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DBRARY
ROOM 5030
v . $ o 1986
TREASURY DEPARTMENT
Treas.
HJ
10
.A13P4
v. 272
U.S. Dept. of the Treasury
PRESS RELEASES
TREASURY NEWS
D e p a r t m e n t of the Treasury • W a s h i n g t o n , n x . * rTeteBftone 566-2041
FFR S 9 55 AH 'flfi
• ••<-Alir.--.4T OF THE TREASURY
For Release Upon Delivery
Expected at 9:30 a.m., E.S.T.
January 31, 1986
STATEMENT OF
DENNIS E. ROSS
ACTING TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE FINANCE COMMITTEE
Mr.
Chairman and Members of the Subcommittee:
I am pleased to present the Treasury Department's views on
S.1959, which addresses the tax treatment of issuers and holders
of interests in multiple class mortgage pools; S.1978, which
addresses the tax treatment of multiple class mortgage pools as
well as pools of various other debt instruments; and S.1839,
which would limit the tax incentives available for investments or
activities conducted in zones designated as environmentally
sensitive. Let me turn first to the question of multiple class
mortgage pools.
Overview
The Treasury Department shares the concern of this
Subcommittee over the absence of clear rules governing the fax
treatment of multiple class mortgage pools. Uncertainty under
current law has effectively denied access to the secondary
mortgage market for some issuers. Moreover, the existing
uncertainty may result in a significant mismatch of the reported
income of holders of interests in multiple class mortgage pools
and the corresponding deductions of issuers, as well as the
conversion for holders of ordinary interest income into capital
gain. Since we expect the market for multiple class mortgage
pools to grow, we view seriously the potential revenue loss from
continued uncertainty in this area. We thus support legislation
clarifying the proper reporting of income and deductions with
respect to mortgage-backed securities. We also support, subject
to appropriate safeguards, legislation that would effectively
exempt the issuer of mortgage-backed securities from tax with
respect to the underlying mortgages.
B-448
-2Although we support the general direction of the legislation
before this Subcommittee, we remain concerned about the growth of
Federal credit, including that of the Federal agencies active in
the secondary mortgage market. As we have testified previously,
we are concerned about the extent to which the Federal agencies
currently predominate in the secondary mortgage market, and
believe it important to encourage private issuers of mortgage
securities to enter that market. To this end, Treasury supports
legislation along the lines of S.1959 and S.1978, modified,
however, to prevent participation in multiple class mortgage
pools by the Federal agencies.
Background
In recent years, mortgage originators, such as thrift
institutions and mortgage banks, have increasingly sold their
mortgages to portfolio investors. This secondary mortgage market
is based principally on the issuance of mortgage-backed
securities, which have the advantage to investors of greater
liquidity and less risk of default than individual whole
mortgages.
The growth in the secondary mortgage market has also seen the
development of new forms of mortgage-backed securities.
Traditionally, mortgage-backed securities have been issued as
certificates of undivided beneficial interest in "fixed
investment trusts," which are viewed for tax purposes as "grantor
trusts." In this format, the certificate holders are treated as
the beneficial owners of the mortgages and bear all income taxes
with respect to the mortgages.
In recent years, the issuance of a single class of uniform
interests in a mortgage pool has proved to be relatively
inefficient, since it prevents the issuer from taking advantage
of the positively sloped yield curve (i,.e., the fact that
long-term yields exceed those for short-term obligations) or
offering investors any degree of call protection (i.e_.,
protection against a call based on prepayment of tHe underlying
mortgages). Because individual mortgages are typically composed
of a series of equal monthly payments, the cash flow from a pool
of mortgages has the^^ame temporal pattern as a series of shortand long-term obligations. A mortgage pool may thus be used to
collaterize an issue of debt obligations with differing terms by
allocating the anticipated mortgage payments among the different
classes of securities. Such arrangements, known as "fast-pay,
slow-pay" or "multiple class" pools, permit the issuer to price
interests in the mortgage pool along the yield curve and to offer
the slow-pay classes some degree of call protection. In this
fashion, multiple class mortgage pools permit an issuer to secure
a better return from a secondary marketing.
Because of uncertainty as to whether a multiple class pool
could be offered as a fixed investment trust and retain grantor
-3trust status for tax purposes, mortgage pool issuers initially
turned to an alternate structure. The Federal Home Loan Mortgage
Corporation ("Freddie Mac") offered the first multiple class pool
in 1983 by issuing several classes of debt securities with
payment schedules tied to the actual payments on a fixed pool of
mortgages. Since the Freddie Mac offering, approximately $27
billion of these securities have been issued, primarily through
thinly-capitalized, single purpose financing corporations.
Typically this has involved creation of a subsidiary (commonly by
an investment banking firm or residential construction company)
solely for the purpose of holding the pool of mortgages, selling
debt obligations secured by the mortgages, and transferring
mortgage payments to investors in accordance with the terms of
their securities.
The type of debt obligation issued by such corporations,
known as a collateralized mortgage obligation ("CMO"), is itself
a relatively inefficient vehicle for marketing a pool of
mortgages. Ideally, the corporate issuer would have no residual
economic or tax consequences from its holding of the underlying
mortgages, which is consistent with the intention that beneficial
ownership of the mortgages be transferred to secondary investors.
Although this economic result might be accomplished by leaving
the issuer without significant capital and issuing obligations
that, in the aggregate, exactly mirrored the characteristics of
the underlying mortgages, this would in turn threaten the
issuer's status for tax purposes as the owner of the mortgages
and the issuer of corporate debt. Thus, if the issuer had no
significant equity and the CMOs were designed to match exactly
the cash flow from the underlying mortgages, the CMOs could be
deemed to constitute equity interests in the issuer or to
represent instead direct interests in the underlying mortgages.
Either characterization could leave the issuer with a tax
liability on the mortgage income that would more than offset the
economic advantages of the multiple class structure.
To insure that the corporate issuer will be respected as
owner of the mortgages and that the CMOs will be characterized as
debt for tax purposes, careful issuers have attempted to satisfy
minimum capitalization requirements and to retain some residual
interest in the underlying mortgages. This approach, however,
introduces a degree of economic inefficiency to the transaction,
since it ties up capital in the issuer and prevents the issuer
from borrowing fully against the underlying mortgages. As a
consequence, some issuers have taken aggressive positions,
providing little if any capitalization and retaining no
significant residual interest in the underlying mortgages. Since
the Internal Revenue Service has not to this date publicly
challenged the formal structure of a CMO transaction, the net
effect at present is a secondary market in which conservative
issuers either operate at a disadvantage or are effectively
precluded.
Aside from the uncertainties as to the tax treatment of
-4issuers, the CMO structure involves certain additional costs for
holders and issuers of mortgage-backed securities. Under section
593 of the Code, a savings and loan association is entitled to
claim bad debt deductions based on a special method if it holds a
significant percentage of its assets in residential mortgages.
Since the holder of a CMO is treated for this and other purposes
as holding corporate debt rather than a direct interest in the
underlying mortgages, CMOs may be a relatively unattractive
investment for many savings and loans that might otherwise prefer
a fast- or slow-pay mortgage pool interest.
Finally, the CMO structure is unattractive to some issuers
because of balance sheet considerations. A relatively modest CMO
transaction may involve over $200 million in debt securities.
Although these transactions involve nearly offsetting assets and
liabilities at the issuer level, many potential participants in
the secondary mortgage market, including some banks and savings
and loan associations, cannot, either due to regulatory or credit
constraints, add significant amounts of debt to their balance
sheets.
The Proposed Multiple Class Trust Regulations
In an attempt to retain the advantages of the multiple class
structure while avoiding the tax and business obstacles of CMOs,
Dean Witter and Sears in 1984 structured two grantor trusts
offering investors differing temporal interests in the payment
rights on $500 million pools of residential mortgages. Dean
Witter and Sears succeeded in marketing interests in the first
pool, but, in April of 1984, before interests in the second pool
were sold, the Internal Revenue Service proposed regulations
denying trust status to arrangements having multiple classes of
ownership interests.
Although the proposed multiple class trust regulations have
generated substantial comment, we continue to believe they were
correct, as a general rule, in denying trust status to multiple
class arrangements. Historically, whether an investment trust is
classified as a trust or as an association has focused on whether
the investors' interests were fixed or could instead be varied
under the terms of the trust agreement. A power to vary the
investors' interests, even though only contingent in form, is
sufficient to deny the arrangement trust status. Thus, the
existing investment trust regulations limit trust classification
to "fixed investment trusts" where there is no power under the
trust agreement to vary the investors' interests.
At the time these regulations were first promulgated in 1945,
fixed investment trusts had only one class of investment
certificates. The certificates represented undivided interests
in the trust property and were, in form, receipts for the
securities held by the trust. Thus, where the trustee had no
power to vary the investment of the trust, a fixed investment
-5trust was little more than a depository arrangement, formed to
hold a pool of specific investment assets. Although the trust
device permitted individual investors to diversify, the
arrangement in substance provided a form of direct, if common
ownership of the trust's assets. This use of a trust to hold
investment assets and facilitate direct investment in a pool of
assets by investors is consistent with the custodial purposes
that have traditionally limited trust classification.
A multiple class investment trust, such as that formed by
Dean Witter and Sears, departs from the traditional form of a
fixed investment trust in that the beneficiaries' interests are
not undivided, but diverse. The existence of varied beneficial
interests indicates that the trust is not employed simply to hold
investment assets, but serves the additional purpose of providing
investors with economic and legal interests that could not be
acquired through direct investment in the trust assets. Such use
of an investment trust introduces the potential for complex
allocations of trust income among investors with the possibility
that the timing and character of the investor's income will
differ from that of the trust's.
The difficult questions that arise concerning the allocation
of income to diverse investors are properly foreign to the trust
area, where rules have not developed to accommodate the varied
forms of commercial investment and no express economic substance
requirement limits the allocation of income for tax purposes.
These considerations prompted the proposed regulations, and we
believe continue to require, as a general rule, that trust status
be denied to investment trusts with multiple classes of
ownershipS.1959 and S.1978
The proposed multiple class trust regulations, and the
consequent failure of attempts to market multiple class mortgage
pools in the grantor trust format, have no doubt prompted the
legislative initiatives represented by S.1959 and S.1978. The
Treasury Department supports the general objectives of the
sponsors of S.1959 and S.1978, and we hope that this hearing
begins a mutual ...effort to resolve the issues in this area. Thus,
we would welcome the opportunity to work with this Subcommittee
as well as industry representatives to develop rules which insure
that income from the underlying mortgages in a multiple class
pool is properly allocated and reported to investors. To assist
in this process, we would like to offer some preliminary views on
technical aspects of S.1959 and S.1978.
Overall Structure. Although S.1959 and S.1978 would appear
to have common objectives, there are potentially significant
differences in their proposed treatment of multiple class
mortgage pools. In general, S.1959 allows the issuer to elect to
treat the issuance of interests in a pool of mortgages as a sale
-6of the mortgages to the investors. Investor interests in such
pools are taxed as debt obligations and new rules are provided
that specify the manner in which income from such obligations is
to be reported. S.1978, on the other hand, treats the issuer of
interests in a pool of mortgages as well as pools of various
other types of debt instruments as a grantor trust. The
application of the grantor trust rules to investors is not
specified, however, leaving uncertain the manner in which income
from the underlying obligations would be allocated.
Although S.1959 and S.1978 each treat the issuer as having
transferred beneficial ownership of the mortgages, and thus leave
the issuer free of any continuing tax liability with respect to
the mortgages, we prefer the approach of S.1959 for a number of
reasons. Most importantly, we believe it necessary that the
manner in which mortgage income is allocated to investors be
specified in any legislation granting tax exemption for the
issuer. Moreover, we do not believe it appropriate that the
necessarily technical rules for the taxation of investors in
multiple class arrangements be developed in the context of the
rules for the taxation of grantor trusts.
We also believe it is appropriate that, as under S.1959,
multiple class arrangements for which the issuer is granted tax
exemption be limited to debt obligations in the nature of real
estate mortgages or mortgage-backed securities. Although
multiple class pools of auto loans, lease receivables, corporate
bonds, and various other obligations would appear closely similar
in concept to multiple class mortgage pools, we believe it
appropriate to proceed with some caution in this area. Thus, we
believe it appropriate that we gain experience with multiple
class mortgage pools before extending the concept of issuer level
tax exemption to multiple class pools of other debt obligations.
Moreover, because of real estate mortgages' typically long term
and significant incidence of prepayment, they present the most
pressing case for the allowance of multiple class arrangements.
Taxation of Investors. S.1959 amends the original issue
discount provisions of the Internal Revenue Code to provide
specific rules for the accrual of original issue discount on a
mortgage-backed security when prepayments on the underlying
obligations shorten the maturity of the interest. The existing
original issue discount rules are uncertain in this area,
providing only that if an intention to call an obligation prior
to maturity exists at the time the obligation is issued, any gain
upon redemption of the obligation (not in excess of the
unamortized discount) is ordinary income. The scope of this rule
is unclear, particularly as regards prepayments based on
contingencies outside the control of either the issuer or holder
of the obligation.
At present, we believe most taxpayers accrue original issue
discount with respect to an obligation that may be prematurely
retired based on the obligation's stated maturity. In cases
-7where prepayments are likely, this approach bases the
obligation's yield on an unrealistic assumption as to its
probable term, and thus results in a deferral of income for the
holder, as well possible conversion of interest income to capital
gain. For example, assume that an investor purchases for $88 the
right to receive $100 at the end of two years and that, although
based on a contingency not within the control of the issuer and
holder, the holder anticipates prepayment of the obligation at
the end of one year. Assuming a two year maturity, $5.81 of
original issue discount accrues in year one and $6.19 of original
issue discount accrues in year two. If the tax treatment of the
holder is based on the stated maturity of the obligation and it
prepays at the end of year one, the holder will only be charged
with $5.81 of total original issue discount and the excess (i..e. ,
$6.19) will be treated as capital gain (assuming the obligation
is a capital asset and it is issued by a corporation). Since the
obligation's price would ordinarily reflect the anticipated
prepayment, the reliance on stated term understates the
obligation's expected and actual yield and results in
undertaxation of the holder.
The fast-pay, slow-pay structure of a multiple class mortgage
pool effectively converts obligations that ordinarily are issued
without discount, i^.e. the underlying mortgages, into a series of
obligations that do Hear original issue discount. Since the
expectation of prepayments is a principal reason multiple class
mortgage pools are formed, any legislation addressing the
taxation of such pools should also address the effect of
anticipated or actual prepayments on the proper accrual of
original issue discount. At least two basic approaches to this
problem exist. One is to assume initially a maturity for the
debt instrument based on market expectations as to prepayments on
the underlying obligations. The other approach is to assume
initially that no prepayments will be made, but to provide for
subsequent adjustments as prepayments actually occur.
The market expectations approach would presumably require
determination of an obligation's expected maturity based in some
manner on its sale price. This approach may be theoretically
correct, since if workable it produces a taxable yield to the
investor that is consistent with the probable and anticipated
economic return cu'the obligation.
If subsequent market
fluctuations or other factors cause actual prepayments to depart
from the expected pattern of prepayments, the resulting economic
gains or losses are properly treated as capital items.
Whatever its conceptual merit, the market expectations
approach is likely not administratively feasible. Investor
expectations are not easily derived from the price paid for an
interest in a mortgage pool. The price paid for such interests
reflects not only prepayment assumptions, but also judgments as
to credit risks and future interest rates (during the expected
term). Because the maturity and yield of an obligation are
interdependent, an infinite number of prepayment assumptions may
-8be consistent with the price an investor paid for an interest.
Moreover, although various sources compile and publish data on
prepayment experience with respect to certain types of mortgages,
this historical information may not accurately reflect current
prepayment assumptions.
Presumably because of the difficulty in taking account of
prepayment expectations, S.1959 takes the alternate approach of
requiring adjustments to the accrual of original issue discount
as prepayments occur. Under S.1959, the accrual of original
issue discount on investors' interests is initially based on the
stated maturity of the underlying mortgages. When a prepayment
on an underlying mortgage is received, shortening the maturity of
the investors' interests, investors accrue additional original
issue discount equal to the increase in the present value of the
stream of payments resulting from the prepayment (discounting at
the original yield based on the stated maturity). In subsequent
taxable years, the investor accrues original issue discount on
the remaining payments at the original yield.
The following example will illustrate the application of
S. 1959. Assume that investors A and B purchase interests in a
mortgage pool which is composed of two mortgages. One mortgage
is scheduled to pay $100 after two years and the other $100 after
three years. Both investors are entitled to receive $100 but, in
the event of a prepayment, A's interest will be retired first.
Assume that A purchases his interest for $85.73 and that B
purchases his interest for $75.13. Assume further that the
payment scheduled to be received at the end of year three is in
fact prepaid at the end of year one and, thus, A's interest is
retired at that time; as a further result of the prepayment, B's
interest will be retired no later than at the end of year two.
Under S.1959, A and B would have the following tax consequences
in year one. A has total original issue discount of $14.27,
representing $6.86 of original issue discount which accrued in
year one without regard to the prepayment, and an additional
$7.41 of original issue discount attributable to the prepayment.
B has total original issue discount of $15.67, which represents
$7.51 of original issue discount which accrued in year one
without regard to the prepayment and $8.26 of original issue
discount attributable to the prepayment. A's additional original
issue discount:-represents the unaccrued discount remaining when
his interest is retired; B's additional original issue discount
is the amount of discount which would have accrued in year two,
but which has been accelerated because the maturity of his
interest has been shortened by one year.
Although the adjustment approach resolves the potential
mischaracterization of prepayment gain that may occur under
present law, it does not remove the potential for deferral of
income. Thus, the rate at which original issue discount accrues
is still based initially on an assumption that payments will be
received as scheduled, despite the near certainty that some
mortgages in the pool will prepay. As noted previously, one
-9solution to the problem of deferral, assuming a maturity based on
investors' expectations, is probably not feasible. Another
possible approach to this problem would be to impose an interest
charge on the original issue discount which is accelerated upon a
prepayment. This is among the issues Treasury would like to
explore with this Subcommittee and industry representatives.
In addition to providing rules for adjusting the accrual of
original issue discount, S.1959 also requires investors, when the
entity elects to treat the issuance of interests as a sale of the
underlying mortgages, to include an additional amount in income
equal to the excess of the amount of income which the entity
would have realized had it remained taxable on the underlying
mortgages over the aggregate amount of original issue discount
accruing to the investors. This "greater of" method (i..e. the
aggregate income to investors is equal to the greater of the
income accruing on their interests in the pool or the income that
would accrue to a single holder of the underlying mortgages) is
intended to prevent a net loss of revenue from the creation of a
multiple class mortgage pool. Without this feature, the current
positively sloped yield curve would result in accrual of income
on interests in a multiple class pool that is slower in the
aggregate than the accrual of income to a single holder of the
underlying mortgages.
The following example illustrates this phenomenon. Assume a
debt instrument will pay $100 at the end of year one and $100 at
the end of year two. Assume the fair market value of the debt
instrument as a whole is $173.55 U .e. , a 10 percent overall
yield), but that the fair market value of the year one payment is
$91.32 (i_.e. , a 9.5 percent yield) and the fair market value of
the year two payment is $82.23 (i.e., a 10.28 percent yield).
The original issue discount whicH accrues on the whole debt
instrument in year one is $17.36 and in year two is $9.09. By
contrast, the original issue discount which accrues on the
separate components of the debt instrument is as follows: in
year one, original issue discount of $17.13 (i.e., $8.68 with
respect to the year one payment and $8.45 witH respect to the
year two payment) accrues and, in year two, original issue
discount of $9.32 accrues. The example illustrates that when, as
is currently true, the yield curve is positively sloped, accruing
discount based on the separate yields of the various components
of a debt instrument will, in the aggregate, result in slower
income inclusion than accrual of discount based on the overall
yield of the whole bond.
The separate components ultimately
accrue the same total amount of original issue discount, but a
portion of it is deferred to later periods.
The "greater of" rule contained in S.1959 is a departure from
the normal rules which govern the purchaser of an original issue
discount obligation. The rule may well be appropriate in this
context, given that S.1959 or similar legislation could
dramatically expand the volume of mortgages placed in multiple
class pools. Although this expansion may produce greater
-10efficiency in the secondary mortgage market, it cannot be
permitted to occur at the cost of any significant loss in
revenue. In this regard, we are currently studying the revenue
effects of S. 1959, and will apprise this Subcommittee when our
analysis is complete.
Compliance and Other Issues. Although I will not address
them in depth, a number of other issues concerning the taxation
of investors must be resolved before an issuer could
appropriately be exempted from tax on the mortgages in a multiple
class pool. For example, S.1959 does not address the
characterization of gain upon the sale of an investor's interest.
The absence of an express rule in this respect could allow an
investor to defeat the proposed adjustment mechanism by selling
his interest at a capital gain. In addition, we are concerned
that S.1959 fails to treat subsequent holders of multiple class
interests in the same manner as subsequent holders of stripped
coupons and bonds are treated under current law. Finally,
significant questions remain concerning the proper treatment of
contingent interests in a pool of debt instruments.
A final positive aspect of S.1959 is that it would repeal a
variety of existing exemptions from the income reporting
requirements and require that an issuer of interests in a
mortgage pool report taxable income to all investors. We support
this aspect of S.1959, and believe that a broad reporting
requirement is an important adjunct to whatever rules are adopted
for determining investors' income.
To summarize the Treasury Department's views with regard to
S.1959 and S.1978, let me repeat that we hope the efforts
initiated by you, Mr. Chairman, and by Senator Cranston and
others will move forward. We offer our support for these efforts
and pledge to work with this Subcommittee and industry
Environmental
representatives to achieve
a practicalZones
solution to the tax issues
in this area.
Let me turn briefly to S.1839, which would deny a number of
generally available tax benefits with respect to activities
conducted in "environmental zones." The tax benefits that would
be denied include: accelerated depreciation; investment tax
credit; exempt status with regard to the at-risk rules;
percentage depletion; expensing of oil and gas intangible
drilling costs and mining exploration and development costs;
capital gains for timber, coal, and iron ore; deductions for soil
and water conservation and land clearing; and the tax exemption
for industrial development bonds. Environmental zones are
specified areas that are of Federal environmental concern, but
that are not formally part of a Federal system such as the
National Park System or similar systems.
-11Although we are sympathetic with the objectives of this
legislation, we question whether it is appropriate to control
private activity in environmental zones through the tax code
rather than through direct regulation. Use of the tax laws for
such purposes could involve substantial administrative
complexity, and would likely either discourage some activities
that pose no environmental threat or result in a complex set
of rules identifying activities that are appropriately exempt.
Our current efforts to reform and simplify the tax system argue
that we not burden the code with additional provisions designed
to achieve non-tax policy objectives.
TREASURYNEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
L13RARY, ROOM 5310
FOR IMMEDIATE RELEASE
FEB S 9 ss AM *Hfi
February 3, 1986
RESULTS OF TREASURY ,'S; WEEKLY^ B ^ $ f < ^ C T IONS
Tenders for $7,035 million of 13-week bills and for $7,010 million
of 26-week bills, both to be issued on February 6, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing May 8. 1986
Discount Investment
Rate
Rate 1/
Price
6.95%
7.00%
6.99%
98.243
98.231
98.233
7.17%
7.22%
7.21%
26-week bills
maturing August 7. 1986
Discount Investment
Rate
Rate 1/
Price
7.04%
7.07%
7-06%
7.40%
7.43%
7.42%
96.441
96.426
96.431
Tenders at the high discount rate for the 13-week bills were allotted 29%,
Tenders at the high discount rate for the 26-week bills were allotted 13%,
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$
43,435
20,265,280
31,375
49,570
51,795
64,915
1,514,655
100,450
14,005
55,340
45,755
1,616,680
361,095
43,435
$
5 ,859,185
'•
31,375
47,745
51,795
52,770
305,250
65,450
14,005
55,340
42,205
105,040
361,095
:
$24,214,350
33,745
17,751,450
17,645
28,295
60,940
68,670
1,746,690
95,180
19,635
65,590
31,940
1,140,430
386,015
33,745
$
5 ,489,880
$7 ,034,690
. $21,446,225
$7 ,010,385
$21,218,390
1,182,835
$22,401,225
$4 ,388,730
1,182,835
$5 ,571,565
: $18,251,970
:
998,455
: $19,250,425
$4 ,166,130
1,586,025
1,236,025
:
1,550,000
1,200,000
227,100
227,100
:
645,800
645,800
$24,214,350
$7,034,690
$21,446,225
$7,010,385
1/ Equivalent coupon-issue yield
:
=
:
$
Accepted
17,645
28,295
60,940
64,320
654,470
60,830
19,635
65,590
27,590
101,430
386,015
998,455
$5 ,164,585
TREASURYNEWS
iepartment of the Treasury • Washington, D.c. • Telephone 566-2041
LIBRARY, ROOM 5310
FOR RELEASE AT 4:00 P.M.
FEB
6 9 55 AH *BB
February 4, 1986
DEPARTMENT OF THE TREASURY
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,000 million, to be issued February 13, 1986.
This offering
will result in a paydown for the Treasury of about $325
million, as
the maturing bills are outstanding in the amount of $14,331 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Monday, February 10, 1986.
The two series offered are as follows:
91-day.bills (to maturity date) for approximately $7,000.
million, representing an additional amount of bills dated
May 16, 1985,
and to mature May 15, 1986
(CUSIP No.
912794 KF 0), currently outstanding in the amount of $15,290 million,
the additional
and original
bills to $7,000
be freely
interchangeable.
182-day bills
for approximately
million,
to be dated
February 13, 1986, and to mature August 14, 1986
(CUSIP No.
912794 KZ 6 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasuries
bills maturing February 13, 1986.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to the
extent that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them. Federal Reserve
Banks currently hold $1,470 million as agents for foreign and international monetary authorities, and $3,488 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series)
B-450
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2|
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued- trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 2
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 565-2041
FOR IMMEDIATE RELEASE
February 5, 1986
Statement by Secretary of the Treasury
James A. Baker, III
at the Press Briefing on the
FY 1987 Budget
February 5, 1986
We seek to build on the foundation of the solid economic
performance that has already taken place. The current economic
expansion has now moved into its fourth year and shows few signs
of slackening. Growth was relatively slow at some times during
1985, but by year-end the economy was gaining momentum.
Some favorable features of last year's economic performance
deserve at least passing mention.
o Consumer price inflation at 3.8 percent remained in the
3.8 to 4 percent range for the fourth year in a row,
and is down sharply from the double-digit rates of
1980.
o Employment ^has risen strongly in the current expansion,
• by more tha*i 9 million people. The unemployment rate
has been reduced to below 7 percent and further
progress is expected.
o Last year's financial market performance was also encouraging. Record amounts of credit flowed to private
borrowers, despite the persistence of large Federal
budget deficits. Short-term interest rates are down on
average by about 1/2 percentage point in the past year
while many of the long-term rates are down by about two
percentage points. The prime rate is down to 9-1/2
B-451
2
percent, the lowest rate in 7 years. Ideally, we would
like to have seen interest rates come down even further
than they have.
All of this added up to a year of solid economic performance
in 1985. The stage has been set for sustained expansion in output, jobs and income. This is one of the most important
prerequisites for improving the budget picture, as well as the
financial security of the American people. During the current
expansion, strong economic growth has been achieved in a much
less inflationary environment than in the late 1970's. We must
strive to extend that good record into the future.
The Administration forecast, upon which Chairman Sprinkel
will comment, calls for 4 percent real growth during the four
quarters of 1986. This would seem to be a reasonable expectation. The consensus private forecast has been a little lower,
around 3 percent. But the latest economic numbers may well be
causing some upward adjustment in the private forecasts.
The inflation outlook is also relatively promising, although
the fall in the external value of the dollar will eventually
begin to exert a little upward pressure.
The Federal Reserve obviously needs to remain alert to the
needs of both the domestic and international financial situations. While they never lack for critics and there is always
room for disagreement on the wisdom of some of their specific
actions, it seems to me that the Federal Reserve has been doing a
good job recently.
* * *
I would like to turn briefly now to the influence of the
international economy on our economic and fiscal situation. As a
result of intensified efforts at promoting a favorable convergence of economic performance among the major industrial countries, we have seen some improvement in the world economy. We
hope to build on the progress this year and to see stronger
growth abroad. That trend would have a favorable impact on trade
and economic growth in the United States.
Exchange markets have recognized these developments. Well
over half of the dollar's rise on a real trade-weighted basis
against other industrial countries from the end of 1980 to last
winter's peaks has been reversed. This is good news for U.S.
industry and agriculture. The U.S. trade deficit is likely to
level off later this year. These developments should contribute
to U.S. growth and to a more sustainable medium-term pattern of
trade and current account balances. The G-5 meeting last
3
September contributed to these developments. Our recent meeting
in London showed that all countries were working to continue
•fforts for sustainable growth.
Another favorable development has been the downward movement
in world petroleum prices. Although not without its costs, on
balance this should increase growth and lower inflation in most
of the world.
* * *
There are two major items on this year's fiscal agenda:
deficit reduction and tax reform.
The large budget deficits that we face are due to excessive
Federal spending. Certainly it is not because the American
people are undertaxed. As shown in the chart attached to my
statement, receipts are running a bit above the long run historical average as a share of GNP. Despite frequent claims to
the contrary, the 1981 Reagan tax cuts are not responsible for
our current fiscal difficulties.
Our problems are on the outlay side of the budget, and that
is where the corrective action needs to be taken. Congress
shares this view. It has debated this issue and has passed the
Gramm-Rudman-Hollings bill to cut the deficit by cutting growth
in spending.
The reduction in the growth of expenditure required to
balance the budget by fiscal year 1991 will not be easy, but the
effort deserves strong bipartisan support. It can be done the
hard, crude way, via sequestration across the board. Or it can
be done more rationally and selectively, with respect for appropriate priorities. The President's budget is carefully drawn to
meet the Gramm-Rudmah targets while preserving essential programs
of the highest national priority.
The only alternatives to the domestic spending cuts
emphasized in the President's budget are to raise taxes, to lower
defense spending, or to cut social security benefits, none of
which are acceptable. There should be no illusion that tax
increases will somehow provide an easy way out. The President
has expressed his views on this issue very clearly. He is firmly
opposed to damaging the economy by increasing taxes. Defense,
which is the most essential duty of the Federal government, must
be maintained. So must the social safety net, including Social
Security and entitlement programs for the needy.
Our other major domestic policy priority is to achieve meaningful tax reform legislation. The bill passed last year by the
House of Representatives is a good start but not a final product.
4
Tax reform remains a top priority item on the President's
agenda. We will work in a bipartisan spirit to achieve meaningful tax reform this year. But let me be very clear that the
President will not compromise on matters of principle and he will
not permit tax reform to degenerate into a tax increase in
disguise.
OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1991
Percent of GNP.
Percent of GNP
25
25
Outlays
Average Outlays
1964-1979
(20.0)
20
20
V-J/sJ„ \. ^e**^ ^p—^
*****
X,...,#••••
.,
^.•••••••••••••V*.
* Receipts
Average Receipts
1964-1979
(18.3)
15
15
y
s
I I I
,< I I I I I I I I I I I I
I I I I I I I I I <r
0 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Fiscal Years
Projected
Note: Outlays include off-budget federal entities.
January 22. 1986 A54a
TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
For Release Upon Delivery
Expected at 1:30 P.M.
February 6, 1986
Testimony of The Honorable James A. Baker, III
Secretary of the Treasury
Before the
House Appropriations Committee
February 6, 1986
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the state of the
economy and the new budgetary path. The major economic objectives
of the Administration have been described by President Reagan in
his State of the Union Message. Further details on this year's
economic and budgetary outlook will be provided this afternoon by
CEA Chairman Sprinkel and Budget Director Miller. My remarks are
an overview of the current situation.
We seek to build on the foundation of the solid economic
performance that has already taken place. The current economic
expansion has now moved into its fourth year and shows few signs
of slackening. Growth was relatively slow at some times during
1985, but by year-end the economy was gaining momentum.
Some favorable features of last year's economic performance
deserve at least passing mention.
o Consumer price inflation at 3.8 percent remained in the
3.8 to 4 percent range for the fourth year in a row. A
table attached to my prepared statement shows the steady
progress that has been made since 1980 when all of the
measures of price performance were rising in the doubledigit range.
B-452
2
o
Employment has risen strongly in the current expansion,
by more than 9 million people. The unemployment rate
has been reduced to below 7 percent and further
progress is expected. The U.S. economy continues to
display great job-creating ability.
o Last year's financial market performance was also
encouraging. Record amounts of credit flowed to
private borrowers, despite the persistence of large
Federal budget deficits. Short-term interest rates are
down on average by about 1/2 percentage point in the
past year while many of the long-term rates are down by
about two percentage points. The prime rate is down to
9-1/2 percent, the lowest rate in 7 years. Ideally, we
would like to have seen interest rates come down even
further than they have.
All of this added up to a year of solid economic performance
in 1985. The latest economic information is generally favorable. Employment, retail sales, industrial production, personal
income, residential construction, new orders and the leading
indicators were all rising strongly at year end. The stage has
been set for sustained expansion in output, jobs and income.
Sustained economic expansion is one of the most important
prerequisites for improving the budget picture, as well as the
financial security of the American people. During the current
expansion, strong economic growth has been achieved in a much
less inflationary environment than in the late 1970's. We must
strive to extend that good record into the future.
The Administration forecast, upon which Chairman Sprinkel
will comment, calls for 4 percent real growth during the four
quarters of 1986. This would seem to be a reasonable expectation. The consensus private forecast has been a little lower,
around 3 percent. But the latest economic numbers may well be
causing some upward adjustment in the private forecasts. Those
of us who advise the President on these matters feel that the
current Administration projections are inherently reasonable
although we also recognize that economic forecasting is at best
an uncertain art.
The inflation outlook is also relatively promising, although
the fall in the external value of the dollar will eventually
begin to exert a little upward pressure.
The Federal Reserve obviously needs to remain alert to the
needs of both the domestic and international financial situations. While they never lack for critics and there is always
room for disagreement on the wisdom of some of their specific
actions, it seems to me that the Federal Reserve has been doing a
good job recently.
3
*
*
*
I would like to turn briefly now to the influence of the
international economy on our own economic and fiscal situation.
As a result of intensified efforts at promoting a favorable convergence of economic performance among the major industrial
countries we have seen some improvement in the world economy. We
expect to build on the progress this year. On balance, we expect
stronger European and LDC domestic demand growth this year as
they continue the process of shifting from export-led to
domestic-led growth. Unfortunately there may be some weakening
in Japanese growth as the previous stimulus from the trade sector
is sharply reduced.
Exchange markets have recognized these generally favorable
developments. The decline of the dollar since its peak last
winter has been substantial. The yen is at a seven-year high
against the dollar. Well over half of the dollar's rise on a
real trade-weighted basis against other industrial countries from
the end of 1980 to last winter's peaks has been reversed. This
is good news for U.S. industry and agriculture. The U.S. trade
deficit is likely to level off later this year. These developments should contribute to a more sustainable medium-term pattern
of trade and current account balances. The G-5 meeting last
September contributed to these developments. Our recent meeting
in London showed that all countries were working to continue
efforts for sustainable growth.
Another favorable development has been the downward movement
in world petroleum prices. Although not without its costs, on
balance this should strengthen growth and lower inflation in most
of the world. A few countries and firms will experience problems,
but with the U.S. debt initiative and a strongly growing world
economy these problems can be handled.
While the international debt situation has continued to
improve, economic growth in many debtor countries has remained
unsatisfactory, and requires greater emphasis on structural
policy reforms within those nations, buttressed by additional
international financial support. As you know, the United States
proposed last October at Seoul, Korea a "Program for Sustained
Growth", involving mutually reinforcing actions by the debtor
countries, the international financial institutions, and the
commercial banks. The response has been very encouraging, with
broad statements of support from the major bank groups in the
U.S. and other key creditor nations, from the multilateral
institutions and in principle from many of the debtor nations.
* * *
There are two major items on this year's fiscal agenda:
deficit reduction and tax reform.
4
The President's budget for fiscal 1987 provides a detailed
plan, satisfying the requirements of the Gramm-Rudman-Hollings
legislation, by which a balanced budget can be achieved by fiscal
1991. The large budget deficits that we currently face are due
to excessive Federal spending. Certainly it is not because the
American people are undertaxed. As shown in the chart attached
to my prepared testimony, receipts are running a bit above the
long run historical average as a share of GNP. Despite frequent
claims to the contrary, the 1981 Reagan tax cuts are not responsible for our current fiscal difficulties.
Our problems are on the outlay side of the budget, and that
is where the corrective action needs to be taken. Congress
shares this view. It has debated this issue and has passed the
Gramm-Rudman-Hollings bill to cut the deficit by cutting growth
in spending. Outlays will continue to grow in absolute terms
along the path projected in the new budget, but the rate of
advance will be reduced significantly. Between FY 1985 and
FY 1991, nominal Federal outlays would rise on average about
3 percent per year. In the prior six-year period, 1979-1985, the
rate of growth was about 11 percent per year. Along the path
projected in the new budget, Federal outlays would decline
steadily as a ratio to GNP from 24 percent in 1985 to about
19 percent in 1991.
Receipts will be growing strongly in absolute terms as the
economy itself grows, but receipts would remain close to a
19 percent ratio to GNP — slightly above historical'experience.
Receipts are projected to rise by about an average 7-1/2 percent
annually between FY 1985 and FY 1991, close to the 8 percent rise
averaged in the previous 6 year period. With receipts growing
normally and outlay growth restrained to a lower path, the budget
will move into balance by 1991.
The reduction in the growth of expenditure required to
balance the budget by fiscal year 1991 will not be easy, but the
effort deserves strong bipartisan support. It can be done the
hard, crude way, via sequestration across the board. Or it can
be can be done more rationally and selectively, with respect for
appropriate priorities. The President's budget is carefully
drawn to meet the Gramm-Rudman-Hollings targets while preserving
essential programs of the highest national priority.
The only alternatives to the domestic spending cuts emphasized
in the President's budget are to raise taxes, to lower defense
spending, or to cut social security benefits, none of which are
acceptable. There should be no illusion that tax increases will
somehow provide an easy way out. The President has expressed hi<^
views on this issue very clearly. He is firmly opposed to damaam g the economy by increasing taxes. Defense, which is the mn^h
essential duty of the Federal Government, must be maintained
L
must the social safety net, including social security and
*
entitlement programs for the needy.
5
The outlay reductions would be expected to bring down
interest rates with a beneficial impact on the entire economy.
In addition, lower interest rates and a declining budget deficit
will moderate the rapid rise in interest expense that has
developed. This will free up funds for growth in essential
programs.
The time has come to reduce what has clearly become an
excessive rate of growth in Federal spending and to move toward a
balanced Federal budget.
Our other major domestic policy priority is to achieve meaningful tax reform legislation. The bill passed last year by the
House of Representatives is a good start but not a final product.
Our primary concerns are the following:
o the bill lowers marginal tax rates but the top
individual rate of 38 percent and the corporate rate of
36 percent are still too high;
o the bill raises the personal exemption to $2000, but to
only $1500 for taxpayers who itemize deductions;
o the bill fails to maintain the cost of capital at
sufficiently low levels to promote economic growth.
The Senate Finance Committee has begun consideration of tax
reform and the Administration has pledged its full cooperation in
improving the House legislation. Our major desired changes
include:
o full $2000 personal exemptions for both itemizers and
nonitemizers, at least for lower and middle-income
taxpayers;
o provision of adequate capital cost recovery allowances
and the protection of those allowances against inflation;
o a top tax rate no higher than 35 percent.
Tax reform remains a top priority item on the President's
agenda. We will work in a bipartisan spirit to achieve meaningful tax reform this year. But" let me be very clear that the
President will not compromise on matters of principle and he will
not permit tax reform to degenerate into a tax increase in disguise.
6
Conclusions
The U.S. economy turned in a solid showing last year and the
outlook this year is for stronger real growth without much
increase in inflation. Internationally, as well, there was
progress during 1985 and we will be working to build on that
foundation. Our major domestic agenda items are reduction of an
excessive rate of growth in Federal spending as we move toward a
balanced budget, and meaningful tax reform for the American
people. We think that both of these efforts deserve and will
receive strong bipartisan support.
RECENT PROGRESS AGAINST INFLATION
(percent change, annual rate, during period indicated)
1980 1981 1982 1983 1984 1985
G N P : Implicit price deflator
9.9
8.7
5.2
3.5
Fixed-weighted basis 9.8 " 8.5 5.0 3.8 4.2 3.5
Consumer price index 12.4 8.9 3.9 3.8 4.0 3.8
Producer price index 11.8 7.1 3.7 0.6 1.7 1.8
(wholesale prices)
Note: Fourth quarter to fourth quarter for GNP deflator, December to December for CPI and PPI.
January 30, 1986 A41
4.1
3.1
OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1991
Percent of GNP.
Percent of GNP
25
25
Average Outlays
1964-1979
(20.0)
20
20
U;-
Jfmmm^-
-\.
^W.
Receipts
Average Receipts
1964-1979
(18.3)
-15
15
011964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
I
1 I
Fiscal Years
I
I I
o
Projected
Note: Outlays include off-budget federal entities.
January 22. 1986 A54d
TREASURY" NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
JBRARY.ROOM 5310
FOR IMMEDIATE RELEASE
f£B g
9 55 AH 'Bfcebruary 4, 1986
•JEPARTMEMT OF THE TREASURY
RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $9,005 million
of $18,693 million of tenders received from the public for the
3-year notes, Series Q-1989, auctioned today. The notes will be
issued February 18, 1986, and mature February 15, 1989.
The interest rate on the notes will be 8%. The range of
accepted competitive bids, and the corresponding prices at the 8%
interest rate are as follows:
Yield Price
Low 8.07% 99.817
High
8.14%
99.635
Average
8.11%
99.713
Tenders at the high yield were allotted 92%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
57,235
$
27,235
New York
15,985,985
7,654,305
Philadelphia
34,700
34,700
Cleveland
67,845
65,845
Richmond
93,820
93,580
Atlanta
66,505
66,505
Chicago
1,183,230
494,150
St. Louis
114,405
96,405
Minneapolis
43,190
43,185
Kansas City
110,020
109,520
Dallas
29,465
29,465
San Francisco
903,810
287,210
Treasury
2,905
2,905
Totals
$18,693,115
$9,005,010
The $9,005 million of accepted tenders includes $807
million of noncompetitive tenders and $8,198 million of competitive tenders from the public.
In addition to the $9,005 million of tenders accepted in
the auction process, $322 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $886 million
of tenders was also accepted at the average price from Government
accounts and Federal Reserve Banks for their own account in
exchange for maturing securities.
B-4bJ
TREASURY MEWS
lepartment
of the Treasury • Washington,
D.c. • Telephone 566-2041
FOR RELEASE
^ n 0 0 M 5310
l 1 " 31 ^ 1
FEBRUARY 4, 1986
4 02 PH 'BR
• • v: OF THE TREASURY
STATEMENT BY THE HONORABLE DAVID C. MULFORD
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. TREASURY DEPARTMENT
BEFORE THE
ORION ROYAL BANK CONFERENCE
THE PLAISTERERS HALL
LONDON, ENGLAND
FEBRUARY 4, 1986
The U.S. Debt Initiative;
Toward Stronger Growth in the Debtor Nations
The international debt crisis continues to pose one of the
greatest challenges for the world economy and financial system
since the Great Depression.
As with all mega-problems confronting world governments,
the debt crisis has that element of monolithic insolubility which
brings out our worst frustrations. Like an elephant, it is easy
to see, hard to get your arms firmly around it, and very unproductive to face the entire bulk of the issue head-on.
This group does not need to hear statistics, but let me
illustrate. By the end of 1985, the external debt of the developing nations had grown to nearly $900 billion — $200 billion
higher than at the onset of the debt crisis in early 1982, and
nearly triple their debt in 1977. Forty percent of this debt is
in Latin America; approximately half, or about $425 billion, is
owed to the private commercial banks. Interest charges alone on
these vast sums presently amount to $75 billion a year, and
total debt service prior to reschedulings amounts to some $140
billion annually, representing by any measure a significant
share of debtors' total export earnings.
B-455
- 2 -
Commodity markets generally remain depressed and per capita
income in many Latin countries remain below earlier levels.
Inflation rates in Latin America are two and a half times as high
as they were five years ago and investment has fallen sharply.
Managing the debt problem, let alone eventually solving it,
requires two critical operating assumptions. First, we must
honestly recognize that there are no easy, all encompassing global
solutions. Second, no matter how overpowering the problem appears
in its totality, we must focus our efforts on those elements of the
problem that are soluble and work to expand those beachheads once
they are established.
Herein lies the importance of the U.S. debt initiative,
rapidly becoming known as the "Baker Plan." It recognizes the
fundamental need for growth and places the objective of increased
growth at the center of the debt strategy. Perhaps in our preoccupation with balance of payments crises, standby programs,
reschedulings and new bank financing we have let our eyes fall
from the far hills to the rough terrain before us. In doing so,
we have not kept two very simple facts firmly in our minds.
First, without,growth there can be no solution to the
debt problem. Countries will never be able to repay any
portion of the debt they are carrying unless they can accumulate resources -- and export earnings -- at a faster pace
than they are accumulating debt.
Second, without economic reform, no amount of money —
whether derived from external borrowing, financial aid, or
inflationary domestic pump-priming — will produce sustained
growth.
We have only to observe the pernicious problem of capital
flight, which in recent years has been equivalent to virtually
all new bank lending to Latin America, to see the futility of
throwing more money at the problem.
Credible reform by the debtor nations will improve their
growth prospects, but economic adjustment and growth must be
financed. The other two elements of the debt initiative provide
for the sources of this finance: Net new lending by commercial
banks and enhanced flows from the international financial institutions. These three mutually reinforcing elements form the working heart of the debt strategy.
I will return in a moment to more detailed comments on the
U.S. debt initiative. But first, it is important to underline
the fact that the debt initiative does not operate in a vacuum
or in isolation from other critical economic issues. Indeed
the debt initiative was launched by Secretary Baker shortly after
- 3 the broad-based initiative taken by the Group of Five industrial
nations at their meeting last September 22nd in New York. The
Plaza statement recognizes that solid, low inflation growth
and open markets in the industrial countries are an essential
prerequisite for stronger growth in the developing nations.
The individual policy intentions announced by the Group
of Five in their September statement focused in particular on
reducing structural impediments to growth, cutting excessive
government expenditures, avoiding protectionist trade measures,
and improving the investment climate as a stimulus to private
sector initiative and growth. These measures are essential to
consolidate and improve growth prospects within the industrial
economies, but will also help to increase the demand for debtor
nations' exports, while over time reducing both nominal and real
interest rates — passing on the benefits of growth. In agreeing on these policy measures, the industrial nations also keyed
in on the kinds of policies which we now recognize are equally
important for growth-oriented reform in the developing nations
themselves.
Since September, there has been a substantial decline in
the dollar and a further reduction in interest rates, both of
which are positive developments. Prospects for world growth are
improving and there is now better convergence of sound, lowinflation performance in the world's major economies. The United
States is implementing a credible deficit reduction program and
is deeply engaged in tax reform. If other key industrial nations
do their part, improving domestically generated growth, I see
greater scope for reduced inflation and further reductions in
interest rates over time.
The response to the U.S. debt initiative from all quarters
has been positive and confirms our conviction that the focus Of
the initiative on these three main elements is essential. There
are differing views on whether the amount of resources we have
called for is sufficient, and many question whether the necessary
reforms in the international financial institutions and the
debtor nations can be accomplished. Others believe there should
be greater involvement on the part of creditor governments. But
our focus on the three main elements for resolving the debt
problem is widely agreed by all key participants to hold the
greatest hope for realistic forward momentum.
What, then, needs to happen to make the strategy work?
First, the debtor nations must reform their economies so
that they can grow. While the developing nations as a whole
have undertaken commendable efforts to deal with their debt
problems during the past three years, those efforts have fallen
short of producing lasting reform within their domestic economies.
- 4 -
They have failed to control adequately government budget deficits.
While some progress has been made in reducing inflation, in most
countries inflation remains extremely high. Overvalued exchange
rates, subsidies and negative interest rates also frustrate the
ability of the market to allocate efficiently resources within
debtor economies. Lack of confidence in the prospects for
renewed domestic growth, as a result, has contributed to serious
capital flight.
A number of important structural reforms are needed to lay
a firm foundation for stronger growth and to reverse the capital
flight which has plagued these economies.
These include the
privatization of public enterprises, the development of more
efficient domestic capital and equity markets, growth-oriented
tax reform, improvement of the environment for both domestic and
foreign investment, trade liberalization and the rationalization
of import regimes. I recognize that many of these touch on sensitive political issues, while their benefits may become visible
only over the longer term. Such reform is difficult, and takes
time. Moreover, it has to be financed, but to attract that
finance it must be credible, with reasonable prospects for long
term success.
Second, new efforts are required by the international
financial institutions. I would underscore at the outset that
the IMF must continue to play its very important role in the
overall debt strategy. Enhanced roles for the World Bank and
the other multilateral development banks will be supplemental
to the IMF's role, not a substitute for it.
We have asked the IMF to give more thought to growth-oriented
policies and this is being done. But given the IMF's central
mission (which is not that of a development institution), and its
need to concentrate its resources on relatively short balance of
payments programs, the Fund's contribution to longer-term reform
efforts will necessarily be somewhat limited and indirect.
The World Bank's mission, on the other hand, is more strongly
focused on longer-term development issues and it already has
experience in addressing some of the types of structural problems
that most debtor countries face. Most of the World Bank's new
lending will be fast-disbursing sectoral and structural adjustment loans. We believe the World Bank has ample capacity to
increase such lending by some $2 billion per year over the next
three years and to concentrate that lending more heavily on
the large debtors with credible reform programs. We are also
prepared, if all the participants in the strategy do their part
and there is a demonstrated increase in the demand for quality
lending above these levels, to consider a general capital
increase for the World Bank.
- 5 An expanded role for the World Bank will also require
important policy and procedural changes in the Bank. This is a
difficult but indispensible exercise, for two reasons:
First, it is hard to change large, mature organizations
with firmly established bureaucracies.
Second, an expansion of fast-disbursing loans must, and
I repeat must, be accomplished without dilution of the
quality of World Bank lending.
Indeed, it will be essential to improve the conditionality of
lending within the World Bank if sectoral lending is to be
increased. This is even more true for the Inter-American
Development Bank. Any substantial increase in fast-disbursing
lending by either Bank which fails to maintain loan quality will
result in a serious risk of over-exposure and a diminished international credit standing for both of these important international
institutions.
It will also be essential for the IMF and the World Bank to
establish a closer working relationship. I realize this is easy
to say, and hard to accomplish. But the member governments of
both institutions must insist that some pragmatic method of closer
cooperation be developed if economic reform in the debtor nations
is going to be credible enough to command additional resources
from private banking institutions. Private lenders must be
convinced that the long-term structural reforms which have not
been sufficiently emphasized in the past will actually take place
this time.
This brings me to the third element of the strategy, what
you, the commercial banks, contribute. Commercial banks in virtually all of the major creditor nations have now indicated their
willingness to support the U.S. debt initiative and to provide
net new^lending to the debtor nations. If the other two parts
of the strategy are implemented in a credible manner, the banks
can only gain from providing additional financing which improves
the creditworthiness of their existing clients. The banks know
that without growth in the debtor nations — and an improved
ability to earn foreign exchange — they cannot expect to be
repaid, nor, to put it bluntly, can they expect to continue
favorable earnings on assets of declining quality. The banks
also know that growth must be financed in large part from private
capital resources.
The banking community therefore should concern itself with
helping both the debtor nations and the international financial
institutions to develop the necessary reforms and procedures
for implementing the debt strategy. Continuing calls for "more
details" on the U.S. debt initiative before the banks will
actually commit any funds are not helpful. I find such comments
- 6 disingenuous. They suggest to me that the banks are waiting for
some indication that we will support stronger government or
World Bank guarantees for bank lending, a reduction in the World
Bank's "preferred creditor status" relative to the commercial
banks, perhaps for rescheduling purposes, or some sharing of that
status for commercial bank loans undertaken in conjunction with
the World Bank or the Inter-American Development Bank. Among
U.S. banks there is also something of a campaign for regulatory
changes to encourage lending.
While such "wish lists" on the part of the banks may be
understandable, we do not intend to support them to induce
increased bank lending. Banks should not be enticed unwillingly
into new lending to'debtor nations. If sound growth-oriented
policies are adopted by the debtor countries, the banks will
benefit from improvements in the quality of outstanding loans.
Traditionally, banks have worked with troubled clients,
because they have believed it to be in their own self-interest.
The present international debt situation is no different. Indeed,
there is more at stake for the participating banks in all the
creditor nations, because they share the same international and
interdependent financial system. Also, their sovereign nation
clients are not going to go out of business. There JLs a future
for international banking.
The commercial banks are being called upon to increase their
exposure by what they know to be a modest 2.5 to 3 percent annually,
while the World Bank is being asked to increase its lending by
50 percent above current spending levels, equivalent to an annual
increase in total exposure of approximately 20 percent. The
provision of government or World Bank guarantees would essentially
transfer risk to governments, voiding even this modest increase
in commercial bank exposure.
What we need instead is for the commercial banks to pitch
in and do their share, thereby helping both the debtor countries
and the international financial institutions to move the process
forward, a process which I emphasize is vital to the interests of
the banks themselves.
The other comment or question I hear is: "When is the debt
initiative going to begin"?
The answer very simply is that it has begun. it is an
ongoing process. Virtually all of the debtor countries are
participating in this process, some more fully and successfully
than others. There is no need for countries to formally embrace
the plan. Indeed, the very word "plan" is misleading because the
debt initiative does not prescribe a specific blueprint or plan
for implementation in every detail by each and every debtor
- 7 country. Rather, it provides a framework, or a grouping of
mutually reinforcing elements, to enable cooperative action in
support of the debtors' own efforts to improve their growth
prospects.
Some of the larger debtors will need to take advantage of
all of the elements of the strategy: an IMF program, enhanced
sectoral loans from the multilateral development banks, and new
money packages from the commercial banks. Mexico and Argentina
are already working in this direction.
Other nations already have certain elements of the strategy
in place. Their most immediate need is to take advantage of the
new resources being provided by the multilateral development
banks by adopting effective structural reforms. We are working
with the World Bank to effect these flows in a relatively short
period of time. Ecuador is perhaps the most advanced of this
group of countries, but others such as Colombia, Uruguay, and the
Ivory Coast are also making good progress and will no doubt
unlock further resources from these institutions in the coming
months.
Obviously some extremely complex problems must still be
resolved in the implementation process. The actual nature of
reforms to be adopted by the debtor nations is under active
negotiation in individual cases. The timing and manner in which
the three main elements of the initiative will fit together also
needs to be carefully worked out, and will vary for different
cases.
For example, will the completion of an IMF standby program
with a debtor country trigger immediate commercial bank lending,
even though important parts of that country's reforms are still
under negotiation with the World Bank and important resources are
not yet pledged to fill any financing gap? Clearly this issue
cannot be solved in a vacuum. It is not merely a theoretical
exercise as many observers seem to think, but is a real negotiating
issue with political and market implications that must be worked
out in practice.
We may wish to consider, in some cases, whether close cooperation between the IMF and the World Bank can produce agreement with
the debtor country on a medium-term policy framework which would
identify the kinds of policy measures needed to achieve sustainable
economic growth. Perhaps in such cases action on certain key
reforms could help to trigger initial disbursements by the IMF,
the World Bank, and the commercial banks, with subsequent actions
and proven progress in implementing prior commitments required
for further disbursements. Such an approach could provide a useful
bridge to the adoption of more comprehensive economic programs
over a longer period, because we recognize that fundamental and
credible reform is above all a political process, requiring
- 8 -
time, steady application, and ingenuity to show results. This
kind of an approach could also help to assure both early flows
of funds and that all three elements of the strategy are moving
together in support of growth-oriented policy reforms.
One particularly important hurdle we must get over is
capital flight, which provides a sensitive barometer for the
implementation of credible reform. Debtor nations and the banking
community alike have suffered from capital flight in recent years.
This is perhaps the ultimate proof that the debt problem can only
be addressed through the adoption of fundamental economic reforms
that restore public confidence in the debtor nations themselves.
No set of unilaterally declared policies by debtor nations
vis-a-vis their creditors, absent credible internal reforms, will
staunch or reverse these financial expressions of insecurity. If
the right economic measures begin to be implemented, there also
must be imaginative solutions designed to help restore capital
resources which have already fled these countries. In a resourcestarved world, restoration of flight capital may actually provide
the largest potential source of capital for these nations. The
banking community needs to focus on imaginative solutions that
contribute to progress in this area, just as they need to look
for debt/equity swap opportunities. Such actions hold out the
possibility of eventually reducing demands for new lending, and
this is clearly in the banks' own interest.
Finally, the banking community also has an interest in
the development of more sensible and open investment policies
within the debtor nations. Total investment as a share of GDP
has declined sharply in most of the Latin debtor nations since
1980. The U.S. private direct investment position in the seven
largest Latin economies was no greater at the end of 1984 than
it was at the end of 1981. A sound investment climate is essential not only to attract foreign capital, but also to encourage
increased levels of domestic savings, and the repatriation of
funds which have moved offshore. Commercial banks understand
the private sector investment business and their help is needed
to encourage the necessary economic reforms.
With your help and support, I am confident that the strategy
we have proposed can provide a needed impetus to growth in the
debtor nations.
Conclusion
Implementation of the U.S. debt initiative is already well
underway. This year, however, will be a critical one in
determining whether our joint efforts can successfully establish
a strong foundation for future growth.
- 9 If the international financial institutions fail to insist
on credible reform -- or the debtor nations fail to undertake
such reform — the strategy will not work, and commercial banks
will not provide supportive financing. The crisis we face can
then only deepen, not only for debtor and creditor countries,
but for the commercial banks as well.
On the other hand, if the debtor nations are serious about
restoring growth to their economies -- and I believe they are -1986 can provide a watershed of opportunity to begin working
productively toward that goal.
Whether we proceed along one path or the other will depend
on the outcome of individual negotiations between the debtor
countries, the international financial institutions, and the
banks. That process is now underway and will be a continuing
one. We may see some milestones keyed to specific countries.
But we should not be looking for a series of major events in
rapid succession.
The debt situation involves a broad range of economic,
financial and political elements, all of which need to be
addressed. The recent decline in interest rates should help
save debtor countries $7 - $8 billion on their commercial bank
debt this year alone. Lower oil prices will also help many of
the debtor nations, but may for several be extremely difficult.
Our strategy must be able to adapt to these changing circumstances
and to provide additional financing where needed, while assuring
that all of the participants continue to do their part.
The process is evolutionary. It will take time and will
require patience, cooperation, political sensitivity, practical
ideas, and steady application of the disciplines within the debt
strategy to restore growth to the debtor nations. That is the
challenge before us, and the only real solution to the debt
crisis.
TREASURY.NJEWS
department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE February 5, 1986
RESULTS OF AUCTION OF 10-YEAV1 Wfti?OT-TARGETED NOTES
The Department of the Treasury h^s a-cceafeexftga total of
$1,001,000 thousand of the $1,585,Odd'thousand? 6T tenders received
from eligible bidders for the 10-year fore^gn^^f^eted notes, Series
B-1996, auctioned today. The notes will be issued February 18, 1986,
and mature February 15, 1996.
The interest rate on the notes will be 8-7/8% 1/ per annum,
payable annually. The range of accepted competitive bids, and the
corresponding prices at the 8-7/8 % interest rate are as follows:
Yield 2/ Price 4/
Low
High
Average
9.04%
9.16%
9.12% 3/
Tenders at the high yield were allotted 40%.
98.940
98.182
98.434
1/ Established in the auction of the companion domestic issue.
2/ Based on an annual interest payment.
3/ This yield is equal to 8.92% on a semiannual payment basis,
which is .05 basis points lower than the average yield on the
companion domestic note.
4/ In addition to the auction price, accrued interest of $0.73958 per
$1,000 for February 15, 1986, to February 18, 1986, must be paid.
B-456
TREASURYNEWS
2041
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
LIBRARY. ROOM 53l0pebruary 5f 1 9 8 6
RESULTS OF AUCTION OF 10-YEAR DOMESTIC NOTES
The Department of the Treasur^BhUs accepted $7,013 million
of $15,765 million of tenders rece^ekifrortTfcWeUF§ublic for the
10-year notes, Series A-199 6, auctioned today. The notes will be
issued February 18, 1986, and mature February 15, 1996.
The interest rate on the notes will be 8-7/8%. 1/2/
The
range of accepted competitive bids, and the corresponding prices
at the 8-7/8 % interest rate are as follows:
Yield
Price 3/
Low
8.94%
99.573
High
8.99%
99.249
Average
8.97%
99.379
Tenders at the high y:Leld were allotted 76% •
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
5,892
$
5,892
New York
13,430,438
5,869,518
Philadelphia
3,960
3,960
Cleveland
38,913'
38,913
Richmond
75,158
49,038
Atlanta
29,300
26,820
Chicago
1,277,535
771,615
St. Louis
98,835
82,835
Minneapolis
12,788
12,548
Kansas City
37,275
36,535
Dallas
7,471
7,471
San Francisco
747,077
107,557
Treasury
782
782
Totals
$15,765,424
$7,013,484
The $7,013 million of accepted tenders includes $453
million of noncompetitive tenders and $6,560 million of competitive tenders from the public.
In addition to the $7,013 million of tenders accepted in
the auction process, $350 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $200 million
of tenders was also accepted at the average price from Government
accounts and Federal Reserve Banks for their own account in
exchange for maturing securities.
1/ The minimum par amount required for STRIPS is $1,600,000.
Larger amounts must be in multiples of that amount.
2/ This interest rate, payable on an annual basis, will also be
applied to the 10-year foreign-targeted notes auctioned today.
3/ In addition to the auction price, accrued interest of $0.73550 D e r
$1,000 for February 15, 1986, to February 18, 1986, must be paid.
TREASURY MEWS
epartment of the Treasury • Washingtonp&!0« Telephone 56
FOR IMMEDIATE RELEASE February 6, 1986
F E B 10 4 02 PH 'BR
AMENDED RESULTS OF AUCTION OE^IO^^M^B^EWIC NOTES
The amounts awarded in yesterday's auction of domestic
10-year notes to foreign and international monetary authorities
and to Government accounts and Federal Reserve Banks for their
own account were inadvertently reversed.
The press release should have shown $200 million as being
awarded to Federal Reserve Banks as agents for foreign and international monetary authorities and $350 million to Government
accounts and Federal Reserve Banks for their own account. All
other particulars in the announcement remain the same.
B--458
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE LIBRARY. ROOM b
February 6, 1986
RESULTS -©£* )fiuc4l®&PoF^30-YEAR BONDS
i-r. ,7 OF THE TREASURY
The Department of the Treasury has accepted $7,004 million of
$17,766 million of tenders received from the public for the 30-year
Bonds auctioned today. The bonds will be issued February 18, 1986,
and mature February 15, 2016.
The interest rate on the bonds will be 9-1/4%. ±> The range
of accepted competitive bids, and the corresponding prices at the
9-1/4 % interest rate are as follows:
Yield Price 2/
Low
9.27%
99.795
High
9.29%
99.594
Average
9.28%
99.695
Tenders at the high yield were allotted 47%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Boston
14,365
$
New York
15,r677,826
Philadelphia
204
Cleveland
41,275
Richmond
4,148
Atlanta
9,905
Chicago
1,,243,504
St. Louis
78,407
Minneapolis
10,256
Kansas City
5,997
Dallas
4,283
San Francisco
675,862
Treasury
162
Totals
$17,766,194
Accepted
$
365
6,686,956
204
1,275
4,148
3,905
215,504
62,407
7,196
5,997
1,283
14,862
162
$7,004,264
The $7,004 million of accepted tenders includes $331
million of noncompetitive tenders and $6,673 million of competitive tenders from the public.
In addition to the $7,004 million of tenders accepted in
the auction process, $250 million of tenders was also accepted
at the average price from Government accounts and Federal Reserve
Banks for their own account in exchange for maturing securities.
1/ The minimum par amount required for STRIPS is $800,000.
Larger amounts must be in multiples of that amount.
2/ In addition to the auction price, accrued interest of $0.76657 per
$1,000 for February 15, 1986, to February 18, 1986, must be paid.
(THIS ANNOUNCEMENT IS EMBARGOED FOR USE UNTIL
2:30 P.M. FEBRUARY 7, 1986)
/
y
FEBRUARY 7, 1986
ANNOUNCEMENT: LIBYAN SANCTIONS
PRESIDENT REAGAN LAST MONTH ANNOUNCED CERTAIN RIGOROUS,
MEASURED AND FOCUSSED RESPONSES TO THE QADHAFI REGIME'S
INVOLVEMENT IN AND SUPPORT FOR INTERNATIONAL TERRORISM. THESE
PEACEFUL MEASURES HAVE THREE GOALS:
— TO END VIRTUALLY ALL DIRECT U.S. ECONOMIC ACTIVITY WITH
LIBYA;
— TO CAUSE ALL UNAUTHORIZED AMERICANS TO LEAVE LIBYA, AND
NOT TO TRAVEL THERE IN THE FUTURE; AND
-- TO MAKE CLEAR TO QADHAFI THAT HE MUST PAY A PRICE FOR
HIS REGIME'S SUPPORT OF TERRORISM.
IN ADDITION, WE ENCOURAGED OTHER NATIONS TO TAKE ACTIONS
WHICH SUPPORT THESE GOALS.
AMERICAN CITIZENS AND BUSINESSES HAVE RESPONDED
ENCOURAGINGLY TO THE PRESIDENT'S ORDERS; IMPLEMENTATION OF THEM
IS PROCEEDING SMOOTHLY:
— WE BELIEVE THAT MOST AMERICANS HAVE NOW LEFT LIBYA AND
THAT ALL BUT A FEW OF THOSE WHO REMAIN ARE FAMILY MEMBERS
OF LIBYAN CITIZENS. EXCEPTIONS FOR HUMANITARIAN PURPOSES
HAVE BEEN GRANTED TO PERSONS IN THIS CATEGORY. THE OTHERS
WHO HAVE CHOSEN TO STAY IN LIBYA ARE SUBJECT TO PROSECUTION
>
UNDER U.S. LAW.
(MORE)
ANNOUNCEMENT:
LIBYAN SANCTIONS
-2-
— UNLICENSED TRAVEL BY AMERICANS TO LIBYA HAS BEEN
PROHIBITED.
=
— ALL DIRECT IMPORTS AND EXPORTS BETWEEN THE UNITED STATES
AND LIBYA HAVE BEEN PROHIBITED (WITH CERTAIN HUMANITARIAN
EXCEPTIONS, SUCH AS DONATIONS OF FOOD, CLOTHING AND
MEDICINE).
— NEW COMMERCE BY AMERICAN CITIZENS AND BUSINESSES WITH
LIBYA HAS BEEN PROHIBITED. GRANTS AND EXTENSIONS OF CREDIT
BY AMERICANS TO LIBYA HAVE BEEN BARRED. AND LARGE AMOUNTS
OF LIBYAN GOVERNMENT FUNDS HAVE BEEN BLOCKED.
IN IMPLEMENTING THE EXECUTIVE ORDERS FOR THE DIVESTITURE OF
ASSETS OF U.S. COMPANIES IN LIBYA, THE SECRETARIES OF TREASURY
AND STATE HAVE ADOPTED THE FOLLOWING PRINCIPLES:
1. AS A GENERAL RULE, ALL ACTIVITIES PURSUANT TO CONTRACTS
AND OTHER ARRANGEMENTS BETWEEN U.S. NATIONALS AND LIBYA ARE
TO BE TERMINATED IMMEDIATELY.
2. U.S. NATIONALS OWNING ASSETS IN LIBYA ARE FREE TO REMOVE
SUCH PROPERTY, WHERE POSSIBLE, OR TO SELL IT TO LIBYA, TO
LIBYAN NATIONALS OR, IF THE PROPERTY IS NOT FOR USE IN
LIBYA, TO ANYONE ELSE.
3. IN EXCEPTIONAL CASES, WHERE ABANDONMENT OF CONTRACTS OR
CONCESSIONS WOULD RESULT IN A SUBSTANTIAL ECONOMIC WINDFALL
TO LIBYA, LIMITED EXTENSIONS ARE BEING GRANTED TO COMPANIES
TO PREVENT WINDFALLS, ON STRICT CONDITIONS. THE CONDITIONS
TO BE IMPOSED, WHICH WE ARE ANNOUNCING TODAY, INCLUDE:
— AN OBLIGATION TO TERMINATE ALL DEALINGS AS SOON AS
PRACTICABLE ON FAIR AND APPROPRIATE TERMS.
(MORE)
ANNOUNCEMENT:
LIBYAN SANCTIONS
-3-
— ALL PROFITS EARNED BY U.S. FIRMS IN LIBYA AFTER FEBRUARY
1 WILL BE PLACED IN AN ESCROW ACCOUNT UNDER U.S. GOVERNMENT
CONTROL, FOR DISPOSITION ONLY AFTER EACH FIRM COMPLETELY
TERMINATES ITS REMAINING ACTIVITIES IN LIBYA AND AS AGREED
BY THE U.S.' GOVERNMENT.
— IN ADDITION, THE OIL COMPANIES MUST:
O END ALL U.S. CORPORATE INVOLVEMENT IN OPERATING THE
OIL FIELDS;
O NOT DISTRIBUTE ANY LIBYAN CRUDE OIL THROUGH THE
COMPANIES' TRANSPORTATION AND REFINING NETWORKS;
O SELL THEIR "EQUITY" CRUDE ONLY "AT THE FLANGE" IN
LIBYAN PORTS, NOT OUTSIDE LIBYA;
o UNDERTAKE NO NEW ACTIVITIES OR OBLIGATIONS; AND
O HOLD EXISTING ACTIVITIES TO THE MINIMUM NECESSARY TO
SATISFY THEIR CONTRACTUAL OBLIGATIONS.
— ALL COMPANIES GRANTED EXEMPTION LICENSES MUST REPORT TO
THE TREASURY DEPARTMENT ON A FREQUENT PERIODIC BASIS ON THE
PROGRESS OF THEIR NEGOTIATIONS FOR WITHDRAWAL FROM LIBYA.
THESE STRICT, LIMITED EXTENSIONS ARE BEING PERMITTED BECAUSE
OTHERWISE THE COMPANIES INVOLVED MIGHT BE (1) SUBJECT TO CLAIMS
THAT THEY HAD DEFAULTED ON THEIR CONTRACTS WITH LIBYA AND (2)
FORCED TO ABANDON SUBSTANTIAL ASSETS IN LIBYA, INCLUDING SOME
OIL CONCESSIONS HAVING UP TO 20 YEARS TO RUN. WE ESTIMATE THE
POTENTIAL ECONOMIC WINDFALL TO QADHAFI TO BE $1 BILLION OR MORE.
WE WANT TO AVOID SUCH A WINDFALL FOR QADHAFI, WHICH WOULD
BE INCONSISTENT WITH OUR OBJECTIVES. »
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
- TREASURY
INTRODUCTORY STATEMENT BY
THE HONORABLE RICHARD G. DARMAN
THE DEPUTY SECRETARY OF THE TREASURY
BEFORE THE HOUSE COMMITTEE ON GOVERNMENT OPERATIONS
SUBCOMMITTEE ON GOVERNMENT INFORMATION, JUSTICE AND AGRICULTURE
FEBRUARY 6, 1986
INTRODUCTION
Thank you for inviting me to appear before your committee today.
It is a pleasure to have an opportunity to do so.
It is my understanding that the Committee is primarily interested
in discussing drug interdiction.
My introductory remarks, therefore,
address:
(I)
the Treasury Department's role in drug interdiction (through
the Customs Service);
(II)
the allocation of resources to the role; and
(III) the relationship of the resource allocation to the challenge
of drug interdiction and to broader issues of drug policy and
strategy.
B-460
- 2 -
Mr. Chairman, I am not by any reasonable stretch of imagination
an expert in this field. I can, however, provide a Departmental perspective on the issues involved; and I am accompanied
by the Commissioner of Customs, who can address detailed
operational issues to the extent that they are of interest
to the Committee.
After this brief introductory statement, we would look
forward to answering your questions.
I. CUSTOMS ROLE IN DRUG INTERDICTION
The Customs role with respect to air and marine interdiction
may be summarized as follows:
Air Program
The Customs Air Program has as its primary mission the detection,
identification, interception, tracking, and apprehension of
smuggler aircraft.
The current program is based upon the following general concepts:
• deterrence against air smuggling, achieved in conjunction
with the provision of assistance to land and marine interdiction;
• integration of air interdiction and support functions;
• use of specialized aircraft to perform the roles of detection,
interception, tracking and apprehension of low flying
smugglers; and
• cooperation with the military, to the extent permitted by
posse comitatus laws.
- 3 The Air Program has an operations division at Customs headquarters and operations centers East and West in the field.
Headquarters is responsible for management, administration, and
operational guidance, with the operations centers responsible
for readiness and line management of the resources under their
command.
Aviation units are deployed across the southern border, staffed
to operate on the equivalent of a 5-day x 8-hour basis, with an
authorized personnel strength of 385 positions. This authorized
level includes 71 new positions allocated to the program in
October 1985. Recruitment is in progress to fill the vacancies.
Recent initiatives in the Air Program have included the following:
• In September 1982, Customs acquired the use of the Air Force's
Tethered Aerostat Radar System (TARS), at Cudjoe Key and
Patrick AFB in Florida.
• In FY 1983, Customs received, from DOD, the first high-speed
Black Hawk helicopter. Customs now has eight such helicopters.
• In FY 1983, Customs received the first of four P-3A detection
aircraft. All four will be operational for the first time this
year.
• In FY 1985, the Cariball Aerostat was placed in operation on
Grand Bahamas Island, providing coverage of smugglers that
overfly the Bahamas.
• In March 1986, the first CHET (Customs High Endurance Tracker)
will be delivered, with the remaining seven trackers scheduled
for delivery by the end of FY 1986. The CHETs will be used
primarily for intercepting and tracking smuggler aircraft.
• Customs currently operates 80 aircraft (deployed as indicated
on the table at the end of Section II).
- 4 Marine Program
The mission of the Customs Marine Program is to investigate,
interdict, and apprehend violators that smuggle narcotics and
contraband by commercial vessels, fishing vessels and pleasure
craft.
The current Marine Program is based upon the following
general concepts:
• integration of case investigations, threat analysis,
intelligence and direct interdiction; and
• coordination of Air and Marine planning, in cooperation with
local, state, and other Federal agencies.
The Marine Program faces a number of operational difficulties,
including smugglers using the following modes of operation to evade
Customs:
• small pleasure craft and speed boats — which are easily
available, and difficult to detect; small vessels off the
coast of the Bahamas and the east coast of Florida — which
are increasingly used to receive airdrops; and professionally
installed secret compartments in all types of vessels -- the
use of which has significantly increased.
II. CUSTOMS INTERDICTION RESOURCES AND THE BUDGET
Budget Request
In the President's FY 1987 Budget, the Administration is
seeking $756 million and 13,231 FTE for the Customs Service.
Of this amount, $71.6 million is for the Air Program and
$33.9 million is for the Marine Program.
- 5 U.S. CUSTOMS SERVICE
BUDGET AUTHORITY AND PERSONNEL
FY 1981 - FY 1987
est. req.
1981
1982
1983
1984
1985
1986
1987
BUDGET AUTHORITY
All Other Customs $458.4 S496.6 $536.6 $564.3 $617.4 $640.4 /S650
Air
27.3
17.8
26.2
64.8
67.2
68.9/
Marine
12.8
12.8
12.3
26.4
46.6
32.9
Total
$498.5
$527.2
S575.1
$655.5
•!/
71.6
33.9
$731.2 $742.2 $756.1
PERSONNEL
All Other Customs 14,145 13,699 13,482 13,496 13,005 13,139 12,330
Air
153
153
165
250
314
385
Marine
148
147
150
347
427
472
Total
14,446
13,999
13,797
14,093
13,746
385
516
13,996* 13,231
* The 1986 personnel total above reflects Customs' reduced personnel level as
a result of the Gramm-Rudman reduction. This number is in the Congressional
materials that will be submitted by the Department to the Appropriations
Committees. Note, the President's Budget does not allocate Gramm-Rudman
reductions by object class so this number is not reflected in the President's
Budget.
The requested levels for the Air and Marine programs for FY 1986 and
FY 1987 will allow Customs to:
- bring on line an additional P3A detection aircraft in FY 1986
for a total of four in FY 1986 and FY 1987:
- bring on line and operate eight new high endurance tracker
aircraft in FY 1986 for use in FY 1986 and FY 1987;
- continue development and improvement of Customs Command, Control,
Communications and Intelligence capability;
- modify two C-12 marine support aircraft in FY 1986 for deployment
in FY 1987, and modify two in FY 1987 — for a total of four
C-12's that will be deployed in FY 1987;
take delivery of 40 "Blue Thunder" type high speed boats for the
Marine program with all in operation in FY 1987.
- 6 Budget Trend
Spending authority for the Customs Air Program has increased
from $17.8 million in FY 1982 to the proposed level of $71.6
million for FY 1987.
The FY 1987 request for the Air Program is four times the FY
1982 appropriated level. The Marine request is almost three
times the FY 1982 level.
CUSTOMS AIR AND MARINE PROGRAMS
Budget Authority
($ in Millions)
Air Program
Marine Program
0 '•—
&&
\9^
\9« A
Fiscal Year
Bu<J9et
- 7 Personnel Trend
On a full-tir\€ equivalent (FTE) basi?, staffing for the Customs Air
Program has grown from 153 FTE in FY 1982 to nearly 400 FTE for FY
1986 and FY 198"7. This increase represents a near tripling of Air
Program personnel over the last four years (1982-86). Similar
growth has occurred in staffing for the Customs Marine Program.
From 150 FTE in FY 1983, the Marine Program has grown to 472 FTE
this year and will increase to more than 500 FTE next year. This
increase in Marine Program staffing represents more than a 200%
increase over the last three fiscal years (1983-1986).
CUSTOMS AIR AND MARINE PROGRAMS
Full Time Equivalent Personnel
19B1-19B7
Ai r Program
ec:
..-C
Marine
.B"
\9©'-
• 96^
.9B 3
^98'
MZ
- p " n 2i pre*
r
:s:al iea<-
Program
—-B—
e
9u'o 9 ~
- 8 Comparative Law Enforcement Resource Trends
Air and Marine Program resources have increased at a greater rate
than other Federal law enforcement programs between FY 1981 and
FY 1986. The Department of Justice and Secret Service have increased
by between 60-70%. The Air and Marine Program have increased by
over 150%.
FUNDING TRENDS (1981 - 1986 BUDGET
AUTHORITY)
Selected Law Enforcement Activities
Including Customs Air and Marine Programs
CuitOBs Strv. Total
C o m 6uard
1981 1962
FliCBl YMP
1983
1984
1985
1988
A T F
Budgtt Authority rtfltcti awunta •• containtd
in tnt FY 1986 Pruldant't Budott.
- 9 Air and Marine Assets (aircraft and vessels)
The increase in Customs budgetary resources for interdiction is
reflected in a related increase in assets. The number of vessels
deployed in the Marine program has more than doubled -- from 94 in
FY 1981 to 218 in FY 1987. The number of Customs aircraft has also
increased — from 68 in FY 1981 to a projected 88 in FY 1987.
(Note: The quality mix for both vessels and aircraft has also
improved.)
U.S. CUSTOMS SERVICE
Number of Aircraft and Vessels in Inventory
FY 1981 and FY 1987
Total Invtntory
BO L - « —
mi
mr
Fiscal YMT
These air and marine assets have been deployed in rough proportion
to the estimated threat -- as indicated by the following table and
charts.
- 10 Customs Interdiction
Aircraft Distribution by Region
January 6, 1986
FUNCTION
MIA
JAX*
MSY
DETECTION:
P-3A
HOU
SAT
ELP* TUC*
2
INTERCEPTION (UNITS):
Citation II
Citation I **
TRACKING (UNITS):
Beechcraft King Air (B-200)
Beechcraft King Air (E-90)
OV-1C Mohawk
APPREHENSION (UNITS):
AH-1G Cobra
UH-60A Black Hawk
2
1
1
1
1
1
1
6
1
4
1
1
1
3
8
2
3
6
2
27 1
3
2
2
4
31
2
0
2
2
1
9
1
1
1
2
2
3
13
11
4
€
4
6
6
8
53
13
9
8
9
12
10
80
5
2
5
2
2
6***
8
3
3
Single-Engine
1
1
0
Helicopter
1
2
8
13
TOTAL
I
2
1
SUBTOTAL
4
2
1
1
MISC. SUPPORT AIRCRAFT:
Twin
2
I
2
SUBTOTAL
SAN* TOTAL
1 •
* Includes Air Units
** One Citation I not included, not considered mission capable
*** One of these twins is dedicated for Marine Support
The following eight aircraft will be removed from the fleet as the CHET aircraft
are received:
East Wing
West Wing
2 - OV-1C Mohawks (Houston)
1 - Beechcraft A-60 (Jacksonville)
1 - Cessna 402 (Jacksonville)
1
1
1
1
-
Piper PA-31 (San Antonio)
Cessna 340 (San Diego)
UH-1B (Tucson)
Aero Commander 681 (San Diego)
- 11 -
Customs Interdiction
Vessel Distribution by Region
January 31, 1986
NE
NY
SE
SC
SW
PA
NC
- 12 -
III.
Resources
in Relation
to Strategy
Not only have Customs drug interdiction resources increased, so
too has the Federal Government's overall investment in interdiction — as indicated by the following chart.
INVESTMENT IN INTERDICTION
Nominal Dollars: 1982-1987
($ in Millions)
All Government
Interdiction
Coaat Guard
-~©—
Cuatoaa (totil)
—6—•
Cuatoas Air Prograa
with DOO Mt 1 stance
Cuttoaa Marine
Prograa
1*2
19B3
19B4
l9
?V*-*19B7
^ e ipra*
. . - *»dQ6t
1986
Fiscal Year
What
is less clear, unfortunately,
is the appropriate
ship of this investment to the development and implementation of
an optimal strategy for reducing drug abuse in America.
relation-
- 13 -
It is obvious, of course, that the retail value of certain drug
seizures has increased. But it is signficiantly less obvious what
relationship there is between this fact and ultimate U.S. drug
use.. Seizures are definitively measurable; but drug use is not.
It is subject to inherently fallible estimating. Interdiction
rates, therefore, are highly arguable, and accordingly, meaningful measures of incremental returns on investment in interdiction
are also arguable. This is the case whether one is comparing
particular modes of interdiction or alternative levels of interdiction.
The analytic problem is compounded as one broadens the scope of
analysis. And broaden the scope one must. OMB has estimated that
for FY 1987, the President's Budget requests SI.808 billion for
drug law enforcement. Of this, roughly 43% is for border interdiction
-- compared with 24% for criminal investigations, 12% for corrections,
8% for federal prosecution, 8% for international narcotics control,
3% for intelligence, and 2% for state and local assistance. (These
estimates involve a degree of judgment in classifying and allocating
expenditures -- but the proportions are at least roughly indicative
of broad relationships.) A very much smaller amount of money is
invested in drug abuse prevention, and in related drug research.
On the basis of what analysis I have seen, one cannot be fully
satisfied that either the current or proposed distribution is an
optimal allocation of limited resources.
- 14 My personal view is that the data and methodology are not yet up
to the task of determining what _is an optimal allocation. And
I would, therefore, place a high priority on more systematic
analysis.
I recognize that in the face of a problem as serious as the
drug problem —
understate —
the seriousness of which I would never wish to
there is an understandable temptation to suggest:
spend what it takes to eliminate the problem.
we (collectively —
Unfortunately,
as a society) do not now have sufficient
available resources to do so.
Our fiscal deficit has become
its own form of addiction, and it, like other addictions, has
the potential to threaten our society's health.
Given severe fiscal constraints and considerable uncertainty
as to optimal resource allocation strategies for addressing
the drug problem, we have decided essentially to stabilize the
investment in Customs drug interdiction —
increasing the
current deterrent capacity only marginally, while continuing
to examine competing alternatives for incremental investment.
This is an approach that I know some will find frustrating. But
while I fully sympathize with the sense of frustration —
want to see the tragedy of drug abuse eliminated —
we all
I do believe
that what we are recommending is, in the current context, a
prudent approach.
Again, I thank you for the opportunity to present this perspective.
*
*
*
*
*
*
TREASURY N€WS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
UBRARY. ROOM 5310
hell 3ii3fH'gg
FOR RELEASE AT 12:00 NOON
Ui 0FJ
^
TREASURY
February 7, 1986
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,000
million of 364-day Treasury bills
to be dated February 20, 1986, and to mature February 19, 1987
(CUSIP No. 912794 LX 0 ) . This issue will provide about $475
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,525
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Standard time, Thursday, February 13, 1986.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. This series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing February 20, 1986.
In addition to the
maturing 52-week bills, there are $14,704 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $2,219 million as agents for foreign
and international monetary authorities, and $5,670 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. For
purposes of determining such additional amounts, foreign and international monetary authorities are considered to hold $125
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 4632-1.
B-46J
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURYNEWS
tepartment of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRARY. ROOM 5310
FOR IMMEDIATE RELEASE
February 10, 1986
CONTACT: ROBERT LEVINE
Phone: (202) 566-2041
FEB
13 8 21 AH %8fi
TREASURY RELEASES JOINT REPORT' 'FM^jWA'lFTRADE TALKS
ON MEDICAL EQUIPMENT AND PHARMACEUTICALS
The Department of the Treasury released today a special
report on the results of U.S.-Japan trade talks in the area of
medical equipment and pharmaceuticals. The talks, initiated in
early 1985, were part of the market-oriented, sector-selective
(MOSS) discussions. The talks yielded significant progress in
creating a more open Japanese health care market by simplifying
regulatory procedures, eliminating administrative delays, and
increasing foreign access to Japanese regulatory authorities.
The Report on Medical Equipment and Pharmaceuticals
Market-Oriented, Sector-Selective (MOSS) Discussions released
today describes the Japanese health care market, outlines the
problems foreign firms faced in entering and competing in that
market, and identifies the agreed market-opening measures. Key
issues addressed in the report include the trade effects of
Japan's regulatory system for protecting public health and safety
and its insurance system for reimbursing health care expenses.
Given that Japan's National Health Insurance system covers nearly
100 percent of the Japanese population, the rules and procedures
for reimbursing doctors, hospitals, and clinics are a central
factor in the market entry of pharmaceuticals and medical
devices.
The report, jointly prepared by the U.S. and Japan MOSS
negotiating teams, also makes clear the commitment both sides
have made to a meaningful follow-up process. The negotiating
teams will continue to meet at a political level on a regular
basis to review implementation of the agreed solutions and to
resolve any additional issues that may arise.
The measures agreed to by the United States and Japan should
encourage the entrance into the market of new producers and new
products. The Japanese health care market is large and growing
-- second only to that of the United States — and of prime
interest to major health care products firms.
B-462
-2The interagency delegations of both sides met six times in
1985 to discuss and develop market-opening measures. The U.S.
side was led by Assistant Secretary of the Treasury for International Affairs David C. Mulford and included representatives
from the Treasury Department, the State Department, the Commerce
Department, the Office of the U. S. Trade Representative, and the
U.S. Food and Drug Administration. The Japanese side was led by
Vice Minister of the Ministry of Health and Welfare Hitoshi
Yoshimura and included representatives from that ministry and the
Ministry of Foreign Affairs and the Ministry of Finance.
TREASURY NEWS
2041
Department of the Treasury • Washington, D.c. • Telephone
LIBRARY. ROOM 5 3 ^ $ r u a r y
FOR IMMEDIATE RELEASE
10
>
1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,028 million of 13-week bills and fof^trjlT million
of 26-week bills, both to be issued on February 13,^ ! 198F^ TWe493R£Ccepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing May 15. 1986
Discount Investment
Rate
Rate 1/
Price
26-week bills
maturing August 14, 1986
Discount Investment
Price
Rate
Rate 1/
7.17%
7.18%
7.18%
7.22%
7.23%
7.23%
7.40%
7.41%
7.41%
98.188
98.185
98.185
7.60%
7.61%
7.61%
96.350
96.345
96.345
Tenders at the high discount rate for the 13-week bills were allotted 67%,
Tenders at the high discount rate for the 26-week bills were allotted 68%,
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
$
66,570
21,811,635
26,830
44,380
50,860
50,620
1,647,060
95,135
50,320
78,990
39,425
1,339,485
363,950
$
36,570
6,085,760
26,830
42,300
50,860
38,220
83,060
54,970
14,320
54,295
29,425
147,805
363,950
$25,665,260
67,725
19,847,510
20,445
33,030
61,815
135,155
1,535,940
91,470
51,230
46,190
29,105
1,181,035
398,255
$
33,725
5,973,125
20,445
33,030
50,715
91,160
179,460
46,470
15,230
46,190
22,505
106,835
398,255
$7,028,365
' $23,498,905
$7,017,145
$22,521,620
1,154,425
$23,676,045
$3,884,725
1,154,425
$5,039,150
:
$20,120,195
1,016,410
$21,136,605
$3,638,435
1,016,410
$4,654,845
1,781,715
1,781,715
:
1,700,000
1,700,000
207,500
207,500
:
662,300
662,300
$25,665,260
$7,028,365
:
$23,498,905
$7,017,145
1/ Equivalent coupon-issue yield
B-463
:
:
:
:
:
=
:
:
$
Accepted
TREASURY NEWS
LIBRARY. D.c. • Telephone
department of the Treasury • Washington,
February
LTF
r
^'3 &21I$
10, 1986
Robert B. Zoellick ' Ap|MfnMd^^/^
Deputy Assistant Secretary for Financial Institutions Policy
Secretary of the Treasury James A. Baker, III, today
announced the appointment of Robert B. Zoellick as Deputy
Assistant Secretary for Financial Institutions Policy.
He will be responsible for coordinating the Treasury
Department's development of policy and legislation affecting
banks, thrifts, and other providers of financial services.
Mr. Zoellick will serve as Deputy to Charles 0. Sethness,
Assistant Secretary of the Treasury for Domestic Finance, who is
coordinating this area and others for George D. Gould, Under
Secretary for Finance. Mr. Zoellick also will work closely with
representatives of other Federal agencies responsible for the
regulation of financial institutions.
Mr. Zoellick had been Special Assistant to Deputy Secretary
of the Treasury Richard G. Darman since July, 1985, and had
served as acting Deputy Assistant Secretary since December.
Prior to joining the Treasury Department, he was Vice President
and Assistant to the Chairman and Chief Executive Officer of the
Federal National Mortgage Association (Fannie Mae).
Mr. Zoellick received a J.D. magna cum laude and a Master of
Public Policy degree from Harvard University. He is a graduate
of Swarthmore College.
A native of Illinois, he has practiced law in Washington and
has served as clerk to Judge Patricia M. Wald on the U.S. Court
of Appeals for the District of Columbia Circuit. Mr. Zoellick
also worked in Hong Kong as a recipient of a Luce Foundation
Fellowship and served with the Council on Wage and Price
Stability from 1975 to 1976.
He and his wife Sherry live in Washington.
B-464
2041
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-204'
FOR RELEASE AT 4:00 P.M. February 11, 1986
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,600 million, to be issued February 20, 1986. This offering
will result in a paydown for the Treasury of about $1,100 million, as
the maturing bills are outstanding in the amount of $14,704 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Tuesday, February 18, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
November 21, 1985, and to mature May 22, 1986
(CUSIP No.
912794 KG 8), currently outstanding in the amount of $7,466 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,800 million, to be dated
February 20, 1986, and to mature August 21, 1986
(CUSIP No.
912794 LA 0>.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing February 20, 1986. In addition to the maturing
13-week and 26-week bills, there are $8,525
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates of accepted
competitive tenders. Additional amounts of the bills may be issued
to Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount of
tenders for such accounts exceeds the aggregate amount of maturing
bills held by them. Fcr purposes of determining such additional
amounts, foreign and international monetary authorities are considered to hold $2,048 million of the original 13-week and 26-week
issues. Federal Reserve Bank?? currently hold $2,173 million as
agents for foreign and international monetary authorities, and $5,670
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders
Department
(for 26-week
forof
bills
series)
the Treasury
to cr
be maintained
Formshould
PD 4632-3
be
onsubmitted
the
(for
book-entry
13-week
on Form
series).
records
PD 4632-2
of the
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 13, 1986
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,003 million of 52-week bills to be issued
February 20, 1986, and to mature February 19, 1987, were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate
(Equivalent Coupon-Issue Yield) Price
92.750
Low
7.17%
7.69%
92.720
High
7.20%
7.72%
92.730
Average 7.19%
7.71%
Tenders at the high discount rate were allotted 1%.
TENDERS RECEIVED, AND ACCEPTED
(In Thousands)
Accepted
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$ 16,900
20,483,285
12,935
22,935
28,325
95,490
1,373,395
76,420
39,930
48,580
19,820
1,330,985
129,185
$23,678,185
$20,723,940
579,245
$21,303,185
2,250,000
$
16,900
8,091,235
12,935
22,935
28,325
43,990
238,355
34,470
20,130
46,600
9,870
308,185
129,185
$9,003,115
$6,048,870
579,245
$6,628,115
2,250,000
125,000
$23,678,185
125,000
$9,003,115
An additional $130,000 thousand of the bills will be issued
to foreign official institutions for new cash.
B-466
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
February 12, 1986
TREASURY TO AUCTION $9,500 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,500 million
of 2-year notes to refund $8,479 million of 2-year notes maturing
February 28, 1986, and to raise about $1,025 million new cash.
The $8,479 million of maturing 2-year notes are those held by the
public, including $418 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $9,500 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign and
international monetary authorities will be added to that amount.
Tenders for such accounts will be accepted at the average price of
accepted competitive tenders.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $662 million of
the maturing securities that may be refunded by issuing additional
amounts of the new notes at the average price of accepted competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
B-467
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED FEBRUARY 28, 1986
February 12, 1986
Amount Offered:
To the public
$9,.500 million
Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... W-1988
(CUSIP No. 912827 TH 5)
Maturity Date
February 29, 1988
Call date
No provision
Interest Rate
To be determined based on
the average of accepted bids
Investment yield
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
August 31, 1986; February 28, 1987;
August 31, 1987; and February 29, 1988
Minimum denomination available .. $5,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest payable
by investor
None
Payment by noninstitutional investors
Full payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts ... Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Receipt of tenders
Wednesday, February 19, 1986,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Friday, February 28, 1986
b) readily-collectible check .. Wednesday, February 26, 1986
•^r co
CD
o
C\J
• < *
CO
CD
federal financing ^anr
mm
.'.rxT.riOOM 5310
9^ ^t:9n AH
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February 12, 1986
. A R V I H T C F THE TREASURY
FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of December 1985.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $153.4 billion
on December 31, 1985, posting a decrease of $0.8 billion
from the level on November 30, 1985. Increases of
$0.3 billion in holdings of agency debt and of less than
$0.1 billion in agency assets partially offset a decrease
of $1.1 billion in holdings of agency-guaranteed debt.
FFB made 368 disbursements during December.
Attached to this release are tables presenting FFB
December loan activity and FFE holdings as of December 31,
1985.
# 0 #
B-468
m
CD
WASHINGTON, DC. 20220
FOR IMMEDIATE RELEASE^ 1
C\J
CD
CD
Page 2 of 9
FECERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
$ 417,000,000.00
261,000,000.00
12/1/95
12/1/95
9.715%
9.368%
9.605% qtr.
9.261% qtr.
12/2
12/9
12/9
12/16
12/30
5,000,000.00
1,760,000.00
9,850,000.00
20,535,000.00
65,550,000.00
3/3/86
3/10/86
3/10/86
3/17/86
4/1/86
7.565%
7.615%
7.615%
7.325%
7.315%
12/2
12/5
12/9
12/12
12/16
12/18
12/23
12/26
12/26
12/30
12/31
181,000,000.00
303,000,000.00
357,000,000.00
298,000,000.00
338,000,000.00
293,000,000.00
311,000,000.00
35,000,000.00
248,000,000.00
317,000,000.00
122,000,000.00
12/9/85
12/12/85
12/16/85
12/18/85
12/23/85
12/26/85
12/31/85
1/1/86
1/2/86
1/6/85
1/8/85
7.515%
7.585%
7.605%
7.395%
7.325%
7.355%
7.395%
7.405%
7.405%
7.305%
7.405%
79,709,034.93
3/31/86
7.295%
12/1
12/12
30,000,000.00
15,000,000.00
12/1/00
12/1/00
9.965%
9.595%
12/4
12/5
12/9
12/9
12/10
12/10
12/10
12/10
12/10
12711
12/13
6,140,780.86
193,810.29
442,817.56
18,099.74
163,901.00
22,499,998.46
45,000,001.54
319,500.00
17,176,427.75
616,702.23
175,983.00
7/15/92
10/15/90
4/15/14
9/8/95
7/31/96
4/15/14
7/31/14
6/15/12
3/12/14
5/15/95
4/30/11
9.328%
8.425%
10.105%
8.805%
9.037%
9.947%
10.074%
9.825%
9.543%
9.451%
9.855%
DATE
AMOUNT
OF ADVANCE
AGENCY DEBT
EXPORT-IMPORT BANK
Note #66
Note'#67
12/2
12/2
NATIONAL CREDIT UNION ADMINISTRATION
Centred Liquidity Facility
Note
+Note
+Note
+Note
•Note
#372
#373
#374
#375
#376
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#545
#546
#547
#548
#549
#550
#551
#552
#553
#554
#555
UNITED STATES RAILWAY ADMINISTRATION
*Note #33
12/31
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Philippines 10
Niger 2
Egypt 6
Morocco 11
Ecuador 8
Egypt 6
Egypt 7
Greece 15
Turkey 18
Kenya 11
Greece 14
+rollover
•maturity extension
10.213% arm.
9.825% arm.
Page 3 of 9
FEDERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual
INTEREST
RATE
(other than
semi-annual)
Foreign Military Sales (Cont'd)
Greece 15
Indonesia 10
Morocco 13
Philippines 10
Tunisia 17
Portugal 1
Peru 9
Egypt 7
Turkey 18
Jordan 12
Colombia 7
Egypt 7
Philippines 10
Tunisia 17
Turkey 18
Jordan 12
Egypt 7
Bolivia 2
Egypt 6
Jordan 12
Morocco 9
Spain 8
Turkey 18
Egypt 6
Turkey 18
$ 705,338.72
1,605,429.00
61,358.92
427,880.00
406,705.80
1,461,789.00
955,667.09
1,099,675.86
605,278.26
1,913,725.00
4,550,870.00
50,000,000.00
365,236.68
20,959.00
866,179.97
3,289,222.69
2,790,244.00
104,168.13
188,934.90
454,949.84
69,580.08
58,167,277.00
199,444.00
699,100.55
6,560,780.00
6/15/12
3/20/93
5/31/96
7/15/92
9/15/96
9/10/94
9/15/95
7/31/14
3/12/14
2/5/95
9/5/91
7/31/14
7/15/92
9/15/96
3/12/14
2/5/95
7/31/14
11/22/95
4/15/14
2/5/95
3/31/94
3/25/96
3/12/14
4/15/14
3/12/14
9.605%
8.835%
9.045%
8.955%
8.983%
8.890%
9.164%
9.845%
9.265%
9.075%
7.660%
9.654%
8.805%
8.875%
9.105%
9.070%
9.665%
9.075%
9.445%
8.985%
9.015%
8.338%
9.075%
9.455%
9.097%
12/2
12/2
12/2
12/2
12/5
12/5
12/5
12/5
12/12
12/12
12/16
12/16
12/18
12/18
12/23
12/31
12/31
12/31
12/31
12/31
359,000.00
548,859.32
146,379.45
1,320,000.00
5,677,000.00
145,000.00
73,345.00
55,900.00
2,300,000.00
308,000.00
531,250.00
2,000,000.00
200,000.00
12,000.00
83,200.00
110,000.00
8,225.00
596,408.00
137,570.92
925,000.00
12/1/87
12/1/89
12/1/89
12/3/90
3/3/86
2/3/86
2/3/86
2/18/86
8/1/86
8/15/86
12/16/91
12/1/90
9/2/03
8/1/86
2/18/86
8/1/86
8/1/86
8/1/86
8/15/86
5/15/87
8.399%
8.858%
9.095%
8.960%
7.585%
7.585%
7.585%
7.585%
7.565%
7.575%
8.647%
8.494%
9.298%
7.525%
7.395%
7.535%
7.535%
7.595%
7.615%
7.885%
12/10
421,650.34
1/15/86
7.555%
12/13
12/13
12/13
12/13
12/13
12/16
12/16
12/16
12/16
12/17
12/18
12/18
12/18
12/18
12/18
12/20
12/24
12/30
12/30
12/30
12/30
12/30
12/30
12/31
12/31
DEPARTMENT OF HOUSING & !JRBAN DEVELOPMENT
Community Development
•Bristol, VA
*Hialeah, FL
*Hialeah, FL
*St. Petersburg, FL
Indianapolis, IN
Indianapolis, IN
Janesville, WI
Newport News, VA
San Diego, CA
Santa Ana, CA i
•Elizabeth, NJ 7
*Yonkers, NY
Oakland, CA
Mayaguez, PR
Newport News, VA
Long Beach, CA
Mayaguez, PR
Garden Grove, CA
Lynn, MA
Montgomery County, PA
8.575%
9.054%
9.302%
9.161%
ann.
ann.
ann.
ann.
7.629%
7.652%
8.834%
8.674%
9.514%
7.583%
ann.
ann.
ann.
ann.
ann.
ann.
7.581%
7.581%
7.640%
7.676%
8.040%
ann.
ann.
ann.
ann.
ann.
9.907%
9.903%
9.897%
8.505%
qtr,
qtr,
qtr,
qtr,
DEPARTMENT OF THE NAVY
Ship Lease Financing
-fCobb
RURAL ELECTRIFICATION ADMINISTRATION
•Saluda River Electric #186 12/2
•Saluda River Electric #186
12/2
Saluda River Electric #271
12/2
•Kamo Electric #209
12/2
+rollover
•maturity extension
1,000,000.00
2,811,000.00
778,000.00
4,941,000.00
12/31/15
12/31/17
V2/18
12/2/87
10.030%
10.026%
10.019%
8.595%
Page 4 of 9
FEDERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•United Power #67 12/2 $ 1,300,000.00 12/2/87
•United Power #129
12/2
3,000,000.00
*Tri-State G&T #89
12/2
3,625,000.00
•Western Farmers Electric #133 12/2
4,250,396.24
•Western Fanners Electric #133 12/2
4,000,000.00
•S. Mississippi Electric #171
12/2
3,500,000.00
•Corn Belt Power #55
12/2
125,000.00
•Corn Belt Power #138
12/2
162,000.00
•Seminole Electric #141
12/2
36,562,000.00
•Dairyland Power #54
12/2
1,187,000.00
•East Kentucky Power #188
12/5
4,000,000.00
•East Kentucky Power #188
12/5
7,000,000.00
•Seminole Electric #141
12/5
8,765,000.00
•Glacier State Telephone #181
12/5
2,424,000.00
•East Kentucky Power #140
12/6
9,480,000.00
•Tex-La Electric #208
12/6
600,000.00
•Colorado Ute Electric #152
12/9
1,045,000.00
•Upper Missouri G&T #172
12/9
345,000.00
•Wolverine Power #190
12/9
148,000.00
Central Iowa Power #184
12/10
2,818,658.00
•Wolverine Power #100
12/12
1,079,000.00
•Wolverine Power #101
12/12
1,303,000.00
•Wolverine Power #101
12/12
220,000.00
•Wolverine Power #182
12/12
2,958,000.00
•Wolverine Power #183
12/12
3,713,000.00
•Wabash Valley Power #104
12/12
5,302,000.00
•Wabash Valley Power #206
12/12
8,313,000.00
•Tri-State G&T #79
12/13
1,490,000.00
•Central Electric #131
12/16
177,000.00
•Soyland Power #165
12/16
9,201,000.00
•Western Illinois Power #162
12/16
3,535,000.00
•Cont. Tel. of Kentucky #115
12/16
100,000.00
•Cont. Tel. of Kentucky #254
12/16
2,400,000.00
•Colorado Ute Electric #203
12/16
993,000.00
•New Hampshire Electric #192
12/16
1,170,000.00
Corn Belt Power #292
12/16
394,000.00
Associated Electric #132
12/16
19,000,000.00
Deseret G&T #211
12/16
23,372,000.00
Vermont Electric #259
12/16
518,000.00
Cont. Tel. of Arkansas #264
12/17
380,000.00
Cont. Tel. of Arkansas #265
12/17
773,000.00
Cont. Tel. of Missouri #253
12/17
2,132,000.00
Hoosier Energy #202
12/17
6,171,000.00
•Seminole Electric #141
12/18
8,510,000.00
•Seminole Electric #141
12/18
16,167,000.00
Cont. Tel. of Iowa #258
12/18
742,000.00
Oglethorpe Power #246
12/19
61,013,000.00
•Colorado Ute Electric #96
12/19
3,720,000.00
•Hoosier Energy #107
12/19
25,048,205.92
•Cajun Electric #76
12/19
20,000,000.00
•Cajun Electric #197
12/19
10,000,000.00
•Oglethorpe Power #150
12/19
10,031,036.00
•N.E. Missouri Electric #217
12/19
1,760,000.00
•Old Dominion Electric #267
12/19
2,006,000.00
•Seminole Electric #141
12/20
11,874,000.00
•Seminole Electric #141
12/20
12,000,000.00
•Tri-State G&T #79
12/10
425,000.00
•Tri-State G&T #89
12/20
6,144,000.00
•Tri-State G&T #89
12/20
1,355,000.00
•Tri-State G&T #89
12/20
3,619,000.00
•Tri-State G&T #89
12/20
2,301,000.00
•Tri-State G&T #89
12/20
8,965,000.00
•maturity extension
12/2/87
12/31/13
12/31/14
12/31/15
12/31/15
12/2/87
12/2/87
12/2/87
12/31/13
1/3/17
1/3/17
12/5/88
12/31/15
12/31/13
12/31/17
12/9/87
12/9/87
12/7/88
12/31/19
12/31/87
12/31/87
12/31/87
12/9/88
12/9/88
12/12/87
12/12/87
12/31/12
12/31/13
12/31/15
12/31/15
12/16/87
12/16/87
12/16/87
12/31/17
12/31/87
12/31/19
12/16/87
12/31/19
1/2/90
1/2/90
1/2/90
12/31/19
12/31/15
12/31/16
1/2/90
12/21/87
12/19/87
12/31/14
12/31/15
12/31/15
12/31/15
12/31/17
12/31/13
1/3/17
12/31/18
12/31/14
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
8.595%
8.595%
10.033%
10.032%
10.030%
10.030%
8.595%
8.595%
8.595%
10.034%
10.051%
10.051%
8.875%
10.055%
10.065%
10.053%
8.595%
8.595%
8.875%
9.928%
8.138%
8.138%
8.138%
8.405%
8.405%
8.125%
8.125%
9.744%
9.685%
9.685%
9.685%
8.095%
8.095%
8.095%
9.685%
8.105%
9.684%
8.095%
9.684%
8.655%
8.655%
8.655%
9.608%
9.505%
9.504%
8.515%
8.165%
8.165%
9.567%
9.565%
9.565%
9.565%
9.562%
9.496%
9.546%
9.541%
9.556%
9.557%
9.557%
9.557%
9.557%
9.557%
8.505%
8.505%
9.910%
9.909%
9.907%
9.907%
8.505%
8.505%
8.505%
9.911%
9.928%
9.928%
8.799%
9.932%
9.941%
9.930%
8.505%
8.505%
8.779%
9.808%
8.057%
8.057%
8.057%
8.319%
8.319%
8.044%
8.044%
9.628%
9.571%
9.571%
9.571%
8.015%
8.015%
8.015%
9.571%
8.025%
9.570%
8.015%
9.570%
8.563%
8.563%
8.563%
9.495%
9.395%
9.394%
8.426%
8.083%
8.083%
9.455%
9.453%
9.453%
9.453%
9.450%
9.386%
9.435%
9.430%
9.445%
9.445%
9.445%
9.445%
9.445%
9.445%
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
atr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 5 of 9
FEDERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
12/31/13
12/31/13
12/31/13
12/31/13
12/31/15
12/31/15
12/31/15
1/3/17
1/3/17
1/3/17
12/31/15
12/31/15
12/31/15
1/3/17
1/3/17
1/3/17
12/31/18
12/31/15
12/23/87
12/23/87
12/23/87
12/31/15
12/31/15
12/31/15
12/31/17
12/31/87
12/31/16
12/31/16
12/31/16
12/31/12
12/31/13
12/31/87
1/2/18
12/30/87
12/30/87
12/30/87
12/30/87
1/2/18
1/2/18
1/2/18
12/29/88
12/30/87
12/30/87
12/31/17
12/30/87
12/30/87
12/31/17
12/31/19
1/2/18
12/31/19
12/31/15
12/31/15
12/31/15
12/31/17
12/31/17
12/31/17
12/31/13
12/31/87
12/31/87
12/31/87
12/31/87
12/31/87
9.557%
9.557%
9.557%
9.557%
9.553%
9.553%
9.553%
9.547%
9.547%
9.548%
9.552%
9.552%
9.553%
9.547%
9.496%
9.496%
9.493%
9.495%
8.135%
8.135%
8.135%
9.499%
9.499%
9.499%
9.496%
8.154%
9.505%
9.505%
9.505%
9.518%
9.491%
8.11S%
9.487%
8.115%
8.115%
8.115%
8.115%
9.445%
9.445%
9.445%
8.365%
8.115%
8.115%
9.445%
8.115%
8.115%
9.445%
9.440%
9.439%
9.440%
9.466%
9.466%
9.466%
9.458%
9.458%
9.458%
9.473%
8.115%
8.123%
8.123%
8.125%
8.125%
INTEREST
RATE
(other than
semi-annual)
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•Tri-State G&T #89
•Tri-State G&T #89
•Tri-State G&T #89
•Tri-State G&T #89
•Tri-State G&T #157
•Tri-State G&T #157
•Tri-State G&T #157
•Tri-State G&T #157
•Tri-State G&T #157
•Tri-State G&T #157
•Tri-State G&T #177
•Tri-State G&T #177
•Tri-State G&T #199
•Tri-State G&T #199
•East Kentucky Power #140
•East Kentucky Power #140
•East Kentucky Power #188
•East Kentucky Power #73
•Dairyland Power #161
•Wabash Valley Power #206
•Wabash Valley Power #252
•Central Electric #131
•Brazos Electric #108
•Brazos Electric #144
•Oglethorpe Power #246
Cajun Electric #263
•Plains Electric #158
•Plains Electric #158
•Plains Electric #158
•Soyland Power #105
•Soyland Power #105
Wolverine Power #274
North Carolina Electric #268
•Colorado Ute Electric #152
•Colorado Ute Electric #168
•Colorado Ute Electric #198
•Colorado Ute Electric #198
•New Hampshire Electric #192
•Glacier State Telephone #181
•Saluda River Electric #186
•East River Electric #117
•Corn Belt Power #138
•Basin Electric #232
•Tex-La Electric #208
•West Virginia Telephone #17
•Seminole Electric #141
•Vermont Electric #193
Cajun Electric #249
Saluda River Electric #271
Brazos Electric #230
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•Ogden Telephone #72
•Colorado Ute Electric #78
•Cajun Electric #263
•Cajun Electric #263
•Kansas Electric #216
•Kansas Electric #216
•maturity extension
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/20
12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/23
12/26
12/26
12/26
12/26
12/26
12/27
12/27
12/27
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/30
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
$ 10,413,000.00
3,648,000.00
2,763,000.00
2,702,000.00
1,250,000.00
1,185,000.00
500,000.00
395,000.00
1,200,000.00
1,623,000.00
227,040.00
11,172,000.00
2,242,000.00
820,000.00
560,000.00
300,000.00
16,500,000.00
3,165,291.00
2,418,000.00
748,000.00
350,000.00
140,000.00
1,931,000.00
3,824,000.00
952,288.00
45,920,000.00
10,172,000.00
7,336,000.00
7,464,000.00
7,248,000.00
9,243,000.00
683,000.00
17,942,000.00
22,335,000.00
418,323.00
2,690,000.00
8,565,000.00
2,067,500.00
3,000,000.00
11,760,000.00
1,250,000.00
117,000.00
570,000.00
3,408,000.00
718,000.00
21,106,000.00
1,800,000.00
5,000,000.00
11,166,000.00
625,000.00
5,122,000.00
3,004,000.00
25,505,000.00
8,258,000.00
7,299,000.00
38,062,000.00
750,000.00
3,784,666.64
62,000,000.00
32,680,000.00
907,000.00
1,140,000.00
9.445% qtr.
9.445% qtr.
9.445% qtr.
9.445% qtr.
9.442% qtr.
9.442% qtr.
9.442% qtr.
9.436% qtr.
9.436% qtr.
9.437% qtr.
9.441% qtr.
9.441% qtr.
9.442% qtr.
9.436% qtr.
9.386% qtr.
9.386% qtr.
9.383% qtr.
9.385% qtr.
8.054% qtr.
8.054% qtr.
8.054% qtr.
9.389% qtr.
9.389% qtr.
9.389% qtr.
9.386% qtr.
8.073% qtr.
9.395% qtr.
9.395% qtr.
9.395% qtr.
9.407% qtr.
9.381% qtr.
8.038% qtr.
9.377% qtr.
8.034% qtr.
8.034% qtr.
8.034% qtr.
8.034% qtr.
9.336% qtr.
9.336% qtr.
9.336% qtr.
8.279% qtr.
8.034% qtr.
8.034% qtr.
9.336% qtr.
8.034% qtr.
8.034% qtr.
9.336% qtr.
9.331% qtr.
9.330% qtr.
9.331% qtr.
9.357% qtr.
9.357% qtr.
9.357% qtr.
9.349% qtr.
9.349% qtr.
9.349% qtr.
9.363% qtr.
8.034% qtr.
8.042% qtr.
8.042% qtr.
8.044% qtr.
8.044% qtr.
Page 6 of 9
FEDERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•Kansas Electric #216 12/31 $ 825,000.00
•Kansas Electric #216
12/31
575,000.00
•Kansas Electric #216
12/31
1,065,000.00
•Kansas Electric #216
12/31
1,245,000.00
Tex-La Electric #208
12/31
5,297,000.00
New Hampshire Electric #270
12/31
3,023,000.00
Kamo Electric #209
12/31
1,798,000.00
•Vermont Electric #193
12/31
158,000.00
•Vermont Electric #259
12/31
1,700,000.00
•Vermont Electric #259
12/31
1,500,000.00
•Cont. Tel. of Kansas #201
12/31
4,020,000.00
•Old Dominion Electric #267
12/31
48,232,323.25
•Old Dominion Electric #267
12/31
48,232,323.25
•Old Dominion Electric #267
12/31
48,232,323.25
•Old Dominion Electric #267
12/31
45,731,959.62
•Tri-State G&T #79
12/31
2,504,000.00
•Tri-State G&T #79
12/31
2,399,000.00
•Tri-State G&T #79
12/31
1,726,000.00
•Tri-State G&T #89
12/31
4,999,680.00
•Tri-State G&T #89
12/31
24,184,320.00
•Tri-State G&T #89
12/31
6,296,000.00
•Tri-State G&T #89
12/31
5,164,000.00
•S. Mississippi Electric #3
12/31
4,986,111.12
•S. Mississippi Electric #3
12/31
4,521,296.32
•S. Mississippi Electric #3
12/31
1,764,814.80
•East Kentucky Power #73
12/31
6,116,478.28
•Kamo Electric #266
12/31
68,445,000.00
•Allegheny Electric #255
12/31
20,000,000.00
•Big Rivers Electric #58
12/31
1,590,000.00
•Big Rivers Electric #58
12/31
519,000.00
•Big Rivers Electric #91
12/31
2,230,000.00
•Big Rivers Electric #91
12/31
5,423,000.00
•Big Rivers Electric #91
12/31
416,000.00
•Big Rivers Electric #91
12/31
258,000.00
•Big Rivers Electric #136
12/31
483,000.00
•Big Rivers Electric #136
12/31
699,000.00
•Big Rivers Electric #136
12/31
73,000.00
•Big Rivers Electric #136
12/31
15,000.00
•Big Rivers Electric #136
12/31
155,000.00
•Big Rivers Electric #143
12/31
47,000.00
•Big Rivers Electric #143
12/31
60,000.00
•Big Rivers Electric #143
12/31
45,000.00
•Big Rivers Electric #143
12/31
94,000.00
•Big Rivers Electric #179
12/31
19,939,000.00
•Big Rivers Electric #179
12/31
5,770,000.00
•Big Rivers Electric #179
12/31
2,695,000.00
•Sunflower Electric #174
12/31
15,000,000.00
12/31/87
12/31/87
12/31/87
12/31/87
12/31/19
12/31/17
12/31/19
12/31/15
1/2/18
1/2/18
1/3/89
12/31/13
12/31/13
12/31/87
12/31/87
12/31/13
12/31/13
12/31/13
12/31/87
12/31/87
12/31/87
12/31/87
1/3/11
1/3/11
1/3/11
12/31/15
12/31/15
1/2/18
12/31/13
12/31/13
12/31/13
12/31/13
12/31/15
12/31/15
12/31/13
12/31/13
12/31/15
12/31/15
1/2/18
12/31/15
12/31/15
12/31/18
12/31/18
12/31/15
12/31/18
12/31/18
12/31/87
8.125%
8.125%
8.125%
8.125%
9.453%
9.465%
9.453%
9.466%
9.458%
9.458%
8.375%
9.402%
9.402%
8.119%
8.119%
9.472%
9.472%
9.472%
8.119%
8.119%
8.119%
8.119%
9.329%
9.329%
9.329%
9.461%
9.461%
9.458%
9.473%
9.473%
9.473%
9.473%
9.466%
9.466%
9.473%
9.473%
9.466%
9.466%
9.458%
9.466%
9.466%
9.458%
9.458%
9.466%
9.458%
9.458%
8.125%
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
12/1/00
9.804%
9.604%
9.804%
9.804%
9.804%
9.804%
9.804%
9.804%
9.804%
9.804%
9.804%
9.804%
SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
Caprock Local Dev. Company
Riverside Development Corp.
Jackson Local Development Co.
Hamilton County Dev. Co.
Enterprise Dev. Corp.
Empire St. Cert. Dev. Corp.
Wisconsin Bus. Dev. Fin. Corp.
Saint Paul 503 Dev. Co.
Ohio Statewide Dev. Corp.
Montgomery County Bus. D.C.
Nine County Dev., Inc.
Milwaukee Econ. Dev. Corp.
•maturity extension
12/4
12/4
12/4
12/4
12/4
12/4
12/4
12/4
12/4
12/4
12/4
12/4
58,000.00
63,000.00
74,000.00
99,000.00
109,000.00
111,000.00
137,000.00
189,000.00
221,000.00
273,000.00
283,000.00
294,000.00
8.044% qtr,
8.044% qtr.
8.044% qtr.
8.044% qtr.
9.344% qtr.
9.356% qtr.
9.344% qtr.
9.357% qtr.
9.349% qtr.
9.349% qtr.
8.289% qtr.
9.294% qtr.
9.294% qtr.
8.038% qtr.
8.038% qtr.
9.362% qtr.
9.362* qtr.
9.362% qtr.
8.038% qtr.
8.038% qtr.
8.038% qtr.
8.038% qtr.
9.223% qtr.
9.223% qtr.
9.223% qtr.
9.352% qtr.
9.352% qtr.
9.349% qtr.
9.363% qtr.
9.363% qtr.
9.363% qtr.
9.363% qtr.
9.357% qtr.
9.357% qtr.
9.363% qtr.
9.363% qtr.
9.357% qtr.
9.357% qtr.
9.349% qtr.
9.357% qtr.
9.357% qtr.
9.349% qtr.
9.349% qtr.
9.357% qtr.
9.349% qtr.
9.349% qtr.
8.044% qtr.
Page 7 of 9
FEDERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
State & Local Development Company Debentures (Cont'd)
St. Louis County LDC 12/4 $ 413,000.00 12/1/00
Wisconsin Bus. Dev. Fin. Corp. 12/4
498,000.00
Gr. Salt lake Business Dist.
12/4
500,000.00
Bay Colony Dev. Corp.
12/4
500,000.00
Nine County Dev., Inc.
12/4
15,000.00
Nine County Dev., Inc.
12/4
16,000.00
Nine County Dev., Inc.
12/4
24,000.00
Mo-Kan Dev., Inc.
12/4
32,000.00
Coastal Area D.D.A., Inc.
12/4
38,000.00
Rural Missouri, Inc.
12/4
47,000.00
St. Louis Local Dev. Co.
12/4
65,000.00
E.C.I.A. Bus. Growth, Inc.
12/4
66,000.00
Texas Cert. Dev. Co., Inc.
12/4
77,000.00
Hamilton County Dev. Corp.
12/4
84,000.00
HEDCO Local Dev. Corp.
12/4
89,000.00
Old Colorado City Dev. Co.
12/4
91,000.00
Crossroads EDC of St. Charles 12/4
93,000.00
Gr. Salt Lake Business Dist.
12/4
111,000.00
Enterprise Development Corp.
12/4
115,000.00
Columbus Countywide Dev. Corp. 12/4
117,000.00
Wilmington Indus. Dev., Inc. 12/4
118,000.00
ARK-TEX Reg. Dev. Co., Inc.
12/4
118,000.00
Gr. Salt Lake Business Dist.
12/4
125,000.00
Gr. Salt lake Business Dist.
12/4
125,000.00
Androscoggin Valley C.G.
12/4
130,000.00
Long Island Dev. Corp.
12/4
133,000.00
San Diego County L.D.C.
12/4
137,000.00
Commonwealth Small Bus. D.C.
12/4
147,000.00
Cen. Calif. Cert. Dev. Corp.
12/4
157,000.00
Econ. Dev. Fnd. of Sacramento 12/4
168,000.00
Coastal Area Dis. Dev. Auth.
12/4
175,000.00
Long Island Dev. Corp.
12/4
187,000.00
Bay Colony Dev. Corp.
12/4
189,000.00
Altoona Enterprises, Inc.
12/4
193,000.00
Long Island Dev. Corp.
12/4
200,000.00
Southern Nevada Cert. Dev. Co. 12/4
207,000.00
Downtown Improvement Corp.
12/4
231,000.00
Mid-Atlantic Cert. Dev. Co.
12/4
231,000.00
Clay County Dev. Corp.
12/4
237,000.00
Maine Dev. Foundation
12/4
252,000.00
Gr. Pocatello Dev. Corp.
12/4
257,000.00
San Diego County L.D.C.
12/4
259,000.00
Long Island Dev. Corp.
12/4
280,000.00
Long Island Dev. Corp.
12/4
300,000.00
Rural Missouri, Inc.
12/4
302,000.00
Enterprise Dev. Corp.
12/4
304,000.00
Three Rivers L.D.C., Inc.
12/4
315,000.00
West Virginia C.D.C.
12/4
318,000.00
Franklin County Indus. Dev. Co.12/4
335,000.00
Gr. Spokane Bus. Dev. Assoc.
12/4
355,000.00
Gr. Metro. Chicago Dev. Corp. 12/4
380,000.00
Crossroads Be. Dev. Corp.
12/4
394,000.00
Enterprise Dev. Corp.
12/4
401,000.00
Downtown Improvement Corp.
12/4
451,000.00
Cen. Upper Peninsula BDC, Inc. 12/4
463,000.00
Bay Colony Dev. Corp.
12/4
491,000.00
La Habra L.D.C., Inc.
12/4
500,000.00
HEDCO L.D.C.
12/4
500,000.00
Mid-Atlantic C.D.C.
12/4
500,000.00
Big Country Dev. Corp.
12/4
500,000.00
Empire State C.D.C.
12/4
500,000.00
Mass. C.D.C.
12/4
500,000.00
Central Ozarks Dev., Inc.
12/4
42,000.00
Columbus Countywide Dev. Corp. 12/4
45,000.00
12/1/00
12/1/00
12/1/00
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/05
12/1/10
12/1/10
9.804%
9.804%
9.804%
9.804%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.023%
10.123%
10.123%
INTEREST
RATE
(other tnan
semi-annual)
Page 8 of 9
FEDERAL FINANCING BANK
DECEMBER 1985 ACTIVITY
BORROWER
FINAL
MATURITY
AMOUNT
OF ADVANCE
DATE
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
State & Local Development Company Debentures (Cont'd)
Mentor Economic Asst. Corp. 12/4 $ 63,000.00
St. Louis County L.D.C.
12/4
82,000.00
Long Beach L.D.C.
12/4
84,000.00
Union County Ec. Dev. Corp.
12/4
88,000.00
Region Nine Dev. Corp.
12/4
98,000.00
St. Paul 503 Dev. Co.
12/4
109,000.00
Columbus Countywide Dev. Corp. 12/4
112,000.00
Warren Redev. & Planning Corp. 12/4
135,000.00
Northern VA L.D.C, Inc.
12/4
137,000.00
Mentor Ec. Asst. Corp.
12/4
137,000.00
Neuse River Dev. Auth., Inc.
12/4
141,000.00
Texas C.D.C, Inc.
12/4
146,000.00
Charlotte C.D.C.
12/4
152,000.00
San Diego County L.D.C.
12/4
162,000.00
Six Rivers L.D.C
12/4
183,000.00
Warren Redev. & Planning Corp.12/4
184,000.00
Black Hawk County E.D.C, Inc. 12/4
189,000.00
Bay Area Bus. Dev. Co.
12/4
263,000.00
Commercial Indus. Dev. Corp.
12/4
281,000.00
East-Central Idaho Dev. Co.
12/4
283,000.00
E.D.F. of Sacramento, Inc.
12/4
315,000.00
La Habra L.D.C, Inc.
12/4
317,000.00
Warren Redev. & Planning Corp. 12/4
329,000.00
E.D.F. of Sacramento, Inc.
12/4
358,000.00
St. Louis County L.D.C.
12/4
359,000.00
Bay Area Employment Dev. Co.
12/4
380,000.00
Northern VA L.D.C, Inc.
12/4
499,000.00
Massachusetts C.D.C
12/4
500,000.00
Oshkosh Commercial Dev. Corp. 12/4
500,000.00
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
12/1/10
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
10.123%
12/1/90
12/1/90
12/1/92
12/1/92
12/1/95
12/1/95
12/1/95
9.105%
9.105%
9.465%
9.465%
9.615%
9.615%
9.615%
Small Business Investment Company Debentures
New West Partners
Rocky Mountain Ventures, Ltd.
Dixie Business Inv. Co, Inc.
Sunwestern Capital Corp.
Market Capital Corporation
Walden Capital Partners
Edwards Capital Corporation
800,000.00
750,000.00
100,000.00
1,000,000.00
500,000.00
600,000.00
600,000.00
12/11
12/11
12/11
12/11
12/11
12/11
12/11
TENNESSEE VAT.T.EY AUTHORITY
Seven States Energy Corporation
+Note A-86-03 12/31
620,135,654.23
3/31/86
7.315%
800,000.00
9A4/99
9.236%
DEPARTMENT OF TRANSPORTATION
Section 511—4R Act
MKT Railroad
12/2
+rollover
FEDERAL FINANCING BANK
DECEMBER 1985 Commitments
BORROWER
Harrisburg, PA
Harrisburg, PA
Kansas City, MO
Lincoln, NE
Massillon, OH
Mayaguez, PR
Sacramento, CA
San Diego, CA
GUARANTOR
AMOUNT
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
$ 1,474,951.00
830,100.00
1,000,000.00
446,000.00
800,000.00
23,298.18
1,000,000.00
3,977,900.00
COMMITMENT
EXPIRES
12/1/87
12/1/86
6/15/86
11/1/86
9/15/86
8/1/86
3/1/88
8/1/86
MATURITY
12/1/87
12/1/92
6/15/86
11/1/86
9/15/86
8/1/86
3/1/88
8/1/86
Page 9 of 9
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
December 31, 1985
Net Change Net Change—FY 1986
November 30, 1985
12/1/85-12/31/85
10/1/85-12/31/85
Agency Debt
Export-Import Bank $ 15,670.3
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
U.S. Railway Association
223.2
14,622.0
1,690.0
73.8
$ 15,409.0
219.6
14,610.0
1,690.0
73.8
$ 261.3
$ 261.3
3.5
1.0
12.0
241.0
-0-0-
-0-0-
64,189.0
105.9
122.8
45.0
65.0
-3.3
6.1
-2.2
3,724.3
31.8
-0-
-0-
-0.6
-1.7
171.6
217.8
Agency Assets
Farmers Home Administration 64,234.0
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
105.9
122.8
4.0
3,724.3
31.2
-0-0-
-0-2.2
Government-Guaranteed Lending
DOD-Foreign Military Sales 18,306.3
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co.
DON-Ship Lease Financing
DON-Defense Production Act
Oregon Veteran's Housing
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
TOTALS^ $ 153,373.2
•figures may not total due to rounding
5,000.0
275.4
33.5
2,111.4
405.3
35.1
28.2
887.6
1,431.0
6.6
60.0
20,653.8
1,041.9
656.5
1,696.4
65.7
177.0
18,134.7
5,000.0
303.1
33.5
2,111.4
407.4
35.1
28.2
887.6
1,452.6
-0-
-0-
-27.7
-14.0
-0-0-
-0-
-2.1
-34.7
-3.1
-0-0-0-
-0-0-0-
-21.6
118.0
60.0
21,826.0
1,043.6
635.0
1,670.5
150.0
177.0
-0-0-
0.8
-0-
-1,172.2
-1.7
21.5
25.9
-84.3
-1,021.7
18.0
60.9
45.0
-87.9
-0-
-0-
$ 154,144.9
$ -771.7
$ -140.0
6.6
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 14, 1986
. CONTACT: CHARLEY POWERS
Phone: (202) 566-2041
TREASURY ANNOUNCES PENALTIES AGAINST TEXAS COMMERCE BANCSHARES
The Department of the Treasury today announced that Texas
Commerce Bancshares, Inc. (TCB) , a bank holding company with
headquarters in Houston, Texas, has agreed on behalf of its bank
subsidiaries to pay civil penalties of $1.9 million for violations of the Bank Secrecy Act. The violations consist of
failures to file Currency Transaction Reports for cash transactions exceeding $10,000, as required under the Act. These
violations include failures to report both international and
domestic currency transactions. This represents a complete
settlement of TCB's civil liability under the Act.
In the wake of the publicity surrounding the Bank of Boston
case, TCB undertook an extensive review of the past Bank Secrecy
Act compliance by its 70 banks. TCB then brought the results of
the review to Treasury's attention and cooperated fully in
developing the scope of its liability.
The penalty was announced by Francis A. Keating, II,
Assistant Secretary for Enforcement and Operations.
Mr. Keating stated: "In assessing this penalty Treasury
considered TCB's commitment to full future compliance and record
of past cooperation with Federal law enforcement officials."
The penalty was based on over 7,000 violations by TCB banks.
Based on the compliance review done by TCB, examinations by the
Comptroller of the Currency and a review of the TCB banks'
compliance history, Treasury is confident that the penalty amount
is appropriate. TCB has agreed to conduct a further review of
cash transactions and to late-file additional Currency
Transaction Reports as required by Treasury. Treasury has no
information that the bank engaged in criminal activity in
connection with these violations.
B-469
-2Mr. Keating added, "We view all Bank Secrecy Act violations
as serious given their potential detriment to law enforcement. I
am firmly committed to rigorous enforcement of the Bank Secrecy
Act, including imposition of civil penalties where appropriate.
We believe that Treasury's imposition of civil penalties has
contributed substantially to recent increased attention to
compliance by many financial institutions. Full compliance with
the Bank Secrecy Act is essential to effective law enforcement
and a prime law enforcement goal of the Department of the
Treasury."
In the last year, over sixty banks have come forward to
Treasury to discuss past Bank Secrecy Act non-compliance. Since
June 1985, twelve other banks have been penalized in amounts
ranging from $121,000 to $4.75 million. The cases of the
remaining banks are under review.
TREASURY NEWS
Department of the Treasury • Washington,
D.C.5310
• Telephone 566-2041
LIBRARY. ROOM
FEB 21 9wArTBIi
For Release Upon Delivery
Expected at 2:00 P.M.
February 18, 1986
JEPAiVTKENT OF THE TREASURY
Testimony of The Honorable James A. Baker, III
Secretary of the Treasury
Before the
Senate Budget Committee
February 18, 1986
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the state of the
economy and the new budgetary path. The major economic objectives
of the Administration have been described by President Reagan in
his State of the Union Message. Further details on this year's
economic and budgetary outlook have been provided in the President's
Budget and Economic Report. My remarks are an overview of the
current situation.
We seek to build on the foundation of the solid economic
performance that has already taken place. The current economic
expansion has now moved into its fourth year and shows few signs
of slackening. Growth was relatively slow at some times during
1985, but by year-end the economy was gaining momentum.
Some favorable features of last year's economic performance
deserve at least passing mention.
o Consumer price inflation at 3.8 percent remained in the
3.8 to 4 percent range for the fourth year in a row. A
table attached to my prepared statement shows the steady
progress that has been made since 1980 when all of the
measures of price performance were rising in the doubledigit range.
B-470
2
o
Employment has risen strongly in the current expansion,
by over 9-1/2 million people. The unemployment rate
has been reduced to below 7 percent and further
progress is expected. The U.S. economy continues to
display great job-creating ability.
o Last year's financial market performance was also
encouraging. Record amounts of credit flowed to
private borrowers, despite the persistence of large
Federal budget deficits. Short-term interest rates are
down on average by about 1/2 percentage point in the
past year while many of the long-term rates are down by
about two percentage points. The prime rate is down to
9-1/2 percent, the lowest rate in 7 years. Ideally, we
would like to have seen interest rates come down even
further than they have.
All of this added up to a year of solid economic performance
in 1985. The latest economic information is generally favorable. Employment rose sharply in January and the unemployment
rate fell. Other statistics have not been quite as strong but
the year is off to a good start. The stage has been set for
sustained expansion in output, jobs and income.
Sustained economic expansion is one of the most important
prerequisites for improving the budget picture, as well as the
financial security of the American people. During the current
expansion, strong economic growth has been achieved in a much
less inflationary environment than in the late 1970's. We must
strive to extend that good record into the future.
The Administration forecast calls for 4 percent real growth
during the four quarters of 1986. This would seem to be a
reasonable expectation. The consensus private forecast has been
a little lower, around 3 percent. But the recent economic
numbers are causing some upward adjustment in the private forecasts. Those of us who advise the President on these matters
feel that the current Administration projections are inherently
reasonable although we also recognize that economic forecasting
is at best an uncertain art.
The inflation outlook is also relatively promising, although
the fall in the external value of the dollar will eventually
begin to exert a little upward pressure.
The Federal Reserve obviously needs to remain alert to the
needs of both the domestic and international financial situations,, While they never lack for critics and there is always
room for disagreement on the wisdom of some of their specific
actions, it seems to me that the Federal Reserve has been doing a
good job recently.
3
*
*
*
I would like to turn briefly now to the influence of the
international economy on our own economic and fiscal situation.
As a result of intensified efforts at promoting a favorable convergence of economic performance among the major industrial
countries we have seen some improvement in the world economy. We
expect to build on the progress this year. On balance, we expect
stronger European and LDC domestic demand growth this year as
they continue the process of shifting from export-led to
domestic-led growth. Unfortunately there may be some weakening
in Japanese growth as the previous stimulus from the trade sector
is sharply reduced.
Exchange markets have recognized these generally favorable
developments. The decline of the dollar since its peak last
winter has been substantial. The yen is at a seven-year high
against the dollar. Well over half of the dollar's rise on a
real trade-weighted basis against other industrial countries from
the end of 1980 to last winter's peaks has been reversed. This
is good news for U.S. industry and agriculture. The U.S. trade
deficit is likely to level off later this year. These developments should contribute to a more sustainable medium-term pattern
of trade and current account balances. The G-5 meeting last
September contributed to these developments. Our recent meeting
in London showed that all countries were working to continue
efforts for sustainable growth.
Another favorable development has been the downward movement
in world petroleum prices. Although not without its costs, on
balance this should strengthen growth and lower inflation in most
of the world. A few countries and firms will experience problems,
but with the U.S. debt initiative and a strongly growing world
economy these problems can be handled.
While the international debt situation has continued to
improve, economic growth in many debtor countries has remained
unsatisfactory, and requires greater emphasis on structural
policy reforms within those nations, buttressed by additional
international financial support. As you know, the United States
proposed last October at Seoul, Korea a "Program for Sustained
Growth", involving mutually reinforcing actions by the debtor
countries, the international financial institutions, and the
commercial banks. The response has been very encouraging, with
broad statements of support from the major bank groups in the
U.S. and other key creditor nations, from the multilateral
institutions and in principle from many of the debtor nations.
* * *
There are two major items on this year's fiscal agenda:
deficit reduction and tax reform.
4
The President's budget for fiscal 1987 provides a detailed
plan, satisfying the requirements of the Gramm-Rudman-Hollings
legislation, by which a balanced budget can be achieved by fiscal
1991. The large budget deficits that we currently face are due
to excessive Federal spending. Certainly it is not because the
American people are undertaxed. As shown in the chart attached
to my prepared testimony, receipts are running a bit above the
long run historical average as a share of GNP. Despite frequent
claims to the contrary, the 1981 Reagan tax cuts are not responsible for our current fiscal difficulties.
Our problems are on the outlay side of the budget, and that
is where the corrective action needs to be taken. It would seem
that Congress shares this view and is serious about cutting
growth in spending. Outlays will continue to grow in absolute
terms along the path projected in the new budget, but the rate of
advance will be reduced significantly. Between FY 1985 and
FY 1991, nominal Federal outlays would rise on average about
3 percent per year. In the prior six-year period, 1979-1985, the
rate of growth was about 11 percent per year. Along the path
projected in the new budget, Federal outlays would decline
steadily as a ratio to GNP from 24 percent in 1985 to about
19 percent in 1991.
Receipts will be growing strongly in absolute terms as the
economy itself grows, but receipts would remain close to a
19 percent ratio to GNP — slightly above historical experience.
Receipts are projected to rise by about an average 7-1/2 percent
annually between FY 1985 and FY 1991, close to the 8 percent rise
averaged in the previous 6 year period. With receipts growing
normally and outlay growth restrained to a lower path, the budget
will move into balance by 1991.
The reduction in the growth of expenditure required to
balance the budget by fiscal year 1991 will not be easy, but the
effort deserves strong bipartisan support.
It can be done the
hard, crude way, via sequestration across the board. Or it can
be can be done more rationally and selectively, with respect for
appropriate priorities. The President's budget is carefully
drawn to meet the Gramm-Rudman-Hollings targets while preserving
essential programs of the highest national priority.
St
'
**•;*' w - ~r
r—r;?~
::-* --"---^^o, nunc ot wnicn are
acceptable. There should be no illusion that tax increases will
somehow provide an easy way out. The President has expressed his
views on this issue very clearly. He is firmly opposed to damaging the economy by increasing taxes. Defense, which is the most
essential duty of the Federal Government, must be maintained.
So
must the social safety net, including social security and
entitlement programs for the needy.
5
The outlay reductions would be expected to bring down
interest rates with a beneficial impact on the entire economy.
In addition, lower interest rates and a declining budget deficit
will moderate the rapid rise in interest expense that has developed. This will free up funds for growth in essential programs.
The time has come to reduce what has clearly become an
excessive rate of growth in Federal spending and to move toward a
balanced Federal budget.
Our other major domestic policy priority is to achieve meaningful tax reform legislation. The bill passed last year by the
House of Representatives is a good start but not a final product.
Our primary concerns are the following:
o the bill lowers marginal tax rates but the top individual rate of 38 percent and the corporate rate of
36 percent are still too high;
o the bill raises the personal exemption to $2000, but to
only $1500 for taxpayers who itemize deductions;
o the bill fails to maintain the cost of capital at
sufficiently low levels to promote economic growth.
The Senate Finance Committee has begun consideration of tax
reform and the Administration has pledged its full cooperation in
improving the House legislation. Our major desired changes
include:
o full $2000 personal exemptions for both itemizers and
nonitemizers, at least for lower and middle-income
taxpayers;
o provision of adequate capital cost recovery allowances
and the protection of those allowances against inflation;
o a top tax rate no higher than 35 percent.
Tax reform remains a top priority item on the President's
agenda. We will work in a bipartisan spirit to achieve meaningful tax reform this year. But let me be very clear that the
President will not compromise on matters of principle and he will
not permit tax reform to degenerate into a tax increase in disguise.
6
Conclusions
The U.S. economy turned in a solid showing last year and the
outlook this year is for stronger real growth without much
increase in inflation. Internationally, as well, there was progress during 1985 and we will be working to build on that foundation. Our major domestic agenda items are reduction of an excessive rate of growth in Federal spending as we move toward a
balanced budget, and meaningful tax reform for the American
people. We think that both of these efforts deserve and will
receive strong bipartisan support.
RECENT PROGRESS AGAINST INFLATION
(percent change, annual rate, during period indicated)
1980 1981 1982 1983 1984 1985
GNP: Implicit price deflator 9.9 8.7
5.2
3.5
4.1
3.1
Fixed-weighted basis 9.8 8.5
5.0
3.8
4.2
3.5
Consumer price index 12.4 8.9
3.9
3.8
4.0
3.8
Producer price index 11.8 7.1
3.7
0.6
1.7
1.8
(wholesale prices)
Note: Fourth quarter to fourth quarter for GNP deflator, December to December for CPI and PPI.
January 30, 1986 A41
Percent of GNP.
OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1991
Percent of GNP
1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Fiscal Years Projected
0
Note: Outlays include off-budget federal entities.
February 6, 1986 A54a
TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
^ARY,RO0M 5310
C
^U :313 AM 'SB
• --^TMEHfGF THE TREASURY
For Release Upon Delivery
Expected at 9:30 A.M.
February 19, 1986
Testimony of The Honorable James A. Baker, III
Secretary of the Treasury
Before the
House Budget Committee
February 19, 1986
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the state of the
economy and the new budgetary path. The major economic objectives
of the Administration have been described by President Reagan in
his State of the Union Message. Further details on this year's
economic and budgetary outlook have been provided in the President's
Budget and Economic Report. My remarks are an overview of the
current situation.
We seek to build on the foundation of the solid economic
performance that has already taken place. The current economic
expansion has now moved into its fourth year and shows few signs
of slackening. Growth was relatively slow at some times during
1985, but by year-end the economy was gaining momentum.
Some favorable features of last year's economic performance
deserve at least passing mention.
o Consumer price inflation at 3.8 percent remained in the
3.8 to 4 percent range for the fourth year in a row. A
table attached to my prepared statement shows the steady
progress that has been made since 1980 when all of the
measures of price performance were rising in the doubledigit range.
n
B-271
2
o
Employment has risen strongly in the current expansion,
by over 9-1/2 million people. The unemployment rate
has been reduced to below 7 percent and further
progress is expected. The U.S. economy continues to
display great job-creating ability.
o Last year's financial market performance was also
encouraging. Record amounts of credit flowed to
private borrowers, despite the persistence of large
Federal budget deficits. Short-term interest rates are
down on average by about 1/2 percentage point in the
past year while many of the long-term rates are down by
about two percentage points. The prime rate is down to
9-1/2 percent, the lowest rate in 7 years. Ideally, we
would like to have seen interest rates come down even
further than they have.
All of this added up to a year of solid economic performance
in 1985. The latest economic information is generally favorable. Employment rose sharply in January and the unemployment
rate fell. Other statistics have not been quite as strong but
the year is off to a good start. The stage has been set for
sustained expansion in output, jobs and income.
Sustained economic expansion is one of the most important
prerequisites for improving the budget picture, as well as the
financial security of the American people. During the current
expansion, strong economic growth has been achieved in a much
less inflationary environment than in the late 1970's. We must
strive to extend that good record into the future.
The Administration forecast calls for 4 percent real growth
during the four quarters of 1986. This would seem to be a
reasonable expectation. The consensus private forecast has been
a little lower, around 3 percent. But the recent economic
numbers are causing some upward adjustment in the private forecasts. Those of us who advise the President on these matters
feel that the current Administration projections are inherently
reasonable although we also recognize that economic forecasting
is at best an uncertain art.
The inflation outlook is also relatively promising, although
the fall in the external value of the dollar will eventually
begin to exert a little upward pressure.
The Federal Reserve obviously needs to remain alert to the
needs of both the domestic and international financial situations. While they never lack for critics and there is always
room for disagreement on the wisdom of some of their specific
actions, it seems to me that the Federal Reserve has been doing a
good job recently.
3
*
*
*
I would like to turn briefly now to the influence of the
international economy on our own economic and fiscal situation.
As a result of intensified efforts at promoting a favorable convergence of economic performance among the major industrial
countries we have seen some improvement in the world economy. We
expect to build on the progress this year. On balance, we expect
stronger European and LDC domestic demand growth this year as
they continue the process of shifting from export-led to
domestic-led growth. Unfortunately there may be some weakening
in Japanese growth as the previous stimulus from the trade sector
is sharply reduced.
Exchange markets have recognized these generally favorable
developments. The decline of the dollar since its peak last
winter has been substantial. The yen is at a seven-year high
against the dollar. Well over half of the dollar's rise on a
real trade-weighted basis against other industrial countries from
the end of 1980 to last winter's peaks has been reversed. This
is good news for U.S. industry and agriculture. The U.S. trade
deficit is likely to level off later this year. These developments should contribute to a more sustainable medium-term pattern
of trade and current account balances. The G-5 meeting last
September contributed to these developments. Our recent meeting
in London showed that all countries were working to continue
efforts for sustainable growth.
Another favorable development has been the downward movement
in world petroleum prices. Although not without its costs, on
balance this should strengthen growth and lower inflation in most
of the world. A few countries and firms will experience problems,
but with the U.S. debt initiative and a strongly growing world
economy these problems can be handled.
While the international debt situation has continued to
improve, economic growth in many debtor countries has remained
unsatisfactory, and requires greater emphasis on structural
policy reforms within those nations, buttressed by additional
international financial support. As you know, the United States
proposed last October at Seoul, Korea a "Program for Sustained
Growth", involving mutually reinforcing actions by the debtor
countries, the international financial institutions, and the
commercial banks. The response has been very encouraging, with
broad statements of support from the major bank groups in the
U.S. and other key creditor nations, from the multilateral
institutions and in principle from many of the debtor nations.
* * *
There are two major items on this year's fiscal agenda:
deficit reduction and tax reform.
4
The President's budget for fiscal 1987 provides a detailed
plan, satisfying the requirements of the Gramm-Rudman-Hollings
legislation, by which a balanced budget can be achieved by fiscal
1991. The large budget deficits that we currently face are due
to excessive Federal spending. Certainly it is not because the
American people are undertaxed. As shown in the chart attached
to my prepared testimony, receipts are running a bit above the
long run historical average as a share of GNP. Despite frequent
claims to the contrary, the 1981 Reagan tax cuts are not responsible for our current fiscal difficulties.
Our problems are on the outlay side of the budget, and that
is where the corrective action needs to be taken. It would seem
that Congress shares this view and is serious about cutting
growth in spending. Outlays will continue to grow in absolute
terms along the path projected in the new budget, but the rate of
advance will be reduced significantly. Between FY 1985 and
FY 1991, nominal Federal outlays would rise on average about
3 percent per year. In the prior six-year period, 1979-1985, the
rate of growth was about 11 percent per year. Along the path
projected in the new budget, Federal outlays would decline
steadily as a ratio to GNP from 24 percent in 1985 to about
19 percent in 1991.
Receipts will be growing strongly in absolute terms as the
economy itself grows, but receipts would remain close to a
19 percent ratio to GNP — slightly above historical experience.
Receipts are projected to rise by about an average 7-1/2 percent
annually between FY 1985 and FY 1991, close to the 8 percent rise
averaged in the previous 6 year period. With receipts growing
normally and outlay growth restrained to a lower path, the budget
will move into balance by 1991.
The reduction in the growth of expenditure required to
balance the budget by fiscal year 1991 will not be easy, but the
effort deserves strong bipartisan support. It can be done the
hard, crude way, via sequestration across the board. Or it can
be can be done more rationally and selectively, with respect for
appropriate priorities. The President's budget is carefully
drawn to meet the Gramm-Rudman-Hollings targets while preserving
essential programs of the highest national priority.
The only alternatives to the domestic spending cuts emphasized
in the President's budget are to raise taxes, to lower defense
spending, or to cut social security benefits, none of which are
acceptable. There should be no illusion that tax increases will
somehow provide an easy way out. The President has expressed his
views on this issue very clearly. He is firmly opposed to damaqm g the economy by increasing taxes. Defense, which is the most
essential duty of the Federal Government, must be maintained. So
must the social safety net, including social security and
entitlement programs for the needy.
5
The outlay reductions would be expected to bring down
interest rates with a beneficial impact on the entire economy.
In addition, lower interest rates and a declining budget deficit
will moderate the rapid rise in interest expense that has developed. This will free up funds for growth in essential programs.
The time has come to reduce what has clearly become an
excessive rate of growth in Federal spending and to move toward a
balanced Federal budget.
Our other major domestic policy priority is to achieve meaningful tax reform legislation. The bill passed last year by the
House of Representatives is a good start but not a final product.
Our primary concerns are the following:
o the bill lowers marginal tax rates but the top individual rate of 38 percent and the corporate rate of
36 percent are still too high;
o the bill raises the personal exemption to $2000, but to
only $1500 for taxpayers who itemize deductions;
o the bill fails to maintain the cost of capital at
sufficiently low levels to promote economic growth.
The Senate Finance Committee has begun consideration of tax
reform and the Administration has pledged its full cooperation in
improving the House legislation. Our major desired changes
include:
o full $2000 personal exemptions for both itemizers and
nonitemizers, at least for lower and middle-income
taxpayers;
o provision of adequate capital cost recovery allowances
and the protection of those allowances against inflation;
o a top tax rate no higher than 35 percent.
Tax reform remains a top priority item on the President's
agenda. We will work in a bipartisan spirit to achieve meaningful tax reform this year. But let me be very clear that the
President will not compromise on matters of principle and he will
not permit tax reform to degenerate into a tax increase in disguise.
6
Conclusions
The U.S. economy turned in a solid showing last year and the
outlook this year is for stronger real growth without much
increase in inflation. Internationally, as well, there was progress during 1985 and we will be working to build on that foundation. Our major domestic agenda items are reduction of an excessive rate of growth in Federal spending as we move toward a
balanced budget, and meaningful tax reform for the American
people. We think that both of these efforts deserve and will
receive strong bipartisan support.
RECENT PROGRESS AGAINST INFLATION
(percent change, annual rate, during period indicated)
1980 1981 1982 1983 1984 1985
G N P : Implicit price deflator
9.9
8.7
5.2
3.5
Fixed-weighted basis 9.8 8.5 5.0 3.8 4.2 3.5
Consumer price index 12.4 8.9 3.9 3.8 4.0 3.8
Producer price index 11.8 7.1 3.7 0.6 1.7 1.8
(wholesale prices)
Note: Fourth quarter to fourth quarter for GNP deflator, December to December for CPI and PPI.
January 30, 1986 A41
4.1
3.1
OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1991
Percent of G N P .
Percent of G N P
25
25
Average Outlays
1964-1979
(20.0)
20
20
..••••••••••„•••
^ Receipts
'V*
Average Receipts
1964-1979
(18.3)
15
15
*
0<
J L
I I I I I I I I I I II
I I I I I I I I <Q
1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Fiscal Years
Projected
Note: Outlays include off-budget federal entities.
February 6, 1986 A54a
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 A.M.
February 20, 1986
Testimony of The Honorable James A. Baker, III
Secretary of the Treasury
Before the
Joint Economic Committee
February 20, 1986
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the state of the
economy and the new budgetary path. The major economic objectives
of the Administration have been described by President Reagan in
his State of the Union Message. Further details on this year's
economic and budgetary outlook have been provided in the President's
Budget and Economic Report. My remarks are an overview of the
current situation.
We seek to build on the foundation of the solid economic
performance that has already taken place. The current economic
expansion has now moved into its fourth year and shows few signs
of slackening. Growth was relatively slow at some times during
1985, but by year-end the economy was gaining momentum.
Some favorable features of last year's economic performance
deserve at least passing mention.
o Consumer price inflation at 3.8 percent remained in the
3.8 to 4 percent range for the fourth year in a row. A
table attached to my prepared statement shows the steady
progress that has been made since 1980 when all of the
measures of price performance were rising in the doubledigit range.
B-472
2
o
Employment has risen strongly in the current expansion,
by over 9-1/2 million people. The unemployment rate
has been reduced to below 7 percent and further
progress is expected. The U.S. economy continues to
display great job-creating ability.
o Last year's financial market performance was also
encouraging. Record amounts of credit flowed to
private borrowers, despite the persistence of large
Federal budget deficits. Short-term interest rates are
down on average by about 1/2 percentage point in the
past year while many of the long-term rates are down by
about two percentage points. The prime rate is down to
9-1/2 percent, the lowest rate in 7 years. Ideally, we
would like to have seen interest rates come down even
further than they have.
All of this added up to a year of solid economic performance
in 1985. The latest economic information is generally favorable. Employment rose sharply in January and the unemployment
rate fell. Other statistics have not been quite as strong but
the year is off to a good start. The stage has been set for
sustained expansion in output, jobs and income.
Sustained economic expansion is one of the most important
prerequisites for improving the budget picture, as well as the
financial security of the American people. During the current
expansion, strong economic growth has been achieved in a much
less inflationary environment than in the late 1970's. We must
strive to extend that good record into the future.
The Administration forecast calls for 4 percent real growth
during the four quarters of 1986. This would seem to be a
reasonable expectation. The consensus private forecast has been
a little lower, around 3 percent. But the recent economic
numbers are causing some upward adjustment in the private forecasts. Those of us who advise the President on these matters
feel that the current Administration projections are inherently
reasonable although we also recognize that economic forecasting
is at best an uncertain art.
0*
The inflation outlook is also relatively promising, although
the fall in the external value of the dollar will eventually
begin to exert a little upward pressure.
The Federal Reserve obviously needs to remain alert to the
needs of both the domestic and international financial situations. While they never lack for critics and there is always
room for disagreement on the wisdom of some of their specific
actions, it seems to me that the Federal Reserve has been doing a
good job recently.
3
*
*
*
I would like to turn briefly now to the influence of the
international economy on our own economic and fiscal situation.
As a result of intensified efforts at promoting a favorable convergence of economic performance among the major industrial
countries we have seen some improvement in the world economy. We
expect to build on the progress this year. On balance, we expect
stronger European and LDC domestic demand growth this year as
they continue the process of shifting from export-led to
domestic-led growth. Unfortunately there may be some weakening
in Japanese growth as the previous stimulus from the trade sector
is sharply reduced.
Exchange markets have recognized these generally favorable
developments. The decline of the dollar since its peak last
winter has been substantial. The yen is at a seven-year high
against the dollar. Well over half of the dollar's rise on a
real trade-weighted basis against other industrial countries from
the end of 1980 to last winter's peaks has been reversed. This
is good news for U.S. industry and agriculture. The U.S. trade
deficit is likely to level off later this year. These developments should contribute to a more sustainable medium-term pattern
of trade and current account balances. The G-5 meeting last
September contributed to these developments. Our recent meeting
in London showed that all countries were working to continue
efforts for sustainable growth.
Another favorable development has been the downward movement
in world petroleum prices. Although not without its costs, on
balance this should strengthen growth and lower inflation in most
of the world. A few countries and firms will experience problems,
but with the U.S. debt initiative and a strongly growing world
economy these problems can be handled.
While the international debt situation has continued to
improve, economic growth in many debtor countries has remained
unsatisfactory, and requires greater emphasis on structural
policy reforms within those nations, buttressed by additional
international financial support. As you know, the United States
proposed last October at Seoul, Korea a "Program for Sustained
Growth", involving mutually reinforcing actions by the debtor
countries, the international financial institutions, and the
commercial banks. The response has been very encouraging, with
broad statements of support from the major bank groups in the
U.S. and other key creditor nations, from the multilateral
institutions and in principle from many of the debtor nations.
* * *
There are two major items on this year's fiscal agenda:
deficit reduction and tax reform.
4
The President's budget for fiscal 1987 provides a detailed
plan, satisfying the requirements of the Gramm-Rudman-Hollings
legislation, by which a balanced budget can be achieved by fiscal
1991. The large budget deficits that we currently face are due
to excessive Federal spending. Certainly it is not because the
American people are undertaxed. As shown in the chart attached
to my prepared testimony, receipts are running a bit above the
long run historical average as a share of GNP. Despite frequent
claims to the contrary, the 1981 Reagan tax cuts are not responsible for our current fiscal difficulties.
Our problems are on the outlay side of the budget, and that
is where the corrective action needs to be taken. Tt would seem
that Congress shares this view and is serious about cutting
growth in spending. Outlays will continue to grow in absolute
terms along the path projected in the new budget, but the rate of
advance will be reduced significantly. Between FY 1985 and
FY 1991, nominal Federal outlays would rise on average about
3 percent per year. In the prior six-year period, 1979-1985, the
rate of growth was about 11 percent per year. Along the path
projected in the new budget, Federal outlays would decline
steadily as a ratio to GNP from 24 percent in 1985 to about
19 percent in 1991.
Receipts will be growing strongly in absolute terms as the
economy itself grows, but receipts would remain close to a
19 percent ratio to GNP — slightly above historical experience.
Receipts are projected to rise by about an average 7-1/2 percent
annually between FY 1985 and FY 1991, close to the 8 percent rise
averaged in the previous 6 year period. With receipts growing
normally and outlay growth restrained to a lower path, the budget
will move into balance by 1991.
The reduction in the growth of expenditure required to
balance the budget by fiscal year 1991 will not be easy, but the
effort deserves strong bipartisan support. It can be done the
hard, crude way, via sequestration across the board. Or it can
be can be done more rationally and selectively, with respect for
appropriate priorities. The President's budget is carefully
drawn to meet the Gramm-Rudman-Hollings targets while preserving
essential programs of the highest national priority.
The only alternatives to the domestic spending cuts emphasized
in the President's budget are to raise taxes, to lower defense
spending, or to cut social security benefits, none of which are
acceptable. There should be no illusion that tax increases will
somehow provide an easy way out. The President has expressed his
views on this issue very clearly. He is firmly opposed to damaging the economy by increasing taxes. Defense, which is the most
essential duty of the Federal Government, must be maintained. So
must the social safety net, including social security and
entitlement programs for the needy.
5
The outlay reductions would be expected to bring down
interest rates with a beneficial impact on the entire economy.
In addition, lower interest rates and a declining budget deficit
will moderate the rapid rise in interest expense that has developed. This will free up funds for growth in essential programs.
The time has come to reduce what has clearly become an
excessive rate of growth in Federal spending and to move toward a
balanced Federal budget.
Our other major domestic policy priority is to achieve meaningful tax reform legislation. The bill passed last year by the
House of Representatives is a good start but not a final product.
Our primary concerns are the following:
o the bill lowers marginal tax rates but the top individual rate of 38 percent and the corporate rate of
36 percent are still too high;
o the bill raises the personal exemption to $2000, but to
only $1500 for taxpayers who itemize deductions;
o the bill fails to maintain the cost of capital at
sufficiently low levels to promote economic growth.
The Senate Finance Committee has begun consideration of tax
reform and the Administration has pledged its full cooperation in
improving the House legislation. Our major desired changes
include:
o full $2000 personal exemptions for both itemizers and
nonitemizers, at least for lower and middle-income
taxpayers;
o provision of adequate capital cost recovery allowances
and the protection of those allowances against inflation;
o a top tax rate no higher than 35 percent.
Tax reform remains a top priority item on the President's
agenda. We will work in a bipartisan spirit to achieve meaningful tax reform this year. But let me be very clear that the
President will not compromise on matters of principle and he will
not permit tax reform to degenerate into a tax increase in disguise.
6
Conclusions
The U.S. economy turned in a solid showing last year and the
outlook this year is for stronger real growth without much
increase in inflation. Internationally, as well, there was progress during 1985 and we will be working to build on that foundation. Our major domestic agenda items are reduction of an excessive rate of growth in Federal spending as we move toward a
balanced budget, and meaningful tax reform for the American
people. We think that both of these efforts deserve and will
receive strong bipartisan support.
RECENT PROGRESS AGAINST INFLATION
(percent change, annual rate, during period indicated)
1980 1981 1982 1983 1984 1985
GNP: Implicit price deflator 9.9 8.7
5.2
3.5
4.1
3.1
Fixed-weighted basis 9.8
8.5
5.0
3.8
4.2
3.5
Consumer price index 12.4
8.9
3.9
3.8
4.0
3.8
Producer price index 11 8
7.1
3.7
0.6
1.7
1.8
(wholesale prices)
Note: Fourth quarter to fourth quarter for GNP deflator, December to December for CPI and PPI.
Percent of GNP.
OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1991
Percent of G N P
25
25
Outlays
Average Outlays
1964-1979
(20.0)
20
A >r ^
I
s^/AsJ \-_=a^^x..->p—^
*<£>*
"
Average Receipts
1964-1979
(18.3)
20
.^v^.
\^
..••••••••••••••«
.#•••••••••
*+ Receipts
15
15y
s
- < l l l
I I I i t I I I I I I I I I I I I I I I <
U
1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Projected
Fiscal Years
Note: Outlays include off-budget federal entities.
Fel)iudiv6, 1986 A54d
TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
feZ! 9
w
WW
-•^L«r IF rHr TREASURY
STATEMENT OF CHARLES 0. SETHNESS
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON SOCIAL SECURITY
OF THE COMMITTEE ON WAYS AND MEANS
FEBRUARY 18, 1986
Mr. Chairman and members of the Committee, I am pleased to
be here today to discuss management of the Social Security old
age ("OASI") and disability ("DI") trust funds, particularly
during a debt limit crisis, and proposals for change. Last fall,
when the debt limit was not increased until fully three months
after it was reached, Secretary Baker was forced to take certain
actions so that Social Security benefits continued to be paid.
Some of those actions caused actual or potential losses to the
trust funds. A similar situation occurred in 1984. Although the
losses have now been cured, we, like you, are concerned about the
situation and about any perception that the Secretary may have
acted improperly. We therefore welcome the opportunity to work
with you to make sure we all have a common understanding of the
problems, and to find effective solutions.
The trust funds are at risk in three separate but interrelated areas during a debt limit crisis—payment of benefits,
trust fund earnings, and trust fund security holdings. I think
it is important to discuss each of these areas separately,
because many of the proposals that have been made deal with only
one part of the problem. I will then suggest a solution that we
believe comes closest to ensuring the integrity of the trust
funds and of the government's promise to pay benefits fully and
on time.
Timely Payment of Benefits
Although the focus of congressional and public attention
this fall was on the trust funds and their holdings rather than
on the payment of benefits, that was only because benefits were
actually paid. It is critical to recognize that many of the
proposals that would protect the earnings or portfolio of the
trust funds would not assure, and in fact might prevent, timely
payment of benefits in a cash crunch caused by a debt limit
B-473
- 2 impasse.
Let me briefly explain why this is the case.
The United States operates largely through a single checking
account, into which virtually all money received by the government from whatever source is deposited and against which
virtually all payments for whatever purpose are charged. Social
Security checks are thus drawn on the same account as any other
government check.
On the first of each month, estimated prospective Social
Security receipts for the month are credited to the trust funds
and invested as required by statute; the funds thus hold new
interest-bearing securities, even though no Social Security taxes
have yet been received.
Checks are mailed to be received on the third of the month.
When those checks (and direct deposit payments) are paid, our
single government account is reduced. For accounting purposes,
the Treasury general account is charged with these payments, and
trust fund securities are redeemed to repay the general account.
Since benefits have already been paid out of the general account,
when payroll taxes are received, they are simply credited to the
same account. Under normal circumstances, this system results
in both timely payment of benefits and maximum earnings for the
trust funds, and is extremely efficient and cost-effective.
During most periods, especially when the government runs a
total budget deficit (even if the Social Security program is
running at a surplus), part of the cash that must be raised to
make government payments comes from selling debt. If the debt
limit prevents the sale of Treasury securities, the government
will inevitably run out of cash, including the cash to pay Social
Security benefits. It is currently virtually impossible for
Federal Reserve Banks (although not the Treasury) to distinguish
Social Security from other checks. If there is not enough money
to pay all government obligations, no one can ensure that all
Social Security benefits will be paid.
It is therefore important to recognize that, unless the cash
transactions of the Social Security system were to be completely
divorced from those of the rest of the government, removing
obligations issued to the Social Security trust funds from the
debt limit would not guarantee timely payment of benefits when
the rest of the government is out of cash because of a debt limit
problem. A separate payments system for Social Security would be
expensive both to establish and to run, all to protect the funds
against a crisis that should not happen — the failure to
increase the debt limit so that obligations already incurred can
be paid.
Trust Fund Earnings
Interest earned by the trust funds is set by statute, which
requires that new securities issued to the funds will earn
- 3 interest at a rate determined monthly based on the average market
yield of all outstanding marketable United States securities that
make up the public debt with more than four years remaining to
maturity. Moreover, the pattern of trust fund purchases and
redemptions has been established over many years and is
essentially mechanical. When new money becomes available, it is
invested in certificates of indebtedness that mature the
following June. Redemptions are done shortest maturity first,
with the lowest rate securities redeemed first within each
maturity group. Each June, all maturing debt is rolled over into
long-term debt at the June formula interest rate, with maturities
spread over 15 years.
This system was the subject of hearings by this subcommittee
in 1981 and 1982 and was analyzed by the National Commission on
Social Security Reform in 1983. The National Commission stated
that "the investment procedures followed by the trust funds in
the past have been proper and appropriate." (Report of the
National Commission on Social Security Reform, 2-22 (1983))
Because this part of the system operates essentially without
discretion, we do not believe there is any conflict of interest
relating to the Secretary's concurrent responsibilities to the
trust funds and to manage the public debt. In response to the
Chairman's request that the GAO look into this issue, the GAO
stated in its December report "there is no evidence that the
Secretary redeemed securities, or failed to invest funds, for the
purpose of avoiding General Fund interest payments to the Trust
Funds." (GAO Report B-221077, Appendix I, 13 (1985)
Although the current system operates without discretion, it
is not entirely neutral as between the trust funds and the
General Fund. For example, in a period of rising interest rates,
the par redemption feature is essentially a subsidy from the
General Fund to the trust funds. Conversely, when interest rates
are falling, the General Fund receives the benefit from the par
redemption feature. Similarly, using an interest rate formula
based on long-term securities to set interest rates without
regard to maturity provides a subsidy to the trust funds on their
short-term holdings when the market yield curve is positively
sloped (that is, when long term interest rates are higher than
short term rates). The General Fund receives the benefit when
short term rates exceed long term rates.
Let me digress a minute to discuss the effect of the
normalized tax transfer (or "NTT") procedure on trust fund
earnings. The NTT allows the trust funds to earn interest on
funds not yet received. This extra interest must by law be
returned to the General Fund. Because of this procedure, and the
fact that interest is credited to the trust funds (as to all
holders of Treasury notes and bonds) semi-annually, failure to
invest the NTT on time because of the debt limit does not
directly lead to a loss of interest unless the impasse is even
more prolonged than it was last year.
- 4 The NTT was intended to address a potential cash flow
problem that has largely disappeared given the projected
surpluses of both OASI and DI. Moreover, we have identified
certain problems with the operation of the NTT. For example, at
a time of falling interest rates the NTT provides an unintended
general fund subsidy to the trust funds when they are allowed to
redeem new low rate securities that without the NTT they would
not yet have acquired. The NTT also creates a large and
artificial increase in the public debt at the beginning of each
month. One alternative that would not disturb the existing
trigger levels in Title II of the Social Security Act is to
credit the normalized tax transfer but to require that the funds
be invested only when the funds would otherwise be received.
Thus, the artificial crediting and debiting of interest to the
trust funds to put them in the position they would be in absent
the NTT would not be necessary. H.R. 3688, introduced by Mr.
Archer and Mr. Daub, would address the NTT. The Administration
is now considering the full effects of the bill.
Repeal of the NTT would, however, mean that if the new money
flowing into the funds could not be invested because of the debt
limit, there would be an interest loss that could not be
corrected without legislation. The interest loss in 1985
resulted almost entirely from the November transactions in which
we redeemed securities several days early in order to make
certain that benefits were paid when the government was out of
cash, not from failure to invest the NTT. If we had not taken
that action, benefits could not have been paid.
The Trust Fund Portfolio
The question of what securities the trust funds should hold
has been studied many times since the funds were established.
Each time, the conclusion has been that investments should be
almost entirely in non-marketable United States Treasury
obligations. There are a number of important benefits to
requiring that a multibillion dollar fund, made up of mandatory
contributions from virtually every employer and employee in the
United States, be invested in non-marketable Treasury
obligations.
Unlike a portfolio that can be invested in private companies
or even in obligations that are guaranteed by the government, the
trust funds' investments do not currently require the Managing
Trustee to make judgments to favor specific social activities,
corporations or other entities. The managers need not assess the
potential and risk of alternative investments, assessments that
could have a substantial impact on other investors' perceptions
of those investments. Needed liquidity is assured, and issues
and redemptions of billions of dollars of non-marketable
securities each month do not cause market dislocations.
However, there clearly are steps that can be taken to
improve the management of the trust fund investments during a
- 5 debt limit crisis. These include always debiting uninvested
balances in the trust funds before redeeming securities to pay
benefits and using any available debt limit capacity at the
beginning, rather than the end, of each day to make trust fund
investments. On the basis of recent experience, we could support
legislation requiring such limited changes.
The inevitable result of changing procedures as described,
however, would be that the government would run out of cash much
faster when it had reached the debt limit. This means that if
the crisis were prolonged, although trust fund earnings and the
portfolio would be better protected, benefit payments could not
be made. The result would be that, unless the changes in
redemption and investment patterns were made legislatively, the
Secretary would once again be faced, as he was last November,
with a conflict—not between his debt management and trust fund
investment roles, but between his duty to invest the trust funds
and his duty to pay benefits.
We would therefore be happy to work with the committee to
develop legislation to better protect trust fund earnings and
holdings but we believe it is essential that any such legislation
deal with the benefit payment problem as well as the fund
investment problem. As demonstrated last year, the funds can be
made whole by legislation enacted after the crisis is over; much
more difficult and human problems will arise if benefits are not
paid. In this respect, we support legislation that requires the
Secretary to notify the other trustees and the Congress before he
takes certain actions relating the the trust funds during a debt
limit impasse.
What Is the Solution?
The best solution to this problem is to get and keep
deficits firmly under control and thus reduce the need to
increase the debt limit. However, even the Balanced Budget and
Emergency Deficit Control Act of 1985 does not project a balanced
budget occurring until 1991, and even then significant debt limit
increases will be needed to permit the investment of the trust
funds and other government investment accounts.
A more immediate solution to the trust fund investment
problem and other problems as well, would be to repeal the debt
limit. Without a debt limit, all new trust fund monies could
always be immediately invested and cash would always be available
to pay benefits.
There are other mechanisms to control spending and deficits,
which require consideration of the proper amount of debt before
rather than after the government incurs legal obligations" If
repeal of the debt limit is not deemed to be desirable, the new
budget procedures under which there would be a single budget
resolution enacted early in the session, with more substantial
sanctions for failure to follow it, suggest that the Senate
- 6 should, as the House does, automatically adopt an increased debt
limit following enactment of the budget resolution.
Proposals for change limited solely to the Social Security
system that respond to both the need to assure timely benefit
payments and the needs of the trust funds are both difficult to
craft and potentially quite expensive. For example, removing
obligations held by the trust funds from the debt limit would fix
the investment and earnings problem but would not insure the
timely payment of benefits should the government run out of cash.
In fact, because redemption of trust fund securities would no
longer make room under the debt ceiling available for issuance of
new Treasury debt to raise cash, the benefit payment problem
could be exacerbated.
Conclusion
The events of last fall were unfortunate and, we hope, will
not be repeated. There are modifications to the current system
regarding timing of investments and patterns of redemptions that
would be beneficial to the funds, as discussed above. However,
because they could also have a negative impact on the ability to
pay benefits, we are reluctant to implement them administratively. It would be far better to repeal the debt limit, or
change it automatically as part of a budget resolution.
Otherwise, as an unacceptably bare minimum, we can only hope to
ensure that debt limit increases are enacted promptly. In any
event, we need to make the day-to-day operation of the trust
funds as error-free as humanly possible, and strive to improve
public understanding of exactly how the system works.
TREASURY MEWS
J
Department of the Treasury • Washington,
D.C. • Telephone 566-2041
33A.-Y.E00M5310
FOR RELEASE UPON DELIVERY
Expected at 1:00 p.m.
February 18, 1986
-r.srCF rr.E TREASURY
STATEMENT OF
ASSISTANT SECRETARY OF THE TREASURY
CHARLES 0. SETHNESS
BEFORE THE
INTERIOR SUBCOMMITTEE
HOUSE COMMITTEE ON APPROPRIATIONS
Thank you for the opportunity to appear before you today to
discuss the termination of the Synthetic Fuels Corporation.
I am Charles 0. Sethness, Assistant Secretary of the Treasury
for Domestic Finance and have been charged by the Secretary
and the Under Secretary for Finance with winding down the
affairs of the corporation and transferring its continuing
monetary and payment obligations as smoothly, quickly, efficiently
and inexpensively as possible.
We view the process of liquidating the SynFuels Corporation as
having two distinct parts.
The first involves closing down the
current operations of the corporation by April 18th and clearing
up any remaining details as soon thereafter as is practicable.
The second concerns ensuring that the ongoing projects that remain
financial obligations of the United States Government are monitored
properly after April in a manner that protects the Government's
interests at the lowest cost.
While both are proceeding at the
same time, I would like to discuss them separately.
B-474
- 2 Our immediate attention, due to the short time frame established
in the Continuing Resolution, has been focused on closing SynFuels'
offices.
This involves many discreet projects such as lease
terminations for office space and equipment, accounting matters,
disposition of library materials, ensuring that management of the
corporation continues smoothly as authority is transferred to the
Secretary of the Treasury, and the like.
Personnel payments, as
you know, are being reviewed by the Office of Personnel
Management and we have established a contact with that agency to
ensure that final paychecks and pension matters are properly
handled.
Although this part of the project is important, it is of short
duration.
A significant portion of our time has been devoted to
the longer range issue of devising a method for protecting the
Government's interests in the ongoing synthetic fuels projects to
which the Goverment is committed, some of which will involve our
monitoring well into the 1990s.
In this regard, we have been proceeding cautiously and discussing
the options for managing this monitoring with a number of interested
parties - for several reasons.
First, the Treasury Department's
expertise is in money, not in energy project engineering,
technology or cost analysis, nor the other major area that is part
of each of the projects, environmental protection.
So we are
trying to make certain that we set up a structure that will protect
us where we lack resources.
Second, the Continuing Resolution prohibits the Secretary fr
om
- 3 delegating any of his authority and responsibilities to any other
agency.
Because of this, we have determined that the best way to
proceed is to hire a small staff of approximately 8 to 10 people
to provide the energy, project and environmental expertise we need
to match our capabilities in the financial area.
(While the size
and composition of this staff is not final, our intent is to keep
it as small as possible.
In addition, we plan to hire these
individuals, at government rates, and on limited term appointments
where possible, so that we will have the flexibility to alter the
staff as we gain experience in this new area.)
The final reason for our deliberate and limited approach focuses
on future relations with the Congress.
We view our role in the
SynFuels area as carrying out the direction given us by the
Continuing Resolution.
We have no interest in building a
permanent structure in the Department to carry out energyrelated programs.
But we'do want to meet our obligations
concerning this project efficiently and effectively.
To this end
we welcome your advice and guidance and solicit your understanding
that the SynFuels project places an unexpected —
and unplanned --
burden on the resources of the Department.
Thank you for your time; I would welcome any questions you
may have.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
JBRATf.ROCM 5310
FOR RELEASE AT 4:00 P.M. February 18, 1986
TREASURY'S WEEKLY BILL^OF^E^ING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,600 million, to be issued February 27, 1986.
This offering
will result in a paydown for the Treasury of about $1,100 million, as
the maturing bills are outstanding in the amount of $14,698 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
l:-00 p.m., Eastern Standard time, Monday, February 24, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
November 29, 1985, and to mature May 29, 1986
(CUSIP No.
912794 KH 6) , currently outstanding in the amount of $7,433 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,800 million, to be dated
February 27, 1986, and to mature August 28, 1986
(CUSIP No.
912794 LB 8).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing February 27, 1986.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to the
extent that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them. Federal Reserve
Banks currently hold $1,473 million as agents for foreign and international monetary authorities, and $3,383 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-475
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
n o o
NEWS
A'SP.OOH
Department of the Treasury
FOR RELEASE AT 4:00 P.M.
Washington, D.c. • Telephone
"FBZI
ID 13 AH 'BB
, , ^ . K T OF THE TREASURY
F e b
^ ^
18
'
1 9 8 6
TREASURY TO AUCTION $7,500 MILLION
OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury will auction $7,500 million
of 5-year 2-month notes to raise new cash. Additional amounts
of the notes may be issued to Federal Reserve Banks as agents
for foreign and international monetary authorities at the average
price of accepted competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
B-477
-2041
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED MARCH 5, 1986
February 18, 1986
Amount Offered:
To the public
$7,500 million
Description of Security:
Term and type of security
5-year 2-month notes
Series and CUSIP designation .... J-1991
(CUSIP No. 912827 TJ 1)
Maturity Date
May 15, 1991
Call date
No provision
Interest Rate
To be determined based on
the average of accepted bids
Investment yield
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
November 15 and May 15 (first
payment on November 15, 1986)
Minimum denomination available .. $1,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment by noninstitutional investors
Full payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts ... Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Receipt of tenders
Wednesday, February 26, 1986,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Wednesday, March 5, 19 86
b) readily-collectible check .. Monday, March 3, 1986
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRARY/ROOM 5310
February 18, 1986
FOR IMMEDIATE RELEASE
n
RESULTS OF TREASURY'S WEEKLY* !llll? AUCTIONS
' --:r 0' THE TREASURY
Tenders for $6,809 million of 13-week bills and for $6,816 million
of 26-week bills, both to be issued on February 20, 1986, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing May 22, 1986
Discount Investment
' Rate
Price
Rate 1/
26-week bills
maturing August 21. 1986
Discount Investment
Price
Rate
Rate 1/
6.95%
6.98%
6.97%
7.01%
7.04%
7.03%
7.17%
7.20%
7.19%
98.243
98.236
98.238
7.37%
7.40%
7.39%
96.456
96.441
96.446
Tenders at the high discount rate for the 13-week bills were allotted 87%.
Tenders at the high discount rate for the 26-week bills were allotted Ql%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$
42,915
18,542,865
25,450
52,250
70,525
41,550
1,190,855
91,235
63,675
67,725
43,890
1,273,590
356,765
$
42,915
5,798,245
25,190
52,225
67,275
36,550
100,375
51,235
35,425
57,805
38,240
147,090
356,765
$21,863,290
$6,809,335
$18,743,370
1,145,510
$19,888,880
:
Accepted
$
36,070
21,175,785
19,075
28,470
79,500
95,980
1,485,440
97,860
46,410
51,865
33,530
1,324,315
359,390
$
36,070
5,751,735
19,075
28,270
54,500
85,980
242,450
57,860
21,410
51,865
23,580
83,725
359,390
:
$24,833,690
$6,815,910
$3,839,415
1,145,510
$4,984,925
:
$21,402,715
1,010,575
$22,413,290
$3,534,935
1,010,575
$4,545,510
1,720,210
1,570,210
:
1,700,000
1,550,000
254,200
254,200
:
720,400
720,400
$6,809,335
:
$24,833,690
$6,815,910
$21,863,290
1/ Equivalent coupon-issue yield.
•
s
:
:
:
TREASURYWEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRARY, ROOM 5310
FOR RELEASE UPON DELIVERY
FEBRUARY 19, 1986
rpR 7 J 3
u 3 p|i %
; jUMTh. Or THE TREASURY
STATEMENT OF EDWARD T. STEVENSON
DEPUTY ASSISTANT SECRETARY OF THE TREASURY (OPERATIONS)
BEFORE THE
SUBCOMMITTEE ON CRIME
HOUSE COMMITTEE ON THE JUDICIARY
ON S. 49, H. R. 3155 AND OTHER LEGISLATION
WEDNESDAY, FEBRUARY 19, 1986
Mr. Chairman and members of the Subcommittee:
I welcome the opportunity to appear before you to
address this Subcommittee on S. 49, H. R. 3155 and other
proposed firearms legislation. In supporting and
evaluating legislative proposals relative to firearms, we
do so in light of the policy of this Administration. As
President Reagan stated in 1983, "I look forward to
signing a bill that truly protects the rights of
law-abiding citizens, without diminishing the effectiveness of criminal law enforcement against the misuse of
firearms." We are also mindful of the preamble of the Gun
Control Act which states:
. . . The purpose of this title is to provide
support to Federal, State and local law
enforcement officials in their fight against
crime and violence, and it is not the purpose
of this title to place any undue or unnecessary
Federal restrictions or burdens on law abiding
citizens with respect to the acquisition,
possession, or use of firearms . . . .
Thus, the primary and overriding objective of firearms
legislation must be to prevent the criminal misuse of
firearms without infringing on the rights of law-abiding
citizens to own firearms. In so doing, Federal law
enforcement is charged with assisting State and local law
enforcement agencies in their efforts to suppress crime
and violence in our society.
B-478
- 2 With these principles in mind, the Treasury and Justice
Departments and the Administration considered S. 49 and
its predecessors and have endorsed this bill.
In arriving at this point, many months of discussions
among the White House, Treasury and Justice Departments,
the bill's sponsors, and members and staff of the Senate
Judiciary Committee transpired. Our approach during these
discussions was to strike a balance between the rights of
law-abiding gun owners on the one hand and the
requirements of law enforcement on the other. Admittedly,
no legislation is perfect and this bill may not please
all those having an interest in firearms legislation,
whether they are sportsmen and other gun owners or those
wanting more gun laws. However, we believe that from a
law enforcement perspective, S. 49 represents an
improvement over the bill as originally introduced in the
Congress and does address some of the inequities in
existing law.
Initially, I would point out that the bill as
originally introduced contained several provisions that
would strengthen existing law and remove burdensome
requirements on licensees and the public. We readily
concurred in these and they are still included in the
bill. More specifically, the bill would repeal the
ammunition recordkeeping requirements of the Gun Control
Act that the Department has recognized have no substantial
law enforcement value since ammunition is not generally
traceable through licensee records. Significantly, the
bill would close a loophole in existing law by prohibiting
any person, not only licensees, from disposing of firearms
and ammunition to felons and other proscribed categories
of persons. Also, Federal firearms laws imposing
disabilities on felons and other prohibited persons would
be clarified by repealing most of Title VII of the
Omnibus Crime Control and Safe Streets Act of 1968 and
incorporating its provisions in the Gun Control Act. The
Armed Career Criminal Act, imposing 15-year mandatory
penalties on violators of Title VII having multiple
robbery or burglary convictions, would be retained in
Title VII.
By way of background, let me address some of the
principal provisions of the bill which the Administration
sponsors and the Senate Judiciary Committee were able to
correct or strengthen in the interest of law enforcement.
- 3 First, with respect to interstate gun sales, S. 49 in its
original form would have permitted unrecorded sales of
firearms between unlicensed individuals residing in
different States, as well as the interstate shipment of
firearms by nonlicensees to other such persons. The
Administration was successful in suggesting amendments to
the bill to permit unlicensed individuals to acquire
firearms outside their States of residence only if the
firearms are obtained in person from a Federal firearms
licensee and the transaction is lawful where the transferee
lives and where the transaction occurs. Thus, S. 49 would
permit law-abiding citizens who are eligible to purchase
and possess firearms under Federal, State and local law
to acquire firearms from licensees out of state. The
channelling of these transactions in firearms through
licensees, who must still keep Federal gun purchase
records, will preserve the Government's ability to trace
crime guns. The continued prohibition against licensees'
sales of firearms to felons and other prohibited
categories of persons, together with the records licensees
must keep of their firearms transactions, will discourage
felons and other prohibited persons from travelling
interstate to purchase firearms.
In its original form, S. 49 provided for inspection of
licensees' records and firearms inventories only if the
Government had probable cause to believe that a violation
of the Gun Control Act had occurred and that evidence of
the violation might be found on the licensed premises.
Warrants would have been required for all inspections. In
effect, this provision would have eliminated compliance
inspections carried out at the licensee's premises and
made it virtually impossible to determine if an existing
licensee qualified for license renewal or if grounds
existed for license revocation. Also, we were concerned
about access to licensees' records for the purpose of
tracing crime guns, as well as gathering needed evidence
in criminal investigations focusing on firearms
purchasers. In the interest of effective law enforcement,
we were successful in suggesting amendments to the bill to
provide for several types of warrantless inspections or
investigations: (1) in the course of criminal
investigation of a person other than the license; (2) to
make an annual compliance inspection; (3) and to trace
firearms during a criminal investigation.
- 4 Another serious problem with the bill that was cured
through our discussions relates to licensee reporting
requirements under the Act. Initially, the bill could be
interpreted to remove the statutory authority by which the
Government may require licensees to report information
from required records. Based upon this authority,
licensees are currently required by regulations to provide
information about particular firearms transactions on
request, to report multiple sales of handguns to the same
person, and to turn in to the Government out-of-business
records upon ceasing business. Under S. 49 as passed by
the Senate, these existing reporting requirements would be
preserved and now specifically required by statute.
Originally, the bill would have required proof of the
element of willfulness in a prosecution for any violation
of the Act. If applicable to all Gun Control Act
offenses, the new element would have made it extremely
difficult to successfully prosecute many serious
offenses. For example, in the absence of evidence that
the defendant had specific knowledge that his conduct
violated Federal law, he would not violate the law by
receiving or possessing a firearm as a felon; transporting
or receiving a firearm in interstate commerce with the
intent to commit a felony with the weapon; transporting or
receiving stolen firearms in interstate commerce knowing
the firearms to be stolen; or using or carrying a firearm
in the commission of a Federal crime. The Administration
succeeded in amending the bill to require proof of a
lesser element-knowledge-for those more serious crimes.
The use of "knowingly" as an element will maintain the
integrity of the criminal provisions of the Act and ensure
that legitimate prosecutions can be maintained.
We were also successful in improving the forfeiture
provisions of the bill. Initially, the bill would have
eliminated the grounds for seizure and forfeiture of
firearms and ammunition that the property was "intended to
be used" in a violation of Federal law. Because this
amendment was overly broad and would prohibit seizing
firearms despite substantial evidence that they were
intended to be used in violent or otherwise serious
crimes, the bill was amended to allow the seizure and
forfeiture of firearms and ammunition intended to be used
in Federal crimes of violence and other specified crimes.
- 5 Turning to other legislation being considered by the
Subcommittee, I would comment on those bills, namely
H. R. 2024 and H. R. 3155, that would prohibit the
transfer or possession of machineguns, weapons "readily
convertible" to machineguns, and silencers and provide for
the Secretary's purchase of those items. In our opinion,
this legislation is unnecessary in view of the fact that
machineguns and silencers are strictly regulated under
existing law, the National Firearms Act. As you know, the
NFA prohibits the making, transfer and possession of such
weapons unless properly registered pursuant to approved
applications for their making or transfer, and violations
are punishable by imprisonment for terms not exceeding 10
years and $10,000 fines. The definition of "machinegun"
includes, not only weapons that fire automatically, but
those designed as machineguns, conversion kits, combinations of parts from which machineguns can be assembled,
and the frames or receivers alone of machineguns.
A better approach would be to amend the NFA by
strengthening the Act's definitions of machinegun and
silencer. Amending these definitions to specifically
include any part of a machinegun conversion kit and any
part intended to be used in the assembly of a silencer
would address the current law enforcement problem
presented by the distribution of incomplete silencers and
incomplete kits to convert weapons into machineguns.
In addition, it would be appropriate to amend the NFA
to deal with the problem posed by individuals who, for the
purpose of collecting personal NFA weapons, obtain a
dealer's license under the Gun Control Act to deal in
firearms generally and also pay the dealer's special
(occupational) tax under the NFA. Having done so, the
individual is then eligible to "deal" in NFA weapons, for
example, machineguns. He is then able to acquire them
interstate and defeat the transfer tax otherwise imposed
on transfers of such weapons to non-special taxpayers.
This person may also import, as dealer "sales
samples,"weapons that otherwise are prohibited from
importation. These weapons are often curios and relics of
interest to collectors. After acquiring the personal
weapons he desires tax-free, he allows his license and
special tax stamp to expire. Several amendments to the
NFA would help resolve these problems. First, those
intending to engage in an NFA firearms business could be
- 6 required to file an application with the Secretary. This
would enable the Secretary to determine that such persons
intend to engage in a bona fide business before they are
entitled to do so. Secondly, the term "transfer" could be
expanded to include the retention of firearms by
individuals who discontinue their so-called "business."
These individuals would then be subject to the transfer
tax on the weapons retained. Thirdly, the Act could be
amended to preclude the importation of NFA firearms for
use as "sales samples" if the firearms have been
determined to be curios and relics. We will be glad to
assist the Subcommittee in drafting the legislation
suggested.
Consistent with our position that law-abiding
citizens' ownership of firearms should not be unduly
burdened by Federal regulation, we do not favor pending
legislation imposing Federal requirements for handgun
permits, licenses or registration or prohibitions on
transactions in particular types of handguns. We believe
that proposals such as these should be implemented by
State and local governments if they so desire. Neither
do we believe it appropriate to involve the Federal
Government in the matter of civil liabilities of gun
manufacturers and owners for injuries resulting from the
misuse of firearms. Again, this is a matter best left to
the States. We would, however, support legislation
contained in two bills, H. R. 1442 and H. R. 3155, that
would provide an additional administrative remedy with
which to deal with Federal firearms licensees who violate
the Gun Control Act. I am referring to the proposal to
authorize the Secretary to suspend licenses which would
provide an alternative to the only administrative remedy
presently available - license revocation.
I would be glad to try to answer any questions you may
have.
TREASURY NEWS
Department of the Treasury • wa$*Mn£$pn, D.C. • Telephone
C
FR2!
FOR IMMEDIATE RELEASE
February 19, 1986
3WPH'BB
RESULTS OF AUCTION OF 2-YEAR NOTES
-,;-;TH.NT OF T-\l TREASURY
The Department of the Treasury has accepted $9,530 million
of $22,319 million of tenders received from the public for the
2-year notes, Series W-1988, auctioned today. The notes will be
issued February 28, 1986, and mature February 29, 1988.
The interest rate on the notes will be 8%.
The range of
accepted competitive bids, and the corresponding prices at the 8%
interest rate are as follows:
Yield
Price
Low
7.99%
100.018
High
8.03%
99.946
Average
8.02%
99.964
Tenders at the high yield were allotted 100%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Totals
Received
$
42,490
19,714,875
22,100
61,785
110,635
78,430
1,047,270
147,675
34,405
135,295
32,785
885,860
5,840
$22,319,445
Accepted
$
30,490
8,507,875
22,100
60,785
74,620
63,430
289,270
130,675
34,400
133,295
27,785
149,360
5,840
$9,529,925
The $9,530 million of accepted tenders includes $826
million of noncompetitive tenders and $8,704 million of competitive tenders from the public.
In addition to the $9,530 million of tenders accepted in
the auction process, $375 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $662 million
of tenders was also accepted at the average price from Government
accounts and Federal Reserve Banks for their own account in
exchange for maturing securities.
2041
TREASURYMEWS
Department of the Treasury • Washington, D.C. .• Telephone 566-204
FOR IMMEDIATE RELEASE
LIBRARY, ROOM 5310
February 24, 1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
fa n
9 k2 M 'flR
Tenders for $6,809 million of 13-week bills and foV 1$6,803 million
of 26-week bills, both to be issued on February 2$9THl98&$UR%reTe accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing May 29, 1986
Discount Investment
Rate
Rate 1/
Price
6.88%
6.98%
6.96%
7.10%
7.20%
7.18%
26-week bills
maturing August 28, 1986
Discount Investment
Rate
Rate 1/
Price
98.261
98.236
98.241
6.95%
7.01%
7.00%
7.30%
7.37%
7.36%
96.486
96.456
96.461
Tenders at the high discount rate for the 13-week bills were allotted 30%,
Tenders at the high discount rate for the 26-week bills were allotted 44%.
TENDERS RECEIVED AND ACC:EPTED
(In Thousands)
Received
Received
Accepted
:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$
41,340
16,056,135
27,650
41,220
45,115
50,625
1,241,660
67,850
38,215
46,070
36,245
1,208,905
311,090
$
41,340
5,421,135
27,650
41,220
45,115
50,625
261,660
39,350
38,180
46,070
31,245
453,905
311,090
38,395
: $
: 16,451,090
:
22,440
34,400
35,420
:
60,795
s
1,345,345
88,255
39,895
50,800
31,095
1,464,430
344,650
$
38,395
5,503,090
22,440
34,400
35,420
51,110
425,345
53,255
39,895
50,800
21,095
183,430
344,650
$19,212,120
$6,808,585
: $20,007,010
$6,803,325
$16,145,390
976,945
$17,122,335
$3,741,855
976,945
$4,718,800
: $16,383,135
:
923,975
: $17,307,110
$3,179,450
923,975
$4,103,425
1,732,885
1,732,885
'- 1,650,000
1,650,000
356,900
356,900
:
1,049,900
1,049,900
$19,212,120
$6,808,585
: $20,007,010
$6,803,325
1/ Equivalent coupon-issue yield.
B-480
Accepted
TREASURYMEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRARY. ROOM 5310
Release Upon Delivery
Expected at 11:00 a.m. EST
February 25, 1986
---?] 9 U2 AH'BR
^i'ARTMCNT OF THE TREASURY
STATEMENT OF
STEPHEN E. SHAY
ACTING INTERNATIONAL TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
OF THE HOUSE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to address this
Subcommittee on the current status of the Treasury Department's
efforts to negotiate and conclude agreements to exchange tax
information ("tax information exchange agreements") with
designated beneficiary countries under the Caribbean Basin
Initiative ("CBI") legislation. This Administration believes that
the combination of tax information exchange and the directly
related tax benefits are an important element of the overall CBI
program. International tax information exchange is important both
to the United States and to our trading partners and allies on
pragmatic grounds and as a matter of principle.
We consider exchange of tax information between nations with
economic interrelationships to be a basic principle of international economic relations. We intend to continue to
pursue improved tax information exchange in relations with our
Caribbean neighbors as well as with our trading partners
throughout the world. In this era of mutual economic and
political interdependence, one member of a family of nations
should not base its economic development on the systematic erosion
of another member's legitimate tax base. The tax base of the
United States, in particular, supports not only the important
governmental functions common to sovereign states generally, but
also supports a foreign aid program that provides very significant
assistance to other countries in need. In addition, the United
States funds a worldwide security shield that protects all
friendly nations.
The connection in the CBI between tax benefits and tax
information exchange is not a product of academic theory, but is
based on very real needs of the United States. In an era of
fiscal limitations, we cannot afford to extend tax benefits for
B-48f development activity if tax shelter promoters and tax
economic
-2evaders can take refuge in the anonymity afforded by certain
countries. While information exchange agreements will themselves
be beneficial to Caribbean Basin countries in administering their
tax systems, the tax benefits that have been extended, and may be
extended in the- future, to Caribbean Basin countries that enter
into tax information exchange agreements provide potentially
significant economic opportunities to countries whose economies
are in need of development.
The tax incentives for Caribbean Basin countries that have
been linked to the conclusion of a tax information exchange
agreement are the convention tax benefit and the Foreign Sales
Corporation benefit. In addition, a provision in the tax reform
bill recently passed by the House of Representatives has the
potential for greatly increased capital investment in countries
that conclude such agreements. I will discuss these benefits
later in my testimony.
In exchange for these benefits, the United States requires
the conclusion of a tax information exchange agreement that meets
certain statutory requirements. I will also discuss the statutory
requirements for an agreement, the benefits of an agreement for
the contracting countries, and the status and progress of
negotiations for agreements later in my testimony. Finally, I
will discuss how an information exchange program operates and
analyze the effectiveness of the present tax incentives in
attracting Caribbean Basin countries to enter into these
agreements.
I. Benefits of Tax Information Exchange Agreements to
Caribbean Basin Countries.
The Convention Tax Deduction.
Section 222 of the Caribbean Basin Economic Recovery Act (the
"Act") amended section 274(h) of the Internal Revenue Code of
1954, as amended (the "Code"), in 1983 to provide that a Caribbean
Basin country that is designated by the President as qualifying
for the trade benefits of the Act, and Bermuda, will be treated as
part of the "North American area" for purposes of allowing
deductions for ordinary and necessary business expenses of
attending conventions and similar business meetings held in that
country if the country in which the meeting is held has entered
into an executive agreement to exchange tax information with the
United States and does not discriminate under its tax laws against
conventions held in the United States (a "qualifying country").
Because Barbados and the United States have concluded a tax
information exchange agreement, and Barbados' tax laws do not
discriminate against U.S. conventions, Barbados qualifies for the
-3convention tax benefit. Jamaica was extended the convention tax
benefit prior to passage of the Act under a protocol to the income
tax treaty between the United States and Jamaica. As the
legislative history to the Act makes clear, the scope of tax
information exchange under that treaty satisfies the statutory
requirements for obtaining the convention tax benefit, even though
there is no separately negotiated agreement that specifically
addresses the requirements of the Code.
The convention tax benefit is a significant potential
incentive to the tourism industry of a Caribbean Basin country.
Although we cannot predict with precision resulting increases in
tourism revenues, we are confident that the attractiveness of the
region would ensure increased activity if meeting and convention
costs are tax-deductible to U.S. taxpayers under the "North
American area" rules.
Eligible Location for Establishment of Foreign Sales
Corporations.
Section 801 of the Tax Reform Act of 1984 amended the Code
effectively to replace the export incentive formerly provided by
the Domestic International Sales Corporation ("DISC") program with
the Foreign Sales Corporation ("FSC") program. A FSC is a
specialized subsidiary of a United States exporter that must be
organized under the laws of a foreign country or a U.S. possession
and carry out substantial economic processes outside the United
States in order to qualify for special tax treatment.
The Code provides specifically that a FSC must be created and
organized under the laws of, and maintain a home office in, either
a possession of the United States (other than Puerto Rico) or a
foreign country that meets exchange of information requirements.
A foreign country fulfills these exchange of information
requirements if (1) it enters into a tax information exchange
agreement, or (2) it has in effect with the United States an
income tax treaty and the Secretary of the Treasury certifies that
the exchange of information program under the treaty is
satisfactory in practice.
The authority accorded the Secretary of the Treasury to find
that information exchange with a treaty partner is satisfactory
for purposes of the FSC information exchange requirement offers a
more flexible standard than the standards required for a tax
information exchange agreement, which I will discuss later in my
testimony. It is appropriate to permit such an exercise of
discretion with respect to a treaty partner. The United States
only enters into tax treaties with countries that have income tax
systems. Such countries generally have tax administration and
enforcement procedures and a clear mutual interest in exchanging
-4information. The ability to exercise discretion permits the
United States to take account of prior experience with the treaty
partner both as a positive and a negative factor.
A Caribbean Basin country that becomes qualified for the
convention tax benefit by entering into a tax information exchange
agreement is also entitled to the FSC benefit. Thus, because of
the tax information exchange agreement, Barbados qualifies for the
FSC benefit. In addition, Jamaica and Trinidad and Tobago qualify
for the FSC benefit because the Treasury Department found the
information exchange programs under our income tax treaties with
those countries to be satisfactory for purposes of the FSC
information exchange requirement.
Qualification to serve as the home country for a FSC can
provide a useful economic benefit to a Caribbean Basin country.
The geographic proximity of the region and the interrelationships
of languages and cultures with the United States may make these
countries more attractive to U.S. businesses than more distant
countries. The incorporation and location of FSCs in a qualifying
country can provide additional employment opportunities in the
office services sector and may encourage the public and private
development of data processing and telecommunications systems that
could serve these countries well in attracting other businesses
that require such an infrastructure. Finally, the intangible
benefit of raising the visibility of these Caribbean Basin
countries in international trade may also be of significant
potential value.
Possible Use of Section 936 Funds In Qualifying Caribbean
Countries.
The tax reform legislation passed by the House of
Representatives in December, H.R. 3838, authorizes the use of
certain funds invested in Puerto Rico under Code section 936 for
investments in Caribbean Basin countries that enter into tax
information exchange agreements. A provision of H.R. 3838 would
modify the tax benefit for investment in Puerto Rico ("section
936") to encourage the use of funds generating "qualified
possession source investment income" ("QPSII") in Caribbean Basin
countries that enter into such agreements with the United States.
H.R. 3838 provides for the first time that QPSII funds deposited
in the Puerto Rican Government Development Bank may also be used
to finance investments in active business assets in qualifying
Caribbean Basin countries, and passive income derived from those
deposits would be tax exempt. Investment of such a large amount
of funds would mean a significant increase in economic activity in
the Caribbean Basin. This provision has the President's
endorsement, solid bipartisan support and the wholehearted
approval of the Government of Puerto Rico.
-5To promote the goals of this initiative, the Governor of
Puerto Rico has spearheaded a drive to attract to the Caribbean
Rasin region "twin plants" related to projects in Puerto Rico.
The Governor of Puerto Rico has indicated that Puerto Rico is
committed to the ambitious goal of infusing $100 million of new
investment into the Caribbean each year. The provision in the
House bill on section 936, combined with Puerto Rico's twin plant
initiative, offers one of the best prospects to date for
stimulating investment in Caribbean Basin countries. The section
936 provision would be a powerful incentive for Caribbean
countries to enter into tax information exchange agreements.
II. Tax Information Exchange Agreements.
Code section 274(h)(6) authorizes the Secretary of the
Treasury to negotiate and conclude the exchange of information
agreements that qualify a Caribbean country for the convention tax
benefit, the FSC benefit, and, upon final passage by Congress of
H.R. 3838, the section 936/twin plant benefit. The statute
imposes certain minimum standards for such agreements. The
exchange of information provisions in the agreements must
authorize the Caribbean Basin country to fulfill specific requests
for information by the United States with respect to civil and
criminal tax matters involving U.S. citizens and residents,
residents of the beneficiary country, and nationals or residents
of countries other than the United States or the beneficiary
country ("third-country persons"), notwithstanding any local
nondisclosure laws regarding bank secrecy and bearer shares.
Thus, a country that restricts disclosure of information regarding
third-country persons or financial information would have to
modify its law or practice with respect to requests for
information by the United States.
A special rule provides for modified standards for exchange
of information agreements that will qualify a country for the
convention tax benefit in certain cases. This rule allows the
requirement that the exchange of information agreement supersede
provisions of local law regarding bank secrecy and nondisclosure
of ownership of bearer shares to be waived in the case of
information sought only for civil tax purposes if (i) the
Secretary of the Treasury, after reasonable efforts to negotiate
an agreement superseding such secrecy laws, determines that it is
not possible to reach agreement but that the agreement negotiated
will significantly assist the administration and enforcement of
U.S. tax laws, and (ii) the President determines that such an
exception to the standards for exchange of information is in the
national security interest of the United States. The override of
local law provisions requiring bank secrecy and nondisclosure of
the ownership of bearer shares would continue to be required with
respect to all criminal tax cases. No agreement has been
concluded under this special exception.
-6Because tax information exchange agreements could be entered
i.ato with countries that have less sophisticated tax enforcement
capabilities than the United States, or that have policies to
attract investors that seek anonymity, the strict statutory
standards for a tax information exchange agreement are intended to
ensure that there is full information exchange with the United
States. In July 1984, the Treasury Department, working with the
Department of Justice and the Internal Revenue Service, formulated
and issued a Discussion Draft of a CBI Exchange of Information
Agreement (the "Discussion Draft") and a Technical Explanation
thereof. The Discussion Draft provides guidance to other
countries regarding a tax information exchange agreement. The
Discussion Draft is intended to be comprehensive in raising issues
that should be considered in arriving at an agreement, but
Discussion Draft is not intended to be a model agreement.
Although an agreement need not include all the provisions found in
the Discussion Draft, the Treasury Department of course cannot
modify the requirements of a tax information exchange agreement
expressly stated in the governing statute.
Ill. Benefits of Tax Information Exchange Agreements to the United
States.
As you are aware, the United States uses a self-assessment
system in its collection of taxes. Each taxpayer files a return
and pays the amount due on the return without governmental
assessment. This is unlike the procedure in many foreign
countries where the government sends each taxpayer an assessment
of tax due.
Our self-assessment system relies in significant part on the
perception by taxpayers that the tax system is equitable and that
each person is paying his fair share. Noncompliance undermines
the perceived and actual equity of our tax system and reduces the
revenues obtained from the existing tax base.
The enforcement cf our self-assessment system relies on a
carefully targeted audit and examination program and, in
appropriate cases, on application of criminal enforcement
sanctions. A key element of an effective examination program is
access to information. Information allows our examiners to
confirm the information reported on a return and to discover those
who would take unsupportable return positions, relying on the
audit lottery or the unavailability of foreign information, as
well as those who seek to evade tax.
The United States' tax interest under the Code extends beyond
its borders. U.S. citizens and residents are taxable on their
worldwide income. Moreover, under the subpart F, foreign personal
holding company, and foreign investment company provisions of the
-7Code, a U.S. shareholder in a foreign corporation that is more
than fifty percent owned by U.S. persons may be subject to tax on
income measured by the earnings of the foreign corporation, even
though it may not conduct any business in the United States. In
addition, the Internal Revenue Service has broad authority under
Code section 482 to reallocate income, deductions, or credits
between two or more business owned or controlled directly or
indirectly by the same interests in international as well as
domestic transactions. Administration of these provisions
requires that the United States be able to obtain information with
respect to international transactions.
The need for international exchange of tax information also
extends to information which may be used in criminal tax cases.
In some international transactions it is impossible to uncover
unreported income without the assistance of the foreign country in
obtaining information which permits tracing the funds earned or
the ultimate ownership of entities involved.
The tax information exchange agreements authorized in the CBI
legislation assist the U.S. in promoting its goal of full
information exchange among friendly neighbors and economic
partners. However, they are only a small part of a larger agenda
that the United States must pursue in order to achieve that goal.
The more countries with which the United States has satisfactory
information exchange, the more difficult it will be for tax
evaders to avoid paying their fair share of tax.
The existence of tax information exchange agreements with
other countries cannot alone solve our compliance problems
involving international transactions. The primary focus for our
resources must continue to be vigorous and efficient tax
administration and enforcement in the United States. Tax
information exchange agreements, however, are an important
enforcement tool. Their utility is in part prophylatic; knowledge
of their existence may reduce tax avoidance transactions involving
use of countries that are parties to an agreement. While
agreements require the cooperation of the other country, an
effective international tax information exchange agreement makes
it possible for the United States to follow those who would use
that country in their efforts to evade their liability for U.S.
tax.l/
The goal of the United States is to pursue full international
tax information exchange in order to combat tax-haven operations
17
experience in
this the
regard
Barbados,
relatively
that Our
illegitimately
erode
U.S.with
tax base.
The though
conclusion
of as
limited, has been entirely satisfactory. Indeed, Barbados already
has honored its agreement to provide information from bank records
in one case.
-8many tax information exchange agreements as possible with
Caribbean Basin countries will do much to advance the United
States toward that goal.
IV. Status of Negotiations Regarding Tax Information Exchange
Agreements.
As noted previously, the Treasury Department has successfully
negotiated and concluded a tax information exchange agreement with
Barbados. That agreement entered into force upon signature on
November 3, 1984.
The United States has initialed agreements (which are not yet
effective) with Costa Rica and the Dominican Republic.
Preliminary informal discussions have been held with St. Lucia.
Interest also has been expressed by a number of other countries;
we are actively seeking to hold formal discussions with those
countries.
One country, St. Kitts-Nevis, has objected that the
requirement that tax benefits be conditioned on the conclusion of
a tax information exchange agreement violates its sovereignty.
While other countries have objected that the standards for
information exchange are too onerous, they have not categorically
rejected the possibility of entering into an agreement under any
circumstances. However, it is clear that the internal laws of a
few countries pose a major impediment to concluding an agreement
unless the country is willing to modify its laws.
In addition to these discussions and negotiations, the
Treasury Department is working with the State Department and the
United States Trade Representative to meet with the U.S.
representatives of the Caribbean Basin countries and to send
information to U.S. embassies in the Caribbean Basin region to
explain the tax information exchange agreements and to express
Treasury's willingness to negotiate such agreements with
interested countriesc
V. Information Requests Under Information Exchange
Agreements.
Because only one agreement that satisfies the standards of
the Act has been concluded, the Treasury Department has limited
statistics on the frequency of use of such agreements or the type
of information requested. However, it is useful to review the
data relating to requests for information under tax treaties.
The Internal Revenue Service generally obtains information
located outside the United States through the efforts of Revenue
Service Representatives (RSRs) stationed at 15 U.S. embassies and
-9consulates throughout the world, when an investigative branch of
the Internal Revenue Service determines that foreign information
is necessary, the Service directs the RSR responsible for the area
where the information is located to attempt to obtain the
information. In many instances, the information may be a matter
of public record. If so, the RSR may obtain the information
personally. In other instances, the RSR may contact the person
with the information and request that it be turned over
voluntarily. In many instances, the requested information will be
provided voluntarily. If, however, the information is not public
or provided voluntarily and it is located in a country with which
we have an income tax treaty which includes an information
exchange article, the Internal Revenue Service will make a formal
request for information under the treaty. The effectiveness of
such formal requests for information naturally varies with the
particular country or type of information involved, but generally
is satisfactory with respect to the majority of our treaty
partners.
The RSRs participated in foreign investigations of 303 cases
in FY 1985. In FY 1985 the United States also made a total of 170
formal requests of 21 treaty countries.2/ Almost half of these
requests (82) were made of Canada. Of the remaining 20 countries
of which requests were made, 15 received fewer than 5 requests,
and 13 received fewer than 3. Fourteen of our treaty partners
received no requests for information from the United States in FY
1985.
Under our information exchange programs, the requesting
country must have a bona fide tax interest in the information
requested. Such information may not be requested to enforce
exchange control requirements, for example, or for political
reasons. In addition, such information is subject to very strict
confidentiality requirements under U.S. law. The Internal Revenue
Service is prohibited from revealing such information even to
other agencies and departments of the U.S. government except for
purposes of enforcing tax laws. The United States expects that a
similar level of confidentiality will be afforded to information
obtained by a qualifying country under a tax information exchange
agreement.
VI. Analysis of the Effectiveness of the Tax Incentives for Tax
Information Exchange Agreements.
The United States believes that the convention tax benefit,
2/
During that period, treaty partners made 316 formal requests
the FSC benefit and the potential section 936 benefit provide
~~
for information from the United States.
useful and attractive incentives for Caribbean Basin countries to
-10enter into tax information exchange agreements. However, we
understand that some countries perceive the detriments of entering
into an agreement as outweighing the tax benefits. Although we
believe that most of the perceived detriments are relatively
minor, I will discuss these perceptions briefly in the interest of
exploring the effectiveness of the present incentives.
First, it must be recognized that a small minority of
Caribbean Basin countries base their economies on offshore banking
industries that place heavy reliance on the continuance of bank
secrecy. These countries believe that the elimination of bank
secrecy with the United States would adversely affect their
offshore banking sectors. They apparently believe that many of
their depositors, desiring anonymity, would move their deposits to
other jurisdictions. Thus, these countries do not feel that the
benefits available for entering into an agreement would offset the
possible effect on their banking sector. While the United States
cannot condone the bank secrecy practices of tax havens, we
recognize that these policies are a factor in why certain
countries are not willing to enter into tax information exchange
agreements.
A number of Caribbean Basin countries have expressed concern
about the administrative burden that replying to information
requests would impose on their relatively small governments. We
believe that this concern is unfounded. It is unlikely that more
than a handful of requests for information would be made. The
statistics on requests for information from major trading
partners, discussed above, evidence that the Internal Revenue
Service will not inundate or overburden these countries with
requests for information. A tax information exchange agreement
should be a mutually beneficial mechanism to provide for
information exchange when and if the need arises and only to the
extent that such information is necessary to serve a bona fide tax
interest of either country.
Some countries perceive that the information exchange
agreement provides a "one-way street," with all of the benefit
running to the United States. This criticism is based on two
different theories. Countries that have no income tax or an
income tax that is not concerned with foreign source income will
not have a reason to request information from the United States
and therefore, in effect, the agreement itself is not reciprocal.
It is true that some countries may have little or no need to make
information requests from the United States. However, this fact
viewed in isolation does not negate the reciprocal nature of the
agreements or diminish the value of the tax benefits that come
with concluding an agreement.
-11Other countries believe that although they may occasionally
have reason to request information from the United States, the
instances would be so few, and the proffered benefits so
uncertain, that the United States would have a clear advantage in
the arrangement. This criticism is not well founded, but raises
concern about the perception of the U.S. motives in linking the
tax benefits of the CBI to tax information exchange agreements.
The special tax incentives available to Caribbean Basin
countries that enter into tax information exchange agreements were
enacted because of an overriding interest of the United States in
the economic well-being of the region. Each of the tax benefits
is carefully crafted to fit a need of the nations in the region.
In exchange for extending these special incentives, Congress
ensured by the condition of information exchange that the U.S. tax
system will be strengthened, not weakened, by the legislation.
It is the view of the Treasury Department that the tax
benefits available under current law provide an adequate
inducement to enter into tax information exchange agreements for
those countries that do not have highly developed offshore banking
sectors that rely on bank secrecy. To achieve success, however,
the United States must press its efforts to inform these Caribbean
countries about the benefits, and dispel unfounded concerns about
the detriments, associated with concluding an agreement.
Moreover, we are confident that passage of the section 936
provision in H.R. 3838 would transform the attitude of many of
these countries from that of skepticism to positive interest. We
do not think it either appropriate or worthwhile to attempt to
provide additional incentives, beyond those just referred to, for
the purpose of inducing bank secrecy countries to conclude an
agreement.
Conclusion.
I thank you, Mr. Chairman and Members of the Committee, for
the opportunity to testify concerning this issue of great
importance to the Treasury Department.
I would be pleased to answer any questions that you might
have at this time.
oOo
TREASURYNEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. L'jRARY. ROOM 5310 February 25, 1986
TREASURY'S WHBKIY fifilJL ,^JF*^RING
The Department of the Treasury,* by 'tHis^ffoblic notice, invites
tenders for two series of Treasury bills totaling approximately
$13,600 million, to be issued March 6, 1986.
This offering
will result in a paydown for the Treasury of about $ 1,300 million, as
the maturing bills are outstanding in the amount of $14,908 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Monday, March 3, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
December 5, 1985, and to mature
June 5, 1986
(CUSIP No.
912794 KJ 2 ) , currently outstanding in the amount of $7,619 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
September 5, 1985, and to mature September 4, 1986 (CUSIP No.
912794 KQ 6 ) , currently outstanding in the amount of $8,806 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing March 6, 1986.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to the
extent that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them. Federal Reserve
Banks currently hold $ 1,319 million as agents for foreign and international monetary authorities, and $3,399 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-482
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.9 23, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRARY. ROOM 5310
- •-S'*i-N7 0FTHETREASJ!flr
THOMAS J. BERGER
APPOINTED DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL MONETARY AFFAIRS
Secretary of the Treasury James A. Baker III has appointed
Thomas J. Berger as Deputy Assistant Secretary of the Treasury
for International Monetary Affairs.
Mr. Berger will play a key role in developing and
implementing U.S. international monetary policies and will be
particularly concerned with U.S. economic and financial
relationships with other industrial countries.
Prior to becoming Deputy Assistant Secretary, Mr. Berger
served, since 1983, as an advisor to the Saudi Arabian Monetary
Agency (SAMA) and resided in Riyadh. His activities at SAMA
focused on the ongoing development and implementation of an
international investment program for the surplus oil revenues
that Saudi Arabia built up during the 1970s and early 1980s. In
addition, he was responsible for providing advice on investment
policy, domestic fiscal and monetary matters, relations with
foreign central banks and ministries of finance, and issues
relating to international financial institutions and multilateral
development banks.
Previously, Mr. Berger was a Vice President in the
Investment Banking Division of Merrill Lynch Capital Markets in
New York which he joined in 1977. While at Merrill Lynch he
worked with U.S. and foreign corporations in arranging
financings, both domestically and abroad. From 1973 until 1975
Mr. Berger was a corporate lending officer with Citibank, N.A. in
New York.
Originally from Princeton, New Jersey, Mr. Berger holds a
bachelors degree cum laude from Harvard College and a masters
degree in business administration from the Harvard Business
School. Mr. Berger is 33, married and lives in Georgetown.
B-483
TREASURYNEWS
Department of the Treasury • Washington,
D.C. • Telephone 566-2041
pv ^ n
MOM 5310
JAMES W. CONROW
DEPUTY ASSISTANT SECRETAR¥^©Fr THE TREASURY
FOR DEVELOPING NATIONS
BEFORE
THE SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT INSTITUTIONS
AND FINANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
FEBRUARY 26, 1986
Thank you, Mr. Chairman, for the opportunity to appear
before the Committee to discuss the environmental aspects
of multilateral development bank activities.
The staff report issued by the Committee in December
1984 was a benchmark in the efforts of your Committee and the
Administration to encourage constructive change in these aspects
Your report included nineteen recommendations, most of which
we endorsed without qualification.
I would like to highlight four areas today:
— where we stand with regard to organizational and
procedural recommendations in each bank,
— the recommendations which were directed to all the
banks regarding training, environmentally beneficial
projects and the inclusion of Environment and Health
Ministers and nongovernmental organizations in the
activities of the banks,
— the elements of the recommendations which we have
deferred,
B-484
- 2 — and finally, a discussion of next steps — where we go
from here.
Organizational and Procedural Recommendations
Several of the recommendations in your report dealt with
organizational matters and were directed to U.S. agencies,
as well as the development banks. Since late 1984, the Treasury
Department has been working closely with the State Department
Bureau of Oceans and International Environmental and Scientific
Affairs. The State Department will be elaborating on the
Bureau's activities, but I would like to say simply that State
has brought a welcome dose of expertise to our overall effort.
We have found their initiative and advice adds to the effectiveness of U.S. policy.
The Bureau staff participates in the inter-agency Working
Group on Multilateral Assistance where each project is reviewed
by the Treasury and State Departments, the Agency for International
Development, the United States Trade Representative, the
Federal Reserve Board and the Departments of Agriculture,
Interior, Labor and Commerce. Discussion of the environmental
aspects of projects has become a regular feature of the Working
Group, led by the staff of the State Department.
An important aspect of the increased attention to these
issues by U.S. agencies is the inclusion of environmental
factors in our early warning system. When a project first
appears in the project pipeline of the banks, the U.S. embassy
is sent a cable soliciting information about a range of
policy issues. About a year ago, the environmental aspects
- 3 were added to the system, and responses from the field are
giving us a basis for early discussions with the development
banks.
Within the banks, there has been some progress toward
organizational changes, although not entirely along the lines
anticipated in your recommendations. The African Development
Bank has an environmental specialist who has begun a program
of staff training and has recommended Bank technical assistance
support to prepare natural resource profiles for borrowing
countries. While there is a greater awareness of the environmental dimension in Bank project proposals, the measures to
deal with environmental aspects are not as well designed as we
would hope.
For example, while the difficult resettlement and watershed management aspects of the La Mape dam in the Cameroons were
identified when the project was put forward for approval last
May, we would have preferred that plans to cope with these
aspects would have been completed and funding identified.
While not designating an environmental coordinator> the
Inter-American Development Bank established an internal Committee
on the Environment in November 1983. I will be reporting to you
more fully on its activities in the near future, but I would
simply like to state today that this arrangement has the potential
to address your concerns. Currently, the Bank's internal
procedures are not as thorough as you and I might hope, but
the Bank is making signifcant efforts to improve its effectiveness
We will be continuing to monitor the activities of the IDB
Committee on the Environment in the coming months, and we will
- 4 keep you informed.
The World Bank has been perplexing. In many instances,
the Bank has performed well. In others, Bank performance
has been frustrating.
For example, a January $10 million IDA credit to Bangladesh
for shrimp aquaculture included a component for shrimp hatcheries
which will eventually be operated largely by the private sector.
The hatcheries are an important step toward relieving pressure
on the off-shore marine fisheries which are in danger of declining.
The project also provided for using non-governmental organizations
to implement a component to strengthen cooperation and understanding between the local farming and fishing communities.
In a second project, a forthcoming $20 million IBRD loan to
Malawi for fuelwood planting is well-targetted to relieve
pressure on the country's rapidly disappearing forest resources.
By contrast, in December, the Bank approved a $50 million
loan to Malaysia to provide infrastructure for a land settlement
project which will lead to clearing 20,000 hectares of tropical
forest. In 1958, eighty percent of peninsular Malaysia was
forested; now, less than 49 percent is forested. While in
many respects land settlement projects in Malaysia have
been successful, I find troubling the absence of an effective
environmental assessment process that can be used to establish
a land use plan which will effectively delineate tropical
forest reserves. In another project in October, the Bank
provided Indonesia a $32 million loan to finance the procurment
and distribution of draft livestock in support of the trans-
- 5 migration program in Sumatra and Sulawesi. In addition to
forest clearing, the livestock are undoubtedly going to be
used to prepare fields for crops, such as rice. But the
soils on these two islands generally cannot sustain annual
cropping, so that in a year or two the farmer will clear
more forest for his crop. The result will be more extensive
deforestation, with relatively meager increases in agricultural
production.
While the overall picture in the Bank remains mixed,
there has been some encouraging movement. Last November,
the Bank began an internal review of natural resource use
problems that have arisen in past Bank projects, especially
in agriculture and energy projects. The review is expected to
last about two years and may yield significant changes in
policies and procedures. While the timeframe appears extended,
the subject is vast and research by external experts will
play an important role. We will monitor protress and keep the
Committee informed.
While the Committee did not direct a recommendation
specifically to the Asian Development Bank, I can report
that a Board review of environmental policies and procedures
in January confirmed two steps which I believe are useful
and important:
— the responsibilities of the two environmental specialists
of the Bank have been re-defined so that more of
their effort can be directed toward the environmentally
sensitive sector of energy and agriculture; and
- 6 —• the Bank's useful technical assistance programs to
conduct regional planning studies which emphasize
the use of natural resources will be expanded. The
study of the Han River Basin in Korea, begun in 1981,
has already led to several projects to control water
pollution.
In other respects, the performance of the Bank continues
to be mixed. Nepal, which has had severe deforestation and
soil erosion problems, was the beneficiary of two constrasting
projects in October 1985. A $14 million loan for livestock
development included provision for livestock exclusion areas
where overgrazing has been a severe problem and for selection
of fodder crops to improve nutrition and provide soil cover.
By contrast, a $20 million loan for rural development in Seti
zone of Nepal is likely to lead to further deforestation in
the southern portion of the region and to the expansion of
cropping, without terracing, in the hilly northern portion -both adding to the soil erosion problem.
Training
Beyond organizational matters, your Committee's report
also suggested that the World Bank's Economic Development
Institute might usefully strengthen its training efforts
in the environmental area. The Institute is offering about
ninety courses in all parts of the world during the current
academic year. On the basis of the Institute's published
catalogue, we judged that environmental considerations
might usefully be included in about one-third of the courses.
- 7 In recent months, we have had several meetings with
the staff of the Institute. It is apparent that the course
offerings are heavily oriented toward reaching developing
country officials who analyze or decide economic policies.
In this context, environmental considerations might be
introduced most effectively by including articulate officials
of agencies responsible for environmental matters in mixed
courses with economic policy officials. In addition, appropriate
course materials and group discussion leaders with environmental
backgrounds could make useful contributions.
We have not reached firm conclusions. But, at this stage,
we are considering a recommendation that the Institute hire
a consultant to systematically review all courses, to recommend
appropriate course participants in environmental fields, and
to suggest appropriate course materials and lecturers.
Environmentally Beneficial Projects
A third important area in which the Committee has made
recommendations is the encouragement of environmentally
beneficial projects in the banks. As I mentioned -- and
as is widely recognized -- the banks currently do environmentally
beneficial projects. I hope that, in our concern about some
projects, we don't lose sight of the positive aspects of
development bank activities.
In deciding what types of environmentally beneficial
projects to propose systematically to the banks, we have adopted
one of the suggestions in your report and are discussing irrigation
management with the World Bank staff. A second topic we are
pursuing cuts across several of the suggestions your report
- 8 put forward. In September, 1985, a Washington-based non-governmental organization, the World Resources Institute, issued a
report containing a large number of ideas for project activity
that might be undertaken in 56 developing countries. Included
are suggestions for fuelwood projects, watershed management
projects, industrial timber development and forest preservation
proposals, as well as institution building. We are planning
to discuss these ideas with the World Bank to determine whether
they offer a basis for project activities. If the results of
our conversations with the Bank are promising, we expect to
extend our discussions to the regional development banks. We
will keep the Committee informed of progress on these subjects.
Participation of Ministers and Nongovernmental Organizations
In a fourth area, your report recommends greater involvement
of Environment and Health Ministers and nongovernmental conservation and indigenous peoples' organizations in project planning
and implementation. The reports we have submitted to the
Committee indicate that the banks were supportive of these'
ideas, in principle, but were cautious with regard to systematic
implementation. I believe this is an area where we can make
greater efforts and I am asking our Executive Directors in the
banks to propose that appraisal reports for projects in sensitive
sectors include specific statements describing either the role
of such Ministers and organizations in project preparation or
why such a role was unnecessary.
_ 9 Deferred Recommendations
Three of the recommendations in your report have seemed
to us inappropriate to implement at this time. First, the
recommendation that we earmark a fixed proportion of MDB
lending programs be earmarked for environmental projects does
not seem to us to be a positive approach. Setting dollar
denominated targets, in our experience, has been a poor management
technique in the development banks. Success should be measured
by quality, not quantity. While we want to encourage environmentally sound and economically beneficial projects, we do not
believe targetry will prove effective in the end.
Second, we would prefer not to establish firm criteria
for supporting or opposing projects. We are confident that
the senior managers of the banks have a genuine commitment to
sustainable development and that our persistence in calling
questionable projects to their attention will yield the changes
we are all seeking. Furthermore, the banks, in designing
projects, need to pursue a range of objectives, some of which
may be in conflict with sound environmental practices. Compromise
may be necessary. I have already mentioned that land settlement
projects in Malaysia have led to deforestation. Some of these
projects have also lifted a sizable number of the landless,
rural poor into the middle class of that country. Rigid
criteria may compromise other objectives, such as poverty
alleviation, which we expect the banks to pursue.
- 10 Third, I continue to believe that a fixed requirement
for a generalized annual report is unnecessary. We have been
keeping you informed of developments regularly and we will
continue to do so. But annual reporting requirements too
often outlive their utility, and we propose to defer this
recommendation.
Where We Go From Here
I believe that the work that this Committee started in
June, 1983 is having a salutary effect on the banks. . Their
response has not always been as rapid nor as complete as
we may have hoped, but your concerted effort to maintain a
constructive approach is yielding benefits. There is awareness
of broad concern and a genuine desire in the banks to support
sustainable development, in terms of environmentally sound
and economically productive projects.
I see two major tasks before us in the coming months.
The first is to focus the discussion about environment and
development on concrete issues -- specifically, on the more
difficult types of project associated with agriculture in
tropical regions, impoundments of rivers and penetration
roads into relatively uninhabited regions. In order to
give the banks a clearer sense of policy direction, I believe
it is time to make a concerted effort to engage other donor'
countries in a discussion of these problems and to encourage
them to provide their executive directors in the banks with
policy guidance. I have begun the process in meetings I attended
in January and February, and my clear impression was that
-limy counterparts in other governments are going to look into
these aspects of bank activities. I plan to continue the
dialogue in the coming months and foresee that we will be
able to 'arrive at a consensus which will furnish the banks
with clear views from major shareholders. We think it may
also be desirable to begin a more direct dialogue with selected
developing countries on the environmental aspects of their
national development activities. We will be discussing this
further with the State Department in the coming weeks.
The second task before us in the months ahead is to continue
to raise these environmental concerns within the banks at
senior levels -- both in the context of specific projects and
in broader policy terms, where we will raise such issues as
the role of nongovernmental organizations in development activities.
These discussions will serve the dual purposes of conveying
our continuing concern and of providing an opportunity to engage
directors representing other countries in the dialogue which
can lead to a broad consensus for change. I am prepared to
commit the Treasury Department and our Executive Directors to
such discussion.
Mr. Chairman, I believe we are half way to achieving
strengthened environmental policies and procedures in the
banks. Much remains to be done, but the task of drawing
attention to the issues is now completed. We should continue
our efforts in a responsible and constructive manner. We
need to be clearc; we need to be specific; and we need to be
constant. I know we have your support and that of your
Committee in this effort.
Thank you.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
(CORRECTED COPY)
For Release Upon Delivery
Expected at 9:30 a.m., EST
February 27, 1986
STATEMENT OF
J. ROGER MENTZ
ACTING ASSISTANT SECRETARY (TAX POLICY)
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AGRICULTURAL TAXATION
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am pleased to have this opportunity to discuss the Treasury
Department's views regarding the imposition of excise taxes on
the importation of crude oil and refined petroleum products. In
particular, the Subcommittee is reviewing S. 1507 and S. 1997,
each of which would impose an excise tax or tariff on crude oil
and refined petroleum products that are imported into the United
States.
Before discussing these bills in detail, I wish to emphasize
the Administration's strong opposition to any^tax i n c r fase,
of a
domestic spending, not by a tax increase in any form.
The Administration remains firmly committed to the enactment
this vear of a revenue-neutral tax reform bill. It is in the
context of such a bill, if at all, that the Administration would
be willing to consider supporting taxes of the type proposed by
S. 1507 and S. 1997.
Background
Tax Provisions. There are presently a variety of specific
taxes applicable to crude oil and refined petroleum products.
Under the Crude Oil Windfall Profit Tax Act of 1980, a Federal
excise tax is imposed on certain domestic crude oil. In general,
the amount of the tax depends upon certain characteristics of the
oil, such as when it was discovered and its method of production,
and'the difference between the value of the oil upon removal and
- 2 statutorily specified base prices. Because the removal price of
oil has been falling, while the inflation-adjusted base prices
have been increasing, the revenues generated by the windfall
profit tax have been rapidly declining. 1/ The tax is scheduled
to phase out over a 33-month period beginning in 1991. 2/
Imported crude oil is not subject to the windfall profit tax.
Under the Tariff Schedules of the United States, however, a
tariff is imposed on imported crude oil and certain refined
petroleum products at rates ranging from approximately five cents
per barrel on certain crude oil (0.125 cents per gallon) to 84
cents per barrel on certain refined products (two cents per
gallon). A higher rate applies to products imported from certain
communist countries, and some refined products may be imported
from Canada without any duty. These tariffs, which are imposed
under the Tariff Act of 1930, are not designed principally to
raise revenue and do not significantly affect the cost of oil or
refined products. 3/
Finally, Federal excise taxes, at rates ranging from three
cents per gallon to 15 cents per gallon, are imposed on gasoline
and other fuels. These excise taxes do not increase general
revenues, but are dedicated to the Highway Trust Fund, the
Airport and Airway Trust Fund, and the Inland Waterways Trust
Fund. The Highway Trust Fund excise taxes are currently
scheduled to expire on September 30, 1988, and the Airport and
Airway Trust Fund taxes are scheduled to expire on December 31,
1987.
Energy Consumption. The percentage of U.S. energy
consumption supplied by imported crude oil and refined petroleum
products has been declining since 1977, when nearly 48 percent of
our gross oil supply was produced abroad. By 1981, our reliance
on imported oil and oil products had declined to 36 percent of
domestic consumption. This trend continued in 1985, during which
31 percent of U.S. gross oil consumption was supplied by imported
1/ During 1984, the windfall profit tax raised $3.9 billion in
products. Net imports in 1985 represented only 27 percent of
net revenues. If the average removal price during 1986 decreases
domestic consumption.
to $18 per barrel, the revenue raised by the windfall profit tax
will be negligible.
2/ The phase-out period could begin in 1988 if the cumulative net
revenues raised by the tax exceed $227.3 billion. Under current
assumptions regarding oil prices, however, we do not expect the
phase-out period to begin before January 1991.
3/ In addition to the general Tariff Schedules of the United
States, the President has authority under the Trade Expansion Act
of 1962 to impose oil import fees or other restrictions if he
finds that imports threaten national security. This authority,
which has been used several times, is subject to Congressional'
override.
- 3 Description of the Bills
S. 1507, sponsored by Senators Boren and Bentsen, would
increase the existing tariff on imported crude oil by $5 per
barrel, and would increase the existing tariffs on refined
petroleum products by $10 per barrel. The $5 additional tariff
on crude oil would begin to phase out when the average world
price of crude oil, as determined quarterly by the Secretary of
Energy, reached $25 per barrel, and would be eliminated when the
average world price reached $30 per barrel. Similarly, the $10
additional tariff on refined products would be phased out for
each product as the average world price of the particular product
moved from $25 per barrel to $35 per barrel.
The increased tariffs imposed by S. 1507 would be refunded
with respect to any barrel of crude oil or refined petroleum
product that was used as heating fuel or in the production of
heating fuel. In addition, the tariff would be refunded for any
crude oil or refined petroleum that was "necessary and inherent"
to the manufacture of any products destined for export. In each
case, the bill contemplates that the Treasury Department would,
by rules and regulations, provide the procedures under which
qualification for a refund of the tariff would have to be proven.
Finally, S. 1507 would express the sense of the Congress that
the net increase in Federal revenues resulting from the new
tariffs should be used to reduce the Federal budget deficit.
S. 1997, sponsored by Senators Wallop and Bentsen, would
impose a new excise tax on the first sale or use within the
United States of crude oil or refined petroleum products that
have been imported. The amount of the excise tax on each barrel
of imported crude oil would be equal to the difference between
the average world-price per barrel of crude oil and a statutorily
prescribed floor, set initially at $22 per barrel. The amount of
the floor, sometimes referred to as the "survival price" of oil,
would be increased annually to account for growth in per capita
nominal gross national product. 4/ The average world price of
crude oil would be determined quarterly by the Secretary of the
Treasury, in consultation with the Secretary of Energy, based on
4/
GNP-adjusted
reference
wouldprincipal
be rounded
off to
theThe
average
per barrel
prices price
for three
classes
of the
next
highest
foreign
crude dollar.
oil. 5/ Based on current budget projections, this
annual increase would average approximately six percent per year
over the fiscal 1986-1991 budget period.
5/ The three classes of foreign crude oil are Rotterdam brent
crude, Saudi light, and North Sea forties.
- 4 The amount of the excise tax imposed under S. 1997 on each
barrel of imported refined petroleum products would be equal to
the per barrel excise tax on imported crude oil, increased by a
$3 per barrel "environmental outlay adjustment," 6/ multiplied by
a barrel of oil equivalent factor. This factor appears to be the
ratio of the Btu content of a barrel of refined product to 5.8
million Btu, the content of a barrel of oil. Thus, for example,
if the average world oil price were $16 per barrel, the excise
tax on a barrel of imported motor gasoline, which yields 5.25
million Btu, would be approximately $8.15. 7/
S. 1997 would exempt from the tax any refined products
imported for use as home heating fuel. Unlike S. 1507, however,
the bill would not exempt from tax imported crude oil that is
imported and refined for use as heating fuel. Further, the bill
would provide exemptions for residual fuel oil and for topped
crude oil imported for further refining, for "process fuels," and
for liquid natural gas. While the scope of the "process fuels"
exemption is not clear, it would presumably apply to petroleum
products used in certain industrial applications. Finally,
S. 1997 would exempt from the new excise tax any crude oil or
refined petroleum product that was sold for export within six
months following its importation.
Discussion
Although the two bills described above differ in various
respects, they share the obvious characteristic of imposing a fee
on most imported oil and refined petroleum products, and thus
raise a series of common considerations. Except as otherwise
indicated, the discussion below applies to both proposals.
We face today crude oil prices that have fallen dramatically.
The spot price for West Texas intermediate crude oil, for
example,
closed Tuesday
at $14.55
per barrel,
as increased
compared
6/
The environmental
outlay
adjustment
would be
annually to account for per capita GNP growth in the same manner
as described above with respect to the statutory floor on the
price of oil.
7/ The $8.15 excise tax on a barrel of motor fuel would be
computed as follows:
Reference price
World oil price
Tax on crude oil
Environmental Outlay Adjustment
Tentative refined product fee
"Barrel of oil equivalent" factor
(5.25 Btu -r 5.8 Btu)
$22
($16)
$ 6
$ 3
x .905
Motor fuel excise tax
$8.15
$ $
- 5 to its recent high price of $31.80 per barrel on November 21,
1985. The falling price of crude oil, its effect on the prices
of refined petroleum and other sources of energy, and the effect
of these price reductions on both the economy in general and on
particular regions of the country must obviously influence our
consideration of these proposals to impose a fee on imported oil.
Effect on Federal Revenues. As already noted, the
Administration would consider the imposition of a fee on imported
oil and refined petroleum products only in the context of a
revenue-neutral tax reform bill. The President has stated that
the House-passed tax reform bill (H.R. 3838) fails in several
respects to meet his minimum requirements for an acceptable bill.
Many of the improvements suggested by the President, as well as
others that have been mentioned by members of the Finance
Committee, would entail a significant loss of revenues. Thus,
the revenue raised by a tax on imported petroleum could be used
to maintain the revenue neutrality of a bill that included the
suggested changes. Accordingly, the revenue effects of the
proposals being considered by this Subcommittee are an important
factor to be considered.
The potential revenue raised by the imposition of a tax on
imported oil and refined petroleum products differs depending
upon the structure of the proposal. Our analysis shows that the
overall revenues (including windfall profit tax collections)
raised from a fixed fee or excise tax are not acutely sensitive
to the precise level of world oil prices. Thus, a fixed $5 per
barrel excise tax would raise roughly the same amount of revenue
regardless of whether the world price of crude oil was $20 or $25
per barrel. S. 1507 and S. 1997, however, establish in varying
ways an import fee that is explicitly dependent upon the level of
world oil prices. Accordingly, the revenue raised by each of
these proposals, unlike a fixed fee, would be sensitive to
changes in the world oil price.
Assuming an October 1, 1986 effective date and oil prices
that
per barrel below
the Administration's
latest
8/
Theremain
latest$4Administration
forecasts,
prepared in December
forecast,
8/
and
assuming
all
other
elements
of
the
forecast
are
T985, assume that crude oil prices will be as follows:
Year
Price per bar re1
1986
1987
1988
1989
1990
1991
$24..76
23..98
23..55
24..07
24,.95
25,.37
- 6 not affected by the imposition of the fee, we estimate that
S. 1507, which would impose a $5 per barrel tariff on imported
crude oil and a $10 per barrel tariff on imported refined
products, would increase revenues by approximately $35.7 billion
over the fiscal 1987-1991 budget period. 9/ Because the tariff is
phased out as the world price of oil increases from $25 to $30
per barrel and the world price of refined products increases from
$25 to $35 per barrel, however, we note that this revenue would
not be realized if the current decline in world prices were
reversed and prices rose again to their former levels.
Again assuming that the average world price of crude oil
remains $4 per barrel lower than the latest Administration
economic forecast, that all other elements of the forecast are
not affected by the imposition of the fee, and that the bill
becomes effective on October 1, 1986, we estimate that S. 1997
would raise approximately $26.0 billion over the five-year budget
period. If the average world price drops more than $4 per barrel
below the latest forecast, of course, a greater amount of revenue
would be raised annually under S. 1997. 10/
'The provisions of S. 1997 raise even greater uncertainty than
S. 1507 in estimating likely revenue effects. In particular,
because the rate of tax under S. 1997 depends more directly upon
the price of oil, the revenue that it would raise would be even
more sensitive to fluctuations in world oil prices than the
revenue raised under S. 1507. Given the volatility of oil prices
and the influence of foreign governments on these prices, it is
difficult to depend upon the taxing mechanism provided in S. 1997
as a stable source of a specified level of revenue over an
extended period. Moreover, in a manner similar to S. 1507, the
9/
The $35.7
billionbe estimated
raised
$31.2
revenue
that would
raised by to
S.be
1997
wouldconsists
vanish of
if the
Billion
in net price
oil import
(whichthereflects
reduction price.
in
average world
of oil fees
exceeded
adjusteda reference
imports resulting from the fee) and $-4.4 billion in additional
net windfall profit tax collections. This estimate of the
revenue effect of S. 1507 takes into account the exemptions
contained in the bill for heating fuel, and oil or refined
products used in the manufacture of goods destined for export.
If the exemption for home heating fuel were deleted, we estimate
an additional revenue increase of $5.7 billion per year.
Deletion of the exemption for oil and refined products used to
manufacture exports would increase the revenue gain by
approximately $1.2 billion.
10/ The $26.0 billion revenue estimate consists of $19.4 billion
in net oil import fees (which reflects a reduction in imports)
and $6.6 billion in additional net windfall profit taxes. Our
estimate of the revenue effects of S. 1997 reflects our
interpretation of each of the exemptions contained in the bill.
If the provisions of S. 1997 were applied without the exceptions for
products and for petroleum products exported within six months of
importation, we estimate that an additional $24.3 billion would
be raised during the budget period.
- 7 As the foregoing analysis suggests, we must be careful not to
assume that the revenue raised by oil import fees of the types
proposed in S. 1507 or S. 1997 will always be available to
maintain the revenue neutrality of a tax reform bill. Indeed,
there is a high degree of uncertainty in predicting the revenue
effects of any variable oil import fee. Under today's market
conditions, this uncertainty is a major detriment of an oil
import fee whose purpose is to ensure that a tax reform bill is
revenue neutral.
National Security Considerations. The tax treatment of
natural resources has long been important in maintaining a viable
domestic energy industry, which is an integral element of our
national security. Consequently, the effect that an oil import
fee would likely have on the domestic energy industry is a
critical factor that must be considered.
There has been a slow, steady decline in world oil prices
since 1981. 11/ The domestic oil industry, which includes
oil-drilling and well-service contractors, oil tool and pipe
manufacturers, and many other businesses, as well as oil
producers and refiners, has been forced to adjust gradually to
this decline in energy demand, oil prices, and drilling activity.
However, the rapidly falling world oil prices encountered
recently, if continued, raises the possibility of a greater
threat to the strength of the domestic oil industry and will
significantly affect the level of exploration and development of
our domestic energy resources.
Indeed, several major oil companies recently announced
substantial reductions in their domestic exploration and
production budgets, and similar announcements from other
companies are widely expected. Moreover, if the price of oil
continues to fall, many of this country's "stripper wells"
(i.e., wells producing on average less than ten barrels of oil
each day), which comprise approximately 15 percent of domestic
oil production, will be made unprofitable and may be prematurely
abandoned.
Because the prices of other sources of energy are related to
the price of oil, this reduction in exploration and development
may eventually spread to other energy sources such as coal and
natural gas. Ultimately, reduced levels of domestic exploratory
and developmental activity will lead to reduced domestic
production.
face domestic
of both this
lower domestic
11/ In 1981, In
the the
average
oil well-head
price production
was $31.77
and
greater
domestic
demand
resulting
from
falling
oil
per barrel. This price has been declining steadily prices,
until 1985,
imports
will
increase,
leading
to
greater
dependence
on
foreign
when it reached $23.88 per barrel.
oil in the near term.
- 8 While a greater demand for oil would generally provide
pressure for an increase in oil prices, such prices are now
significantly affected by the production policies of the major
oil-producing nations. Thus, prices might possibly drop to
relatively low levels before heightened demand would cause them
to increase. Many producers, drilling contractors, and others
dependent upon the oil industry might not be able to survive
while waiting for the price to rebound.
By imposing taxes solely on imported petroleum, both of the
bills being considered by this Subcommittee would generally
increase the prices of domestic energy and refined products above
the prevailing world prices. Because the prices of all energy
sources are to some extent interrelated, the prices of other
domestic energy sources would be increased. Thus, the effects to
the domestic energy industry that are caused by falling oil
prices would be relieved by each proposal. Moreover, the higher
price for domestic resources may encourage exploration and
development in this country or, at the least, stem the reduction
in such activities resulting from lower prices.
General Impact on Business and Industry. The imposition of a
tax on imported petroleum would have several clearly delineated
effects on non-energy domestic businesses and industries. The
increase in energy costs resulting from the tax would obviously
have the most serious impact on industries that are heavy energy
users or that rely significantly on petroleum feedstocks. In
particular, domestic manufacturers of products such as plastic,
glass, cement, paper, limestone, steel, textiles, aluminum,
chemicals, and paint would face substantially higher costs. The
agriculture sector, particularly farmers, also would be
especially hurt, because the likely decrease in the costs of fuel
and fertilizer resulting from falling world oil prices would be
partially or fully offset by the imposition of an oil import fee.
In addition to the direct impact that higher energy costs
would have on most domestic industries, an oil import fee also
would make it more difficult for many domestic industries to sell
their products abroad. Exports from the United States would face
tougher competition because foreign producers of comparable goods
would benefit from falling energy costs at the same time that the
import fee would be maintaining U.S. energy prices at a
relatively higher level. Indeed, many of the industries that
would be most affected by higher energy costs have previously
complained about the relatively low energy costs enjoyed by some
foreign competitors. Moreover, the impact of an oil import fee
on the international competitiveness of many industries would be
exacerbated by an increase in imports of energy-intensive
manufactured products, which would continue to enjoy the benefit
of lower foreign energy costs.
- 9 Each of the effects described above would offset the reduced
imports of foreign crude oil and refined products that would
result from imposition of an import fee. Accordingly, imposition
of an oil import fee ultimately could negatively affect our
balance of trade.
Even if an exemption from the tax were provided for crude oil
or refined petroleum products imported to manufacture goods
destined for export, as contemplated in varying degree by S. 1507
and S. 1997, it is likely that the relief would be effective in
only a limited number of cases, and that the international
competitiveness of many industries would, nevertheless, be
negatively affected by an oil import fee. In particular, an
exemption would probably effectively benefit only vertically
integrated producers that directly import petroleum for use in
the manufacture of exports. The benefit of such an exemption
would be of limited effectiveness, at best, for the many
independent producers of intermediate and final products.
Finally, imposition of an oil import fee would likely hurt
independent marketers of petroleum, who cannot rely on increased
production income to offset the reduced demand for their products
that an oil import fee would likely entail.
Although the effects of an oil import fee on domestic
industry would in general be negative, such a fee would aid
several energy-producing areas. As discussed in the context of
national security, imposition of an import fee would
significantly benefit certain sectors of the domestic energy
industry. An oil import fee also could have a major effect on
the domestic refining industry. Due largely to declines in U.S.
petroleum consumption and decontrol of oil prices, we have faced
recently a reduction in U.S. operating refining capacity. 12/
Although domestic refiners, like all purchasers of oil, wouTcT
face the higher energy costs resulting from an oil import fee,
they would benefit from a structure that imposes a higher fee on
refined products than on crude oil and thus discourages the
importation of refined products. In this regard, it should be
noted that S. 1507 and S. 1997 in different respects would both
establish a higher fee on imported refined products than on
imported crude oil. Accordingly, both of those proposals would
aid domestic refiners.
In addition, we recognize that oil royalties, severance
taxes,
and compiled
other energy-related
are Administration
a significant source
12/
Data
by the Energy receipts
Information
of revenuethat
for U.S.
some operable
States. refinery
Consequently,
the has
fiscal
healthfrom
of
Indicate
capacity
declined
these
States,
which
has
been
hurt
by
the
steep
decline
in
oil
18.62 million barrels per year on January 1, 1981, to 15.7
prices, would
be on
improved
imposition
of an oil
import
million
barrels
January through
1, 1985.
This capacity
did not
fee.
Rapidly
falling
oil
prices
also
may
have
an
adverse
impact
decline further during 1985".
- 10 on banks that have made energy loans. Many of these banks have
recently made provisions for additional loan loss reserves and
have reduced their volume of new energy loans. Nevertheless,
continued instability in oil prices may have more serious effects
on such banks, and could trigger some bank failures. By
softening the fall of domestic energy prices, an oil import fee
would protect those banks from declines in market prices. This
beneficial effect may be offset, however, because other banks may
be helped by falling oil prices and certain banks with loans to
oil-exporting nations may be hurt by imposition of an oil import
fee.
Effects on Energy Consumption. Higher energy costs have
encouraged greater energy conservation. Some of these
conservation efforts have resulted in the development of more
fuel-efficient cars and appliances, and the design and
installation of more energy-efficient industrial facilities.
While these developments are likely to represent more permanent
changes, a number of other conservation efforts, such as the
installation of greater insulation in older homes and the
willingness to tolerate lower winter or higher summer
temperatures by adjusting thermostats, may well be dissipated by
a drop in energy costs.
Policies that raise the prices of energy for consumers, such
as an oil import fee, would encourage the continuation of these
efforts and would deter energy use. This would be a step toward
further reducing our reliance on uncertain foreign supplies.
Effect on Consumers. It is extremely difficult to determine
precisely how higher energy costs resulting from a tax on
imported petroleum would be distributed throughout the economy.
To some extent, these costs would be shared by foreign oil
producers and refiners, domestic businesses that use en.ergy, and
consumers. While tracing the precise incidence of these costs is
difficult, consumers would clearly be directly and adversely
affected by higher energy prices through purchases of gasoline
and, depending upon the scope and effectiveness of any
exemptions, home heating oil and electricity generated by burning
residual fuel oil. Moreover, because prices for almost all
sources of energy are interrelated and depend to a great extent
on the prevailing price of oil, consumers would face increased
costs through purchases of other sources of energy, including
natural gas and, to a lesser extent, electricity generated by
burning coal or natural gas. In addition, consumers would
indirectly bear higher costs in their purchases of all goods and
services, because the higher energy costs that would be faced by
producers of energy-intensive basic materials and by the
construction and transportation industries would, in turn, be
reflected in higher prices generally.
- 11 While the effects described above would occur in the case of
most consumption-based taxes, their nature is altered in the case
of an oil import fee, because the Treasury would realize an
increase in revenue only with respect to oil imports, while
consumers would bear higher prices on all petroleum products and
natural gas (and other goods), regardless of whether the oil,
natural gas, or refined product was produced in the United States
or abroad. Thus, while the burden of the tax would fall upon
foreign producers and domestic consumers, the benefits would be
shared by the Federal government and the domestic oil industry.
In general, our analysis indicates that, based solely on the
increase in oil prices, the domestic oil industry would realize
after-tax benefits equal to $1.75 for every $1 of tax collected
by the Treasury. 13/ To the extent that higher oil prices also
lead to higher prices for natural gas and coal," the energy
industry would realize an even greater share of the benefit in
proportion to Federal revenue.
Distributional Impact. The Administration has proposed that,
to the greatest extent possible, the distribution by income class
of taxes paid should generally be the same following tax reform
as under current law. Moreover, we have proposed that the tax
system should not be an additional burden on those below the
poverty line, and that such poor families should, insofar as
possible, totally escape Federal income taxation. We also have
sought to reduce the tax burden on middle-income working
Americans. Accordingly, we must carefully evaluate the
distributional impact of an oil import fee when considering the
advisability of such a tax.
Lower income families spend a relatively large portion of
theirTheincome
on energy
consumption.
with incomes
below
13/
allocation
of the
benefits of Families
an oil import
fee could
be
$12,000, for
example,
approximately
25 percent
of theirof an
partially
shifted
away spend
from domestic
producers
by enactment
alternative windfall profit tax. Such a tax, which would apply
to domestic oil, would withhold from the oil industry a portion
of the increase in the price of domestic oil that would result
from an import fee, by assuring that all oil producers would pay
some excise tax with respect to the increased price of oil, and
would thus shift more of the benefit to the Federal government.
An alternative windfall tax also would permit the import fee to
be set at lower rates, and still raise the same aggregate
revenue. An alternative windfall profit tax equal to 50 percent
of the oil import fee, for example, would provide an
approximately equal split of the benefit between the Federal
government and the domestic oil industry.
- 12 incomes on gasoline, fuel, and other energy uses, while families
with incomes above $42,000 spend less than seven percent of their
incomes on such expenditures. Consequently, any energy tax tends
to be regressive in effect, taking a relatively greater share of
income from the poor and middle class. The higher energy costs
resulting from energy taxes also may lead to higher prices for
other consumer goods, thus intensifying this burden on the poor
and middle class, although possibly reducing slightly the
regressive effect of such taxes.
The distributional impact of oil import fees, depending upon
the scope and effectiveness of any exemptions, can be extremely
regressive. As detailed in Table 1, for example, we estimate
that the $5 and $10 per barrel tariffs imposed by S. 1507,
ignoring the exemption provided for home heating fuel, would in
1989 increase energy costs for families with incomes below
$10,000 by an average of 2.47 percent of total income. In
contrast, the energy costs for families with incomes above
$100,000 would increase by an average of only 0.20 percent of
total income. When the exemption provided by S. 1507 for home
heating fuel is considered, the regressive effect of the tax is
curtailed, but the energy costs paid by lower income families
would still increase by an average of 1.92 percent of income,
while the energy costs of the higher income families would
increase by only 0.18 percent. Perhaps more significantly, the
increased burden of energy costs resulting from imposition of an
oil import fee, as set forth in the Table 1, would for most •
families more than offset the tax decreases that are provided in
the President's tax reform proposals. The impact of S. 1997, as
illustrated in Table 2, is also regressive.
The regressive nature of a tax on imported oil and refined
products may be corrected through several possible means in
addition to the varying exemptions for home heating fuel proposed
by the bills. First, the income tax rate schedules could be
modified to reduce the taxes paid by those in the income classes
that are most seriously hurt by the oil import fee. This
solution, however, would substantially reduce aggregate income
tax revenues, thus making enactment of a revenue-neutral tax
reform bill more difficult. Moreover, an adjustment to the rate
schedules would not help many of the families that are most
negatively affected by an oil import fee, namely those who
already do not face any income tax liability and those who will
be removed from the tax rolls by virtue of tax reform.
Second, consideration could be given to targeting relief
narrowly to the additional burden faced by lower income families.
In particular, imposition of an oil import fee could be
accompanied by enactment of a refundable income tax credit
directed at lower income families. Although a refundable credit
might be difficult to design satisfactorily and would undoubtedly
pose substantial administrative problems, such a credit could be
used to reduce the regressive nature of an energy tax at a
relatively moderate revenue cost.
- 13 Regional Impact. An oil import fee would have a
disproportionate impact on certain regions of the United States
that consume more energy or different types of energy than other
areas. As illustrated by Table 3, the consumption of energy
varies significantly by region. Families in the Northeast, for
example, consume more .energy than do families in other regions.
In addition, because the various regions differ in population
density and availability of public transportation, they also
differ in their use of motor fuels. For example, gasoline
consumption is regionally dependent, and tends to be higher in
areas outside the Northeast. Finally, the types of fuels used in
different regions vary, and those differences contribute to a
non-uniform regional impact of an oil import fee.
As suggested by the levels of energy expenditures set forth
in Table 3, the burden of an oil import fee, imposed without any
exception, would be felt most heavily in the Northeast. Both
proposals being considered by the Subcommittee mitigate this
disproportionate regional impact by providing exemptions for
heating fuel and, in the case of S. 1507, crude oil, that is to
be refined into home heating fuel. This solution, while in
concept a well-intentioned response, raises several concerns.
Exemptions for petroleum used for specific purposes are
difficult to administer effectively, will impose bureaucratic
burdens on segments of the domestic oil industry, and may offer
only limited relief to the affected people. For example, if an
exemption were granted only to home heating fuel, as proposed by
S. 1997, a powerful incentive would be created to increase
imports of home heating fuel, thus hurting domestic refineries.
If this effect were avoided by extending the exemption to crude
oil imported for use in refining home heating fuel, as proposed
by S. 1507, the exemption would be more effective in shielding
the cost of home heating oil from a price increase. The
potential revenue increase resulting from imposition of the
import fee, however, would be reduced considerably. In
particular, we estimate that an exemption granted to both crude
oil and refined home heating fuel, such as the one proposed by
S. 1507, would reduce the revenue gained through an import fee by
approximately 15 percent.
More significantly, however, the task of monitoring the
ultimate use of refined products produced from imported crude oil
would be extremely onerous. Such a task is particularly
difficult, because home heating fuel is used for commercial
heating and also is virtually identical to diesel fuel, uses that
would not enjoy any special exemptions under either bill.
Finally, we should not underestimate the potential bureaucratic
and regulatory burdens that the administration of such exemptions
might place on domestic producers, refiners, and heating oil
distributors.
The burden of increased residential electric bills, caused by
generate
also
natural
the higher
falls
gas
electricity,
disproportionately
costs
prices
ofwould
residual
thatincrease
would
fuel
on the
result
oil
sympathetically
Northeast.
andfrom
natural
an oil
Similarly,
with
gasimport
used to
fee
- 14 higher oil prices. The increased cost of heating homes with
electricity or natural gas, however, is not addressed in either
bill. In addition, California would be especially affected by
such a fee, because of its dependence upon oil-generated
electricity. A scheme of exemptions for residual fuel designed
to correct this impact would lead to greater revenue losses an-d
more administrative problems and bureaucratic burdens than would
be created by an exemption for home heating fuel.
Foreign Policy Considerations. Any proposal to impose a fee
on imported crude oil and refined petroleum products raises a
host of foreign policy concerns. As discussed below, the
imposition of an oil import fee, depending upon its provisions,
would raise concerns under the General Agreement on Tariffs and
Trade (GATT) and bilateral agreements with several oil-exporting
countries. In addition, an import fee, by increasing the price
of imported oil and refined petroleum products, would decrease
U.S. demand for such oil, and would thus reduce the volume of
exports for many countries, some of which are heavily dependent
upon revenues from such sales to meet foreign loan obligations.
While the effects of such a decrease would vary depending upon
the country, it would especially hurt several of our most
established trading partners, including Mexico, Canada,
Venezuela, and the United Kingdom, each of which supplies a
significant portion of our petroleum imports. While exemptions
for oil imported from one or more particular countries could be
provided to mitigate these consequences, such exemptions would
not only raise the treaty concerns discussed below, but also
would pose even greater administrative and bureaucratic burdens
than an exemption for home heating fuel or other specific uses.
Moreover, such exemptions, depending upon the countries involved
could significantly affect the potential revenue raised by an oi
import fee. 14/
Administrative Burdens. As noted above, we are concerned
that the proposals for various exemptions contained in both bill
would lead to substantial administrative and bureaucratic
burdens. In particular, providing exemptions for crude oil or
refined products imported from particular countries or for
particular uses might necessitate an extensive regulatory and
14/ Based on apparatus.
current import
if could
an exemption
provide
enforcement
Such levels,
regulation
amount were
to
Tor
crude
oil
and
refined
petroleum
products
imported
from
unreasonable Federal government intrusion into the oil business,
Mexico,
we properly
estimate abandoned
a 17 percent
in of
the oil
revenue
a role we
with reduction
the removal
price
potentially
raised
by
any
of
the
proposals.
If
exemptions
were
controls in 1981.
provided for Canada, Venezuela, or the United Kingdom, we
estimate that the revenue would be decreased by 15 percent, 12
percent, and six percent, respectively. Moreover, we note that
granting an unlimited exemption for oil imported from certain
countries may result in an increase in imports from those
countries, thereby magnifying the potential reductions in
revenues.
- 15 Effect of GATT and Other Treaty Issues. We are reviewing
whether the various oil import fee proposals are consistent with
our treaty obligations under the General Agreement on Tariffs and
Trade (the "GATT") and various other bilateral agreements. We
have committed ourselves in the GATT not to increase our tariffs
on refined petroleum products. 15/ Both of the oil import fees
under consideration would violate these commitments unless one of
the GATT exceptions applies. One such exception is national
security. We are considering whether, under current conditions,
an import fee can be justified as necessary, in GATT terms, for
the protection of "essential security interests."
The GATT generally allows other countries to "redress the
balance of concessions" if one country imposes new import
barriers, even if those restrictions are permissible under the
GATT exceptions. If GATT signatories harmed by the oil import
fee were to redress the balance of concessions by imposing
offsetting duties on U.S. products, this would harm U.S.
producers of such products. One way to avoid other countries
redressing the balance by retaliation would be to offer them
"compensation" by reducing U.S. trade barriers to other products
such countries export to the United States. However, providing
compensation by reducing U.S. trade barriers to other products
from injured countries would adversely affect U.S. producers of
competing products. Compensation would also reduce the net
revenue raised from any oil import fee.
If the import fee were applied on a discriminatory basis,
such as exempting certain suppliers, it would also violate the
non-discrimination obligation in the GATT generally known as the
most favored nation provision. Various bilateral Friendship,
Commerce and Navigation Treaties, including treaties with some
oil producing countries that are not GATT signatories, contain
similar most favored nation provisions. Excepting some suppliers
from any oil import fee would be likely to draw a response from
those suppliers entitled to most favored nation treatment that
are not excepted. Before deciding on any oil import fee, we
15/
We have
made a
similar U.S.
commitment
to Venezuela and
withtherespect
should
carefully
consider
treaty obligations
adverse
to
crude
oil
in
a
bilateral
treaty.
The
most
favored
nation
effect any breach of such obligations would have on U.S.
provision
producers. in the GATT, discussed below, would preclude the United
States from imposing higher duties on GATT signatories than on
Venezuela.
- 16 Macroeconomic Effects. As an oil-importing nation, the
United States stands to benefit from the decline in world oil
prices. The present decline, if sustained, will likely result in
a short-term reduction in the inflation rate and a longer-term
reduction in interest rates. The decline in world oil prices is
expected to result directly in lower prices for both refined oil
products and other fuels. In addition, the cost of many
energy-intensive goods, ranging from steel and other metals to
glass, ceramic, and plastic products, also would be expected to
decline. These macroeconomic benefits resulting from lower oil
prices would be diluted if an oil import fee were imposed.
An oil import fee would clearly affect the relative price of
goods and services, but the extent of its impact on the overall
price level and interest rates would depend, in part, on the
response of the Federal Reserve. If the money supply were
allowed to increase to accommodate the fee, there would be a
short-term increase in the inflation rate, thus offsetting the
price reductions that would otherwise result from lower world oil
prices. 16/ If the money supply were held steady, however, there
would liK~ely be a reduction in labor and capital income. In
short, depending upon monetary policy, one might expect either
higher prices and a slight decline in real GNP or more stable
prices and greater decline in real GNP.
Conclusion
As I have indicated throughout my testimony, there are both
benefits and detriments that would result from the imposition of
an oil import fee as proposed in S. 1507 and S. 1997. The
President has stated that he would not foreclose consideration of
an oil import fee in the context of a revenue-neutral tax reform
bill that meets his prerequisites.
16_/ In
n addition to its more general effects, the inflationary
Tmpac t of the oil import fee, if any, might also lead to
increased Federal outlays for various entitlement programs that
are affected by the Consumer Price Index (CPI) and for interest
payments on the national debt. Although it is difficult to
determine the precise impact that an oil import fee would have on
the CPI, we note that a reduction in the CPI of one percentage
point could result in a $4 billion saving in Federal outlays.
Table 1
Average Per-Family Burden for The Boren-Bentsen Bill (S. 1507),
for 1989, Assuming Oil Prices $4 per barrel less than CEA Projections.
Family Income
($ thousands)"
0-10
10-15
15-20
20-30
30-50
50-100
100 or more
U.S. Average
Increase in Oil Expenditures
(in dollars) 1/
Elec- | Fuel
Gasotricity|Oil&LPG line
Total
6.56
8.89
9.81
10.53
14.30
19.06
27.11
27.72
28.13
23.36
25.61
32.35
39.53
59.23
89.33
129.62
154.19
186.58
241.95
309.45
319.51
123.62
166.64
187.37
222.72
288.60
368.04
400.85
12.23
35.10
196.49
287.77
Increase in Expenditures as
Percent of Family Income 2/
No Exemptions | As proposed
92
47
11
33
94
07
79
89
64
72
44
49
18
20
Family
| Percentage Change
Increase in Expenditures] Total % Change In
Income
j
in Tax Under
as % of Current Tax
Tax Burden
($ thou.)|President's Proposall~No Exempt.[As proposed jNo Exempt.|As Proposed
0-10
-35.5
177.6
137
101.5
141
10-15
-22.8
41.7
34
11.8
18
15-20
-13.5
23.3
20
6
9
20-30
-8.7
14.4
12
3
5
30-50
-6.6
9.3
8
1
2
-3
-3.8
50-100
-4.2
5.2
4
1
100 or more
-5.3
1.5
1
Office of the Secretary of the Treasury
February 26, 1986
Office of Tax Analysis
1/ Assumes that foreign and domestic producers absorb $1 per barrel of the
fee. Does not include increased price of natural gas or non-oil goods.
2/ Does not include possible increase in transfer payments.
Table 2
Average Per-Family Burden for The Wallop-Bentsen Bill (S. 1997),
for 1989, Assuming Oil Prices $4 per barrel less than CEA Projections.
Family Income
($ thousands)
Increase in Oil Expenditures
(in dollars) 1/
Elec- | Fuel
GasotricitylOil&LPG line
Total
0-10
10-15
115-20
20-30
30-50
50-100
100 or more
9.84
13.34
14.72
15.80
21.44
28.58
40.67
41.59
42.19
35.04
38.41
48.52
59.29
81.34
134.00
194.44
231.29
279.87
362.93
464.18
479.26
185.43
249.96
281.05
334.09
432.90
552.06
601.26
U.S. Average
18.35
52.64
294.29
•365.27
Increase in Expenditures as
Percent of Family Income 2/
No Exemptions | As proposed
2.88
71
66
00
41
61
18
34
96
08
66
74
26
30
Family
| Percentage Change
Total % Change In
Import Fee Burden as
Income
|
in Tax Under
,
Tax Burden
% of Current Tax
($ thou.)[ President' s Proposal j~No Exempt. |As proposed JN~o Exempt. |As Proposed"
205
229
170
0-10
-35.5
264
51
39
29
10-15
-22.8
62
30
21
17
15-20
-13.5
34
18.8
12
10
20-30
-8.7
21
12.3
7
5
30-50
-6.6
13
3
2
50-100 more
-4.2
7
-3
-3
100 or
-5.3
2
Office of the Secretary of the Treasury
February 26, 1986
Office of Tax Analysis
1/
Assumes that foreign and domestic producers absorb $1 per barrel of the
fee. Does not include increased price of natural gas or non-oil goods.
2/
Does not include possible increase in transfer payments.
Table 3
Per-Family 1983 Household Energy Expenditures by Region (in dollars).
Region
Natural Gas
Northeast
Midwest
South
West
Average U.S.
400.00
431.92
224.20
260.61
323.78
Electricity
Fuel Oil, LPG
Gasoline
Total
388.89
103.29
92.53
42.42
146.95
972.22
1,126.76
1,209.96
1,181.82
1,136.20
2,338.89
2,187.79
2,224.20
1,915.15
2,185.19
577.78
525-82
697.51
430.30
578.26
Source: Energy Information Administration
Office of the Secretary of the Treasury
Office of Tax Analysis
February 26, 1986
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
-iARY. r.nfif^Sjflf Y
26
'
1986
RESULTS OF AUCTION OF 5-YEAR 2-MONTH NpT.E,S.
~.3 -r, fi>"i
The Department of the Treasury has acceptejd-r.$A^8S20 million
of $19,156 million of tenders received from the public for the
5-year 2-month notes, Series J-1991, auctioned today. The notes
will be issued March 5, 1986, and mature May 15, 1991.
The interest rate on the notes will be 8-1/8%.
The range of
accepted competitive bids, and the corresponding prices at the 8-1/8%
interest rate are as follows:
Yield
Price
Low
8.10%
100.043
High
8.13%
99.918
Average
8.12%
99.960
Tenders at the high yield were allotted 43%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
10,143
10,143
$
New York
16,502,071
6 ,533,338
Philadelphia
6,000
6,000
Cleveland
147,005
81,930
Richmond
47,337
17,637
Atlanta
32,979
25,409
Chicago
1,460,961
581,211
St. Louis
80,768
63,768
Minneapolis
17,134
15,994
Kansas City
44,787
44,287
Dallas
10,909
9,769
San Francisco
795,391
129,691
Treasury
726
726
$19,156,211
$7 ,519,903
Totals
i
The $7,520 million of accepted tenders includes $450
million of noncompetitive tenders and $7,070 million of competitive tenders from the public.
In addition to the $7,520 million of tenders accepted in
the auction process, $318 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
B--486
ASURY NEWS
FOR IMMEDIATE
RELEASE
March 3, 1986566-2041
)epartment
of the
Treasury • Washington, D.C. • Telephone
i. ROOM 5310
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,857 million of 13-week bills anjj fpr -S 6^,81^ m 11 ion
of 26 -week bills, both to be issued on
March 6, 1986, ^vere*5cfi pted today.
•7;-:riT OF THE TREASURY
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing
June 5, 1986
Discount Investment
Rate
Rate 1/
Price
Low
High
Average
a/ Excepting 1
26-week bills
maturing September 4, 1986
Discount Investment
Rate
Rate 1/
Price
6.92% a/
7.14%
98.251
6.92%
7.14%
98.251
6.92%
7.14%
98.251
tender of $10,000,000.
6.86%
6.88%
6.87%
7.20%
7.23%
7.22%
96.532
96.522
96.527
Tenders at the high discount rate for the 13-week bills were allotted 59%.
Tenders at the high discount rate for the 26-week bills were allotted 5%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
.... Institutions
TOTALS
$
41,840
28,325,485
22,200
70,570
45,470
59,055
1,282,850
91,685
40,275
63,875
51,340
1,339,085
333,300
: $
22,200
44,800
45,470
58,055
81,850
55,185
14,675
60,775
41,340
83,260
333,300
46,295
19,954,000
18,490
35,800
87,960
59,515
1,394,525
82,945
43,115
49,075
34,030
864,410
347,685
$
46,295
5,983,405
18,490
35,800
47,010
39,265
77,025
50,195
18,115
49,075
28,030
71,210
347,685
$31,767,030
$6 ,857,365
: $23,017,845
$6,811,600
$28,695,665
1,149,665
$29,845,330
$3 ,786,000
1 ,149,665
$4 ,935,665
: $19,399,735
:
983,810
: $20,383,545
$3,193,490
983,810
$4,177,300
1,748,900
1 ,748,900
:
1,650,000
1,650,000
172,800
172,800
:
984,300
984,300
$31,767,030
$6,857,365
1/ Equivalent coupon-issue yield.
B-487
41,840
Accepted
$
5 974,615
$23,017,845
$6,811,600
STATE DEPARTMENT PRESS RELEASE
FOR IMMEDIATE RELEASE
U.S. and Barbados Exchange Instruments of Ratification of Bilateral
~~-~~~~
Tax Convention
On February 28, 1986, the United States and Barbados exchanged
instruments of ratification of a bilateral convention to avoid
double taxation on income and to prevent tax evasion, thus bringing
the Convention into force. It is the first income tax treaty
concluded between the U.S. and Barbados.
At a ceremony held in the Department of State, Barbados
Ambassador Peter D. Laurie and Deputy Assistant Secretary of State
Richard N. Holwill signed and exchanged instruments of ratification
of the Convention between the United States and Barbados for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Income, together with an exchange of notes, signed
at Bridgetown on December 31, 1984. The Convention will enter into
force immediately, and certain provisions will have retroactive
effect for both governments.
The Convention's principal features include provisions to
prevent third-country residents from taking unwarranted advantage of
treaty benefits, and establishes maximum rates of tax at source on
payments of dividends, interest and royalties. It contains rules
found in most U.S. tax treaties regarding taxation of business
profits, personal service income, transportation income, real
property income and capital gains, as well as relief from double
taxation. The Convention recognizes that Barbados is a developing
country by providing somewhat broader rights for the source country
to tax business profits and certain types of personal income than is
generally true for U.S. tax treaties with developed countries. The
Convention also contains rules concerning resolution of disputes and
the exchange of tax information.
Barbados is a Caribbean Basin Initiative beneficiary, and signed
a Tax Information Exchange Agreement with the United States in
September, 1984.
TREASURY NEWS
Department of the Treasury • Washington, D.C,• Telephone
•UOM 5310566-2041
FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
March 4, 1986
^
4 3 55 PH '8(5
tifVKT.iENTCF THE TREASURY
TESTIMONY OF THE HONORABLE
GEORGE D. GOULD
UNDER SECRETARY FOR FINANCE
U.S. DEPARTMENT OF TREASURY
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
TUESDAY, MARCH 4, 1986
Mr. Chairman and Members of the Distinguished Committee
I greatly appreciate this opportunity to appear before your
Committee. You have faced numerous significant financial
issues over the past few years, and I believe you have striven
to keep the legal and regulatory structure in step with a
rapidly evolving marketplace. That challenge is still present
today, perhaps more than ever. I am pleased to have a chance
to work with this Committee, and perhaps to contribute to its
important deliberations. While I have had some opportunity to
meet many of this Committee's members individually, I look
forward to getting to know all of you soon.
My testimony addresses three topics. First, I would like to
say a few words about the prospects of the nation's insured
depository institutions and their ability to serve consumers,
businesses, and themselves. Second, I will discuss the problems
of thrifts and FSLIC, and offer some suggestions on how we might
cope with them better. Third, my testimony touches on some other
deposit insurance issues — related specifically to how we might
increase the fairness and effectiveness of the FDIC's operations.
I also am pleased to note that my colleagues and I have attempted
to offer this Committee complementary statements. Comptroller
Clarke will expand on my remarks about banks' abilities to serve
the public and maintain financial health. Later this month,
Chairman Seidman will share some more detailed ideas about
strengthening deposit insurance operations. And we have been
working closely with Chairman Gray to develop some practical
solutions to help FSLIC.
B-488
- 2 -
I.
Services to the Public and Profitability:
Safety and Soundness
The Keys to
A. Banks' Changing Marketplace
Any deposit insurance system can be only as strong over time
as the industry it is indirectly insuring. And an industry can
remain financially healthy only if it can compete effectively
to serve consumers and other customers.
In the past, banks competed among themselves in a special business
preserve created by the law. Neither technology nor changing •
customer demands posed a real threat. Dissatisfaction with
service was communicated through Congress or the regulators
as much as through the market.
Those days are gone. And they should be. The price for the
banks* security was paid for by consumers, who had ceilings
on savings rates and limited investment options; by businesses,
many of which were forced to raise funds through less efficient
banking intermediaries; and by society, which made saving less
attractive and restricted the development of investment instruments that reduce and spread risks.
There are many beneficiaries of the new era — consumers, small
savers, business borrowers, and our international competitive
position in a critical service industry. But even if one were
willing to sacrifice the interests of these groups in order
to turn the clock back for banks, the deed could not be done.
The marketplace, technology, and consumer preferences have moved
ahead. The big problem today is that banks are falling behind,
with a possible consequence for safety and soundness in the nottoo-distant future.
Let me offer a few examples.
On the asset side, the growth and diversification of securities
stand out as a major competitive challenge to the depositories'
loan portfolio business. Many hitherto illiquid loans — mortgages, commercial paper, even car and other consumer loans —
are now "securitized." These securities offer low-cost, riskdiversified, high-return vehicles for transferring funds from
savers to spenders and investors.
The whys and wherefores of this evolution are too detailed to
discuss at length in this statement. In brief, advances in
computers and communications have made "packaged" transactions
and investments less expensive, more flexible, and more available.
Investors can acquire more detailed information about the characteristics and risk profiles of myriad investment opportunities —
without relying on banks to "intermediate" through their port-
- 3 -
folios. Securities can even be broken down and "rebundled" to
suit special investor tastes — for example, the collateralized
mortgage obligation (CMO), which structures cash flows from
mortgage securities to suit different preferences for maturity
and uncertainty.
The securities' numbers and effects are as notable as their
names and acronyms. In 1980, total commercial paper outstanding
amounted to $124 billion while commercial banks* commercial and
industrial (C&I) loans amounted to $327 billion. By 1985, commercial paper totaled $303 billion and bank C&I loans were $494
billion — increases of 143 percent and 51 percent, respectively.
Moreover, the competition from commercial paper forced banks
to switch a large percentage of their C&I loans from the prime
rate to the usually lower money market rates.
Dealer-placed, non-financial commercial paper is most directly
comparable with bank C&I loans. The increase in outstandings
for this type of commercial paper in the 1980-1985 period was
140 percent, almost three times the increase in commercial bank
C&I loans over the same period. (Dealer-placed, non-financial
commercial paper outstanding grew from $37 billion to $88
billion — 11 and 18 percent of C&I loans at the end of 1980
and 1985, respectively.)
Mortgage-backed securities supply another example of the
remarkable transformation of illiquid assets into easily traded
securities. From modest beginnings in the early 1970's, outstanding mortgage-backed securities of various kinds now total
about $375 billion.
Changes on the liability, or deposit, side of the banking
business are just as striking. The well-known money market
funds took advantage of much lower cost organizations to offer
savers a higher return. In part because the Congress passed
the Depository Institutions Deregulation and Garn-St Germain
Acts, banks have been able to counter the money market funds
to a degree. (Nevertheless, between 1980 and 1985, consumer
deposits in commercial banks increased by 85 percent while the
non-institutional holdings of money market funds increased by
over 250 percent.)
Money market funds were just the first shot in the struggle
for savers' money. And any perusal of investment advertisements
in today's papers reveals that bank investments are the stragglers.
The Wall Street Journal's "Business Bulletin" of February 20
led off with the alert that "Banks Scramble for IRA dollars as
interest rates decline": This report and others explain that
bank and thrift CD's are losing the contest for middle class
savings to mutual funds. Meanwhile, Federal district courts
disagree over whether banks can offer competitive collective
retirement trust accounts.
- 4 If banks cannot evolve, the term "counting house" industry may
before long become an epitaph like "smoke stack" or "rust bowl."
This trend is understandably hard for most of us to accept,
schooled as we have been by banking's historical image of
affluence and influence. We see some quarterly profits that
look reasonable. But the indicators of longer-term expectations
about returns on banks' equity are difficult to ignore.
Mr. James McCormick, in testimony before this Committee last
year, contended that relative financial performance of major
banks has been slipping for about 15 years, as measured by
a capital asset pricing model. While bank stocks have moved
up with other stocks since the time of that testimony,
Mr. Mccormick's basic findings about major banks' relative
financial performance still appear sound. Poor performance
means banks will have a harder time attracting capital; the
attempts to earn a higher return in their traditional, limited
sphere of business may even increase their loan portfolio risk.
Weak banks translate into weak deposit insurance funds. Such
weakness also means that we are wasting a valuable and vital
business that can help consumers, small savers, American industry,
and our international competitiveness. Economists call them
"end-users," but banks call them customers. Banks are trying
to adapt, straining to offer more and better services. Appropriately enough, they are seeking different niches — depending
on their size, location, experience, and comparative advantage.
But their common problem is that they are hemmed in by out-ofdate legal constraints.
I urge the Congress to reconsider and clarify the services
that banking organizations may offer their customers. This is
not just a matter of competitive equity, but one of competitive
survival. If bank holding companies' authority to compete in
familiar business areas such as commercial paper, mutual funds,
municipal revenue bonds, and mortgage-backed securities is not
clarified soon, they run the risk of being bypassed permanently.
Banks' prospects are looking even worse in light of recent court
decisions about commercial paper services. Unless reversed by
the courts or the Congress, these decisions would force banks
to give up business they have handled for years. This retrogression would hurt both business customers and investors.
Small banking organizations in particular need the freedom to
aid consumers and to help themselves by offering insurance,
real estate brokerage, and other local services. Banks have
been shut off from these activities not because of risk, but
because powerful interest groups want to preclude competition.
Moreover, the whole of the benefits for savers exceeds the competitive gain from the sum of individual services: If banking
organizations can diversify, they can offer integrated financial
planning to savers who cannot afford expensive investment advisors
- 5 If the Congress does not wish to deal specifically with each
new line of business for banks, it could permit the Federal
Reserve Board to authorize bank holding company "activities
of a financial nature," with whatever limits the Congress
considers appropriate. And it is certainly hard to understand why the Congress should not at least grant banking
organizations the authority to sponsor mutual funds that
would be available for middle class savings — so small savers
can benefit from their competitive service.
B. Consumer Banks
Some people who are concerned about the financial future of
depositories have determined the best course is to sacrifice
the consumer, or other users of bank services. They seek to
hold back new entrants and competitors from the bank and thrift
industries. One can understand this approach, especially from
those used to the system that prevailed before communicationscomputer technology and consumer-saver preferences opened up the
marketplace.
Nevertheless, it is a mistaken approach for anyone concerned about
services to the public. Moreover, I fear it could be a dangerous
course from a safety and soundness perspective — because we would
waste energy trying to hold back the rising waters instead of
seeking to channel them toward prudent and productive uses.
The so-called nonbank bank is perhaps the prime example of this
challenge. Even the name, along with its accessory "loophole,"
is designed to evoke opposition. One wonders what would have
been the future of discount brokers if some public affairs
genius for securities firms had tarred them effectively with
the term "nonbroker broker."
I cannot discover anything wrong with a bank that orients its
business toward consumers. Indeed, it can bring additional
capital, skills, competition, and perhaps retailing expertise
to the banking system. Some noteworthy groups have moved past
the labels to come to the same conclusion: For example, the
American Association of Retired Persons has announced its support
for a form of nonbank bank.
Like other primarily middle class groups, senior citizens want
to be smart investors, but they struggle to understand the
diversity of available products. Why should we stop firms
from focusing their business expertise on meeting this need?
Small businesses, too, can be served well by the nonbank bank,
albeit in different form: the kind of bank that foregoes demand
deposits but offers commercial loans. These lenders are serving
as conduits between the large deposit and commercial paper mar-
- 6 -
kets, and businesses that are not big enough to issue securities.
It is, of course, important to examine how these new banks
will be regulated and supervised. The first answer, contrary
to the statements of some, is that consumer banks are chartered
and regulated by state and national banking authorities — just
like all other banks. Indeed, a "family bank" bill that has
been introduced would subject them to more stringent community
service and capital requirements than banks and thrifts face.
It is also important to ask about the regulation of transactions
and affiliations between the consumer bank and its parent. A
concern for the safety of the bank payments system may merit
requiring certain commitments by the parent firm, or structural
intermediaries between parent and bank. The blunt approach to
this task is simply to prohibit nonbank banks altogether. But
then we have lost the many benefits of these new entrants.
Moreover, the prohibition approach runs the sizable risk of
failing to hold back market change and thus missing an opportunity
to develop the right regulation from the start.
There already are a number of laws that govern the relations
between nonbank banks and their parents. The Treasury Department
would certainly welcome, however, a charge by the Congress to
work with the financial institutions regulators to develop uniform
rules on the affiliations between nonbank banks and their
parents.
My closing comment on consumer banks relates to thrifts. As I
discuss below, one way to reduce the size of the problem borne
by the thrift industry and FSLIC involves permitting more firms
to purchase ailing thrifts. Currently, some laws, Federal
Reserve Board policies, industry opposition, and pending legislation have stymied would-be purchasers. Some rejected firms
that want to offer financial services have formed consumer
banks.
Congress may wish to consider reducing the barriers encountered
by these potential acquirers — thereby channeling potential
consumer bank entrants toward thrifts, reducing FSLICs costs
(and the S&L industry's ultimate burden), and bringing new capital
into the industry. Without a significant Congressional effort,
however, we could end up cutting off valuable new providers of
services to middle class consumers and not help thrifts.
II. The Problems of the Thrifts and FSLIC
I recognize that for many people the problems of the thrifts
and FSLIC comprise the most important deposit insurance issue.
The Administration shares this interest in addressing the
thrift industry's problems in a prompt fashion. Indeed, given
- 7 -
the decline in interest rates and the current substantial
profits of many thrifts, this is a propitious time to make
headway. Today, I would like to report to you on: (1) estimates of the size of the problem; (2) the limits of FSLIC's
current resources; and (3) a suggested approach toward solving
these problems.
A. Problem Size
Anyone's estimate of the cost of resolving problem thrift cases
entails considerable uncertainty. The hesitation is partially
attributable to important variables — such as interest rates
and regional real estate conditions — that may affect significantly the health of many institutions over time. In addition,
Congress and the FHLBB have the option of permitting many institutions that are liquid but technically insolvent to remain
open.
The most common method of calculating the set of problem institutions is through net worth analysis, which is based on an
examination of a thrift's capital. There are various ways to
measure a thrift's capital base, but the two most prevalent
approaches rely on GAAP (Generally Accepted Accounting Principles) and RAP (Regulatory Accounting Principles, which include
special adjustments that increase capital).
As of September 30, 1985, there were 461 GAAP-insolvent thrifts
insured by FSLIC. These thrifts had assets with a book value
of $114 billion; 236 of them were unprofitable in the third
quarter.
As of the same date, there were 105 RAP-insolvent thrifts insured
by FSLIC. Their assets totaled $22 billion, and only four had
net income in the third quarter.
The table attached to this statement gives a fuller exposition
of the possible problem set. In particular, it supplies (1)
statistics for a narrower net worth measure, tangible net
worth (TAP), which excludes goodwill and other intangible
assets, and (2) data on thrifts with net worth between 0 and 3
percent of assets.
One can refine the analysis of thrifts' financial soundness by
examining factors such as quality of profits, duration match
between assets and liabilities, and portfolio composition.
Indeed, FSLIC employs this detail to select its case load, which
currently consists of about 90 thrifts with assets of approximately
$40 billion. The FHLBB's Office of Examination and Supervision
also uses the financial detail from "call reports" to develop a
"next tier" list of significant supervisory cases.
- 8 Moving from these statistics on troubled thrifts to identification of a number that will require FSLICs assistance involves
considerable supposition and judgment. The Bank Board, the GAO,
and various academicians have published a number of analyses of
potential demands on FSLIC. Under present conditions, their
estimates of the number of thrifts requiring at least some direct
assistance range between 200 and 460 institutions. Their estimates of the book value of assets involved runs from $60 to
$120 billion.
Any estimate of resolution costs is equally indefinite. A few
years ago, when "interest rate spread" cases dominated FSLIC's
case load, resolution costs were about five percent or less
of an institution's assets. But the surge in cases involving
poor quality assets has increased that percentage considerably.
Estimated resolution costs as a percentage of assets in 1985 and
1984 were about 15 percent. If asset quality cases diminish in
size and number, this percentage could fall considerably.
In sum, the recently published reports estimate a range of
200-460 problem thrifts, with assets of $60-$120 billion and
resolution costs between 5-20 percent. They suggest that
the total cost of assistance would range from about $5-$25
billion. Chairman Gray's response to Chairman Garn earlier
this year appraised the resolution costs at almost $17 billion.
FSLIC need not incur all these costs immediately. Indeed, as
an organizational matter, FSLIC may need to prolong its assistance effort. Deferring the resolution of problem institutions
does, however, entail risk. An increase in interest rates will
cause additional losses. Without appropriate supervision,
thrifts in a precarious position may take actions that increase
risk and possibly ultimate loss. Even with careful supervision,
FSLIC may end up assuming the operating losses from thrifts that
continue to lose money. Therefore, we believe it is in F S L I C s ,
the industry's and the public's interest to step up both the
resolution and supervision effort considerably.
B. FSLIC s Resources
FSLIC must cope both with financial and organizational constraints.
The FHLBB has just reported that FSLICs total reserves (assets
minus liabilities) at the end of 1985 totaled about $6 billion.
If FSLICs "allowances for losses" for various assets are low,
as some commentators have asserted, then its total reserves
would be commensurately lower.
FSLICs annual income comes from its regular deposit insurance
assessments (one-twelfth of one percent of deposits), investment
income, and a special assessment (at most, one-eighth of one
percent annually). We estimate that FSLICs 1986 income before
expenses should total about $2.6 billion, of which a little
over $1 billion is from the special assessment.
- 9 The FHLBB and FSLIC are expanding staff considerably so as to
handle better their supervisory and problem case resolution
responsibilities. The FHLBB's budget included 628 staff positions
("full time equivalents") in 1985; the Administration is seeking
to increase this number to 862 in 1986 and 965 in 1987. The
break out for FSLIC alone is 159 in 1985, 298 in 1986, and 372
in 1987.
Furthermore, during 1985 the FHLBB shifted its examination
force (about 750 people) to the 12 FHLBanks, which have mapped
out an ambitious growth program for this important function.
The establishment of the so-called 406 Corporation, now properly
focused in authority, may also help FSLIC to dispose of assets
more expeditiously and profitably.
Despite these substantial efforts to expand organizationally,
there are limits on FSLICs capability to increase its case
resolution efforts. In setting future targets, we need to be
aware of past results: FSLIC resolved 33 cases ($6.5 billion
in assets) in 1985; 27 ($6 billion in assets) in 1984; 49 ($16
billion in assets) in 1983; and 74 ($28 billion in assets) in
1982. The larger numbers in earlier years reflect the relatively
easier task (and lower cost) of resolving "negative interest rate"
spread cases.
C. A Suggested Approach: A Three-Pronged Strategy
We recommend a three-pronged strategy to help the thrift industry
and FSLIC.
First, we need to strengthen the thrift industry as a whole.
We must set targets and create incentives for the industry
to increase its capital. Concurrently, we need to halt the
growth of the problem through improved supervision.
Second, we must enhance FSLICs resources so that it can handle
a greater number of insolvent institutions. FSLIC needs
additional funds if we wish to make more progress, more quickly.
To avoid placing too great a burden on the industry at once, the
funds for FSLIC should be a balance of industry assessments and
prudent borrowing or investment from the Federal Home Loan Banks.
In effect, FSLIC could borrow against its future stream of assessment and investment income to avoid encumbering the industry
with a full recapitalization effort immediately.
Third, we can lower the resolution costs that FSLIC and the
industry must pay if we manage to increase the demand from
acquirers and enhance the franchise value of ailing thrifts.
New entrants can also increase the industry's overall capital
base and long-term health.
- 10 We recognize that interindustry thrift acquisitions are a touchy
subject for many parties, especially some segments of the industry
that wish to avoid competition. But the acquisition logic is
straightforward and undeniable. The problem institutions have
created real costs that FSLIC and the industry must bear.
Neither the Congress nor the Administration is in the mood to
accept a budget-busting bailout, although we can help in
other non-expenditure ways. So if the thrift industry wants to
cut its costs, it should not close out potential acquirers.
As I noted in the first part of this statement, these new
competitors are already pursuing alternatives that will enable •
them to serve consumers and others. Why not channel this energy
and capital to help FSLIC (and the thrift industry) instead of
trying to retain the market structure of a much earlier era?
Indeed, many thrifts, such as the members of the National
Council of Savings Institutions, have recognized and accepted
these stark facts. NCSI welcomes increased acquisitions of
ailing thrifts by a variety of firms.
We also have had productive discussions with the U.S. League
of Savings Institutions. While we may have some differences
of opinion, we agree on a great deal. And there's a strong
common interest in action now to help thrifts and strengtnen
FSLIC.
We acknowledge that the thrift problem will not be solved
overnight. But interest rates are down and many in the industry
are enjoying exceptional profits. This is the time to move
forward vigorously with the elements of this three-part program.
1. Strengthening the Thrift Industry
First, we need to increase the capital base of the industry.
This increase can be spurred in part by FHLBB regulations,
currently under consideration, to increase minimum net worth
requirements over time. (Risk-based capital requirements
offer a variation on this theme.)
To comply, some mutual thrifts may need to switch to stock
form, because it will prove difficult to build the necessary
capital by relying solely on retained earnings. The FHLBB is
examining ways to help by easing the conversion process.
Furthermore, it is appropriate to consider incentives to raise
capital as well as mandates to do so; higher capital levels
could be linked to increased business freedom.
Second, the FHLBB should continue its effort to phase out
regulatory accounting (RAP). The industry's ability to return
to generally accepted accounting principles (GAAP) would be a
valuable signal to investors and depositors that this industry
will be run soundly.
- 11 -
Third, the FHLBB and the FHLBanks should continue to enhance
their efforts to improve supervision. The additional latitude
in business activities that thrifts now enjoy must be combined
with careful monitoring, especially for thrifts without much
of their own equity capital at stake. Active enforcement of
rules to limit or monitor the growth of weak and poorly capitalized thrifts should be an adjunct to this supervision. An
appropriate system of risk-related insurance premiums may
buttress this effort.
Fourth, we need to reconcile states' authority to grant new
thrift powers with FSLICs financial responsibility to pay up
if thrifts fail. We believe some proposals go too far in the
direction of prohibiting state-authorized activities. We
believe a better balance could be achieved by the retention
of additional state powers only in holding company subsidiaries
(rather than prohibit them) — if the Bank Board determines
this extra protection of FSLIC is necessary. The state institutions could still proceed in new business areas, but they
would need to do so with their own capital (through a holding
company subsidiary) instead of with FSLIC-insured funds. This
capital could include profits "upstreamed" from the thrift
subsidiary — if they are not necessary to meet Bank Board
capital standards.
2. Enhancing FSLICs Resources
FSLICs estimated income before expenses for 1986 is about
$2.6 billion, including a little over $1 billion from another
year of the special assessment. There have been numerous
suggestions about ways to raise more capital for FSLIC. The
proposals include a special one percent recapitalization,
an increase in the special assessment, and a merger with the
FDIC. We would prefer to avoid these measures for now, if
possible. Instead, we believe the current contributions to
FSLIC can be combined with carefully evaluated borrowing and
investments from the FHLBanks, spaced out over time.
Some members of the industry are seeking to end the special
assessment. While we agree that the assessment must remain
"special" and impermanent, it is not the right time to scale
it back. We can review the need for this extra charge after
the FHLBB has had an opportunity to address more problem cases.
Indeed, if FSLIC can deal promptly with some of the weakest
thrifts, which are often among the most aggressive bidders
for "hot" money, the case resolution effort may be able to
reduce the industry's cost of obtaining deposits. This cost
reduction would in part offset the special assessment. Moreover, new entrants, if permitted, could lower FSLICs costs
and broaden the industry's capital base, thus potentially
lessening the burden for existing healthy thrifts.
- 12 -
To date, the assistance of the twelve FHLBanks has remained
relatively minor. The FHLBanks are owned by the industry, but
linked to the FHLBB in myriad ways. They are well-capitalized
institutions (1985 paid-in stock of $8.3 billion and surplus
of $1.8 billion) with strong assets and earnings.
The FHLBanks issue consolidated debt, for which they are
joint and several obligors, in the private capital markets.
In part because of the FHLBanks' ties to the FHLBB, their
paper trades as "agency" securities, with borrowing spreads
close to Treasury securities.
The Garn-St Germain Act authorized the FHLBB to direct the
FHLBanks to lend to FSLIC. There are possible variations on
this loan approach, perhaps involving deposits, subordinated
debt, and preferred stock. Authorizing legislation may be
necessary for investments in FSLIC. Furthermore, any financing
"package" must be attentive to the FHLBanks' position in the
debt markets and to the operating needs of the thrift industry.
In addition, the FHLBanks could take some pressure off FSLIC
by providing their standard advances to troubled thrifts without
the FSLIC guarantee the FHLBanks require today. These advances
might be a substitute for the "hot" money that finances certain
weakened thrifts while FSLIC considers how to handle them. The
advances would lower the risk and costs of a thrift on "hold"
and ease the deposit bidding wars that hurt local healthy thrifts.
I met last week with the twelve presidents of the FHLBanks to
discuss our ideas with them. They gave me some important
insights. Most important, the FHLBank presidents are anxious
to work with the Congress, the Bank Board, and the Treasury to
fashion additional FHLBank support for FSLIC. We, in turn,
will seek to arrange a FHLBank financing package that taps the
Banks' skills and resources responsibly.
3. Expand the Acquisition Program for Ailing Thrifts
An increased acquisition effort offers one real option for
expanding the set of institutions that can bear the cost of
the thrift problem. Therefore, it is vital that we reexamine
old beliefs about entry into the thrift business.
At a minimum, we must extend the emergency acquisition provisions
of the Garn-St Germain Act, which expire April 15. In doing so,
the Congress may wish to modify the statutory bidding process.
The law now provides a second shot for some losing bidders
through an awkward procedure that has prolonged the process
and dampened other bidders' interest.
- 13 -
We also urge the Congress and the regulators to look twice before
determining that certain classes of bidders, such as securities
firms, cannot be accommodated in some fashion. Perhaps certain
restrictions on affiliate transactions and conflicts of interest
may suffice. In addition, some proposals before the Congress,
such as the "tandem" restrictions, make thrift acquisitions
exceedingly unattractive; they also strike a blow against consumers by prohibiting cross-marketing and other business connections that improve service and competition.
The regulators can also play an important role. The FHLBB has
proposed a regulation that would increase the franchise value
of a failing thrift: It would permit an acquiring S&L the right
to expand into three additional states. The Bank Board is also
taking steps to speed up the acquisition process and to market
thrifts more actively.
The Federal Reserve Board has moved cautiously in permitting
bank holding companies to acquire ailing thrifts. The FRB's
tandem restrictions on BHCs' acquisitions of ailing thrifts
are exceedingly stringent. The separation between an acquired
thrift and other subsidiaries is much greater than that between
the B H C s bank and those subsidiaries. These rules are vestiges
of acquisitions during an earlier era when statutory interest
rate differentials were in place, and before interstate banking
compacts took hold. We surmise that the FRB is in part waiting
for signals from Congress with respect to the current usefulness
of such restrictions.
Summary on Thrifts
We wish to engage the Congress in this effort to help strengthen
thrifts and resolve FSLICs problems. We value highly your
experience and insights. Equally important, we need your help
to make real progress with the many players involved. We can
make a start alone. But together we can develop a meaningful
program that will make a difference.
III. Operational Deposit Insurance Issues
When Professors Milton Friedman and John Kenneth Galbraith
are in agreement on an economics issue, I usually find it
worthwhile to listen. So it is on deposit insurance. Both
- 14 -
gentlemen have stressed the key systemic protection afforded
the nation's financial network by deposit insurance . V
Moreover, it is important for America's small savers to have
at least one totally safe investment.
I stated earlier that over time a deposit insurance system
can be only as strong as the industry it stands behind. We
are urging the Congress to permit the depository institutions
to evolve with their marketplace — for the sake of the
customers they serve and the very health of those financial
institutions. In addition, we also must recognize that periods
of market adjustment, whether or not we wish it, will result
in some institutions failing. It happens in all industries.
While we need to avoid substantial costs to the public, the
failure of less competitive firms is not an altogether unhealthy
sign.
Failures of depositories, however, cause problems for the FDIC
and FSLIC. They must manage the failure process so as to minimize
disruption of the financial system and the lives of the depositors.
I have just discussed such a "failure management" program in the
context of FSLIC and the thrifts. Without presaging Chairman
Seidman to a great degree, I would like to outline for this
Committee some important operational "failure management" issues
facing the FDIC. We share Chairman Seidman's interest in these
matters and welcome an opportunity to work with this Committee
to enhance the FDICs ability to protect depositors and the
financial system.
V
Professor Friedman wrote in 1963 in A Monetary History
of the United States that:
Federal insurance of bank deposits was the most
important structural change in the banking system
to result from the 1933 panic and, indeed in our
view, the structural change most conducive to monetary
stability since state bank note issues were taxed
out of existence immediately after the Civil War.
Professor Galbraith explained in 1975 in Money: Whence
it Came, Where it Went, that:
'
The anarchy of uncontrolled banking [was] brought
to an end not by the Federal Reserve System but
by the obscure, unprestigious, unwanted Federal
Deposit Insurance Corporation .... in American
monetary history no legislative action brought
such a change as this.
- 15 One frequently mentioned operational issue is the unequal treatment accorded large and small banks. The inequality arises
in part because the FDIC does not have the tools to treat
different size banks alike, while keeping costs and disruptions
down. The FDIC needs the authority both to arrange purchase
and assumption transactions with greater flexibility, and to
ensure that stockholders, managers, and liability holders
remain at risk.
For example, the FDIC has sought authority to acquire the
voting or common stock of an insured bank in connection with
an emergency assistance plan. A floor amendment to the GarnSt Germain Act prohibited such purchases. The FDIC has sought
this power for two important reasons: to ensure that the shareholders bear their full loss and to give the FDIC time to operate
the bank as a going concern while it examines the portfolio
closely and readies the bank for sale. Such an "open bank rescue"
helps preserve the bank's value and avoids a "fire sale." To
avoid concerns about FDIC ownership of banks, the Congress could
impose a reasonable time limit on the F D I C s ownership, perhaps
with an extension if the FDIC makes certain certifications about
the progress of audits, reorganizations, and marketing plans.
Two other key operational issues for any deposit insurer are
the definition of deposit and the delineation of accounts eligible
for insurance. Some court decisions have broadened the meaning
of deposit to include, for example, letters of credit. We believe
it is appropriate for the Congress — in consultation with
the FDIC and the FSLIC — to define deposits by statute; we have
concerns about a broad delegation of this powerful authority to
the regulators.
The absence of priorities for creditor claims has at times tied
the FDIC's hands (and increased its costs) when it has sought to
arrange purchase and assumption transactions. We believe the
Congress may wish to establish a depositor preference claim
over other general creditors, as some states have done.
Another important "failure management" issue relates to the
cost we are willing to force banking customers and the FDIC to
bear to preserve historical geographic barriers to competition.
Perhaps at one time these barriers had an important local value.
But we need to reevaluate their cost today.
The Garn-St Germain Act only permits interstate rescue mergers
of "failed" institutions of at least $500 million in assets.
The same law permits interstate mergers of "failing" thrifts
of any size. The FDIC should not be hamstrung in this fashion,
especially if we wish it to: lower resolution costs; seek to
maintain service to borrowers, depositors, and the community;
and avoid disruptive bank liquidations.
- 16 An analogous problem arises in some unit banking states. The
Congress should examine whether it is now time to permit the
FDIC to allow failing banks to be operated as branches of
their acquirers. Otherwise, some small, failing banks in
rural communities are more likely to be closed and liquidated.
In those exceptional circumstances, should the interests of
the local bankers (or their regulators) triumph over those of
other people in a small town?
Finally, the FDIC faces an important operational issue of how
it will manage the poor quality assets of failed institutions.
In the.past, the FDIC often kept the poor quality assets after
it arranged for another bank to assume the good assets and
deposits. This approach has the unfortunate effect of making
the FDIC the owner and liquidator of many loans. The FDIC has
suggested that it may be time to leave more loans, even poor
ones, within the private financial system. This approach has
three benefits. It may make it easier for debtors to restructure
their loans, it relies on private sector (often local) skills
and incentives, and it eases the FDIC's organizational burden.
In summary, we believe there is much that can be done to
improve the "failure management" capabilities of the deposit
insurance agencies. But many reforms require Congressional
action. Some issues will force us to reassess whether longestablished barriers now hurt local borrowers and savers
more than they protect them. The need is clear. The changes
wrought by national, even international, financial markets
cannot be disregarded. We have an opportunity to adapt our
regulatory systems to them, so that consumers and small savers
can be served better. I would like to assist this Committee in
meeting the challenge.
IV. Conclusion
We will make our best effort to press forward now on these three
consequential topics.
If banking organizations could engage in more services, they
could attend much better than they can today to the needs of
the public — consumers, small businesses, state and local
governments, America's corporations, and others. Just as
important, especially from a safety and soundness point of view,
is the exigent need for banking organizations to catch up with
the evolution of the market; otherwise, they face economic
obsolescence. Their regulation and supervision must adapt, too.
It is to all our advantages to think creatively about safeguards
for depositories owned by different types of firms, instead of
trying to prohibit market and technological changes that we
will never control or prevent. Moreover, the nation's consumers
and small savers show no evidence of wanting to stop these beneficial changes.
- 17 -
The time also is ripe to make major advances on the problems
of the thrifts and FSLIC. The necessity is plain and compelling.
We must: (1) strengthen the industry and limit growth of the
problem; (2) enhance FSLICs capability, relying in part on
the FHLBanks, to resolve more problem cases; and (3) reduce the
burden on the industry by bringing in new capital and assisting
FSLIC by promoting acquisitions of ailing thrifts.
We also will consider improvements in the deposit insurers'
operational ability to manage failures. Some suggestions the
FDIC is considering can enhance equitable treatment of banks,
lower costs, and lessen disruptions to borrowers, depositors,
and their communities.
Finally, and equally important, I wish to reaffirm the Treasury's
commitment to work closely with this Committee and the Congress
to address these challenges. We will refine our ideas with you.
We will seek to answer your questions. If legislation is
appropriate and opportune, we stand ready to assist in ways
large and small.
I have appreciated this invitation to present our views today.
And I respectfully look forward to many more exchanges in the
future.
Mr. Chairman, I would be pleased to answer any questions the
Committee may have.
FSLIC-Insured Institutions
(September 30, 1985)
Low Net Worth 0-3% of Assets
Insolvent
All
RAP 1/
GAAP 2/
TAP 3/
RAP
GAAP . TAP
Total - 3%
Net Worth or Less
RAP
GAAP
TAP
Number of firms
3,224
105
461
686
680
788
788
785
1,249
1,474
Assets ($billions)
1,042
22
114
343
253
320
346
275
434
689
-4.9
-3.3
-4.7
1.93
1.84
1.63
1.38
.47
-1.5
4
225
377
Net Worth/Assets (%)
(as measured, respectively,
by RAP, GAAP, and TAP)
Firms with positive net
income in 3rd quarter
2,611
421 587 628
425 812 1,005
Net income ($millions) 1,052
-380 -379 -169
-60 91 462
•440 -288 293
Annualized ROA (%) .41
-6.80 -1.32 -.20
-.10 .12 .54
-.64 -.27 .17
Source:
FHLBB's Office of Policy and Economic Research
1/ Regulatory net worth.
2/ Net worth as defined under Generally Accepted Accounting Principles.
3/ Tangible net worth — GAAP net worth less goodwill and other intangible assets,
TREASURY NEWS
Department of the Treasury • washingtopRd^^foTelephone 56
FOR RELEASE AT 4:00 P.M. March 4, 1986
&;? fi 3 H3 PH '8fi
TREASURY ' S WEEKLY BILL, pEF^RIJJg
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,600 million, to be issued March 13, 1986.
This offering
will result in a paydown for the Treasury of about $1,275 million, as
the maturing bills are outstanding in the amount of $14,866 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Monday, March 10, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
June 13, 1985,
and to mature
June 12, 1986
(CUSIP No.
912794 KK 9 ) , currently outstanding in the amount of $16,161 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,800 million, to be dated
March 13, 1986,
and to mature September 11, 1986 (CUSIP No.
912794 LC 6 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing March 13, 1986.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to the
extent that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them. Federal Reserve
Banks currently hold $1,427 million as agents for foreign and international monetary authorities, and $3,586 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-489
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE
-IBRARY.ROOM
5310
March 4, 1986
Remarks by
° ^ H n on
Secretary of the Treasury KTHLNT OF THE TREASURY
James A. Baker, III
at the Creve Coeur Club's
88th Annual Washington Day Dinner
The Civic Center
Peoria, Illinois
Tuesday, March 4, 1986
Good evening, and thank you, Bob, for that introduction. You
know, ladies and gentlemen, George Washington — the honoree of
tonight's dinner — once described friendship as "a plant of slow
growth that must undergo and withstand the shocks of adversity."
Well, folks, by that definition %and after what Bob and I have
been through these past several years in Washington, we're really
good friends now.
So when Bob called me a couple of weeks ago and asked me to
speak to you this evening, I was quick to accept — partly
because of that friendship and partly because Peoria has become
pretty well-known in Washington lately. Bradley University's
Braves and their best-in-the-country record have been front page
news in a town where sports is almost as important as politics.
It's a pleasure to be here in Peoria tonight for this special
occasion.
Americans really enjoy our myths and traditions. They
entertain us. They inspire us. We use them to pass our values
on to our children. Parson Weems' versions of the stories we
associate with George Washington — cutting down the cherry tree
and tossing a silver dollar across the Potomac — are cases in
point.
But, as de Tocqueville said, Americans also "accept tradition
only as a means of information and existing facts only as a
lesson to be used in ...doing better." We like to examine and,
as Bob will tell you is the case in Congress, argue at length the
merits of various public policy options.
So what I'd like to do tonight is mention several myths that
have had some currency in public policy discussions in recent
months and share my point of view and experience with you on
these topics.
B-490
-2041
-2The myths I have in mind are these:
o Protection is the best way for American industry to
respond to foreign competition.
o The solution to the problem of a high deficit is to raise
taxes.
o The President's budget shortchanges those whose need is
great and gives defense spending a bonus.
The myth may be that American industry is weak and needs
protection, but the unassailable fact is that — given a level
playing field — American industry can out-produce, out compete,
and out-sell anybody, anywhere in the world.
While job creation in Western Europe remained flat, our
economy gained nearly 10 million new jobs in just over three
years and fueled the international recovery. Our toughest
competitors, the Japanese, appreciate the value of our technology
and the quality of our workforce. That's one of the reasons why
Mitsubishi Motors joined Chrysler to build an auto assembly plant
in Rockford. And that's happening all over the country, not just
here in Illinois.
»
As the economic recovery has spread, we have seen a favorable
convergence of international economic performance, largely as a
result of working with the major industrialized countries to
solve our problems.
Last September the finance ministers and central bankers of
the G-5 nations — Great Britain, France, West Germany, Japan and
the United States — gathered at the Plaza Hotel in New York.
Our goal was to adopt and implement policies that would lead
to solid economic performance for all of us. We agreed that the
exchange markets did not accurately reflect fundamental economic
conditions and that some orderly appreciation of the non-dollar
currencies against the dollar was desirable.
The dollar has come down more than 30 percent against the yen
and the deutschemark in the past year. That's good news for all
of you who are concerned about the trade deficit, and it is good
news for industries and farmers in Illinois and elsewhere who
face foreign competition. I have been receiving a number of
encouraging comments just this evening from business leaders who
are now more optimistic about our export picture.
Of course most exports and imports do not respond immediately
to exchange rate changes. But we expect the trade deficit to
shrink by the end of this year. Past experience suggests that by
that time we will see the demand for imports weaken and stronger
markets for our products overseas.
-3We now face the challenge of advancing our efforts to improve
the international monetary system. The current system of
floating rates remains valid. It has served us well during a
series of global economic shocks, particularly because of its
flexibility.
At the same time, the system has been less stable than we
would have liked. As the President pointed out in his State of
the Union address, we must be sensitive to the problems that
"wild currency swings" cause our farmers and other exporters.
Exchange rates are one factor — though by no means the only one
— contributing to protectionist pressures.
President Reagan has asked me to determine if the nations of
the world should meet to discuss the role and relationships of
our currencies. Given the volatility of exchange rates over the
last 15 years, we think it's worth considering whether some
innovations might be made to encourage stability in the
international monetary system.
I've been referring to our policies involving major
industrial nations, but we must also remember that growth in the
less developed world is extremely important to the United States.
Jobs and income right here in Peoria depend on trade with those
countr ies.
As you know, many of the less developed countries wrestle
with problems stemming from their heavy loads of foreign debt.
We believe that these LDCs can help themselves by adopting the
kind of measures called for in the "Program for Sustained Growth"
we announced at the annual meeting of the International Monetary
Fund and World Bank last year in Seoul, Korea. So far, the
response to the plan has been encouraging.
The other part of the equation is to push for free but also
fair trade. In his address on trade last fall, President Reagan
outlined how we must strengthen, extend, and modernize the
trading system. He described the dangers of rushing blindly into
protectionist "solutions" that risk disastrous trade wars.
Evidence is overwhelming that such conflicts are unwinnable.
If our experience with the Smoot-Hawley tariff in 1930, that set
off a trade war and significantly deepened the Great Depresssion,
weren't enough to convince us, there is now a large and
compelling body of economic scholarship to back up the point.
Protectionism, in reality, pits one American worker against
another, one industry against another, one commmunity against
another, and raises prices for everyone.
The best way to promote free and fair trade is through
multilateral negotiations. We believe it's time for another GATT
round as soon as possible. Such negotiations allow us to
counterbalance powerful groups that expect to benefit from
protectionism with those who will benefit from free trade.
-4Meanwhile, we are slowly but surely making progress in
opening up markets in Japan and other countries on a bilateral
basis. To combat subsidized imports or ones that are dumped on
our markets we are continuing aggressive enforcement of the
anti-dumping and countervailing duty acts.
Moreover, President Reagan is the first president in our
country's history to initiate Section 301 cases to remove unfair
trade barriers overseas. Until he assumed leadership in that
area, industry had to go to the trouble and expense of making the
first move.
The Special Trade Representative, Ambassador Yeutter has been
negotiating removal of unfair trade practices in Korea, Taiwan,
Brazil, and the European Community. We have resolved some issues
and we will continue to press forward.
We cannot and will not continue to accept $150 billion trade
deficits. The steps we are taking on international exchange
rates and on enforcing the trade laws that we already have on the
books are making a difference. We are beginning to turn the
corner~~on the trade deficit problem and we're heading for better
times. And that's no myth.
The second myth I mentioned a few minutes ago is that the
solution to the high deficit is to raise taxes. "And that's a
fairly easy myth to refute. After all, the presidential
candidate who ran on a platform of a tax increase carried only
his own home state and the District of Columbia.
If American taxpayers have to dig deeper into their pockets
to pay the country's bills, the wrong people are being asked to
tighten their belts. The President is absolutely in tune with
the American people on this issue. We do not face large deficits
because the American people are undertaxed. We face them because
the federal government overspends.
Experience has already proved that higher taxes reduce
incentives for Americans to work, save, and invest — choking off
the tremendous job-creating capacity of the economy. Nor is it
clear that higher taxes would reduce the deficit. Experience has
shown that such revenues are used for more federal spending, not
for deficit reduction.
And while I'm on this point let me shoot down a related myth,
that the Reagan tax cuts of 1981 caused the deficit. Tax
revenues which had soared to over 20 percent of GNP before those
cuts fell to 19 percent — the same average range that prevailed
from 1952 to 1979. But spending rose to 24 percent of GNP last
year, a substantial increase above the 20 percent average during
the 1960s and '70s.
-5Over the past five years we've made some real strides toward
reducing the burden of government on the economy. We've started
down the road to responsible deficit reduction, paving the way
for sound fiscal and monetary policy at home. And we have
underway a historic effort at achieving significant tax reform
that will allow Americans to channel their economic energy into
productive enterprise, rather than tax shelters.
True tax reform will lead our country into increased
productivity and growth. And true tax reform also means a tax
system that is fair — ensuring that everybody pays his fair
share — but no more. It will take bipartisan support to achieve
a tax reform bill that meets the standards the President has set.
This week the first cuts mandated by the legislation that
commits the federal government to a balanced budget by year 1991
took effect. And contrary to widespread misunderstanding, the
Gramm-Rudman-Hollings legislation's automatic spending cuts are
triggered only if Congress fails to pass a budget that meets its
deficit target limits.
While one provision of the law has been challenged and will
be reviewed by the Supreme Court, it is the law of the land and
it is a big step in the right direction.
The President has submitted a budget to Congress for Fiscal
Year 1987 that meets the deficit target of $144 billion. The
Congress must now make some tough choices. Cutting the deficit
involves difficult decisions. We must fund essential programs
and we must maintain the social safety net and we must provide
for modest but steady growth in defense.
Mentioning the social safety net leads me to the last myth I
want to talk about — the peculiar idea that President Reagan's
budget distorts the nation's values and priorities.
Leave aside the fact that the President grew up here in
Illinois and knew the dark days of the Depression from the
underside. Leave aside the fact that the President came to
conservative economic views after many years as an FDR liberal.
Look to the fact that contrary to the common impression, the
brunt of the President's proposed cuts does not fall on the poor.
The President is not asking for many changes in programs -- aid
to families with dependent children, supplemental security
income, food stamps and the like — which serve the truly needy
and comprise the social "safety net." Overall, real outlays for
safety net programs rose 12 percent from 1980 to 1985 and will
continue to rise through the President's second term.
Compared to spending for human resources and other nondefense
programs, military spending is not a great burden on our economy.
Defense expenditures today, as a fraction of the Gross National
Product, are smaller than in any year between 1951 and 1972.
-6With the Administration's present plans, defense spending would
stand at 6.2 percent of GNP by 1991. This percentage would still
be less than that in any year of the Eisenhower, Kennedy or
Johnson Administrations.
And the President will not tolerate waste in the Pentagon any
more than he would accept it in other government programs. Last
week he welcomed a report from the Packard Commission which
outlined improvements and potential savings in our military
procurement system.
This administration is guided by two principles. One: we
aim to achieve the essential task of reducing the deficit without
harming our defense and social needs. We are going to create a
leaner, better-integrated, more streamlined Federal government —
stripped of marginal, nonessential and inappropriate functions
and activities. The other is to enable each American to overcome
dependency — to achieve independence and self-confidence.
The President has commissioned an evaluation of the programs
and strategies the federal government supports to meet the
financial, educational, social, and safety concerns of poor
families. He has also asked the Secretary of Health and Human
Services to report on how the private sector and government can
work together to address the problems caused by catastrophic
illness.
Helping those who need assistance is one of the most
important threads in the fabric of American life. Ours has
always been a nation of givers — volunteers, open-handed
charity, and neighborly cooperation.
It has been estimated that more than half of all American
adults — 92 million people — work in their spare time for some
worthwhile cause or contribute to it with their hard-earned
dollars.
And that attitude is alive here in Peoria and all over
America. It's the kind of spirit that — in President Reagan's
words — "makes me absolutely convinced that this country's
future is ours to shape — that no problem is beyond our ability
to solve."
I'm not by nature a cheerleader, but I am absolutely
convinced, after my experiences in Washington, that this country
really is poised for greatness. I've now served in two Cabinet
departments and for four years at the White House.
I've seen firsthand how in only five short years we have
turned national frustration into national rededication. I've
seen 39 straight months of economic growth, interest rates cut in
half, and inflation falling from over 12 percent in 1980 to under
4 percent for the past four years in a row.
-7But there has been something else growing in this country as
well — a resurgence of pride and hope, even in the face of some
problems that we must face and solve together. And despite some
of the concerns that you have here in Illinois and here in
Peoria, there is much to be proud of.
I'm reminded of some words written by a midwesterner, Wendell
Willkie, who rose from his boyhood in Indiana to run for
President. "I believe in America because in it we are free —
free to choose our government; to speak our minds; to observe our
different religions.
"Because we are generous with our freedom and share our
rights with those who disagree with us. Because we hate no
people and covet no people's land. Because we are blessed with a
natural and varied abundance.
"Because we have great dreams and because we have the
opportunity to make those dreams come true."
From the earliest days of our country's history, we have been
a people known for our rockhard, clear-eyed realism. We are also
a nation that has drawn strength from our traditions. And we
have inspired the whole world with our dreams.
The world's hopes do rest with America's future and America's
hopes do rest with us. As your native son and statesman Adlai
Stevenson said, we must resolve "to serve our great traditions,
greatly."
Thank you and God Bless You.
"iKEASURYNEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
March 6, 1986
« .'RP^ y ?~r-,ks -Jin
STATEMENT OF THE
HONORABLE CHARLES O. SETHNESS " : - TREASURY
ASSISTANT SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
THURSDAY, MARCH 6, 1986
Mr. Chairman, and Members of this Distinguished Committee
I am pleased to have this opportunity to present the
Administration's views on the difficulties facing insured
agricultural banks. I look forward to working closely with
you on this and other financial institutions issues.
The problems in our agricultural sector have created
serious financial and personal difficulties for many farmers.
These problems have made it hard for some farmers (especially
the most highly-leveraged producers) to repay their loans.
As a result, there has been a substantial increase in the
number of nonperforming assets at agricultural banks and other
farm lending institutions (e.g., the Farm Credit System).
We are alert to these problems. Nevertheless, we also
must examine this issue in a fair perspective, given the many
demands on the Federal Government's resources today. For
example, according to the Federal Reserve, 80 to 85 percent
of all farmers remain in sound financial condition.
Agriculture is going through a major transition in
America. And it must do so if it expects to compete
effectively for export markets. The new Farm Bill will spend
at least $50 billion over the next few years to ease the way.
The lower dollar will help, too.
Current USDA economic projections anticipate several more
years of severe pressure on farmers, rural communities and
agricultural lending institutions. But USDA expects the
capacity-demand mismatch to improve and land values appear
to be bottoming out in many parts of the country.
B-491
- 2 Despite the difficult near-term outlook, the Administration
believes the bank regulatory structure and the farm assistance
programs currently in place make the problems at agricultural
banks manageable. We believe, however, that it is critical for
the bank regulatory agencies to continue to work constructively
with farm banks on their problems and the concerns of their
borrowers. We will strive to assist the regulators in this
task.
The remainder of my statement: (1) presents an overview
of the nature of the financial problems of agricultural banks;
(2) discusses how recent legislation strengthening the Farm
Credit System (FCS) and the programs of the Farmers Home
Administration (FmHA) benefit these banks; and (3) addresses
the major special assistance programs that some agricultural
bankers are requesting.
Financial Problems of Agricultural Banks
Most agricultural banks* are still sound. But the number
of individual banks with problem loans is increasing. The
agricultural banking sector will continue to face trying times
until agricultural incomes and land prices stabilize. The
FDIC and OCC have stated, however, that they do not believe
agricultural bank problems will affect the safety and soundness
of the banking system.
The banking sector's direct exposure to the agricultural
sector is limited to slightly over two percent of total
commercial bank assets. Only about 23 percent of total farm
debt, (i .e., $48 billion in direct loans) is held by commercial
banks.*"* About half of that commercial bank credit (S24 billion)
is held by banks that are diversified and thus better able to
absorb nonperforming agricultural loan losses. The other $2 4
billion of commercial bank agricultural loans is held by almost
4,000
agriculturalbanks
banks.
Agricultural
are defined here as those with over
25 percent of their gross loans in agricultural credits
(loans secured by farm land, loans to finance agricultural
production and other loans to farmers).
The Federal Reserve Board estimates that at year-end 1985
total U.S. farm debt equaled about $210 billion. Commercial
banks held about 23 percent of the total farm debt, the Farm
Credit System (FCS) held about 29 percent, the Farmers Home
Administration (FmHA) held about 13 percent, life insurance
companies and the Commodity Credit Corporation held about
13.5 percent, and individuals and others held the remaining
21.5 percent.
- 3 Historically, agricultural banks have enjoyed higher
earnings, higher capital levels, and lower loan losses than
nonagricultural banks. Therefore, in spite of their present
problems, agricultural bank capital is still reasonably strong.
On September 30, 1985, 50 percent of the agricultural banks
had reported capital-to-asset ratios of over 10 percent,
37 percent had reported capital between 8 and 10 percent, 12
percent had reported capital between 6 and 8 percent and only
1 percent had reported capital below 6 percent. As a group,
their capital-to-asset ratio of 9.75 percent was well above
the average of 7.5 percent for the entire banking system.
Obviously, there is a great disparity in the condition
of individual agricultural banks. There may also be a number
whose apparently high capital does not reflect fully the
continued deterioration in their loan portfolios. In addition,
the troubled banks are concentrated geographically. Sixty-two
agricultural banks failed in 1985 — just over one percent of
all farm banks. But 52 were located in the Midwest and Great
Plains states, where the farm economy has been hit most severely
by the weak export market for American farm products. The
failed banks are generally extremely small; the average asset
size of failed agricultural banks in 1985 was just under $20
million.
We also must be careful not to suggest that all bank
failures deprive small communities of their local lenders.
Late last year, the FDIC testified in the House that 40 of the
50 agricultural banks that had failed as of that time had been
reopened -- either as free-standing banks or as branches of
another bank. This fact does not deny the hardship to the
banker and some problem borrowers. But clearly we have ways
to maintain credit in rural towns and communities without
resorting to possibly costly solutions to assist all troubled
banks.
The FDIC expects that in 1986 farm bank problems will
continue at levels at least equal to those experienced during
the recent past. It estimates that losses on total farm loans
for all lenders will range from about $7 billion to $20 billion
over the next three to four years. Farm loan charge-offs at
commercial banks are estimated to have reached $1.5 billion in
1985. When combined with farm loan losses at other lenders,
the total for 1985 would exceed $3.0 billion.
Most agricultural banks are handling their problems well
and remain sound institutions. Farmers, their bankers, and the
bank regulators are working together to solve loan repayment
problems. Nevertheless, if the farm economy does not improve
over the next few years, many marginal farmers and their banks
will continue to face hard times.
- 4 Farm Credit Amendments Act of 1985
Late last year, I was deeply involved with the drafting
and enactment of the Farm Credit Amendments Act of 1985, which
the President signed into law on December 23, 1985. Because
this legislation moved so rapidly, many people remain only
partially informed about its contents and effects. I would
like to describe the Act briefly for you, because agricultural
banks will benefit notably from its passage.
The Act strengthens the Farm Credit System (FCS) in three
major ways. First, it enables the FCS to help itself by transferring its substantial surplus to those districts in greatest
need of capital. This additional capital will help hard-pressed
FCS districts to absorb losses and work with debt-stressed
farmers. Second, the Act reforms the Farm Credit Administration
by making it an arms-length regulator and granting it powers
to ensure that FCS lenders operate in a safe and sound manner.
Third, the new law gives a carefully restricted "backstop" to
the FCS to ensure its ability to fund itself in the capital
markets.
Some agricultural bankers have contended that since
Congress enabled the Farm Credit System to help itself, Congress
should help them. This reasoning is highly ironic. It ignores:
(1) the significant differences between the FCS and farm banks,
as well as the nature of the help FCS received? and (2) the
critical fact that a viable FCS helps agricultural banks in
many ways.
First, the FCS differs from banks. It is a privately
owned cooperative that is chartered by Congress to supply
credit and closely related services to farmers and ranchers.
The System's approximately 800 constituent units are linked
by: (1) their reliance on consolidated borrowings in public
debt markets (about $68 billion outstanding); (2) the joint
and several liability of the 37 System banks that play the key
intermediary role; (3) loss-sharing contracts; and (4) their
common legal establishment under the Farm Credit Act of 1971.
The FCS is chartered by Congress to serve only one sector
of our economy: agriculture. It does not have the diversified
asset powers that banks enjoy. In addition, the FCS raises
money in the bond markets, whereas banks fund themselves
through deposits — with liquidity assured by deposit insurance
and the Fed's discount window. If bond market investors lose
confidence in FCS, there is no FDIC to stop the run.
One major assistance given the FCS by the 1985 Act was
the authority to shift surplus capital from healthy institutions to the weaker ones — something ihat the commercial
- 5 banks are not likely to propose for themselves. Moreover,
the package included a new requirement that FCS lenders must
prepare independently audited financial statements according
to generally accepted accounting principles (GAAP) — just
when the banks are seeking to loosen their accounting standards.
Second, a viable FCS helps agricultural banks in at least
four ways:
(1) Commercial banks are the largest single holder of FCS
bonds; if these bonds were to lose value, many agricultural
banks would suffer sizable losses.
(2) FCS fills an important lending niche that most
agricultural banks avoid: making long-term land loans. If FCS
funds were not available, the banks would be pressured to meet
this need of farmers. Federal Land Banks currently hold about
$49 billion of farm debt (23 percent of the total outstanding),
accounting for about 60 percent of farm mortgage finance.
(3) If FCS could not roll over its debt, it would have to
liquidate its farm loans -- depressing the value of farm land
and other farm assets even further. Such a decline in farm
collateral values would severely damage agricultural banks.
(4) Finally, FCS's owners are its farmer-borrowers. If
they lose the value of their stock because FCS cannot pay its
debts, many farmers will be unable to repay their loans from
agricultural banks.
This winter the FCS forecasted that its total losses will
be in the range of S5-S6 billion over years 1985 through 1987.
As of September 30, 1985, FCS had $5.5 billion in earned
surplus, $5.3 billion in borrower stock, and $1.6 billion in
loss reserves.
FCS reported a $2.7 billion loss for 1985, leaving S3.4
billion of earned surplus and loan loss reserves of $3.2
billion. The System's large loss has not disturbed the market
for the bonds it sells to raise funds. Since Congress passed
the Farm Credit Amendments Act, the yields on the bonds have
narrowed to between 30 and 55 basis point above comparable
Treasury bill yields, and even narrower spreads over the yields
for other "agency" borrowers. These borrowing rates are
comparable to those for healthy major corporate borrowers.
Benefits of the Farmers Home Administration Programs
The Farmers Home Administration (FmHA) -- an agency within
the U.S. Department of Agriculture that holds 13 percent of
total farm debt — also relieves the pressure on agricultural
- 6 banks in several ways. FmHA is a lender of last resort for
farmers, other rural residents, and communities unable to
obtain credit at affordable rates and terms from commercial
lenders. At the end of September 1985, the agency had about
270,000 farm and ranch borrowers.
The FmHA's major farm loan programs include:
(1) Farm operating loans. These are usually one-year
loans to help farmers cover the cost of producing a crop. In
fiscal 1985, FmHA obligated $4.7 billion for operating loans,
about $1.1 billion of which was for guaranteed loans.
(2) Farm ownership loans. These are long-term loans to
assist in acquiring farms. The FmHA made $720 million in
ownership loans in fiscal 1985.
(3) Disaster emergency loans. These are designed to help
farmers recover from the effects of a natural disaster such as
drought or flood. The budget for emergency loans varies
according to the number of officially declared disasters; in
fiscal 1985 and 1984, FmHA made $491 million and more than
$1 billion in emergency loans, respectively.
During fiscal 1985, the Secretary of Agriculture, employing
his discretionary authority, provided special credit assistance
to over 152,000 FmHA farm borrowers, more than double the
number of borrowers in 1984. Special credit assistance included
deferral of loan payments, rescheduling, and subordination of
liens to commercial lenders in the private sector.
In addition, in September 1984, the Administration
introduced a FmHA debt reduction program to help farmers and
banks. Under this program, the FmHA guarantees up to 90
percent of renegotiated loans on which a bank has written down
the principal and/or reduced the interest charge sufficiently
for the borrower to service his debt. There has been
surprisingly little use of this program by the banks.
The newest FmHA program to assist farmers and their
bankers was authorized by the 1985 Farm Bill. The Act directs
the Secretary of Agriculture to establish an interest rate
reduction program for loans made by commercial banks and
guaranteed by the FmHA. Under the program, a commercial
lender must reduce the interest rate on a farm loan by a
specified minimum amount to allow a farmer to have a positive
cash flow. Then the Secretary can make a payment to the lender
in an amount equal to up to 50 percent of the cost of the
interest rate reduction. This payment may not exceed the cost
to the government of reducing the rate by more than two percent.
The term of the interest rate reduction contract may not exceed
the remaining loan term, or three years, whichever is shorter.
7 The amount of funds available for this program can total
up to $490 million; the program runs until September 30, 1988.
Clearly, banks with problem loans and their farmer-borrowers
have much to gain from this sizable expenditure program.
Proposed Special Assistance Programs for Agricultural Banks
There are several special assistance measures proposed by
the agricultural banking community and others. These include:
(1) issuing net worth certificates; (2) permitting extended
loan write-down periods; (3) creating additional programs for
principal or interest rate buydowns; (4) placing a moratorium
on foreclosures; and (5) relaxing state laws to ease the
preservation of banking services to communities with a failing
bank. I will review each of these proposals briefly.
Net Worth Certificates (NWC). NWCs were first authorized
by the Garn-St Germain Act of 1982. The Act permits the FDIC
and FSLIC to purchase NWCs from qualified insured thrift institutions in exchange for promissory notes, in order to assist
institutions experiencing losses due mainly to interest rate
spread problems. Since NWCs qualify as capital for regulatory
purposes, they in theory allow thrifts time to restore capital
to adequate levels.
Some members of the banking industry have asked Congress
to expand the program to provide paper capital to agricultural
banks — this time to offset losses on problem loans, not losses
due to negative interest margins.
The major disadvantage of this program is that the
ultimate costs could be very high. If the farm economy did
not turn around soon, the FDIC would have to pay off many of
the holders of the promissory notes at substantial cost.
Moreover, the managers of institutions kept alive in this
fashion have an incentive to take greater risks: If their
gamble pays off, they stay in business; if they lose, the
FDIC would pick up the tab.
The program would also disguise the true state of capital
adequacy and violate generally accepted accounting principles.
As we have seen in the case of the thrifts, "creative" bookkeeping can undermine confidence in a whole industry. In
addition, while in theory this program could be directed only
at fundamentally sound banks in temporary trouble, in practice
it is difficult to set this criterion and to stick to it.
Permitting Extended Loan Write-Down Periods. A second
type of proposal would supercede accounting rules by permitting
banks to extend loan write-downs over a number of years.
Currently, a bank must book a loan loss when it determines that
a portion of the loan is no longer likely to be paid back.
- 8 Allowing a bank to amortize loan losses over an extended period
is really the same as allowing it to overstate its capital
position. This approach may undermine the public's knowledge
of, and confidence in, a bank's financial condition. It also
runs the risk of increasing the FDIC's costs by keeping fundamentally insolvent institutions alive with no real capital at
risk.
The advantage of the loss deferral proposal over NWCs is
that NWCs involve a promissory note by the FDIC. If the bank
fails, the FDIC must pay off the note. The loss deferral
program simply overstates the capital buffer between the losses
and the FDIC.
The Comptroller's Office is examining the risks and
benefits of a variant of loan loss amortization. In effect,
it may be able to "regularize" a capital rebuilding schedule
for banks whose capital has fallen below supervisory standards,
but which have reasonably good prospects for recovery over
time. If workable, this approach may help limit credit
contraction; otherwise, percentage lending limits may force
a bank with a reduced capital base to reduce loans outstanding.
Principal or Interest Rate Buydowns. The Administration's
newly authorized $490 million program for the FmHA offers an
example of how an interest rate buydown can work. The Federal
Government and the lender share the cost of reducing the
principal or debt service on a loan —• to an amount the borrower
can manage. This type of program increases the likelihood
that a satisfactory work-out can be arranged between the farmer
and the lender.
This type of program may encounter problems, however, if
a farmer has several lenders. If one lender decides to reduce
his loan's interest rate so as to return the borrower to a
positive cash flow, the other lenders will have improved their
positions at the first lender's expense. Requiring coordination
between the lenders would heip distribute losses more equitably,
but could involve administrative problems.
The Administration wants to make the existing buydown
program work. FmHA published regulations for it in the Federal
Register on February 25, 1985; and farmers and bankers can
take advantage of it immediately.
Given the cost of this approach, it would be imprudent to
expand outlays before we even have seen how the first sum works.
Neither Congress nor the Administration can accept a budget
busting addition now.
- 9 A Moratorium on Foreclosures. Some have suggested placing
a moratorium on foreclosure proceedings against farmers who
fail to keep up their debt service payments. This approach
ends up hurting both farmers and lenders.
First, a moratorium would have a chilling effect on future
farm lending, especially for young or marginal borrowers.
Second, a moratorium would not improve a farmer's cash
flow or help him or her to obtain additional credit for
continuing operations. It just buys some time, perhaps at the
cost of some further erosion of the farmer's capital. If
farmers are facing foreclosure, they are experiencing more
than temporary difficulties. For the last few years, bank
regulators have encouraged forbearance on farm loans so
that banks will resort to foreclosure only when no mutually
satisfactory plan to make the loans payable can be worked out.
Third, a moratorium would overwhelm many farm banks.
Farmers would have less incentive to keep their loans current.
The banks could not liquidate any of their nonperforming
loans; they would be locked into continuing losses from
the interest carrying costs.
Relaxing State Laws to Maintain Rural Credit. Some
restrictive state laws — pertaining to farm ownership, unit
banking, and out-of-state acquisitions -- exacerbate current
problems. Restraints on farm ownership reduce the demand for,
and hence the price of, farm land. Unit banking states limit
the ability of banks to weather losses through offsetting
profits from a more diversified lending base. Moreover, states
that still require acquirers of failing banks to run the banks
as stand-alone operations make it hard or impossible for the
FDIC to arrange purchases that could maintain banking service
for many communities. Neither our rural citizens nor the FDIC
can continue to afford barriers to branching in emergency
situations.
Similarly, the emergency acquisition provisions of the
Garn-St Germain Act of 1982 severely restrict acquisitions
of troubled banks across state lines: The bank must have
failed, and must have assets of at least $500 million. This
is "populism" for a few bankers — but not for farmers, not for
people in small towns, and not for the other bankers who must
finance the FDIC. The emergency acquisition provisions will
expire on April 15 unless the Congress extends them. If we
want to manage the failure of small banks better — so borrowers
and small savers are helped — Congress should eliminate
these restrictions and extend the emergency provisions.
- 10 Conclusion
Agricultural bankers deserve our respect for their able
handling of the challenges caused by the massive structural
changes now taking place in the agricultural sector. But we
must be careful about taking "crisis" actions that will cost
us dearly over time without really helping most farmers or
bankers.
We will seek full utilization of existing programs that
give temporary aid to basically sound farmers and farm bankers
who are encountering short-term problems. These supports are
not insignificant. The Farm Credit System has just chartered
its new Capital Corporation in order to channel System reserves
where needed most. The Farmers Home Administration has already
begun to put in place its new $490 million interest rate buydown
program, and its other lending programs can continue to help
both farmers and bankers.
We also will continue to work with the bank regulators to
consider the best means possible to ease the plight of farmers
and bankers during this exceedingly difficult transition period.
We must recognize, however, that regulators also have a longterm duty to ensure that banks are soundly run and capitalized,
so as to protect borrowers, lenders, and the deposit insurance
funds.
The new special assistance programs that have been proposed
are, for the most part, problematical in many respects. There
is no panacea. In varying degrees, the proposals: (1) run the
risk of actually weakening the banking industry over time; (2)
will likely be very expensive, either now or in the future;
and (3) pose serious questions of equity as between lenders to
various sectors of the economy.
We recognize the seriousness of the agricultural bank
problem to important areas of the nation. We will keep at it.
We will consider carefully all proposals to assist agricultural
banks and will continue to work with the Office of the
Comptroller, the Federal Deposit Insurance Corporation, the
Federal Reserve Board, and the Department of Agriculture to
develop approaches essential to the long-term well-being of
the agriculture credit sector.
Mr. Chairman, that concludes my prepared statement. I
would be happy to answer any questions the Committee may have.
•«r CO
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federal financing bamc
WASHINGTON, DC. 20220
'B^r,nooH53io
FOR IMMEDIATE RELEASE
""
v
' & M *fifi March 7, 1986
" ^ T K m OF rH£ TREASURY
FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of January 1986.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $153.7 billion on
January 31, 1986, posting an increase of $0.3 billion
from the level on December 31, 1985. This net change
was the result of increases in holdings of agency debt
and agency assets of $0.1 billion each and in holdings
of agency-guaranteed debt of under SO.2 billion. FFb
made 286 disbursements during January.
Attached to this release are tables presenting FFB
January loan activity, commitments entered during January,
and FFB holdings as of January 31, 1986.
# 0
B-492
CO
CO
CD
co in
m
CO
t-.a je 2 zi
;
FEDERAL FINANCING BANK
JANUARY 1986 ACTIVITY
fcGF&OWER •-
"•"••-•"-* -' •-*'••• "-
M
AMOUNT
'• OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
V31
$ 223,000,000.00
356,000,000.00
30,000,000.00
317,000,000.00
342,000,000.00
37,000,000.00
134,000,000.00
6,000,000.00
362,000,000.00
106,000,000.00
35,000,000.00
324,000,000.00
281,000,000.00
1/8/86
1/13/86
1/15/86
1/16/86
1/20/86
1/21/86
1/22/86
1/24/86
1/27/86
1/31/86
2/1/86
2/3/86
2/6/86
7.405%
7.415%
7.385%
7.385%
7.565%
7.545%
7.545%
7.455%
7.455%
7.365%
7.315%
7.315%
7.395%
1/16
150,000,000.00
2/29/16
9.685%
950,000.00
3,000,000.00
1,500,000.00
42,630,000.00
550,000.00
14,450,000.00
5,000,000.00
4/1/86 •
4/7/86
4/8/86
4/14/86
4/17/86
4/29/86
4/29/86
7.455%
7.415%
7.385%
7.575%.
7.435%
7.335%
7.335%
80,000,000.00
40,000,000.00
1/1/01
1/1/01
9.395%
9.455%
7/31/14
3/12/14
6/15/12
9/8/95
4/15/14
7/31/14
4/30/11
3/20/93
9/8/95
9/15/95
7/31/14
2/5/95
7/25/92
10/15/90
5/15/95
7/15/92
9.595%
9.115%
9.395%
8.355%
9.485%
9.635%
9.608%
8.695%
8.365%
9.119%
9.605%
9.095%
8.405%
8.401%
7.816%
9.065%
'•*"r DATE
INTEREST
RATE
(other than
semi-annual)
AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#556
#557
#558
#559
#560
#561
#562
#563
#564
#565
#566
#567
#568
Power Bond Series 1986 A
V2
V6
V8
V8
V13
1/16
1/16
1/20
1/20
1/22
1/27
1/27
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note
Note
Note
+Note
+Note
•Note
+Note
#377
#378
#379
#380
#381
#382
#383
1/3
1/7
1/8
1/13
1/17
1/27
1/27
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
VI
1/31
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Egypt 7
Turkey 18
Greece 15
Morocco 11
Egypt 6
Egypt 7
Greece 14
Indonesia 10
Morocco 11
Peru 9
Egypt 7
Jordan 12
Botswana 4
Niger 2
Niger 3
Philippines 10
+rollover
1/2
1/2
V6
V6
V7
1/7
V7
V7
1/7
V7
V9
1/9
1/10
1/10
1/10
1/10
3,023,002.40
942,079.93
177,040.00
28,367.07
523,827.82
940,921.00
533,840.70
20,402.00
191,996.29
24,389.00
1,610,134.99
1,039,764.00
36,525.40
100,000.00
100,000.00
920,924.00
9.616% ann.
9.678% ann.
?a^e 3 o!
FEDERAL FINANCING BANK
JANUARY 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual
INTEREST
RATE
(other than
semi-annual)
Foreign Military Sales (Cont'd)
Portugal 1
Portugal 2
Thailand 12
Turkey 18
Egypt 7
Turkey 18
Spain 8
Jordan 12
Egypt 7
Colombia 7
Spain 8
Peru 10
Tunisia 17
Philippines 10
Egypt 6
Egypt 7
Morocco 11
Morocco 12
Egypt 7
Turkey 18
Jordan 12
Greece 15
Egypt 6
Dominican Republic 8
Thailand 12
Niger 2
Morocco 13
Botswana 4
Jordan 12
Turkey 18
Egypt 7
Indonesia 10
Jordan 12
Greece 15
Egypt 6
Colombia 7
Jordan 12
Tunisia 16
Tunisia 17
1/10
1/10
1/10
1/13
1/13
1/14
1/14
1/14
1/14
1/14
V15
1/15
V15
1/16
1/16
1/16
1/16
1/16
1/17
1/21
1/21
1/21
1/21
1/21
1/22
1/22
1/22
1/22
1/22
1/22
1/22
1/28
1/28
1/28
1/28
1/28
1/30
1/30
1/30
$ 19,120,924.00
14,279,076.00
3,383,983.00
1,110,112.20
7,169,191.60
5,469,354.00
4,232,680.00
238,742.00
10,442,119.00
1,442,879.00
8,962.08
75,054.00
27,750.00
323,347.38
1,516,969.83
50,000,000.00
232,017.14
37,154.56
7,916,286.87
3,582,062.25
1,224,100.78
6,901,034.76
363,842.03
67,006.83
6,919,205.00
111,325.49
150,437.70
180,994.74
2,444,497.00
28,442,225.10
500,980.14
492,490.00
15,212,861.00
1,511,407.40
840,541.00
989,542.65
685,990.00
198,857.32
553,158.68
9/10/94
9/10/95
3/20/96
3/12/14
7/31/14
3/12/14
3/25/96
2/5/95
7/31/14
9/5/91
3/25/96
4/10/96
9/15/96
7/15/92
4/15/14
7/31/14
9/8/95
9/21/95
7/31/14
3/12/14
2/5/95
6/15/12
4/15/14
4/30/96
3/20/96
10/15/90
5/31/96
7/25/92
2/5/95
3/12/14
7/31/14
3/20/93
2/5/95
6/15/12
4/15/14
9/5/91
2/5/95
2/4/96
9/15/96
9.223%
8.723%
9.219%
9.495%
9.833%
9.605%
8.935%
9.465%
9.945%
8.415%
8.875%
9.495%
9.245%
9.095%
9.595%
9.702%
8.585%
9.365%
9.685%
9.360%
9.205%
9.538%
9.575%
8.786%
9.218%
8.437%
9.005%
8.325%
9.212%
9.374%
9.635%
8.775%
9.159%
9.435%
9.535%
8.235%
9.145%
9.215%
8.932%
5/1/87
2/1/87
9/15/86
2/18/86
7/V03
7/V03
8/1/86
5/1/87
2/18/86
8/1/86
2/1/86
12/1/86
9/2/86
2/3/86
7.905%
8.125%
7.685%
7.565%
9.702%
9.702%
7.855%
8.005%
7.315%
7.595%
7.315%
7.655%
7.555%
7.395%
DEPARTMENT OF HOUSING & URBAN DEVELOPMENI
Conmunity Development
Biloxi, MI
Harrisburg, PA
MassilIon, OH
Newport News, VA
Albany, NY
Albany, NY
Springfield, MA
Biloxi, MI
St. Louis, MO
Ponce, PR
Atlanta, GA
Onaha, NE
Lorain, OH
Indianapolis, IN
•maturity extension
1/6
1/6
1/6
V13
1/14
V14
1/14
1/23
1/27
1/27
1/27
1/29
1/29
V31
450,000.00
200,000.00
280,000.00
136,500.00
212,600.00
500,000.00
574,351.05
50,000.00
1,250,000.00
2,297,923.00
1,860,000.00
285,000.00
150,000.00
123,500.00
8.061% ann.
8.290% ann.
7.767% ann.
9.937%
9.937%
7.885%
8.165%
ann.
ann.
ann.
ann.
7.606% ann.
7.773% ann.
7.599% ann.
fe«
FEDERAL FINANCING BANK
JANUARY 1986 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
1/15
$ 43,316,650.34
44,561,684.08
47,642,729.54
113,852,682.12
116,422,407.03
118,839,782.17
107,879,688.62
104,788,142.81
124,086,023.84
117,268,592.12
120,680,368.76
105,919,489.26
122,312,472.03
126,322,576.50
2,200,359.00
2,200,359.00
2,200,359.00
1,584,382.08
1,584,418.71
2,330,000.00
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4A5/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
4/15/86
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
7.605%
1/21
1/27
338,610.84
184,023.42
10/1/92
10/1/92
8.817%
8.797%
8.722% qtr.
8.702% qtr.
12/31/18
1/3/88
1/3/88
3/31/88
12/30/88
12/30/88
12/31/13
12/31/13
12/31/15
12/31/15
12/31/15
12/31/18
12/31/18
12/31/18
1/6/88
1/6/88
1/6/88
1/6/88
12/31/16
1/11/88
3/31/88
12/31/20
12/31/18
12/31/16
1/13/88
1/13/88
1/13/88
1/11/89
1/11/89
12/31/18
12/31/18
V13/88
9.456%
8.145%
8.145%
8.208%
8.385%
8.385%
9.484%
9.484%
9.476%
9.476%
9.476%
9.461%
9.461%
9.461%
8.165%
8.165%
8.165%
8.165%
9.484%
8.215%
8.448%
9.708%
9.717%
9.722%
8.485%
8.485%
8.485%
8.745%
8.745%
9.715%
9.715%
8.485%
9.347%
8.064%
8.064%
8.125%
8.299%
8.299%
9.374%
9.374%
9.366%
9.366%
9.366%
9.352%
9.352%
9.3 52%
8.083%
8.083%
8.083%
8.083%
9.374%
8.132%
8.361%
9.593%
9.602%
9.607%
8.397%
8.397%
8.397%
8.651%
8.651%
9.600%
9.600%
8.397%
DATE
INTEREST
RATE
(other than
semi-annual)
DEPARTMENT OF THE NAVY
Ship Lease Financing
"K.uuu
+Darnell
+Buck
•Lopez
-Williams
+Bobo
+Obregon
+Kocak
+Bonnyraan
•Fisher
•Anderson
•Pless
+Baugh
+Hauge
+Lopez Container
•Williams Container
+Bobo Container
+Bonnyman Container
•Fisher Container
+Pless Container
1/13
1/15
1/15
1A5
Defense Production Act
Gila River Indian Community
Gila River Indian Community
RURAL ELECTRIFICATION ADMINISTRATION
Allegheny Electric #304
*Wabash Valley Power #104
•Wabash Valley Power #206
•Wolverine Power #101
•Wolverine Power #182
•Wolverine Power #183
•Corn Belt Power #55
•Corn Belt Power #94
•Kansas Electric #216
•Saluda River Electric #186
•Continental Tel. of Texas #119
•Brazos Electric #108
*Brazos Electric #230
•South Texas Electric #200
•Wabash Valley Power #206
•Northwest Electric #176
•Corn Belt Power #94
•Corn Belt Power #166
*Cajun Electric #180
•Basin Electric #137
•Wolverine Power #101
*So. Mississippi Electric #171
*So. Mississippi Electric #289
•Soyland Power #165
•Wabash Valley Power #104
•Wabash Valley Power #206
•Wabash Valley Power #206
^Wolverine Power #182
•Wolverine Power #183
•Western Farmers Electric # D 3
•Western Farmers Electric #220
•French Broad Electric #245
•rollover
•maturity extension
1/3
V3
1/3
V3
1/3
V3
1/3
V3
V3
V3
1/3
1/3
V3
1/3
1/6
V6
V6
1/6
V6
V9
1/10
1/13
V13
1/13
V13
1/13
1/13
V13
V13
1/13
1/13
V13
487,000.00
6,327,000.00
12,306,000.00
1,936,000.00
4,869,000.00
5,452,000.00
232,000.00
448,000.00
10,900,000.00
8,640,000.00
1,819,000.00
409,000.00
6,995,000.00
230,000.00
29,911,000.00
775,000.00
423,000.00
77,000.00
58,500,000.00
25,000,000.00
1,725,000.00
15,000,000.00
3,973,000.00
4,385,000.00
3,453,000.00
11,896,000.00
2,292,000.00
2,203,000.00
2,813,000.00
2,631,000.00
57,000.00
226,000.00
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
FEDERAL FINANCING BAM<
JANUARY 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
New Hampshire Electric #270 1/15 $ 642,000.00
•New Hampshire Electric #192
1/16
1,115,000.00
•Western Illinois Power #99
1/16
4,859,000.00
•Western Illinois Power #225
1/16
13,803,000.00
•East Kentucky Power #188
1/21
3,732,000.00
•So. Mississippi Electric #90
1/21
750,000.00
•Western Illinois Power #162
1/21
9,509,000.00
•Western Farm Electric #133
1/21
7,400,000.00
•Central Power #278
1/21
158,000.00
Sugarland Telephone Co. #210
1/22
4,314,000.00
Tri-State G&T #250
1/22
3,490,000.00
Oglethorpe Power #246
1/23
24,257,000.00
Associated Electric #132
1/23
17,413,000.00
•Wolverine Power #101
1/23
167,000.00
•Colorado Ute Electric #96
1/23
1,145,000.00
•East Kentucky Power #140
1/23
360,000.00
•Basin Electric #137
1/23
25,000,000.00
•Dairyland Power #54
1/23
1,400,000.00
•Sunflower Electric #174
1/23
6,000,000.00
Vermont Electric #311
1/24
1,376,480.00
•Brazos Electric #108
1/27
468,000.00
•Brazos Electric #144
1/27
1,379,000.00
•Colorado Ute Electric #196
1/27
1,810,000.00
Corn Belt Power #292
1/28
311,000.00
•W&shington Electric #269
1/29
2,126,829.26
North Carolina Electric #268
1/30
4,813,000.00
•Wabash Valley Power #206
1/30
134,000.00
•Dairyland Power #54
1/30
1,465,000.00
•Southern Illinois Power #38
1/31
300,000.00
•East Kentucky Power #140
1/31
3,666,000.00
•Corn Belt Power #94
1/31
300,000.00
•Corn Belt Power #138
1/31
229,000.00
•Plains Electric #158
1/31
2,866,000.00
•Saluda River Electric #186
1/31
1,106,000.00
•Allegheny Electric #175
1/31
1,838,000.00
Kamo Electric #266
1/31
5,014,000.00
Tex-La Electric #208
1/31
1,130,000.00
SMALL BUSINESS ADMINISTRATION
1/2/18
12/31/18
12/31/14
12/31/18
1/3/17
12/31/12
1/3/17
1/3/17
3/31/88
12/31/20
12/31/20
12/31/20
12/31/20
3/31/88
1/25/88
1/3/17
1/3/17
12/31/14
1/25/88
1/2/18
1/3/17
1/3/17
1/27/88
1/2/18
12/31/14
1/2/18
2/1/88
1/30/89
3/31/88
12/31/14
12/31/14
12/31/18
12/31/18
12/31/18
12/31/15
12/31/15
12/31/20
9.734%
9.607%
9.629%
9.607%
9.583%
9.494%
9.583%
9.583%
8.389%
9.568%
9.568%
9.627%
9.627%
8.377%
8.315%
9.644%
9.644%
9.657%
8.315%
9.591%
9.621%
9.621%
8.265%
9.518%
9.438%
9.481%
8.185%
8.435%
8.208%
9.498%
9.498%
9.501%
9.501%
9.501%
9.397%
9.516%
9.502%
1/1/01
1/1/01
1/1/01
1/1/01
1/1/01
1/1/01
1/1/01
1/V01
1/1/01
1/V01
1/1/01
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
9.199%
State & Local Development Company Debentures
Texas Panhandle Reg. Dev. Corp.1/8 50,000.00
Texas Panhandle Reg. Dev. Corp.1/8
113,000.00
Alabama Community Dev. Corp.
1/8
119,000.00
San Diego County L.D.C.
1/8
122,000.00
Small Enterprise Dev. Co.
1/8
149,000.00
Ozark Gateway Dev., Inc.
1/8
166,000.00
Commonwealth 9n. Bus. Dev. Corpl/8
168,000.00
Central California C D . Corp. 1/8
179,000.00
Rural Missouri, Inc.
1/8
179,000.00
Greater Pocatello Dev. Corp. 1/8
182,000.00
Oregon Cert. Bus. Dev. Corp.
1/8
224,000.00
Tulare County Ec. Dev. Corp. 1/8
236,000.00
Commonwealth 9n. B.D.C.
1/8
242,000.00
Clay County Dev. Corp.
1/8
281,000.00
Eastern Maine Dev. District
1/8
294,000.00
. Mid-City Pioneer Corp.
1/8
350,000.00
Community D.C. of Ft. Wayne
1/8
355,000.00
Ocean State B.D. Auth., Inc.
1/8
373,000.00
Wisconsin Bus. Dev. Fin. Corp. 1/8
383,000.00
Rural Missouri, Inc.
1/8
427,000.00
Eastern Maine Dev. District
1/8
498,000.00
•maturity extension
woi
1/1/01
WOI
W01
VV01
W01
W01
W01
1/1/01
W01
9.618% qtr.
9.494% qtr.
9.516% qtr.
9.494% qtr.
9.471% qtr.
9.384% qtr.
9.471% qtr.
9.471% qtr.
8.303% qtr.
9.456% qtr.
9.456% qtr.
9.514% qtr.
9.514% qtr.
8.291% qtr.
8.230% qtr.
9.530% qtr.
9.530% qtr.
9.543% qtr.
8.230% qtr.
9.479% qtr.
9.508% qtr.
9.508% qtr.
8.181% qtr.
9.407% qtr.
9.329% qtr.
9.371% qtr.
8.103% qtr.
8.348% qtr.
8.125% qtr.
9.388% qtr.
9.388% qtr.
9.391% qtr.
9.391% qtr.
9.391% qtr.
9.289% qtr.
9.405% qtr.
9.392% qtr.
t^avje o : t d
FEDERAL FINANCING BANK
JANUARY 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.413%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
9.507%
State & Local Development Company Debentures (Cont'd)
Urban Bus. Dev. Corp.
1/8
Union County Ec. Dev. Corp.
1/8
St. Louis Local Dev. Co.
1/8
CSRA Local Dev. Corp.
1/8
Alabama Community D.C.A., Inc. 1/8
St. Louis Local Dev. Co.
1/8
Big lakes C. D. Co.
V8
Cambridge Ec. Dev. Corp.
1/8
St. Louis Local Dev. Co.
1/8
Charlotte C. D. Corp.
1/8
Historic 25th St. Dev. Co.
1/8
E. C. I. A. Bus. Growth, Inc. 1/8
St. Louis Local Dev. Co.
1/8
Crater Dev. Co.
1/8
Phoenix L. D. Corp.
1/8
San Diego County L. D. Corp.
1/8
Forward Dev. Corp.
1/8
Bus. Dev. Corp. of Nebraska
1/8
First District Dev. Co.
1/8
Economic Dev. Foundation
1/8
Pecan Valley Ec. Dev. District 1/8
Greater Salt Lake Bus. Dis. 1/8
Georgia Mountains Reg. E.D.C. 1/8
Texas C. D. Co., Inc.
1/8
Mahoning Valley Ec. Dev. Corp. 1/8
Crossroads EDC of St. Charles 1/8
Ocean State Bus Dev Auth, Inc 1/8
St. Louis County L. D. C.
1/8
Gr. Salt Lake Bus. District
1/8
N. Puerto Rico L. D. Co., Inc.1/8
S.W. Michigan Dev. Co., Inc. 1/8
St. Louis County L.D.C.
1/8
S. Cen. Kansas E.D. Dis., Inc.1/8
Gr. Kenosha Dev. Corp.
1/8
Texas Cert. Dev. Co., Inc.
1/8
Phoenix L. D. Corp.
1/8
Empire State C D . Corp.
1/8
Columbus Countywide Dev. Corp. 1/8
Union County Ec. Dev. Corp.
1/8
Treasure Valley C. D. Corp.
1/8
East Texas Reg. Dev. Co.
1/8
Union County Ec. Dev. Corp.
1/8
Columbus Countywide Dev. Corp. 1/8
Columbus Countywide Dev. Corp. 1/8
Hamilton County Dev. Co., Inc.1/8
Evergreen Community Dev. Assoc .1/8
Alabama Community Dev.'Corp.
1/8
Corp. for B.A. in New Jersey
1/8
San Diego County LDC
V8
Treasure Valley C. D. Corp.
1/8
Neuse River Dev. Auth., Inc.
1/8
Economic Dev. Foundation
1/8
River East Progress, Inc.
1/8
Evergreen Community Dev. Assoc .V8
Fulton County C D. Corp.
1/8
Wilmington Indus. Dev., Inc. V 8
Metro Area Dev. Corp.
1/8
Nevada State Dev. Corp.
V8
MSP 503 Dev. Corp.
1/8
Verd-Ark-Ca Dev. Corp.
1/8
Bay Area Bus. Dev. Co.
1/8
Clark County Dev. Corp.
1/8
Community E.D.C of Colorado
1/8
$ 42,000.00
54,000.00
55,000.00
61,000.00
66,000.00
71,000.00
83,000.00
84,000.00
84,000.00
99,000.00
99,000.00
100,000.00
108,000.00
109,000.00
122,000.00
122,000.00
158,000.00
168,000.00
170,000.00
208,000.00
223,000.00
224,000.00
231,000.00
233,000.00
240,000.00
250,000.00
252,000.00
252,000.00
255,000.00
280,000.00
300,000.00
312,000.00
323,000.00
330,000.00
331,000.00
379,000.00
500,000.00
48,000.00
52,000.00
53,000.00
70,000.00
71,000.00
82,000.00
84,000.00
99,000.00
105,000.00
113,000.00
126,000.00
128,000.00
135,000.00
142,000.00
146,000.00
165,000.00
180,000.00
194,000.00
197,000.00
210,000.00
248,000.00
270,000.00
271,000.00
272,000.00
278,000.00
307,000.00
W06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
1/1/06
W 06
1/1/06
Vl/06
1/1/06
Vl/06
1/1/06
1/1/06
1/1/06
W 06
1/1/06
1/1/06
1/1/06
W 06
1/1/06
1/1/06
1/1/06
Wll
wn
Wll
Wll
Wll
wn
Wll
Wll
Wll
1/1/11
Wll
Wll
Wll
Wll
Wll
1/1/11
Wll
Wll
Wll
Wll
Wll
Wll
Vl/11
Wll
Wll
1/1/11
INTEREST
RATE
(other than
semi-annual)
Page 7 ;:
FEDERAL FINANCING BANK
JANUARY 1986 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
DATE
INTEREST"
INTEREST
RATE
RATE
(semi(other than
annual)
semi-annual)
FINAL
MATURITY
State & Local Development Company Debentures (Cont'd)
Bay Area Bus. Dev. Co.
1/8
Nevada St. Dev. Corp.
1/8
South Dakota Dev. Corp.
1/8
Nevada St. Dev. Corp.
1/8
E.D.F. of Sacramento, Inc.
1/8
St. Louis Local Dev. Co.
V8
Mcintosh Trail Area Dev. Corp. 1/8
Bay Area Business Dev. Co.
V8
326,000.00
334,000.00
343,000.00
389,000.00
470,000.00
500,000.00
500,000.00
500,000.00
W
W
W
W
W
l
l
l
l
l
l
l
l
l
l
9.507%
9.507%
9.507%
9.507%
9.507%
W H
Wll
Wll
9.507%
9.507%
9.507%
1/1/91
W96
W96
W96
W96
1/1/96
W96
8.855%
9.365%
9.365%
9.365%
9.365%
9.365%
9.365%
Small Business Investment Company Debentures
Falcon Capital Corp.
BT Capital Corp.
CMNY Capital Company, Inc.
Heritage Capital Corp.
Orange Nassau Capital Corp.
Seaport Ventures, Inc.
Vadus Capital Corporation
1/22
1/22
1/22
1/22
1/22
1/22
1/22
500,000.00
5,000,000.00
900,000.00
1,000,000.00
1,000,000.00
1,000,000.00
1,000,000.00
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
•Note A-86-04 V31
488,992,522.31
4/30/86
7.385%
•rollover
FEDERAL FINANCING BANK
JANUARY 1986 Commitments
BORROWER
Ponce, PR
Cincinnati, OH
Omaha, NE
Florence, SC
GUARANTOR
HUD
HUD
HUD
HUD
AMOUNT
$ 2,297,923.00
1,171,000.00
350,000.00
1,100,000.00
COMMITMENT
EXPIRES
8/1/86
12/1/88
12/V86
7/1/87
MATURITY
8/1/86
12/1/03
12/V86
7/1/87
Page 8 of 8
IAL FINANCING BANK HOLDINGS
(in millions)
Program
Agency Debt
January 31, 1986
December 31, 1985
1/1/86-1/31/86
Net Change—FY 1986
10/1/85-1/31/86
225.2
14,690.0
1,690.0
73.8
$ 15,670.3
223.2
14,622.0
1,690.0
73.8
$ -02.0
68.0
-0-0-
$ 261.3
3.0
309.0
-0-0-
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government-Guaranteed Lending
64,354.0
105.9
122.1
3.4
3,724.3
30.5
64,234.0
105.9
122.8
4.0
3,724.3
31.2
120.0
-0-0.7
-0.6
-0-0.7
185.0
-3.3
-0.7
-2.7
-0-2.5
DOD-Foreign Military Sales
DBS.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space communications Co.
DON-Ship Lease Financing
DON-Defense Production Act
Oregon Veteran's Housiny
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
D0T-W1ATA
18,391.3
5,000.0
281.L
32.2
2,111.4
405.3
35.1
27.8
887.6
1,426.0
7.1
60.0
20,677.5
1,050.2
674.7
1,709.8
65.7
177.0
18,306.3
5,000.0
275.4
33.5
2,111.4
405.3
35.1
28.2
887.6
1,431.0
6.6
60.0
20,653.8
1,041.9
656.5
1,696.4
65.7
177.0
85.0
-05.7
-1.3
-0-0-0-0.4
-0-5.0
0.5
-023.7
8.4
18.2
13.4
-0-0-
302.7
-0-8.2
-1.3
-34.7
-3.1
-0-0.4
-0112.9
1.3
-0-998.0
26.3
79.0
58.4
-87.9
-0-
$ 153,373.2
$ 336.1
5 196.1
Export-Import Bank $ 15,670.3
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
U.S. Railway Association
/vjency /msecs
TOTALS^ $ 153,709.3
figures may not total due to rounding
TREASURY NEWS
Department of the Treasury • washifigtofi, D.C. • Telephone 566-2041
";i-'z 9 22 AH'8fi
llV:HT
»F,-HE TREASURY
FOR RELEASE AT 12:00 NOON
March 7, 1986
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,000
million of 364-day Treasury bills
to be dated March 20, 1986,
and to mature March 19, 1987
(CUSIP No. 912794 MB 7). This issue will provide about $475
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,529
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Standard time, Thursday, March 13, 1986.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. This series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing March 20, 1986.
in addition to the
maturing 52-week bills, there are $14,861 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $1,999 million as agents for foreign
and international monetary authorities, and $5,751 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. For
purposes of determining such additional amounts, foreign and international monetary authorities are considered to hold $200
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
B-493
be submitted on Form PD 4632-1.
TREASURY'S 13-, 26-, AND 52-V7EEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%« Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenders. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURY NEWS
RRftRY
Department of the Treasury • Washington,
D.C.
RARY,R00H
5310 • Telephone 566-2041
FOR IMMEDIATE RELEASE
March 10, 1986
i-H 3 23 5M 'ES
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
- 7 THE TREASURY
Tenders for $6,809 million of 13-week bills and for $6,840 million
of 26-week bills, both to be Issued on March 13, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-•week bills
maturing
Discount
Rate
6.54%
6.55%
6.55%
June 12, 1986
Investment
Rate 1/
Price
6.74%
6.75%
6.75%
98.347
98.344
98.344
:
26--week bills
maturing September 11 , 1986
Discount Investment
Rate 1/
Rate
Price
:
6.54%
6.54%
6.54%
:
6.86%
6.86%
6.86%
96.694
96.694
96.694
Tenders at the high discount rate for the 13-week bills were allotted 95%,
Tenders at the high discount rate for the 26-week bills were allotted 65%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Received
$
32,395
21,526,635
330,625
41,195
112,975
43,565
1,615,030
84,035
40,510
56,320
40,015
1,347,345
323,150
$
32,395
6,016,235
30,625
37,160
40,475
39,965
54,530
54,425
15,400
56,320
30,015
78,275
323,150
$25,593,795
30,515
22,466,350
16,880
50,995
42,625
30,600
1,557,445
77,605
37,140
46,190
30,540
885,520
389,600
$
30,515
6,073,980
16,880
25,995
31,625
30,450
60,445
49,605
12,140
46,190
20,540
52,100
389,600
$6,808,970
: $25,662,005
$6,840,065
$22,360,645
1,049,820
$23,410,465
$3,575,820
1,049,820
$4,625,640
: $22,307,560
'
901,845
: $23,209,405
$3,485,620
901,845
$4,387,465
1,835,730
1,835,730
:
1,750,000
1,750,000
347,600
347,600
'
702,600
702,600
$25,593,795
$6,808,970
1/ Equivalent coupon-issue yield.
B-494
$
Accepted
.
1
:
:
:
:
'> $25,662,005 $6,840,065
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
March 12, 1986
STATEMENT OF THE HONORABLE
JAMES A. BAKER, III
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FOREIGN OPERATIONS
OF THE
COMMITTEE ON APPROPRIATIONS
U.S. SENATE
MARCH 12, 1986
Mr. Chairman and members of the committee:
I welcome this opportunity to discuss with you the Adminis
tration's budgetary proposals for the Multilateral Development
Banks (MDBs) for fiscal year 1987.
Since taking office, the Administration has stressed the importance of sound, market-oriented policies to achieving economic
development. Today, I would like to review this issue; to
discuss its importance in the Administration's initiative to
encourage growth in many developing countries now contending
with high debt service payments; and to stress the cost effectiveness of MDB operations.
Program for Sustained Growth
Last October at the annual meetings of the world Bank and IMF,
I outlined a U.S. proposal for addressing the problems of debt
ridden developing countries — the "Program for Sustained
Growth". This three-point program aimed at improving debtors'
growth prospects builds on the current case-by-case debt
strategy and involves the following elements:
(1) credible policy reform by the debtor nations;
(2) an enhanced role for the international financial
institutions, particularly the World Bank; and,
(3) significant net new lending from the commercial
banks.
Stronger and sustainable growth in the debtor countries is
essential to solving the debt problem. Achieving this
objective, however, requires recognition by the debtor
countries themselves of the need to adopt growth-oriented
B-495
2 economic policies. Absent appropriate economic policies, no
amount of money — whether derived from external borrowing,
foreign aid, or domestic monetary expansion — will produce
sustained growth.
The types of policies required for stronger and sustainable
growth are:
— the privatization of burdensome and
inefficient public enterprises,
— the development of more efficient
domestic capital equity markets,
— growth oriented tax reform,
— improvement of the environment for
both domestic and foreign direct
investment, and
— trade liberalization and the rationalization of import regimes.
Many of these touch sensitive political issues, and their
benefits may become visible only over the longer term.
Role of the MDBS. The MDBS, in particular the World Bank and
the Inter-American Development Bank (IDB), are expected to play
a central role in this initiative. We have also asked the IMF
to give more thought to growth-oriented policies and this is
being done. But the IMF's central mission is not that of a
development institution. It concentrates on relatively shortterm balance of payments programs. Hence, the Fund's contribution to longer-term reform efforts is necessarily somewhat
limited and indirect. The MDBS on the other hand, are more
strongly focused on longer-term development issues, and thus
are in a better position to deal with the longer-term structural problems most debtor countries face.
The expanded role for the MDBs that this Program foresees, in
particular the roles of the World Bank -and the IDB, will also
require important policy and procedural changes in these
institutions. These changes may be difficult but are indispensable if these institutions are to significantly expand their
policy-based, fast-disbursing lending.
For example, it will be essential to improve and strengthen
conditionality. Any substantial increase in fast-disbursing
lending which fails to maintain loan quality will result in a
serious risk of over-exposure and a diminished international
credit standing.
- 3 The World Bank already has experience in addressing some of
the types of structural problems that most debtor countries
face. Much of the World Bank's new lending will be fastdisbursing sectoral and structural adjustment loans. We
believe the World Bank has ample capacity to increase lending
commitments by some $2 billion per year over the next three
years and to concentrate that lending more heavily on the
large debtors with credible reform programs. We are also
prepared, if all the participants in the strategy do their
part and there is a demonstrated increase in the demand for
quality lending above these levels, to consider a general
capital increase for the World Bank.
In this context our ongoing and past efforts to strengthen
MDB policies take on an ever great importance.
Strengthen Economic Policies
From the outset this Administration has emphasized that a
fundamental role of the MDBs should be to encourage policy
reform in developing countries. This was a central theme
of the Administration's assessment of the MDBs, published in
1982. This general theme, which we have emphasized with the
MDBs and with the major donor countries, is translated into
four main areas:
— improved loan quality
— privatization
-- country strategies, and
— adjustment in lending terms.
Loan Quality
We have had a measure of success in our continuing efforts
to improve loan quality. We have pushed the MDBs to focus
more on how overall macroeconomic policies impact on
projects, and they have responded by broadening their examination to include all of the variables in the economy,
e.g., interest rates and exchange rates, not just those
traditionally in their preview — e.g., user charges and
farm-gate prices.
Our chief concern" now is that too often the MDBs yield to
borrower intransigence on improving loan quality issues.
For instance, an unwillingness to rationalize uneconomic
public utility rates or import tariffs. This is particularly true toward the end of a fiscal year when the
question becomes one of making a loan or not. We want a
greater resolve by the MDBs to seek strong, economic loan
conditions; and an increased willingness by the MDBs to
refuse funding when these conditions are not accepted, or,
once accepted, are not met.
- 4 Private Sector
The MDBs are doing much more to promote the private sector.
The Asian Development Bank (ADB) established a private sector
unit, which has started a limited program of lending to the
private sector without guarantees. The World Bank has been in
the forefront in convincing governments, particularly in Africa,
to restrict their role in the economy. Overall, the MDBs are
focusing more on the private sector. Now the Administration
wants each of the MDBs to enhance their operations to promote
private sector development, i.e., to devise ways to emphasize
the private sector in preference to the public sector. Possibilities include intermediating loans between the foreign and
domestic private sector, having parastatal enterprises become
more responsive to market forces, and where appropriate,
selling off all or part of the state's interest.
We recognize there are honest differences of opinion regarding
the role of the state in some sectors of the economy — such
as utilities and telephone service. But we cannot allow these
unique sectors to obscure the fact that in most industries,
government ownership is disruptive, inefficient, and is not
required. In our opinion, the MDBs must confront these cases
head-on.
Country Strategy
All of the MDBs produce lending plans for borrowing countries
that set out to varying degrees the resource base and the
policies — taxing, pricing, regulations, investment climate,
etc. — which will best exploit market opportunities in those
countries. Too often, however, there is an insufficient connection between country strategy documents and lending. We
believe country strategies must serve as a broad guideline in
the preparation of individual loans, and should not be undermined. Better coordination on country strategies between the
MDBs, bilateral donors and borrowers is needed. In particular,
country strategies must be worked out thoroughly with the
developing countries to have their full support — without
their support this will not work.
Lending Terms
Finally, we are suggesting moderate changes in concessional
lending terms. This includes a reduction of maturities and
grace periods, repricing during a loan to reflect changes in a
borrower's economic circumstances, and establishment of a small
interest charge. Other donor countries have been generally
supportive of our desires to reduce maturities and grace
periods, and to provide for repricing of future loan contracts.
- 5 However, they are strongly resisting our request to charge
modest interest rates. We will continue our discussion on
these issues with other donors during the course of the
ongoing replenishment negotiations.
The Multilateral Investment Guarantee Agency (MIGA)
Consistent with these efforts to strengthen economic policy,
the Administration has supported the creation of the Multilateral Investment Guarantee Agency (MIGA), and is requesting
Congressional support and approval of the MIGA. The MIGA will
promote reform of developing countries investment policies,
enhance the private sector's contribution to the development
process, and encourage the flow of non-debt capital to developing countries. Its strong mandate to promote policy reform in
developing member countries will be a valuable addition to the
programs we are using to promote policy reform through the
multilateral development banks. In addition, by stimulating
the flow of private direct investment to developing countries,
the MIGA can be an important component in our international
debt strategy by furthering our objective to enhance the role
of the private sector in developing countries and the movement
toward equity vs. debt capital in these countries.
U.S. membership in the MIGA will also advance our national
interests. The United States, as the largest international
investor, has a major stake in seeing that appropriate
standards for investment protection are developed. Due to its
multilateral nature, the MIGA will be better positioned to
promote reforms than OPIC or other national insurance agencies,
which focus on individual transactions to increase the competitiveness of their investors. This will be a small, cost
effective operation requiring little funding. In return we
will secure an important new instrument for promoting an
improved international economy.
Thus, the Administration believes that the United States should
move expeditiously to join the MIGA and seeks authorization and
full funding of U.S. membership in the FY 1987 Budget. The
$222.0 million U.S. subscription — which is 20.5 percent of the
total —
will include $44.4 million of budget authority of which
$22.2 million is to be paid in cash and $22.2 million is to be in
the form of non-negotiable non-interest bearing promissory notes.
The remainder of the Administration's request is for $177.6
million of callable capital under program limitations. I want
to emphasize that this is a one year appropriation; we do not
envisage additional budget requests.
The MIGA will be a valuable addition to the multilateral institutions because it is uniquely positioned to further our policies
toward development in developing countries as well as serve our
own economic interests. Support for its creation comes not only
- 6 from the Administration; it has also attracted broad endorsement from the private sector. I therefore urge that the
Congress enable us to move expeditiously to become a founding
member of the MIGA.
Environment
Mr. Chairman, another critical area of interest regarding MDB
policies and operations is the environment. You have expressed
concern about the negative impact of some MDB projects on the
environment. The Treasury Department has found that MDB
performance in this area is mixed, and has expressed its concern in meetings with senior management at the MDBs, and with
other member countries. Major problems have surfaced in such
projects as dams, penetration roads into relatively undeveloped
areas, and agriculture and rural development. Too often, if
environmental considerations threaten expeditious project
financing, the environment is assigned low priority and is left
to be dealt with later. We believe projects in environmentally
sensitive sectors should only be accepted if environmental
aspects have been thought through, and if measures necessary
for sustainable development have been identified and any
necessary funding assured. We are carrying out the requirements
which you placed in the FY 1986 appropriation act and will be
responding to you in detail in the near future.
Cost Effectiveness of the MDBs
It is important to emphasize that while we are seeking changes
in the MDBs, they are very important to the conduct of U.S.
foreign and economic policy; and they are performing better.
Hence, it is in our own self-interest to assure they are
adequately funded.
The cost to the United States of trying to duplicate bilaterally
what has been achieved multilaterally in the MDBs would be
prohibitive. Through 1984 the MDB hard loan windows have made
total loan commitments of $133.1 billion at a cost to the
United States of only $2.4 billion. The soft, concessional
loan windows have made $50.6 billion in loan commitments at a
cost to U.S. taxpayers of $14.8 billion. As we have pointed
out previously, most of the countries that receive allocations
from the State Department's Economic Support Fund (ESF) also
receive MDB support. Three countries that receive ESF but no
MDB assistance — Israel, Italy, and Spain — have per capita
incomes too high to qualify as MDB borrowers. Interestingly,
there are a number of countries of strategic importance to the
United States — e.g., Argentina, Brazil, and Mexico — that
receive substantial MDB support, but no ESF at all.
It is true that MDB programs do not always live up to the high
standards we and the MDBs themselves have set. That is why we
are trying to exercise our leadership in directing how the
- 7 MDBs can improve their operations. Through our leadership
we have been seeing a better product. However, we can only
maintain our leadership position if we are willing to bear
what the other members mutually perceive to be our fair share
in supporting these institutions. We cannot have it both
ways, i.e., we cannot for long place more of the burden
of fostering and enlarging the international economic system
on the MDBs and other international organizations, and then
refuse to support them adequately.
Currently we are negotiating replenishments with all of the MDB
groups. We have been consulting with the Congress regularly
during these negotiations to ensure we are taking into account
your views. We will continue these consultations as the negotiations proceed.
These replenishments and aspects of the U.S. debt initiative
indicate a potential need for increased resources for the MDBs
which is at variance with our current budget environment. The
Administration's fiscal year 1986 request for the MDBs was
reduced by $228.8 million by Congress in the Continuing Resolution; implementing Gramm-Rudman-Hollings reduced it another
$48.1 million. The funding requests reflect a commitment on the
part of the United States Government. We have an obligation to
our friends and allies to honor these commitments. We will be
seeking your support for appropriating these shortfalls.
We are currently discussing with the Department of State and
OMB how best to handle these shortfalls in MDB funding. I
would urge your support in this effort and ask that you not
compound the problem with additional reductions in the FY 1987
budget request for the MDBs.
The Fiscal Year 1987 Budget Request
Our MDB fiscal year 1987 request is composed almost exclusively
of funding requirements negotiated by this Administration in
close consultation with this Committee.
These funding proposals reflect both the need for budgetary
restraint and the financial requirements for effective development programs. The fiscal year 1987 request is for $1.4
billion in budget authority and $3.8 billion under program
limitations for callable capital.
International Bank for Reconstruction and Development (IBRD)
For the IBRD in fiscal year 1987, the Administration is
requesting: 1) S109.7 million in budget authority and $1,353.0
million under program limitations for subscriptions to the
sixth installment of the 1981 GCI; 2) $65.7 million in budget
- 8 authority and $685.5 million under program limitations for
subscriptions to the first of two installments to the IBRD's
1984 Selective Capital Increase (SCI); and 3) $7.4 million for
paid-in capital subscriptions and $66.7 million in program
limitations for callable capital subscriptions to the 1970 SCI.
The 1984 SCI totals $8.4 billion and was unanimously approved
by the IBRD Executive Board in May 1984. This SCI adjusts
members' relative shares to reflect their relative position
in the world economy. U.S. participation is the parameter
of U.S. support for the World Bank and our willingness to
work cooperatively with other donor countries to strengthen
the World Bank's financial position and ensure improved costsharing.
The Administration continues to believe that the IBRD should
play a prominent role in the longer-term development programs
of its borrowers and regards "equitable cost-sharing" among
donors to be a key element of our participation in all of the
MDBs. An important consideration for the United States in
negotiating the SCI was the general understanding to maintain
a conservative interpretation of the IBRD's "sustainable
level of lending" (SLL).
International Development Association (IDA)
For fiscal year 1987, the Administration is requesting $750
million for the third installment for the $2.25 billion U.S.
share of the $9 billion Seventh Replenishment. We are pleased
at the speed with which the World Bank has moved, with full
support of the Executive Board, to strengthen the administration and management of its African operations, with the object
of supporting policy reform efforts in this region. We continue to believe the countries of Sub-Saharan Africa and other
least developed countries should have first claim on available
IDA resources as long as these countries are able to make
effective use of these resources.
International Finance Corporation (IFC)
For fiscal year 1987, the Administration is seeking $35.0
million for the second of five installments on the U.S.
subscription to a $650 million IFC capital increase unanimously approved by the IFC Executive Board in June 1984.
This capital increase is needed to support an IFC five-year
plan for the period FY 1985-1989 that is consistent with the
direction and emphasis the United States has encouraged the
IFC to take.
- 9 Multilateral Investment Guarantee Agency (MIGA)
As mentioned above, for fiscal year 1987, the Administration
is requesting $44.4 million in budget authority and $177.6
million under program limitations for the U.S. subscription. Of the budget authority, half ($22.2 million) will be
paid in cash and half will be in the form of non-negotiable,
non-interest bearing promissory notes that will be treated
like callable capital.
The MIGA is a new international institution designed to encourage
the flow of investment to ana among developing countries by
issuing guarantees against political risk, carrying out a wide
range of promotional activities and encouraging sound investment
policies in member countries. Foreign direct investment, which
the MIGA will accelerate, can be a direct substitute for official
financial flows. The Administration has strongly supported the
creation of this institution and believes that the United States
should move expeditiously to join it.
Inter-American Development Bank (IDB)
For fiscal year 1987, the Administration is requesting $58.0
million in budget authority and $1,231.0 million under program
limitations for the fourth installment. The lending program
based on the 1983 capital increase is designed to continue
strong support for the long term development of the countries
in Latin America and the Caribbean.
Fund for Special Operations (FSO)
For fiscal year 1987, the Administration is requesting $72.
million for the fourth installment. The FSO replenishment
designed to address the long term development needs of the
poorest countries, primarily in Central America and the
Caribbean.
Inter-American Investment Corporation (IIC)
For fiscal year 1987, the Administration is seeking $13
million for the third of four installments to the IIC.
The Administration strongly supported establishing the lie
as a practical means of enhancing the capacity of the IDB
to aid the private sector in borrowing countries. The
investment program will provide loans and equity participation for small- to medium-sized privately controlled firms
in Latin America and the Caribbean.
Asian Development Bank (ADB)
For fiscal year 1987, the Administration is seeking $13.2
million in budget authority and $251.4 million under program
limitations for the fourth of five installments for the 1983
- 10 General Capital Increase. The ADB is a key institution in
one of the most economically dynamic and politically sensitive
regions of the world. Active and positive U.S. participation
has served U.S. interests.
Asian Development Fund (ADF)
For fiscal year 1987, the Administration is requesting $130
million for the fourth installment to the third replenishment.
The ADF has supported well designed and effective development
projects in some of the poorest countries in the world. U.S.
support benefits the people of such countries as Pakistan and
Sri Lanka as well as many of the strategic island countries
in the South Pacific.
African Development Bank (AFDB)
For fiscal year 1987, the Administration is requesting $18.0
million in budget authority for subscriptions to paid-in capital
and $54.0 million under program limitations for callable capital
for the fifth of five installments for the initial U.S. subscription to the AFDB.
The AFDB is visible evidence of U.S. commitment to work with
the countries of Africa for the achievement of their long
term development objectives.
African Development Fund (AFDF)
For fiscal year 1987, the Administration is seeking $75 million
in budget authority for the second of three installments for
the U.S. contribution to the fourth replenishment. During the
period of the fourth replenishment, 85 percent of AFDF lending
will go to the poorest African countries. Fund lending will
continue to be focused on agriculture with 40 percent of the
replenishment resources going to this sector. The remainder
of AFDF lending will go to high priority projects for transportation, health, education and water supply.
The substantial increase in the U.S. contribution to the AFDF
is a reflection of the Administration's belief that concessional
development assistance should be focused on the poorest countries,
particularly those of Sub-Saharan Africa.
Conclusion
In conclusion, Mr. Chairman, I want to emphasize the Administration's commitment and full support for the MDBs. They play
an important role in U.S. foreign and international economic
policy. Now, we are asking them to take a more active part in
supporting growth-oriented policy reform in the developing
countries — to play a central role in implementing the
- 11 "Program for Sustained Growth". Successful implementation of
this program will be very helpful to the U.S. economy, it
will increase effective demand among developing countries for
U.S. exports; and will reduce the strains on the international
financial system by helping developing countries reduce their
debt service obligations to more manageable proportions.
I recognize fully that even in the best of circumstances
supporting foreign assistance is never popular. -Now, at a
time of severe budget constraint, it will be even more
difficult. But I strongly believe that if we do not firmly
support the MDBs now, we may have to resort to more costly
measures later.
TREASURY NEWS
Dep0rt«ent
of the Treasury . ^
^
^
. Te.ep h o „e sss-2041
FOR RELEASE AT 4:00 P.M.
March 11, 1986
TREASURY'S W ^ R ? B ^ W * | ) R l N G
The Department of the Treasurjrpby^thW*Wbiie notice, invites
tenders for two series of Treasury bills totaling approximately
$13,600 million, to be issued March 20, 1986.
This offerine
will result in a paydown for the Treasury of about $1,250 million as
the maturing bills are outstanding in the amount of $14,861 million
Tenders will be received at Federal Reserve Banks and Branches and *
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Monday, March 17, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
December 19, 1985, and to mature June 19, 1986
(CUSIP No.
912794 KL 7), currently outstanding in the amount of $7,624 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,8 00 million, to be dated
March 20, 1986,
and to mature September 18, 1986 (CUSIP No.
912794 LD 4).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing March 2 0, 1986.
In addition to the maturing
13-week and 26-week bills, there are $8,529
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates of accepted
competitive tenders. Additional amounts of the bills may be issued
to Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount of
tenders for such accounts exceeds the aggregate amount of maturing
bills held by them. For purposes of determining such additional
wounts, foreign and international monetary authorities are considered to hold $1,844 million of the original 13-week and 26-week
" • M S . Federal Reserve Banks currently hold $2,044 million as
»?ents for foreign and international monetary authorities, a ™ J ^ ' ' ^
•*}Uon f o r their * o w n a c c o u n t . These amounts " P r e 8 ? n ^ ^ e h ^ i n e - d
Ridings of such accounts for the three issues o f » t ^ " ^ 1 ; l B : h e
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on * > » ™ « 6 3 2
(f
or 26-week series) or Form PD 4632-3 (for 13-week series).
JM96
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7„15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12:30 p.m. Eastern
time on the day of the auction. Such positions would include bills
acquired through "when issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with the same
maturity date as the new offering, e.g., bills with three months to
maturity previously offered as six-month bills. Dealers, who make
primary markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and borrowings
on such securities, when submitting tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches, A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of their
tenaers. The Secretary of the Treasury expressly reserves the right
to accept or reject any or all tenders, in whole or in part, and the
Secretary's action shall be final. Subject to these reservations,
noncompetitive tenders for each issue for $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments will
be made for differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
ani tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
STATEMENT OF THE HONORABLE
JAMES A. BAKER, III
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FOREIGN OPERATIONS
OF THE
COMMITTEE ON APPROPRIATIONS
U.S. HOUSE OF REPRESENTATIVES
MARCH 13, 1986
Mr. Chairman and members of the committee:
I welcome this opportunity to discuss with you the Adminis
tration's budgetary proposals for the Multilateral Development
Banks (MDBs) for fiscal year 1987.
Since taking office, the Administration has stressed the importance of sound, market-oriented policies to achieving economic
development. Today, I would like to review this issue; to
discuss its importance in the Administration's initiative to
encourage growth in many developing countries now contending
with high debt service payments; and to stress the cost effectiveness of MDB operations.
Program for Sustained Growth
Last October at the annual meetings of the World Bank and IMF,
I outlined a U.S. proposal for addressing the problems of debt
ridden developing countries — the "Program for Sustained
Growth". This three-point program aimed at improving debtors'
growth prospects builds on the current case-by-case debt
strategy and involves the following elements:
(1) credible policy reform by the debtor nations;
(2) an enhanced role for the international financial
institutions, particularly the World Bank; and,
(3) significant net new lending from the commercial
banks.
Stronger and sustainable growth in the debtor countries is
essential to solving the debt problem. Achieving this
objective, however, requires recognition by the debtor
countries themselves of the need to adopt growth-oriented
B-497
- 2 economic policies. Absent appropriate economic policies, no
amount of money — whether derived from external borrowing,
foreign aid, or domestic monetary expansion — will produce
sustained growth.
The types of policies required for stronger and sustainable
growth are:
— the privatization of burdensome and
inefficient public enterprises,
-- the development of more efficient
domestic capital equity markets,
— growth oriented tax reform,
— improvement of the environment for
both domestic and foreign direct
investment, and
— trade liberalization and the rationalization of import regimes.
Many of these touch sensitive political issues, and their
benefits may become visible only over the longer term.
Role of the MDBs. The MDBs, in particular the World Bank and
the Inter-American Development Bank (IDB), are expected to play
a central role in this initiative. We have also asked the IMF
to give more thought to growth-oriented policies and this is
being done. But the IMF's central mission is not that of a
development institution. It concentrates on relatively shortterm balance of payments programs. Hence, the Fund's contribution to longer-term reform efforts is necessarily somewhat
limited and indirect. The MDBs on the other hand, are more
strongly focused on longer-term development issues, and thus
are in a better position to deal with the longer-term structural problems most debtor countries face.
The expanded role for the MDBs that this Program foresees, in
particular the roles of the World Bank and the IDB, will also
require important policy and procedural changes in these
institutions. These changes may be difficult but are indispensable if these institutions are to significantly expand their
policy-based, fast-disbursing lending.
For example, it will be essential to improve and strengthen
conditionality. Any substantial increase in fast-disbursing
lending which fails to maintain loan quality will result in a
serious risk of over-exposure and a diminished international
credit standing.
- 3 The World Bank already has experience in addressing some of
the types of structural problems that most debtor countries
face. Much of the World Bank's new lending will be fastdisbursing sectoral and structural adjustment loans. We
believe the World Bank has ample capacity to increase lending
commitments by some $2 billion per year over the next three
years and to concentrate that lending more heavily on the
large debtors with credible reform programs. We are also
prepared, if all the participants in the strategy do their
part and there is a demonstrated increase in the demand for
quality lending above these levels, to consider a general
capital increase for the World Bank.
In this context our ongoing and past efforts to strengthen
MDB policies take on an ever great importance.
Strengthen Economic Policies
From the outset this Administration has emphasized that a
fundamental role of the MDBs should be to encourage policy
reform in developing countries. This was a central theme
of the Administration's assessment of the MDBs, published in
1982. This general theme, which we have emphasized with the
MDBs and with the major donor countries, is translated into
four main areas:
— improved loan quality
— privatization
-- country strategies, and
— adjustment in lending terms.
Loan Quality
We have had a measure of success in our continuing efforts
to improve loan quality. We have pushed the MDBs to focus
more on how overall macroeconomic policies impact on
projects, and they have responded by broadening their examination to include all of the variables in the economy,
e.g., interest rates and exchange rates, not just those
traditionally in their preview -- e.g., user charges and
farm-gate prices.
Our chief concern now is that too often the MDBs yield to
borrower intransigence on improving loan quality issues.
For instance, an unwillingness to rationalize uneconomic
public utility rates or import tariffs. This is particularly true toward the end of a fiscal year when the
question becomes one of making a loan or not. We want a
greater resolve by the MDBs to seek strong, economic loan
conditions; and an increased willingness by the MDBs to
refuse funding when these conditions are not accepted, or,
once accepted, are not met.
- 4 Private Sector
The MDBs are doing much more to promote the private sector.
The Asian Development Bank (ADB) established a private sector
unit, which has started a limited program of lending to the
private sector without guarantees. The World Bank has been in
the forefront in convincing governments, particularly in Africa,
to restrict their role in the economy. Overall, the MDBs are
focusing more on the private sector. Now the Administration
wants each of the MDBs to enhance their operations to promote
private sector development, i.e., to devise ways to emphasize
the private sector in preference to the public sector. Possibilities include intermediating loans between the foreign and
domestic private sector, having parastatal enterprises become
more responsive to market forces, and where appropriate,
selling off all or part of the state's interest.
We recognize there are honest differences of opinion regarding
the role of the state in some sectors of the economy — such
as utilities and telephone service. But we cannot allow these
unique sectors to obscure the fact that in most industries,
government ownership is disruptive, inefficient, and is not
required. In our opinion, the MDBs must confront these cases
head-on.
Country Strategy
All of the MDBs produce lending plans for borrowing countries
that set out to varying degrees the resource base and the
policies — taxing, pricing, regulations, investment climate,
etc. — which will best exploit market opportunities in those
countries. Too often, however, there is an insufficient connection between country strategy documents and lending. We
believe country strategies must serve as a broad guideline in
the preparation of individual loans, and should not be undermined. Better coordination on country strategies between the
MDBs, bilateral donors and borrowers is needed. In particular,
country strategies must be worked out thoroughly with the
developing countries to have their full support -- without
their support this will not work.
Lending Terms
Finally, we are suggesting moderate changes in concessional
lending terms. This includes a reduction ot maturities and
grace periods, repricing during a loan to reflect changes in a
borrower's economic circumstances, and establishment of a small
interest charge. Other donor countries have been generally
supportive of our desires to reduce maturities and grace
periods, and to provide for repricing of future loan contracts.
- 5 However, they are strongly resisting our request to charge
modest interest rates. We will continue our discussion on
these issues with other donors during the course of the
ongoing replenishment negotiations.
The Multilateral Investment Guarantee Agency (MIGA)
Consistent with these efforts to strengthen economic policy,
the Administration has supported the creation of the Multilateral Investment Guarantee Agency (MIGA), and is requesting
Congressional support and approval of the MIGA. The MIGA will
promote reform of developing countries investment policies,
enhance the private sector's contribution to the development
process, and encourage the flow of non-debt capital to developing countries. Its strong mandate to promote policy reform in
developing member countries will be a valuable addition to the
programs we are using to promote policy reform through the
multilateral development banks. In addition, by stimulating
the flow of private direct investment to developing countries,
the MIGA can be an important component in our international
debt strategy by furthering our objective to enhance the role
of the private sector in developing countries and the movement
toward equity vs. debt capital in these countries.
U.S. membership in the MIGA will also advance our national
interests. The United States, as the largest international
investor, has a major stake in seeing that appropriate
standards for investment protection are developed. Due to its
multilateral nature, the MIGA will be better positioned to
promote reforms than OPIC or other national insurance agencies,
which focus on individual transactions to increase the competitiveness of their investors. This will be a small, cost
effective operation requiring little funding. In return we
will secure an important new instrument for promoting an
improved international economy.
Thus, the Administration believes that the United States should
move expeditiously to join the MIGA and seeks authorization and
full funding of U.S. membership in the FY 1987 Budget. The
$222.0 million U.S. subscription — which is 20.5 percent of the
total —
will include $44.4 million of budget authority of which
$22.2 million is to be paid in cash and $22.2 million is to be in
the form of non-negotiable non-interest bearing promissory notes.
The remainder of the Administration's request is for $177.6
million of callable capital under program limitations. I want
to emphasize that this is a one year appropriation; we do not
envisage additional budget requests.
The MIGA will be a valuable addition to the multilateral institutions because it is uniquely positioned to further our policies
toward development in developing countries as well as serve our
own economic interests. Support for its creation comes not only
- 6 from the Administration; it has also attracted broad endorsement from the private sector. I therefore urge that the
Congress enable us to move expeditiously to become a founding
member of the MIGA.
Environment
Mr. Chairman, another critical area of interest regarding MDB
policies and operations is the environment. You have expressed
concern about the negative impact of some MDB projects on the
environment. The Treasury Department has found that MDB
performance in this area is mixed, and has expressed its concern in meetings with senior management at the MDBs, and with
other member countries. Major problems have surfaced in such
projects as dams, penetration roads into relatively undeveloped
areas, and agriculture and rural development. Too often, if
environmental considerations threaten expeditious project
financing, the environment is assigned low priority and is left
to be dealt with later. We believe projects in environmentally
sensitive sectors should only be accepted if environmental
aspects have been thought through, and if measures necessary
for sustainable development have been identified and any
necessary funding assured. We are carrying out the requirements
which you placed in the FY 1986 appropriation act and will be
responding to you in detail in the near future.
Cost Effectiveness of the MDBs
It is important to emphasize that while we are seeking changes
in the MDBs, they are very important to the conduct of U.S.
foreign and economic policy; and they are performing better.
Hence, it is in our own self-interest to assure they are
adequately funded.
The cost to the United States of trying to duplicate bilaterally
what has been achieved multilaterally in the MDBs would be
prohibitive. Through 1984 the MDB hard loan windows have made
total loan commitments of $133.1 billion at a cost to the
United States of only $2.4 billion. The soft, concessional
loan windows have made $50.6 billion in loan commitments at a
cost to U.S. taxpayers of $14.8 billion. As we have pointed
out previously, most of the countries that receive allocations
from the State Department's Economic Support Fund (ESF) also
receive MDB support. Three countries that receive ESF but no
MDB assistance — Israel, Italy, and Spain — have per capita
incomes too high to qualify as MDB borrowers. Interestingly,
there are a number of countries of strategic importance to the
United States — e.g., Argentina, Brazil, and Mexico — that
receive substantial MDB support, but no ESF at all.
It is true that MDB programs do not always live up to the high
standards we and the MDBs themselves have set. That is why we
are trying to exercise our leadership in directing how the
- 7 MDBs can improve their operations. Through our leadership
we have been seeing a better product. However, we can only
maintain our leadership position if we are willing to bear
what the other members mutually perceive to be our fair share
in supporting these institutions. We cannot have it both
ways, i.e., we cannot for long place more of the burden
of fostering and enlarging the international economic system
on the MDBs and other international organizations, and then
refuse to support them adequately.
Currently we are negotiating replenishments with all of the MDB
groups. We have been consulting with the Congress regularly
during these negotiations to ensure we are taking into account
your views. We will continue these consultations as the negotiations proceed.
These replenishments and aspects of the U.S. debt initiative
indicate a potential need for increased resources for the MDBs
which is at variance with our current budget environment. The
Administration's fiscal year 1986 request for the MDBs was
reduced by $228.8 million by Congress in the Continuing Resolution; implementing Gramm-Rudman-Hollings reduced it another
$48.1 million. The funding requests reflect a commitment on the
part of the United States Government. We have an obligation to
our friends and allies to honor these commitments. We will be
seeking your support for appropriating these shortfalls.
We are currently discussing with the Department of State and
OMB how best to handle these shortfalls in MDB funding. I
would urge your support in this effort and ask that you not
compound the problem with additional reductions in the FY 1987
budget request for the MDBs.
The Fiscal Year 1987 Budget Request
Our MDB fiscal year 1987 request is composed almost exclusively
of funding requirements negotiated by this Administration in
close consultation with this Committee.
These funding proposals reflect both the need for budgetary
restraint and the financial requirements for effective development programs. The fiscal year 1987 request is for $1.4
billion in budget authority and $3.8 billion under program
limitations for callable capital.
International Bank for Reconstruction and Development (IBRD)
For the IBRD in fiscal year 1987, the Administration is
requesting: 1) $109.7 million in budget authority and $1,353.0
million under program limitations for subscriptions to the
sixth installment of the 1981 GCI; 2) $65.7 million in budget
- 8 authority and $685.5 million under program limitations for
subscriptions to the first of two installments to the IBRD's
1984 Selective Capital Increase (SCI); and 3) $7.4 million for
paid-in capital subscriptions and $66.7 million in program
limitations for callable capital subscriptions to the 1970 SCI.
The 1984 SCI totals $8.4 billion and was unanimously approved
by the IBRD Executive Board in May 1984. This SCI adjusts
members' relative shares to reflect their relative position
in the world economy. U.S. participation is the parameter
of U.S. support for the World Bank and our willingness to
work cooperatively with other donor countries to strengthen
the World Bank's financial position and ensure improved costsharing.
The Administration continues to believe that the IBRD should
play a prominent role in the longer-term development programs
of its borrowers and regards "equitable cost-sharing" among
donors to be a key element of our participation in all of the
MDBs. An important consideration for the United States in
negotiating the SCI was the general understanding to maintain
a conservative interpretation of the IBRD's "sustainable
level of lending" (SLL).
International Development Association (IDA)
For fiscal year 1987, the Administration is requesting $750
million for the third installment for the $2.25 billion U.S.
share of the $9 billion Seventh Replenishment. We are pleased
at the speed with which the World Bank has moved, with full
support of the Executive Board, to strengthen the administration and management of its African operations, with the object
of supporting policy reform efforts in this region. We continue to believe the countries of Sub-Saharan Africa and other
least developed countries should have first claim on available
IDA resources as long as these countries are able to make
effective use of these resources.
International Finance Corporation (IFC)
For fiscal year 1987, the Administration is seeking $35.0
million for the second of five installments on the U.S.
subscription to a $650 million IFC capital increase unanimously approved by the IFC Executive Board in June 1984.
This capital increase is needed to support an IFC five-year
plan for the period FY 1985-1989 that is consistent with the
direction and emphasis the United States has encouraged the
IFC to take.
- 9 Multilateral Investment Guarantee Agency (MIGA)
As mentioned above, for fiscal year 1987, the Administration
is requesting $44.4 million in budget authority and $177.6
million under program limitations for the U.S. subscription. Of the budget authority, half ($22.2 million) will be
paid in cash and half will be in the form of non-negotiable,
non-interest bearing promissory notes that will be treated
like callable capital.
The MIGA is a new international institution designed to encourage
the flow of investment to and among developing countries by
issuing guarantees against political risk, carrying out a wide
range of promotional activities and encouraging sound investment
policies in member countries. Foreign direct investment, which
the MIGA will accelerate, can be a direct substitute for official
financial flows. The Administration has strongly supported the
creation of this institution and believes that the United States
should move expeditiously to join it.
Inter-American Development Bank (IDB)
For fiscal year 1987, the Administration is requesting $58.0
million in budget authority and $1,231.0 million under program
limitations for the fourth installment. The lending program
based on the 1983 capital increase is designed to continue
strong support for the long term development of the countries
in Latin America and the Caribbean.
Fund for Special Operations (FSO)
For fiscal year 1987, the Administration is requesting $72.5
million for the fourth installment. The FSO replenishment is
designed to address the long term development needs of the
poorest countries, primarily in Central America and the
Caribbean.
Inter-American Investment Corporation (IIC)
For fiscal year 1987, the Administration is seeking $13
million for the third of four installments to the IIC.
The Administration strongly supported establishing the lie
as a practical means of enhancing the capacity of the IDB
to aid the private sector in borrowing countries. The
investment program will provide loans and equity participation for small- to medium-sized privately controlled firms
in Latin America and the Caribbean.
Asian Development Bank (ADB)
For fiscal year 1987, the Administration is seeking $13.2
million in budget authority and $251.4 million under program
limitations for the fourth of five installments for the 1983
- 10 General Capital Increase. The ADB is a key institution in
one of the most economically dynamic and politically sensitive
regions of the world. Active and positive U.S. participation
has served U.S. interests.
Asian Development Fund (ADF)
For fiscal year 1987, the Administration is requesting $130
million for the fourth installment to the third replenishment.
The ADF has supported well designed and effective development
projects in some of the poorest countries in the world. U.S.
support benefits the people of such countries as Pakistan and
Sri Lanka as well as many of the strategic island countries
in the South Pacific.
African Development Bank (AFDB)
For fiscal year 1987, the Administration is requesting $18.0
million in budget authority for subscriptions to paid-in capital
and $54.0 million under program limitations for callable capital
for the fifth of five installments for the initial U.S. subscription to the AFDB.
The AFDB is visible evidence of U.S. commitment to work with
the countries of Africa for the achievement of their long
term development objectives.
African Development Fund (AFDF)
For fiscal year 1987, the Administration is seeking $75 million
in budget authority for the second of three installments for
the U.S. contribution to the fourth replenishment. During the
period of the fourth replenishment, 85 percent of AFDF lending
will go to the poorest African countries. Fund lending will
continue to be focused on agriculture with 40 percent of the
replenishment resources going to this sector. The remainder
of AFDF lending will go to high priority projects for transportation, health, education and water supply.
The substantial increase in the U.S. contribution to the AFDF
is a reflection of the Administration's belief that concessional
development assistance should be focused on the poorest countries
particularly those of Sub-Saharan Africa.
Fair Export Financing
In addition to our MDB requests, Mr. Chairman, we are seeking
funding for the Fair Export Financing Act, which is the
President's proposal for a $300 million "war chest" to combat
the trade distorting use of tied aid credits.
- 11 Tied aid and partially untied aid credits offered by the
governments of other countries are a predatory means of
financing exports. The market-disrupting effects of these
practices have caused the United States to lose export
sales. These practices also impede the growth of developing countries to the extent that they divert funds away
from legitimate development assistance.
The Administration has proposed an agreement in the Organization for Economic Cooperation and Development that
would require at least 50 percent of any such credit to be
in the form of a grant. That minimum grant element would
make these credits so expensive to use that in practice
they would be limited to reai foreign aid. We have succeeded
in raising the minimum grant element from 20 to 25 percent,
but have been blocked from imposing greater discipline over
tied aid credits.
Nearly all other OECD members agree that the figure should
rise. However, a few countries remain which have so far
resisted efforts to negotiate an effective end to this predatory concessional financing.
The "war chest" proposal seeks to strengthen the U.S. negotiating position through an appropriation in the amount of
$300 million for the creation of a temporary tied aid credit
facility in the Department of the Treasury. The facility
would be used to provide grants tied to Export-Import Bank
and/or private credits targeted at the export markets of
those countries which engage in such tied aid and partially
untied aid credits and which block progress toward an
arrangement to restrict tied aid credits. This facility
could support up to $1.0 billion in tied aid credit
authorization.
It should be emphasized that this facility would be used
selectively to provide leverage to the Secretary of the
Treasury in negotiating the elimination of predatory and
trade distorting financing by other countries. Under our
budgetary constraints, we cannot hope to provide enough
assistance to all of our exporters to allow them to match
effectively the tied aid offers of foreign competitors
worldwide. We have drafted our proposal selectively, in
a cost-effective fashion, so that we can specifically target those users of tied aid credits delaying a negotiated
solution. Only a negotiated end to the practice will
provide the kind of relief and a level playing field that
all of our exporters deserve.
Authorizing legislation has been introduced in both Houses
of Congress, and hearings have been held. We hope that a
- 12 final product will be approved very soon. I hope that this
Committee will also give prompt and positive attention to
the request.
Conclusion
In conclusion, Mr. Chairman, I want to emphasize the Administration's commitment and full support for the MDBs. They
play an important role in U.S. foreign and international
economic policy. Now, we are asking them to take a more active
part in supporting growth-oriented policy reform in the developing countries — to play a central role in implementing the
"Program for Sustained Growth". Successful implementation of
this program will be very helpful to the U.S. economy; it
will increase effective demand among developing countries for
U.S. exports, and will reduce the strains on the international
financial system by helping developing countries reduce their
debt service obligations to more manageable proportions.
I recognize fully that even in the best of circumstances
supporting foreign assistance is never popular. Now, at a
time of severe budget constraint, it will be even more
difficult. But I strongly believe that if we do not firmly
support the MDBs now, we may have to resort to more costly
measures later.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 56
FOR IMMEDIATE RELEASE CONTA^^' S$Pc$n5310
M^rBi 13, 1986
566-2041
TREASURY ANNOUNCES PROPOSED REGULATIONS j[] Q9 JH ^fi
FOR BOOK-ENTRY SECURITIES
C'Er-AftTMEKT OF THE TREASURY
The Department of the Treasury today released proposed regulations
that would revise its existing rules for transferring interests in
Treasury marketable book-entry securities. These rules will apply
to Treasury securities held in the commercial book-entry system,
which is now designated as the Treasury/Reserve Automated Debt
Entry System ("TRADES"). The revision of the existing regulations
is intended to provide investors in Treasury securities held in
book-entry (non-paper) form with more straightforward procedures by
which their interests in those securities can be established and
maintained.
Public comment on the proposed regulations can be submitted during
a 60-day period from the date of publication in the Federal
Register. Treasury encourages all sectors of the government
securities market to give the proposed rules careful consideration.
The proposed rules respond to the desire of investors, dealers,
clearing banks and other participants in the government securities
market for clear and commercially practicable rules for transferring interests in book-entry Treasury securities. The proposed
regulations would accomplish this result by creating uniform
Federal rules concerning the transfer of Treasury book-entry
securities. These rules are based on best current commercial
practice and on existing law governing uncertificated securities
under Article 8 of the Uniform Commercial Code.
Once they are finally adopted, the regulations will apply to both
existing and new securities, although they will not limit contractual obligations of the United States with respect to any security
issued and outstanding prior to the effective date described in the
regulations. Also, the rights of private parties in securities
transactions that occur before the effective date will not be
altered by the new regulations.
The revision of Treasury's existing book-entry regulations is part
of an overall Department effort to issue its marketable securities
exclusively in book-entry form. In mid-1986, the Treasury will
initiate a new Treasury Direct Access Book Entry System ("TREASURY
DIRECT") intended for use primarily for investors who usually hold
securities to maturity. Once conversion to the new system is
completed, all Treasury book-entry securities will be held either
through the TRADES system or in TREASURY DIRECT (formerly referred
to as T-DAB). The regulations governing TRADES, together with
companion regulations governing TREASURY DIRECT (published in
B-498
proposed form in December 1985), will form a comprehensive set of
rules governing all marketable Treasury book-entry securities.
Copies
Department
of the
of proposed
the Treasury
TRADES
and regulations
the Federal are
Reserve
available
Banks.
from the
TREASURY NEWS
Department of the Treasdr? I Washington, D.C. • Telephone 566-2041
LIBRARY.ROOM 5310
FOR RELEASE AT 4:00 P.M.
March 12, 1986
MAR 18 ID 09 AH'BR
TREASURY TO AUCTION $9,500 MILLION OF 2-YEAR NOTES
;u ftr: . r ;,- THE TREASURY
The Department of the Treasury will auction $9,500 million
of 2-year notes to be issued March 31, 1986. This issue will
provide about $1,150 million new cash, as the maturing 2-year
notes held by the public amount to $8,348 million, including
$598 million currently held by Federal Reserve Banks as agents
for foreign and international monetary authorities.
In addition to the maturing 2-year notes, there are $3,746
million of maturing 4-year notes held by the public. The disposition of this latter amount will be announced next week.
Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold $1,035 million, and Government accounts and Federal Reserve Banks for their own accounts
hold $1,458 million of maturing 2-year and 4-year notes.
The $9,500 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks for their own accounts,
or as agents for foreign and international monetary authorities,
will be added to that amount. Tenders for such accounts will be
accepted at the average price of accepted competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
B-499
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED MARCH 31, 19 86
March 12, 198 6
Amount Offered:
To the public
$9,500 million
Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... X-1988
(CUSIP No. 912827 TK 8)
Maturity Date
March 31, 1988
Call date
No provision
Interest Rate
To be determined based on
the average of accepted bids
Investment yield
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
September 30 and March 31
Minimum denomination available .. $5,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the
average price up to $1,000,000
Accrued interest payable
by investor
None
Payment by noninstitutional investors
Full payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts ... Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Receipt of tenders
Wednesday, March 19, 1986,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Monday, March 31, 19 8 6
b) readily-collectible check .. Thursday, March 27, 1986
TREASURVNEWS
FOR IMMEDIATE
RELEASE
epartment
of the
Treasury •LIBRARY.
Washington,
• Telephone
13, 1986 566-2041
ROOM 5310 D.C.March
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,014 millibn%f ;i$^week bills to be issued
March 20, 1986,
and to mature, .T cMansdftEAHgnr 1987,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Low
High
Average -
Discount
Rate
6. 59%
6. 63%
6. 61%
Investment Rate
(Equivalent Coupon--Issue Yield) Price
7.03%
93.337
7. 08%
93.296
7. 06%
93.317
Tenders at the high discount rate were <allotted 59%.
Location
TENDERS RECEIVED AND ACCEPTED
(In Thousands )
Accepted
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Off]Lcial
Institutions
TOTALS
$
19,150
19,264,070
7,200
15,960
60,960
32,970
1,550,485
79,110
13,865
44,720
6,705
1,278,270
125,595
$22,499,060
$
19,150
7,522,120
7,200
15,960
60,960
28,870
377,835
53,110
13,865
44,720
6,705
737,850
125,595
$9,013,940
$19,500,275
548,785
$20,049,060
2,250,000
$6,015,155
548,785
$6,563,940
2,250,000
200,000
$22,499,060
200,000
$9,013,940
An additional $200,000 thousand of the bills will be issued
to foreign official institutions for new cash.
R-500
1392
WERT
BOOKBINDING
Grdntville. Pj
@FedFRASER