,
Director, Office of Market Finance, presented the chart show,
which had been released to the public on July 29/ updating
Treasury borrowing estimates and providing statistical
information on recent Treasury borrowing and market interest
rates.
The public meeting ended at 12:10 p.m.
August refunding
The Committee reconvened in closed session at the Madison
Hotel at 2:15 p.m.
The members were present who had attended the
public briefing.
Deputy Assistant Secretary Anderson gave the
Committee its Charge, which is also attached.
The Committee began by considering the attached proforma
financing plan for the July-September quarter that had been
prepared in advance by one of the members, using the market
borrowing estimates that were released by the Treasury on July
29. The Committee began with a discussion of whether to
recommend reopening the 10-year note issued in July 1996.
They
voted unanimously to recommend reopening that note in part to add
to its liquidity in the secondary market.
The Committee then discussed the sizes of the refunding
issues.
Two-packages were presented:
$19 billion of 3-year notes, $10 billion of 9-11/12 year
notes in a reopening, and $10-billion of 30-year bonds -which received 16 votes; and
$19 billion of 3-year notes, $9 billion of 9-11/12 year
notes in a reopening, and $11 billion of 30-year bonds -which received 2 votes.
2
The Committee did not see a need for cash managem~nt bills
as part of the August refunding. The consensus was that, if the
Treasury were ~o trim the size of the refunding package, the 3year note si~e should be reduced. The Committee also foresees
t~at the TreasurY,will need to issue short-term cash management
b111s for the perlod from early September until after the
September 15 tax payment date.
The Committee consensus was that the proforma financing plan
suggested for the October-December seemed appropriate.
Inflation-protection securities
The Chairman opened the discussion with a description of the
Canadian structure and the current pay structure that the
Treasury had published as possibilities for inflation-protection
securities.
Deputy Assistant Secretary provided a brief summary
of the discussion at the symposium held at the Treasury on July
24"
1996, on the structure of the inflation-protection
securities.
The Committee began by discussing the possible impact of
deflation on the value of the inflation-protection bonds, then
turned to the specific questions in the Charge:
structure:
In the Canadian model the impact of inflation on
the principal accrues over the life of the bond and a fixedinterest coupon is paid currently on the inflation-adjusted
principal.
In the current-pay method, all of the return that is
attributable to inflation and a fixed interest rate are paid each
6 months.
The Committee consensus was each model has advantages.
The Canadian model would attract pension funds, insurance
companies, and individual self-directed retirement savings
through 401(k) plans. The current pay structure wculd attract
mutual funds and other investors that are not tax-advantaged and
accounts that need greater liquidity. The Committee pointed out
that there are tradeoffs between trying to provide inflation
protection over the longer term and the short-term considerations
pertaining to market liquidity.
Multiple maturities:
The Committee consensus recommendation
is that the Treasury pick one maturity at least in the beginning,
with the preference being for 10 years.
Awarding less than the announced amount:
The Committee
consensus is that the Treasury should cut back from the announced
amount only under extreme circumstances.
other:
The consensus was that when-issued trading for
inflation-protection securities should be longer than that for
conventional Treasury securities to give market participants more
time for price discovery.
A 1-week minimum for the WI period was
3
suggeste~, although this is no longer than the usual
for the regular midquarter refunding operation.
wt
period
The meeting adjourned at 4:15 p.m.
July 31
The Committee reconvened at 8:]0 a.m. at the Treasury in
closed session. All members were present, except Mr. Kessenich
and Mr. Lodge.
The Chairman presented the Committee report
(copy attached) to Assistant Secretary Bradbury and Deputy
Assistant Secretary Anderson.
In response to questions, the Committee discussed briefly
the amount of time needed by dealers and investors between the
Treasury's final announcement of details of inflation-protection
securities and the first auction.
It will be necessary for
market participants to make computer systems changes, and to test
them, before the first auction. That time period was estimated
in a range of 3 to 6 months.
The meeting adjourned at 9:05 a.m.
7'
Jit(
v·
I
«
K. Ouseley,
/Of f ice. of ~arket
Domestic Finance
July 31, 1996
Attachments
Certified by:
Richard Kelly, Chairman
Treasury Borrowing Advisory Committee
of the Public Securities Association
July 31, 1996
36,64
Mdenl R.egister I Vol 61. No. 135 I Friday, July 12. 1996 I Notices
=Estimated Number of Respondent' .
600.
Estimated Burden Hours Per
Respondent: 5 minutes.
Frequency of Response: 0
Estimated Total Reportil tJurden:
170 hours.
Clearance Officer: G~ cl: Slmar (202)
622-3869. Internal Rf' nue !Service.
Room 5571. 1111 C()stitution Avenue.
NW .. Washingto ' 20224.
OMB Review Milo Sunderhauf
(202) 395-73 , Office of Management
and Budget. Jam 10226. New
Executive .fice Building, Washington.
DC 20507
Lois K. 1"Illand.
Depa' ;rental Reports Management Officer.
IFF -6<:.96-17696 FUed 7-11-96; 8:45 ami
.. ,JNG <::OM 4830-41-4>
Departmental OffIces; Debt
Management Advisory Commtttee;
Meeting
Notice is hereby given. pursuant to 5
U.S.C. App. section 10(a)(2). that a
meeting will be held at the U.S.
Treasury Department. 15th and
Pennsylvania Avenue. NW .•
Washington. DC. on July 30 and 31.
1996. of the following debt management
advisory committee:
Public Securities Association
Treasury Borrowing Advisory
Committee
The agenda for the meeting provides
for a technical background briefing by
Treasury staff on July 30. followed by a
charge by the Secretary of the Treasury
or his designate that the committee
discuss particular issues, and a working
session. On July 31. the committee will
present a written report of its
recommendations.
The background briefing by Treasury
staff will be held at 11 :30 a.m. Eastern
time on July 30 and will be open to the
public. The remaining sessions on July
30 and the committee's reporting
.
session on July 31 will be closed to the
public. pursuant to 5 U.S.c. App.
section 10(d).
This notice shall constitute my
determination. pursuant to the authority
placed in heads of departments by 5
U.s.c. App. section 10(d) and vested in
me by Treasury Department Order No.
101~5, that the closed portions of the
meeting are concerned with information
that is exempt from disclosure under 5
U.S.c. section 552b(c)(9)(A), The public
interest requires that such meetings be
closed to the public because the
Treasury Department requ..:.res frank and
full ad vice from representati ves of the
financial community prior to making its
final-decision on major financing
operations. Historically. this advice has
been offered by debt management
advisory committees established by the
several major segments of the financial
community. When so utilized. such a
committee is recognized to be an
advi.sory committee under 5 U.S.C, App.
section 3.
Although the Treasury's final
announcement of finanCing plans may
not reflect the recommendations
provided in reports of the advisory
committee. premature disclosure of the
committee's deliberations and reports
would be likely to lead to significant
financial speculation in the securities
m8l'ket. Thus. these meetings fall within
the exemption covered by 5 U.S.C.
552b(c)(9)(A).
The Office of Domestic Finance is
responsible for maintaining records of
debt management advisory committee
meetings and for providing annual
reports setting forth a summary of
committee activities and such other
matters as may be infonnative to the
public consistent with the policy of 5
U.S.C. 552b.
~
the U.S. from foreign fabric:
exported to another country for
assembly into an article that is retw
to the U.S. and entered, or withdrr ;d
from warehouse. for consumPti~'/11
after July 1. 1996. the dutiable
~
the article shall not include !.hi llue°
such components, In the fina' ule 0(
document implementing thr d'O'lisiOl!a
of section 334 of the Act.
Jlishect In
the Federal Register on ~ ,A ember 5
1995 (60 FR 46188). Cur ms stated
follOWing regarding 19/ lR 10.25:
Under section 334(b)V where &ooda "y.
V
ihe
assembled abroad fronr }mponents CUt i.n
the United Statl'S frorr .Jreign fabric (~
though under sectio, ~ the cut
components are nor )oducts of the UnJlIId
States and the 88Sf ,bling country ia the
country of origin' )1e assembled 8OOda.
when imported ,iO the United States. Will .
continue to re<' ,ve the same duty treellDeat
presently aeq jed to such goods under
rubheading/ '2.00.80. HTSUS· • •
section 3U (4) serves to preservw I tariff
treabnent
t otherwise would no 10lJ8llr be
availablr dar the section 334 origin ruJe.
Set' n 10.25 incorporatea by
refer ce the same operational.
Dated: July 8,1996.
vo/' tion, and documentation
rf' ents applicable to goods
John D, Hawke. Jr .•
( ered under subheading 9802.00.80
Under Secretary of the Treasury for Domestic
SUS. Accordingly. in promulgatini
Finance.
9 Q'R 10.25. Customs expressed ita
IFR Doc. 96-17742 Filed 7-11-96; 8:45 am)
intent to continue to allow entry of
IIIU.IiIO c:ooa 4I1,..a..M
these goods under subheading
9802.00.80, on and after July 1. 1996.
Thus. imported goods entitled to a duty
Customs Service
allowance under 19 Q'R 10.25 are to be
Entry of Certain Goods Asaembl(
entered under subheading 9802.00.8065,
Abroad From Components Cut
HTSUS, and, solely for purposes of
Shape In the U.s. From Foretger ·ebrtc
calculating the duty allowlUlC9 under
this subheading, Customs will treat
AGENCY: U,S. Customs Service'
these textile components as if they were
Treasury.
"U.S. fabricated components",
AcnOH: General notice.
It is important to note. however, that
.
I
permitting the entry of section 10.25
SI,JMMARY: This docume~ As forth
goods under subheading 9802.00.8065,
instructions for the pro
entry under
in order to implement the duty
,the Hannonized Tariff .aedule of the
allowance provided under section
United States of certaV goods
assembled abroad ~ ,components cut 334(b)(4)(A) of the Act. should not be
interpreted as a determination of the
to shape in the U,S i om foreign fabric.
country
of origin of these cut
FOR FURTliEA INFO~ 4nOH CONTACT:
Craig Willer. SPf .al Classification and components. The determination of the
country of origin of.textile components
Marldng Branch )(fice of Regulations
cut in the U.S. from foreign fabric will
and Rulings (2f -482-6980),
be made under a general application of
SUPPUMENTA' , INFORMATION:
the section 334 rules of origin. as
implemented by section 102.21.
Backgroun,
Customs Regulations (19 Q'R 102.21).
1, Entry 0/ Jection 334(b)(4j(A) Goods
Thus. it is possible that a shipment of
Under 91 2.00.8065
.
assembled. goods will be eligible for a
partial duty allowance under
Secti J 10.25. Customs Regulations
subheading 9802.00.8065 pursuant to
(19 cr .10.25) implements section
10.25, but the country of origin of those
334P ,4)(A) of the Uruguay Round
Agr Jments Act ("the Act") (codified at goods. for quota. marking and other
general origin purposes, will be neither
19 J.S.C. 3592), which provides that
the country of assembly nor the U.s.
... ,ere components are cut to shape in
r
f
Treasury Borrowing Advisory Committee
of the
Public Securities Association
Chairman
Richard Kelly
Chairman of the Board
Aubrey G. Lanston & Co., Inc.
One Chase Manhattan Plaza, 53rd Fl.
New York, NY 10005
Vice Chairman
Stephen Thieke
Chairman, Market Risk Committee
IP Morgan & Company, Inc.
60 Wall Street, 20th Floor
New York, NY 10260
Daniel S. Ahearn
President
Capital Markets Strategies Co.
50 Congress Street, Ste. 816
Boston, MA 02109
Timothy W. Jay
Lehman Government Securities, Inc.
3 World Financial Center
New York, NY 10285-0900
lames R. Capra
President
Capra Asset Management, Inc.
555 Theodore Frernd Avenue Ste C-204
Rye, NY 10580
Barbara Kenworthy
Managing Director
of Mutual Funds - Taxable
Prudential Insurance
~1cCarter Highway
2 Gateway Center, 7th Floor
Newark, NJ 07102-5029
Kenneth M. DeRegt
Managing Director
Morgan Stanley & Co., Incorporated
1585 Broadway
New York, NY 10036
Mark F. Kessenich, lr.
Managing Director
Eastbridge Capital, Inc.
308 Royal Poinciana Plaza
Palm Beach, FL 33-l80
2
Richard D. Lodge
President
Bane One Funds Manage_ment Company
100 East Broad Street, 17 FI.
Columbus, OH 43271-0133
William H. Pike
Managing Director
Chemical Bank
270 Park A yen ue
New York, NY 10017
Wayne D. Lyski
Chairman & Chief Investment Officer
Alliance Fixed Income Investors
Alliance Capital
Management Corporation
1345 Avenue of the Americas
New York, NY 10 105
Richard B. Roberts
Executive Vice President
Wachovia Bank & Trust Co., NA
P.O. Box 3099
Winston-Salem, NC 27150
Robert D. McKnew
Executive Vice President
Bank of America
555 California Street, 10th Fl.
San Francisco, CA 94104
Joseph Rosenberg
President
Lawton General Corporation
667 Madison Avenue
New York, NY 10021'-8087
Michael P. Mortara
Partner, Co-head Fixed Income Division
Goldman-Sachs & Co.
85 Broad Street, 26th Floor
New York, NY 10004
Morgan B. Stark
Principal
Ramius Capital Group
40 West 57th Street, 15th Fl.
New York, NY 10019
Daniel T. Napoli
Senior Vice President
Merrill Lynch & Company
250 Vesey Street, North Tower
World Financial Ctr, 8th Fl.
New York, NY 10281
Craig M. Wardlaw
Executive Vice President
Nations Bank Corporation
Nations Bank Corporate Center
Mail Code NCI 007-0606
Charlotte, NC 28255-0001
July 30, 1996
COMMITTEE CHARGE
The Treasury would like the Committee's specitic advice on the following:
Treasury financing
the composition of a financing to refund $17.6 billion of privately held notes
maturing on August 15 and to raise approximately $20 billion of cash in 3-, 10-.
and 30-ye<:tr notes and bonds;
reopening the July lO-year note in the refunding;
the composition of Treasury marketable financing for the remainder of the JulySeptember quarter and the October-December quarter.
Inflation protection securities
The Treasury is in the final stages of considering the terms and conditions of
inflation-protection securities. We would like to have the Committee's views on the
following:
The comment letters that we have received indicate interest in both a Canadianstyle structure and a current-pay inflation floater. Does the Committee have a
view as to which structure would attract the broadest market?
Most commenters suggest a range of maturities (2-5 years, 10 years and 30
years). How could we develop a range of maturities ard promote market liquidity
at the same time?
Would you recommend single price auctions, in which investors would bid the real
rate? Would you recommend that the Treasury announce, as part of the terms of
the auction, that we would retain the option to award less than the full amount
offered, if there were an extremely long tail between the yield necessary to sell,
for example, 95 percent of the announced size and the remaining 5 percent.
Do you have any other comments on the structure or inflation index to be used
the inflation-protection securities program?
Other topics
We would welcome any comments that the Committee might wish to make on
related matters.
\0
Summary of July to September 1996
Estimated Net :\1arketable Borrowing
(Billions of dollars)
:'IIet new money raised or announced as of "'/29/96 :
Regular weekly Treasury bills (includes $17 5 billion foreign add-ons)
52-week bills (includes $795 million foreign add-ons)
Cash management bills
2-year notes (includes $3.92 billion foreign add-ons)
5-year notes (includes $1.65 billion foreign add-ons)
lO-year note less 7-year redemption (includes $800 million foreign add-ons)
~et
12.7
1.8
00
5.2
7.7
38
312
new money left to be raised:
Regular weekly Treasury bills
52-week bills
Cash management bills
2- & 5-year notes
Refunding
-16.6
0.8
0.0
6.6
20.8
Total net marketable borrowing:
(assumes a total of $11 billion foreign add-ons)
44.8
Note. Assumes an end-of-quarter cash balance of$40 billion.
Summary of October to December 1996
Estimated Net Marketable Borrowing
(Billions of dollars)
Net new money to be raised:
Regular weekly Treasury bills
52-weel5. b~lls
Cash management bills
2- & 5-year notes
Refunding
la-year note less 7-year redemption
Total net marketable borrowing in quarter:
(assumes a total aU I 0 billion foreign add-ons)
Vote Assumes an end-of-quarter cash balance of 530 billIOn
10.0
1.6
150
10.7
2.3
2.4
42.1
52.1
DEF1CIT SUMMARY
BILLIONS OF DOLLARS
FY1996
Receipts
Outlays
Surplus/Deficit
Other Net Fin. Sources
Borrowing
Marketable
Non-Marketable
Change in Cash
Cash Balance
End-of-quarter CB Target:
Symmary Iota Is
Receipts
Outlays
Deficit
ONFS
Borrowing
Marketable
Non-Marketable
Change
Cash Balance
199~
1995
1995
1996
1996
~
1996
~
~
.Lao
~
Mar
1996
8.Qr
1996
1996
~
.ilm
1996
,Lu1
1996
1996
~
~
(a)
(a)
(a)
(a)
(a)
(a)
(a)
(a)
(a)
956
1184
-22.8
-6.3
12.3
148
-2.5
-16.8
212
90.0
128.5
-38.5
-12.8
56.2
58.3
.-2.2
4.9
26.1
1383
133.0
5.3
170
-279
-25.0
-2.9
-5.6
20.5
20.0
1429
123.6
19.3
-1.4
-09
5.3
-6.3
17.0
37.5
89.4
133.6
-44.3
-169
549
55.3
-0.5
-6.3
31.2
890
136.3
-47.3
22.3
15.7
16.5
-08
-93
21.9
20.0
203.4
131 0
72.4
-95
-36.4
-36.5
0.1
26.4
483
90.0
143.3
·53.3
-102
19.7
20.0
-04
-43.8
45
151 9
1178
34.1
8.1
-8.6
-9.1
05
33.5
38.0
35.0
1000
1290
-29.0
-5.0
32.3
37.7
-5.4
-1.7
36.3
103.0
1405
-375
2.0
16.8
16.1
07
-18.7
176
1599
1350
249
1995
1996
1996
1996
~
323.9
3798
-55.9
-2.1
40.6
.Q.L
OJ.
EY..
321.3
393.6
-72.3
40
69.7
48.1
n2
-7.6
-17.5
20.5
-7.5
1.4
21.9
~
445.3
392.1
532
-11.6
-25.4
-25.7
0.2
162
38.0
362.9
4045
-41.6
3.0
40.6
45.0
-4.4
2.0
40.0
1453.4
1570.0
-116.6
-6.7
125.4
144.6
-193
2.1
400
1997
8.Qr
1997
1997
1997
.ilm
1997
,Lu1
1997
~
aug
~
208.7
133.8
74.9
94.5
146.4
-51.9
-2.2
14.1
140
0.1
-40.0
5.0
1592
132.0
27.2
-7.7
10.5
11 5
-10
30.0
35.0
35.0
100.4
131.5
-31.1
1.5
29.6
33.4
-3.8
0.0
35.0
105.0
1424
-37.4
-48
272
26.5
0.7
-150
20.0
161 5
1488
12.7
04
69
60
-8 5
-88
03
22.4
400
400
1996
FY1997
Receipts
Outlays
Surplus/Deficit
Other Net Fin. Sources
Borrow!ng
Marketable
Non-Marketable
Change In Cash
Cash Balance
End-of-quarter CB Target:
1996
1996
1996
1997
1997
1997
~
~
~
Jan
~
Mal:
99.8
1218
-22.0
97.0
131.6
-34.6
-1.0
3.0
3.5
_ -0.5
-20.0
20.0
47.0
47.5
-0.5
5.0
25.0
140.3
1374
2.9
19
0.2
12
-1.0
5.0
30.0
30.0
1495
129.5
20.0
1.0
-16.0
-125
-3.5
5.0
35.0
95.3
136.5
-41.2
-7.3
43.5
43.5
0.0
-5.0
938
139.0
-45.2
5.6
29.6
30.1
-0.5
-10.0
20.0
-7.4
30.0
20.0
1997
1996
1997
1997
1997
Symmary Iotals
~
.Q.L
~
OJ.
EY..
Receipts
Outlays
Deficit
ONFS
Borrowing
Marketable
Non-Marketable
Change
Cash Balance
337.1
390.8
-53.7
-6.5
502
52.2
-2.0
-10.0
30.0
338.6
405.0
-66.4
462.4
412.2
50.2
-13.9
-213
-20.7
-0.6
15.0
35.0
366.9
1505.0
16307
-125.7
-24.0
149.7
159.7
-99
-0.7
57.1
61.1
-4.0
-10.0
20.0
422.7
-55.8
-2.9
63.7
671
-3.4
5.0
0.0
40.0
40.0
-4.0
-45.9
-462
0.3
25.0
45.0
7 1
-02
200
400
400
U.S. TREASURY FINANCING SCHEDULE FOR 3RD QUARTER 1996
BILLIONS OF DOLLARS
ANNOUNCEMENT
AUCTION
SETTLEMENT
~
QAIE
QAIf
QAIE
3&6 MONTH BILLS
06/25
07/02
07;09·
07'01
07 108
07115
07122
07!29
08105
08112
08119
08126
09/02
09/09
09/16
09/23
0705
07;11
07/18
0725
08/01
08108
08/15
08122
08/29
09/05
09112
09/19
09/26
07116
07/23
07/30
08106
08113
08120
08127
09/03
09/10
09/17
OFFERED
AMOUNT
292
292
28.2
27 1
26.0
26.0
26.0
260
26.0
260
26.0
25.2
252
MATURING
AMOUNT
INTEREST
PAYMENT
NEW
M.OOll
277
277
22.7
23.2
276
30.2
274
26.9
265
29.9
28.5
27.1
26.6
1 51
1 49
5.52
3.97
-158
-4.15
-138
-0.89
-0.48
-3.92
-2.46
-1.89
-140
351.79
-5.66
19.37 A
19.25
19.25
18.36
18.46
19.28
1.01
0.79
-0.02
57.87
56.10
1.n
15.00
15.00
0.00
,l,
A
A
A
A
346.13
FOREIGN
ADD·ONS
057
007
059
!) 53
1-YEAR BILLS
07112
08/09
09/06
07118
08/15
09/12
07/25
08/22
09119
080
CASH MANAGEMENT BILLS
16-Day Bill
08/30
09/02
09/03
Matures 9/18196
V
COUPONS
~450
0.70
3.14
202
075
2.75
3.00
080
5.58
0.62
2.90
190
090
2133
20.78
1843
9.33
5.52
0.32
3.17
18.75
12.50
18.44
9.71
5.59
0.31
2.79
174.08
136.35
2·Year Note
5·Year Note
06119
06119
06125
06126
07101
07/01
18.79A
12.50A
10-Year Note
07103
97109
07115
10.00A
7.00
2-Year Note
5-Year Note
07117
07/17
07/23
07/24
07/31
07/31
18.79A
12.50A
18.17
9.60
3-Year Note
10-Year Note
30-Year Note
07/31
07131
07/31
08/06
08107
08108
08/15
08115
08115
19.00
10.00
10.00
1822
2-Year Note
5-Year Note
Q8I2J
08121
08127
08128
09/03
09/03
18.75
12.50
2-Year Note
5-Year Note
09/18
09/18
09/24
09/25
09/30
09/30
NET CASH RAISED IN 3rd QUARTER
FOREIGN ADD-ONS / MISC. PURCHASES
TOTAL NEW MONEY RAISED IN 3rd QUARTER
A
*
#
= Announced
Matunng 7·Year Note
Includes $700 million of the 8% of 2001 which was called In April.
39.00
/?
9.36
#
37.73
33.S4
1100
44S4
8.92
U.S. TREASURY FINANCING SCHEDULE FOR 4TH aUARTER 1996
BILUONS OF DOLLARS
ANNOUNCEMENT
AUCTION
SETILEMENT
OFFERED
MATURING
LS.S.U.f
QAIE
QAIE
QAI.f
e.MQUtH
8MQUtH
3&6 MONTH BILLS
09124
10101
10108
10115
10122
10/29
11/05
11/12
11/19
11/26
12103
12110
12117
09/30
10/07
10/14
10/21
10/28
11104
11/11
11/18
11/25
12102
12109
12116
12123
10103
10/10
10/17
10/24
10/31
11107
11/14
11/21
11/29
12105
12112
12119
12126
26.0
270
270
28.0
280
28.0
28.0
28.0
28.0
28.0
28.0
27.0
27.0
282
28.1
247
25.3
26.6
26.5
26.7
26.6
271
27.7
28.6
26.1
25.7
-2.20
·1 14
229
272
1 38
148
132
1.38
093
031
-0.57
0.87
127
358.00
347.98
1002
19.25
19.25
19.25
1848
18.87
18.79
0.77
0.38
0.46
57.75
56.14
161
INTEREST
NEW
E8:iMI:t:lI MQtiEi
1·YEAR BILLS
10/04
11/01
11/29
10/10
11/07
12105
10/17
11/14
12112
CASH MANAGEMENT BILLS
10/29
Matures 12119/96
10/30
11/01
8.00
8.00
0.00
10/29
10/30
11/01
15.00
0.00
15.00
11127
Matures 12119/96
11/29
12102
15_00
15.00
0.00
10·Year Note
10/02
10/08
lOllS
10.00
7.61
2.84
2.39
2-Year Note
5·Year Note
10/16
10/16
10/22
10/23
10/31
10/31
18.75
12.50
18.40
8.50
562
0.35
4.00
3-Year Note
10-Year Nole
30-Year Bond
10/30
10/30
10/30
11/05
11/06
11/07
11/15
11/15
11/15
19.00
10.00
10.00
36.67
22.03
2.33
2-Year Nole
5·Year Note
11/13
11/13
11/19
11/20
12102
12102
18.75
12.50
18.68
9.66
5.76
0.07
284
2-Year Note
5-Year Note
12111
12111
12117
12118
12131
12131
18.75
12.50
18.36
9.44
4.50
0.39
3.07
142.75
127.31
40.76
15.44
48·0ay Bill
83·Day Bill
Matures 1/23197
17·0ay Bill
COUPONS
NET CASH RAISED THIS QUARTER
FOREIGN ADD-ONS { MISC. PURCHASES
TOTAL NEW MONEY RAISED THIS QUARTER
*
Maturing 7-Year Nole
A = Announced
39.00
42.07
10.00
52.07
FOREIGN
8ClQ-Qt:lS
TREASURY FINANCING REQUIREMENTS
April - June 1996
$BiI. r--------------.:....-.,...-~......:....:...:-----------__, $Bil.
Uses
163 )'.
Sources
150
100
Savings
Bonds
•
•
Cash
Surplus'
•
- 50
State and
Local
"Includes budget deficit, direct loan actIVIty, changes In accrued Interest
and checks outstanding and minor miscellaneous debt transactions.
Department 01 the Trea.sulj'
Office 01 M4f1(&t F,,·...,nce
July 29,1996-1
TREASURY FINANCING REQUIREMENTS
July - September 1996
$Bil. r--------------.:---:....---.--------------, $Bil.
Uses
Sources
182';'
150
150
100
100
State and
Local
•
50
50
5%
•
Deficit'
Net Market •
Borrowing
4
o
0'-_....-=.:.:
, Assumes a $40 billion cash balance on September 30.1996.
Dapattrneont of the Treasury
Office 01 Market Mr'IIIInce
2
Includes budget deficit, direct loan activity. changes In accrued Interest
and checks outstanding and minor miscellaneous debt transactions.
3
Issued or announced through July 26, 1996.
July 31 1996-2
TREASURY OPERATING CASH BALANCE
Semi- Monthly
$Bil. r----------------.-...:~--------_r_---__,
60
Tax and Loan
Accounts Balance
•
40
20
o~--------------------Federal Reserve Account
•,
--,,
...
,,
,
•
-20
II
-40
_60L--L--L---L-~L-~-~-~-~-~--~-~-~--~-~-~
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
1995
May
Jun
Jul
Aug
Sep
1996
21Assumes refunding of matunng Issues.
Depertmenl of th& TressUT)'
July 29.1996-3
Office of Mantel FInance
TREASURY NET MARKET BORROWING
y'
$BiI , . . . . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $ B i l .
100
100
77.2
80
80
60
60
45
40
20
o
-20
-40
Coupons
DOver 10 yrs
o
o
5 -10 yrs
-20
Y
2 - under 5 yrs
Bills
•
-40
-25.7
-60L--------~--~----L-------------------------~
II
III
1992
DepartrTldf11 a1 the Treasury
ott\ceof~1Finance
II
IV
III
1993
IV
II
III
1994
IV
II
III
1995
y
Excludes Federal Reserve and Govemment Account Transactions.
11
7 year note discontinued after Apnl 1993.
JI
Issued or announced through July 26. 1996.
IV
II
-60
IIW
1996
July 31.1Q96-4
NET NEW CASH FROM NONCOMPETITIVE TENDERS IN
WEEKLY BILL AUCTIONS !I
$Mil.
Discount Rate %
Net New Cash (left scale)
o 26 week
200
Discount Rate (nght scale)
5.50
26 week
. 1 3 week
!-'.
13 week
100
5.25
5.00
4.75
0
-100
-200
-300
-400
Aug
Jul
Sep
Nov
Oct
Dec
Jan
Feb
Mar
y
Apr
Jun
May
Jul P
1996
1995
Excludes noncompetitive tenders from foreign official accounts and the Federal Reserve account
p Preliminary
Oe~nto1th&T"ll5ury
July 29 1996-5
00... 01 Ma:nc&1 F!n&l'lC&
NONCOMPETITIVE TENDERS IN TREASURY NOTES AND BONDSV
$Bil.
$BiI
[=:J 2 & 5 Year
3.5 r-
3.5
-
" ' 3 Year
c=J 10 Year
3.0 r-
- 3.0
[=:J 30 Year
2.5
-
2.5 I-
2.0
2.0 l-
1.5 I-
,
1.5
:z
1.0
,
1.0 r"
0.5 r-
o
"
~
.
J
A SON D J
Y
1994
0.5
:
.;
,
1
,
F M A M J
J
"
,
A SON D
J
F M A M J
1995
In
Jp
0.0
1996
Excludes noncompetitive tenders from foreign OfflC~1 accounts and the Federal Reserve account
p Preliminary
The maximum noncompetluve award to any noncompetttrve bidder IS $5 millton. effective November 5, '991
Effective February 11, 1992, a noncompetitive bidder may not hold a position In WI trading, tutures. or forward contracts.
nor submit both competitIVe and noncompetitive bids for Its own account.
D~ntotNTreuury
Office of Market Rnance
Jutt291~
NET STRIPS OUTSTANDING (1985-1996)*
$8il.l------------------.:..----....:..--------,
1989
1990
1991
End of Quarter
1992
1993
1994
1995
96
·Stnps program began February 15, 1985.
Reconstitution began May 1, 1987.
DQpomnent of the Treasury
DffIc8 01 Mance!
i='1NU\C&
JulY 29 lQ9&7
SECURITIES HELD IN STRIPS FORM 1994-1996
Privately Held
$8il.
$8il.
Strippable
•
80
o
III
Stripped
As of July 31, 1994: $731.8 billion, $222.5 billion
As of July 31,1995: $783.6 billion, $226.1 billion
80
As of July 19, 1996: $823.3 billion, $227.8 billion
60
60
40
40
20
20
o
Less than 5 years
5-10 years
10-15 years
15-20 years
20-25 years
25-30 years
o
Years Remaining to Maturity
Note' The STRIPS program was established In February 1985. The 11 5/8% note of November 15,
1994, issued on November 15, 1984, was the first STRIPS-eligible secunty to mature.
De;.nment of the Tr&aSUl)'
01 Matket Finance
Qffioe
Juty 29 1996-8
SECURITIES HELD IN STRIPS FORM 1994-1996
Percent of Privately Held
0/0 r-----------------------------------~--------------------------~%
•
As of July 31,1994
D
II
40
As of July 31, 1995
40
As of July 19, 1996
20
20
Less than 5 years
10-15 years
5-10 years
25-30 years
20-25 years
15-20 years
o
Years Remaining to Maturity
Note: The STRIPS program was established In February 1985. The 115/8% note of November 15,
1994. Issued on November 15. 1984, was the first STRIPS-eligible security to mature
Department 01 the Treasury
Offi~ 01 M8fl(81 Fanance
July 29 1996-9
TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
$Bil.
$Bil.
8
7.8
8
3.5
6
6
4
4
2
2
0
0
-2
-2
-4
-4
r---c
-6
-8
-12
-14
II
III
1992
Delo'Nll'1rf-.nt of 1M Treasury
otfic::e of Market FInance
LJ
D
State and Local Series
•
-10
-6
Savings Bonds
IV
-4.7
-8
-10
-8.9
Foreign Series
1\
III
1993
-12
IV
II
III
1994
IV
II
III
1995
IV
II
Ille
-14
1996
e estimate
July 29,1996-10
SALES OF UNITED STATES SAVINGS BONDS
1980 - 19&6
$Bil.r------------~~--!..!:~-----------____,
6
5
4
•
Total Sales
3
Payroll Sales
•
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 96 e
End of Quarter
e estImate
Dep81'tmflnloltheTreuury
Off\ca of Marw.el F!nance
J..,ty29 199&-11
STATE & LOCAL GOVERNMENT SERIES
.
...
.....:: ....
......
:
...,.. .....
.-.,.,.:.
: .. :
..
....
,.
$Bil..-------------------------------,$Bil.
.- • •
~..
10
5
-
Gross Issues
•• •
Redemptions
10
5
$B~ ~~===~==:::::::::I====::::====::::::====~===~=~$OBil.
o~I-~------~~---,~----------------------_t~o
-5
-5
-
NetSLGs
-10L--L-~-L~--~~-~~--~----~~~L-~~~~~~-10
II
III
1992
IV
II
III
1993
IV
II
III
1994
IV
II
III
1995
IV
II
1996
Note: SLGS sales were suspended from October 18.1995 to March 29. t996.
Depertr'nent of
the T!1UIsury
OtficeofMIU'Ic~FII'IUtCII
July 29.1996-12
STATE AND LOCAL MATURITIES 1996-1998
$Bil.r-------------------------------,$Bil.
9.3
8
6
6
4
4
2
2
o
III
IV
1996
II
III
IV
1997
II
III
1998
IV
Dei:lllll'trrenloflheTreuury
0ffIee of ManIs! Finance
July 29
1i~Q6-':)
QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES
$ B i l . r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , $Bil.
90
80
Nonmarketable
90
o
80
Marketable
70
~ Net Auction Awards to Foreign U
60
•
70
64.2
Other Transactions
60
50
50
40
40
30
30
20
20
10
10
0
o
·10
-0.1
:
i
~
·20
)
i
~
·10
·20
·30
.30L---I-I--III--IV-L---II--II-I-I-V----I~I--~III-~IV~~-~~~~~~~~
III
IV
I
II
1131
1995
1996
1992
1993
1994
Y
Oepel'tm8nf o/1h6 T rusury
Office of Mantat HNlnc:e
V
Noncompetitive awards to foreign official accounts held ,n custody at the Federal Reserve In
excess of foreign custody account holdings of maturing securrtles. Foreign add·ons prohibited
from October 18, 1995 to March 29, 1996 to avoid exceeding the debt limit.
Data through May 31, 1996.
July 29 199&14
FOREIGN HOLDINGS AS A PERCENT OF TOTAL
PRIVATELY HELD PUBLIC DEBT
Pe~ent
------------------------______________________________
Percent
28
26
24
22
18
16
1991
1992
1993
1994
1995
96
Quarterly
Depenmern 01 ttle Tre&.sury
Q1'rk;e of Mar'llel F,nance
July 29 1996-15
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
December 31, 1994
December 31, 1995
: Asa%of IAsa%of
Total
Total
$ Billions I
: \ $ Billions
Private
Foreign
,1
Ii
Country
Japan
Asa %01
Total
foreign
31, 1996
May
Asa%of II
As a % of IAsa%ot
Total
Total
$ Billions
Total
Private
I
Foreign I Private
II
$175.7
25.5%
5.5%
$219.9
25.5%
6.7%
$255.1
268%
7.6%
United Kingdom
91.0
13.2%
2.9%
1236
14.3%
3.8%
141.5
14.9%
4.2%
Germany
54.4
7.9%
1.7%
53.7
6.2%
1.6%
63.9
6.7o,~
1.9%
Netherland Antilles
27.6
4.0%
0.9%
509
59%
1.5%
357
38%
1.1%
Singapore
21.9
3.2%
0.7%
29.7
34%
0.9%
35.5
3.7%
1.1%
Switzerland
324
4.7%
1.0%
370
4.3%
1.1%
345
3.6%
1.0%
1.0%
Mainland China
20.5
3.0%
0.6%
34.9
4.0%
1.1%
34.3
3.6%
OPEC
25.6
3.7%
0.8%
280
3.2%
0.8%
32.1
3.4%
1.0%
Spam
27.9
4.1~/o
09%
193
2.2%
0.6%
31 4
33%
0.9%
Canada
246
3.6%
0.8%
25.1
2.9%
08%
30.4
32%
0.9%
2.8%
0.7%
21 1
2.2%
0.6%
Taiwan
25.8
3.7%
0.8%
240
Hong Kong
13.8
2.0%
0.4%
18.8
2.2~/o
0.6%
19.9
2.1%
0.6%
7.9
1.1%
0.2%
16.4
1.9%
0.5%
168
18%
0.5%
13.1
1.9%
0.4%
12.7
1.5%
04%
13.1
14%
0.4%
9.7
1.4%
0.3%
9.2
1.1%
0.3%
12.7
1.3%
0.4%
4.8%
1735
18.2%
5.2%
26.2%
951.5
1000%
28.3%
MexiCO
Belgium
France
Other
116.8
16.9%
3.7'%
1589
18.4%
Estimated
Foreign Total
688.7
100.0%
21.7%
8621
100.0%
Note: RP's are included 'n 'other" Detail may not add to totals due to rounding.
Source: Treasury Foreign PortfoliO Investment Survey benchmark as of end-year 1989
and monthly data collected under the Treasury InternatIOnal Capital reporting
system.
o.pe:rtrnent 01 the Traasury
Office of Mar1<et FU'\IlIrca
July 29 \996-16
SHORT TERM INTEREST RATES
Quarterly Averages
%r-----------------------------~----~------------------------,%
Through
July 24
10
10
8
8
6
6
•
3 Month
Treasury Bill
4
4
198519861987198819891990199119921993199419951996
Oepat1menl o'!he Tfeasury
OffIce oj M&I1tet FInance
Ju'Y2919Q&.1a
SHORT TERM INTEREST RATES
Weekly Averages
%.--------------------------------------------------------------,%
91--
-9
I
•
Prime Rate
81--
I~--------------------------8
Through_
7-
6
Federal Funds
_ .
...................
5-
7
July 24
..............
-
..,.
-.. '",
.............
,................, __.............
..-....
#.
~
4
Oct
Depar1ment of the Tretl4llry
Office of MllJ1(et Firence
Nov
1995
Dec
.---
-5
3 Month
Treasury Bill
I,
"i
......
-.""-":'-,,.~
•
,
i,
t,
Commercial
Paper
i'
,I
Jan
Feb
,I
'J[
Mar
Apr
1996
May
Jun
,
4
Jul
July29 1~19
LONG TERM MARKET RATES
Quarterly Averages
%r---------------------------~----~----------------------~ %
..
12
11
12
11
New Aa Corporates
10
!
9
..
8
7
10
Through
July 24
9
8
7
30-Year
Municipal Bonds
6 -
6
5~------------~----~--~--~----~--~----~------------~5
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Oepartm8l11 01 It'oe T'tlS!Sl.II)'
Office of Marital Flnanea
Ju'V 29. 19Q6.20
INTERMEDIATE TERM INTEREST RATES
Weekly Averages'
%r---------------------------------------------------------------------,
, ... ,
,
8 --
, '--,
..
"'"
7
,"
, JI
, ...
I
I
%
8
AA 10-Year Industrial
..
"'" - -,II
7
Treasury 5-Year
6
"
"
I ...... ~
FHLMC 30-Year
Conventional
, ,_
,'-
i
Through
July 24
6
5 L--O-c-t-----N-O-v----D-e-C-----J-a-n----F-e-b-----M-a-r-----A-p-r----M-a-y-----Ju-n----~J~UI~ 5
1995
1996
• Salomon 10-yr. AA Industnal,s a Thursday rate.
Departrnentofthe TreuufY
Oftlce of Ma/1(et Frl'lflnc8
July 29 H196·21
MAR'<ET YIELDS ON GOVERNMENTS
0/0
I--I-~-----;-----r----r----'-----'----""'---""'------' %
• ____~----rt---·---t---
July 29,1996
6.5
!
: '
---1-.1
6.0
April 29, 1996
%
I1
6.0
r--~-'-r---,-----...l...-~_--...._.---J~ %
I
...,.____
7'0
I
5.5
I
I
6.5
70
----
,
5.0
10
12
14
16
18
20
22! 24
26
5.5
I
65
28
60
30
I
6.0
65
5.0
o
2
3
4
7
6
5
8
9
10
Years to Maturity
Department 01 the Trauur','
OffIce of Mafll:el FlI'18./1OO
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
BY MATURITY
$Bil.
Jl\ne 30, 1996 --+ 2970.5
3000
2500
2000
D
D
0
D
II
Over 10 years
I
423.2
2-10 years
1-2 years
1 year & under
984.5
Bills
I
1500
483.2
I
1000
494.5
500
o
1985
\
\
\
\
\
.\
i
\.
\
\
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
As of December 31
Department of the Treuury
Office of Maf1(et Finance
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
Percent Distribution
0
Coupons
o 1-2 years
o 1 year & under
Over 10 years
02-10 years
•
Bills
100%
14
80
33
60
40
20
o
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995 Jun '96
As of December 31
Deper1ment of 1he Tr8a.5Ury
July 29. lQQ6-24
Office 0111.4.""01 Fu..... nce
AVERAGE LENGTH OF THE MARKETABI ,E DEBT
Privately Held
Years--------------------------~----------------------------
10
. - - June 1947
10 Years
5 Months
Months
June 30,1996
5 Years, 3 Months
66
9
8
'-~
64
62
60L---------~~~--------~
J
F M A M J
J
A SON
0
December 1975
2 Years
5 Months
2LL~-LLL~~_LLL~~_L~LL~:~i~~~~~_L~~~~~~~~~
194547 49 51 53 55 57 59 61 63 65 67 69 71 7375 7779 81 83 85 87 89 91 93 95
D~rtment of the Treaaury
Offloe 01 Mar1l:et I=mance
MATURING COUPON ISSUES
August - December 1996
(in millions of dollars)
June 30, 1996
Held by
Maturing Coupons
Total
43/8%
8
%
71/4%
61/4%
7
%
61/2%
8
%
67/8%
71/4%
43/8%
61/2%
71/4%
61/8%
71/2%
Note
Bond
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
08/15/96
08/15/96 -01 21
08/31/96
08/31/96
09/30/96
09/30/96
10/15/96
10/31/96
11/15/96
11/15/96
11/30/96
11/30/96
12/31/96
12/31/96
Totals
2.1
V
o.portmenl
20,670
1,485
9,825
19,292
10,088
19,639
7,989
28,331
20,259
22,065
9,871
18,940
9,635
19,608
217,697
Federal Reserve
& Government
Accounts
Private
Investors
3,074
758
499
810
381
1,200
375
1,395
1,129
4,528
210
265
200
1,275
17.596
727
9,326
18,482
9,707
18,439
7.614
26.936
19.130
17,537
9,661
18,675
9,435
18,333
16,099
201,598
ForeignJ!
Investors
2,076
0
478
2.781
360
2,786
158
3,493
1,522
4,813
1,267
4,772
655
3,264
28,425
F R.B. custody accounts for foreign offiCial Institutions; Included In Pnvate Investors
On April 11, Treasury announced the call for redemption at par on August 15. 1996, the B%
1996-01, dated August 16. 1976, due August 15, 2001.
at 1tle Treasury
0t11C8 0' !oIaN8! Fu'Wr1Ce
July 29 199&-26
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
I
38
36
34
32
30
28
1996
I
26
24
22
20
18
16
14
12
10
8
6
4
6~========~==~======~======~======~~~==~~~~~~~~==~
1997
38
36
34
32
30
28
292
279
26
24
22
20
18
16
14
12
10
8
6
4
2
o
J
Oepal"tmltnt oi the Tr. .S4Jry
01bc:e of Market RNlnolt
F
M
A
M
•
Secunties Issued prior to 1994
!Ii
New Issues calendar year 1994
J
J
D
o
A
s
o
N
New Issues calendar year 1995
Issued or announced through July 26, 1996
July 29 199&27
TREASURY MARKETABLE MATURITIES
Privately held, Excluding Bills
S8il.
40
38
38
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
$8 il
25 r24r22 r20 r18"-
1998
42
I
320
299
32.2
32 1
32.0
31 9
;='~I'"
..
275
0-··
~~
'
4 r~ r- .
117
122
112
f' ~I
'30 '3
,
-
r-
274
28
26
24
22
20
18
16
14
12
10
r-
rr-
rrrrrrr8 r6 rrr-
20
18
16
14
12
10
8
6
120
rIr-
I-
Department of Itle Treasury
!8
:i
2002
21 7
i
107
,
!
I
--
I
16
Ii
2003
237
I
275
i
I
30
•
15.6
20.5
2004
124
16.2
I
r-
rr-
I
¥
rrr-
D
I
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-
1999
13~27
133
I>
f>
-
297
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..
22 r20 r18r18 r14 f12 f10
8-
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1
I
I
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295
244
2001
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F M A M J
J
A
J
_
Secunties issued pnor to 1994
o
_
New Issues calendar year 1994
;:::::] Issued or announced through July 26. 1996
o N
t-
v
D
New Issues calendar year 1995
Office of Marxet Rnance
Ju.lV29,1996-28
TREASURY MARKETABLE' MATURITIES
S8i I.
24
22
20
18
16
14
12
10
8
6
Privately held, Ex.C_".::lu:..:d::,:in...,:g::...:::.B.:.,.ill.:.S,...-_--:-::-_ _ _ _-:-:-_--r_ _-:;-;;-_---"
Ir---
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88
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I11III New issues calendar year 1994
Department of the rrauury
178
I
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i
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(
64
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July 29, 19ge..29
TREASURY MARKETABLE MATURITIES
Ir___, ___-=-:-=-:___-,p_r_iv_a_te...:.ly_h_e-T1ld, Excluding Bills
2'
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o
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New Issues calendar year 1995
Issued or announced through July 26, 1996
Oeparnnan! a1!he Trell9vry
Office
otMano:e~
F,nllnQj
Jury 29. 1a96-30
TENTATIVE SCHEDULE OF ISSUES TO BE ANNOUNCED
AND AUCTIONED IN AUGUST 1996 Y
Monday
Tuesday
Wednesday
5
6
12
13
14
19
20
21
26
27
Auction
3 yearY
7
Auction
10 year?!
Friday
Thursday
1
8
2
Auction
30 year?!
15
9
Announce
52 week
16
Auction
52 week Y
Announce
2 year
5 year
22
23
29
30
28
Auction
2 yearll
Auction
5 yearV
..:v Does not Include weekly bills
?! For settlement Augus115
21 For settlement August 22
1{For settlement September 3
OeOlllrtmen'l of ItItI TrMSUry
Ofhee 01 Man.;e1 Finarco
July 31 199&.31
TENTATIVE SCHEDULE OF ISSUES TO BE ANNOUNCED
AND AUCTIONED IN SEPTEMBER 1996Ji
Monday
2
Tuesday
Wednesday
3
Thursday
4
5
Friday
6
Holiday
9
Announce
52 week
10
11
12
13
Auction
52 week 51
16
23
17
18
24
25
Announce
2 year
5 year
19
20
26
Auction
2 yearY
27
Auction
5 year~
30
Y
Does not Include weekly bills
51 For settlement September 19
]I For settlement September 30
Department of It'Ie Tre.aury
oj Maf'C~n FI!"I8.I"1Ce
OffICII
JUly)'
lQQ&32
TENTATIVE SCHEDULE OF ISSUES TO BE ANNOUNCED
AND AUCTIONED IN OCTOBER 1996 Y
Monday
Tuesday
Wednesday
1
2
Friday
Thursday
3
4
Announce
10 year
7
Auction
52 week~
Auction
10 year51
14
15
16 Announce
2 year
5 year
Holiday
21
23
22
17
18
24
25
Auction
5 year 11
Auction
2 year~
28
11
10
9
8
Announce
52 week
30
29
31
Y
Does not Include weekly bills
15
~ For settlement October 17
lIFor settlement October 31
51 For settlement October
DePOrtment of lTle Treasury
Offic:e of Mal'\(e\ Fu".ance
•• uty 31 1996-33
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220
Monthly Report
by the
Secretary of the Treasury
Purs uant to the
Mexican Debt Disclosure Act
of 1995
Contents
Page 1
I.
Overview
II.
Current Condition of Mexico's Economy
3
III.
Mexico's Financial Transactions
7
IV.
Disbursements, Swaps, Guarantees and Compensation
to the U. S. Treasury
7
V.
Status of the Oil Facility
9
July 1996
Treasury Secretary's Report to Congress
July 1996
I.
Overview
In providing assistance to Mexico under the February 21, 1995 Agreements, the U.S.
government acted to protect vital U.S. interests: American exports and jobs, the
security of our common border, and the stability of other emerging market
economies. U.S. and other international support in 1995 has allowed Mexico to
implement the policies necessary to avert default, regain access to capital markets,
and restore the basis for sustainable growth.
On July 25, the Government of Mexico announced that, in August 1996, it will
prepay $7 billion of the $10.5 billion still outstanding to the United States. The
majority of Mexico's prepayment, $6 billion, will come from a new private bank
floating rate note issue, backed by oil export proceeds released from the facility
backing the U.S. loan. Mexico will fund an additional $1 billion prepayment to the
United States from other market financings, including proceeds of the recent Brady
Bond exchange. As another sign of its financial health, Mexico has announced that it
will also prepay the IMF $1 billion from proceeds of recent market financings.
Mexico has met all payment obligations under the U.S. financial support program.
Not including the August prepayment, Mexico has repaid a net $2 billion in
outstanding short-term swaps to the Treasury and Federal Reserve. By August, not
only will Mexico have repaid nearly three-quarters of its debt to the United States
well ahead of schedule, it also will have made interest payments totalling $1.29
billion, including a $239 million payment on July 1.
All of Mexico's obligations to the United States under the February 21, 1995
Agreements are backed by proceeds from Mexico's crude oil, oil products, and
petrochemical product exports. Payments for these exports flow through a special
account at the Federal Reserve Bank of New York. Approximately $12.6 billion had
passed through this account as of July 22.
Though the effects of the deep recession of 1995 are still being felt, data indicate that
an economic recovery is underway in Mexico. Through the first quarter of 1996,
GDP growth has averaged 2.4% (seasonally-adjusted, quarter-over-quarter) for the
past three quarters.
Monetary policy remains firm. Inflation was 1.6% in June, the lowest monthly rate
since December 1994, and 0.73 % during the first half of July. Rates on the
benchmark 28-day cetes were 28.89% at the July 23 auction, down from 32.94% in
the July 16 auction, but up from 28.29% in the June 25 auction. The peso
depreciated slightly in July, and, as of July 24, Mexico's stock market was down
1
Treasury Secretary's RepOl i to Congress
July 1996
8.3 % since the end of June, though still above its pre-crisis level in peso terms.
Mexico's international reserves have risen to $15.4 billion from the year-end 1994
level of $6. 1 billion, though they are down slightly from year -end 1995.
Although the situation of Mexico's banking system remains difficult, its restructuring
continues. The National Banking and Securities Commission (CNBV) has announced
a second round of recapitalization for three more banks: Bital, Bancrecer, and
Banorte. Falling interest rates have brought down the cost of Mexico's debtor relief
programs and have helped keep the level of nonperforming loans stable, though they
remain high. The newly formed Agency for Valuation and Sale of Assets (VVA),
similar to the RTC in the U. S., has begun the sale of the p 100 billion in assets now
under the control of FOBAPROA.
On July 23, the Government of Mexico announced a plan to relieve as much as 40%
of the debt burden of farmers. The program, starting in September, combines debt
relief and restructuring, and is estimated by the government to cost p30 billion, split
evenly between the government and banks. As with other assistance programs, costs
are spread out over many years.
2
Treasury Secretary's Report to Congress
July 1996
II.
Current Condition of Mexico's Economy
a.
Economic Developments
Available data suggest that the recovery continued in the second quarter of 1996
Mexico's trade balance remained strongly in surplus in June -- according to
preliminary figures, the surplus was $591 million.
•
In June, exports and imports rose by 13 % and 17 %, respectively, on a yearover-year basis. In the first half of 1996, exports and imports were both 18 %
higher than the first half of 1995.
•
For the first half of 1996, the trade surplus was $3.9 billion, $700 million
higher than in the same period of 1995.
Indicators sensitive to domestic demand have been strengthening, but remain below
their pre-crisis level.
•
Retail sales rose 0.7% in May on a year-over-year basis, the first year-overyear increase in sixteen months, which was in line with analysts' expectations.
They were up 5.7 % on a monthly basis following an 8.5 % decline in April.
•
Domestic vehicle sales increased by 3.5 % in May from April, the eighth
monthly increase in the last eleven months.
Labor indicators have been mixed. The open unemployment rate, a narrow rate of
joblessness in the urban formal sector, rose from 5.4% in May to 5.6% in June and
was higher than private analysts had expected. It fell to 5.6 % in the second quarter
from 6.2 % in the first quarter.
•
Adding the number of employees who involuntarily work less than 35 hours a
week, a measure of underemployment, the rate rose from 7.0% in May to
7.6% in June. However, it fell from 8.3 % in the first quarter to 7.5 % in the
second quarter of 1996.
•
Permanent registrations in the social security system (IMSS), a measure of
employment in the formal economy, rose by 0.6% from May to June
(preliminary), and were 5.3% above the low of July 1995.
3
Treasury Secretary's Report to Congress
July 1996
While uncertainties continue, the economy is projected to grow in 1996
•
In a June survey by Consensus Economics, private analysts revised upward
their forecast of 1996 GDP growth, from 2.3 % in the April survey to 3.2 %.
This is higher than the Government of Mexico's official projection of 3.0 %.
II.
b.
Monetary and Fiscal Policy
Monetary aggregates indicate policy remains on track
•
In 1996, net domestic credit (NDA), the monetary base less international
reserves, has fallen by about p24 billion, through July 19. Net international
reserves (NIR) increased by p20 billion during the same period.
Mexico met its second quarter monetary program targets, with reserves
much higher than expected and similar over-performance on NDA.
•
Since January 1 of this year, base money has fallen about 6.4%, to p62.5
billion.
Mexico continues firm fiscal stance
•
The public sector first quarter budget results were better than planned.
Mexico posted a budget surplus of p1.5 billion, a solid p8 billion better
than the programmed goal of a deficit of p6,4 billion. The primary
surplus, too, came in p8 billion stronger than targeted, at p26.6 billion.
Inflation continues to come down
•
II.
Inflation was 1.6% in June, the lowest monthly rate since December 1994 and
0.73% during the first half of July.
'
c.
Financial Sector Developments
Restructuring continues in the banking system
•
The National Banking and Securities Commission (CNBV) has announced a
second round of recapitalization for three more banks: Bital, which will put up
4
Treasury Secretary's Report (0 Congress
July 1996
p1.5 billion in new capital; Bancrecer, which will put up p2.5 billion; and
Banorte, which will put up pI billion. FOBAPROA, the central bank insurance
fund, will buy p5 billion in loans from the three banks, at a rate of 2 pesos in
loans for every 1 peso in new capital put up by shareholders.
Under the bank restructuring program, the 12 non-intervened banks
have now provided or pledged pSI billion in new capital, while: selling
p96 billion in loans to FOBAPROA. Thus, 22 % of loans outstanding in the
banking system as of the end of 1994, the beginning of the crisis, have
now been sold to FOBAPROA.
•
The CNBV has stated its intention to end FOBAPROA'S 100% guarantee of
interbank liabilities, though not the full guarantee of bank deposits.
•
The newly formed Agency for Valuation and Sale of Assets (VV A), similar to
the RTC in the U.S., has begun the sale of roughly plOO billion in assets now
under the control of FOBAPROA.
Government announces new farm debt relief program
•
The Government of Mexico announced a plan to relieve as much as 40% of
the debt burden of farmers.
The program, starting in September, combines debt relief and
restructuring, and is estimated by the government to cost p30 billion,
split evenly between the government and banks. As with other
assistance programs, costs are spread out over many years.
Financial asset quality remains a concern
The level of nonperforming loans (including those of the intervened banks) stayed
roughly flat from the end of April to the end of May.
•
As of May 31, nonperforming loans for the entire private banking system, plus
loans sold to FOBAPROA, represented 18.2 % of all loans; this ratio has held
steady for the last six months.
•
The CNBV stated that the reported level of nonperforming loans will double as
Mexican banks begin reporting under U. S. GAAP this year. The CNBV had
previously estimated an increase of 70%.
5
Treasury Secretary's Report to Congress
July 1996
II.
d.
Financial Markets
The peso depreciated and interest rates rose
•
The peso depreciated 0.24% during July, closing at p7.61 on July 24, from its
June 28 close of p7.59. The peso remains 7% above its low of p8.14, reached
in Ncvember 1995.
The real exchange rate remained flat from the end of June to mid-July,
leaving the real peso 11. 7 % above its level at the beginning of 1996.
At its current level, the peso is 26.7% below its pre-devaluation level
(November 1994) in real tenns.
•
The July 23 primary auction resulted in 28-day cetes yields of 28.89% (on an
annualized basis), down from their July high of 32.94 % in the July 16 auction,
but up from 28.29% in the June 25 auction.
Rates on Udibonos rose from 7.13 % at their introduction on May 28,
to 7.56 % on June 25 and 9.15 % on July 23. (These bonds yield a
"real" rate, in that their principal is indexed to Mexican inflation.)
Financial asset prices were mixed
•
As of July 24, Mexico's stock market, in peso tenns, was down 8.3% since
the end of June, though it is up 26 % over pre-crisis levels, and up 103 % since
the February 1995 low. In dollar tenns, the Balsa index is down 42 % from
pre-crisis levels, but up 90% from its March 1995 low.
•
The Mexican Brady Par Bond yield spread over U.S. Treasuries, adjusted to
remove the effect of partial collateralization, has fallen from 6.69% on June
28 to 6.50% on July 24. This is more than twelve percentage points below the
19.37% spread reached in March 1995.
•
Mexico's 30-year uncollateralized dollar global bond. which was priced to
yield a spread of 552 basis points over U.S. Treasuries on April 30, was
trading in the secondary market on July 24 at 566 basis points over the
Treasury bond of comparable maturity.
6
T-qasury Secretary's Report to Congress
July 1996
Mexico continues to attract international capital
The Mexican government and its agencies have raised over $18 billion in the
international capital markets in the past twelve months. This includes the recently
announced oil-backed $6 billion private bank floating rate notes, the proceeds of
which will be used to prepay Treasury ESF swaps.
II.
e.
International Reserves
Net international reserves (BOM measure) were roughly unchanged in J:1ly -- $15.37
billion on July 12, or $31 million below their level at the end of June. July reserves
were $370 million below their level at the end of 1995.
•
Net international reserves according to the IMF measure were $1.69 billion on
July 12, also virtually unchanged from the end of June.
•
Reserves (BOM measure) continue to exceed total 1996 amortizations of
external debt owed by the Government of Mexico and its agencies. Reserves
continue to exceed three months of non-maquiladora imports -- despite strong
import growth this year.
III.
Mexico's Financial Transactions
In accordance with the February 21, 1995 Agreements, Mexico requested, and
Treasury authorized, the use of the funds disbursed to redeem tesobonos and other
short-term, dollar-denominated debt of the Mexican government and its agencies. All
funds have been used to redeem tesobonos, which are now fully retired.
IV.
Disbursements, Swaps, Guarantees and Compensation to the U.S.
Treasury
As of July 31, 1996, $10.5 billion remain outstanding under the U.S. support
program, all in the form of medium-term swaps. No principal payments are due until
June 30, 1997. However, the Mexican government has announced plans to prepay $7
billion in outstanding medium-term swaps in early August, 1996.
•
A total of $13.5 billion in U.S. funds has been disbursed to Mexico under the
support program: $3 billion in short-term swaps and $10.5 billion in medium-
7
Amortization Schedule of ESF and Federal Reserve Swaps with Mexico
Amount
Disbursed
(US Millions)
13,500
~epayments to date (bold); Scheduled Repavment for outstanding balance~US$ million)
Short-term swaps" provided on:
Medium-term swaps provided on:
03/14/95
04/19/95
05/19/95
01/11/95
01/13/95
02/02/95"""
500
2,000
3,000
3,000
2,000
500
I
Quarter
Current Interest Rate:
Ending
n/a
Mar-31-95
6,000
Jun-30-95
5,000
Sep-30-95
2,500
I
I
n/a
I
l
I
n/a
7.50%
1016%j
I
10.16%[
Due (US$ million)
Annually·"'·
Quarterly
07/05/95
2,500
10,500
920%
500 (Mar 14) 500 (Mar 14)
Oec-31-95
700 (Oct 11
Mar-31-96
1,300 (Jan 29)
0
0
0
0
Jun-30-96
0
0
0
0
Sep-30-96
0
0
0
0
Oec-31-96
0
0
0
0
Mar-31-97
0
0
0
0
415
I
Jun-30-97
0
245"*
0
170**
Sep-30-97
0
245
170
205**
620
Oec-31-97
Mar-31-98
0
245
170
205
620
0
375**
245
170
205
620
245
170
205
995
375
375
245
245
170
170
205
205
995
375
245
170
205
995
Jun-30-99
375
245
Sep-30-99
245
170
170
205
205
995
375
Oec-31-99
750
245
170
205
1,370
Mar-31-2000
Jun-30-2000
0
305
130
205
Jun-30-98
Sep-30-98
Oec-31-98
Mar-31-99
c-------
----
3,605
995
0
0
0
245
640
245
0
0
0
0
0
0
0
0
0
0
Oec-31-2000
* Short-term swap totals for each period represent equivalent amounts for ESF and Federal Reserve .
•• All medium-term swaps payments are due on last date in each calendar quarter
In
995
1,655
4,355
--
Sep-30-2000
***$2 billion
10,500
short term swaps disbursed on February 2, 1995 were rolled over for an additional 90 day period on
May 3, 1995, and August 1, 1995, for a new maturity date of October 30, 1995. On October 11, Mexico repaid $700 million of
these obligations. The outstanding $1 3 billion was rolled over for an additional 90 day period on October 30, for a
new maturity date of January 29, 1996, when they were repaid
** •• This column represents the sum of quarterly payments In a given year; it does not represent an additional payment
885
Treasury Secretary's Report to Congress
July 1996
term ~waps. (Swap arrangements are described in the Semi-Annual Report.)
Of thIS total, no more than $12.5 billion has been outstanding at anyone time.
The United States has not extended any securities guarantees to Mexico under
the support program.
Mexico has not missed any interest payments or required principal repayments under
any of the swaps.
•
To date, the United States has received $1.23 billion in interest payments from
Mexico, including $239 million in interest on medium-term swaps paid to the
ESF on July 1.
v.
Status of the Oil Facility
The payment mechanism, established under the Oil Proceeds Facility Agreement,
continues to function smoothly. This has been confirmed by independent reviews (in
August 1995 and February 1996).
•
In each review, Petroleos Mexicanos' (PEMEX) independent public auditors,
Coopers & Lybrand, analyzed the information utilized for the previous two
quarterly export reports prepared by PEMEX and provided to the U. S. Treasury
pursuant to the Oil Proceeds Facility Agreement.
•
According to the reviews, the quarterly reports "fairly present" information
related to both PEMEX'S oil exports and the collection of proceeds from such
exports. The next semi-annual review is expected in August.
The Framework Agreement and the Oil Purchase Facility Agreement will be amended
to permit Mexico's new $6 billion floating rate note issue, the proceeds of which will
be used to prepay some of the outstanding medium-term ESF swaps.
•
This new note issue is backed by Mexican oil export revenues released from
the oil facility.
•
Additional oil export revenues will be released to facilitate an addition $1
billion prepayment by Mexico.
•
Adequate coverage of the $3.5 billion in swaps that will remain outstanding
will be preserved, as the share of oil proceeds "carved out" will be less than
the share of U.S. swaps prepaid.
9
Treasury Secretary's Report to Congress
July 1996
Payments through the Federal Reserve Bank of New York account
As of July 22, approximately $12.6 billion had flowed through Mexico's special funds
account at the Federal Reserve Bank of New York, a daily average of $25 million
since the oil agreement went into effect in early March 1995. To date, there have
been no set-offs against the proceeds from Mexico's crude oiL petrochemical, and
refined product exports.
10
((84 (~(6
04/02/97
6:;;'
MRS
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