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LIBRARY
ROOM 5030
, % •> 1986
TREASURY DEPARTMENT
Treas.
HJ
10
.A13P-4
v. 273
U.S. Dept. of the Treasury
PRESS RELEASES
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
AT 1:30 P.M.
REMARKS FOR
SECRETARY OF TREASURY
JAMES A. BAKER, III
BEFORE THE
GREATER NEW YORK CITY U.S. SAVINGS BONDS CAMPAIGN
FRIDAY, MARCH 14, 1986
I am pleased and honored to be with some very distinguished
members of the New York business community.
America has been celebrated for many things since she was
born free in a world full of monarchies not so long ago. Perhaps
none is so inspiring as the willingness of her citizens to use
their freedom to join together and build a better society.
You have stepped forward for America. You have lent your
prodigious talents and enthusiasm to the cause of United States
Savings Bonds.
You are here because Savings Bonds are important to the debt
management program of the U.S. government.
For every one billion dollars worth of Bonds sold, about $54
million in interest costs is saved the government and taxpayers.
In a diversifying financial marketplace, Savings Bonds have a
secure niche as a no-risk, low-cost, easy to buy savings
instrument with an excellent return.
In fact, Savings Bonds sales last month were up 32 percent
from a year earlier. A front page story in USA TODAY was
headlined "HOT BUY — 8 percent plus — Savings Bond Boom." This
is a promising start for 1986 and with everyone's help I believe
it will be another outstanding year for Savings Bonds.
Effect of the High Dollar
Now, I'd like to broaden the perspective a bit and take a
look at an area that is familiar to you — the international
economy. As key players in the world's leading financial center,
you are acutely aware of exchange rates. You know how billions of
dollars flash instantly across borders and oceans, and how profits
can be made and lost over seemingly infinitesimal changes in the
values of currencies. The sun never sets on exchange markets. As
they say, "the heat is always on."
B-501
-2The powerful influence of exchange rates is illustrated by
the sharp rise of the dollar earlier in this decade. From the
middle of 1980 to its peak in February of last year, the dollar
rose 42 percent on average against other major currencies.
Against some of these the dollar more than doubled.
This has created problems for our exporters and those who
compete against imports. Some economists estimate that the
strengthened dollar caused a third to a half of our trade deficit
last year. I know that one of your fellow companies calculated
that the high dollar may have reduced its earnings by $1 billion
or more over a four year period.
Not surprisingly, the dollar's increase reinforced some of
the fiercest protectionist pressures we've seen since the days of
the Smoot-Hawley tariff. We've all seen countless news stories on
this subject. At Treasury we tried to calculate approximately how
many. The result demonstrated the increasingly close relationship
between exchange rates and trade policy.
We conducted a computerized word search (Nexis) of major
publications such as The New York Times and The Washington Post.
We counted the number of news stories in which the words
"protectionist" or "protectionism" appeared within 25 words of the
word "dollar". In 1980, as the dollar was just beginning its
steady ascent, such a linkage occurred only ten times.
The next year it happened in 12 stories. Then 55 in 1982,
rising to 91 in 1983. There were 124 by 1984 — over 12 times as
many in 1980. And in 1985, when the dollar hit its peak,
"protectionism/protectionist" and "dollar" were within 25 words of
each other in 402 stories. In all, the rise in the number of
stories coincided remarkably with the rise of the dollar.
Fundamentals Behind Currency Values
In addition to the media, the strong dollar focused the
attention of politicians and economists on the operation of the
international monetary system. Debate has arisen over whether
there are ways to improve exchange rate stability and avoid wild
currency swings. But before entering this dialogue, we must
remember that exchange rates are like seismographs. They measure
underlying trends and tremors.
Few people would disagree that the stability of the
international monetary system is directly related to the harmony
of economic fundamentals among the major industrialized countries.
By fundamentals, I mean measures of economic performance such as
growth, inflation, and unemployment. Exchange market instability
occurs when there are dissonant economic fundamentals among
countries.
-3That was why our dollar strengthened so vigorously earlier in
this decade. In late 1982, we came out of recession sooner and
stronger than most of the rest of the world. As growth lagged in
other industrial countries, and some LDC's experienced serious
financing problems, investors sought haven in a less tumultuous
and more prosperous United States.
International Monetary Policy
The way for major industrialized countries to promote
stability in exchange markets is through a favorable convergence
of economic performance and consistent policies.
The meeting of the G-5 nations here at the Plaza Hotel last
September was a major step in that direction. The G-5
representatives announced their intentions to reduce structural
impediments to growth, control government expenditures, avoid
protectionism, and improve investment climates.
They also concluded that exchange rates did not fully reflect
the basic improvement in growth and inflation performance in other
countries. In light of this fact, the G-5 members agreed, for the
very first time, that some further orderly appreciation of the
main non-dollar currencies against the dollar was desirable.
The effect of this announcement on the exchange market
underscored the market's recognition of the favorable convergence
of G-5 economic policies and performance. Since September 22, the
dollar has fallen, in generally orderly conditions, by 21 percent
against the Deutschemark, and 26 percent against the yen.
With that drop in the dollar the Treasury tells me that I
might have to change my signature on the dollar bill from James A.
Baker the third to James A. Baker the "two and a half."
The dollar's decline is obviously good news for exporters,
and for all who are concerned about the trade deficit and
protectionism. I have heard from quite a few businessmen who are
now optimistic about the export picture. Given the dollar drop,
lower oil prices, and increased demand overseas, we believe the
trade deficit will start to shrink by the end of this year.
The dollar's drop will not produce an immediate cut in the
trade deficit. Past experience suggests that the full effect of
favorable changes in exchange rates on the trade balance takes 12
to 18 months. Consumer buying habits don't change right away, and
long-term contracts must expire.
But eventually Adam Smith wins out. Price changes have an
effect. Imports slow and exports pick up. The trade deficit will
finally come down. At the same time, most analysts expect
inflation to stay low, especially as the price of oil declines.
-4Building on Progress
What can we do to build on the progress we've made so far?
At home, we must continue our efforts to cut government
spending and pass a tax reform bill with sufficient incentives for
productivity and growth.
From our fellow industrial countries we need policies that
promote strong noninflationary growth. This will boost demand for
our exports, reduce current account imbalances, and strengthen the
Administration's hand against protectionist legislation. Such
policies will also provide expanding markets for LDC countries as
U.S. import growth slows.
To sustain any expansion, it is critical that the other
industrialized countries press ahead with structural reforms.
We believe the Japanese should take further steps to liberalize
capital markets, develop mortgage and consumer debt markets and
enact tax reform that addresses their savings-consumption
imbalance. The Germans could improve growth prospects for their
economy by deregulating certain labor and capital markets and
reforming their tax code as well.
It is also vital that industrialized countries allow the
recent decline in oil prices to be fully passed on to consumers,
boosting real income and hence domestic demand, in their
economies.
Although no one can predict exactly how oil prices will move,
average dollar prices in 1986 will be well below the 1985 level.
This makes possible a considerable reduction in inflation rates.
If prices remain low, we could see another sizable drop in
the inflation rate for the industrialized countries this year.
Forecasting the effect of falling prices on economic growth is
also tricky, but on average real GDP growth could accelerate as
well.
These benefits from falling oil prices led the central banks
of Germany, Japan, and the United States to lower discount rates
last week. That action is a welcome step toward achieving strong
noninflationary growth.
I believe that the goal of international growth is all the
more possible because of the spirit of cooperation among the major
industrialized nations. The harmony of the G-5 allows us to take
advantage of favorable economic circumstances.
Now this brings me back to the challenge of advancing our
efforts to improve the international monetary system. This month
marks the 13th anniversary that world economy has been operating
on a sea of floating exchange rates. Given some of the rough
passages over that period of time, we think it's worth considerinq
whether some changes might be made to promote more stability in
the international monetary system.
-5The President has asked me to determine if the nations of the
world should meet to discuss the role and relationships of our
currencies. There is now no fixed timetable for this decision.
We will assess the situation after discussions of monetary issues
at the April IMF Interim Committee meeting before reaching any
decisions on how to proceed.
Less Developed Country Growth
The twin goals of monetary stability and favorable economic
performance are not limited to the major industrialized countries.
Without stronger growth by less developed countries, there
can be no solution to their debt problems. Debtor countries
simply must accumulate resources — and export earnings — faster
than they accumulate debt.
Improved growth and lower interest rates in the major
industrialized countries will provide substantial economic
benefits for developing countries. Additional efforts, however,
are also needed.
Our debt initiative, the "Program for Sustained Growth,"
involves three critical groups of players — the debtor countries,
the international financial institutions, and commercial banks.
The initiative emphasizes the importance of structural
reforms that are needed to lay a firm foundation for stronger
growth among the debtor nations. These include privatization of
public enterprises, more efficient domestic capital and equity
markets, growth-oriented tax reform, a more favorable investment
climate, and trade liberalization.
Such reform is difficult and won't happen overnight.
Financing will be needed to induce countries to make these
difficult choices.
The International Monetary Fund must continue to play its
very important role in the overall debt strategy. The Fund's m a m
mission involves relatively short-term balance of payment
programs. The need to focus IMF resources on these programs will
mean that its efforts must be complemented by World Bank measures
to encourage longer-term adjustment.
The World Bank is well placed to play an expanded role in
promoting structural reforms by LDC's. Most of the new lending
from the World Bank will be fast-disbursing sectoral and
adjustment loans. We believe it can boost annual lending by some
$2 billion for each of the next three years and concentrate those
loans more heavily on large debtors with credible reform programs.
-6If the debtor nations make the needed reforms, the commercial
banks should pitch in and do their share to help these debtor
countries and the international financial institutions move the
process along. Banks in nearly all of the major creditor nations
have voiced support for our debt initiative. We call on them to
increase their exposure by a modest 2.5 to 3 percent annually, $20
billion in net new lending over the next three years.
But we will not support across-the-board government or World
Bank guarantees to induce commercial bank lending. If sound
growth-oriented policies are adopted by the debtor countries, the
banks will benefit from improvements in the quality of outstanding
loans.
Let me repeat — the banks will make these loans if it's in
their self-interest to do so. We are not going to twist any arms
and we are not going to bail out any bad loans.
Contrary to what you may have read in the press, the debt
initiative has already begun. Virtually all of the debtor
countries are participating m negotiations with the World Bank,
some more fully and successfully than others.
Some of the larger debtors will need to take advantage of all
of the elements of the strategy, including the negotiation of an
IMF program, enhanced structural adjustment or sectoral loans from
the multilateral development banks, and new money packages from
the commercial banks. Mexico and Argentina are already heading in
this direction.
Other nations already have certain elements of the strategy
in place and will focus primarily on unlocking additional World
Bank resources. 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.
The recent decline in interest rates and oil prices will
improve prospects for most debtor nations. Oil importing debtors
will benefit in several ways — through reduced oil bills, new and
larger export markets in a more rapidly growing industrialized
world and lower interest payments on debt as lending rates follow
inflation down.
The recent decline in interest rates should help save debtor
countries $7 to $8 billion on their commercial bank debt this
year alone.
The major oil producing debtors, Mexico, Venezuela and
Nigeria should find the decline in their export earnings partiallv
offset by the higher growth and reduced interest rates in
industrial countries. But even if the price of oil were to
average $15 per barrel this year, the financing needs of the 15
major debtors would remain manageable within the framework of our
initiative without extraordinary financing measures.
-7Obviously some extremely complex problems must be resolved as
the initiative proceeds. 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 m a m
elements of the initiative will fit together needs to be carefully
worked out.
Conclusion
When we look at the complexities of international monetary
reform and LDC debt, we may conclude that our tasks are great, but
they are quite within our capacity. The outlook for U.S. growth,
inflation and employment has improved substantially with the
decrease in the price of both the dollar and oil.
Not least, the outlook is brighter because of an increase in
international cooperation. The volunteer spirit brought us here
today, and I think it's brought nations together recently to work
on common economic problems.
We now have an opportunity to build on this positive spirit
and work toward lasting progress for all nations. Adlai Stevenson
once said, "the world at our mid-century is like a drum — strike
it anywhere and it resounds everywhere." Those words are all the
more true today.
Thank you very much.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
March 17, 1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,814 million of 13-week bills and for $6,807 million
of 26-week bills, both to be issued on
March 20, 1986,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing June 19, 1986
Discount Investment
Rate
Rate 1/
Price
Low
High
Average
a/ Excepting 1
26-week bills
maturing September 18, 1986
Discount Investment
Rate
Rate 1/
Price
6.49%£/
6.69%
98.359
6.53%
6.73%
98.349
6.52%
6.72%
98.352
tender of $645,000.
6.52%
6.56%
6.55%
6.84%
6.88%
6.87%
96.704
96.684
96.689
Tenders at the high discount rate for the 13-week bills were allotted 66%,
Tenders at the high discount rate for the 26-week bills were allotted 79%
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
$
41,175
19,803,885
27,205
47,325
46,155
50,805
1,583,815
73,715
12,875
43,795
39,210
1,530,260
307,240
27,205
47,325
46,155
47,405
253,415
45,715
12,875
43,795
32,510
142,220
307,240
: $
16,855
19,815,950
:
:
20,525
24,090
:
49,985
:
52,410
1,548,060
:
68,970
9,605
:
38,325
26,980
1,251,980
351,010
$
16,855
5,858,150
20,525
24,090
49,985
41,360
151,820
48,970
9,605
38,275
20,930
175,010
351,010
$23,607,460
$6 ,814,280
: $23,274,745
$6,806,585
$20,211,675
1,048,730
$21,260,405
$3 ,418,495
1,048,730
$4 ,467,225
: $19,892,585
:
860,460
: $20,753,045
$3,424,425
860,460
$4,284,885
1,750,655
1,750,655
:
1,750,000
1,750,000
596,400
596,400
:
771,700
771,700
$23,607,460
$6 ,814,280
: $23,274,745
$6,806,585
1/ Equivalent coupon-issue yield.
$
41,175
Accepted
5 ,767,245
REASURY NEWS
nrtment of the Treasury • Washington. D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
AT 9:00 A.M.
REMARKS BY
SECRETARY OF THE TREASURY
JAMES A. BAKER, III
AT THE FIFTEENTH ANNUAL FINANCIAL MANAGEMENT CONFERENCE
WASHINGTON, D.C.
TUESDAY, MARCH 18, 1986
Thank you for that generous introduction, Jerry. It is an
absolute pleasure to be with all of you this morning.
And before I begin, I'd like to
just on my own behalf, but also
Despite the many demands on his
contributions to efficiency and
salute each one of you, not
on behalf of President Reagan.
time, he is well aware of your
integrity in government.
I'd like to turn to some issues facing Federal Financial
Managers. In recent years you have been asked to take on new
responsibilities. You have moved from your traditional roles as
the government's accountants and budgeteers into the realm of
financial asset management, first with cash management and more
recently with credit management and debt collection.
I'm proud that Treasury's Financial Management Service has
played a leadership role in this effort. Treasury's ability to
manage the government's cash and debt has been enhanced
considerably by the development of better collection and payment
systems, plus agency efforts to manage cash, credit, and other
working capital assets.
But the progress we've made is largely due to the tireless
dedication of agency managers who get these things done. Your
accomplishments are remarkable considering constraints on
staffing and funding. We need you now more than ever!
The President's Reform '88 initiatives will further our
objectives in financial resource and information management. The
Office of Management and Budget and the Treasury Department are
both involved in achieving those objectives and we have
complementary strengths. Under the so-called "lead agency"
program, we have forged a successful new partnership.
That program has two broad objectives — effective management
of agency program resources and improved reporting to meet
management, oversight and public needs.
B-503
-2Most of you deal with one or more of these initiatives every
day, and I'd like to mention them, at least in passing.
In Cash Management, for example, you have generated real
interest savings of over $1 billion. Debt Collection is an area
where OMB has put much emphasis in the past several years.
Credit Management — we will work closely with lending agencies
to meet the objectives of OMB's circular A-129.
We are confident that the skill and imagination of financial
managers will enable us to upgrade Financial Systems at a price
the country can afford.
Government-wide financial reporting is also a priority.
Better data can reduce the number of surprises and provide time
to deal with financial problems before they reach crisis
proportions.
Loan Sales are another new venture that we will pursue in
creative ways. Electronic Funds Transfer is the wave of the
future — the day is not too far off when most of our payments
will be made electronically.
You have many challenges ahead. You will be setting goals
and laying out options toward reaching those goals. Some of
these options will seem to be deceptively easy. They're the
quick-fixes. Others are more difficult and require patience,
time and effort. But if followed through, they will ultimately
succeed long after the quick-fixes have failed.
The same philosophy applies to international economic policy
as well. Progress comes with patience. I'd like to discuss our
"management" approach to such difficult issues as trade and less
developed country debt.
Some suggest simple protectionist solutions to the trade
deficit. But we believe we must take into account fundamental
long-term factors. Trade problems are best solved by achieving
balanced, strong and noninflationary growth among all nations.
To do this we take a page out of your book. Financial
managers well know how colleagues should consult and reach a
consensus before making a decision and proceeding on an endeavor.
It is a good practice for countries as well.
The meeting of the G-5 nations — Great Britain, France, West
Germany, Japan, and the United States — in New York City last
September was a major step toward improving the coordination of
sound economic policies. The G-5 representatives announced their
intentions to reduce structural impediments to growth, control
government expenditures, avoid protectionist trade measures, and
improve investment climates.
-3They also concluded that exchange rates do not fully reflect
the basic improvement in growth and inflation performance in
other countries. As you know, the U.S. dollar appreciated
significantly from 1980 until February of last year. This caused
problems for exporters and for those who compete against imports.
It worsened dangerous protectionist pressures.
The G-5 members agreed, for the first time publicly, that
some further orderly appreciation of the main nondollar
currencies was desirable. The effect of this announcement on the
exchange market was dramatic. Since September 22, the dollar has
fallen, in generally orderly conditions, by 21 percent against
the Deutschemark, and 28 percent against the yen.
With that drop in the dollar the Treasury tells me I might
have to change my signature on the dollar bill from James A.
Baker III to James A. Baker the "two and a half."
The dollar's decline is obviously good news for exporters and
for everyone concerned about the trade deficit.
Beyond exchange rates, we must continue to harmonize
fundamental economic factors in the spirit of the G-5. The
recent action by the United States, West Germany and Japan to
lower discount rates was welcome sign of cooperation.
We in the America must also do our part by cutting government
spending and passing a tax reform bill that promotes productivity
and economic expansion.
From our fellow industrial countries we need growth-oriented
policies as well. Their growth is beginning to accelerate, and
must be sustained. More vigorous foreign economies will demand
more of our exports, reduce current account imbalances, and
strengthen this Administration's hand against protectionist
legislation. Such growth will also provide expanding markets for
LDC countries as U.S. import growth slows.
It is also vital that industrialized countries allow the
recent decline in oil prices to be fully passed on to consumers.
If governments don't tax away this new wealth, it will boost real
income and stimulate growth in their economies.
In all, given these three factors — the drop in the dollar,
declining oil prices, and increased growth abroad, we conclude
that the trade deficit will shrink by the end of this year. The
full effect of the dollar decline will not be felt immediately.
It takes some time for consumer buying habits to change, and for
long-term contracts to expire.
But eventually, the trade deficit will come down. We look
forward to that moment. Keeping that in mind makes it easier for
all to avoid the temptations of protectionism.
-4Our goal of economic growth is not limited to the major
industrialized countries. Without stronger growth by le^ss
developed countries, there can be no solution to their debt
problems. All industrial nations would be poorer for that.
Debtor countries simply must accumulate resources — and export
earnings — faster than they accumulate debt.
Our debt initiative, the "Program for Sustained Growth," has
three elements that depend on each other — growth-oriented
economic reforms by debtor countries, net new lending by
international financial institutions, and net new lending by
commercial banks. Simply, if the debtors make needed reforms,
they should get more financing to help the process along.
Contrary to what you may have read in the press, the debt
initiative has already begun. All three groups have responded
favorably to our proposal. Virtually all of the debtor countries
are participating in negotiations with the World Bank, some more
fully and successfully than others.
Some of the larger debtors will need to take advantage of all
the elements of the strategy — including the negotiation of an
IMF program, enhanced structural adjustment or sectoral loans
from the multilateral development banks, and new money packages
from the commercial banks. Mexico and Argentina are already
heading in this direction.
Other nations already have certain elements of the strategy
in place and will focus primarily on unlocking additional World
Bank resources. 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.
So, as with the trade deficit, we are moving toward our goal.
We must not let our heads be turned by quick-fix ideas like
writing down the LDC debt. That would only cause a serious 'hit'
to our banks, damage to our exporters, and the loss of some
democratic countries in Latin America. Nor do we favor other
so-called easy solutions such as across-the-board government or
World Bank guarantees to induce commercial bank lending.
Let me repeat — the banks will make these loans if it's in
their self-interest to do so. We are not going to twist any arms
and we are not going to bail^out any bad loans. This would be
poor management of a manageable problem.
You well know the results of bad management. You probably
recall better than most how the rapid growth of government
programs in recent decades overwhelmed the management structure
needed to administer these programs.
In many cases we basically did not plan ahead. The result
was often ad hoc management and short-sighted policy making.
This Administration recognizes those deficiencies and with your
help, we're correcting them.
-5Likewise we firmly oppose shortsighted trade policies. Many
in the Congress are planting protectionist time bombs on the
legislative calendar. They are scheduled to explode jus-t before
the November elections.
And just as the trade deficit should start to ease!
Let's not ruin this brighter future by indulging in tariffs
and quotas or by putting our trade laws on automatic pilot.
Let's not overlook the benefits of the lower dollar, cheaper oil
and more growth overseas. Let's keep in mind what should happen
to the trade deficit this year rather than what occurred last
year.
By the same token, we have designed a well-received framework
for managing the LDC debt problem. Let's follow through with it,
not by altering our plans or submitting new blueprints, but by
building on the foundation that has already been laid.
Progress in public policy cannot be measured by an hourglass.
Progress is measured by results. We do not race against the
clock. We race against ourselves. We strive to do better than
before.
A few minutes ago I congratulated you on your success, but we
all know that in terms of achieving excellence, we are still much
closer to the beginning than the end. So, our challenge remains
the same. Don't look back, nor at the crowd, but to the finish.
Thank you very much and good luck.
TREASURYNEWS
epartment of the Treasury • Washington, JI.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
March 18, 1986
3 3 us PK 'BB
CONTACT:
4T 0? THE TREASURY
Art Siddon
566-5252
CURRENCY CHANGES ANNOUNCED
Treasury Secretary James A. Baker, III announced today changes
to the United States currency necessary to continue protecting the
public in ordinary currency transactions by deterring counterfeiting
at the source.
The development of advanced copying machines that permit high
resolution color reproduction, even by unskilled operators, is
rapidly increasing. The future widespread availability of such
copiers threatens to create a new kind of problem involving
so-called "casual counterfeiters" with access to such equipment.
This "crime of opportunity" involving small amounts of counterfeit
notes in widely dispersed locations could seriously hamper the
Secret Service's enforcement efforts.
These are the only changes contemplated now. The Treasury
Department is not considering changes in currency design or color;
nor is the Department proposing any recall, demonetization, or
devaluation of the currency.
The changes approved by the Secretary will add:
A security thread — A clear polyester thread will be
incorporated into the paper. It will be arranged vertically
through a narrow clear field on the notes and will be able to
be seen with the human eye when held to a light source. Each
denomination will have an identifiable printed pattern on the
thread .
The thread will be located between the left border of the note
and the Federal Reserve seal on all notes except the one dollar
denomination. On the one dollar note the thread will be
located between the Federal Reserve seal and the portrait. The
thread is embedded in the paper used for U.S. currency.
The printed thread can only be detected with transmitted light.
Copiers use reflected light and are unable to reproduce the
pattern shown on the thread.
B-504
-2Microprinting on the face of the note — The words "United
States of America" will be engraved repeatedly around the
portrait on the face of the note. Very few copiers now have
the resolution capability to reproduce accurately the
microprinting.
All existing anticounterfeiting features in the currency will
be maintained. The new features will deter the casual counterfeiter
and complicate the task of the professional counterfeiter.
These two additional deterrents together will provide
effectiveness for the immediate future. They can be mass produced
with no effect on the current life cycle of the notes, with minimal
cost to the Government.
The Treasury's Bureau of Engraving and Printing is continuing
its research and development of additional counterfeiting
deterrents. As that research and development progresses, the
applicability of new deterrents to the currency will be evaluated.
Production of the new currency is scheduled to begin in
12 months, with the first notes entering circulation in 15 to 18
months.
Both the new currency and existing currency will be legal
tender and will circulate side by side. Old currency will be
removed from circulation in the normal course of currency processing
at the Federal Reserve Banks and Branches. It will remain legal
tender as long as it is in circulation.
An in-depth briefing for the press will be conducted by
Treasury officials at the time the currency is introduced.
TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
U3RARY.R03M 5310
MAR 19 3 us PH 'BB
iV, ART.-.tS7 OF THE TREASURY
STATEMENT OF THE HONORABLE DAVID D. QUEEN
ACTING ASSISTANT SECRETARY (ENFORCEMENT & OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
March 18, 1986
White Collar Crime Oversight Hearing on Money Laundering
Mr. Chairman and members of the Committee:
Thank you for the opportunity to appear before you today on
the subject of money laundering. Because the Treasury Department, like the Justice Department, has testified in the past
before this Committee in great detail on this subject, I will
not go into depth regarding the history of Treasury's battle
against money laundering. Instead, I will provide an update on
Treasury's involvement with this issue since we last appeared
before you. I will then discuss briefly legislative initiatives
that will assist in Treasury's enforcement of the Bank Secrecy
Act.
At the outset, let me express my appreciation to you,
Mr. Chairman, and the members of this Committee for your continuing interest in this topic. This Committee is fully aware
of the implications of the money laundering problem — for law
enforcement, for our financial community, and for our society at
large. The Treasury Department welcomes the opportunity to work
with you as you explore methods of improving our nation's
response to this challenge.
The enforcement and administration of the Bank Secrecy
Act is the centerpiece of Treasury's efforts to combat money
laundering. The reporting data generated pursuant to the Act
and the regulations under it are essential to our country's
investigations into drug trafficking, organized crime, and a host
of related offenses. State and local law enforcement, as well as
Federal agencies, make use of this data to initiate investigations and to support ongoing investigations.
B-505
-2Improved Compliance with the Reporting Requirements
Over the last several years, Treasury has devoted substantial attention to improving the compliance of financial
institutions with the reporting of cash transactions under the
Bank Secrecy Act. This effort has resulted in a major increase
in the number of Currency Transaction Reports, or Forms 4789,
filed with the Internal Revenue Service. Approximately 700,000
such forms were filed in 1984, and an estimated 1.7 million were
filed last year.
The vast increase in reporting volume has temporarily
exceeded the capability of the IRS to process the forms and add
the information to the data base. However, IRS has directed
considerable attention to this problem, and $6 million is
included for this in the pending FY 1986 supplemental of
$340 million. A new division of approximately 250 people has
been established at the Detroit Data Center to process the
Currency Transaction Reports (CTRs), and the Reports of Foreign
Bank Accounts. It is my understanding that they are now capable
of handling the current level of receipts, which is approximately
60,000 CTRs per week. Arrangements have been made to contract
out the processing of 700,000 CTRs. We expect that the backlog
will be eliminated by June of this year.
The Office of Financial Enforcement
Another improvement in our administration of the Act has
been the establishment last year of the Office of Financial
Enforcement. We have taken this step to place greater emphasis
on the program and provide a basis for expanding Treasury's
program to administer the Bank Secrecy Act.
Civil Penalty Assessment-Relation to Criminal Cases
In the wake of the publicity surrounding the Bank of Boston
case, over sixty banks or bank holding companies have been"identified as being in violation of the Bank Secrecy Act. Many
of these institutions have come forward as volunteers. Others
have come forward as a result of bank regulatory exams, particularly those of the Comptroller of the Currency. To date
thirteen civil penalties have been assessed under 31 U.S.C.
§ 5321, ranging from $121,000 to $ 4.75 million in the case of
Bank of America. The dollar amounts of the penalties that have
been assessed to date reflect the level of cooperation and
commitment to future compliance of the banks involved, as well as
other factors. Other cases are under review, and we anticipate
that additional penalties will be assessed shortly. in many
instances, the cases are taking several months to conclude
-3because of the time required for banks to conduct an examination
of past compliance and to reconstruct past unreported transactions for late-filing of Currency Transaction Reports.
In all the cases in which penalties have been assessed,
Treasury predicated the assessment on a finding of a willful
violation based on reckless disregard for the law. In no case
have we found instances of intentional money laundering or
specific intent to violate the law. If specific intent to
violate is evidenced, it would be our policy generally to refer
the matter for possible criminal action prior to civil action.
In a case of voluntary disclosure of substantial noncompliance or penalty referral by a bank regulatory agency, we
routinely refer the case to the Criminal Investigations Division
of the Internal Revenue Service for evaluation and investigation.
The Internal Revenue Service then decides whether to refer the
matter to the Department of Justice for criminal prosecution.
If there is an ongoing criminal prosecution, we discuss with the
United States Attorney's Office that is handling the case whether
to proceed with the civil case or to defer action until the
conclusion of the criminal case.
Criminal penalties (under 31 U.S.C. § 5322) and civil
penalties (under 31 U.S.C. § 5321) are cumulative. There is
nothing to preclude imposition of civil penalties at the
conclusion of a criminal case or imposition of criminal penalties
at the conclusion of a civil case. We explicitly state in all
our penalty settlement agreements that nothing in the agreement
"limits in any way the right of the United States to investigate
or prosecute any criminal violation of the Act."
We want to emphasize that Treasury has not as yet closed the
door to volunteers, and we continue to encourage financial institutions to come forward with past violations. Non-volunteer
banks will be dealt with more severely. Financial institutions
that have not filed required Currency Transaction Reports for any
reason have a continuing legal duty to do so. The case of a bank
that becomes aware of past non-compliance and makes no effort to
contact Treasury and to late-file Currency Transactions Reports
as we direct, will not be treated as a civil case.
We believe that Treasury's rigorous enforcement of the Bank
Secrecy Act, including the imposition of publicly announced,
substantial civil penalties, where appropriate, has contributed
to enhanced awareness of the requirements of the Bank Secrecy
Act. As a consequence, we believe, as confirmed in our dealings
-4with the many banks with which we have met, that overall compliance has improved and that full compliance has become a high
priority with many major financial institutions.
Legislative Intiatives
I would now like to discuss briefly legislative measures
that will help in the fight against money laundering and enhance
Treasury's Bank Secrecy Act enforcement efforts. First and
foremost is early and favorable action on the "Money Laundering
and Related Crimes Act," S. 1335, which was developed jointly
by the Departments of Treasury and Justice. From Treasury's
standpoint, this bill contains two critical revisions to the
Bank Secrecy Act. First, the bill provides Treasury with civil
summons authority for the first time. Second, the bill provides
for a civil penalty for negligent violations of the Bank Secrecy
Act. Currently, Treasury has authority to assess civil penalties
for "willful" violations under 31 U.S.C. § 5321. "Willful" in a
civil penalty context means with specific intent or with reckless
disregard of the law. Nevertheless, mere negligent non-filing of
currency reports deprive the Government of potentially useful
law enforcement information to the same extent as willful nonfilings. The prospect of penalties for negligent violations
should encourage financial institutions to give more attention to
good compliance.
There are two other legislative proposals not contained in
S. 1335, that were drafted at the request of Subcommittee
Chairman Pickle and forwarded to him by Treasury in January. We
would like to take this opportunity to share these proposals with
the Committee today. We will also share these proposals with the
other committees considering the Administration's bill.
The first proposal would prohibit structuring of currency
transactions to avoid the $10,000 currency transaction reporting
requirement. Structuring includes the well-known practice of
"smurfing". Recent decisions in three Federal Circuits have made
it clear that the current law is inadequate to sustain consistent
prosecutions for structuring. The proposal would make a person
who structures transactions to avoid the currency reporting
requirements, or who causes a financial institution not to file a
required report, subject to the criminal and civil sanctions of
the Bank Secrecy Act.
The second proposal would provide seizure and forfeiture
authority for currency related to a domestic reporting violation
or interest in property traceable to the currency. The
forfeiture would not affect bona fide purchasers who took the
currency or property without notice of a reporting violation.
-5Currently, there is forfeiture authority only for monetary
instruments underlying violations of the reporting requirements
for internationally transported monetary instruments.
Finally, of major importance is revision to the Right to
Financial Privacy Act (RFPA). The revisions to the RFPA
contained in the Administration's money laundering bill can be
considered as an adjunct to that bill, with application separate
from the subject of criminal money laundering legislation or
enforcement of the Bank Secrecy Act.
The most important and least controversial of the revisions
is the amendment to subsection 1103(c) of the RFPA, 12 U.S.C.
§ 3403 (c). Currently, § 3403(c) provides that nothing in the
Act shall preclude a financial institution from notifying a
govenment authority that the institution has information "which
may be relevant to a possible violation of any statute or
regulation." The statute gives no guidance on what information
can be given without running the risk of exposure to civil
liability under the RFPA. The proposed amendment sets out
explicitly that enough information can be given to enable Federal
law enforcement authorities to proceed with legal process, e.g.,
summons, subpoena, or search warrant, in accordance with the
RFPA. This information at a minimum must include the nature of
the suspicious activity, the name of the customer, and other
identifying information necessary to identify the customer
or the account involved.
We believe you will find very little opposition in the
financial community to this particular revision of the RFPA.
The revision imposes no new legal duty on financial institutions,
clarifies the right of financial institutions to act as good
citizens without risk of civil liability, far outweighs any
jeopardy to legitmate privacy interests, and would be of major
assistance to Federal law enforcement.
For consistent application throughout the United States this
amendment must be accompanied by the proposed preemption provision so that a financial institution that complies with the RFPA
will not run afoul of any more restrictive state privacy law.
The proposed clarification of the "good faith defense" to civil
liability is also needed to protect financial institutions who
cooperate with Federal law enforcement in good faith within the
confines of the RFPA.
Regulatory Improvements
In addition to seeking legislation, Treasury has been
discussing with the Department of Justice, and with the bureaus
within Treasury responsible for Bank Secrecy Act compliance,
-6possible improvements to the Bank Secrecy Act regulations. We
have circulated a draft of these amendments within Treasury and
will publish them as proposed regulations in the Federal Register
in the near future.
As this Committee is aware, Treasury made a number of
regulatory improvements to the Bank Secrecy Act regulations last
year. This new set of proposals will be a continuation of our
efforts to implement the Act as effectively as possible.
Mr. Chairman, this concludes my prepared remarks. I would
be pleased to answer any questions you or the other members of
the Committee may have.
TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
LIDPw'.RY.ROOM 5310
FOR RELEASE AT 4:00 P.M. March 18, 1986
;^I9 3 us PH %BS
TREASURY'S WEEKLY BILL OFFERING TREASURY
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 27, 1986. This offering
will result in a paydown for the Treasury of about $1,550 million, as
the maturing bills total $15,162 million (including the 142-day cash
management bills issued November 5, 1985, in the amount of
$3,004 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 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
December 26, 1985, and to mature June 26, 1986 (CUSIP No.
912794 KM 5 ) , currently outstanding in the amount of $7,629 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,800 million, to be dated
March 27, 1986, and to mature September 25, 1986 (CUSIP No.
912794 LE 2 ) .
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 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 $1,445 million as agents for foreign and international monetary authorities, and $2,924 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-506
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 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 5
FOR RELEASE AT 4:00 P.M.
LIBRARY. ROOM 531©
[
TREASURY TO AUCTION ^I-YEAS A^B$7B|EAR NOTES
TOTALING $13,500^1^1.^
March 18, 1986
The Treasury will raise about $9,750 million of new cash
by issuing $7,000 million of 4-year notes and $6,500 million
of 7-year notes. This offering will also refund $3,746 million
of 4-year notes maturing March 31, 1986. The $3,746 million of
maturing 4-year notes are those held by the public, including
$437 million currently held by Federal Reserve Banks as agents
for foreign and international monetary authorities.
In addition to the maturing 4-year notes, there are $8,348
million of maturing 2-year notes held by the public. The disposition of this latter amount was announced last 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 maturing
securities held by Federal Reserve Banks for their own account
may be refunded by issuing additional amounts of the new 2-year
and 4-year notes at the average prices of accepted competitive
tenders.
The $13,500 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 prices of accepted competitive tenders.
The Treasury Department announced that it will not offer
the 20-year bond usually announced at this time in the quarter.
In the absence of sufficient certainty that Congress will act
soon on pending legislation to increase Treasury's bond authority,
the Treasury decided to preserve its remaining authority for the
30-year bond tentatively scheduled for announcement on April 30.
Treasury has used $191.6 billion of the present $200 billion
authority to issue bonds (maturities over 10 years) without
regard to the 4-1/4 percent ceiling on such issues. The remaining $8.4 billion is not enough to provide for reasonable amounts
of both a 20-year bond and a 30-year bond; and the 30-year bond
has been the more attractive issue in the market and thus less
costly to the Treasury.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offering
circulars.
Attachment
oOo
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 4-YEAR AND 7-YEAR NOTES
March 18, 1986
Amount Offered to the Public
Description of Security:
Term and type of security
Series and CUSIP designation
$7/000 million
4-year notes
Series N-1990
(CUSIP No. 912827 TL 6)
Issue date
March 31, 1986
Maturity date
March 31, 1990
Call date
No provision
Interest Rate
To D e 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...$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 f u l l ^ t n ^ e n ^ e r "
age price up to $1,000,000
Accrued interest payable
None
by investor
Payment through Treasury Tax
m
and Loan (TT&L) Note Accounts
Acceptable for TT&L Note
Option Depositaries
Payment by non-institutional
investors
Full payment to be
submitted with tender
Deposit guarantee by
designated institutions
Acceptable
Kev Dates *
Receipt of tenders
Tuesday, March 25, 1986,
prior to 1:00 p.m., E S T
Settlement (final payment
a)due
t>\
cash
r e afrom
d ior
l y -institutions):
Federal
c o l l e c t i bfunds....
l e check:
*?
T hnda
u r*'
s d a y ^, MM-a rU c^h 2 7 , 1986
19 8 6
$6,500 million
7-year notes
Series F-199 3
(CUSIP No. 912827 TM 4)
April 3, 1986
April 15, 1993
No provision
To be determined based on
the average of accepted bids
To-be—determined at auction
To be determined after auction
October 15 and April 15 (first
payment on October 15, 1986)
$1,000
Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Acceptable for TT&L Note
Option Depositaries
Full payment to be
submitted with tender
Acceptable
Wednesday, March 26, 1986,
prior to 1:00 p.m., EST
Thursday, April 3, 1986
Tuesday, April 1, 19 8 6
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
l.!3RATf.R00M 5310
FOR RELEASE UPON DELIVERY
March 18, 1986
,QC
STATEMENT OF THE HONORABLE JAMES. A-ASgAKER, III
SECRETARY OF THE TREASURY
SENATE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE,
AND GENERAL GOVERNMENT
MARCH 18, 1986
MR. CHAIRMAN, MEMBERS OF THE SUBCOMMITTEE:
I am pleased to appear before this Subcommittee to
discuss the operating budget for the Treasury Department for
Fiscal Year 1987.
Last month, I appeared before the Senate Budget
Committee as one of the President's chief economic
spokesmen.
We discussed the economy and the Federal Budget.
I underscored the importance of a growing economy to
improving the budget picture and pointed out that during the
current expansion, strong economic growth has been achieved
with much less inflation than in the late 1970's.
We must
strive to extend that good record into the future.
Continued economic expansion will require reducing the
deficit and balancing the budget by FY 1991.
This will not
be easy, but the effort deserves strong bipartisan support.
B-508
- 2 -
Today I am before you, not as economic spokesman, but
as the chief operating officer of one of the Nation's major
departments.
For instance, we administer the Nation's tax system,
and collect the government's revenues. We manage the
government's fiscal affairs, including paying its bills and
financing its debt. We manufacture the Nation's currency
and coin. We help regulate our country's financial
institutions. We process passengers and cargo coming into
the country and enforce both import and export laws. We
carry out basic federal law enforcement responsibilities,
including protecting the President and Vice-President. We
participate in efforts to combat illegal drug trafficking,
and administer firearms and explosives laws. Finally, we
advise the President on monetary, economic, financial and
tax policies.
In order to continue to carry out these essential
governmental functions, we are requesting a total FY 198 7
budget for the Department of the Treasury of $6.0 billion
and 129,127 FTE positions. (These funding and staffing
totals include $5.6 million and 75 positions for the orderly
shut-down of the General Revenue Sharing program. The
Appropriations Subcommittee for Housing and Urban
Development and Independent Agencies is reviewing that
request.)
- 3 -
Our FY 198 7 budget request for Treasury operating
programs represents an increase of $364 million, or
6.5 percent above the proposed level for FY 1986.
In addition to the request for Treasury operating
programs, the FY 1987 Budget includes proposed legislation
for $78 million and 1,664 FTE in order to provide for the
management and liquidation of the Small Business
Administration loan portfolio. This relates to the proposed
termination of the Small Business Administration as
reflected in the President's Budget. It is our
understanding that this request will be taken up by the
Commerce, Justice, and State Subcommittee.
Our budget has seven major objectives:
I. At the top of the list is protecting the integrity of
the tax administration system.
The experiences of the 1985 tax filing season were
deeply troubling to the Department and a source of great
frustration to the taxpaying public. It is my belief that a
recurrence of the problems that plagued the IRS last year
would have a corrosive effect on our society and a
devastating impact on the willingness of our citizens to
comply with the system. This erosion of public confidence
has a big price tag: a one percent drop in voluntary
compliance results in a revenue loss of almost $6 billion.
This is clearly a case where an ounce of prevention is worth
a pound of cure.
- 4 -
We have reviewed closely the requirements for tax
processing and taxpayer service and have developed
appropriate requests for FY 1986 and FY 1987 to address
these needs. We have designed our budget requests to
revitalize the tax system and restore public confidence in
its effectiveness. We learned a lesson from last year and
intend to ensure adequate funding and to stretch each dollar
to its fullest.
At this point, Mr. Chairman, I'd like to emphasize the
importance of timely consideration of the IRS supplemental.
As you know, we have submitted a $340 million supplemental
request for FY 1986. The supplemental will:
o improve the quality of tax processing operations
through more management oversight and employee
training;
o increase service center staffing to stay current
with the work load; and
o provide taxpayer service levels that are
responsive to taxpayer requests for information
and account status.
Mr. Chairman, I cannot overstate the importance of the
supplemental funds to IRS operations both now and in the
foreseeable future. In order to maintain current activity
levels and allow for the logistical continuity of
operations, prompt action on the full amount of the request
is critical.
- 5 -
II.
Our second objective is to strengthen the capability of
the IRS to promote tax compliance and generate revenue.
In FY 1986, the supplemental request will enhance the
following enforcement and revenue producing activities:
o hiring and training of audit staff in advance for
a major drive to increase tax revenues in FY 198 7
as part of a three-year revenue initiative;
o increased actions against abusive tax shelters and
attention to currency transaction reports; and
o assistance to states in carrying out audits of
foreign and domestic activities of multinational
firms.
In FY 1987, we intend to build a stronger and more
credible deterrent against noncompliance with tax laws. In
FY 1985, IRS faced an estimated tax gap -- taxes owed but
not paid — of over $100 billion. This gap has risen from
$29 billion in 1973, when the IRS first began estimating it.
This continued erosion of our receipts base through
noncompliance undermines the confidence of the general
taxpayer and needlessly adds to the budget deficit.
The cornerstone of the request is the previously
mentioned revenue initiative which will yield $10 billion by
FY 1991. We are also seeking funds for other high-yielding
activities. These include faster litigation of pending tax
shelter cases to reduce case backlog and the resolution of
unreported income cases disclosed through the document
matching program.
- 6 -
III.
Our third budget objective is to meet our law
enforcement and protection responsibilities.
The FY 1987 budget for Customs provides for
stabilization of the investment in drug interdiction and
overall staffing levels at approximately the 1985 level.
The requested funds will permit Customs to:
o enforce our Nation's import and export laws
through the processing of over seven million
entries of merchandise, 93 million carriers and
nearly 300 million passengers;
o collect over $15 billion in revenue; and
o operate the recently acquired tools to combat drug
trafficking.
The requested funding for the Secret Service will help
us prepare for the 1988 Presidential campaign and protect
foreign dignitaries visiting the 1987 Pan American Games.
The Service will acquire sophisticated equipment to better
support its protective efforts.
The Bureau of Alcohol, Tobacco, and Firearms' budget
will continue efforts to ensure the collection of all
alcohol and tobacco excise taxes and to reduce the criminal
use of firearms and explosives. We estimate BATF revenue
collections at approximately $10 billion in FY 1987.
In FY 1987 the Federal Law Enforcement Training Center
will institute a new policy of funding only the direct costs
of basic training. Participating organizations will assume
- 7 -
responsibility for the respective costs of the students'
travel, meals and lodging.
IV. The fourth budget objective is to supply the resources
necessary to manage the Nation's finances and service the
Nation's debt. This includes:
o continuing the Administration's efforts to improve
cash and credit management; and
o putting into operation the "Treasury Direct"
System for the issuance of marketable securities
to individual investors.
V. Fifth, we must ensure adequate currency and coin to
meet the Nation's demands. The requests for the U.S. Mint
and the Bureau of Engraving and Printing will accomplish
this objective.
VI. Sixth, we must provide for appropriate policy
formulation and management oversight of Departmental
operations. The Department develops and carries out the
Nation's economic, financial and tax policies. In
recognition of the Department's critical role in the
Nation's economic affairs, the President has given the
Department responsibility for chairing his Economic Policy
Council.
As you are well aware, we are spearheading tax reform.
The President believes that tax reform is of the highest
- 8 -
priority; our tax system must be simpler, fairer and
encourage economic growth. The Department is also advancing
an initiative for sustained economic growth to help
developing countries cope with their debt service problems.
Last fall, in conjunction with the other G-5 countries,
we initiated actions to improve the U.S. trade deficit by
bringing an overvalued dollar into better balance with their
currencies. As a follow-on to those initiatives, the
President has directed the Department to determine if a more
comprehensive restructuring of international monetary
relationships should be discussed with other nations.
VII. Finally, Treasury's budget continues the critical
modernization efforts begun in previous years. We believe
that investments in information systems pay off generously
in increased efficiency over the long run. For example:
o For the IRS, requested funds will continue the
Automated Examination System. The increased
productivity from this initiative will enable IRS
to collect additional net revenue of $5.1 billion
through 1991.
o In the Customs Service, we need to move forward
with development of the Automated Commercial
System (ACS) and the Treasury Enforcement
Communications System (TECS II) . These systems
will enhance productivity and effectiveness.
- 9 -
o
In the fiscal services, we will continue to
modernize the government's disbursement and
collection systems, relying on electronic systems
as opposed to inefficient and costly paper-based
procedures.
In summary, our $6.0 billion request for the Department
of the Treasury represents:
o a necessary investment in the IRS to preserve the
integrity of the tax system;
o a prudent investment in the IRS to increase tax
compliance and consequently make a major
contribution to deficit reduction; and
o the responsible preservation of the essential
governmental functions of the Department.
Mr. Chairman, that concludes my opening remarks.
I shall be happy to answer any questions that you or the
other Subcommittee members may have.
* * * * *
FREASURY NEWS
»partment of the Treasury • Washington, D.C. • Telephone 566-2041
LIEP.ARY.-OOM.5310
•if'A"M£Nr OF rflE TREASURY
For Immediate Release
March 19, 1986
Contact: Bob Levine
Phone: (202) 566-2041
TREASURY AUTHORIZES EXIMBANK TO MATCH BRAZILIAN SUBSIDIES
Secretary of the Treasury James A. Baker, III has authorized the
Export-Import Bank of the United States to support a sale in the U.S.
market by a domestic producer facing heavily subsidized financing in
dollars from the Government of Brazil.
In authorizing the Eximbank action, Secretary Baker expressed
concern at the apparently increasing use by the Brazilian Government of
subsidized financing to support exports to the United States.
"We have noted instances of such export subsidies for general
aviation aircraft and other products, as well as in the present case,"
the Secretary said. "While we are sympathetic to Brazil's need to
export, it doesn't need these subsidies in source of harm to U.S. trade
interests, and make it more difficult for the United States to keep its
market open. Moreover, given Brazil's debt problems, we wonder whether
such export subsidies to industrialized countries are appropriate."
Under Section 1912 of the Export-Import Bank Act, the Secretary
found that the Brazilian financing would be "a significant factor" in
the sale. Further, the Brazilian Government declined to withdraw the
subsidies when requested to do so. He therefore authorized the Bank to
make a matching offer to Allis Chalmers.
Allis Chalmers Hydro, of York, Pennsylvania, is bidding to supply
hydroelectric power generating equipment for two stations on the
Allegheny River new Pittsburgh. Allis Chalmers faced a competing bid
from Voight S.A. of Sao Paulo, Brazil, supported by Brazilian
Government export financing at 5% interest.
o 0 o
B-509
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
IkL: /.ROOM 5310
FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
March 20, 1986
TESTIMONY OF THE HONORABLE
GEORGE D. GOULD
UNDER SECRETARY FOR FINANCE
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
THURSDAY, MARCH 20, 1986
Mr. Chairman and Members of the Distinguished Subcommittee:
I compliment the Chairman for calling these hearings on the
condition of depository institutions, and I greatly appreciate
this opportunity to appear before your Subcommittee.
We share your keen interest in this subject and have been
working on many aspects of it — involving different types
of depositories, various lending markets, and both shortand long-range implications for consumers, small savers,
borrowers, and the health of the depositories themselves.
I recognize that all of us may not see eye-to-eye on how to
serve the American public best on each and every one of these
issues. But I honestly believe we share much ground on a
number of matters, particularly relating to the thrift industry
I am hopeful we can work together on these subjects for the
common good.
My statement addresses four topics. First, as the Chairman
requested, we have examined closely the problems of the thrifts
and FSLIC. I would like today to outline our analysis and the
elements of a proposal we are developing with the Bank Board
and the Federal Home Loan Banks. The industry groups have
expressed general agreement with key aspects of this approach.
B-510
- 2 Second, I will discuss briefly the problems of agricultural
banks and the recent joint statement of the three banking
agencies on regulatory policies toward agricultural lenders.
Third, my statement touches on some operational deposit
insurance issues — related specifically to how we might
increase the fairness and effectiveness of the FDIC's
operations.
Fourth, I would like to say a few words about the general
prospects of the nation's insured depository institutions and
their ability to serve consumers, savers, businesses, and
themselves. Neither Congress nor the Administration can afford
a total preoccupation with immediate issues to the detriment of
the not-too-long-term health of American banking organizations.
Otherwise, our nation's banks will face economic obsolescence,
consumers and other customers will be served less well, our
system of banking regulation and supervision will fall behind
the marketplace, and the deposit insurance funds will be at
greater risk.
I am pleased to add that we have been working closely with our
colleagues in the regulatory agencies on these issues. I understand they will address some of your more specific questions on
the condition of banks in various lending areas in their statements later in these hearings.
I. The Problems of the Thrifts and FSLIC
The Chairman and many members of this Subcommittee have stressed
that the problems of the thrifts and FSLIC comprise the most
important deposit insurance issue. The Administration assigns
this subject an equal priority.
Indeed, given the decline in interest rates and the current
substantial profits of many thrifts, this is a propitious time
to make headway. We have worked closely with Chairman Gray
to develop a sound proposal. While we need to resolve some
significant details in coming weeks, I would like to report
to you today on: (1) estimates of the size of the problem;
(2) the limits of FSLICs current resources; and (3) our
three-part 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.
- 3 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.
Moving from these statistics on troubled thrifts to identification of a number that will require FSLIC's 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.
- 4 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. Last week, before this Subcommittee, Chairman Gray
appraised the resolution costs at approximately $16 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 FSLIC'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 FSLIC's total reserves (assets
minus liabilities) at the end of 1985 totaled about $6 billion.
If FSLIC's "allowances for losses" for various assets are low,
as some commentators have asserted, then its total reserves
would be commensurately lower.
FSLIC's 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 FSLIC's 1986 income before
expenses should total about $2.6 billion, of which a little
over $1 billion is from the special assessment.
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.
- 5 Despite these substantial efforts to expand organizationally,
there are limits on FSLIC's capability to increase its case
resolution efforts. In setting future targets, we need to be
aware of past results: FSLIC resolved 33 cases (involving
thrifts with $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 FSLIC's 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 investment by or borrowing from the Federal Home
Loan Banks. In effect, FSLIC could draw against its future
stream of assessment and investment income, and some of the
FHLBanks' future profits, 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.
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.)
- 6 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.
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 FSLIC's financial responsibility to pay up
if thrifts fail. We believe some proposals go too far in the
direction of prohibiting state-authorized activities. Public
officials and private businesspeople from some of your states
have made this point to us, too. 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 FSLIC's Resources
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 investments and
borrowing from the FHLBanks, spaced out over time.
- 7 Some members of the industry are seeking to end the special
assessment. While we agree that the assessment must remain
"special" and impermanent, now 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 FSLIC's costs
and broaden the industry's capital base, thus potentially
lessening the burden for existing healthy thrifts.
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 (December 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. The preferred stock option is preferable because it both increases FSLIC's accounting reserves
and provides a budget offset for FSLIC's case resolution outlays. However, authorizing legislation is probably 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 recently 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,
are seeking to arrange a FHLBank financing package that taps the
Banks' skills and resources responsible.
- 8 3.
Expand the Acquisition Program for Ailing Thrifts
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.
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?
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.
We also urge the Congress and the regulators to look twice before
determining that certain classes of bidders, such as firms with
securities affiliates, cannot be accommodated in some fashion.
Perhaps certain restrictions on affiliate transactions and conflicts of interest may suffice. in addition, some proposals
before the House, 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 BHC 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.
- 9 Finally, I should explain how our support for consumer banks
is completely consistent with, and indeed reinforces, our
effort to expand the acquisition market for ailing thrifts. As
the Treasury has stated in the past, we would consider closing
the nonbank bank loophole in the context of comprehensive legislation. That legislation would have to include provisions to
reduce the statutory and regulatory barriers that currently exist
for potential thrift acquirers. That is the only way we can
really channel potential consumer bank entrants toward troubled
thrifts — so as to reduce FSLIC's costs, bring new capital into
the thrift industry, and continue to offer more competitive and
better services for working people of modest means.
Those who argue that they want to encourage thrift acquisitions
by closing down consumer banks alone are pursuing quite a different agenda. They do not want the competition from new entrants,
and to this end they are willing to cut off valuable new providers
of services to the middle class. Indeed, legislation pending in
the House reflects this approach: Not only would the bill halt
the consumer bank movement, but it would severely discourage thrift
acquisitions and tie the hands of thrift owners who want to market
more services to small savers.
Summary on Thrifts
The time is ripe to make major advances on the problems of the
thrifts and FSLIC. Public confidence in FSLIC and the thrifts
requires all of us to come together to take action now.
Mr. Chairman, you have been alert to these issues. You have
asked us for a plan, and we are presenting one -- together with
the Bank Board, the FHLBanks, and substantial industry support.
We know you are ready and willing to act on the right program.
We would like to work closely with you and the Members of this
Subcommittee as we refine the details over the next few weeks.
Then together we can take expeditious action to strengthen FSLIC,
this important industry, and the faith of depositors throughout
the nation.
II. Agricultural Banks
American agriculture is undergoing a major transition. This
transition is critical if we expect to compete effectively
for export markets. The new Farm Bill authorizes expenditures
of at least $50 billion over the next few years to ease the
way. The lower dollar and lower interest rates will help, too.
Nevertheless, current USDA economic projections anticipate
several more years of significant pressure on many farmers,
rural communities, and agricultural lending institutions. We
believe, therefore, that it is critical for the bank regulators
to continue to work constructively with farm banks on their
problems and the concerns of their borrowers. The regulators'
joint statement of March 11, which I have attached to this
testimony, is exactly the type of effort we need.
- 10 A.
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. Commercial banks hold about $48 billion in direct
farm loans.** The almost 4000 agricultural banks hold about
$24 billion of this agricultural debt.
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,
only 1 percent of the agricultural banks had reported capital-toasset ratios below 6 percent. (Fifty percent had reported capital
of over 10 percent; 37 percent had reported capital between 8 and
10 percent, and 12 percent had reported capital between 6 and 8
percent.) As a group, agricultural banks' 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.
*
Agricultural banks 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.
- 11 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 before another Subcommittee of this
Committee that 40 of the 50 agricultural banks that had failed
as of that time had been reopened — either as freestanding
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.
B. Relief for Agricultural Banks and Their Borrowers
Recent initiatives, both statutory and regulatory, should provide
some relief to agricultural banks and their borrowers.
The 1985 Farm Bill, enacted into law on December 23, establishes
a $490 million interest rate reduction program for loans made by
commercial banks and guaranteed by the Farmers' Home Administration
(FmHA). Under this program, a commercial lender must reduce the
interest rate on a farm loan to enable the farmer to attain a
positive cash flow. Then USDA can contribute as much as 50 percent
of the cost of the rate reduction, up to a total Government "rate
buydown" of two percent. FmHA published regulations for this new
expenditure program in late February, so it is available for farmers
and bankers now.
On March 11, the Federal Reserve Board, the FDIC, and the Office
of the Comptroller of the Currency issued a joint statement on
regulatory policies toward agricultural lenders. This statement
explains that "the banking agencies believe it appropriate to
employ supervisory policies that will assist basically sound,
well-managed banks to weather this transitional period, consistent
with the need to maintain an adequate supervisory framework and
the credibility of regulatory and public financial statements."
To alleviate the strains on farm lenders, the banking agencies
committed to pursue four policies immediately.
First, they will allow a bank experiencing difficulties to
operate below the minimum capital requirement, provided the
bank has the capacity to restore its capital within five years.
In effect, this policy recognizes that a primary purpose of
capital is to absorb unanticipated losses: Agricultural banks
with respectable prospects of recovery should now be able to
draw on their traditionally high levels of capital. The OCC
has outlined a special capital forbearance approach for implementing this policy.
Second, the banking agencies reaffirm their intent to accommodate banks that forbear on farm loans through appropriate debt
restructurings. It is in everyone's financial interest to keep
a farmer on his or her land if there is a reasonable prospect
of repayment.
- 12 Third, the regulators will make available and encourage the
appropriate use of Financial Accounting Standards Board statement
No. 15 (FASB 15) for troubled loan restructurings. FASB 15 can
help bankers avoid an automatic charge-off of losses on certain
restructured loans, even where there have been notable concessions
in financing terms.
In brief, FASB 15 allows financial institutions to maintain the
value of a restructured credit, provided that the total anticipated
future cash receipts (both principal and interest) at least equal
the principal value of the loan. (The anticipated future receipts
must be both probable and reasonably anticipated.) This technique
should be especially appealing because it helps the farmer stay
afloat along with the lender; both need to come to terms to
restructure a loan satisfactorily.
Fourth, the banking agencies propose to modify their reporting
and disclosure requirements to separate performing renegotiated
debt from nonperforming loans.
Finally, I should note that the regulators informed the Senate
Banking Committee that the last three of these policies would
also be available to lenders holding energy and other loans.
The OCC and the FDIC are undertaking an expedited analysis to
determine whether the capital forbearance policy also need be
applied to energy lenders in some fashion.
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.
The emergency acquisition provisions of the Garn-St Germain Act
of 1982 provide some flexibility to maintain credit services
to areas served by failed banks. But they incorporate significant restrictions that hamper regulators' efforts to solve
problem cases: 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.
- 13 The emergency acquisition provisions will expire on April 15
unless the Congress extends them. We have been working with the
banking regulators to propose adjustments that Congress can make
at the time of extension. We basically concur with Chairman
Seidman's recent recommendations to: permit acquisitions of
"failing" banks (already the case for thrifts); reduce the $500
million asset limit, perhaps to $250 million; and authorize the
acquisition of a bank holding company where one or more bank(s)
in the system is in danger of failing, the bank(s) satisfy the
size test, and the failing bank(s) account for a significant share
of the holding company's assets. It would also be beneficial if
an acquired bank could be operated as a branch instead of as a
separate institution.
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
gentlemen have stressed the key systemic protection afforded
the nation's financial network by deposit insurance.* Moreover, it is important for America's small savers to have at
least one totally safe investment.
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.
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.
- 14 -
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 finances of the
depositors. I have discussed such a "failure management" program
in the context of FSLIC and the thrifts. Chairman Seidman has
also outlined 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
Subcommittee to enhance the FDIC's ability to protect depositors
and the financial system.
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 FDIC'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.
- 15 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. 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
Subcommittee in meeting the challenge.
IV. Services to the Public and Profitability: The Keys to
Safety and Soundness
We have outlined today some major and minor proposals to handle
the problems of the thrifts and FSLIC, agricultural banks, and
the FDIC's "failure management." But I would be remiss if I
stopped with those immediate problems.
It is also vitally important that we ensure banks' ability to
operate in a fast-changing marketplace -- both to promote their
safety and soundness and to supply more and better services to
consumers and other customers. Too often in the past, the debate
on change in the banking world has focused on the need to expand
their "powers" vis-a-vis others, without much discussion of why
this expansion is necessary. The debate broke down into an
unappealing exchange over "who gets what," particularly in
relation to the powerful securities firms.
We believe that we have a duty to explain to Congress why
expanded banking services will result in a more secure banking
system that can be responsive to the needs of consumers, state
and local governments, and America's various businesses. If
Congress will not permit banks to evolve with their market,
we ultimately will create a much bigger deposit insurance
problem than any I have discussed today.
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.
- 16 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 debt, 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 portfolios. 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.
- 17 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.
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.
- 18 -
Mr. James McCormick, in testimony before the Senate 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-of-date 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.
Banking organizations, particularly small ones, 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.
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.
- 19 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 how those used to the system
that prevailed before communications-computer technology and
consumer-saver preferences opened up the marketplace have
arrived at this position.
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. 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.
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 introduced
in the House 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
being ineffective in the face of 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.
- 20 V.
Conclusion
I would like to work closely with this Subcommittee to address
some pressing problems we all recognize. We acknowledge that
in a short legislative year, with many issues competing for
the Congress' attention, any other approach is likely to result
in stalemate.
I believe the difficulties of the thrifts and FSLIC are
especially worthy of joint action. We can make a start alone,
but we can accomplish much more with your help.
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.
Attachment A
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March 11, 1986
Attachment B
Joint Statement of the Federal Reserve Board,
the Federal Deposit Insurance Corporation and
the Office of the Comptroller of the Currency
on Regulatory Policies Toward Agricultural Lenders
The Federal bank regulatory agencies are fully
aware of the problems
economy
and
the
created
for
borrowers
in the agricultural
financial
and
strains
these
lenders.
In
sector
of our
problems
light
of
have
these
conditions, the banking agencies believe it appropriate to
employ
supervisory
policies
sound,
well-managed
banks
period, consistent
with
that
to
will
weather
the need
assist
this
basically
transitional
to maintain
an adequate
supervisory framework and the credibility of regulatory and
public
financial
policies
to
statements.
help
achieve
Supervisory
these
and
objectives
regulatory
are
outlined
below.
In addition to_ the regulatory policies contained
in this statement,
the banking agencies continue
to urge
the Congress and state legislatures to take steps to help
maintain the provision of banking services in small communities.
The
acquisitions
Garn — St
across
Germain
state
Act
of
1982
lines of troubled
prohibits
banks
before
they have failed and of failed banks with assets under $500
million.
The
banking
agencies
constraints
should
be
acquisitions
across
state
criteria
eased
by
believe
allowing
lines and by
so as to maintain
that
the banking
these
failing
reducing
services
two
bank
the
size
in
farm
-2-
communities.
An easing of state restrictions on branching
could also help maintain .banking services in small towns in
cases
when
a
separately
organized
and
capitalized
bank
night not be viable.
In order to help alleviate strains on farm lenders
and
provide
additional
agricultural
support
for
sector,
and
time
the
to
resolve
banking
commitment
to
problems
agencies
the
in
express
following
the
their
supervisory
policies and principles:
- A major function of capital is to absorb
unanticipated losses and help an organization weather
a period
of
adversity.
Heavy
losses
may
reduce
a
bank's capital below normal levels or below minimum
regulatory
allow
a
below
the
guidelines.
bank
The
experiencing
minimum
capital
banking
agencies
difficulties
requirement
to
will
operate
provided
the
bank has the capacity to restore capital within five
years.
- The banking agencies reaffirm their policies not to
discourage
through
banks
appropriate
from
debt
forbearing
on
restructurings,
farm
loans
recognizing
that such restructurings may be in the interests of
both
the
bank
and
the
borrower
when
there
is
a
reasonable prospect that the borrower will eventually
be able to repay the loan.
-3-
- Consistent
with
their
forbearance, the banking
general
view
toward
agencies will continue not
to require an automatic charge-off of loans that have
been
restructured.
principles,
as
Generally
set
forth
in
accepted
accounting
Pinancial
Accounting
Standard No. 15 (Accounting by Debtors and Creditors
for
Troubled
Debt
Restructurings)/
allow
financial
institutions to maintain the value of a restructured
credit provided that the total of anticipated future
cash receipts under the new modified terms which are
both
probable
and
can
be
reasonably
estimated
least equals the principal value of the loan.
generally
accepted
accounting
principles
do
at
Thus
not
necessarily require the immediate charge-off of loans
or portions of loans that have been restructured in
accordance with that rule.
- The banking agencies see no compelling reason for
interpreting
nonperforming
or
reporting
loans.
agencies propose
In
renegotiated
line
to modify
with
this
regulatory
debt
with
view,
the
reporting
and
disclosure requirements for restructured debt so that
such debt, if it is performing in accordance with the
new terms, would be designated as loans "Restructured
and
In
Compliance
With
Modified
Terms."
TREASURY NEWS
lepartment of the Treasury • U3RARY.
Washington,
D.c. • Telephone 566-204
ROOM
5310
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
March 20, 1986
•'•'=* V !2 21 ?}\ %
STATEMENT BY
THE HONORABLE DAVID C. MULFORD
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT INSTITUTIONS
AND FINANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
MARCH 20, 1986
Mr. Chairman, Members of the Committee, thank you for
inviting me to discuss the U.S. debt initiative and where
it stands. The draft bill you have sent offers several
relevant suggestions which I would also like to discuss.
But I would like to stress at the outset that the Administration does not see a need for legislation at this
time to implement our debt initiative.
The current international debt crisis is one of the
greatest challenges for the world economy and financial
system since the Great Depression. It has that element
of insolubility which brings out our worst frustrations.
The U.S. economy has been seriously and adversely
affected by the debt situation. U.S. exports to the
developing countries have slumped. Our financial institutions have had to bolster their reserves. And the
demands on the Federal Budget for foreign assistance have
intensified. If we manage the debt situation responsibly
and wisely, these adverse effects should recede in the
future.
B-511
- 2 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
?he problem appears in its totality, we must focus our efforts
on those elements of the problem that are soluble and where
we can be effective.
Herein lies the importance of the U.S. debt initiative.
It recognizes the fundamental need for growth. It places the
objective of increased growth and the reforms necessary to
promote growth at the center of the debt strategy.
We believe that without growth there can be no solution
to the debt problem. Countries must expand their debt servicing capability — real income and export earnings — at a
faster pace than they are accumulating debt.
We also firmly believe that without economic reform, no
amount of money — whether derived from external borrowing,
foreign assistance, or inflationary domestic pump-priming
will produce sustained growth.
Credible reform by the debtor nations will improve their
growth prospects, but debtor nations simply cannot be expected
to grow and adjust simultaneously without additional external
finance. Linked with credible reform, the other two elements
of the debt initiative provide for the sources of this finance:
net new lending by the commercial banks and enhanced flows
from the international financial institutions. These three
mutually reinforcing elements form the working heart of the
debt initiative.
It is also important to emphasize that the debt initiative
does not operate in a vacuum or in isolation from other
critical economic issues. Recent developments in the global
economic environment are improving prospects for developing
countries and for our own economy:
— There has been a substantial reduction in interest
rates. LIBOR currently stands at approximately
7.6 percent, as compared to 10.2 percent a year ago.
Each percentage point decline has reduced the debt
service on commercial loans to the fifteen major
debtor nations by $2.5 to $3 billion.
— The dramatic decline in crude oil prices gives
most developing countries financial relief on their
oil imports, impetus to exports from the estimated
one percent increase in OECD growth, and additional
interest rate relief as inflationary expectations
subside further. We are already seeing the interest
rates fall in some major industrialized countries.
— Even some of the oil exporting countries will be
offsetting their lost export earnings with reduced
interest rate costs.
- 3 —
The 25 to 30 percent decline since September in the
U.S. dollar versus the yen and deutsche mark should
make imports from the United States more competitively
priced in all developing country markets. Export
opportunities should also improve for those economies
whose exchange rates track closely with movements in
the dollar.
There are good prospects for additional steps in the
coming months which can add impetus to growth. First, the
United States is implementing a credible deficit reduction
program. All Branches of the U.S. Government recognize thatwe must get the U.S. deficit under control. Suggestions that
involve budgetary outlays such as increasing purchases for
the Strategic Petroleum Reserve should be viewed in that
context. While they may have beneficial effects, they would
require additional budget outlays and they further complicate
the already difficult decisions which the President and the
Congress will be facing in the coming weeks.
Second, the Congress and the Executive Branch are deeply
engaged in tax reform, which can give impetus to private
sector growth and initiative.
Third, the U.S. trade deficit in 1986 should be about
$20 billion lower than we expected as recently as last fall.
For 1987, the deficit should drop below $100 billion. This
can be accomplished without resorting to protectionist
solutions and with continued solid growth in the U.S. economy.
If other key industrial nations do their part -- improving domestically generated growth, maintaining or improving
access to markets, and continuing the economic and financial
cooperation of recent months — I see greater scope for
continued growth, reduced inflation and further reductions
in interest rates over time.
The rapidly approaching meetings of the Interim and
Development Committees, the OECD Ministerial Meeting and
the Tokyo Economic Summit will be opportunities to continue
cooperation on these matters so important to resolving the
debt situation in developing countries.
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 credible, growth-oriented
reform in the debtor countries, supported by net new lending
by the commercial banks and enhanced by policy-based lending
from the international financial institutions is essential.
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.
- 4 The initiative is now in place and is being implemented.
What must happen now to make the strategy work?
First, the debtor nations must reform their economies
so that they can grow. While there have been commendable
efforts to deal with the debt problems during the past
three years, 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.
The debtor nations will need to examine intensely opportunities for privatization of public enterprises, the development
of more efficient domestic capital and equity markets, growthoriented 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.
We have heard the suggestion that trade liberalization
should play a central role in reform efforts. While this is
often true, I would stress that reforms must be tailored to
the situation of each debtor nation. No single element
should be seen as a necessity for policy-based lending
from the development banks. Nor should the United States
seek to impose its own bilateral trade objectives on these
loans. That would be counterproductive.
Our first goal needs to be to encourage economic reform
which will generate growth and relieve debt constraints, and
in some cases, liberalization of restrictive trade practices
is important. However, finance needed to support reform
will only be made available if these reforms are credible,
with reasonable prospects for long-term success.
Second, 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 debtor nations. If reform in the debtor countries is 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 declininq
quality.
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.
- 5 It is also suggested that we consider changes in the
structure of U.S. capital markets or the regulation of
private financial institutions in order to achieve a lasting resolution of the debt crisis.
I do not believe this is necessary at this time.
Indeed, it could be counterproductive, because it suggests
some form of generalized changes in U.S. practice can bring
about a lasting solution to the debt crisis.
The changes that are necessary in large degree are
external to the United States: adjustment by the debtor
nations, support from the IMF and increased lending from
the commercial banks and the MDBs. Changes in U.S. banking
regulations will not reestablish the creditworthiness of
countries, provide the new financing necessary to promote
growth, nor instill the confidence necessary in domestic
populations to lead to a return of flight capital.
The heads of the U.S. regulatory agencies already are
on record as stating that new lending to countries making
appropriate adjustment efforts can improve the quality of
outstanding loans. I believe that the U.S. financial system
and U.S. regulatory agencies are sufficiently flexible that
they can accommodate and deal with specific issues on a
case by case basis, as they arise.
The commercial banks are being called upon to increase
their exposure by a modest 2.5 to 3 percent annually, while
the World Bank is being asked to increase its lending by
an amount equivalent to an annual increase in total exposure
of about 20 percent. The provision to commercial banks of
World Bank guarantees or of some sharing of the Bank's "preferred creditor" status through subtly crafted cofinancing
arrangements would essentially transfer risk to governments,
voiding the modest increase in commercial banks exposure.
While the desire for such measures is understandable, we do
not intend to support them to induce increased bank lending.
This brings me to the third element of the debt initiative, the contribution from the international financial
institutions. I would underscore at the outset that the IMF
must continue to play its central 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 growthoriented 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
contributions will necessarily focus on macroeconomic
policy, rather than long-term structural reforms.
- 6 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.
An expanded role for the World Bank will 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 quality of conditionally of lending with the World Bank if sectoral
lending is to be increased. Any increase in fast-disbursing
lending by the Bank which fails to maintain loan quality will
result in a serious risk of over-exposure and a diminished
international credit standing for this important international
institution.
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.
The expanded role for the World Bank in the debt
initiative is not limited to policy-based lending. An
important element of economic reform in almost all debtor
nations is the need to strengthen the role of the private
sector. A major World Bank tool for this purpose is the
proposed Multilateral Investment Guarantee Agency, or the
"MIGA."
The MIGA is 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.
- 7 The United States has long been an advocate of a greater
role for foreign direct investment in the development process.
Foreign direct investment both enhances the private sector's
role and encourages the flow of non-debt capital, which can
expand productive capacities and facilitate the structural
changes which are essential to resolving the debt problem.
Despite its advantages, foreign direct investment declined
from 20.4 percent of total capital flows to developing
countries in 1975 to 10 percent in 1984.
Perceptions by investors of restrictive investment
policies, especially uncertainties about the transfer of
returns on investments, appear to have contributed to the
reduction in direct investment flows. Policies that distort
or impede international investment flows conflict with the
obvious needs of developing countries for capital. The
MIGA, with its strong mandate to encourage reforms, will
stimulate the flow of foreign direct investment to these
countries.
I understand that you have received the Administration's
legislative proposal, but there is real reluctance to initiate
a new program in the current budgetary environment. Let me
emphasize that the impetus to achieve this long sought U.S.
objective should not be dissipated by waiting. A delay would
disrupt the international efforts now underway to encourage
the flow of equity investment to developing countries. The
MIGA clearly advances our interests: it supports our development policy, reinforces our international debt strategy and
will result in further investment flows to the developing
nations. Early authorization for U.S. membership and full
funding is important to the success of our overall international efforts. Your support is essential.
I should touch on another key funding question related
to the World Bank before turning to other matters. We are
prepared, if all the participants in the debt strategy do
their part and there is a demonstrated increase in the
demand for quality lending, to consider a general capital
increase for the World Bank. This Committee will carry the
responsibility for convincing your colleagues in the House
that any such capital increase is justified. We will need
your guidance and views during negotiations of this subject,
if conditions emerge which warrant consideration of a capital
increase.
An alternative to a capital increase which has been
advanced is a change in the gearing ratio of the Bank.
Presently, the Bank can not have outstanding disbursements
in excess of subscribed capital, reserves and surplus. We
oppose any change in this limitation. We would cite three
simple reasons.
First, the change in the gearing ratio would be a
fundamental change in the nature and amount of financial
resources which stand behind the securities offered by the
Bank to investors. Bluntly:
- 8 —
we would risk raising the cost of funds to the
Bank and the cost of Bank loans to all borrowers,
and
— we would risk reducing the pool of investors
prepared to invest in Bank securities to the
point where
— we are uncertain that even the existing lending
program could be funded.
Second, the timing could not be less propitious. With
our support the Bank is currently modifying the nature of
its lending operations fundamentally. Investors see that
a growing portion of Bank loans are going to support policy
changes, rather than infrastructure projects which promise
to earn foreign exchange. While we support this shift
because it promises the most effective means of dealing with
the debt situation, we can understand that investors may be
watching carefully. To add a fundamental change in the Bank's
financial structure which diminishes the relative amount of
shareholder resources at risk would be highly imprudent.
Third, the budgetary savings which presumably would be
the point of the gearing ratio change can be achieved by
making subscriptions in the form of callable capital which
do not necessarily entail budget outlays. It would be
premature to discuss now the need for additional capital.
But callable capital is well-understood by the investment
community, raises none of the disadvantages of a gearing
ratio change and, if there is no paid-in element, has no
impact on the Federal budget. In short, I see no advantage
— practical or theoretical — to a gearing ratio change,
when compared to callable capital.
Several other suggestions for changes in the World
Bank are useful contributions. First, we can support
an increase in the amount of structural adjustment lending.
The ten percent ceiling is not a barrier. We are prepared"
to see it raised to accommodate the demand for wellconditioned loans designed to support reform programs.
Second, the idea of increasing the World Bank share
of already approved, but unfinished projects was a prominent
element of the Special Action Program in effect in 1983 and
1984. It may be appropriate in specific cases. However,
if the purpose is to provide more foreign exchange in an'
appropriate policy context, the structural and sectoral
adjustment lending programs can meet the same need without
complicating project accounting and implementation.
Finally, I agree with the suggestion that reforming
financial sectors can play a key role in several debtor
nations. Clearly, sensitive political issues are involved
and each country situation needs to be evaluated individually.
- 9 Before concluding my thoughts on the debt initiative, I
want to touch on the role of the Inter-American Development
Bank. As you know, Mr. Chairman, we are seeking a number
of specific reforms in the replenishment negotiations for
the Bank. These reforms — directed toward enhancing the
Bank's ability to identify and negotiate appropriate policy
conditions for its lending — are essential if the Bank is
to play a meaningful role in resolving the debt problems
of borrowing countries in the region. We are hopeful that
we can make significant progress on these points next week,
as member countries convene for the Bank Annual Meeting in
San Jose, Costa Rica.
To put in place the financial underpinnings for future
Bank lending, the member governments have negotiated a merger
of the Ordinary Capital and Inter-Regional Capital accounts
of the Bank. This merger will allow more efficient use of
Bank capital. In other words, the Bank will be able to lend
on the basis of a smaller increment of capital subscriptions
from members, than if the two accounts were to remain separate.
U.S. agreement to the proposal requires legislative action,
and I urge your prompt and favorable consideration.
Let me summarize by saying that if the U.S. initiative
succeeds, we will see 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 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.
Before concluding, I would like to add a somewhat related
comment.
I understand that you are contemplating requirements
for a series of reports on a number of topics. Mr. Chairman,
I can only say that Gramm-Rudman-Hollings is real and its
effects on the Treasury Department are real. Some weeks
ago, I asked my staff to analyze existing reporting requirements to see which ones can be eliminated. We have several
proposals. In this climate, the thought of doing additional
reports does not seem realistic unless their legislative
purpose is immediate. I and my staff stand ready to meet
with the Committee formally or informally at the call of the
Chair. But the expense of written reports would be hard for
us to justify.
With this plea to you to cooperate with our efforts to
reduce expenditures, I now look forward to hearing your views
on the debt initiative and to answering questions you may have.
Thank you.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
March 20, 1986
*
li^ARY. RCOi i 5310
Department of the Treasury
United States Secret Service
Introductory Statement of
j^p £5 9 55 /SH 'fifi
David D. Queen
Acting Assistant Secretary ^^^HcHT OF TH; TREASURY
(Enforcement and Operations)
For Presentation to the Subcommittee on Treasury
Postal Service and General Government
Committee on Appropriations
United States Senate
Mr. Chairman and Members of the Committee:
It is a pleasure for me to appear before you in support
of the annual appropriation request for the United States
Secret Service. I am testifying because Assistant Secretary
Keating is unable to be here today. He is traveling with
the Attorney General on a factfinding mission to Thailand,
Burma, India and Pakistan, to investigate the problem of
drug trafficking in and through that region.
Appearing with me today are the Director of the Secret
Service, John R. Simpson, key Secret Service staff members,
and Jill E. Kent, Deputy Assistant Secretary for
Departmental Finance and Planning.
The budget request for fiscal year 1987 is 307,140,000
dollars. These funds are needed to carry out the vital
missions of the U.S. Secret Service, which include
protection of the President, Vice President, and foreign
heads of state. As you know, Mr. Chairman, the U.S. Secret
Service also has a critical investigative mission in
protecting the currency against counterfeiting and in
investigating credit card fraud, computer fraud, and the
theft and forgery of government obligations. The Secret
Service has carried out these missions with determination
and enthusiasm.
Protection continues to be the Secret Service's highest
priority. During fiscal year 1985, the Secret Service
expended more man-hours in protection than in any past
non-campaign year. The man-hours devoted to the protective
mission represented 58 percent of the total for fiscal year
1985. Just as fiscal year 1985 included the close of the
Presidential campaign and the Presidential Inauguration,
fiscal year 1986 started off with a major special event, the
United Nation's 40th General Assembly, for which the Secret
Service planned and carried out a challenging protective
function. During the period of late September 1985 to
October
City
did
anfor
outstanding
30,
this
1985,
event.
over
jobFrom
and
100 heads
are
all reports,
toof
be state
commended
the
visited
Secret
forNew
this
Service
York
fine
- 2 As we look to the future, we see that these special
events are becoming more numerous. In July of fiscal year
1986, the Statute of Liberty Celebration will take place, no
doubt attended by many foreign VIP's. During fiscal year
1987, the Pan American Games will be held in Indianapolis.
In the spring of fiscal year 1987, Pope John Paul II is
scheduled to visit our country. Events such as these pose
enormous challenges for the Secret Service, especially in
view of the threat of terrorism. Careful and detailed
planning, meticulous training and preparation, and continued
support and cooperation from local, state and other Federal
law enforcement agencies are essential in meeting these
protective challenges.
Even though field agents were devoting much of their
time to protection activities, they were still able to
perform their criminal enforcement missions effectively. In
fiscal year 1985, both arrests [1,738] and convictions
[1,591] for counterfeiting exceeded the levels of fiscal
year 1984. The Secret Service seized, and kept from being
passed to the public, 61.7 million dollars of counterfeit
notes. Efforts to suppress counterfeiting overseas have
been expanded with the establishment of the Milan, Italy
field office. The Secret Service is exploring the
possibility of establishing additional foreign field
offices.
As our society moves from financial transactions
conducted primarily with paper checks and currency, to
electronic, computer-based systems, the Secret Service's
workload in combatting fraud involving computers, credit
cards, and electronic funds transfer will continue to grow.
The Secret Service is adapting its programs to meet these
challenges as our financial system continues to evolve. As
an example of this progress, the Secret Service has made an
excellent start against the serious problem of credit card
crime, with 884 arrests in fiscal year 1985. So far this
fiscal year, the Service has made another 559 arrests in
credit card cases.
Mr. Chairman, this concludes my opening statement. I
will now ask Mr. John Simpson, The Director of the U.S.
Secret Service, to provide you with his prepared statement,
and we will then be pleased to respond to questions you or
other members of the committee may have.
TREASURY MEWS
epartment
of theRELEASE
Treasury • Washington, D.C.
• Telephone
566-2041
FOR IMMEDIATE
March
19, 1986
LmA
«**00Hsti
RESULTS OF AUCTION 0?3 2TYEAR NOTES
The Department of the Treasury has^f accepted?^9,502 million
of $21,821 million of tenders received rVoWfftlie^ypublic for the
2-year notes, Series X-1988, auctioned today. The notes will be
issued March 31, 1986, and mature March 31, 1988.
The interest rate on the notes will be 7-1/8%. The range of
accepted competitive bids, and the corresponding prices at the 7-1/8%
interest rate are as follows:
Yield
7.17%
7.21%
7.19%
Tenders at the high yield were allotted 25%.
Low
High
Average
Price
99.918
99.844
99.881
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Accepted
Received
Location
Boston
$
110,975
$
41,725
17,980,640
7,808,890
New York
33,300
33,300
Philadelphia
71,310
68,310
Cleveland
91,105
62,850
Richmond
61,045
59,540
Atlanta
1,660,145
648,895
Chicago
121,455
105,455
St. Louis
33,285
33,265
113,040
111,040
Minneapolis
25,320
16,570
Kansas City
1,513,135
505,885
Dallas
6,495
6,495
San Francisco
$21,821,250
$9,502,220
Treasury
The Totals
$9,502 million of accepted tenders includes $773
million of noncompetitive tenders and $8,729 million of competitive tenders from the public.
In addition to the $9,502 million of tenders accepted in
the auction process, $305 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,000 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-513
TREASURYNEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566
L._.--»
' IUVI i ^ 0 — v
MARCH 19. 1986
?,l\ 12 33 PH.'86
DEPARTMENT GF THE TREASURY
APPOINTMENT OF WILLIAM J. BREMNER
AS DEPUTY ASSISTANT SECRETARY FOR FEDERAL
FINANCE
WILLIAM J. BREMNER HAS BEEN APPOINTED DEPUTY ASSISTANT
SECRETARY OF THE U.S. TREASURY FOR FEDERAL FINANCE, EFFECTIVE
APRIL 1, 1986.
PREVIOUSLY^ MR. BREMNER WAS VICE PRESIDENT AND A REGIONAL
OFFICE- MANAGER AT THE CHASE MANHATTAN TREASURY CORPORATION.
BASED IN THE COMPANY'S OFFICE IN HOUSTON, TEXAS, HE WAS
RESPONSIBLE FOR THE MARKETING OF U . S . TREASURY AND FEDERAL AGENCY
SECURITIES, MONEY MARKET INSTRUMENTS, MUNICIPALS AND FOREIGN
EXCHANGE ACTIVITIES.
FROM 1980 TO 1985, MR. BREMNER HEADED BREMNER ADVISORY
CORPORATION IN LOUISVILLE, KENTUCKY, WHICH PROVIDED INVESTMENT
AND FINANCIAL CONSULTING SERVICES. FROM 1969 TO 1 9 8 0 , M R .
BREMNER WAS EMPLOYED BY THE LIBERTY NATIONAL BANK AND TRUST
COMPANY IN LOUISVILLE. RISING TO SENIOR VICE PRESIDENT, HE
MANAGED TAXABLE INVESTMENT PORTFOLIOS, MONEY MARKET INVESTMENTS,
FEDERAL FUNDS, CERTIFICATES OF DEPOSIT, AND REPURCHASE
AGREEMENTS.
MR. BREMNER SERVED IN THE UNITED STATES ARMY FROM 1966-68,
INCLUDING A TOUR IN VIETNAM.
H E RECEIVED A BACHELOR OF ARTS
DEGREE FROM MARQUETTE UNIVERSITY IN 1 9 6 5 .
A FELLOW OF THE FINANCIAL ANALYSTS FEDERATION, MR. BREMNER
HAS BEEN PUBLISHED IN THE AMERI CAN'BANKER.
H E IS MARRIED AND HAS
TWO SONS. HE WAS BORN ON JANUARY 19, 1943, IN CHICAGO, ILLINOIS.
B-514
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 9:30 a.m., EST
March 25, 1986
STATEMENT OF
DENNIS E. ROSS
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
The Committee is today considering the domestic and
international petroleum market, and the policy implications of
oil import fees. I am pleased to have this opportunity to appear
before you and discuss the Treasury Department's views regarding
the imposition of fees on the importation of crude oil and
refined petroleum products. In particular, I will concentrate on
the tax policy issues raised by various proposals to impose an
excise tax or tariff on crude oil and refined petroleum products
imported into the United States. Other members of the
Administration will discuss the economic, energy, and foreign
policy ramifications of oil import fees and the current oil
market.
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
statutorily specified base prices. Because the removal price of
B-515
- 2 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
billion of
in
products.
Net imports
in 1985
represented
only $3.9
27 percent
net
revenues.
If
the
removal
price
during
1986
averages
$18
per
domestic consumption.
barrel, the revenue raised by the windfall profit tax will be
negligible.
2/ Under the applicable statutory provisions, the phase-out
period would begin in 1988 if the cumulative net revenues raised
by the tax exceeded $227.3 billion. Under current assumptions
regarding oil prices, however, the phase-out period will not
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 Pending Oil Import Fee Legislation
There are presently three bills introduced in the Senate that
would in varying ways impose excise taxes or increased tariffs on
imported oil and refined petroleum products. Although the
Committee is not considering any specific bills, I believe it
would be helpful to describe the pending legislation in full.
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 guarterly 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
gualification 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 egual to the excess, if any, of a
statutorily prescribed floor, set initially at $22 per barrel,
over the average world price per barrel of crude oil. The amount
of the floor, sometimes referred to as the "survival price" of
oil, would be increased annually to account for growth in per
4/
The GNP-adjusted
would
to the
capita
nominal gross reference
national price
product.
4/ be
Therounded
averageoff
world
next highest dollar. Based on current budget projections, this
annual increase would average approximately six percent per year
over the fiscal 1986-1991 budget period.
- 4 price of crude oil would be determined guarterly by the Secretary
of the Treasury in consultation with the Secretary of Energy,
based on the average per barrel prices for three principal
classes of foreign crude oil. 5/
The amount of the excise tax imposed under S. 1997 on each
barrel of imported refined petroleum product would be equal to
the per barrel excise tax on imported crude oil, increased by a
$3 per barrel "environmental outlay adjustment," 6/ and
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 Btu 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 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 of
importation.
5/ The three
classes
foreign crude oil are Rotterdam brent
crude, Saudi light, and North Sea forties.
6/ The environmental outlay adjustment would be increased
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 gasoline would be
computed as follows:
Reference price $22
World oil price
Tax on crude oil
Environmental Outlay Adjustment
Tentative refined product fee
"Barrel of oil equivalent" factor
(5.8 Btu •=- 5.25 Btu)
Motor fuel excise tax
($16)
$ 6
$ 3
$ 9
x .905
$8.15
- 5 S. 1412, sponsored by Senator Hart, would increase the
existing tariff on both imported crude oil and refined petroleum
products by $10 per barrel. Thus, unlike S.1507 or S. 1997, the
bill would not impose a higher fee on refined petroleum products
than on crude oil.
S. 1412 does not by its terms exempt any types of petroleum,
such as home heating fuel, from imposition of the oil import fee.
Under the bill, however, the Departments of Health and Human
Services and Energy would determine the monetary effect of the
fee on lower-income families and individuals. An equivalent
amount of the revenue raised from the import fee would be used to
increase funding for Federal aid for such people. The remaining
revenue for the fee would be used to reduce Social Security
taxes.
Discussion
Although the 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 each proposal.
We face today crude oil prices that have fallen dramatically.
The spot price for West Texas intermediate crude oil, for
example, closed last Thursday at $12.80 per barrel. 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 are the backdrop against which the merits
of increasing the fees on imported oil must be considered.
Effect on Federal Revenues. The potential revenue raised by
the imposition of a tax on imported oil and refined petroleum
products varies with the details of the particular proposal. Our
analysis shows that the overall revenues (including windfall
profit tax collections) raised from a fixed fee or excise tax on
imported oil are not acutely sensitive to the precise level of
world oil prices. Thus, a fixed per barrel excise tax on
imported oil 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, would establish a fee
that is explicitly dependent upon the level of world oil prices.
Accordingly, the revenue raised by these proposals, unlike the
fixed fee proposed by S. 1412, would be highly sensitive to
changes in the world oil price.
- 6 Assuming an October 1, 1986 effective date and oil prices
that remain $4 per barrel below the Administration's latest
forecast, 8/ and assuming all other elements of the forecast are
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, however, th
tariff is phased out as the world price ol oil increases from $2
to $30 per barrel and the world price of refined products
increases from $25 to $35 per barrel, this revenue would not be
realized if the current decline in world prices were reversed an
prices rose again to their former levels.
8/ The latest Administration forecasts, prepared in December
T985, assume that crude oil prices will be as follows:
Year Price per barrel
1986 $24.76
1987
1988
1989
1990
1991
23.98
23.55
24.07
24.95
25.37
9/ The $35.7 billion estimated to be raised consists of $31.2
Billion in net oil import fees (which reflects a reduction in
imports resulting from the fee) and $4.5 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.
- 7 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. 10/
The provisions of S. 1997 raise even greater uncertainty than
those of S. 1507 in estimating likely revenue effects. Whereas
the revenue raised by S. 1507 would be relatively stable so long
as oil prices remained below $25 per barrel, the fee imposed and
revenue raised by S. 1997 would fluctuate with increases or
decreases in the price of oil. Given the volatility of oil
prices and the influence of foreign governments on these prices,
the taxing mechanism provided in S. 1997 would not provide a
stable source of revenue over any extended period. Moreover,
similar to the operation of S. 1507, S. 1997 would cease to raise
revenue if the average world price of oil exceeded the adjusted
reference price.
Using the same assumptions as for S. 1507 and S. 1997, we
estimate that S. 1412, which would impose a flat $10 per barrel
additional tariff on imported oil and refined petroleum products,
would increase revenues by approximately $75.6 billion over the
five-year budget period. 11/ In contrast to S. 1507 and S. 1997,
which would phase out the fee if the price of oil rose above
specified
prices,
the revenue
revenues estimate
raised by
S. 1412of
would
be billion
10/
The $26.0
billion
consists
$19.4
relatively
regardless
fluctuations
in oil in
prices.
in
net oil stable
import fees
(which ofreflects
a reduction
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 home heating fuel and certain other petroleum 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.
11/ We note that the revenue raised through imposition of the oil
import fee under S. 1412 would be expended to increase Federal
expenditures for certain programs designed to benefit
lower-income persons and to reduce Social Security taxes. In
this regard, S. 1412 would not in the aggregate increase or
decrease Federal revenues.
- 8 National Security Considerations. A viable domestic energy
industry is integrally related to our national security. Much of
the interest in an oil import fee grows out of concern over the
health of that industry in a time of falling world oil prices.
The recent dramatic fall in world oil prices follows a period of
several years in which prices have declined on a steady
basis. 12/ This downward trend in prices has already forced 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, to
adjust to narrowed profit margins and a fall-off in drilling
activity. If the recent and very rapid fall in world oil prices
continues, the health of the domestic oil industry could be
threatened, with potentially serious effects on the level of
exploration and development of our domestic energy resources.
In response to the current climate of falling oil prices,
several major oil companies have recently announced substantial
reductions in their domestic exploration and production budgets.
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 abandoned.
Because the prices of other sources of energy are related to
the price of oil, reductions in oil 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. In the face of both this lower domestic production
and greater domestic demand resulting from falling prices, oil
imports will increase, leading to greater dependence on foreign
oil in the near term.
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
12/ In 1981, the average domestic oil well-head price was $31.77
to increase. Many producers, drilling contractors, and others
per barrel. This price has been declining steadily until 1985,
dependent upon the oil industry might not be able to survive
when it reached $23.88 per barrel.
while waiting for oil prices to rebound.
- 9 By imposing taxes solely on imported petroleum, each of the
bills described above 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 also be increased. Thus, each of the proposals would
offset to some extent the effects of falling oil prices on the
domestic energy industry. 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, and the consequent increase in energy
costs, would have significant adverse effects on non-energy
domestic businesses and industries. Most seriously affected
would be 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,
especially farmers, also would be hurt, since 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.
The higher energy costs that would result from an oil import
fee would make it more difficult for many domestic industries to
retain existing markets for their products both at home and
abroad. Foreign producers of comparable goods would benefit from
falling energy costs, while U.S. energy prices would remain at a
relatively higher level because of the oil import fee. 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.
The effects described above would have a negative impact on
our balance of trade, which could more than offset the positive
trade effects of reduced imports of foreign crude oil and refined
products that would result from imposition of an import fee.
Thus, the net effect of an oil import fee could be to worsen our
balance of trade position.
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 such relief would be effective in
only a limited number of cases, and that the international
- 10 competitiveness of many industries ^ J d b ^ i " t b % ^ ? ^ ^ ! l y
affected. Although the exemption would benefit vertically
integrated producers that dif"tly import petroleum for use in
the manufacture of exports, it " o u l d b e ° f r " ^ m ^ and'final
for the many independent producers of intermediate and final
products. Finally, imposition of an oil wport fee would likely
hurt independent marketers of petroleum, who cannot rely on
increased production income to offset the reduced demand that an
oil import fee would likely entail.
Although the effects of an oil import fee on domestic
industry would in general be negative, am import fee would aid
certain sectors off the domestic energy industry, including the
domestic refining industry. Due largely to declines in ";S*
,
petroleum consumption and decontrol of oil prices, we have faced
recently a reduction in U.S. operating refining capacity.±3/
Although domestic refiners, like all purchasers of oil, would
face the higher energy costs resulting from an oil import fee,
they would benefit to the extent a higher fee is imposed on
refined products than on crude oil, and a disincentive thus
established for 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 other energy-related receipts are a significant source
of revenue for some States. Consequently, the fiscal health of
these States, which has been hurt by the steep decline in oil
prices, would be improved through imposition of an oil import
fee.
Rapidly falling oil prices also may have an adverse impact on
banks with significant energy loan portfolios. Many such banks
have recently made provisions for additional loss reserves and
have reduced their volume of new energy loans. Continued
instability in oil prices may have more serious effects on such
banks, and could trigger some failures. By softening the fall of
domestic energy prices, an oil import fee would protect those
banks from declines in market prices. On the other hand,
imposition
of an oilbyimport
fee could
hurt banks
with loans to
13/
Data compiled
the Energy
Information
Administration
oil-exporting
countries,
since
the
fee
could
affect
the oil from
Indicate that U.S. operable refinery capacity has declined
revenues
flowing
to such
18.62
million
barrels
percountries.
year on January 1, 1981, to 15.7
million barrels on January 1, 1985. This capacity did not
decline further during 1985.
- 11 Effects on Energy Consumption. Higher energy costs have
encouraged greater energy conservation, and thus such
developments as more fuel-efficient cars and appliances, and the
design and installation of more energy-efficient industrial
facilities. While these developments may represent more or less
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 energy, 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 for 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.
While the effects described above would result from 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
would
by higher
to
Federal
the realize
Treasury.
prices
revenue.
an even
for
To natural
the
greater
extent
gas
share
that
and of
higher
coal,
the benefit
the
oil energy
prices
in proportion
industry
also lead
- 12 Distributional Impact. Lower income families spend a
relatively large portion of their income on energy consumption.
Families with incomes below $12,000, for example, spend
approximately 25 percent of their 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 items.
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,
? f n 2 r * n 9 t h e e x e m P t i o n provided for home heating fuel, would in
*?2 ni« C ^ e a s e e n e r 9 Y costs for families with incomes below
$10,000 by an average of 2.47 percent of total income. In
£ ? n n ^ n ' t h e e n e r 9y 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
reduced, 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 onlv
0 18 percent. The impact of S. 1997, as illustrated in Table 1,
is also regressive. Although we have not had an opportunity to
S ! e a distributional analysis of S. 1412, its distributional
q n ? ? S ? ' « i 9 n o r i n V h e i n c r e a s e d transfer payments and reduced
the other b[ll? T * P r o v i ? e d b * t h e bill, would be similar to
the other bills. We note, however, that the increased tran^fpr
payments and reduced Social Security taxes contemplated by
S. 1412 would mitigate its regressive effect.
There are a number of ways to reduce the reqressive nature nf
a tax on imported oil and refined products in addition tS the
exemptions for home heating fuel, the increased Federal
appropriations, or the reduction in Social Securitv taxes
proposed by the three bills. First, the income tax lltl
schedules could be modified to reduce the taxe M H
S5%K
the income classes that are most seriously hurt bv ^ n
°" X\
fee. This solution, however, would substantiallyYreduce
^ ^
aggregate income tax revenues. Moreover an adiiiJmfn? «- .u
rate schedules would not help many of the famili^.h I t 0 t h e
negatively affected by an oil import fee namelv ? h o ^
^ V " ^
Wh
insufficient income to generate a tax H a b i H t J 7
°
^
- 13 Second, consideration could be given to targeting relief
narrowly to lower income families. In particular, imposition of
an oil import fee could be accompanied by enactment of a
refundable income tax credit for lower income families. Although
a refundable credit might be difficult to design satisfactorily
and would undoubtedly pose substantial administrative problems,
such a credit would reduce the regressive nature of an energy tax
at a relatively moderate revenue cost.
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 2, 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 2, the burden of an oil import fee, if imposed without
any exception, would be felt most heavily in the Northeast. Both
S. 1507 and S. 1997 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. 14/ This solution, while in concept well-intentioned,
raises several concerns.
Exemptions for petroleum used for specific purposes are
difficult to administer, will impose bureaucratic burdens on
segments of the domestic oil industry, and may offer only limited
relief to the affected persons. For example, if an exemption
were granted only for 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
be more
effective ininSocial
shielding
the cost
of home
14/
Under would
S. 1412,
the reduction
Security
taxes
heating oil
from
a oil
priceimport
increase.
The potential
revenue
Resulting
from
the
fee revenues
remaining
after the
increase
resulting
from
imposition
of
the
import
fee,
increases in Federal funding for certain lower-income however,
programs
would be allocated among the States in proportion to the monetary
effect of the increased tariff on residents of each State. This
provision, which would mitigate the disparate regional impact of
an oil import fee, would apparently require the imposition of
different Social Security tax rates in various States.
- 14 would be reduced considerably. In particular we estimate that
an exemption granted to both crude oil and refined home heating
fuel, sSch as the one proposed by S. 1507, reduces 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, which
would not enjoy any special exemptions. 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
the higher costs of residual fuel oil and natural gas used to
generate electricity, also would fall disproportionately on the
Northeast. Similarly, natural gas prices would increase
commensurately with higher oil prices. The increased cost of
heating homes with electricity or natural gas, however, is not
addressed in either S. 1507 or S. 1997. In addition, California
would be especially affected by an oil import fee, because of its
dependence upon oil-generated electricity. A scheme of
exemptions for residual fuel designed to offset this impact would
lead to greater revenue losses and 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 (the "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
- 15 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 oil import fee. 15/
Administrative Burdens. As noted above, we are concerned
that the proposals for various exemptions contained in S. 1507
and S. 1997 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 enforcement apparatus. Such regulation could amount to
unreasonable Federal government intrusion into the oil business,
a role we properly abandoned with the removal of oil price
controls in 1981.
Effect of GATT and Other Treaty Issues. We are continuing to
study whether the various oil import fee proposals are consistent
with our treaty obligations under the GATT and various other
bilateral agreements. We have committed ourselves in the GATT
not to increase our tariffs on refined petroleum products. 16/
Each of the oil import fees described above 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 could 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
balance
of concessions
by imposing
15/
Based to
on redress
existingtheimport
levels,
if an exemption
were
offsetting
duties
on
U.S.
products,
this
would
harm U.S.
provided for crude oil and refined petroleum products
imported
from Mexico, we currently estimate a 13 percent reduction in the
revenue potentially raised by S. 1997. If exemptions were
provided for Canada, Venezuela, or the United Kingdom, we
estimate that the revenue would be decreased by 11 percent, 9
percent, and six percent, respectively. Somewhat greater
reductions would arise under S. 1507 or S. 1412. 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.
16/ We have made a similar commitment to Venezuela with respect
to crude oil in a bilateral treaty. The most favored nation
provision in the GATT, discussed below, would preclude the United
States from imposing higher duties on GATT signatories than on
Venezuela.
- 16 -
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 could also reduce the net
revenue raised from any oil import fee.
If the import fee were applied on a discriminatory basis,
by exempting oil imported from certain countries, it also would
violate the non-discrimination obligation in the GATT generally
known as the most favored nation provision. Moreover, 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 countries from any oil import fee would be likely
to draw a response from those countries entitled to most favored
nation treatment that are not excepted.
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. 17/ If the money supply were held steady, however, there
would liK~ely be a reduction in labor and capital income. In
short,
upon
policy,
one might
either
17/
In depending
addition to
itsmonetary
more general
effects,
the expect
inflationary
higher
prices
and
a
slight
decline
in
real
GNP
or
more
stable
impact of the oil import fee, if any, might also lead to
prices
and Federal
greater outlays
decline for
in various
real GNP.entitlement programs that
increased
are affected by the Consumer Price Index (CPI) and for interest
payments on the national debt.
- 17 Conclusion
As I have indicated throughout my testimony, there are both
advantages and disadvantages to the imposition of an oil import
fee as proposed in S. 1412, S. 1507 and S. 1997. Previously, the
Administration had considered whether an oil import fee might
appropriately be included as part of a revenue neutral tax reform
proposal. After additional study, the Administration has
concluded that, on balance, the costs of an oil import fee
outweigh the benefits. Accordingly, the Administration is
opposed to the imposition of a fee on the importation of crude
oil or refined petroleum products.
Table 1
Average Per-Family Burden for The Boren-Bentsen Bill (S. 1507),
for 1989, Assuming Oil Prices $4 per barrel less than CEA Projections
Family Income
($ thouisands)
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/
| Increase in Expenditures as
Elec- | Fuel
GasoPercent of Family Income 2/
tricity! Oil&LPG line
Total
No Exemptions 1 As proposed
6.56
27.72
123.62
89.33
1.92
47
8.89
28.13 129.62
166.64
1.11
33
9.81
23.36 154.19
187.37
.94
07
10.53
25.61 186.58
222.72
.79
89
14.30
32.35 241.95
288.60
19.06
39.53 309.45
368.04
.64
72
27.11
59.23 319.51
400.85
.44
49
.18
20
12.23
35.10 196.49
287.77
Average Per-Family Burden for The Wallop-Bentsen Bill (S. 1997),
for 1989, Assuming Oil Prices $4 per barrel less than CEA Projections.
0-10
10-15
115-20
20-30
30-50
50-100
100 or more
Increase in Oil Expenditures I
(in dollars) 1/
| Increase in Expenditures as
Elec- | Fuel
Gaso1 Percent of Family Income 27
As p roposed
tricityl Oil&LPG line
Total | No Exemptions
2.88
3.71
185.43
9.84
41.59 134.00
13.34
42.19 194.44
249.96
2.00
1.66
14.72
35.04 231.29
281.05
1.61
1.41
15.80
38.41 279.87
334.09
1.34
1.18
21.44
48.52 362.93
432.90
1.08
.96
28.58
59.29 464.18
552.06
.74
.66
40.67
81.34 479.26
601.26
.30
.26
U.S. Average
18.35
Family Income
($ thoiisands)
52.64
294.29
365.27
March 21, 1986
Office of the Secretary of the Treasury
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
Per-Family 1983 Household Energy Expenditures by Region (in dollars).
Region
Northeast
Midwest
South
West
Average U ,S
Natural Gas
400.00
431.92
224.20
260.61
323.78
El ectricity
Fuel Oil, LPG
577.78
525.82
697.51
430.30
578.26
Source: 1Energy Informati on Administration
Office of the Secretary of the Treasury
Office of Tax Analysis
388.89
103.29
92.53
42.42
146.95
Gasoline
Total
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
TREASURYNEWS
Department of the Treasury • Washington, D.c. • Telephone
March 24, 1986 566-2041
FOR IMMEDIATE RELEASE
''***'* ROOtf 5329
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Ui
9
°oto%
Tenders for $6,801 million of 13-week.bills and for $6,815 million
\a foi were accepted today.
of 26-week bills, both to be issued on March 27,£1986y^y
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing
June 26, 1986
Discount Investment
Price
Rate
Rate 1/
26-week bills
maturing September 25, 1986
Discount Investment
Rate
Rate 1/
Price
6.33%
6.38%
6.36%
6.42%
6.44%
6.43%
6.52%
6.58%
6.56%
98.400
98.387
98.392
6.73%
6.75%
6.74%
96.754
96.744
96.749
Tenders at the high discount rate for the 13-week bills were allotted 22%,
Tenders at the high discount rate for the 26-week bills were allotted 93%
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Accepted
1
38,470
18,619,805
23,075
40,470
43,655
41,545
1,392,880
77,985
16,880
52,700
48,100
1,168,860
269,080
$
38,470
5,583,605
23,075
40,470
43,655
41,545
344,880
50,425
16,880
52,700
44,200
251,860
269,080
$
33,575
19,154,600
18,175
23,740
30,785
38,895
1,855,025
70,400
13,755
42,500
28,705
1,218,520
373,925
5 33,575
5,112,400
18,175
23,740
30,785
28,790
720,835
42,400
13,755
42,500
18,705
354,950
373,925
$21,833,505
$6,800,845
$22,902,600
$6,814,535
$19,151,080
974,560
$20,125,640
$4,118,420
974,560
$5,092,980
$19,497,290
891,525
$20,388,815
$3,409,225
891,525
$4,300,750
1,474,350
1,474,350
1,450,000
1,450,000
1,063,785
1,063,785
$22,902,600
$6,814,535
Tv£e
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
233,515
233,515
TOTALS
$21,833,505
$6,800,845
An additional $985
thousand of 13-week bills and an additional $4,015
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
TREASURYNEWS
fepartment of the Treasury • Washington, D.c. • Telephone 566-2041
'--ZOOM 5310
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY BILL 0>FEklNG
"tw
March 25, 1986
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 April 3, 1986.
This offering
will result in a paydown for the Treasury of about $450
million, as
the maturing bills are outstanding in the amount of $14,447 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 31, 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
January 2, 1986,
and to mature
July 3, 1986
(CUSIP No.
912794 KV 5), currently outstanding in the amount of $7,628 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
October 3, 1985,
and to mature October 2, 1986
(CUSIP No.
912794 KR 4), currently outstanding in the amount of $8,421 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 April 3, 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 $779
million as agents for foreign and international monetary authorities, and $3,259 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-517
TREASURY1 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 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.
4/85
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Lf3R/.RY. ROOM 5310
March 25, 1986
RESULTS OF AUCTION 0fi;4ft£EAR NOTES
The Department of the Treasury hats Accepted $7,040 million
of $26,754 million of tenders received from the public for the
4-year notes, Series N-199 0, auctioned today. The notes will be
issued March 31, 1986, and mature March 31, 1990.
The interest rate on the notes will be 7-1/4%. The range of
accepted competitive bids, and the corresponding prices at the 7-1/4%
interest rate are as follows:
Yield Price
Low
7.29%
High
7.29%
Average
7.29%
Tenders at the high yield were allotted 75%.
99.863
99.863
99.863
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
$
42,139
23,523,498
7,720
107,061
62,526
26,931
1,739,863
82,954
4,438
42,192
8,999
1,104,385
800
$26,753,506
Accepted
$
9,139
6,684,988
7,720
19,061
13,526
16,931
150,863
72,954
4,438
41,192
2,999
15,385
800
$7,039,996
The $7,040 million of accepted tenders includes $447
million of noncompetitive tenders and $6,593 million of competitive tenders from the public.
In addition to the $7,040 million of tenders accepted in
the auction process, $465 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $458 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-518
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
„.V.-!'.EHT OF THE TREASURY
March 26, 1986
Charles H. Powers Appointed
Deputy Assistant Secretary (Public Affairs)
The Treasury Department today announced the appointment of
Charles H. Powers as Deputy Assistant Secretary (Public Affairs),
effective March 17, 1986. Mr. Powers will report directly to
Margaret D. Tutwiler, Assistant Secretary (Public Affairs and
Public Liaison).
The Office of Public Affairs, which Mr. Powers will manage,
maintains liaison with the news media, coordinates the public
activities of Treasury Department officials, and produces public
information materials.
Mr. Powers rejoined the Treasury Public Affairs staff in late
1985 after an association with Ogilvy and Mather Washington. He
had previously served the Treasury Department from 1975 to 1978
and from 1980 to 1985.
He served as a public affairs officer with the Internal
Revenue Service in Philadelphia and Washington, D.C. In 1982 he
became a public affairs officer in the Office of the Secretary.
Mr. Powers was press secretary to U.S. Senator Richard S.
Schweiker of Pennsylvania from 1978 to 1980.
His active duty U.S. Air Force service included assignment in
Southeast Asia in 1969. He is currently a member of the Air
Force Reserve. He also worked in television news at WTJV-TV,
Miami, Florida, and WMAL-TV, Washington, D.C.
Mr. Powers received his AB degree from the University of
Miami (1965) and MA degree from New York University (1967) . He
resides in Alexandria, Virginia with his wife and two sons.
Mr. Powers was born May 7, 1945 in New York City.
# # #
B-519
TREASURY NEWS
lepartment of the Treasury • Washington, OJC3M0Telephone 566-2041
,
H;R3I 7 30flH BB
FOR IMMEDIATE RELEASE
March 26, 1986
'ARTHEHT OF THE TREASURY
RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $6,505 million
of $ 15,996 million of tenders received from the public for the
7-year notes, Series F-199 3, auctioned today. The notes will be
issued April 3, 1986, and mature April 15, 1993.
The interest rate on the notes will be 7-3/8%. The range of
accepted competitive bids, and the corresponding prices at the 7-3/8%
interest rate are as follows:
Low
High
Average
Yield
7..44%
7..50%
7..48%
Price
99..640
99..318
99..425
Tenders at the high yield were allotted 59%.
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
$
23,432
13,762,745
773
172,995
17,629
10,888
1,398,904
42,118
6,750
15,298
7,875
535,822
385
$15,995,614
Accepted
$
3,432
5,272,093
773
150,445
8,809
7,888
940,044
26,118
6,750
15,298
6,645
66,702
385
$6,505,382
The $6,505 million of accepted tenders includes $314
million of noncompetitive tenders and $6,191 million of competi
tive tenders from the public.
B-520
TREASURY NEWS
lepartment of the Treasury • Washington, bt. telephone 566-2041
&s3l 4o9PH'8fi
FOR RELEASE AT 4:00 P.M.
APARTMENT OF THE TREASUR^ 0 * 1
27
'
1986
TREASURY OFFERS $15,000 MILLION OF 14-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice, invites
tenders for approximately $15,000 million of 14-day Treasury bills
to be issued April 3, 1986, representing an additional amount of
bills dated April 18, 1985, maturing April 17, 1986 (CUSIP No.
912794 KB 9) .
Competitive tenders will be received at all Federal Reserve
Banks and Branches prior to 1:00 p.m., Eastern Standard time,
Tuesday, April 1, 19 86. Each tender for the issue must be for
a minimum amount of $1,000,000. Tenders over $1,000,000 must be
in multiples of $1,000,000. Tenders must show the yield desired,
expressed on a bank discount rate basis with two decimals, e.g.,
7.15%. Fractions must not be used.
Noncompetitive tenders from the public will not be accepted.
Tenders will not be received at the Department of the Treasury,
Washington.
The bills will be issued on a discount basis under competitive
bidding, and at maturity their par amount will be payable without
interest. The bills will be issued entirely in book-entry form in
a minimum denomination of $10,000 and in any higher $5,000 multiple,
on the records of the Federal Reserve Banks and Branches. Additional amounts of the bills may be issued to Federal Reserve Banks
as agents for foreign and international monetary authorities at
the average price of accepted competitive tenders.
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, futures,
B-521
- 2 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.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities. 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.
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Those
submitting tenders 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. 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.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank or Branch in cash or
other immediately-available funds on Thursday, April 3, 1986. 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, and this notice, prescribe the terms of
these Treasury bills and govern the conditions of their issue.
Copies of the circulars may be obtained from any Federal Reserve
Bank or Branch.
rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
F01 IMMIDIATE RELEASE
MARCH 27. 1986
Contact: Bob Levine
(202)566-2041
BAKER WELCOMES HEW IMF FACILITY
FOR LOW IHCOME COUHTRIES
Secretary of the Treasury James A. Baker, III today welcomed the
IMF Executive Board decision to create a new facility, the Structural
Adjustment Facility, to support comprehensive growth-oriented
economic programs in low-income countries with protracted balance of
payments problems. The funds in this Facility will be complemented
by World Bank and other resources to facilitate economic growth in
these countries, most of which are in Sub-Saharan Africa. The
resources are to be used in the context of a comprehensive
macroeconomic and structural policy framework to be developed by the
IMF, the World Bank and each member country. The Secretary regards
this as a major step in strengthening the cooperation of the IMF and
World Bank in support of comprehensive economic programs by these
countries. The World Bank Board also supported the U.S. approach in
its March 17 meeting.
The support of the two Boards reflects extensive international
consultations toward implementation of a proposal to assist the
lowest-income countries put forward by Secretary Baker at the
IMF/IBRD Annual Meetings in Seoul this past October. Secretary Baker
expressed appreciation for the efforts of many industrial and
developing countries in shaping the final proposal in order to
attract broad international support, and to the managements of the
IMF and World Bank for their constructive contributions to this
cooperative effort.
The Secretary believes the approach can serve as an important
catalyst to encourage additional flows for comprehensive economic
policy reform, thus providing a useful framework for multilateral
support of economic growth in the lowest-income countries.
pOo
B-522
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
UBRARY, ROOM 5310
APR 3 9 27 AH'SB
DEPAETKEHT OF THE TREASURY
For Immediate Release Contact: Charlie Powers
March 28, 1986
566-5252
TREASURY DEPARTMENT ASSESSES PENALTY AGAINST
BARNETT BANKS OF FLORIDA, INC. UNDER BANK SECRECY ACT
The Department of the Treasury announced today that Barnett
Banks of Florida, Inc., a bank holding company headquartered in
Jacksonville, Florida, has agreed to a settlement that requires
the bank to pay a civil penalty of $112,000 for failure to report
513 currency transactions as required by the Bank Secrecy Act.
David D. Queen, Acting Assistant Secretary (Enforcement
and Operations), who announced the penalty, said the penalty
represented a complete settlement of Barnett's Banks civil
liability for these violations. Queen said Barnett Banks
promptly and on its own initiative brought this matter to the
attention of the Department of the Treasury, cooperated fully
with Treasury, and conducted a complete internal investigation of
its Bank Secrecy Act compliance. Barnett Banks has enhanced its
existing compliance program to ensure full compliance by all its
banks with reporting requirements in the future.
The Department of the Treasury has no evidence that Barnett
Banks engaged in any criminal activities in connection with these
reporting violations.
###
B-523
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
March 31, 1986
RARY.njOM 53
l°i
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,025 million of 13-TweeJ
of 26-week bills, both to be issued on April'
for $7,002 million
were accepted today,
91
•i-'tfTCi ilHE REASURY
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing July 3, 1986
Discount Investment
Price
Rate
Rate 1/
6.32%
6.36%
6.35%
6.51%
6.56%
6.54%
26-week bills
maturing October 2, 1986
Discount Investment
Price
Rate
Rate 1/
6.30% a/ 6.60%
6.33%
6.63%
6.32%
6.62%
98.402
98.392
98.395
96.815
96.800
96.805
a./ Excepting 1 tender of $1,000,000.
Tenders at the high discount rate for the 13-week bills were allotted 19%.
Tenders at the high discount rate for the 26-week bills were allotted 77%
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Accepted
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
$
39,580
22,945,910
28,830
44,720
41,295
38,475
1,631,380
71,390
16,085
49,915
42,855
1,427,380
305,410
$
39,580
6,160,055
28,830
44,720
41,295
38,475
95,330
51,390
16,085
49,510
33,805
120,570
305,410
$26,683,225
$
31,170
5,804,530
14,795
24,835
44,775
35,640
347,035
46,455
13,270
39,000
21,790
190,635
388,305
$7,025,055
: $20,165,935
$7,002,235
$23,691,640
1,039,175
$24,730,815
$4,033,470
1,039,175
$5,072,645
: $17,258,045
:
898,490
: $18,156,535
$4,094,345
898,490
$4,992,835
1,796,710
1,796,710
:
1,500,000
1,500,000
155,700
$26,683,225
155,700
$7,025,055
:
509,400
$20,165,935
509,400
$7,002,235
1/ Equivalent coupon-issue yield.
$
Accepted
31,170
16,695,730
14,795
24,835
44,775
35,640
1,471,035
72,455
13,270
39,000
26,790
1,308,135
388,305
TOTALS
B-524
Received
TREASURY NEWS
department
of the RELEASE
Treasury • •Washington,
D.c. • Telephone
FOR IMMEDIATE
,r>rw~.. „«
CONTACT: Art Siddon
April 1, 1986
LIBRARY. ROOM 5310
566-5252
TREASURY PLAMftrRPlloiS ^O^Agfi FOR DEAF
DEPARTMENT CF THE TREASURY
The Department of the Treasury announced today that it will
begin in mid-summer a government-wide pilot test to improve
accessability of federal agencies and information to the deaf,
hearing impaired and speech impaired.
The one-year pilot test, undertaken in cooperation with the
U.S. Architectural and Transportation Barriers Compliance Board
(ATBCB), will allow the Treasury and the ATBCB to assess jointly
the level of interest among federal agencies and the feasibility
of supporting the program beyond the trial period.
Under the program, two modern Telecommunications Devices for
the Deaf (TDD) will be collocated with Treasury telephone
operations in the Office of the Secretary's Telecommunications
Center in the Main Treasury Building.
Once the TDD units are installed, a TDD user in any of the
50 states, Puerto Rico or the Virgin Islands wishing to contact an
agency of the Executive, Legislative or Judicial branches may call
the Treasury TDD relay. A government office wishing to contact an
individual with a TDD will be able to call the Treasury TDD
operator, as well.
The TDD relay operator will answer the call, receive the
message from the TDD user, and acknowledge the message through M ne
TDD relay. The operator will then telephone the called party,
announce that "Treasury TDD operator" is calling on behalf of
"name and other identification of the TDD user" and relay the
message or request for information. The operator will continue to
relay messages -- via the TDD in one direction and orally in the
other direction -- until the conversation has ended.
It is anticipated that the TDD relay will operate from
9:00 a.m. to 5:00 p.m. (Eastern Time), Monday through Friday
except on federal holidays.
# # #
B-525
2041
TREASURY
apartment of the Treasury • Washington ax. • Telephone 56
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY B^ILL OF^FSitiaSfi
""^--,^5310
CEPART.MEhT -
THE
April
lf
1986
TREASURY
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 April 10, 1986.
This offering
will result in a paydown for the Treasury of about $450
million, as
the maturing bills are outstanding in the amount of $14,451 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, April 7, 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
July 11, 1985,
and to mature July 10, 1986
(CUSIP No.
912794 KN 3) , currently outstanding in the amount of $15,971 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
April 10, 1986,
and to mature October 9, 1986
(CUSIP No.
912794 LF 9 ) .
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 April 10, 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 $676
million as agents for foreign and international monetary authorities, and $3,297 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-526
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
rREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE
-: *k ' OOM"5aj)0il 1, 1986
RESULTS OF TREASURY'SR A&CT§jq£V j]JJ 'fjfj
OF 14-DAY CASH MANAGEMENT BILLS
"' ••• •**-•• 'r.Z TREASURY
Tenders for $15,030 million of 14-day Treasury bills to
be issued on April 3, 1986, and to mature April 17, 1986, were
accepted at the Federal Reserve Banks today. The details are
as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Rate
Investment Rate
(Equivalent Coupon-Issue Yield)
Price
99.721
7.291
7.18%
Low
!
99.718
7.37
7.24%
High
99.719
7.35'
7.22%
Average
Tenders at the high discount rate were allotted 47%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS:
(In Thousands)
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS
B-527
Accepted
Received
Location
$
$
55,,614,000
—
—
40,000
—
4,r016,500
—
625,000
30,000
--
14,350,750
—
—
—
—
491,570
-—
---
2,r475,000
188,000
$62,800,500
$15,030,320
2041
rREASURY NEWS
ipartment of the Treasury
• Washington,
D.C. • Telephone 566-2041
BIOGRAPHICAL
NOTES
CHARLES SCHOTTA
DEPUTY ASSISTANT SECRETARY
FOR ARABIAN PENINSULA AFFAIRS
Charles Schotta is Treasury Deputy Assistant Secretary for
Arabian Peninsula Affairs. He is responsible for the formulation
and execution of Treasury Department policy on international
energy issues and toward the countries of the Arabian Peninsula,
particularly Saudi Arabia. The U.S.-Saudi Arabian Joint Commission on Economic Cooperation is under his direction. He also
directs collection of data on U.S. bank and corporate claims on
and liabilities to foreign entities.
From 1979 to 1983, Mr. Schotta was Deputy Assistant
Secretary for Commodities and Natural Resources. He joined the
Treasury in 1971 as Chief of the Econometrics Group in the Office
of the Assistant Secretary for International Affairs. From 1973
to 1975, he was director of the Office of International Financial
Analysis; from 1975 to 1977, he was Director of the Office of
Energy Policy Analysis; and from 1977 to 1979, he was Director of
the Office of International Energy Policy.
Prior to joining the Treasury Department, Mr. Schotta was
Associate Professor of Economics at Virginia Tech. He also
served on the faculties of the University of California, Davis,
the University of Texas, El Paso, and Texas Christian University.
In addition to authoring numerous articles on a wide range of
economic and financial subjects, he has consulted widely in the
banking, public utility, insurance, and anti-trust fields for
both business and government.
Mr. Schotta holds a B.A. degree in Economics from Texas
Christian University and an M.A. degree in Economics from Brown
University, where he also pursued additional graduate studies.
Mr. Schotta hails from Fort Worth, Texas.
B-528
(Rev.)
TREASURYTMEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRARY. ROOM 5310
f
*>R 9 II 57flH Bfi
FOR RELEASE AT 12:00 NOON
• ^'A^MENT GF THE TREASURY
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,250
million of 364-day Treasury bills
to be dated April 17, 1986,
and to mature April 16, 1987
(CUSIP No. 912794 MF 8). This issue will provide about $900
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,362
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, April 10, 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 April 17, 1986.
In addition to the
maturing 52-week bills, there are $14,550 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 $1,687 million as agents for foreign
and international monetary authorities, and $5,360 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-529
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 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
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
LI"?w\:vY.RCOM 5310
STATEMENT OF THE HONORABLER FBANHlS7 Ai ^S&ATING, II
ASSISTANT SECRETARY^(ENFORCEMENT)
U.S. DEPARTMENT';OF'THE TREA&rJKY
AT THE
LAWYERS' COMMITTEE MEETING
ASSOCIATION OF BANK HOLDING COMPANIES
April 3, 1986
Treasury's Enforcement and Administration of the Bank Secrecy Act
I want to thank the Association for the opportunity to take
part in the Lawyer's Committee Program. As many of you know, T
am new to the job of Assistant Secretary. I have been involved
with the Bank Secrecy Act for only a very brief time, and only
from a broad, policy perspective.
Nevertheless, I would like to share with you my thoughts on
Treasury's administration of the Act, from the standpoint of
financial institutions generally and bank holding companies in
particular. I will first discuss why Treasury places such
emphasis on compliance with the reporting requirements under the
Act and the regulations. Then, I will say a few words about our
enforcement policy.
First, as to the reporting, we must not lose sight of the
need for the information itself. This information is indispensable to our financial investigations. Recently, you have
heard much about money laundering, and money laundering remains a
serious challenge -- not only to law enforcement, but also to the
financial community, and to the public at large.
But money laundering is not the only problem the Bank Secrecy
Act was intended to address. The report information also assists
law enforcement in combatting drug trafficking, tax evasion, and
organized crime. The investigations that rely on the information
are not Treasury's alone. Other federal agencies and even state
and local law enforcement use this information to uncover and
attack the financial base of criminal enterprises.
Some of the most important uses of the information pertain to
the thirteen task forces that President Reagan created to investigate organized crime and drug trafficking. Since becoming
fully operational in July of 1983, these task forces have
initiated over 1200 cases. They have resulted in the indictment
of 8500 individuals and 3400 convictions.
B-530
-2-
These statistics are only part of the story. Two out of
every three of those cases have a financial component, and an
even larger percentage use Treasury's financial analytical
capability in one way or another. This analytical capability, as
you know, is wholly dependent on the Bank Secrecy Act reporting
information. This information, when analyzed, can provide direct
leads for new investigations. It can provide support for ongoing
investigations. And even where a specific investigation is not
involved, the information allows us to track currency flows and
detect abnormal patterns that could be an indication of illicit
financial activity. This information may reflect the need for
international law enforcement cooperation.
We must remember that money is the lifeblood of organized
crime. To the extent that we can detect illicit financial
activity, we can strike a blow against the criminal enterprises
that victimize our society.
But to return to the specific problem of money laundering:
the reporting is a means to a larger end. Our overall goal is
to deny the money launderer his access to our financial system.
This is, admittedly, an ambitious undertaking, but it is one that
we are firmly committed to achieving.
Law enforcement alone cannot attain this goal. We must have
the participation and support of the financial community. From
the inception of the Act, Treasury, in accordance with the
legislative intent, has relied upon the financial community, and
especially banks, to support our efforts.
No bank can do its part against money laundering unless it
has a comprehensive program to ensure compliance. It should be
clear to all of us by now that money launderers look for banks
that are lax when it comes to currency transaction reports. And
exempt list status is something that criminal organizations value
highly. No bank should take the reporting obligations lightly:
to do so is to risk not only coming under the sanctions of the
Bank Secrecy Act, but also becoming the prey of the money
launderer and his criminal cohorts.
There is another reason why compliance is essential for a
bank. A bank's reputation is among its most valued assets.
There is a danger of harm to this reputation whenever a bank is
associated in the public's mind with organized crime. It is only
prudent for a bank to take steps to keep the money launderer from
making it an unwitting accomplice.
Compliance is not solely a matter for tellers and branch
managers. Tt must be a commitment, expressed and emphasized
by top management. The bank must be able to conduct its own
internal audits to see that reporting is comprehensive and
timely. Exempt lists, which have posed a problem for some banks,
should receive close scrutiny as a matter of policy.
-3-
As far as training is concerned, employees should know how to
recognize the commonly-used methods of the money launderer, such
as repeated cash transactions under $10,000, or the purchasing of
cashier's checks with cash by non-customers. The latter, as you
may know, is the modus operandi of the so-called "smurf", who
goes from bank to bank exchanging cash crime proceeds for a more
readily transportable and less suspicious form of funds.
The guiding principle here is a simple one: a bank should
take reasonable steps to know its customers. And the bank's
employees should be prepared to notify the Internal Revenue
Service when they notice suspicious financial activity, such as
the "smurfing" I just mentioned.
Compliance, as we all know, is a legal obligation. But
beyond legal obligations, there is an ethical obligation as well.
Just as we are all obliged to be good citizens, part of this
obligation is doing our part to prevent crime and to report
crimes that we witness. This obligation does not stop at the
doors of a financial institution. Treasury urges every bank to
take affirmative steps to guard against money laundering, and we
will continue to work with the financial community toward this
end .
We have met with organizations in your industry, such as the
American Bankers Association, and we have lent our participation
and support to programs to educate financial institutions on the
need for programs to ensure compliance and to provide for the
training of bank employees. We are also exploring avenues to
work more closely with the industry on such matters as revision
of the Bank Secrecy Act regulations.
Penalty Assessment
I would now like to move on to the matter of enforcement
policy. As you are probably aware, Treasury since last June has
announced 14 civil penalties against banks and bank holding
companies. We anticipate that many more will be announced over
the next several months. In the four cases with holding
companies, we have allowed the bank holding companies to
negotiate and settle on behalf of their subsidiary banks. We
have generally given holding companies the option whether to
announce the settlement as an assessment of separate penalties
against the banks or as a settlement against the holding company
on behalf of its banks.
We have also determined not to assess penalties in several
cases. When such a determination is made, a letter is sent to
the bank or holding company, as appropriate. We make no public
announcement of the decision not to impose a penalty.
We believe that rigorous enforcement, including the
imposition of penalties, is essential to increased awareness of
-4the Bank Secrecy Act and to improved compliance. For example, in
response to our enforcement policies, all the banks with which we
have been meeting have vastly improved their overall compliance
programs - training, legal review, audit procedures, exemption
review.
Penalty Factors
In assessing a penalty, we consider many factors -- the
nature and volume of violations, the effectiveness of the bank's
past Bank Secrecy Act compliance program and controls, the
circumstances of disclosure, the degree of cooperation, the
bank's commitment to future compliance, the size of the bank, and
to some extent, the financial condition of the bank.
In assessing the penalties, we have tried to be as evenhanded
as possible without being rigid. We consider it our duty to
those who have settled with us already to treat similarly
situated banks in a similar manner .
What To Do If Violations Are Discovered
If you discover violations or receive a critical examination
from a bank regulatory agency, you should contact my office. We
will then give you guidance on what further information will be
required and what further late-filing of CTR's must be done.
Our policy in such cases is to request an extensive memorandum
explaining how and why the violations occurred. In this way, we
can begin our dialogue with you and prepare to consider the many
factors present in an individual case.
All late-filed CTR's should be filed in the usual way with
the Internal Revenue Service with copies provided to my office.
Late-filing with the IRS alone, without notice to my office, will
only delay bringing the matter to our attention — it will not
bury the matter. We have the capability and are currently
searching late-filings to ascertain whether banks have been
late-filing CTRs without notifying Treasury.
We will be especially concerned about the scope of your
review of non-compliance. Before we reach a settlement, we want
to have some reasonable assurance that the non-compliance a bank
has disclosed to us is the full extent of the problem.
We will routinely request a waiver of the civil statute of
limitations. Our experience is that assembling the required
information and late-filing may take several months, or in any
event longer than it might appear at first.
Treasury will request late-filing of CTR's with respect to a
number of types of unreported transactions. For example, in all
cases in which a bank has failed to file transactions with a
foreign correspondent bank, or with a domestic foreign currency
-5dealer, we will require complete late-filing for five years.
There is a very high degree of law enforcement utility for this
information. We believe that there is a continuing legal duty to
late-file.
We will not require late-filing of every unreported transaction stemming from an improper exemption. Therefore, we
encourage you to disclose violations to Treasury early, before
you undertake extensive late-filing. In the area of exempt list
violations, we may be able to work together to lessen the
late-filing burden.
When we receive the requested written information, we will
then invite you in for a meeting or a series of meetings with one
of our attorneys from the Treasury Office of General Counsel and
a member of my staff. If settlement is reached, a standard
written agreement wherein the bank denies liability, but agrees
to payment of a penalty, will be signed by both parties.
I want to reassure you on an important point: the fact that
a bank is negotiating with Treasury is closely held. If there is
a press inquiry, Treasury will neither confirm nor deny that it
is talking to a bank .
If settlement cannot be reached, we will refer the matter to
the Department of Justice for civil action. We want to reach an
amicable settlement with all banks that come forward voluntarily
with past non-compliance. We do not believe it would serve the
best interest of either party to become embroiled in a litigation
battle. We do not intend to test legal questions by litigation
as the course of first resort. Nor will we be reluctant to
litigate, if given no choice.
The Question of Publicity
This brings us to the matter that I know is of special
concern to you -- the way in which Treasury treats the public
announcement of penalties. Treasury has become very sensitive to
banks' apprehension regarding public announcements of penalties.
Since I came to Treasury, it is fair to say I have made no
efforts to maximize press attention to the penalties that have
been announced. Nevertheless, T believe that some public
announcement is essential to our compliance effort. For this
reason, and in fairness to those banks who have already settled
with us, I intend to announce every penalty by press release. I
do not intend generally to hold press conferences when penalties
are announced .
The press release will note, where appropriate, the
cooperation of the bank and that Treasury has no information that
the bank was engaged in criminal activities in connection with
the violations. We make the settlement agreement available to
-6the press on request, and if the information is readily
available, we also inform the press of the unreported dollar
amount underlying the violations.
While we will not allow banks to prescreen our press
releases, we will consider including in the release points that a
bank suggests, and we will coordinate with the bank on the timing
of a release. In settlements with holding companies on behalf of
their subsidiaries, we will decide on a case-by-case basis
whether to announce the names of the individual banks.
Treasury does not dictate to a bank on the way it handles the
announcement of the penalty. We only caution that the bank be
truthful and responsible and not make light of the matter by
dismissing the violations as "technical."
We envision that the matter will be in and out of the news in
one day. We are not interested in engaging you in prolonged
public debate.
Advantage of Voluntary Disclosure
Some of you may be asking yourselves a fundamental question:
Why should a bank come forward voluntarily?
There is no question that Treasury will look more favorably
on a bank that voluntarily discloses past violations. A bank
that discovers past violations and fails to disclose them to
Treasury runs a calculated risk, especially in light of improved
examination procedures by bank regulators. In our view, the
character of the case of such a bank changes significantly when
the decision to take this risk becomes apparent.
And finally, I want to add that we have not closed the doors
to volunteers, and we encourage you and your clients to come
forward.
Relationship of Civil to Criminal Cases
I will now turn to a topic about which many banks have raised
questions—the relationship of criminal cases to civil cases.
Treasury routinely refers cases of serious non-compliance
to the Internal Revenue Service's Criminal Investigations
Division for evaluation. The IRS then decides whether to refer
the case to the Department of Justice for criminal action. The
settlement agreements specifically state that civil settlement
does not in any way restrict criminal investigation and referral.
We cannot and will not make any accommodation on criminal
treatment in civil settlement negotiations.
-7Under the statutory scheme, criminal and civil penalties are
cumulative. In cases where there has been a criminal connection,
Treasury will follow with civil penalties, where appropriate, and
conversely, criminal sanctions may follow civil penalties.
If there is an ongoing criminal case, we will defer
resolution of the civil case if requested to do so by the United
States Attorney handling the case. We ask the bank for a waiver
of the statute of limitations, and we resume discussions at the
conclusion of the criminal case or when we are given the go ahead
by the United States Attorney. .
In concluding my remarks today, let me express, once again,
my appreciation for the opportunity to meet with you and to
discuss topics in which Treasury, as well as all of you, have a
substantial interest.
Thank you for your kind attention, and I look forward to
hearing your questions and comments.
TREASURYNEWS
lepartment
of the
Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE
RELEASE
April 7, 1986566-2041
.DR
Y.^O^l 5310
RESULTS OF TREASURY'S WEEKLY "BILL AUCTIONS
Tenders for $7,015 million of
of 26-week bills, both to be issiled on April 10, 1986,
were accepted today.
cr.T 0: THE TREASURY
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing July 10, 1986
Discount Investment
Rate
Rgite 1/
Price
:
:
:
:
6.16%
6.20%
6.19%
:
6.34%
6.39%
6.38%
98.443
98.433
98.435
:
26-week bills
maturing October 9, 1986
Discount Investment
Rate 1/
Price
Rate
6.15%a/
6.18%
'• 6.17%
6.44%
6.47%
6.46%
96.891
96.876
96.881
aj Excepting 1 tender of $1,000,000.
Tenders at the high discount rate for the 12l-week bills were allotted 56%
Tenders at the high discount rate for the 2t>-week bills were allotted 49%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
46,735
21,047,820
23,485
50,435
48,905
53,250
1,719,875
70,125
16,920
50,410
44,880
1,768,720
368,770
$
44,235
5,889,530
23,485
50,435
46,985
46,25(5
291,915
42,125
16,620
50,410
34,880
109,280
368,770
$25,310,330
$
Accepted
32,940
18,078,620
13,880
:
28,650
:
27,775
:
71,355
:
1,525,150
•
71,420
'>
15,890
:
44,360
:
31,600
:
1,331,890
•
447,885
$
32,940
5,624,060
13,880
28,650
27,775
41,705
369,970
44,400
11,890
44,360
26,600
301,890
447,885
$7,014,920
: $21,721,415
$7,016,005
$22,287,980
1,205,815
$23,493,795
$3,992,570
1,205,815
$5,198,385
: $18,768,000
:
957,115
:
$19,725,115
$4,062,590
957,115
$5,019,705
1,671,535
1,671,535
145,000
145,000
:
$7,014,920
:
•
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$25,310,330
1/ Equivalent coupon-issue yield.
B-531
:
1,625,000
1,625,000
371,300
371,300
$21,721,415 . $7,016,005
TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2
FOR RELEASE AT 4:00 P.M. ^OM 5310
TREASURY'S WEEKLY BILL OFFERING
April 8/ 1986
"7
, " J ir,"
•- r. 7.f>
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 April 17, 1986.
This offering
will result in a paydown for the Treasury of about $550
million, as
the maturing bills are outstanding in the amount of $14,550 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, April 14, 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
January 16, 1986,
and to mature July 17, 1986
(CUSIP No.
912794 KW 3), currently outstanding in the amount of $7,660 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
April 17, 1986,
and to mature October 16, 1986
(CUSIP No.
912794 LG 7).
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 April 17, 1986.
In addition to the maturing
13-week and 26-week bills, there are $8,362
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
amounts, foreign and international monetary authorities are considered to hold $2,132 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $2,257 million as
agents for foreign and international monetary authorities, and $5,510
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department
(for 26-week
of series)
the Treasury
or Formshould
PD 4632-3
be submitted
(for 13-week
on Form
series).
PD 4632-2
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 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
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE April 8, 1986
AMENDED WEEKLY BILL OFFERING
The weekly bill offering announcement made earlier today
understated the amount to be paid down by the Treasury Department.
The bills maturing April 17, 1986, total $29,580 million
(including the 14-day cash management bills issued April 3, 1986,
in the amount of $15,030 million).
Accordingly, the amount to
be paid down should have been shown as $15,575 million rather
than $550 million.
All other particulars in the announcement remain the same.
oOo
B-535
TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone
-;iih~.-i!'.;t00£ 5310
• -• .wJ.E.-.T Or Trie TREASURY
Statement by
Robert A. Cornell
Deputy Assistant Secretary
for Trade and Investment Policy
Department of the Treasury
Before
Subcommittees on Africa and
International Economic Policy and Trade
Committee on Foreign Affairs
House of Representatives
April 9, 1986
Chairmen and Members of the Subcommittees?
I appreciate the opportunity to present the Treasury
Department's views on H.R. 997 and to comment on the sanctions
approach contained therein. The Administration, like the
Congress, seeks the end of apartheid and establishment of a
system of government in South Africa in which all South Africans
can participate.
Assistant Secretary Crocker has outlined implementation of
the President's September 1985 Executive Order, and has put forth
our position on further sanctions on South Africa. Two
significant economic elements in the September package were the
ban on importation of Krugerrands and the ban on bank lending to
the South African Government and its instrumentalities.
These
two measures which are enforced by Treasury were designed to send
strong signals to the South African Government rather than to
damage the economic well-being of the South African people.
Treasury has strictly enforced these two measures and is not
aware of any efforts to evade either.
B- 53 3
- 2 -
We think that measures such as those proposed in H.R. 997,
aimed at the entire South African economy, will not realize their
goal, even though they may be sincerely intended to do so. We
hold this view for several reasons:
Eliminating the U.S. economic presence in South Africa and
attempting to damage severely the South African economy will
not provide the incentives for genuine change that we seek.
U.S. firms in South Africa promote beneficial change. If we
prohibited economic relations and thereby removed our firms
from the scene, they would no longer be able to promote
change.
The proposed measures would harm the majority, non-white
population of South Africa more than they would help it.
The measures would harm United States banks, investors, and
business firms.
Since the statements by officals of the Departments of State
and Commerce cover in detail foreign policy considerations, codes
of labor conduct and related matters, I shall focus my remarks
particularly on the effects of the President's September 1985
economic measures and the legislative proposals to ban U.S.
investment, to prohibit imports and further restrict exports, and
to deny tax credits to U.S. investors.
Ban on Imports of Krugerrands
The proposed statutory ban on importation of Krugerrands,
found in Section 4 of H.R. 997, is unnecessary. The importation
of Krugerrands is already prohibited under President Reagan's
Executive Order 12535 of October 1, 1985, and became effective on
October 1L, 1985. As was stated in the October 1, 1985, White
House Message to Congress, the Krugerrand ban "was taken in
recognition of the fact that the Krugerrand is perceived in the
Congress as an important symbol of apartheid. This view is
widely shared by the U.S. public." President Reagan directed
this prohibition "in recognition of these public and
Congressional sentiments."
Treasury, including its Office of Foreign Assets Control
which administers this sanction, has received no indication of
any evasion of this ban. This sanction has had a significant
impact on total South African exports to the United States
In
- 3 -
1984, the last year of "normal" Krugerrand exports to the United
States, total South African exports to the United States were
$2.49 billion. In 1985 total South African exports to the United
States declined by $410 million. As for Krugerrands, we estimate
that approximately 1.3 million ounces of Krugerrands were
exported to the United States in 1984, with an approximate value
of $400 million; in 1985 we estimate that roughly 300,000 ounces
of Krugerrands were exported to the United States, all prior to
the imposition of the ban. Today, no Krugerrands are being
imported.
Ban on Bank Loans to South African Public Sector
Last September, the President also imposed a ban on most
types of U.S. bank loans to the South African Government,
including public sector entities such as power companies and the
agricultural marketing boards. The ban, for example, prevents
U.S. export financing where the importing entities are in the
governmental sector. Treasury's Office of Foreign Assets Control
has promulgated regulations to carry out this ban, and has
received no indication of any effort to evade this measure.
Total U.S. bank claims on South Africa in September 1985
were $3.4 billion. But only a small portion of these claims,
about five percent or $180 million, represented direct lending to
South African public sector entities. The amount is small
because over a period of several years U.S. banks of their own
accord had greatly reduced their claims on the public sector of
South Africa.
The U.S. ban on bank lending to the South African Government
was one of several measures aimed against the machinery of
apartheid. This action followed other developments.
U.S. banks independently froze and then reduced their
credit lines to South Africa, mostly affecting the private
sector. The U.S. banks' actions were taken in late July and
August of last year as a result of, among other events, President
Botha's declaration of a state of emergency. The banks'
decisions to freeze and reduce their credit lines and the further
erosion of international confidence in South Africa and its
currency led to a declaration by the South African Government in
early September of a moratorium on repayments of principal on
much of the country's foreign debt owed to banks. U.S. bank
claims on South Africa's private sector have in effect been
- 4 -
frozen as a result of this action, and will decline if debt is
repaid without the benefit of new loans. Therefore, the overall
effect of the U.S. ban coupled with independent actions of U.S.
banks and the South African Government itself are likely to
result in a continued decrease in U.S. bank claims on South
Africa.
Disinvestment and Ban on New Investment
Let me now turn to the sanctions approach found in H.R. 997.
As you know, Mr. Chairman, this Administration has a
long-standing policy not to restrict market oriented investment
flows. In the case of South Africa, this goal and our mutual
concerns for the economic and social well-being of non-whites in
South Africa are best served by not requiring disinvestment and
not banning new investment. I should note, however, that owing
to market forces, there was a $500 million net decline in the
outstanding amount of U.S. direct investment in South Africa at
the end of 1984, the latest year for which we have data.
The Impact on the Non-White Community. A ban on new
investments in South Africa and/or a requirement that U.S. firms
disinvest would have some impact on the employment of non-whites
in South Africa and on the exemplary labor policies practiced by
U.S. firms with operations in South Africa. U.S. firms operating
in South Africa are important employers of non-whites and a major
source of pressure for change in South Africa's policies. In
fact, according to U.N. data, two-thirds of the employees of
foreign owned firms in South Africa are black. Limiting the
ability of these firms to bring in new capital, to grow or to
adjust to market conditions, or requiring that they leave South
Africa, could reduce job opportunities for non-whites. The white
South Africans who might buy these firms may hire a smaller
percentage of blacks than foreign investors do. The level of
unemployment among blacks is already extremely high—about 25
percent according to some observrs. Any reduction in foreign
investment would retard the South African economy's growth rate
and its ability to absorb new non-white entrants into the job
market.
Replacement by Other Investors. Although the United States
is the third largest source of direct investment in South Africa,
an ending of new U.S. investment flows or the sale of existing
capital assets is not likely by itself to create a long-term
- 5 -
anger for the South African economy. Other countries (Japan, the
United Kingdom, West Germany) have significant commercial
interests in South Africa, and their firms which also compete
with us in world markets, or South African firms, would fill gaps
left by departing U.S. firms. South Africa also has demonstrated
its ability to develop efficient indigenous production in the
face of international sanctions, such as in its arms industry.
Adverse Impact on U.S. Investors. U.S. firms would also be
placed in a precarious position by a ban on new investment or a
requirement to disinvest. A large portion of U.S. investment in
South Africa is in those sectors where there are numerous
competitors--automotive vehicles, pharmaceuticals, petrochemicals
and computers. A ban on new investments would limit established
U.S. firms' capacity to adjust to the dynamics of the market and,
without the ability to make new investments, ultimately could
force many firms to withdraw. This could be extremely costly to
the firm. Firms would likely be forced to sell their assets at a
price well below market value. The likely buyers—white South
Africans and non-U.S. foreigners—would reap windfall gains from
the forced sale of U.S. firms. In addition, the buyers would
likely have less interest in maintaining and encouraging
non-discriminatory practices in the workplaces than U.S. firms
do. It is hard to see the point of a policy that would: a)
confer windfall capital gains on white South African investors
and our worldwide competitors at American expense, and b) weaken
our stance against discriminatory practices in the workplace.
Blocked Transfers. If faced with disinvestment, the South
African Government could effectively block the transfer of the
proceeds of the divested assets from South African rands into
dollars. In this situation, U.S. investors would hold
inconvertible South African rands, which for all intents and
purposes would be worthless. Even if transfers were not blocked,
the U.S. investor would be paid in "financial" rands, which,
under South Africa's present system, can only be converted into
foreign exchange by selling to another foreign investor. With
U.S. investors forced to divest, under the proposed legislation,
the resulting downward pressure on the financial rand would
reduce even further the dollar value of the realized assets.
Denial of U.S. Tax Credits
The Treasury Department opposes the proposed denial of
credits or deductions for South African taxes because a denial
would violate both U.S. treaty obligations and sound tax policy.
- 6 -
Our bilateral income tax treaty with South Africa was signed in
1946, and a protocol was signed in 1950. The treaty was ratified
in 1952. Though statutory override of treaty obligations is
possible within any system, as indicated below, we consider it to
be a highly undesirable step as the effect would be to penalize
U.S. firms, not South Africa.
The United States taxes U.S. citizens and residents,
including U.S. corporations, on their worldwide income. When a
portion of that income is earned in a foreign country, the
foreign country will generally also tax that same portion. As a
result, the same items of income may be subject to double
taxation. To avoid such international double taxation, the
United States permits foreign taxes paid on income earned outside
the United States to be credited against U.S. tax. To preserve
the U.S. tax on U.S. income, the foreign tax that may be claimed
as a credit is limited to the U.S. tax that would otherwise be
due on the foreign income.
Denial of credits would have a very uneven impact across
U.S. companies depending on whether they operate only in South
Africa or in other countries as well, and depending on the
effective tax rates which they face in South Africa and in other
countries. For companies with foreign taxes paid to third
countries in excess of the U.S. tax on foreign income, the denial
of credit for South African tax while continuing to allow credit
for high third country tax would probably have little impact on
U.S. firms' desire to do business in South Africa. U.S.
multinationals which operate in South Africa have major
operations in such high tax countries as Germany, Canada and the
United Kingdom.
On the other hand, for a U.S. company paying foreign taxes
which are below the U.S. tax on foreign income, the proposed
denial of credit would result in the double taxation of income
earned in and taxed by the Republic of South Africa
The
d South
frican
^ M n h ^ c ' i U on
/
tax rate on this income could be
as high as 85-90 percent as a result of the proposal. Thus, in
the latter case it is the U.S. investor who suffers. This may
well drive him out of South Africa, and will, as indicated
elsewhere in my testimony, lead to his replacement by other
foreign or South African firms at bargain basement prices?
The United States foreign tax credit is based on sound tax
policy. It conforms with accepted international practice by
according to host countries the primary right to tax income
earned in that country and placing on the home country the
- 7 -
obligation to relieve double taxation. Furthermore, the United
States is obligated to relieve international double taxation of
income earned by U.S. citizens, residents and corporations in
South Africa by our income tax treaty with South Africa. This
treaty obligation would be directly violated by the proposed
legislation. If the United States, because of unilateral
overrides of treaty benefits, is seen by our treaty partners and
potential partners as taking our treaty obligations lightly, they
will be less likely to make concessions. Our entire tax treaty
program will be weakened, with the result that foreign treaty
benefits for U.S. businesses will be more difficult to achieve
elsewhere in the world.
This is an example of how, while it might not be apparent at
first glance, an action motivated by laudable intentions would
have serious adverse implications that go far beyond these
intentions. This action would significantly harm U.S. tax treaty
policy, and in any event will have little overall impact on South
Africa.
Trade Ban
Finally, the Treasury Department firmly opposes the measure
proposed in H.R. 997 to prohibit all South African imports into
the United States and to ban most exports. It is an unavoidable
fact that critical industries in the United States are dependent
upon imports of ferrochromium, platinum, and manganese from South
Africa. The United States currently imports from South Africa
approximately 60 percent of U.S. ferrochromium requirements, 80
percent of its platinum group metals (necessary for catalytic
converters), and 65 percent of its industrial diamonds
requirements. A ban against importation of these goods from
South Africa would require large switching of sourcing to obtain
these vital materials. This would result in higher costs,
particularly for our beleaguered steel industry, and the Soviet
Union, which also supplies these minerals, would obtain a
windfall.
With reference to exports, you are aware, Mr. Chairman,
that the United States Government currently has in place
comprehensive controls on exports to South Africa covering
military and dual-use items, computers, and nuclear technology.
All these controls focus pressure on the South African
Government, its defense agencies, and those agencies which
enforce the policies of apartheid.
- 8 -
A total ban on exports would impact on our exports sector;in
fact U.S. exports to South Africa declined by $1 billion last
year. It would also have a grave impact on the South African
people and its economy, denying them goods and services necessary
for a healthy economy. We believe it would be wrong to target
the South African people. The President's Executive Order was
aimed at the South African Government and its enforcement of
apartheid.
Conclusion
In summary, Mr. Chairman, we recognize the pressures to
respond strongly to South Africa's policies, and the Congress's
genuine attempts to develop a sound approach. In fact, the
financial markets have already recognized the increased risks of
doing business with South Africa. Nevertheless, Treasury's
examination of the types of measures proposed in legislation such
as the largely punitive economic actions contained in H.R. 997,
in terms of their potential for promoting change and their
effects on U.S. interests and the interests of non-whites in
South Africa, leads to the conclusion that the proposed measures
would be ineffective, counterproductive, or both. We believe the
proposed sanctions in H.R. 997 would not produce the changes we
all seek, but would damage interests we would like to promote and
defend. Such sanctions would further disadvantage the non-white
population in South Africa, and would have adverse, perhaps
significant and long-standing, effects on U.S. Government and
private economic interests and on our ability to influence events
in a positive fashion.
F2.14
TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
U3RA; \RC0M 5310
STATEMENT OF THE HONORABLE JAMES A. BAKER,' III T.-.:
SECRETARY OF THE TREASURY
OF THE UNITED STATES
BEFORE THE MEETING OF THE IMF INTERIM COMMITTEE
APRIL 9-10, 1986
WASHINGTON, D.C.
EVCJRY
The Functioning of the International Monetary System
This meeting provides an important opportunity to advance
our work in developing a broad international consensus on
measures to improve the functioning and stability of the
international monetary system. It is the first occasion for
substantive discussion in this Committee of the G-10 and G-24
reports, representing one more step in our efforts to
strengthen the system in a way that helps us all achieve our
basic goals of high sustainable growth, low inflation, and
open markets.
The current international monetary system has both
strengths and weaknesses. It has provided a useful framework
for responding to the multiple global economic shocks of the
1970's and early 1980's. And recent cooperative efforts have
helped produce greater convergence of favorable economic
performance and more consistent policies among the major
industrialized nations. This has contributed to exchange rates
which are more in line with fundamentals, helping set the stage
for a reduction in large external imbalances.
This progress notwithstanding, the system continues to
have weaknesses which need addressing, both in terms of the
framework within which our economies relate, as well as in
terms of underlying policy and performance weaknesses. The
U.S. is committed to work with others in an effort to find the
best ways to strengthen the system. We need to improve the
functioning of the system, not only to help us deal with the
economic problems we face, but to help avoid such problems in
the future.
The reports of G-10 and G-24 offer some useful suggestions
for improvements in the operation of the international monetary
system. They bring out a number of areas of broad agreement,
B-534
- 2 -
as well as areas where views diverge. We continue to support
the general thrust of the G-10 report as a good step in the
right direction, deserving of prompt implementation where
possible. In particular, the IMF Executive Board should
implement the surveillance recommendations in the G-10 report
as well as the proposal for increased publicity for abbreviated
assessments by the Managing Director of countries' policies and
performance. In addition, ideas to revise and strengthen the
surveillance principles and procedures have been developed, and
we support further steps in this direction. I am pleased that
work is already underway to do just that.
The IMF Executive Board has looked at a range of issues
relating to the strengthening of the international monetary
system, as outlined by a report by the Managing Director. This
is a good beginning, but more work, analysis and study need to
be done. I do not believe this Committee needs any special
group to be formed for follow-up work. We should continue work
in the Executive Board, and ask our Executive Directors to
report back to us in the fall for further substantive Interim
Committee discussion.
In our effort to develop realistic, effective and
pragmatic arrangements, a number of general points need to be
considered. First, the basic objectives of any strengthened
system should be:
1. To maximize economic growth consistent with price
stability and sustainable balance of payments
positions; and
2. To help maintain an open, stable system of trade and
payments.
Second, there must be a basic foundation of improved
international cooperation and policy commitment by all
countries for any strengthening of the international system to
work. Recent developments suggest that such a foundation is
emerging, but we must all see to it that this cooperation is a
lasting feature of the system.
Third, we believe that there are a number of qualities
that we should be looking for in any strengthened system. Five
that I would mention are:
1. Symmetry: A stengthened system should encourage
countries to follow sound, growth-oriented, consistent
policies in a symmetrical fashion, applied evenhandedly to surplus as well as deficit countries, to
small countries as well as large.
2
» Policy breadth: The problems that underlie the
external imbalances and exchange rate volatility of
recent years, have been multifaceted, stemming from
- 3 -
policy and performance insufficiencies in a number of
areas, including fiscal, monetary and structural
policies. It is important, therefore, that a
strengthened system be able to address potentially a
range of policies and problems in order to promote
convergence of favorable performance and more
consistent policies.
3. Flexibility; Any system needs to have adequate
flexibility to respond to exogenous developments and
allow for differences in performance among countries
Recent oil price developments have underscored the
need for flexibility in the system.
4. Automaticity: That being said, it can be argued that
the current system has too much flexibility. Any
strengthened system should, therefore, contain a
somewhat greater degree of automaticity in addressing
problems that develop.
5. Political will: It is all well and good to say that
there must be political will. But the issue for
strengthening the system is not so much whether there
is sufficient political will, but what system can best
help each of us in our efforts to muster the political
will to do what is right.
With these considerations in mind, we should continue our
efforts to find approaches which embody these qualities. We
clearly need further work to do that.
We have approached today's discussions with an open
mind. I look forward to working together with you in our
continuing search for ways of improving the functioning of our
international monetary system.
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 8, 1986
AMENDED WEEKLY BILL OFFERING
The weekly bill offering announcement made earlier today
understated the amount to be paid down by the Treasury Department.
The bills maturing April 17, 1986, total $29,580 million
(including the 14-day cash management bills issued April 3, 1986,
in the amount of $15,030 million).
Accordingly, the amount to
be paid down should have been shown as $15,575 million rather
than $550 million.
All other particulars in the announcement remain the same.
oOo
B-535
epartment of the Treasury • Washington, D.C. • Telephone 566-204
L:
- '•«•'. *oc:< 5320
FOR RELEASE
APRIL 8, 1986
• p? In ;> c^GQHTACT: BOB LEVINE
7 ; i <1
566-2041
^ij;:;:
r -.•ZAZ'JZY
STATEMENT BY THE HONORABLE DAVID C. MULFORD
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. TREASURY DEPARTMENT
AT THE
CARTER CENTER DEBT CRISIS CONFERENCE
EMORY UNIVERSITY
ATLANTA, GEORGIA
APRIL 8, 1986
The U.S. Debt Initiative:
Toward Stronger World Growth
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 want to hear detailed statistics, but let
me illustrate with a few simple numbers. 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 $420 billion, is owed to the private commercial banks and
$120 billion to U.S. 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-536
- 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 as its
first and foremost element 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. As you
all know, the Plaza agreement has resulted in a major change in
relative exchange rates. But we should also bear in mind that
the agreement involved much more than just exchange rate adjustment. The Plaza statement recognizes that solid, low inflation
growth and open markets in the industrial countries are an essential
prerequisite for stronger world growth.
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 are crucial not only to growth
within the industrial nations, but also as a basis for growthoriented reform in debtor nations.
Changes in the global economic environment are already
having a beneficial impact on the prospects for future growth.
The 35 percent decline in the dollar versus the yen and deutsche
mark since February 1985 will help to improve the competitive
environment for U.S. industry both at home and abroad. The U.S.
trade deficit in 1986 should be about $20 billion lower than we
expected as recently as last fall. For 1987, the deficit should
drop below $100 billion -- without, I would emphasize, resorting
to protectionist solutions and with continued solid growth in
the U.S. economy.
Interest rates have also declined sharply in recent months
in reflection of both the U.S. commitment to Gramm-Rudman budget
deficit reduction and falling oil prices. U.S. short term
rates have fallen from over 11 percent in 1984 to 7.5 percent,
very similar to the decline in LIBOR rates over this same period.
U.S. long term interest rates have similarly declined from 13.5
percent to 9.5 percent during this period.
You don't need to be reminded of the importance of interest
rate changes of this magnitude for U.S. businessmen. However,
they are also very important for debtor nations. The major
debtor countries are expected to save $7-8 billion in interest
payments on their debt this year alone.
The dramatic reduction in oil prices is expected to give
further impetus to stronger growth and lower interest rates
in the industrial nations in the period ahead. This will provide
- 4 -
indirect benefits for most developing countries, in addition
to the direct benefits from reduced oil import costs. Thus,
the difficulty experienced by oil exporters ought not to
obscure the stimulus to recovery and growth which the fall
in oil prices provides to the global economy as a whole.
Although both the G-5 initiative and the debt initiative
are well advanced, there remains a considerable amount of
unfinished business in both areas. I would like to summarize
for you a few of the tasks yet before us.
In his recent State of the Union address, President Reagan
recognized the serious problems for American farmers and exporters
caused by substantial exchange rate variability. He called for
closer economic coordination among the major trading countries
and directed Secretary Baker to determine if the nations of the
world should convene to discuss the role and relationship of our
currencies.
Discussions on the need to improve the international monetary
system are currently underway in the Interim Committee of the IMF
which Secretary Baker will be attending in April. The present
flexible exchange rate system has served us well these past 15
years in dealing with a world economy faced with multiple economic
shocks. However, the system has had its weaknesses and there is
a need to reduce the kind of exchange rate variability which has
characterized the system in recent years. A consensus is emerging
that greater exchange market stability depends critically on achieving better convergence of favorable economic performance and
compatible policies among the key currency countries.
The fundamental issue is how to encourage sovereign nations
to pursue mutually consistent and reinforcing policies. The
G-5 Plaza agreement represented a major advance in economic
collaboration. The Interim Committee will consider recommendations to strengthen the IMF's ability to promote sound, consistent
policies which move in the right direction. However, the United
States is convinced that more can and should be done. We will
approach the April meetings with an open mind and will consider
realistic measures that could command wide support.
With regard to the debt situation, 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
- 5 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.
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 contributions will necesarily focus
primarily on macroeconomic policy, rather than long-term
structural reforms.
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
- 6 lending will be fast-disbursing sectoral and structural adjustment loans as opposed to the more traditional project 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.
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, the
commercial banks. 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.
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
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.
- 7 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.
Assistance for the Poorest Nations
My remarks so far today have dealt with the major debtor
countries. I would like to turn now to the poorest countries,
particularly in Sub-Saharan Africa, many of which have seemingly
intractable economic problems, including serious debt-related
difficulties.
The economic situation in Sub-Saharan Africa has worsened
significantly in recent years. A combination of factors has
been responsible for the decline — extended drought, falling
commodity prices, effects of the recession in the early 1980s,
and, importantly, the absence of sound economic management in
many of the countries in the region. GDP per capital declined
for the region as a whole by over ten percent between 1980 and
1983.
As a result of these problems, many African countries
have experienced protracted balance of payments problems.
While many have made use of IMF credits, the deteriorating
balance of payments situation has led to an increased number
of reschedulings and, in several cases, the build-up of
arrears to the IMF.
It has become increasingly clear that the economic
and financial problems facing African countries will require
long-term solutions. While IMF programs can deal with some
of the short-term balance of payments difficulties of these
countries, restoration of sustainable growth will also require
structural economic reforms for which an institution such as the
World Bank is better suited.
- 8 -
Recognizing this, Secretary Baker, at the Seoul IMF/
World Bank meeting, proposed a program for dealing with the
African economic situation. This proposal called for using
reflows to the IMF Trust Fund in conjunction with World Bank
resources to provide additional financing to poor countries
with protracted balance of payments problems which are willing
to undertake comprehensive economic reforms.
After months of intensive consultations in the international
community, the IMF and the World Bank Boards recently approved
the U.S. proposal. The Trust Fund arrangement will enable
the IMF, World Bank and the recipient country to work together
to develop a comprehensive policy framework which will serve
as the basis for separate lending agreements between each of
the institutions and the recipient government.
This approach will seek to remove structural impediments to
production, savings, investment and non-inflationary growth.
Each program will include both macroeconomic and structural
components, tailored to the needs of the individual countries.
Under the arrangement, staff of the IMF and World Bank
will work with the recipient country to develop a policy
framework which will involve consistent, supportive macroeconomic and structural policy objectives, and to determine
areas for priority attention. Fund and Bank staff will also
reach general agreement on financing needs and sources to
support the comprehensive program.
Funding resources to implement the arrangement will
include $3.1 billion in reflows to the IMF Trust Fund and
roughly equivalent resources from the World Bank, primarily
through IDA, the soft-loan window of the Bank. In addition, we
hope that the development of a coherent policy framework for
borrowing countries will catalyze bilateral contributions to
be utilized in association with Trust Fund arrangement programs.
We were extremely pleased by the IMF and World Bank Boards'
decisions to support our proposal. Comprehensive economic
policy reform is the most important step toward countering
economic stagnation in the poorest countries and setting the
stage for a resumption of sustainable growth. This arrangement
provides those governments with the wisdom and determination
to set their economies on the course to growth to have access
to the resources necessary to finance the difficult adjustments
which they will have to undertake.
9
The Trust Fund arrangement also signals a new step in
coordination between the IMF and the World Bank. The Fund
has always focused its programs on dealing with short-term
balance of payments difficulties, primarily through macroeconomic policies. The World Bank, on the other hand, is
a development institution with greater familiarity working
on structural problems in developing economies. Creating
an arrangement where they can bring their complementary
expertise to bear on the complex economic problems facing
the poorer countries will result in benefits to the recipient
countries and the capabilities of both institutions.
The Trust Fund arrangement also provides an opportunity
to increase coordination among bilateral donors, who have
traditionally pursued their aid programs in specific countries
without systematic thought to whether their programs were
consistent with those of other donors. Under the Trust Fund
arrangement, consultations among bilateral donors, multilateral
institutions and the recipient country can be strengthened,
leading to more coherent aid programs and ultimately more
rapid development.
Conclusion
The substantial exchange rate changes that have occurred
since the Plaza agreement last September will help to reduce
the large trade imbalances among the major countries. However,
in an effort to improve the functioning of the system, we now
need to focus on ways to achieve greater growth in Europe and
Japan and continued improvements in access to Japanese markets
in order to reduce substantially the large imbalances that will
remain in the system. Our own success in implementing GrammRudman budget deficit reductions and accomplishing tax reform will
also be important. Finally, a new round of trade negotiations
should give further impetus to global growth through the mutual
reduction of trade barriers.
If the debtor nations also do their part in adopting growthoriented reforms — and they are supported in their efforts by
additional lending from the international financial institutions
and the commercial banks -- the debt situation should be both
manageable and containable in the period ahead.
TREASURYNEWS
r
epartment of the Treasury • Washlngtbh^.c.
• Telephone 566-2041
* I S VJ -s AH *Bfi
" S-Z'-.T OF THE TREASURY
STATEMENT OF THE HONORABLE JAMES A. BAKER, III
SECRETARY OF THE TREASURY
OF THE UNITED STATES
BEFORE THE MEETINGS OF THE
INTERIM COMMITTEE OF THE INTERNATIONAL MONETARY FUND (IMF)
AND DEVELOPMENT COMMITTEE OF THE WORLD BANK AND THE IMF
APRIL 9-11 , 1986
WASHINGTON, D.C.
The International Debt Situation:
Improving the Prospects for Growth
These meetings provide an important opportunity to
continue the informal dialogue begun in the Interim and
Development Committees last April. Those discussions were
very useful in focusing our attention on prospects and
policies for the medium term, particularly for heavily
indebted developing nations.
One of the most important developments during the past
year has been the emergence of broad agreement among both
creditor and debtor nations that improved growth in the debtor
nations is essential to any resolution of the debt problem.
Debtor countries must be able to create real resources — and
export earnings — at a faster pace than they are accumulating
debt. Sustainable growth with adjustment must therefore be
the central objective of our debt strategy.
Steady growth, low inflation, and open markets in the
industrial nations are critical to provide a firm foundation
for stronger growth in the debtor nations. Considerable progress
has already been made in this area in recent months. The
individual policy intentions announced by the major industrial
nations last September in New York focused in particular on
B-537
- 2 -
reducing structural impediments to growth, cutting excessive
government expenditures, avoiding protectionist trade measures,
and improving the investment climate as a stimulus to the
private sector and to overall 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
and reduce both nominal and real interest rates over time —
thereby passing on the benefits of growth. The fruits of
these and previous economic policy efforts are already
becoming evident:
o Stronger industrial country growth and lower inflation
this year should add $5 billion to developing nations'
non-oil exports and reduce their import costs by $4
billion.
o The substantial reduction in both short and longer-term
interest rates since early 1985 should reduce debt
service payments for developing countries by $11
billion or more annually.
o Lower interest rates, stronger industrial country
growth, and the recent dollar depreciation should
also help to improve the outlook for commodity export
earnings.
The sharp decline in oil prices will also help most
debtor nations through reduced oil import costs, stronger
growth and further interest rate reductions in industrial
nations, and increased trade opportunities. We estimate that
it will reduce oil import costs for oil importing developing
nations by an additional $13 billion this year. While the
financing needs of the oil exporting developing countries
will increase, we believe these requirements can be managed
within the overall framework of the debt initiative we have
proposed.
Indeed, these economic developments suggest that during
the next two years developing nations will face the best
external environment since the early 1970s, providing a solid
foundation for their own efforts to strengthen growth.
Nevertheless, our debt strategy cannot rest on growth in
the industrial nations alone. The adoption of growth-oriented
macroeconomic and structural policies by the debtor nations
themselves is essential to permit them to take full advantage
of improved opportunities in global markets and to strengthen
the domestic foundations for growth for the longer term. Of
key importance will be policies designed to enhance domestic
savings, encourage increased portfolio and equity investment,
and stimulate the return of flight capital.
- 3 -
The U.S. Initiative for Major Debtors
and
for
and
the
As you know, at last October's Annual Meetings of the IMF
the World Bank I proposed a "Program for Sustained Growth"
the principal debtor countries, involving three essential
mutually reinforcing elements:
adoption by debtor nations of comprehensive
macroeconomic and structural policies to improve
growth and reduce inflation;
a continued central role for the IMF, in conjunction
with increased and more effective structural adjustment
lending by the multilateral development banks; and
increased lending by the commercial banks in support
of debtors' reform efforts.
Our initiative was designed to strengthen the current
international debt strategy by focusing on the need for
growth. It also recognized that without economic reform in
the debtor nations, no amount of money — whether derived
from external borrowing, financial aid, or inflationary
domestic pump-priming — will produce sustainable growth.
Increased financing can be useful in facilitating and
supporting domestic policy shifts to increase economic growth.
But additional borrowing would be imprudent, and merely
increase the total debt burden, in the absence of credible
policy measures to assure that any new financing is used
efficiently and productively.
Net new lending and growth-oriented policy reforms must
be closely linked to maintain the confidence and support of
the international financial community and to permit total
debt to be reduced significantly over time. That is the
essence of the debt initiative we have proposed.
Our proposal envisages:
— a 50 percent increase in World Bank and IDB disbursements to the principal debtors, to $9 billion annually
in 1986-88, or about $20 billion in net new credits
over this period, after scheduled repayments; and
— $20 billion in net new lending by the commercial banks
over the same period in support of growth-oriented
policies by the debtor nations.
- 4 The response to the U.S. proposal from all quarters has
been positive and confirms our conviction that the focus of
the initiative on these three main elements is correct and
holds the greatest hope for realistic forward momentum. It has
been endorsed by a number of key industrial countries, and by
an unprecedented joint statement of support by the Managing
Director of the IMF and the President of the World Bank. The
President of the Inter-American Development Bank (IDB) has also
supported the initiative, and member nations are currently considering IDB reforms to assist in its implementation. National
banking groups in the seven Summit countries, the Netherlands,
Sweden and Saudi Arabia, as well as major individual banks in
other creditor countries have also voiced their support for
the proposal.
Finally, the Cartagena and Group of 24 developing countries
have welcomed the initiative's emphasis on growth and enhanced
financial assistance.
I recognize that there are differing views on whether the
amount of financing we have called for is sufficient. Clearly,
the amount of financing needed for individual debtors will
vary to some extent with major changes in the global economic
environment, including the recent sharp decline in oil prices and
interest rates. Total financing needs therefore are not set in
concrete.
Nevertheless, I believe that the $40 billion in net
financing flows from the commercial banks and the multilateral
development banks which we have called for will meet the needs
of debtor nations if genuine reforms are undertaken. World
Bank estimates support this judgment, based on industrial
country growth in line with current forecasts.
Moreover, if this approach is successful in generating
the needed reforms, I have no doubt that additional financing
will be forthcoming, if subsequently needed.
There has been a tendency to talk about the debt initiative
as the "Baker plan", as if this were a blueprint for a quick
solution. I would prefer to view it as a multilateral debt
initiative reflecting common agreement on how to proceed in
helping debtor countries overcome their financial debt problems.
The debt initiative provides a cooperative framework for
efforts by the debtors themselves, supported by the international financial institutions and the commercial banks
The
policy measures which are needed will vary from country to
country, depending on their own economic situations
The
development of medium-term economic programs will ultimately
be their own responsibility, but must be credible in order to
gain IMF, World Bank, and commercial bank support
This
process of returning debtor countries to creditworthiness and
voluntary borrowing will take time.
- 5 -
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 too often fallen short of
producing lasting reform within their domestic economies. Many
have failed to control adequately government budget deficits.
While some progress has been made in reducing inflation, in
most countries inflation remains too 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.
Structural problems have also received inadequate attention
in many countries. Structural reforms are a necessary foundation
for stronger growth and to reverse the capital flight which has
plagued these economies. These include the development of more
efficient domestic capital and equity markets, increased efficiency
and privatization of public enterprises, growth-oriented tax reform,
improvement of the environment for both domestic and foreign
investment, trade liberalization and the rationalization of import
regimes.
Such reforms are difficult. I recognize that many of them
touch on sensitive political issues, while their benefits may
become visible only over the longer term. But determined efforts
must be made to address these problems if sustainable growth is
to be achieved.
It will be important that these efforts be supported by
the international financial institutions.
The IMF's role should continue to be a catalytic one,
providing policy advice and where appropriate, temporary
growth-oriented economic programs which can catalyze additional
capital flows. Supporting sound macroeconomic policies, particularly fiscal, monetary and exchange rate policies, is an
essential part of that effort. Without the creation of a stable
financial environment and market-oriented exchange rate policy
that can promote competitiveness and help avoid capital flight,
other policy changes are likely to be of only marginal
effectiveness.
But with such an environment, it is important that structural
problems be aggressively addressed in order that a broad basis
for growth and adjustment be established. Accordingly, it is
also very important that the Fund give increasing attention in
its programs to structural policy changes which are necessary
to establish the basis for sustainable growth and balance of
payments adjustment. Pricing policy, public enterprise reform
and divestiture, tax reform, financial sector development, trade
liberalization, and labor market reforms are among those areas
which merit increased attention in Fund-supported programs.
- 6 -
The Fund has, in fact, been addressing these areas with
increasing frequency, and we welcome the progress that has
been achieved in this aspect. But such growth-oriented policies
have not always been given adequate priority in Fund supported
programs, and we look for further adaptation of Fund lending
policies, including greater use of review clauses, in order to
help assure a growth orientation to such programs. The actual
policy coverage and mix would be determined on a case-by-case
basis in light of the circumstances of the country concerned.
In most cases, we will expect Fund support to continue to
take the form of stand-by arrangements, but it must be remembered
that IMF financing is temporary, and it is natural and appropriate
that such financing not continue over a lengthy period of time.
Thus, we welcome the development of other techniques of Fund
support, such as "classical" stand-bys and enhanced surveillance,
to be used in selected cases.
The Fund's approach to structural policies also will need
to be developed in close cooperation with the World Bank, whose
mission is strongly focused on longer-term development issues.
The World Bank already has considerable experience in addressing
the kinds of structural problems that most debtor countries face
and will play a key role in this area. We expect that much of
the World Bank's new lending will be fast-disbursing sector and
structural adjustment loans as opposed to the more traditional
project loans.
The World Bank currently has ample capacity to increase
annual lending commitments by some $2-2.5 billion above FY 1985
and to concentrate that lending more heavily on the large debtors
with credible reform programs. The United States is 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.
The World Bank is already moving ahead to strengthen
procedures and policies to implement this expanded role. It is
currently assisting major debtors in the development of medium-term
adjustment programs which emphasize the mobilization of domestic
savings, a more attractive investment climate, rationalization of
the public sector, removing price distortions, and trade liberalization. It also plans to implement procedures which will
streamline operations and provide for a more comprehensive review
of lending priorities for individual countries. Finally, Bank
staff are working with private creditors in considering ways
to better mobilize additional support for debtors' adjustment
programs.
- 7 -
It will be essential for the IMF and the World Bank to
establish a closer working relationship as part of this process
to assure that macroeconomic and structural policy measures
are consistent and mutually supportive.
Significant progress has already been made in improving
cooperation between the two institutions, including recent
experience in coordinating World Bank structural or sectoral
loans with IMF programs in Chile, Ecuador, the Ivory Coast,
the Philippines, and Uruguay, among others. In these cases,
collaboration between the two institutions has extended to
catalyzing commercial bank support.
We believe these efforts are on the right track and
should be continued. Development of a formal cooperative
framework for implementation of the initiative, however, does
not appear to be necessary at this point. The mechanisms for
cooperation — and for triggering commercial bank lending —
will necessarily vary for individual countries.
Some of the larger debtors will need to take advantage
of all of the elements of the strategy: an IMF program,
enhanced sectoral or structural adjustment loans from the
multilateral development banks, and new money packages from
the commercial banks.
Mexico and Argentina are among a number of countries moving
in this direction. Mexico is discussing a new program with the
IMF, and working with the World Bank on sector loan programs.
Argentina has a program with the Fund, and a follow-on program
is planned. Last week the World Bank approved an agricultural
sector loan for $350 million for Argentina as the first in a
series of contemplated loans linked to policy reforms. The
Philippines should also be able to benefit from a comprehensive
approach.
A number of other nations, such as Colombia and Uruguay,
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. Ecuador fits in this group and
has recently completed negotiations on World Bank loans for the
agricultural and industrial sectors totaling $215 million.
Ecuador is also negotiating a new IMF standby program
to replace the one which expired last month. Other countries are
at different stages of implementing comprehensive, growth-oriented
economic programs.
Implementation of the debt initiative, therefore, will depend
on the pace of negotiations between individual debtor nations and
the international financial institutions. If the IMF and World
Bank place greater emphasis on sound, market-oriented policies to
- 8 -
improve growth and promote adjustment — which we believe is
happening — and the debtor nations move decisively in this
direction, I am confident that new commercial bank lending
can be counted on to support these efforts.
Let me mention here two areas which deserve special
attention: efforts to improve both domestic and foreign
investment in the debtor nations and the importance of
trade liberalization and trade finance.
Foreign investment must be an important component of our
growth strategy. It is non-debt creating financing, and therefore doesn't increase the debt service burden. It also can
provide a vehicle for the return of flight capital and a
significant stimulus to entrepreneurial dynamism, increased
efficiency, transfer of technology and managerial know-how
which can facilitate structural change and growth. A hospitable climate for both domestic and foreign banking institutions
would improve the efficiency and resource mobilization capability
of the local market. This will also improve opportunities for
swapping debt for equity, which has already had some success
in some of the Latin American countries.
For most developing nations, however, both domestic and
foreign investment has fallen significantly in recent years.
Foreign direct investment in developing countries has declined
from 20 percent of total flows in 1975 to just 11 percent in
1984. A number of factors underlie these trends, including:
— the increased availability of commercial bank financing
during the 1970s;
— domestic retrenchment and capital flight in response to
the debt crisis during the early 1980s;
— the imposition of new restrictions and performance
conditions on foreign investment; and
— perceptions of increased political risk on the part of
foreign investors, and poor growth prospects for the
economy as a whole.
Reversing this trend, like reversing capital flight,
will depend on a number of factors:
— First, the adoption by debtors of sound macroeconomic
policies, including positive real interest rates,
realistic exchange rates, market-related prices,'and
a concerted attack on inflation;
- 9 -
Second, liberalizing investment regimes, which will
signal investors of a more stable, predictable, and
transparent policy environment over the longer run; and
Third, enhanced assurance against political risk,
including expropriation and uncertainty about foreign
exchange convertibility.
Support for the creation of the MIGA can help to encourage
the flow of investment both to and among developing countries,
through encouraging needed policy reforms as well as through
its political risk and dispute settlement activities. We believe
that the MIGA can make an important contribution to economic
growth and development and look forward to participating in this
new institution. Participation by developing countries in the
negotiation of global rules governing foreign investment in GATT
as part of the new round of trade negotiations could also help
to improve the investment climate.
Global trade liberalization and expansion through the new
trade round can provide a further boost to growth in the debtor
countries and deserves their active support and participation.
It does not make sense for these nations, however, to delay
trade policy reforms in their own economies which can contribute
to stronger growth while awaiting the completion of global
trade negotiations. The United States is therefore prepared to
consider giving credit in the new round for trade liberalization
measures adopted as part of debtor nations' domestic policy
reforms, and subsequently bound in the GATT negotiations. We
hope other industrial countries will show a similar willingness
to give appropriate credit for these measures.
We are also concerned about the need for continuing
availability of adequate trade finance to support increased trade
with the developing nations. Lending by export credit agencies
to countries which adopt sound adjustment measures is an important
complement to both private and multilateral lending.
Officially supported trade finance is crucial to maintaining
essential imports in support of adjustment efforts. It also can
serve as a catalyst for further private finance as well as give
the debtor an incentive to adjust. In this regard, it is important that export credit agencies continuously evaluate their cover
policies in light of changing debtor situations. We believe that
in many cases present policy is too restrictive. Adjusting
countries are penalized if creditor countries automatically go
off cover when a country seeks to restructure its debt. We
believe that conclusion of a Paris Club rescheduling offers an
excellent opportunity for countries to consider liberalizing
export credit cover policies for countries which are adjusting.
- 10 -
Individual export credit agencies will continue to make
decisions on cover policy for a particular country on a case-bycase basis in light of national policies and priorities. Nevertheless, the IMF and the World Bank can play an important role
by increasing transparency with regard to both other creditors'
cover policies and the debtor's adjustment measures and priorities. Such increased transparency may well encourage some
export credit agencies to resume cover more quickly.
Assistance for the Low-Income Countries
Last fall in Seoul, when we reviewed economic conditions
in low-income countries, the situation was discouraging. The
countries in the region were beset by low economic growth,
mounting arrears on their financial obligations; and, in a
number of cases, famine and drought.
The economic conditions and prospects of these countries
now seem somewhat brighter. As the World Bank report indicates,
the low-income countries of Sub-Saharan Africa, for example,
could register real economic growth of 3.6 percent this year.
This would allow for a positive, albeit modest, increase in
their per capita income for the first time in many years.
The return of good rainfall and some commodity price
movements have been helpful, but we are also beginning to see
a payoff from policy reforms put in place by some low-income
countries, including more realistic exchange rates, more
market-oriented agricultural prices, and rationalization and
privatization of inefficient state enterprises.
Despite such improvements, it remains clear that fundamental
changes are required to restore economic growth and sustainable
payments positions in these countries. Comprehensive macroeconomic
and structural policies, supported by adequate external finance,
are required in order to lay the basis for economic growth and
development in the medium-term.
With these objectives in mind, the U.S. put forward a proposal
for use of Trust Fund reflows, in conjunction with World Bank and
other resources, to support growth-oriented policies in low-income
countries with protracted balance of payments problems. As later
modified, this proposal gained the support of the international
community and was recently endorsed by the Executive Boards of
the Bank and the Fund, with the Fund creating a new facility, the
Structural Adjustment Facility (SAF), to implement the proposal.
I welcome the actions taken by both Boards, and I would like
to take this opportunity to acknowledge the efforts of many who
helped bring this effort to fruition.
11 -
The medium-term policy frameworks, which will be developed
jointly by the Fund, the Bank, and countries concerned through
joint missions, represent a major step forward in Bank/Fund
collaboration. We believe that the policy framework papers,
which will set forth problem areas and policy priorities and
timetables for addressing those problems, can usefully guide
the country and both institutions in developing annual programs.
Such programs, developed within this framework covering both
economic and structural policies, should have a higher likelihood of success. Importantly, the Policy Frameworks will also
contain an assesment of external financing needs and indicative
levels of financing from the Bank, and the Structural Adjustment
Facility.
These frameworks can also help to catalyze additional
bilateral resources and assure more effective and productive
use of bilateral assistance. To that end, individual country
Policy Framework papers can be shared with bilateral donors
through consultative groups. We believe this can improve
coordination of bilateral assistance efforts, and we support
the suggestion in the World Bank President's report that the
multilateral agencies assume a larger role in the aid coordination process. We look to the World Bank to take the leading
role in this effort, and we hope that the Development Committee
will endorse President Clausen's suggestion that progress in
the area of donor coordination be reviewed at the fall meeting.
The comprehensive policy framework approach is based on
a widespread recognition of the urgent need to address the
serious and prolonged economic problems of low-income countries.
The task that lies before us is to ensure that this new approach
is effectively implemented. This will require, first and foremost, that the debtors take the needed policy actions. It will
also require a high degree of cooperation between the Fund and
the Bank.
We look forward to seeing the first framework papers
developed by the Fund, the Bank, and the countries concerned.
We look forward to the successful conclusion of the IDA VIII
replenishment negotiations, which will provide a significant
portion of the funding for the adjustment programs undertaken
pursuant to the Policy Frameworks. IDA'S increased emphasis
on Africa is a significant aspect of the ongoing international
efforts to address the problems of that region.
Conclusion
In summary, let me say that we are encouraged by the
positive developments which have occurred in recent months.
It is important, however, to maintain the momentum that already
exists, because much still remains to be done. We believe that
with a continued cooperative approach by all, the growth
aspirations of debtor countries can be realized.
TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
HARY.i, '••'•;•! 5310
i .1 ; ]
Apr-irl 10, 1986
•«T ^F THE TREASURY
Michael R. Hill Appointed
Inspector General
Secretary of the Treasury James A. Baker, III, has announced
the appointment of Michael R. Hill as Inspector General of the
Department of the Treasury. Mr. Hill had been Deputy Inspector
General since March 1985, and was Acting Inspector General since
January of this year.
As Inspector General, Mr. Hill will manage audits and
investigations involving the Department's programs and
operations.
Before coming to Treasury, Mr. Hill held several managerial
positions from 1981 to 1985 at the National Aeronautics and Space
Administration (NASA). These included Assistant Inspector
General for Auditing, Acting Assistant Inspector General for
Management Services, and Deputy Director of Headquarters and
Special Projects.
From 1975 to 1981, Mr. Hill was an Accountant, Supervisory
Auditor and Chief of the Cost Advisory Branch at U.S.
Environmental Protection Agency office in Cincinnati. He served
as Internal Auditor at the Navy Finance Center in Cleveland,
Ohio, from 1973 to 1975. Previously, Mr. Hill was Assistant
Credit Manager at the Sears, Roebuck and Company in Minot, North
Dakota (1970-73).
Mr. Hill earned a Bachelors of Business Administration from
Minot State College (1973) , a Masters of Business Administration
from Xavier University (1981), and is a Certified Public
Accountant (CPA). He is married and has a son. Mr. Hill was
born in Cincinnati, Ohio, on June 5, 1948.
# # #
B-538
TREASURYNEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
JBniUY. ROOM 5310
FOR IMMEDIATE RELEASE
April 10, 1986
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,258 million of 52-week bills to be issued
April 17, 1986,
and to mature April 16, 1987,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate
(Equivalent Coupon-Issue Yield) Price
94.004
5.93%
6.30%
Low
93.984
5.95%
6.32%
High
93.994
5.94%
6.31%
Average Tenders at the high discount rate were allotted 65%
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$
13,220
24,807,635
8,405
14,620
48,460
43,380
1,720,345
62,000
14,250
39,830
16,370
2,572,220
_ 175,200
$29,535,935
$
13,220
8,312,385
8,405
14,620
18,460
13,380
255,595
34,000
14,250
33,175
9,620
355,470
175,200
$9,257,780
$26,609,990
600,945
$27,210,935
2,200,000
$6,331,835
600,945
$6,932,780
2,200,000
125,000
$29,535,935
125,000
$9,257,780
An additional$450,000 thousand of the bills will be issued
to foreign official institutions for new cash.
B-539
federal financing bank
0}
0}
©
WASHINGTON, D.C. 20220
April 11, 1986
FOR IMMEDIATE RELEASE
FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of February 1986.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $153.4 billion on
February 28, 1986, posting a decrease of $0.3 billion
from the level on January 31, 1986. This net change was
the result of decreases in holdings of agency debt of less
than $0.1 billion and of agency assets of $0.6 billion
and an increase in holdings of agency-guaranteed debt of
$0.3 billion. FFB made 233 disbursements during February.
Attached to this release are tables presenting FFB
February loan activity, commitments entered during February,
and FFB holdings as of February 28, 1986.
# 0 #
B-540
aa
Page 2 of 7
FEDERAL FINANCING BANK
FEBRUARY 1986 ACTIVITY
BORROWER
DATE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
$ 293,000,000.00
306,000,000.00
298,000,000.00
51,000,000.00
243,000,000.00
167,000,000.00
150,000,000.00
229,000,000.00
146,000,000.00
35,000,000.00
25,000,000.00
284,000,000.00
279,000,000.00
2/10/86
2/13/86
2A7/86
2/18/86
2/19/86
2/21/86
2/24/86
2/24/86
2/28/86
3/1/86
3/3/86
3/4/86
3/6/86
7.315%
7.365%
7.565%
7.465%
7.465%
7.365%
7.365%
7.365%
7.465%
7.325%
7.325%
7.325%
7.385%
15,000,000.00
9,244,000.00
405,000.00
30,415,000.00
5/6/86
5/13/86
5/13/86
5/21/86
7.355%
7.565%
7.465%
7.375%
12,500.00
200,000.00
7,270,222.92
1,333,480.38
742,415.00
23,400,000.00
823,473.36
868,342.53
856,352.68
5,923.76
20,202,771.85
620,884.70
8,386.50
50,000,000.00
15,390.60
605,321.00
2,690,045.00
2,888,689.32
626,074.13
1,854,476.98
14,279,076.00
1,433,817.62
35,130.97
128,358.00
7,609.00
1,856,072.11
334,538.70
423,612.80
16,960.00
299,265.60
29,463,893.42
7/25/92
4/30/96
4/15/14
6/15/12
9/10/94
9/10/95
3/12/14
3/25/96
3/12/14
1/15/88
7/31/14
4/30/11
5/31/96
7/31/14
4/30/11
3/20/93
9/10/95
3/20/93
3/12/14
7/31/14
9/10/95
4/30/96
5/31/96
3/20/96
3/12/14
7/31/14
6/10/96
11/15/92
9/21/95
9/14/95
3/12/14
8.105%
8.639%
9.485%
9.423%
9.135%
8.858%
9.265%
8.435%
9.195%
7.495%
9.415%
9.435%
8.705%
9.453%
9.525%
8.675%
9.056%
8.888%
9.285%
9.515%
8.723%
8.902%
8.735%
8.945%
9.105%
9.315%
9.055%
8.515%
8.975%
8.259%
8.836%
AMOUNT
OF ADVANCE
AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#569
#570
#571
#572
#573
#574
#575
#576
#577
#578
#579
#580
#581
2/3
2/6
2/10
2/13
2/13
2/17
2/17
2/19
2/21
2/24
2/24
2/24
2/28
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Note
+Note
Note
+ttote
#384
#385
#386
#387
2/4
2/11
2/12
2/19
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Botswana 4
Dominican Republic #8
Egypt 6
Greece 15
Portugal 1
Portugal 2
Turkey 18
Spain 8
Turkey 18
Botswana 2
Egypt 7
Greece 14
Morocco 13
Egypt 7
Greece 14
Indonesia 10
Portugal 2
Indonesia 10
Turkey 18
Egypt 7
Indonesia 10
Dominican Republic 8
Morocco 13
Thailand 12
Turkey 18
Egypt 7
El Salvador 7
Jordan 11
Morocco 12
Zaire 4
Turkey 18
+rollover
2/3
2/3
2/3
2/3
2/3
2/3
2/3
2/4
2/4
2/5
2/5
2/5
2/5
2/6
2/7
2/7
2/7
2/10
2/10
2/10
2/10
2/12
2/12
2/12
2/12
2/13
2/13
2/13
2/13
2/19
2/19
INTEREST
RATE
(other than
semi-annual)
Page 3 of 7
FEDERAL FINANCING BANK
FEBRUARY 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(other than
semi-annual)
INTEREST
RATE
(semiannual
Foreign Military Sales (Cont'd)
Egypt 7
Egypt 6
Jordan 11
Turkey 18
Egypt 7
Botswana 4
Philippines 10
Egypt 7
2/19
2/24
2/24
2/24
2/26
2/27
2/27
2/28
$ 2,595,339.66
46,500.00
36,997.74
3,734,513.67
9,045,211.36
670,221.28
175,586.00
1,312,715.00
7/31/14
4/15/14
11/15/92
3/12/14
7/31/14
7/25/92
7/15/92
7/31/14
9.046%
8.885%
8.285%
8.700%
8.745%
8.051%
8.275%
8.455%
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
Atlanta, GA
Indianapolis, IN
Peoria, IL
•Janesville, WI
Indianapolis, IN
San Diego, CA
Chicago, IL
Louisville, KY
Newport News, VA
South Bend, IN
•Seaside, CA
+St. Louis, MO
•Newport News, VA
Mayaguez, PR
Santa Ana, CA
Masillon, OH
Montgomery County, PA
Springfield, MA
Boston, MA
8.743%
8.696%
8.717%
8.743%
arm.
ann.
ann.
ann.
2/3
2/3
2/3
2/3
2/3
2/6
2/12
2/12
2/13
2/18
2/18
2/18
2/18
2/20
2/24
2/26
2/26
2/26
2/28
2,600,000.00
668,500.00
5,945,000.00
393,345.00
6,180,000.00
1,677,900.00
150,000.00
674,000.00
132,300.00
322,371.91
833,700.00
13,000,000.00
2,151,885.00
3,073.18
255,000.00
80,000.00
837,000.00
212,000.00
113,163.20
2/3/92
5/1/90
2/1/91
2/3/92
3/3/86
8/1/86
8/16/04
2/2/87
2/18/86
2/18/92
2/18/92
2/15/87
2/18/92
8/1/86
8/15/86
9/15/86
5/15/87
8/1/86
3/3/86
8.560%
8.515%
8.535%
8.560%
7.315%
7.555%
9.205%
7.805%
7.465%
8.351%
8.351%
7.725%
8.351%
7.605%
7.535%
7.575%
7.785%
7.525%
7.385%
2/18
2/28
43,583,218.74
43,583,218.74
2/28/86
4/15/86
7.365%
7.385%
2/24
151,797.40
10/1/92
8.317%
8.232% qtr.
1/2/18
2/3/88
1/3/17
1/3/17
1/3A7
12/31/18
3/31/88
1/3/17
12/31/20
2/6/88
3/31/88
2/10/88
2/10/88
2/10/88
3/31/88
1/3/17
9.494%
8.115%
9.484%
9.484%
9.484%
9.485%
8.152%
9.357%
9.418%
8.115%
8.305%
8.275%
8.275%
8.275%
8.299%
9.511%
9.384% qtr.
8.034% qtr.
9.374% qtr.
9.374% qtr.
9.374% qtr.
9.375% qtr.
8.071% qtr.
9.250% qtr.
9.310% qtr.
8.034% qtr,
8.221% qtr.
8.191% qtr.
8.191% qtr,
8.191% qtr,
8.215% qtr,
9.401% qtr,
'
9.417% ann.
7.953% ann.
8.525%
8.525%
7.874%
8.525%
ann.
ann.
ann.
ann.
7.602% ann.
7.937% ann.
DEPARTMENT OF THE NAVY
Ship Lease Financing
Matthiesen
+Matthiesen
Defense Production Act
Gila River Indian Community
RURAL ELECTRIFICATION ADMINISTRATION
Saluda River Electric #271
•French Broad Electric #245
•Saluda River Electric #186
•United Power #139
•South Texas Electric #200
•Tex-La Electric #208
Colorado Ute Electric #276
New Hampshire Electric #192
Hoosier Energy #202
•Tennessee Telephone #80
New Hampshire Electric #270
•Wabash Valley Power #104
•Wabash Valley Power #206
•Wabash Valley Power #206
•Wolverine Power #101
•Wolverine
Power #182
•maturity
extension
+rollover
2/3
2/3
2/3
2/3
2/3
2/3
2/4
2/5
2/6
2/6
2/10
2/10
2/10
2/10
2/10
2/10
1,610,000.00
1,000,000.00
960,000.00
3,010,000.00
422,000.00
750,000.00
1,494,000.00
15,815,000.00
3,000,000.00
1,217,000.00
286,000.00
4,062,000.00
821,000.00
1,981,000.00
89,000.00
3,497,000.00
Page 4 of 7
FEDERAL FINANCING BANK
FEBRUARY 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
$ 4,458,000.00
•Wolverine Power #183
2/10
88,000.00
•Western Farmers Electric #64 2/10
8,500,000.00
•Western Farmers Electric #133 2/10
2,193,000.00
•Western Farmers Electric #220 2/10
980,000.00
2/10
•Soyland Power #165
7,900,000.00
2/10
•Sunflower Electric #174
1,485,000.00
2/13
KEPCO #313
2,000,000.00
2/13
•South Texas Electric #109
1,438,000.00
2/13
11,450,000.00
•Wolverine Power #101
2/14
8,000,000.00
2/18
Buckeye Power #314
2,257,000.00
2/18
•Sunflower Electric #151
2/18
562,000.00
•Brazos Electric #230
557,000.00
2/18
•Dairyland Power #160
2/18
540,000.00
•Dairyland Power #173
970,000.00
2/18
•Colorado Ute Electric #198
2/18
25,000,000.00
•New Hampshire Electric #192
506,000.00
2/18
2/19
466,000.00
•Basin Electric #137
28,871,000.00
2/20
•East Kentucky Power #140
2/21
873,000.00
Tel. Ut. of E. Oregon #256
1,154,000.00
2/21
Oglethorpe Power #246
2/21
6,181,000.00
•Colorado Ute Electric #96
2/24
745,000.00
•Dairyland Power #54
2/24
1,299,057.00
•East Kentucky Power #188
2/24
1,505,000.00
•Colorado Ute Electric #96
2/24
300,000.00
2/24
1,150,000.00
•Colorado Ute Electric #168
2/25
414,000.00
•Colorado Ute Electric #203
2/27
6,459,000.00
•Central Electric #131
2/27
3,517,000.00
•Western Illinois Power #162
2/27
13,511,000.00
New Hampshire Electric #270
2/27
8,604,000.00
•Plains Electric #158
2/27
2,396,000.00
•Plains Electric #158
2/27
1,120,000.00
•Plains Electric #158
2/27
3,420,000.00
2/27
600,000.00
•Cooperative Power #130
2/28
2,660,000.00
•Cooperative Power #156
2/28
2,973,000.00
New Hampshire Electric #270
2/28
5,092,000.00
North Carolina Electric #268
2/28
28,000.00
United Power #86
2/28
500,000.00
•Allegheny Electric #175
•Allegheny Electric #175
•Tri-State G&T #79
State & Local
Development Company Debentures
*Tri-State
G&T #177
•Southern Illinois Power #38
Columbus
Countywide
Dev. Corp. 2/5
52,000.00
SMALL
BUSINESS
ADMINISTRATION
Ashtabula County 503 Corp.
2/5
55,000.00
65,000.00
Southern Nevada CDC
2/5
84,000.00
Ashtabula County 503 Corp.
2/5
85,000.00
Middle Flint Area Dev. Corp. 2/5
97,000.00
Central Virginia Ec. Dev. Corp.2/5
105,000.00
Iowa Business Growth Co.
2/5
119,000.00
Rural Missouri, Inc.
2/5
132,000.00
Pennyrile Area Dev. DL«t., Inc.2/5
138,000.00
San Diego County LDC
2/5
160,000.00
Dev. Corp. of Middle Georgia 2/5
162,000.00
295,000.00
San Diego County LDC
2/5
Coastal Enterprises, Inc.
2/5
•rollover
•maturity extension
9.511%
1/3/17
9.511%
V3A7
1/3/17
9.511%
V3/17
9.511%
1/3/17
9.511%
12/31/18
9.502%
12/31/15
9.312%
1/3/17
9.317%
3/31/88
12/31/15 8.219%
9.257%
12/31/14
12/31/18
9.079%
2/18/88
9.077%
2/18/88
8.115%
2/18/88
8.115%
2/18/88
8.115%
12/31/16
12/31/16 * 8.115%
12/31/20 9.078%
12/31/20 9.078%
2/22/88
9.037%
2/21/89
9.076%
V3/17
8.175%
2/24/88
8.295%
2/24/88
9.044%
2/24/88
8.055%
12/31/16
12/31/16 8.055%
8.055%
3/3V88
12/31/14 8.876%
12/31/16
8.876%
12/31/16 8.005%
3/31/88
8.673%
2/29/88
8.674%
2/31/88
8.674%
1/2/18
12/31/14 8.014%
8.005%
12/31/15
12/31/15 8.015%
12/31/18
8.672%
12/31/18
8.673%
3/3 V88
8.386%
8.386%
8.443%
8.443%
7.851%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2A/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
2/1/01
9.131%
9.401% qtr.
9.401% qtr.
9.401% qtr.
9.401% qtr,
9.401% qtr.
9.392% qtr,
9.206% qtr.
9.211% qtr,
8.136% qtr.
9.152% qtr.
8.978% qtr.
8.976% qtr,
8.034% qtr,
8.034% qtr.
8.034% qtr.
8.034% qtr,
8.977% qtr,
8.977% qtr.
8.937% qtr.
8.975% qtr.
8.093% qtr.
8.211% qtr.
8.944% qtr.
7.975% qtr.
7.975% qtr,
7.975% qtr,
8.780% qtr.
8.780% qtr.
7.926% qtr,
8.581% qtr,
8.582% qtr,
8.582% qtr.
7.935% qtr,
7.926% qtr,
7.936% qtr.
8.580% qtr.
8.581% qtr,
8.300% qtr,
8.300% qtr.
8.356% qtr,
8.356% qtr.
7.775% qtr
Page 5 of 7
FEDERAL FINANCING BANK
FEBRUARY 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
State & Local Development Company Debentures (Cont'd)
Bay Area Employment Dev. Co.
2/5
Brattleboro Dev. Credit Corp. 2/5
McPherson County SBD Assoc.
2/5
St. Louis County LDC
2/5
Tucson LDC
2/5
Tulare County Ec. Dev. Corp.
2/5
St. Louis County LDC
2/5
CDC of Mississippi, Inc.
2/5
Texas CDC, Inc.
2/5
Verd-Ark-CA Dev. Corp.
2/5
Birmingham Citywide LDC
2/5
Chester County SB Asst. Corp. 2/5
St. Louis County LDC
2/5
Tulare County Ec. Dev. Corp.
2/5
Jefferson County LDC
2/5
Old Colorado City Dev. Co.
2/5
Cleveland Area Dev. Fin. Corp. 2/5
Gr. Metro. Chicago Dev. Corp. 2/5
Fargo-Cass County. Ind. D.C.
2/5
Nine County Dev., Inc.
2/5
South Eastern Ec. Dev. Corp.
2/5
Evergreen Community Dev. Assoc.2/5
South Shore Ec. Dev. Corp.
2/5
Gr. Salt Lake Bus. District
2/5
Charlotte CDC
2/5
Tulare County Ec. Dev. Corp.
2/5
Centralina Dev. Corp.
2/5
Lake County Ec. Dev. Corp.
2/5
Columbus Countywide Dev. Corp. 2/5
Tulare County Ec. Dev. Corp.
2/5
Long Island Dev. Corp.
2/5
Lorain County CDC
2/5
CDC of Mississippi, Inc.
2/5
Granite State Ec. Dev. Corp.
2/5
Northwest Arkansas CDC
2/5
Northwest Arkansas CDC
2/5
Nevada State Dev. Corp.
2/5
Northeast Louisiana Ind., Inc. 2/5
Ohio Statewide Dev. Corp.
2/5
Indiana Statewide CDC
2/5
CDC of N.E. Georgia, Inc.
2/5
Long Island Dev. Corp.
2/5
Nevada State Dev. Corp.
2/5
Wisconsin Bus. Dev. Fin. Corp. 2/5
Asheville-Buncombe Dev. Corp. 2/5
Evergreen Community Dev. Assoc.2/5
Ocean State B.D.A., Inc.
2/5
Neuse River Dev. Auth., Inc.
2/5
MSP 503 Dev. Corp.
2/5
Wilmington Indus. Dev. Inc.
2/5
Texas Panhandle Reg. Dev. Corp.2/5
Gr. Southwest Kansas C X
2/5
New Haven Comm. Invest. Corp. 2/5
San Diego County LDC
2/5
Neuse River Dev. Auth., Inc.
2/5
Arrowhead Reg. Dev. Corp.
2/5
St. Louis County LDC
2/5
E.C.I.A. Bus. Growth, Inc.
2/5
Wilmington Indus. Dev., Inc.
2/5
Mentor Ec. Assistance Corp.
2/5
Treasure Valley C D . Corp.
2/5
St. Paul 503 Dev. Co.
2/5
Union County EDC of Sacramento 2/5
357,000.00
378,000.00
34,000.00
34,000.00
45,000.00
61,000.00
62,000.00
66,000.00
69,000.00
73,000.00
93,000.00
95,000.00
98,000.00
103,000.00
105,000.00
105,000.00
108,000.00
121,000.00
122,000.00
126,000.00
134,000.00
145,000.00
145,000.00
147,000.00
160,000.00
173,000.00
182,000.00
184,000.00
187,000.00
193,000.00
207,000.00
210,000.00
216,000.00
239,000.00
254,000.00
279,000.00
285,000.00
286,000.00
289,000.00
295,000.00
320,000.00
320,000.00
328,000.00
336,000.00
369,000.00
378,000.00
420,000.00
500,000.00
53,000.00
58,000.00
61,000.00
67,000.00
84,000.00
116,000.00
126,000.00
133,000.00
135,000.00
139,000.00
142,000.00
147,000.00
147,000.00
168,000.00
207,000.00
2/1/01
2/1/01
2A / 0 6
2/1/06
2/1/06
2/1/06
2/1/06
2/1/06
2/1/06
2/1/06
2A/06
2/1/06
2A / 0 6
2/1/06
2A/06
2/1/06
2/1/06
2/1/06
2/1/06
2/1/06
2A/06
2/1/06
2/1/06
2/1/06
2A / 0 6
2/1/06
2/1/06
2/1/06
2/1/06
2/1/06
2A / 0 6
2/1/06
2/1/06
2/1/06
2A / 0 6
2/1/06
2/1/06
2/1/06
2A/06
2/1/06
2A / 0 6
2/1/06
2A / 0 6
2/1/06
2A/06
2/1/06
2A / 0 6
2/1/06
2/1/11
2/1A1
2/1/11
2/1A1
2/1/11
2/1A1
2/1/11
2/1A1
2/1/11
2/VH
2/1/H
2/VH
2/1/H
2/1/11
2/1/11
9.131%
9.131%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.323%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
INTEREST
RATE
(other than
semi-annual)
Page 6 of 7
FEDERAL FINANCING BANK
FEBRUARY 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)
212,000.00
San Francisco Indus. Dev. Fund 2/5
218,000.00
2/5
Clay County Dev. Corp.
227,000.00
2/5
Amador Ec. Dev. Corp.
231,000.00
2/5
Treasure Valley CDC
246,000.00
2/5
la Habra LDC, Inc.
268,000.00
Warren Redev. & Planning Corp. 2/5
353,000.00
Ocean State Bus. D.A., Inc.
2/5
360,000.00
San Diego County LDC
2/5
Small Business Investment Company Debentures
2/1/11
2/1/H
2/1/11
2/1/11
2/1/11
2/1/11
2/1/11
2/1/H
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
9.414%
500,000.00
500,000.00
1,000,000.00
4,200,000.00
480,000.00
300,000.00
2,000,000.00
1,000,000.00
500,000.00
500,000.00
400,000.00
500,000.00
2/1/93
2/1/93
2/V96
2/1/96
2/V96
2/1/96
2/1/96
2/1/96
2/1/96
2/1/96
2/1/96
2/1/96
8.655%
8.655%
8.795%
8.795%
8.795%
8.795%
8.795%
8.795%
8.795%
8.795%
8.795%
8.795%
First Princeton Capital Corp. 2/19
Associated Capital Corporation 2/19
ASEA Harvest Partners II
2/19
Clinton Capital Corporation
2/19
Fundex Capital Corporation
2A9
GC&H Parnters
2/19
Questech Capital Corporation
2/19
Rocky Mountain Ventures Ltd.
2/19
Associated Capital Corporation 2 A 9
Threshold Ventures Inc.
2/19
Snared Ventures Inc.
2/19
S.W. venture Cap. of Texas Inc.2/19
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
619,327,813.54
+Note A-86-06 2/28
5/30/86
7.425%
+rollover
FEDERAL FINANCING BANK
FEBRUARY 1986 Commitments
BQRROVER
Bethlehem, PA
Lorain, OH
Miami, FL
Pasadena, CA
Sacramento, CA
Sacramento, CA
St. Louis, MO
Cajun Electric Power
Kodiak Electric Association
GUARANTOR
AMOUNT
COMMITMENT
EXPIRES
HUD
HUD
HUD
HUD
HUD
HUD
HUD
REA
REA
$ 633,000.00
700,000.00
5,958,400.00
178,246.17
750,000.00
805,302.00
15,000,000.00
200,000,000.00
1,603,000.00
2/15/87
9/1/86
8/1/87
7/15/86
2/15/87
2/15/87
2/15/87
2/24/90
3/31/93
MATURITY
2/15/87
9/1/86
8/1/87
7/15/86
2/15/87
2/15/87
2/15/87
12/31/20
12/31/20
Page 7 of 7
Program
Agency Debt
[< FINANCING BANK 1
HOLDINGS
I*
(in
(in millions)
millions)
Net Change
Net Change—FY 1986
February 28, 1986 January 31, 1986
Export-Import Bank $ 15,670.3
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
U.S. Railway Association
Agency Assets
Fanners Home Administration 63,774.0
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government-Guaranteed Lending
DOD-Foreign Military Sales 18,542.4
DEd.-Student roan 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* $ 153,418.4
•figures may not total due to rounding
225.8
14,673.0
1,690.0
73^9
105 9
122.1
3]4
3,724.3
30.0
5,000.0
288.7
32.2
2,111.4
405.3
35.1
27.8
887.6
1,469.6
7.3
60.0
20,739.0
1,059.8
688.5
1,728.5
65.6
177.0
$ 15,670.3
225.2
14,690.0
1,690.0 .
73.8
64,354.0
105.9
122.1
3.4
3,724.3
30.5
2/1/86-2/28/86
$ -0-
0.7
-17.0
-0-0-580.0
-0-0-0-0-0.5
18,391.3
5,000.0
281.1
32.2
2,111.4
405.3
35.1
27.8
887.6
1,426.0
151.1
7.1
0.2
-0-
60.0
20,677.5
1,050.2
674.7
1,709.8
65.7
177.0
$ 153,709.3
-07.6
-0-0-0-0-0-043.6
61.5
9.6
13.8
18.7
-0-0$ -290.9
10/1/85-2/28/86
$ 261.3
3.7
292.0
-0-0-395.0
-3.3
-0.7
-2.7
-0-2.9
453.8
-0-0.7
-1.3
-34.7
-3.1
-0-0.4
-0156.5
1.5
-0-936.5
35.9
92.8
77.1
-88.0
$ -94.8
-0-
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
For Immediate Pelease
April 11, 1986
Contact:
Charlie Powers
566-5252
TFEASUFY DEPARTMENT ASSESSES PENALTY AGAINST
INTEPFIPST CORPORATION UNDER BANK SECRECY ACT
The Department of the Treasury announced today that
TnterFirst Corporation, a bank holding company headquartered in
Dallas, Texas, has agreed to a settlement that requires the bank
to pay a civil penalty of $315,000 for failure to report 1,261
currency transactions as required by the Bank Secrecy Act.
Francis A. Keating, II, Assistant Secretary (Enforcement),
who announced the penalty, said the penalty represented a
complete settlement of TnterFirst's civil liability for these
violations. Keating said TnterFirst cooperated fully with
Treasury. This cooperation and InterFirst's history of
assistance to law enforcement authorities were considered in
assessing the amount of the penalty. InterFirst has instituted
measures to ensure future compliance with the Bank Secrecy Act
throughout its system.
The Department of the Treasury has no evidence that
TnterFirst engaged in any criminal activities in connection with
these reporting violations.
B-541
TREASURYNEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
;f ROOM 5310
FOR IMMEDIATE RELEASE
April 14, 1986
RESULTS OF TREASURY'S WEEKLY. BILL AUCTIONS
Tenders for $7,016 million of 13-week bills and for $7,033 million
of 26-week bills, both to be issued on April 17, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing
July 17. 1986
Discount Investment
Price
Rate
Rate 1/
Low
5.83%a/
6.00%
High
5.85%
6.02%
Average
5.84%
6.01%
a/ Excepting 1 tender of $1,035,000.
26-week bills
maturing October 16. 1986
Discount Investment
Price
Rate
Rate 1/
98.526
98.521
98.524
5.90%
5.93%
5.93%
6.17%
6.20%
6.20%
97.017
97.002
97.002
Tenders at the high discount rate for the 13-week bills were allotted 15%.
Tenders at the high discount rate for the 26-week bills were allotted 58%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Accepted
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
y
52,300 $
52,300
22,744,260
5,784,260
30,695
30,695
105,740
54,435
54,440
44,440
59,810
40,360
2,377,615
386,690
76,580
46,880
42,805
17,455
67,690
67,190
41,395
50,645
84,200
1,835,550
365,580
365,580
Accepted
. $
33,675
: 22,987,250
25,485
:
29,695
140,770
:
53,230
1,837,685
78,060
44,085
39,450
32,515
:
1,605,570
417,945
$
32,175
5,545,350
25,485
29,695
103,170
38,450
324,525
50,060
31,485
38,950
25,415
370,150
417,945
$7,015,880
' $27,325,415
$7,032,855
$3,777,540
1,183,710
1,183,710
$ 25,809,080 $4,961,250
1,695,830
1,695,830
$23,814,915
956,600
$24,771,515
$3,522,355
956,600
$4,478,955
1,650,000
1,650,000
903,900
903,900
: $27,325,415
$7,032,855
$
$ 27.863,710
$ 24,625,370
358,800
358,800
$ 27,863,710
$7,015,880
Equivalent coupon-issue yield.
B-r)i42
Received
:
TREASURYNEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY BILlii HwFERING
". ROOM 5310
April 15, 1986
The Department of the Treasury, by 'tliis* public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,000 million, to be issued April 24, 1986.
This offering
will result in a paydown for the Treasury of about $200
million, as
the maturing bills are outstanding in the amount of $14,194 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, April 21, 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
January 23, 1986,
and to mature July 24, 1986
(CUSIP No.
912794 KX 1 ) , currently outstanding in the amount of $7,238 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
April 24, 1986,
and to mature October 23, 1986
(CUSIP No.
912794 LH 5 ) .
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 April 24, 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 $840
million as agents for foreign and international monetary authorities, and $3,258 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-543
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 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
rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041
For Immediate Release
April
Contact: Bob Levine
1 5 , 1986
(202) 566 2041
STATEMENT ON ECUADOR
The United States Government has assured the Government of
Ecuador of Its support for Ecuador's continuing
adjustment e f f o r t s .
economic
The United States praises these efforts
particularly In light of the recent difficulties stemming
the oil price d r o p .
In this c o n n e c t i o n , the Treasury
from
Department
is actively c o n s i d e r i n g , in consultation with the appropriate
Ecuadorian a u t h o r i t i e s , provision of additional
financing-to strengthen Ecuador's financial
B-544
short-term
position.
TREASURY NEWS
epartment of the Treasury • Washington, D-C. .• TefepJione 566-2041
AFR Zi 4 IR PH 'BR
DE -ARTHUKT :' THE TREASURY
STATEMENT OF THE HONORABLE JAMES A. BAKER, III
SECRETARY OF THE TREASURY
OF THE UNITED STATES
BEFORE THE OECD MINISTERIAL MEETING
APRIL 17, 1986
PARIS, FRANCE
Assuring Sustained Economic Growth and Adjustment
Mr. Chairman, Secretary General Paye, Distinguished Colleagues.
The Need for Cooperation
One year ago, in different economic circumstances, I suggested
that we form a partnership for growth. The principal focus of our
discussions then was on economic problems — sluggish domestic
performance, structural barriers to growth and employment creation;
and the persistence of large and growing external imbalances.
Today, though conditions have changed, that concept of
partnership remains valid. There have been important improvements
in the environment and short-run prospects for many weaker economies, but we still need to act together -- cooperatively and
effectively — to take full advantage of our improved
opportunities.
o We can say with the advantage of hindsight that when we
last met, the dollar — and, in mirror-image, the major
non-dollar currencies — had reached and passed a major
turning point. From the peak of late February last
year, the dollar has declined 22 percent on a tradeweighted basis against the other major currencies.
Against the Yen and the DM the dollar has declined 31
and 33 percent, respectively.
o The dramatic decline in oil prices is a second major
change in the environment. We believe that it is, on
balance, overwhelmingly favorable to the world economy,
and to the adjustment of external imbalances.
o We hear of renewed dynamism in Europe, and of Japanese
efforts to stimulate domestic demand.
- 2 -
In the remainder of my remarks, I want to suggest ways in
which we can best take advantage of these developments to improve
prospects for growth and adjustment of external imbalances. Let
me turn first to oil prices.
The effect of lower oil prices is highly favorable; it really
has a double-barreled effect, on external imbalances as well as
domestic performance.
o The direct effect lowers substantially the import bill
of most industrial and developing countries; the U.S.
import bill should fall by about $18 billion per year.
o We expect lower oil prices to add up to a point to real
GNP growth in Germany in the first year; the rest of
Europe should equally benefit, and even the UK will gain
in the long run from stronger growth in her major
trading partners.
o We expect OECD inflation to be cut by up to two points
and Germany and Japan could experience zero or even
negative inflation rates.
The latest round of discount rate cuts reinforces the favorable effects of lower oil prices; in addition to demonstrating the
benefits of sustained anti-inflation policies, it illustrates the
importance of cooperative action.
The U.S. is doing its share. Specifically., we are expecting
strong growth, cutting government spending and reducing our budget
deficit, and seeking pro-growth tax reform. Let me now turn to
the U.S. economy.
U.S. Domestic Economic Outlook
The U.S. economy is now in its fourth year of expansion.
Strong real growth and moderate inflation are projected for 1986
and beyond.
We expect 4 percent real growth from fourth quarter 1985 to
fourth quarter 1986, reflecting strong residential investment
activity plus a rebuilding of inventories. Consumption and
capital investment should rise moderately.
The slowdown in U.S. real growth, to just under 2 percent
average annual rate in the last year and one half, was largely an
inventory phenomenon. Total domestic final demand has remained
strong. We expect this underlying strength to continue, while
inventory investment picks up some. The expected flattening out
of net exports in real terms will also contribute to GNP growth
in the short term. Falling oil prices and other favorable
developments are causing upward revision of many private
forecasts.
- 3 -
o
Short-term interest rates are down by about 2 percentage
points and long-term rates by 3-4 percentage points in
the last year. This should help to stimulate interestsensitive sectors of the economy.
o U.S. stock and bond markets have been rallying strongly
during much of this year, reflecting increasing optimism
over the economic and financial outlook.
o Inflation remains subdued. A disinflationary process is
still underway in energy, agriculture and other sectors of
the economy. Money wages are rising slowly and there are
few signs of any emerging inflationary pressures.
On the fiscal policy front, we are taking meaningful action
to cut the budget deficits. As you know, the Gramm-RudmanHollings Act provides a mechanism for reducing Federal spending
and the deficit, and is designed*to produce a balanced budget by
1991.
The President's FY 1987 budget, announced on February 5,
meets or exceeds the GRH targets. In FY 1987, the budget deficit
would be reduced to $144 billion (3.2 percent of GNP). The
deficit would continue to be reduced steadily under GRH, falling
below 1 percent of GNP by 1990 and reaching balance by 1991.
Outlays would continue to grow in absolute terms along the
path projected in the new budget, but the rate of advance would be
reduced significantly. Federal outlays would decline steadily as
a ratio to GNP from 24 percent in 1985 to below 19 percent in
1991. Receipts would grow strongly as the economy itself grew,
but receipts would remain close to a 19 percent ratio to GNP —
slightly above historical experience.
The only alternatives to domestic spending cuts along the
lines indicated in the President's budget are to raise taxes, to
lower defense spending, or to cut social security benefits, none
of which is acceptable. President Reagan has made control of the
size of government, to release needed resources to the private
sector, an urgent national priority. He also retains his firm
commitment to continuing tax reform to remove disincentives to
effort and efficiency, and to keeping inflation under control.
I might note that we are hearing expressions of concern that
success in the U.S. effort to reduce federal outlays and our
budget deficit will be bad for the global economy, since it would
cause a slowdown in U.S. growth. This seems ironic, in view of
the volume of complaints about large U.S. deficits before we took
this action.
We believe such concerns are ill-founded, and our growth
forecast includes the effects of Gramm-Rudman in reducing our
budget deficit. The favorable factors I have cited, notably
- 4 lower oil prices and substantial interest rate declines, will
mean that the private sector quickly takes up any slack due to
deficit reduction.
The External Situation
Exchange rate changes over the past year, and lower oil
prices, should produce a substantial reduction in the projected
U.S. trade and current account deficits from what they would have
been, though they will remain at politically unsustainable levels.
Reflecting the lower dollar, improved foreign growth
prospects, and lower oil prices, we now believe the U.S. trade
deficit will gradually improve this year and in 1987.
o For 1986, we now project a trade deficit of about $125
billion — $20 billion lower than we projected last fall
— and a current account deficit about $120 billion.
o We expect a further substantial decline in trade and
current account deficits, to below $100 billion, for 1987.
This outlook is heavily dependent on assumptions as to growth
rates at home and abroad, as well as the changes in exchange rates
which have occurred over the past year. In particular, we expect
growth in the other major industrial countries to strengthen
relative to the U.S., thus closing the "growth gap" which has been
a major factor in the strong dollar and widening U.S. external
deficits.
o Exchange rate changes to date, along with lower oil prices,
are the major factor in the projected reversal of the U.S.
trade and current account deficits.
o But by late 1987 the exchange rate movements to date will
have taken their full effect, and the "growth gap" will
reassert itself, causing our trade and current account
deficits to widen even further.
The 1987 level itself — in the $100 billion range — is not
politically sustainable.
I must tell you frankly that protectionism in the U.S. is not
dead. Our ability to resist a resurgence is seriously weakened if
we cannot hold out the realistic prospect of sustained adjustment
in the U.S. external deficit in future years, well beyond the
improvement now projected for 1986 and 1987. And I might add that
our efforts to hold the line are not helped when the EC imposes
GATT-illegal restrictions to limit our agricultural sales to
Portugal.
Basically, there are only two fundamental ways the U.S.
imbalance can be reduced to sustainable levels over time:
- 5 o
By reversing the "growth gap" between the U.S. and
our trading partners — both in the OECD and in the
LDCs; or
o Through further changes in relative cost and price
performance, including exchange rate change.
We all agree that U.S. recession is not the way to alter
relative growth performance. Fortunately a recession is not in
our forecast, nor in our policies.
The Need for Stronger Growth Abroad
Recent experience shows the importance of exchange rates as
powerful adjustment tools, and sensitive indicators of developments in fundamentals of policies and performance. We recognize
that changing fundamentals takes place over time; the effects show
up only gradually. But current trends and prospects suggest a
need for greater emphasis on achieving more balanced growth across
countries without cutting U.S. growth, and for less exclusive
reliance on exchange rate change in achieving more sustainable
pattern of external balances.
Recently, we have been hearing increasing optimism about the
growth outlook for other OECD countries. But the projected
improvements to date do little more than keep pace with the U.S.
outlook for 1986 and 1987. And substantial external imbalances
will persist -- particularly in Japan and Germany. For adjustment
to be sustained, we need stronger European and Japanese growth to
help reduce trade and current account imbalances further.
We believe that sharply lower oil prices do not alter this
goal; rather, potential growth effects make it more achievable.
Growth, Adjustment, and Oil Prices
Oil price declines, both in their magnitude and timing —
since they coincide with signs of independent European recovery —
offer a golden opportunity to strengthen growth. Stronger growth
not only helps intra-OECD adjustment, but is key (along with lower
interest rates) to the LDC debt strategy.
This leaves one basic question that is crucial to the
outlook: how can the other OECD countries take advantage of oil
price declines to contribute to adjustment of external imbalances
— not simply strengthening all current accounts, but improving
the pattern of external balances as well.
For Europe, a prerequisite to achieving stronger, more
sustained growth continues to be the removal of structural
rigidities, which thwart the efficient use of economic resources.
These structural barriers are especially troublesome in the labor
market, where they depress both the supply of and demand for
employment. The labor market rigidities we are concerned with
- 6 include high minimum wages, government regulations limiting the
ability of firms to hire and fire workers, and in some countries
excessively generous unemployment and welfare benefits which
undermine incentives to seek work. Such rigidities have a direct
effect in discouraging growth of employment. But they also have a
longer-term impact, through their effect on decisions to invest in
labor saving, rather than employment-creating, productive capacity.
Our partners face other structural problems that hinder
economic performance, in addition to labor market rigidities. A
number of these are the direct result of previous government policy
actions: for example, high marginal tax rates that unnecessarily
discourage private initiative and work effort, and taxes and
regulatory controls which stifle development of dynamic financial
markets.
Japan also faces structural barriers to more rapid growth,
especially growth of domestic demand which is crucial to adjustment
of Japan's large external surplus.
Japan is more dependent on imported energy than any other
industrial country. As a result, Japan is in a position to gain
relatively more than others in terms of a favorable impact on real
domestic growth from lower dollar oil prices. But this occurs only
if the gains are fully translated into growth of domestic demand.
At the same time, lower oil prices will result in a sizable
increase in Japan's current account surplus in 1986 and 1987.
On the other hand, recent exchange rate movements are likely
to cost Japan more in weakened trade competitiveness and export
stimulus than other countries, and this will have a negative effect
on overall real GNP growth. Thus it is extremely important that
the growth slowdown from yen appreciation be offset by higher
domestic demand from oil price gains and specific policies
undertaken to strengthen domestic investment and consumption.
More generally, the OECD needs to persevere with efforts to
improve the structure and efficiency of members' capital and
financial markets. As part of this process, I am pleased that
work is underway to strengthen and extend the OECD Codes of
Liberalization of Invisible Operations and Capital Movements to
cover the full range of bank and financial market operations.
In addition, we all need to keep our markets open. Stronger
growth and exchange rate realignment will be hampered in bringing
about adjustment of external imbalances if countries — especially
those in external surplus — restrict access to their markets to
protect inefficient domestic producers.
Finally, we need to provide greater impetus to ongoing
efforts to improve the functioning of the international monetary
system. The current international monetary system has both
strengths and weaknesses. It has provided a useful framework
for responding to the multiple global economic shocks of the
- 7 1970s and early 1980s. And recent cooperative efforts have helped
produce greater convergence of favorable economic performance and
more consistent policies among the major industrialized nations.
This has contributed to exchange rates which are more in line with
fundamentals, helping set the stage for a reduction in large
external imbalances.
This progress notwithstanding, the system continues to have
weaknesses which need addressing, both in terms of the framework
within which our economies relate, as well as in terms of underlying policy and performance weaknesses. The U.S. is committed to
work with others in an effort to find the best ways to strengthen
the system. We need to improve the functioning of the system, not
only to help us deal with the economic problems we face, but to
help avoid such problems in the future.
Conclusion
Since we last met, there has been a substantial change for the
better in performance and prospects for the world economy. But
this does not lessen the nature of the challenge we face, which
remains to cooperate more closely to implement policies which will
foster sustained noninflationary growth and orderly adjustment of
imbalances. Rather, the improved situation raises the potential
rewards of success.
Optimism, but not complacency, should be our attitude. We
know what needs to be done, and have made good progress in a number
of areas during the past year. We have come too far to relax our
efforts short of full success.
TREASURY NEWS
AprilD.C.
16, 1986
epartment of the Treasury • Washington,
• Telephone 566-2041
toZI 4 lepras
Utf'Ah'.'HIlHT
Assistant
THE TREASURY
J. Roger Mentz
Secretary of the Treasury for Tax
Policy
J. Roger Mentz was confirmed by the U.S. Senate as Assistant
Secretary of the Treasury for Tax Policy on April 1 1 , 1986 and
was sworn in on April 1 4 . He succeeds Ronald A. P e a r l m a n , who
returned to private law p r a c t i c e .
From December 1985 until his confirmation, Mr. Mentz served
as Acting Assistant Secretary of the Treasury (Tax P o l i c y ) .
From
April to December 1985 he was Deputy Assistant Secretary for Tax
Policy at the Department of T r e a s u r y .
Previously, he was partner
in the law firm of Mudge Rose Guthrie Alexander and Ferdon from
1966 to 1985.
Mr. Mentz earned a B.S.E. degree with honors in chemical ^
engineering from Princeton University in 1963. He received his
L.L.B. degree from the University of Virginia Law School in 1 9 6 6 ,
where he served as a member of the Virginia Law Review and was a
member of the Order of the Coif.
Mr. Mentz has served on the Executive Committee of the New
York State Bar Association Tax Section "si.nce 1973 and served as
Chairman of the Tax Section from 1 9 8 2 - 8 3 . He is also a member of
the American Bar Association Section of Taxation. Mr. Mentz was
an Adjunct Associate Professor at the New York University Law
School L.L.M. Program from 1 9 7 9 - 8 0 , where he taught a course in
international t a x a t i o n .
He has also written extensively on a
variety of tax i s s u e s .
M r . Mentz and his wife Marilyn have two c h i l d r e n , Steven and
Tanna .
o 0 o
B-546
TREASURY NEWS
epartment of the Treasury • Washington, p ^ f Telephone 566-2041
^Zl
4nPH 1 Bfi
STATEMENT OF THE HONORABLE FRANCIS A!?E iKJafftlG, II
ASSISTANT SECRETARY (ENFORCEMENT)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
APRIL 17, 1986
Mr. Chairman and Members of the Committee:
I sincerely appreciate the opportunity to appear before
you to discuss legislative responses to the problems of money
laundering, especially legislative initiatives that will enhance
Treasury's enforcement of the Bank Secrecy Act. This is my first
opportunity to testify before Congress on this subject since I
assumed the position of Assistant Secretary last December and
to affirm to you my commitment to rigorous Bank Secrecy Act
enforcement.
I am pleased to introduce Mr. Robert J. Stankey, the Acting
Director of the Office of Financial Enforcement, who I know
is a familiar figure to you, Mr. Chairman, and your staff.
Mr. Stankey has been with Treasury since the inception of the
Bank Secrecy Act. It is fair to say that he, more than any
other person, has been responsible for the development of the
Bank Secrecy Act into an effective law enforcement weapon and
cornerstone in Treasury's financial law enforcement program.
Update on Treasury's Bank Secrecy Act Enforcement
Before turning to the legislative measures under discussion,
I would like to briefly update the Committee on Treasury's Bank
Secrecy Act enforcement activities since my predecessor testified
before you last year in your hearings following the Bank of
Boston case. On February 14, 1986, we prepared for the Committee
a report on these activities which we have made available for
distribution today. I will highlight four topics from that
report - civil penalty assessment, improved Bank Secrecy Act
examination procedures, commitment of Treasury resources to Bank
Secrecy Act enforcement and regulatory amendments.
Civil Penalty Assessment
First, I would like to discuss Treasury's imposition of civil
penalties against financial institutions for past non-compliance.
B-547
-2In the wake of the publicity surrounding the Bank of Boston case,
and in good measure as a response to the hearing of this Committee, over sixty banks or bank holding companies have come forward
to Treasury with past violations of the Bank Secrecy Act. Some
have come forward as a result of bank regulatory examinations,
particularly those of the Comptroller of the Currency. To date,
fifteen civil penalties have been assessed under 31 U.S.C.
§ 5321, ranging from $112,000 to $4.75 million in the case
of Bank of America.
Other cases are under review, and we anticipate that
additional penalties will be assessed shortly. In many
instances, the cases are taking several months to conclude
because of the time required for banks to conduct an examination
of past compliance and to reconstruct past unreported transactions for late-filing of Currency Transaction Reports.
We want to emphasize that Treasury has not as yet closed the
door to volunteers, and we continue to encourage financial institutions to come forward to disclose past violations. Nonvolunteer banks will be dealt with more severely. Financial
institutions that have not filed required Currency Transaction
Reports for any reason have a continuing legal duty to do so.
Banks that become aware of past non-compliance and make no effort
to contact Treasury are running a serious risk. We are planning
a major effort to uncover these non-volunteers. This effort will
ultimately depend heavily on the support of the bank supervisory
agencies.
We believe that Treasury's rigorous enforcement of the Bank
Secrecy Act, including the imposition of publicly announced,
substantial civil penalties, where appropriate, has contributed
to enhanced awareness of the requirements of the Bank Secrecy
Act. As a consequence, and as confirmed in our dealings with
many banks and the increased volume of Currency Transaction
Reports, we believe that overall compliance has improved and that
compliance has become a high priority with many major financial
institutions.
Improved Examination Procedures
Another major initiative to ensure full compliance with the
Bank Secrecy Act has been Treasury's work with bank supervisory
agencies to improve and standardize Bank Secrecy Act examination
procedures.
As many of the civil penalty cases and the Bank of Boston
case demonstrated, the procedures being used by the examiners
were not sufficient to ensure that all violations of the Act
would be detected, particularly failures to report international
bank-to-bank transactions. These procedures needed to be
improved, and a number of other issues also had to be considered
in order to make compliance examinations more effective. These
issues included the maintenance of detailed workpapers, the
-3sharing of information among bank supervisory agencies, and the
uniform application of the examination procedures. To address
these matters, we have had a series of meetings with the Federal
bank supervisory agencies and others who have an interest in
improving the procedures used by examiners for checking the
compliance of financial institutions with the Bank Secrecy Act.
As a result of these consultations, we expect to send final
instructions on examination procedures to the supervisory
agencies this week. It is axiomatic that improved and aggressive
examination will foster improved compliance.
Our experience in the improvement and standardization of
examination procedures made clear to me the need for ongoing
interchange of ideas between Treasury and the agencies to which
Treasury has delegated Bank Secrecy Act enforcement responsibility. Therefore, I am convening a permanant Interagency
Working Group on Bank Secrecy Compliance, consisting of representatives of Treasury, Customs, IRS, the SEC, and the bank
supervisory agencies. The group will be chaired by the Deputy
Assistant Secretary (Law Enforcement) and will meet monthly or
more frequently as needed. We will use this forum to discuss not
only examination procedures, but mutual enforcement problems and
Treasury policy initiatives including revisions to regulations.
Commitment of Treasury Resources
In July, 1985, the Treasury Department established the Office
of Financial Enforcement to assist in implementing and administering the Bank Secrecy Act regulations. The establishment of
this office provided a focal point for Bank Secrecy Act related
activity within the Treasury Department and acknowledged the
increasing importance of the Act in Treasury's law enforcement
efforts. The office has broad responsibilities for the compliance activities of all agencies that have been delegated
responsibilities under the Act, and there has been an increased
commitment of staff resources to the office.
In addition to the increase in the Office of Financial
Enforcement, there has been a very large commitment of resources
by both the Customs and the IRS. As Assistant Commissioner
Wassenaar testified yesterday, the IRS has established a separate
division in Detroit to handle BSA reporting matters.
Regulatory Initiatives
Since last year, we have strengthened the Treasury Bank
Secrecy Act regulations in several respects. On May 7, 1985,
regulations became effective that designated casinos as
financial institutions subject to Bank Secrecy Act reporting
and recordkeeping requirements. As evidenced in hearings by
the President's Commission on Organized Crime last summer, money
laundering through casinos may have been even more widespread
than once thought. We believe that the new regulations have
reduced the attactiveness of the use of casinos for money
-4laundering.
A regulatory amendment pertaining to international transactions was published as a final rule last summer. Under the
regulations, Treasury will be able in the future to require a
financial institution or a selected group of financial institutions to report specified international transactions, including
wire transfers or cashier's checks, for defined periods of time.
We envision that this will require reporting of transactions with
financial institutions in designated foreign locations that would
produce information especially useful in identifying individuals
and companies involved in money laundering and tax evasion. Tne
Internal Revenue Service's Office of Criminal Investigations
is developing a plan for the initial use of this regulatory
authority.
We are also discussing a number of other regulatory
amendments, including regulatory solutions to problems of
"smurfing" and structuring transactions to avoid the reporting
requirements of the Bank Secrecy Act. These revisions are being
discussed within Treasury and with the Department of Justice and
should be published in the Federal Register within the next few
weeks. As with all amendments to the Bank Secrecy regulations,
Treasury will consider carefully the financial and operational
impact of regulatory changes on financial institutions as it
seeks to meet the needs of law enforcement.
Legislation
I would now like to address the various proposals under
discussion to bolster our attack against money laundering and
to improve Treasury's enforcement of the Bank Secrecy Act.
First is H.R. 2785 and 2786 (identical bills), the "Money
Laundering and Related Crimes Act," which was developed jointly
by the Departments of Justice and Treasury. I would like to
remark on the critical revisions to the Bank Secrecy Act contained in the bill. I understand that my colleague from the
Department of Justice, who will testify before you next week,
will address the provisions of the bill establishing the criminal
offense of money laundering and related revisions to Title 18.
Most important, under H.R. 2785 and 2786 the Secretary would
be given for the first time summons authority both for financial
institution witnesses and documents in connection with Bank
Secrecy Act violations. This authority was among the legislative
recommendations in the October, 1984 report of the President's
Commission on Organized Crime on money laundering and is also
contained in H.R. 1945 and H.R. 1367.
The Secretary may summon a financial institution officer,
or an employee, former officer, former employee or custodian of
records, who may have knowledge relating to a violation of a
recordkeeping or reporting violation of the Act and require
-5production of relevant documents. This authority is essential
both to investigate violations and to assess the appropriate
level of civil penalties once a violation is discovered.
This authority is essential to enforcement of the Bank
Secrecy Act with respect to miscellaneous non-bank financial
institutions such as casinos and foreign currency brokers, which
number in excess of 3,000. The responsibility for compliance
review of these institutions has been delegated to the Internal
Revenue Service. However, currently, the IRS summons authority
is restricted to Title 26 purposes. Therefore, in examining
these institutions IRS must rely on voluntary cooperation.
Under this bill, a summons would be issued only by the
Secretary or with his approval by a supervisory level official of
an organization to which the Secretary has delegated Bank Secrecy
Act enforcement authority, e .g., the Internal Revenue Service,
the Comptroller of the Currency or the Customs Service. An agent
or bank examiner in the field could not issue a summons on his or
her own authority. H. 1367 by contrast provides that Treasury
may not delegate summons authority. For Treasury, the ability
to delegate summons authority is a practical necessity.
The bill also provides for a civil penalty for negligent
violations of the Bank Secrecy Act. Currently, Treasury has
authority to assess civil penalties for "willful" violations
under 31 U.S.C. § 5321. "Willful" in a civil penalty context
means with specific intent or with reckless disregard of the
law. Nevertheless, mere negligent non-filing of currency reports
deprives the government of potentially useful law enforcement
information to the same extent as willful non-filings. The
prospect of penalties for negligent violations should encourage
financial institutions to give more attention to good compliance.
H.R. 2785 and 2786 also provide important revisions to the
Right to Financial Privacy Act (RFPA). The revisions to the RFPA
contained in the Administration's money laundering bill can be
considered as an adjunct to that bill, with application separate
from the subject of criminal money laundering legislation or
enforcement of the Bank Secrecy Act.
The most important and least controversial of the revisions
is the amendment to subsection 1103(c) of the RFPA, 12 U.S.C.
§ 3403(c). Currently, § 3403(c) provides that nothing in the Act
shall preclude a financial institution from notifying a government authority that the institution has information "which may be
relevant to a possible violation of any statute or regulation."
The statute gives no guidance on what information can be given
without running the risk of exposure to civil liability under
the RFPA. The proposed amendment sets out explicitly that enough
information can be given to enable Federal law enforcement
authorities to proceed with legal process, e .g., summons,
subpoena, or search warrant, in accordance with the RFPA. This
information at a minimum must include the nature of the sus-
-6picious activity, the name of the customer, and other identifying
information necessary to identify the customer or the account
involved.
We believe you should find very little opposition in the
financial community to this particular revision of the RFPA.
The revision imposes no new legal duty on financial institutions,
clarifies the right of financial institutions to act as good
citizens without risk of civil liability, far outweighs any
jeopardy to legitimate privacy interests, and would be of major
assistance to Federal law enforcement.
For consistent application throughout the United States,
this amendment must be accompanied by the proposed preemption
provision so that a financial institution that complies with the
RFPA will not run afoul of any more restrictive state privacy
laws. The proposed clarification of the "good faith defense to
civil liability is also needed to protect financial institutions
who cooperate with Federal law enforcement in good faith within
the confines of the RFPA.
In addition to the Administration's money laundering bill,
there is another legislative initiative on which I urge early and
favorable action. That is the bill discussed in this Committee
yesterday by Congressman Pickle.
This bill would prohibit structuring of currency transactions
to avoid the $10,000 currency transaction reporting requirement.
Structuring includes the well-known practice of "smurfing."
Recent decisions in three Federal Circuits have made it clear
that the current law is inadequate to sustain consistent prosecutions for structuring. The proposal would make a person who
structures transactions to avoid the currency reporting requirements, or who causes a financial institution not to file a
required report, subject to the criminal and civil sanctions
of the Bank Secrecy Act.
The bill also provides seizure and forfeiture authority for
currency related to a domestic (CTR) reporting violation or
interest in property traceable to the currency. The forfeiture
would not affect bona fide purchasers who took the currency or
property without notice of a reporting violation. Currently,
there is forfeiture authority only for monetary instruments
underlying violations of the reporting requirements for
internationally transported monetary instruments. The forfeiture
would not be applicable to domestic financial institutions
examined by a federal bank supervisory agency or a financial
institution regulated by the Securities and Exchange Commission.
With respect to the other bills before the Committee,
Treasury opposes two provisions in H.R. 1474. Section 3 of
H.R. 1474 would provide that every Bank Secrecy Act reporting
exemption be approved by the Secretary. Under the current
regulations (31 C.F.R. § 103.22(b)), a bank may exempt from
-7reporting certain cash deposits and withdrawals of accounts
of retail businesses in amounts commensurate with the lawful,
customary conduct of such a business. The bank has a continuing
duty to monitor the qualifications for such exemptions, and it
would be unwise, in our view, to shift the burden of monitoring
the eligibility of bank customers for exemptions away from the
bank. The bank is in the best position to know its customers and
changes in their status. The provision is accordingly
inefficient, overly burdensome and unnecessary.
Section 4 of H.R. 1474 would require that every person,
including every financial institution, report all outgoing
international wire transfers. As discussed above, with respect
to Treasury's new international transaction reporting regulations, Treasury already has authority under 31 U.S.C. § 5314 to
require reporting of international wire transfers. However,
wholesale reporting of international wire transfers would not be
in keeping with the restriction of § 5314 that Treasury consider
the need to "avoid burdening unreasonably a person making a
transaction with a foreign financial agency." This broad
reporting requirement would create a virtual blizzard of reports,
burdening financial institutions out of all proportion to the
utility of the information generated and would bury the Treasury
Department in an avalanche of reporting forms, all but a very few
of which would be unrelated to money laundering.
I would now like to turn to H.R. 4280. This bill would make
two major changes to the Bank Secrecy Act. First, it would amend
31 U.S.C. § 5313 to provide that the Treasury could only require
reporting of domestic currency transactions in excess of $10,000.
As you know, $10,000 is the reporting amount currently under
Treasury regulations. We disagree strongly with this restriction
on Treasury rulemaking flexibility and the ability to respond to
changing law enforcement needs. There may be instances where the
$10,000 reporting trigger is too high. For example, we have
discussed various ways to address the smurfing problem by
regulatory changes. One idea that has been circulated within
Treasury is to require reports at the time of cash purchases of
cashier's checks in excess of $3,000. This reporting requirement
or similar use of the regulations to address such changing law
enforcement problems would be precluded by H.R. 4280.
Another provision of H.R. 4280 would require a financial
institution to keep special records relating to any cash
transaction in excess of $3,000. Similar proposals have been
under discussion within Treasury and within the Department of
Justice as regulatory solutions to the various schemes being used
to avoid the currency reporting requirements. We believe that a
regulatory rather than legislative response is appropriate to
address these situations, so that we can maintain the flexibility
to respond to changing law enforcement needs. Moreover, in
considering
any
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-8law enforcement interests served.
Another bill introduced by Congressman Wortly provides that
Treasury review all exemptions not less than once a year and "in
any case in which there is a change in management or control of a
financial institution." As we have discussed above with respect
to H.R. 1474, the annual review of all exemptions is a practical
impossibility. However, we would have no objection to the review
of exemptions when there is a change in control. We generally
support increased attention to Bank Secrecy Act compliance at the
time of changes in control.
Finally, Mr. Chairman, I want to express my appreciation
for the continuing interest and support that you and the other
members of this committee have demonstrated for Treasury's
administration of the Bank Secrecy Act.
This concludes my prepared remarks. Mr. Stankey and I would
be pleased to answer any questions the Committee may have.
TREASURY NEWS
epartment of the Treasury • Washington^,*;..*"Telephone 566-2041
STATEMENT OF THE HONORABLE JAMES A. BAKER, III
SECRETARY OF THE TREASURY
OF THE UNITED STATES OF AMERICA
BEFORE THE MEETING OF THE OECD COUNCIL AT MINISTERIAL LEVEL
APRIL 17, 1986
PARIS, FRANCE
Toward Stronger Growth in the Debtor Nations
The international debt situation remains a challenge, not
only for individual debtor nations but for the international
community as a whole. However, recent developments give us
cause for increasing optimism that the problems of debtor
nations are manageable, and that growth can be restored through
cooperative efforts on the part of all of the key players.
One of the most important developments during the past year
has been the emergence of broad agreement among both creditor and
debtor nations that improved "growth" in the debtor nations is
essential to any resolution of their debt problems. The "Program
for Sustained Growth" which the United States proposed at the
Seoul meetings last October seeks to promote such growth.
This debt initiative has received broad and strong support
from major industrial country governments and their central
banks; the IMF, World Bank, and IDB; U.S. commercial banks
accounting for more than 95 percent of outstanding U.S. bank
claims on these countries, and national banking groups in all
other major creditor countries, including Canada, France,
Germany, Italy, Japan, the Netherlands, Sweden, Switzerland,
Saudi Arabia, and the United Kingdom.
We have also been heartened by the unanimous support for
this approach expressed by the Group of Ten Finance Ministers
and Central Bank Governors last week, and its endorsement by
both the Interim and Development Committees.
B-548
- 2 -
Improving the Global Environment
Understandably, a number of debtor nations have emphasized
the importance of improvements in the global economic environment
to support their own efforts to adjust their economies and
improve their growth prospects. It is, indeed, the fundamental
task of the industrial nations to help ensure a solid foundation
for the implementation of the debt initiative through efforts to
provide a world economic environment characterized by low inflation, low interest rates, sustained and more balanced growth, and
open markets.
As we discussed this morning, we are making considerable
progress in improving global economic prospects. Stronger
industrial country growth and lower inflation this year will
add $5 billion to developing nations' non-oil exports and reduce
their import costs by approximately $4 billion. The sharp reduction in both short and long-term interest rates since early last
year should reduce developing nations' debt service payments by
$11 billion. In addition, the recent dollar depreciation should
help reduce debt/export and debt service ratios for the debtor
nations. All of these factors should help improve the outlook
for commodity prices.
The sharp decline in oil prices will also help most debtor
nations through reduced oil import costs, stronger growth and
further interest rate reductions in industrial countries, and
increased trade opportunities. We estimate that it will reduce
oil import costs by an additional $13 billion for oil importing
developing nations. While the financing needs of the oil
exporting debtor nations will increase, we believe these
requirements can be managed within the framework of the
strengthened debt strategy.
These developments will contribute significantly to
promoting developing nations' growth and easing their debt
servicing obligations. All of this being said, however, these
measures should not be viewed as a "fourth leg" to the debt
initiative, but rather as a solid foundation upon which cooperative efforts in the debt area must rest.
Credible Policy Reform
The adoption of sound, growth-oriented, market-based macroeconomic and structural policies by the debtor nations themselves
is the key to the improvement of their growth prospects, to
encouraging increased equity investment, and to stimulating the
return of flight capital.
In the absence of such policy improvements, stronger
financial support from the international community will be
stymied, and growth will not materialize. Implementation of
- 3 -
the debt initiative therefore will depend critically on progress
toward implementing comprehensive economic policies in individual
debtor nations.
I recognize that these policies will take time to accomplish
fully, that they will differ among countries depending on their
individual circumstances, and that they will take time to put
in place. (It is heartening, however, that a number of debtor
nations are moving to reduce inflation and fiscal deficits, to
allow exchange rates to be market-determined, to rationalize and
privatize public enterprises, to adopt positive interest rates,
and to improve the investment climate as an incentive to the
return of flight capital.)
International Financial Institutions
I am also encouraged by the active role which the international financial institutions are playing in supporting these
efforts. The IMF should continue to play a central role in this
process, continuing to focus on sound macroeconomic policies,
particularly fiscal, monetary, and exchange rate policy. The
IMF now has existing or pending arrangements with 11 of the
major debtor nations.
It is also important for the Fund to work closely with the
World Bank, which, together with other development banks,
should assume an enhanced role in supporting growth-oriented
policies in the debtor countries. The World Bank's mission is
focused on longer-term development issues, and it will play a
key role in the structural policy area. Indeed, we expect that
much of the World Bank's new lending will be fast-disbursing
sector and structural adjustment loans as opposed to the more
traditional project loans.
The World Bank is already moving ahead to strengthen
procedures and policies to implement this expanded role. It is
currently assisting major debtors in the development of mediumterm adjustment programs. It also plans to implement procedures
which will streamline operations and provide for a more comprehensive review of lending priorities for individual countries.
Finally, Bank staff are working with private creditors in
considering ways to better mobilize additional support for
debtors' adjustment programs.
The World Bank currently has ample capacity to increase
annual lending commitments by some $2 - $2.5 billion above
FY 1985 and to concentrate that lending more heavily on the
large debtors with credible reform programs. The U.S. is 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. I firmly believe, however, that
crossing that line now would be counterproductive to the
initiative and to the debt strategy as a whole.
- 4 -
The World Bank currently has structural or sector loan
negotiations underway with 13 of the heavily indebted,
middle income debtors. New structural or sectoral adjustment
loans have already been signed with some of these countries,
including Ecuador and Argentina, both of which are also
discussing follow-on standby programs with the IMF. Other
countries are at different stages in implementing comprehensive,
growth-oriented economic programs. Implementation of the debt
initiative, therefore, will depend on the pace of negotiations
between individual debtor nations and the international financial
institutions.
It will also be essential for the commercial banks to
implement their pledges of financial support for debtors' reform
efforts. We expect the banks will be consulting closely with
both the IMF and the World Bank, as well as with the debtors
themselves. They must be ready to do their part once the debtors
have embarked on growth-oriented programs which have the support
of the Fund and the World Bank.
For the low income debtor countries, we are very pleased
with the action of both the Fund and the Bank on the Trust Fund
initiative. This initiative provides a major step forward in
Fund/Bank cooperation and a positive context for the IDA VIII
negotiations. We look forward to its implementation in order
that a basis for growth can also be established in those
countries as well, and my colleague, Deputy Secretary of State
John Whitehead, will have more to say about this initiative in
a moment.
Before concluding, I would like to mention three areas that
I believe deserve special attention: (1) efforts to improve the
investment environment in debtor nations, (2) the importance of
trade liberalization, and (3) tied aid credits.
Foreign Investment
Foreign investment must be an important component of our
growth strategy. It is non-debt creating financing, and therefore doesn't increase the debt service burden. It also can
provide a vehicle for the return of flight capital and a
significant stimulus to entrepreneurial dynamism, increased
efficiency, transfer of technology and managerial know-how
which can facilitate structural change and growth. A hospitable climate for both domestic and foreign banking institutions
would improve the efficiency and resource mobilization capability
of the local market. This will also improve opportunities for
swapping debt for equity, which has already had some success
in some of the Latin American countries.
- 5 -
For most developing nations, however, both domestic and
foreign investment has fallen significantly in recent years.
Foreign direct investment in developing countries has declined
from 20 percent of total flows in 1975 to just 11 percent in
1984. A number of factors underlie these trends, including:
— the increased availability of commercial bank
financing during the 1970s;
— domestic retrenchment and capital flight in response
to the debt crisis during the early 1980s;
— the imposition of new restrictions and performance
conditions on foreign investment; and
— perceptions of increased political risk on the part of
foreign investors, and poor growth prospects for the
economy as a whole.
Reversing this trend, like reversing capital flight,
will depend on a number of factors:
First, the adoption by debtors of sound macroeconomic
policies, including positive real interest rates,
realistic exchange rates, market-related prices, and
a concerted attack on inflation;
Second, liberalizing investment regimes, which will
signal investors of a more stable, predictable, and
transparent policy environment over the longer run; and
Third, enhanced assurance against political risk,
including expropriation and uncertainty about foreign
exchange convertibility.
Support for the creation of the MIGA can help to encourage
the flow of investment both to and among developing countries,
through encouraging needed policy reforms as well as through
its political risk and dispute settlement activities. Participation by developing countries in the negotiation of global
rules governing foreign investment in GATT as part of the new
round of trade negotiations could also help to improve the
investment climate.
Trade
Global trade liberalization and expansion through the new
trade round can provide a further boost to growth in the debtor
countries and deserves their active support and participation.
It does not make sense for these nations, however, to delay
trade policy reforms in their own economies which can contribute
to stronger growth while awaiting the completion ot global trade
negotiations. The United States is therefore prepared to consider
- 6 -
giving credit in the new round for trade liberalization measures
adopted as part of debtor nations' domestic policy reforms, and
subsequently bound in the GATT negotiations. We hope other
industrial countries will snow a similar willingness to give
appropriate credit for these measures.
It will also be important, however, for the OECD nations
to maintain open markets as growth improves to permit increased
export earnings for the debtor nations, and to maintain cover
on export credits for countries which adopt sound adjustment
policies. Officially supported trade finance is crucial to
maintaining essential imports in support of adjustment efforts.
In this regard, I was very pleased with the affirmation by the
Group of Ten Ministers and Governors last week of their willingness to cooperate regarding resumption of export credit cover
to countries implementing appropriate adjustment policies. I
hope that the OECD as a whole can similarly agree to move in
this direction.
Tied Aid Credits
Last April all OECD Ministers agreed that prompt action
should be taken to improve discipline and transparency over
tied and partially untied aid credits. Continued use of such
credits in order to promote exports distorts trade, misallocates aid, undermines the Export Credit Arrangement, and adds
unnecessarily to tension in international trade relations.
Despite the Ministerial mandate, the tied aid credit problem
has not been resolved in the past year, nor is it dwindling in
importance. Notified tied aid credits have increased from
$4 billion in 1982 to over $8 billion in 1985.
We have an opportunity to resolve this problem at this
Ministerial. The simplest and most direct solution is to raise
the level of concessionality. Significantly increasing the aid
component of tied and partially untied aid credits will limit
their usefulness as trade promotion devices.
The report of the Chairman of the Export Credits Group sets
the stage for resolution of this problem. The United States can
support most of the elements of the Chairman's proposal. In
particular, we can accept the Chairman:s proposal for staged
increases in the grant element for the middle income group of
developing countries provided that the final minimum permissible
grant element is high enough. We would consider a staged increase
to 35 percent, however, as too low.
We also can accept the proposal by the Chairman and the
European Community for a change in the method for calculating
the grant element to reflect the actual cost of aid as part of
a package with a significant increase in the grant element. We
oppose a lower grant element for partially untied aid credits.
- 7 -
I realize that these proposals will have a significant
impact on programs in a number of OECD governments, including
the United States. This impact is a necessary outgrowth of
achieving fair and equitable discipline over current practices
of tied and partially untied aid credits. Nonetheless, in
order to ease the immediate impact of these changes, we are
ready to agree with the Chairman's proposal to phase in both
the increase in the grant element and the proposed revision
in the method of calculating the grant element beginning on
July 1, 1986.
Japan has been making strong statements about the need
to reduce the Japanese trade surplus in order to reduce
international trade frictions. Consistent with this objective,
I would urge Japan to join the emerging consensus and go along
with the changes proposed by the European Community to resolve
the tied aid credit issue. It is no answer, in our view, to
say that the change in the method of calculating the grant
element penalizes low interest rate countries. Such countries
have had in effect a free ride for a long time and all this
does is cancel out a longstanding advantage.
The U.S. Congress is closely following our efforts to
increase discipline over tied and partially untied aid credits.
Earlier this week, the Senate and House of Representatives
adopted a resolution deploring the predatory use of tied and
partially untied aid credits and indicated that Congress would
be willing to take additional steps if successful negotiations
are not concluded.
Therefore, like Nigel Lawson, I urge Ministers to support
efforts to resolve this problem now. It is not a matter that
we should have to confront at the Summit or in other fora.
Conclusion
In summary, let me say that we are encouraged by the
positive developments which have occurred in recent months.
It is important, however, to maintain the momentum that already
exists, because much still remains to be done. We believe that
with a continued cooperative approach by all, the growth
aspirations of debtor countries can be realized — for their
benefit and that of the global community as a whole.
TREASURYNEWS
epartment of the Treasury • Washington, D.C. • Telephone
FOR RELEASE AT 4:00 P.M. , ,,„... -,in April 16, 1986
.;, i» ,"w 0, i 0 0 1 U
TREASURY TO AUCTION $9,750 MILLION OF 2-YEAR NOTES
R
18 r, ..n
The Department of the Treasury will,auction $9,750 million
of 2-year notes to refund $8,079 million:"br 2-year notes maturing
April 30, 1986, and to raise about $1,675 million new cash.
The $8,079 million of maturing 2-year notes are those held by the
public, including $452 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $9,750 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 $1,129 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
n_cL4Q
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED APRIL 30, 1986
April 16, 1986
Amount Offered:
To the public
$9,750 million
Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... Y-1988
(CUSIP No. 912827 TN 2)
Maturity Date
April 30, 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
October 31 and April 30
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, April 23, 1986,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Wednesday, April 30, 198 6
b) readily-collectible check .. Monday, April 28, 1986
TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone
L
^A.7.-:oH5310
5pR
^ 9 w M MS
" : " a r H £ H T C F ^ c TREASURY
For Release Upon Delivery
Expected at 9:30 a.m., EST
April 21, 1986
STATEMENT OF
J. ROGER MENTZ
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to discuss the
Treasury Department's views regarding the proposals in
Chairman Packwood's tax reform markup document (the
"Chairman's Plan") relating to Federal excise taxes and
tariffs. The proposals would make Federal excise taxes
and tariffs nondeductible for Federal income tax purposes,
increase the rate of Federal excise tax on certain wines to
the rate currently applied to beer, and adjust the rates of
Federal excise tax on alcohol and tobacco products and
certain fuels to reflect future price increases.
The achievement of fundamental tax reform is a central
goal of this Administration.
In the President's view, the
key elements of a revenue-neutral tax reform bill are a full
$2,000 personal exemption for both itemizers and nonitemizers, at least for individuals in the lower- and middleincome tax brackets; a rate structure with a maximum rate
B-550
-2-
no higher than 35 percent; tax brackets that reduce taxes
for middle-income -working Americans; basic tax incentives
for American industries, including those which depend upon
heavy capital investment in equipment and machinery; and
a minimum tax which allows no individual or business to
escape paying a fair share of the overall tax burden. The
President believes that these changes will promote future
economic growth, improve the fairness of the tax system,
and simplify the system for millions of individual
taxpayers.
As the tax reform process has moved forward, the
Administration, the House Ways and Means Committee, and
now the Senate Finance Committee have come to recognize
the difficulty of raising enough revenue from the income tax
system to accomplish fundamental changes. The Administration's tax reform proposals did not include provisions
comparable to those in the Chairman's Plan relating to
excise taxes and tariffs. Instead, we proposed general
base broadening to maintain the revenue neutrality of our
tax reform plan. We encourage renewed consideration of
those tax reform proposals made by the Administration and
not incorporated in the Chairman's Plan that would raise
additional revenues. In addition, we support efforts by
the Committee to develop alternative revenue raising
proposals that are consistent with the President's tax
reform goals. If, however, the base-broadening and other
revenue raising proposals that are accepted by the Committee
do not raise sufficient revenues, we could support raising
revenue through excise tax changes in the context of
revenue-neutral tax reform that meets the President's goals.
It is in that spirit that we consider the excise tax and
tariff proposals that are included in the Chairman's Plan.
My testimony is divided into three major sections,
corresponding to the three proposals in the Chairman's
Plan relating to excise taxes and tariffs: the denial of an
income tax deduction for Federal excise taxes and tariffs;
an increase in the excise tax rate on wine; and adjustments
in certain excise tax rates to reflect price changes. The
proposal to deny the deductibility of Federal excise taxes
and tariffs raises the most revenue and requires more
complex analysis than the other two proposals, so I will
turn to it first.
-3-
Proposal to Deny Deductibility of
Federal" Excise Taxes and Tariffs"
Background
Under current law, Federal excise taxes and tariffs are
imposed on a wide range of goods, services, and activities.
For fiscal year 1986, total Federal excise tax revenues are
estimated to be over $34 billion. Of this amount, approximately $17 billion are general tax revenues and the
remaining $17 billion are earmarked for designated spending
purposes. This earmarking occurs by way of an automatic
appropriation to a segregated trust fund, such as the
Highway Trust Fund, of an amount equivalent to the receipts
from certain excise taxes. A schedule listing the
significant Federal excise taxes and the amount of projected
revenues for fiscal year 1986 is attached as Appendix A.
During calendar year 1985, total Federal tariff collections
were approximately $11.5 billion. A schedule listing the
major categories of Federal tariffs is attached as Appendix
B. Although it is not possible in the time that is
available to me to discuss each of the Federal excise taxes
and tariffs, a brief description of several of the excise
taxes and tariffs that generate very substantial revenues
may be helpful.
Distilled Spirits. The Federal excise tax on distilled
spirits is imposed on the producer or importer of distilled
spirits at the rate of $12.50 per "proof gallon." This rate
was increased in October 1985 from $10.50 per proof gallon.
A proof gallon is the volume of distilled spirits containing
the same amount of alcohol as one gallon of 100 proof (50
percent alcohol) distilled spirits. For example, one gallon
of 80 proof distilled spirits is equal to 0.8 proof gallons,
and is subject to a Federal excise tax of $10.00. In
general, the excise tax on distilled spirits becomes payable
when the spirits are removed from the bonded premises of the
producer or importer. The excise tax typically is treated
as a cost of goods sold in determining the taxable income of
the taxpayer. The distilled spirits excise tax is expected
to generate receipts of $4.0 billion in fiscal year 1986.
Revenues from the tax are included in the general fund.
Wine. The Federal excise tax on wine is imposed on the
producer or importer of the wine. The rate of tax varies
depending on the alcohol content and carbonation of the
wine, as follows: $0.17 per gallon (a standard measure
gallon as opposed to a proof gallon) on still wines
containing not more than 14 percent alcohol; $0.67 per
gallon on still wines containing more than 14 percent
-4alcohol and not more than 21 percent alcohol; $2.25 per
gallon on still wines containing more than 21 percent and
not more than 24 percent alcohol; $2.40 per gallon on
artificially carbonated wines; and $3.40 per gallon on
champagne and other sparkling wines. Wines containing more
than 24 percent alcohol are taxed as distilled spirits. In
general, the tax becomes payable when the wine is removed
from the bonded premises of the producer or importer. The
excise tax typically reduces taxable income as a cost of
goods sold. Wine excise tax receipts are expected to be
$276 million in fiscal year 1986. Revenues from the tax are
included in the general fund.
Beer. The Federal excise tax on beer is imposed on the
producer or importer of the beer. The rate of tax is $0.29
per gallon ($0,226 per gallon in the case of certain small
domestic producers), and does not vary based on alcohol
content. In general, the excise tax on beer becomes payable
when the beer is removed from the bonded premises of the
producer or importer. The excise tax typically reduces
taxable income as a cost of goods sold. Beer excise tax
receipts are expected to be $1.6 billion in fiscal year
1986. Revenues from the tax are included in the general
fund.
Tobacco Products. The Federal excise taxes on
cigarettes and certain other tobacco products are imposed
on the manufacturer or importer of the products. The rate
of tax on most cigarettes is $8.00 per thousand ($0.16 per
pack of 20). In 1983, this rate was temporarily increased
to the present level from $4.00 per thousand ($0.08 per pack
of 20); the rate has been fixed at the present level by the
Consolidated Omnibus Budget Reconciliation Act of 1985
(P.L. 99-272). In general, the excise taxes on tobacco
products become payable when the products are removed from
the bonded premises of the manufacturer or importer. The
taxes typically reduce taxable income as a cost of goods
sold. Excise tax receipts from tobacco products are
expected to be $4.6 billion in fiscal year 1986. Revenues
from the taxes are included in the general fund.
Gasoline. The Federal excise tax on the sale or use of
gasoline is imposed on the producer or importer of gasoline
at the rate of $0.09 per gallon. The tax becomes payable at
the time of the sale or use by the producer or importer.
The tax typically reduces taxable income as a cost of goods
sold. After accounting for refunds and other adjustments,
the gasoline tax is expected in fiscal year 1986 to yield
$8.6 billion to the Highway Trust Fund and an additional $71
million to the Aquatic Resources Trust Fund. Revenues
included in the Highway Trust Fund are used for Federal-aid
highway and other ground transportation programs.
-5Diesel Fuel. The Federal excise tax on diesel fuel
is imposed on the seller (or, in the absence of a sale, on
the user) of diesel fuel used in a diesel-powered highway
vehicle. The rate of tax is $0.15 per gallon. This rate
was increased in August 1984 from $0.09 per gallon. The tax
becomes payable at the time a sale is made to an owner or
operator of a diesel-powered highway vehicle (or, in the
absence of a sale, at the time the fuel is used in a dieselpowered highway vehicle). The tax typically reduces taxable
income as a cost of goods sold. Receipts from the diesel
fuel excise tax are expected to be $2.6 billion in fiscal
year 1986. Revenues from the tax are included in the
Highway Trust Fund.
Heavy Trucks and Trailers. The Federal excise tax on
heavy trucks and trailers is imposed on the person who makes
a retail sale of (or, in the absence of a retail sale, who
uses) a truck or trailer chassis or body, or of a tractor of
the kind chiefly used for highway transportation in
combination with a trailer or semitrailer. The rate of tax
is 12 percent of the sales price of the truck or trailer.
Exclusions are provided for truck chassis or bodies suitable
for use with a vehicle having a gross vehicle weight of
33,000 pounds or less and for trailer and semitrailer
chassis and bodies suitable for use with a vehicle having a
gross vehicle weight of 26,000 pounds or less. The tax
typically reduces taxable income as a cost of goods sold.
Receipts from the heavy truck and trailer tax are expected
to be $1.2 billion in fiscal year 1986. Revenues from the
tax are included in the Highway Trust Fund.
Highway Truck Use. The Federal highway truck use
tax is an annual tax imposed on the user of any truck that
(together with the trailers customarily used in connection
with trucks of the same type) has a taxable gross weight of
at least 55,000 pounds. The rate of tax ranges from $100
per year, in the case of trucks having a taxable gross
weight of 55,000 pounds, to $550 per year, in the case of
trucks having a taxable gross weight of over 75,000 pounds.
These tax rates were reduced, and the weight threshold
increased, in July 1984, in conjunction with the increase
in diesel fuel tax rate described above. The highway
truck use tax typically is deducted as an ordinary and
necessary business expense. Receipts from the tax are
expected to be $0.4 billion in fiscal year 1986. Revenues
from the tax are included in the Highway Trust Fund.
Telephone Communications. The Federal telephone
communications tax is imposed on any person paying for
local telephone, toll telephone, or teletypewriter exchange
service. The tax is collected by the service provider. The
rate of tax is equal to three percent of the amount paid for
-6such communications services. In the case of telephone
services purchased by businesses, the tax typically is
deducted as an ordinary and necessary business expense. In
the case of telephone services purchased by nonbusiness
customers, the tax typically is treated as a personal
expense for which no deduction is allowed. Receipts from
the telephone communications tax are expected to be $2.6
billion in fiscal year 1986. Revenues from the tax are
included in the general fund.
Air Transportation. The Federal air transportation
tax is imposed on any person paying for transportation by
air that begins and ends in the United States or in a zone
encompassing parts of Canada and Mexico that are within
225 miles of the continental United States. The tax is
collected by the service provider. The rate of
tax is equal to eight percent of the amount paid for such
transportation. In the case of air transportation purchased
by businesses, the tax typically is deducted as an ordinary
and necessary business expense. In the case of air transportation purchased by nonbusiness customers, the tax
typically is treated as a personal expense for which no
deduction is allowed. Receipts from the air transportation
tax are expected to be $2.6 billion in fiscal year 1986.
Revenues from the tax are included in the Airport and Airway
Trust Fund. These funds are used to cover the cost of
Federal Aviation Authority operations, provide for air
traffic control modernization, and provide grants for
airports.
Windfall Profit Tax. The crude oil windfall profit
tax is imposed on the producer of domestically-produced
crude oil. Foreign-produced crude oil imported into the
United States is not subject to the tax. The producer is
the person holding the "economic interest" with respect to
the oil. This economic interest is normally shared by
various parties (including owners of royalty interests) who
participate in the production of the oil. The tax applies
to the "windfall profit" element in each barrel, i.e., the
excess (if any) of the removal price of the oil over its
inflation-adjusted "base price," less an adjustment for any
state severance tax. The base price of the oil and the rate
of windfall profit tax vary depending on the classification
("tier") of the oil and the identity of the producer. The
current average base prices of Tier 1, Tier 2, and Tier 3
oil are $18.43, $21.93, and $28.75, respectively. The rates
of tax on the windfall profit element of the oil range from
70 percent on Tier 1 oil to 22.5 percent on Tier 3 oil.
Independent producers are taxed at lower rates than
integrated oil producers on Tier 1 and Tier 2 oil, and are
not taxed at all on stripper well oil. The windfall profit
tax typically is deducted by the producer as an itemized
-7deduction under section 164(a)(5). The Administration's
1987 Budget forecast of receipts in fiscal year 1986 from
the windfall profit tax was $4.2 billion. At current price
levels for crude oil, however, the windfall profit tax is
not expected to generate a significant amount of revenue.
Revenues from the windfall profit tax are included in the
general fund.
Tariffs. Federal tariffs are imposed on the importer
of the product and become payable when the product enters
the customs territory of the United States. Tariffs
typically reduce the importer's taxable income as a cost of
goods sold. Tariff revenues are included in the general
fund.
During 1984, total Federal tariff collections were
equal to 3.7 percent of the value of all goods imported into
the United States. Notariff is imposed on certain
categories of imported goods, so that the average tariff
rate on imported goods actually subject to tariff was 5.5
percent of value. Tariff rates vary widely, moreover, among
general product categories and among the particular products
within each general product category. For example, on a
trade-weighted basis, textile fibers and products (including
apparel) imported into the United States are subject to an
average tariff rate of 19.8 percent of the value of the
product. Within this category, men's or boy's wool knit
coats,•suits, trousers, slacks, and shorts generally are
subject to a tariff rate of 31.4 percent, while men's and
boy's cotton knit shirts and sweaters generally are subject
to a tariff rate of 21 percent.
Description of the Proposal
The Chairman's Plan would disallow any deduction or
other reduction of income for Federal income tax purposes
for the payment of any Federal excise tax or tariff. Thus,
the amount of any Federal excise tax or tariff could not be
deducted as an ordinary and necessary business expense or
an expense incurred for the production of income, offset
against income from the sale of property as a cost of
goods sold, or added to the adjusted basis of depreciable
property. The legal incidence of several Federal excise
taxes would be clarified or changed to reduce the number
of situations in which the ultimate consumer of the taxable
good or service would be the person liable for the tax. For
example, the legal incidence of the telephone communications
and air transportation taxes would be shifted to the person
providing the services. Presumably, no change would be made
with respect to those excise taxes (such as the excise taxes
on certain "prohibited transactions" of tax-exempt
organizations and on certain "golden parachute" payments)
that are nondeductible under current law.
-8-
The proposal also includes an "anti-avoidance" rule
to ensurePth!t the deduction disallowance has th.-jff.ct of
increasing the income tax "ability of the payor of the
excise tax or tariff by the amount ° f t h « t a x or tariff
multiplied by the maximum corporate income tax rate. tor
example, if the legal incidence of an " " f ^ J ^ d ^ i ^ a x S d
corporation with net operating losses, a V
» f^ro^n
It a marginal rate of less than 35 P « « " ' °[ t /
^
person not otherwise subject to tax in the United States,
the corporation, individual, or foreign person would be
treated as having a separate "basket" of income equal to the
amount of the excise tax or tariff. The income in this
basket could not be reduced by any deductions, and would be
taxed at the maximum corporate income tax rate or **,,,,._
percent. The resulting tax could not be offset by credits.
Our preliminary estimate is that the proposal would
raise $66.5 billion over fiscal years 1986-1991. The manor
components of this revenue increase are as follows:
1986-1991
Amount
($
Billions)
Excise Taxes:
9.0
Alcohol
7.5
Tobacco
Gasoline
en
Diesel Fuel
il*2
All Other Excises
13.6
Total Excises 50.6
Tariffs
15 9
*
Total 66.5
All of the additional income tax revenues would be included
in general revenues.
-9Discussion
Although the denial of a deduction for Federal excise
taxes and tariffs would, in form, affect only Federal income
tax liabilities, we believe the proposal would be similar
in effect to, and thus is appropriately analyzed as, a
direct increase in Federal excise taxes and tariffs. As
with a direct increase in these levies, the additional tax
burden resulting from the proposal would vary directly with
the number of units sold subject to the tax. For example,
under the proposal, as under the existing cigarette excise
tax, domestic sales of cigarettes by a cigarette manufacturer would generate tax liabilities proportional to the
number of cigarettes sold. In contrast, liabilities under
the income tax are not based on the number of units sold,
but rather on the return to equity capital used in the
production of the particular good.
Although we believe the proposal is similar in effect
to a direct increase in excise taxes and tariffs, it should
be noted that the amount of this effective increase will
vary with the marginal tax rate of the person subject to the
levy. As with a direct increase in excise taxes and
tariffs, sellers of the taxed goods will attempt to avoid
the economic burden of the proposal by passing that burden
on to purchasers in the form of higher prices. The price
increase required to shift the burden fully to purchasers
will depend, however, on the marginal income tax rate that
applies to the seller. For sellers in the 35 percent income
tax bracket, a price increase equal to 54 percent of excise
tax and tariff liabilities would be required to maintain the
prior level of after-tax profits.*
* If excise taxes are deductible as under current law, a
35 percent bracket taxpayer subject to a one dollar
excise tax must increase his prices by one dollar in
order to cover that liability and leave his income tax
liability (and hence his after-tax income) unchanged.
If, as under the proposal, the one dollar excise tax is
no longer deductible, the taxpayer must increase prices
by an additional amount to cover the income tax
attributable to the lost one dollar deduction, plus the
income tax attributable to the price increase. In
other words, a price increase will create additional
income tax liability that will, in turn, require an
additional price increase. Thus, a 35 percent bracket
taxpayer will not fully recover the extra income tax
liabilities from the lost deduction unless his prices
are increased by $.54. The $.54 is equal to the $.35
income tax on the lost deduction (35% x $1.00 = $.35),
plus the $.19 income tax on the price increase (35% x
$.54 = $.19). A larger price increase would be
required
in
case
of
an
ad valorem
tax, since
any tax
price
liability
increase
as the
well
would
as his
increase
income
the
taxtaxpayer's
liability.
excise
-10-
For taxpayers with less than a 35 percent marginal tax
rate, the effective increase in excise tax or tariff rates
will be somewhat smaller. For example, taxpayers with a
zero marginal tax rate would be required to pay an income
tax of 35 percent of their Federal excise and tariff
payments under the proposal's "anti-avoidance" rule. Such
taxpayers could maintain their after-tax income by
increasing prices by 35 cents for each dollar of current
excise tax or tariff liability. Thus, for these taxpayers
the proposal is equivalent to only a 35 percent increase in
excise taxes and tariffs.* Taxpayers subject to income tax
at a rate between zero and 35 percent are in an intermediate
position; to maintain after-tax income they must increase
their prices by between 35 percent and 54 percent of their
excise taxes and tariffs, depending on their marginal income
tax rate. Also in an intermediate position are taxpayers
with net operating losses. Although their current marginal
tax rate is zero, net operating losses used to offset
current price increases would no longer be available to
offset possible taxable income in future years.
Economic Effects
The ability of sellers to shift the tax burden under
the proposal to purchasers depends on the responsiveness of
purchasers and sellers of the taxed good to changes in
price. If purchasers are relatively unresponsive to such
changes (i.e., they will not significantly reduce their
purchases of the good if the price increases), then
purchasers will tend to bear more of the burden of an excise
tax on the good than will sellers of the good. The degree
of responsiveness of purchasers to changes in price depends
As on
in the
example,
under current
largely
the preceding
availability
of substitute
goods.law,
On the
taxpayers with no marginal income tax liability need to
increase prices by only one dollar in order to cover
a one dollar excise tax liability and leave their
after-tax income unchanged. Under the proposal, these
taxpayers must increase prices by an additional $.35
to cover the $.35 "anti-avoidance" tax and thus leave
their after-tax income unchanged. Because the $.35
increase in price would not create additional income
tax liability, no additional price increase would be
required.
-11-
other hand, if sellers of the good are relatively
unresponsive to changes in price (i.e., they will, not
significantly reduce their supply of the good if the
price they receive for the good decreases), then land,
labor, and capital used in the business of providing the
good will tend to bear more of the burden of the tax. The
degree of responsiveness of sellers to changes in price
depends largely on the availability of alternative uses for
the land, labor, and capital used in producing the good.
In the very long run, the supply of most goods can be
expected to be highly responsive to changes in price, since
with sufficient time the quantity supplied of most goods can
be increased (or decreased) at a relatively constant unit
cost. If sellers are unable to pass on to purchasers the
full amount of an of excise tax or other cost increase,
the rates of return to land, labor, and capital used in the
industry will fall. The reduced rates of return will cause
land, labor, and capital that would otherwise have been
employed in providing the good to be employed in other
sectors of the economy that offer a higher rate of return.
In theory, the rates of return to land, labor, and capital
in different sectors of the eccgnomy would move back toward
equilibrium over time, and the burden of the excise tax
or other cost increase would be fully reflected in prices.
Depending on the responsiveness of the purchasers to
price increases, the long-run shift of the excise tax to
purchasers may result in a relatively small or a relatively
large reduction in the market for the good.
The magnitude of the reduction in the market for the
good will largely determine how quickly the adjustment to
the new equilibrium takes, how disruptive it may be, and the
extent of its effect on markets for other goods. Any
reduction in the market for the good as a result of an
increase in excise taxes would in turn reduce the amount of
land, labor, and capital required to produce the good. Over
time these factors of production would find employment in
other industries, but during the transition period there
could be windfall losses in the form of reduced earnings, or
even unemployment. At the same time, land, labor, and
capital employed in producing goods not subject to excise
taxes, goods which have become relatively cheaper, may
receive windfall gains as purchases of those goods increase.
-12It should be noted that even if the full tax burden of
the proposal is shifted to purchasers, the relative change
in the price of the affected goods would be quite small in
relation to the effective increase in excise taxes or
tariffs. The table below illustrates this point.
Approximate Percentage Increase
in Retail Price Due to
Nondeductibility Assuming:
50 Percent Tax : 100 Percent Tax
Product
Passthrough
:
Passthrough
Pack of 20 cigarettes a/ 4.0% 8%
Six-pack of beer b/
1.5
3
Gallon of gasoline c/
2.5
5
a/ Retail price of $1.05, from industry sources, used in
calculations. Current Federal excise rate is $.16.
b/ Retail price of $3.21, from industry sources, used in
calculations. Current Federal excise rate is
approximately $.16.
c/ Retail price of $.91 as reported in the Oil and Gas
Journal for the week of April 9, used in calculations.
Current Federal excise rate is $.09.
Special Circumstances
Although valid as a general model, the above analysis
as to the economic effects of the proposal must be modified
in certain circumstances. For some goods, long-run supply
will not be highly responsive to price changes because the
factors (land, labor, and capital) used to produce the good
are quite specialized to its production. These factors are
in limited supply and exhaustible, such as oil reserves, or
have few (if any) alternative uses, and therefore cannot be
shifted to the production of alternative goods. For such
goods, even in the long run, the burden of an excise tax is
borne at least partially by the specialized factors, rather
than entirely by purchasers.
Second, the burden of an excise tax will not be passed
on to purchasers where the tax does not apply to all
producers of the good, and the market price is determined by
reference to goods that are not subject to the tax. In
particular, the windfall profit tax cannot be passed on to
purchasers because the price of oil is determined in the
-13world market, which does not reflect an excise tax imposed
strictly on domestic production. All of the additional
windfall profit tax burden under the proposal would
therefore be borne by owners of domestic oil.
Third, although an increase in excise taxes or tariffs
generally will cause temporary market dislocations, if a
market is already disrupted because prices are below their
long-run equilibrium level, an increase in excise taxes or
tariffs may be stabilizing. This may be true currently for
petroleum markets, where the recent large decline in oil
prices arguably has reduced the price for oil and possibly
other energy products below their long-run equilibrium
level.
Finally, it is possible that sellers of a good or
service subject to an excise tax or tariff will be
differentially affected by the proposal. As noted above,
the effect of the proposal on an individual seller will
depend on the seller's marginal income tax rate. If the
market price of a good is determined by sellers in the 35
percent income tax bracket, full passthrough to customers of
the additional tax burden from the proposal would produce a
price increase of 54 percent of excise tax or tariff
liabilities. Sellers of the good with marginal income tax
rates of less than 35 percent also will raise their prices
by 54 percent of the excise tax or tariff, but could have
recovered the excise tax or tariff with a smaller increase.
Thus, in these circumstances, low-bracket taxpayers would
receive a windfall (notwithstanding the anti-avoidance
rule). Similar differential effects on sellers would occur
in any market where at least a portion of the tax burden is
passed on to purchasers, and different sellers are in
different marginal income tax brackets.
Effect on International Trade
The proposal to deny an income tax deduction to the
payor of an excise tax would have a mixed effect on the
international trade position of the United States. Excise
taxes on consumer goods such as alcohol and tobacco products
are applied equally to imported as well as domesticallyproduced goods. Therefore, domestically-produced goods of
this type would generally not be advantaged or disadvantaged
by the proposal as compared to foreign-produced goods.
Excise taxes that apply to goods and services purchased in
significant quantities by businesses, such as trucks, fuels,
and telephone services, would increase costs, and eventually
prices, of a wide range of domestically-produced goods.
Since comparable levies could not be imposed on imports that
use such goods and services, some domestic producers would
be disadvantaged by the proposal. In contrast, domestic
producers that compete with imports would be advantaged by
-14the effective increase in tariffs under the proposal. The
effects on imports and exports would to some extent offset,
and, on balance, we would expect a relatively small decline
in the level of exports and imports.
Tax Policy Considerations
Justification for Selective Excise Taxes. As I have
already stated, we believe that the proposal to deny a
deduction for the payment of Federal excise taxes is
properly analyzed as similar in effect to a direct increase
in excise taxes. In evaluating the proposal, it is thus
necessary to consider the circumstances in which the
imposition of an excise tax or an increase in existing rates
may be justified.
1. External Social Costs. One of the traditional
justifications for imposing an excise tax is to ensure that
the market price of a good reflects any external social
costs associated with its production or consumption. The
free market will efficiently allocate economic resources to
the extent that, "at the margin," all of the economic costs
to society of the good are reflected in the price charged by
the producer and all of the economic benefits to society of
the good are reflected in the price paid by the consumer.
In most cases, essentially all of the costs to society of
the good are borne by the producer, and hence will be
reflected in the price charged by the producer. Similarly,
essentially all of the benefits to society are received by
the consumer, and hence will be reflected in the price paid
by the consumer. In some cases, however, the social costs
of producing or consuming a particular good exceed the cost
to the producer or consumer. These external, uncompensated
costs are borne by other members of society who do not
directly benefit from the production or consumption of the
good. When external costs are present, the imposition of an
excise tax can make the allocation of economic resources
more efficient by raising the price of the damaging activity
and thereby internalizing the external cost.
For example, it is widely accepted that the public
health and other social costs resulting from the consumption
of alcoholic beverages and tobacco products would not be
reflected in the price for these products that would be set
by market factors alone. To illustrate, the external costs
attributable to alcohol abuse include such direct costs as
property damage and personal injuries incurred by innocent
victims of alcohol-related auto accidents, as well as such
indirect costs as the burden of extra health care costs
shifted from an alcoholic to society at large by insurance
or public health care programs. Although excise taxes are
currently imposed on alcohol and tobacco products, many
believe that the current tax levels do not adequately
reflect the external costs of these products. Some evidence
-15-
that this view is widely held is the fact that current law
also places restrictions on the advertisement of these
products. It is notable as well that a group of prominent
economists recently has called for substantial increases in
the Federal excise taxes on alcohol.*
It also may be true that the market prices of gasoline
and other petroleum products, particularly at the current
depressed levels, do not fully reflect the social costs of
producing or consuming these products. For example, among
the external social costs associated with gasoline
consumption are air pollution and the prospect that future
economic growth may be endangered by reliance on uncertain
foreign supplies of oil. In addition, increased excise
taxes on petroleum products also may be appropriate to
encourage energy conservation and thus reflect the value of
nonrenewable resources to future generations.
2. Surrogate User Fees. The imposition of an excise
tax also may be justified as a surrogate user fee where the
Federal government provides services that directly benefit
users of certain goods or services. Examples of such
surrogate user fees are the Federal excise taxes on gasoline
and diesel fuels, most of the revenues from which are used
for Federal-aid highway programs. Excise taxation of
certain goods, such as.motor fuels, may be justified: both as
a surrogate user fee and as a way to internalize external
costs.
A group of 67 economists, including Nobel laureates
Franco Modigliani, Paul Samuelson, and James Tobin,
has signed a petition supporting efforts to increase
Federal excise taxes on alcoholic beverages and
eliminate or modify the differential tax treatment
between beer, wine, and distilled spirits. See Tax
Notes, March 17, 1986, p. 1178.
-16-
3. Demand Unresponsive to Price Changes. A final
justification for imposing excise taxes is their ability, in
certain circumstances, to raise revenue with minimal
distortion of consumer choices. If demand by consumers for
a particular good is quite unresponsive to price changes, an
excise tax on that good would cause very little change in
the amount of the good consumers would purchase. Hence,
distortion of consumer choices would be minimized. Since a
basic goal of tax policy is to raise revenue without
distorting economic behavior, an excise tax may in some
circumstances be a legitimate alternative to more broadly
based tax measures.
Use of Revenues
Excise taxes serve to reflect external social costs or
user benefits in two ways. First, by increasing the price
of the taxed good, they reduce demand for the good and
thereby the level of associated external costs, or the need
to provide associated user benefits. Second, the excise
taxes provide revenues to help pay for associated external
costs or user benefits. These revenues may be used directly
in related government programs, for example, to finance
highway construction. These revenues also may be used to
reduce other Federal taxes, and thus provide indirect
compensation for the external costs borne by private
persons. Excise taxes on goods with price-unresponsive
demand also could provide revenue to replace revenues from
other sources that distort economic behavior to a greater
extent. Thus, under the proper circumstances, we believe it
would be reasonable to use certain excise tax revenues as a
means of reducing income tax burdens, as the Chairman's Plan
contemplates.
Distributional Impact
One of the President's principal tax reform objectives
is that families below the poverty line not be required to
pay Federal income taxes. The President's tax reform
proposals sought as well to reduce the tax burden on
middle-income working Americans. These objectives relate to
the basic fairness of the tax system, and require that we
carefully evaluate the distributional impact of the proposal
to deny a deduction for Federal excise taxes and tariffs.
In general, the distributional effect of the proposal
will depend on the extent to which the incidence of the
excise taxes and tariffs are passed on in price increases,
as well as on the consumption by different income classes of
the goods and services subject to the levies. Conventionally, analysis of the distributional effect of excise taxes
-17is based on the assumption that these levies are fully
passed on to customers, and on calculations using annual
income and consumption data. These data show consumption to
represent a higher percentage of income for lower-income
than for higher-income families. Accordingly, these
conventional calculations would show the distributional
effect of the proposal to be regressive.
For several reasons, however, income and consumption
are more closely related over time than they are in any
given year. For example, young families tend to spend a
higher proportion of their incomes than middle-aged families
(who tend to have higher incomes), while at retirement,
income normally falls by a greater amount than consumption.
Further, in any given year, some families will maintain
their "normal" spending levels in spite of low income due to
illness, unemployment or windfall losses, while other
families will maintain "normal" spending patterns in spite
of windfall gains. Thus, relying on annual consumption data
to distribute the excise tax burden makes these taxes appear
to be more regressive than they would if lifetime
consumption and income data were relied upon.*
In addition, the nature of some excise taxes suggests
that their distributional consequences might be properly
judged from a different perspective. As discussed earlier,
some excise taxes are justified because market prices are
too low, either because they do not reflect external costs
associated with production or consumption of the good, or
because they do not reflect government benefits provided to
users of the good. The burden of these taxes is therefore
comparable to the prices paid for privately consumed goods
and services. Individuals who do not consume the taxed
goods, and therefore do not impose external costs on others
or receive user benefits, do not have a tax burden. In
See James
Davies,
St-Hilaire,
Whalley,
contrast,
the burden
of France
the income
tax is and
not John
directly
"Some
Lifetime
Tax Incidence,"
related
to Calculations
any external of
cost
or specific
government The
Americanbenefit.
Economic Review, September 1984, p. 633.
expenditure
-18Finally, as a matter of tax policy, we should
neither accept nor reject a single provision of a comprehensive tax reform package on the basis of its distributional
impact considered in isolation. As the Administration has
consistently emphasized, attention should be focused on the
distributional effects of the package as a whole. If
consideration of the package as a whole suggests its
distributional effects are inappropriate, there are a number
of ways in which the package could be tailored to alter
these effects.
Tax Treaty, GATT, and Related Issues
Tax Treaties. Application of the anti-avoidance rules
of the proposal to certain foreign persons who are not
currently subject to U.S. income tax could violate the
business profits article of numerous income tax treaties
that the United States has entered into with foreign
countries, including treaties with Canada, France, Germany,
Japan, and the United Kingdom. Generally, the business
profits article of an income tax treaty prohibits one treaty
country from taxing the business profits derived by a
resident of the other treaty country unless such profits are
attributable to a permanent establishment in the first
treaty country.
GATT and Related Issues. Denial of an income tax
deduction to the payor of a tariff would raise issues under
the General Agreement on Tariffs and Trade (GATT). Article
II of the GATT prohibits the imposition of tariffs in
amounts higher than those agreed to in international
negotiations. In addition, it could be argued that the
proposal nullifies or impairs the benefits of tariff
concessions granted to other countries.
If the proposal were found to violate the GATT or to
nullify or impair benefits under the GATT, the United States
would be expected to offer compensation to those countries
which were adversely affected. Compensation would normally
be in the form of reduced duties. If the United States did
not offer adequate compensation, other countries would be
entitled to retaliate against U.S. exports. Reduced duties
on imports into the United States or increased foreign
duties on U.S. exports would result in reduced sales and
income for U.S. producers.
Even if the denial of a deduction for the payment of
tariffs were found not to violate the GATT, the proposal
might have a detrimental effect on foreign trade. Other
countries, most of which allow tariffs to be deducted for
purposes of measuring taxable income, could respond to
adoption of the proposal by adopting comparable provisions.
Because most of our trading partners have both higher
tariffs and higher income tax rates than we do, U.S. exports
could be disproportionately affected by such retaliation.
-19-
Proposal to Increase Excise Tax Rate on Wine
Background
Under current law, different rates of Federal excise
tax are imposed on different categories of wine. The
different categories are determined by the alcohol content
and carbonation of the wines. Specifically, the schedule of
Federal excise taxes on wines is as follows: $0.17 per
gallon on still wines containing not more than 14 percent
alcohol; $0.67 per gallon on still wines containing more
than 14 percent and not more than 21 percent alcohol; $2.25
per gallon on still wines containing more than 21 percent
and not more than 24 percent alcohol; $2.40 per gallon on
artificially carbonated wines; and $3.40 per gallon on
champagne and other sparkling wines. The rate of Federal
excise tax on beer is $0.29 per gallon (a lower rate applies
to certain small brewers). Most beers contain between
3 percent and 5 percent alcohol. The rate of Federal excise
tax on distilled spirits is $12.50 per proof gallon.
Adjusted for differences in alcohol content, most still
wines are subject to a substantially lower rate of Federal
excise tax than beer and distilled spirits. For example,
the same amount of alcohol is contained in one gallon of
distilled spirits containing 50 percent alcohol; 12-1/2
gallons of beer containing 4 percent alcohol; 2-1/2 gallons
of still wine containing 20 percent alcohol; and 4 gallons
of still wine containing 12-1/2 percent alcohol. The
respective Federal excise taxes on these beverages are
$12.50 on the distilled spirits; $3.63 on the beer; $1.68
on the still wine containing 20 percent alcohol; and $0.68
on the still wine containing 12-1/2 percent alcohol.
Description of the Proposal
Under the Chairman's Plan, the rate of Federal excise
tax on still wines containing not more than 21 percent
alcohol would be increased to the Federal excise tax rate
currently imposed on beer (on an alcohol content equivalence
basis). Our preliminary estimate is that the proposal would
raise Federal revenues by approximately $1.5 billion over
fiscal years 1986-1991.
Discussion
As discussed earlier, a principal justification for
imposing a Federal excise tax on wine and other alcoholic
beverages is that the consumption of alcoholic beverages
produces social costs not reflected in their market price.
This rationale would suggest that the amount of tax should
-20bear a relationship to the amount of alcohol contained in
the beverage and that, after adjustment for differences in
alcohol content, the tax rates on different alcoholic
beverages should not be widely dissimilar.
The external social costs resulting from the
consumption of alcoholic beverages may, however, vary
depending upon the type of alcoholic beverage. To the
extent there is clear evidence of such variance, some
differences in excise tax rates may be appropriate.
Proposal to Adjust Federal Excise Tax Rates
to Reflect Price Changes
Background
Under current law, the Federal excise taxes on
alcoholic beverages, tobacco products, gasoline, diesel
fuels, special motor fuels, and aviation fuels are based on
the quantity of goods sold, rather than on the value of the
goods sold. The tax rates are not adjusted for inflation.
Description of Proposal
9
The Chairman's.Plan would provide for the adjustment
of Federal excise tax rates on alcoholic beverages, tobacco
products, gasoline, diesel fuel, special motor fuels, and
aviation fuels to reflect changes in prices. The rates
would not, however, be permitted to fall below the levels o
current law. The proposal would raise Federal revenues by
approximately $9.7 billion over fiscal years 1986-1991.
Discussion
As noted above, we believe that excise taxes may be
justified to internalize external costs associated with
producing or consuming the good, to cover government
benefits to the users of the good, or to raise revenue with
minimal distortion of economic behavior. Setting excise ta
rates at a level that will achieve the intended goal of the
tax requires identification and measurement of associated
external costs or user benefits, as well as the
responsiveness of consumers of the good to price (and
therefore excise tax) changes.
These are not simple tasks, nor are they free of
controversy about the proper definition and measurement of
associated costs and benefits. Although any inflation rate
adjustment will provide an imperfect means of correcting
excise tax rates for changes in costs or benefits associate
-21with the use of taxed goods, we believe that the alternative
of having fixed rates slowly eroded by inflation is on
balance undesirable. We thus support the Chairman's
proposal.
As inflation has occurred and the prices of taxed goods
have tended to rise, the amount of unit based (as opposed to
value based) Federal excise taxes has fallen, both in
constant dollar terms and as a percentage of the price of
the goods. The decline in the rate of Federal excise taxes
in constant dollar terms has been particularly pronounced in
the case of excise taxes on alcoholic beverages. Although
the Federal excise tax on distilled spirits was increased in
1985 from $10.50 per proof gallon to $12.50 per proof
gallon, the rate had not previously been increased since
1951. Similarly, the Federal excise taxes on beer and wines
have not been increased since 1951. If the excise taxes on
these products had increased by the same percentage as
consumer prices (314 percent), the excise taxes on distilled
spirits, beer, and wine (containing not more than 14 percent
alcohol) would have risen between 1951 and 1985 from $10.50
to $43.48 per proof gallon in the case of distilled spirits;
from $0.29 to $1.20 per gallon in the case of beer; and from
$0.17 to $0.70 per gallon in the case of wine.
The Chairman's Plan does not describe the manner in
which Federal excise tax rates would be adjusted to reflect
price changes. Such adjustment could be made by changing to
an ad valorem basis for the taxes, so that they reflect the
price of the products sold rather than the quantity of the
products sold. Alternatively, the adjustment could be made
by leaving the basis of the tax unchanged and periodically
adjusting the rate of tax by an appropriate price index. We
recommend the latter alternative. Changing to an ad valorem
basis would require significant changes in administrative
practice and raise compliance problems, for example, through
the manipulation of intercompany transfer prices.
Conclusion
If sufficient base-broadening measures are not adopted,
and if the President's tax reform objectives are otherwise
met, the Administration could support excise and related tax
proposals as part of a revenue-neutral tax reform bill,
provided that a justification exists for increasing the
level of the particular tax. As I have indicated in my
testimony, the factors that may justify an increase in
particular excise taxes are the existence of external costs
associated with the production or consumption of the taxed
good or service, the function of the tax as a surrogate user
fee for goods or services supplied by the Federal
government, and the fact that a particular excise tax may
cause minimal distortion of economic behavior where demand
for the taxed good is relatively unresponsive to changes in
price.
Appendix A
Estimated Federal Excise Tax Collections for Fiscal Year 1986
General Fund Revenues $ Millions
A. Alcohol Excise Taxes
1. Distilled spirits 4,110
2. Wines
3. Beer
4. Alcohol occupational taxes
(brewers, dealers)
Refunds
Total 5,888
B. Tobacco 4,609
276
1,605
21
-124
C. Manufacturers' Excise Taxes
1. Gasoline 1
2. Firearms, shells and cartridges
3. Pistols and revolvers
4. Bows and arrows
5. Gas guzzler
6. Windfall profit
Refunds
Total 4,255
D. Miscellaneous Excise Taxes
1. General and toll telephone
and teletype service
2. Wagers taxes, including
occupational taxes
3. Employee pension plans
4. Tax on foundations
5. Foreign insurance policies
Refunds
Total 2,535
E. Other 153
92
24
9
58
4,161*
-90
2,327
7
14
127
80
-20
Subtotal, General Fund 17,440
Trust Fund Revenues
P. Highway Trust Fund
1. Gasoline 8,730
2. Trucks, buses, and trailers
3. Tires, innertubes and tread rubber
4. Diesel fuel used on highways
5. Use-tax on certain vehicles
Refunds
Total
1,198
251
* 2,618
406
-180
13,022
-2G.
Airport and Airway Trust Fund
1. Transportation of persons 2'??T
2. Waybill tax
3. Tax on fuel
4. International departure tax
Refunds
Total 2'954
144
1*J
94
"5
H. Aquatic Resources Trust Fund 203
I. Black Lung Disability Insurance
Trust Fund
546
J. Inland Waterway Trust Fund 51
K. Hazardous Substances Trust Fund 427
Subtotal, Trust Funds 17,203
Total Excise Taxes 34,643
Office of the Secretary of the Treasury April 17, 1986
Office of Tax Analysis
Note: Detail may not add to totals due to rounding.
* This estimate was based on a forecast of oil prices made in
December for the FY 1987 budget. The forecast for calendar
year 1986, for example, was $24.70 a barrel. At a price
below $16.50 a barrel, there would be no windfall profit tax
liability.
Appendix B
Estimated Customs' Duties
for Selected Commodity Groups for
Calendar Year 1985
$ millions
Food 473
Alcoholic beverages
Tobacco
Crude oil & petroleum products
Chemicals
Pharmaceuticals
Tires
Plywood
Paper
Textiles yarns and fabrics
Glass
Iron & steel mill products
Non-ferrous metals
Metal manufactures
Machinery
Transportation equipment
Apparel
Footwear
Scientific instruments
OfficeToys
of and
the Secretary
of the Treasury
games
Office of
Tax
Analysis
Total
127
64
213
306
29
73
41
47
494
192
492
75
253
2,861
1,785
3,028
572
186
April 14,
187 1986
11,498
TREASURY NEWS
Department of the Treasury • Washington, D>f ^^Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 1:00 p.m.
April 22, 1986
TESTIMONY OF THE HONORABLE
GEORGE D. GOULD
UNDER SECRETARY FOR FINANCE
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON COMMERCE,
CONSUMER, AND MONETARY AFFAIRS
OF THE
COMMITTEE ON GOVERNMENT OPERATIONS
U.S. HOUSE OF REPRESENTATIVES
TUESDAY, APRIL 22, 1986
Mr. Chairman and Members of the Subcommittee:
I commend the Chairman for calling these valuable hearings,
and I appreciate the opportunity to take part.
The subjects you are exploring are of great consequence. All
of us are well aware that the Congressional impasse on the
renovation of half-century old banking laws leaves a large
segment of the American financial services industry operating
in (and around) an antiquated legal construction.
This inaction is not just a problem for our nation's banking
organizations. We are hurting their customers, too, including
consumers and savers of modest means. The old notion of how
to serve consumers persists among some of your colleagues: They
seek to dictate rules ordering depositories to do this or that
for their customers, rules of increasing specificity that always
are seeking to catch up with innovation — but which are doomed
to remain at least one step behind the market and technology.
Meanwhile, the opportunity to help consumers by authorizing more
firms to compete for the public's business through increased
services lies dormant under the weight of old laws.
B-551
- 2 America's businesses and productive capacity suffer as well.
The efficient movement of capital always has been critical for
economic growth and development. Anyone concerned about American
entrepreneurship, our trade position, or our technological
advancement cannot ignore the financial network that is supposed
to channel investment effectively. I believe it is a woeful
mistake to let our banking system fall behind the changes taking
place in the industries it should serve. Our international
competitors are not so short-sighted.
The agenda you outlined in your letter of invitation is wide
ranging. My recent statements before the House and Senate Banking
Committees address some of your topics of inquiry, especially
the clear need for the Congress to free banking organizations to
evolve with their marketplace.
Today, I would like first to summarize our position on one of the
key subjects you are exploring: The need for banking organizations
to offer some securities services. We have commented on this topic
at length, but its importance merits brief restatement. Then I
would like to devote the rest of my remarks to another significant
issue for this Subcommittee, one that seems to cut across many
of the items on your agenda: regulating access to the payments
system.
I. Securities Services for Banking Organizations
The spectacular rise of active securities markets for what
were once illiquid assets has challenged the heart of banks'
traditional lending businesses — whether in commercial and
industrial loans, mortgages, or now even car loans, and computer
lease and credit card receivables. In addition, the inability
of banks to offer mutual fund services handicaps their ability
to serve and compete for many of their traditional depository
customers.
Much has been written from both legal and economic perspectives
on whether the Glass-Steagall Act, part of the Banking Act of
1933, is, after more than fifty years of change, still appropriate.
Perhaps a political perspective is most revealing: Time and
again strong lobbies, focusing on their narrow protectionist
interests, have kept the banks' services hemmed in. The banks
lose. Their customers lose. The public good loses.
In recognition of this reality, we have urged the Congress to
test incrementally the precepts of Glass-Steagall. We could
make a start by clarifying the authority of banking organizations
to compete in familiar and relatively low-risk securities
businesses like underwriting and dealing in commercial paper,
municipal revenue bonds, and mortgage-backed securities. We
also need to enable banks to compete for their traditional
middle-income customers by offering mutual funds. Then the
Congress could evaluate the industry's experience and take
additional steps later, if beneficial.
- 3 The Subcommittee is familiar with our argument and will hear
more from Comptroller of the Currency Clarke on this subject,
so I will not belabor the point today. I would certainly be
pleased, however, to explore this issue further with the
Subcommittee during the question period.
II. The Payments System
A. How the Payments System Relates to Your Inquiry
The payments system is a frequently mentioned but rarely understood point of dispute in the debate over the separation of
banking from commerce. In particular, it relates to the question
of who should be able to own fully regulated depository institutions. Some of the opponents of consumer banks, of unitary thrift
holding companies, and even of expanded services for bank holding
companies contend that these competitive developments put the
payments system at risk.
I believe it is time to clarify and discuss the concerns about
the payments system by asking how the new owners of fully regulated
consumer banks or thrifts threaten it. If we can isolate specific
dangers, perhaps we can determine a way to alleviate them through
regulation. Appropriate regulation would certainly be preferable
to prohibiting commercial and other firms from owning banks and
thrifts, because there are real costs to foreclosing these new
owners. The costs of prohibition include: (1) fewer investors
of capital in banks and thrifts; (2) less competition; (3) less
transference of management and marketing skills acquired in other
businesses; and (4) less innovation through synergistic development
of services for consumers and other customers. (Indeed, at this
point a total prohibition on depository ownership by commercial,
industrial, and "inappropriate" financial firms would require
major divestitures.)
B. What is the Payments System?
What is the payments system?
It's the mechanism through which funds are transferred between
payers and receivers throughout the economy. When you write a
check, the payments system ensures that the person to whom it is
payable gets his or her money. When a company pays salaries
through "direct deposit", the payments system makes certain the
employees' bank accounts are credited with the funds. When you
use a credit card at a store, the payments system ensures that
the retailer gets the money from your bank. And so on. The system
is fundamental to the efficient operation of a market economy.
- 4 C.
Who Runs the Payments System and How Does It Work?
Depository institutions (e.g., banks, thrifts, and credit unions)
provide "retail" access to the payments system. The system enables
them to exchange checks and electronic transfers among one another
through private arrangements and the Federal Reserve.
There are two major "wholesale" electronic payment systems in the
United States. The primary wholesale system is FedWire, an
electronic funds transfer mechanism of the Federal Reserve System.
Banks and other depositories send and receive payments to one
another over FedWire throughout the day. The average daily volume
of transfers totals approximately 150,000, involving about $400
billion.
When a bank makes a transfer over FedWire, the payment is final:
The bank instructs the Fed to transfer money from the sender's
account to the receiver's account at the Federal Reserve, and the
receiving bank then gets an irrevocable credit for its funds.
It is common for banks to overdraft their own clearing accounts at
the Federal Reserve during the day as they transfer funds to other
parties. Some flexibility on overdrafts is necessary because the
speed and efficiency of transactions would be slowed considerably
if banks were only allowed to make transfers against collected
balances; it is difficult to anticipate the timing of receipts and
disbursements within one day. At the end of each day, however,
the banks must reestablish their reserve balances with their Federal
Reserve Banks.
If a sending bank could not cover all its transfers at the end of
a day (i.e., if it failed), the Federal Reserve could not revoke
the credit it gave the receiving depository. The Fed would still
stand behind the sender banks' payments for the day (and would
become a creditor of that failed bank).
The second major electronic payments system in the U.S. is called
CHIPS (Clearing House Interbank Payment System). CHIPS is privately
owned and operated by the New York Clearing House Association.
It currently has about 150 U.S. and foreign bank participants,
representing over 40 nations. On average, CHIPS handles about
90,000 transfers each day, involving well over $200 billion.
Unlike the FedWire, a CHIPS transfer does not result in the
actual movement of funds until the end of the day. Throughout"
the day, participating banks send payment messages, which they
must settle among one another late in the afternoon. Participants
that have sent more payments than they have received are required
to transfer funds over FedWire to the CHIPS settlement account at
the New York Federal Reserve Bank to cover the sums they owe.
- 5 When the amounts sent equal the amount owed, settlement is
completed by transfers to participants.
The banks participating in CHIPS are required to monitor their
exposure to other banks. The system monitors each bank's total
overdraft on all the banks in the system.
CHIPS appears able to remain competitive with FedWire, despite
its lack of an irrevocable credit upon transfer, for three major
reasons: (1) it charges less for same-day settlement service;
(2) the participants by and large trust one another to make good
on payments; and (3) the participants have a strong interest in
maintaining a viable competitor to FedWire.
D. Who has Access to the Payments System?
The Depository Institutions Deregulation and Monetary Control
Act of 1980 allowed all depository institutions (as defined
by section 19(b) of the Federal Reserve Act) to make direct use
of the Federal Reserve's payments facilities. Prior to that Act,
only banks that were members of the Federal Reserve and a small
number of other institutions could obtain the Fed's payment
services directly.
The 1980 Act was supposed to improve the Fed's ability to conduct
monetary policy by permitting it to impose reserve requirements on
all U.S. depositories. In return, all depositories gained access
to the payments system. Congress intended this wider access to
enable all depositories to offer better, more efficient, and less
costly services to their customers. Indeed, during the legislative
debate, both Chairman Barnard and then-Chairman Proxmire spoke
about the benefits of greater competition in the payments system.
The 1980 Act also instructed the Federal Reserve to charge users
for these services. These charges were to enable other providers
of payment services to compete with the Fed. As it has turned
out, the Fed has continued to play the dominant role in the
payments system because it establishes the groundrules that govern
the most important aspects of the system.
For example, the Fed's assurance of final payment on any transfer
over FedWire has given it a notable edge over would-be electronic
funds transfer competitors. Other systems can transfer payments,
but in the end the Federal Reserve controls their all-important
settlement. Some private sector domestic competitors, such as
Bankwire, simply could not compete and have fallen by the wayside.
- 6 The Federal Reserve's dominion over the payments system has had
some important effects. First, the fees for payment system
services provide a hefty independent income to the Fed (revenues
which are provided to the Treasury after expenses). Second, it
gives the Fed a significant tool for exerting indirect control
over the full range of depositories that now have access to the
payments system.
E. New Concerns About Access to the Payments System
A few years after all depository institutions gained access to
the Federal Reserve's payments system, some commentators raised
concerns about who should own these depositories. In particular,
these commentators opposed commercial firms' ownership of consumer
banks or thrifts. Non-financial firms have been free to own a
thrift for decades; consumer (or nonbank) banks have become
increasingly active and evident since 1980.
To be frank, the nature of the risk posed by these owners has not
always been portrayed with precision. The difficulty in doing so
may be due in part to the complexity of the payments system subject.
I would like to start to identify these supposed problems so
we all can discuss whether they should supercede the competitive
(and capital infusion) benefits of broader ownership of fully
regulated depositories.
So far, I have been able to discern four somewhat interrelated
payments system concerns: (1) The "new" owners will be more
likely than "old" bank holding companies to misuse their regulated
depository; (2) The "new" owners will not intervene to save their
depositories if the depositories are in trouble; (3) The "franchise
value" of the payments system must be preserved for banks and
thrifts in order to compensate them for the "costs" of regulation;
and (4) Broader ownership of depositories will dilute the regulators
control over depositories and the financial system. Let me comment
on each point.
1. New Owners are More Likely to Misuse Their Depositories
One concern is that the "new" owners of consumer banks and
thrifts — whether a commercial or industrial company or a financial firm outside the bank holding company universe — are more
likely to misuse their depositories. This misuse, if it occurred,
could injure the payments system of which the depositories are a
part.
- 7 This concern suggests that bank and thrift executives are in
some sense different from (and more scrupulous than) executives
of a retail or industrial company that might own a depository.
Even if the depository is fully regulated, so the argument runs,
the temptation for a troubled parent to draw on its banks will
overcome any legal limits. Supposedly, the managers of the
depository would fail to exercise an independent credit judgment.
There is a fear that the "captive" bank could incur substantial
daylight overdrafts (loans), on behalf of its weakened owner (or
affiliates), and then the bank would default when its affiliates
fail to repay the overdrafts. The advocates of this point seem
to ignore the alternative case — that it may be handy to have a
healthy owner around to infuse capital into a weak bank.
In addition to some questionable assumptions about the character
of managers in different businesses, this "misuse hypothesis"
appears to postulate substantial regulatory failure and fraud.
This despite a battery of laws and procedures in place to prevent
and penalize such abuse.
First, bank advances on behalf of an affiliate are, in effect,
loans covered by the strictures of Section 23A of the Federal
Reserve Act. Section 23A limits affiliate loans by insured
banks to 10 percent of the bank's capital for any one affiliate
and 20 percent for all affiliates as a group.V Thus, if a bank
has 5 percent capital, its daylight overdraft on behalf of its
affiliate cannot exceed one-half of 1 percent of the bank's
assets, and overdrafts to all affiliates cannot exceed 1 percent.
Purchases of assets from affiliates, investments in the securities
of affiliates, and guarantees issued on behalf of affiliates are
also subject to these limits. In addition, a loan to a third
party, where the proceeds are used for the benefit of an affiliate
or are transferred to it, is considered a loan to the affiliate
itself for purposes of these restrictions.
Even within these limits, Section 23A requires all loans to
affiliates to be fully secured by high quality collateral. If
an insured bank's directors, officers, and employees violate
Section 23A, they can be personally subject to severe penalties,
including substantial civil fines.
*/
"~
Of course a consumer bank would be prohibited from even
making such a loan, because it would be a commercial loan.
Under present law, a nonbank bank (of which consumer banks
are a subset) can either make commercial loans or accept
demand deposits, but not both. If it did, the bank would
fall under the Bank Holding Company Act, which severely
restricts the activities of the holding company owner and
its affiliates.
- 8 Second, the depository must adhere to numerous independent regulatory requirements pertaining to safety and soundness. These
requirements are monitored by examinations, including on-site
reviews of payments activities. If a depository's performance is
deficient, its regulators possess broad powers to rectify the
situation. These powers include the authority to remove directors,
officers, and employees and to impose monetary penalties.
Third, the Federal Reserve requires depositories and payments
systems to establish a number of safeguards to limit the risks
posed by daylight overdrafts. These protections apply to any
depository that uses electronic funds transfer systems that process
settlements through the Fed's facilities.
The most significant new safeguards are the "bilateral net credit
limits" and "sender net debit caps." A bilateral limit sets a
maximum amount that a depository is willing to receive from
another depository; it is, in effect, a limit on a daylight line
of credit and is subject to prudential credit standards. The
bilateral limits apply to CHIPS and other private systems. FedWire's assurance of payment precludes the need for receivers
to establish bilateral credit limits.
A sender net debit cap is a limit on a depository's total overdrafts
within each system, e.g., FedWire and CHIPs, and also across all
electronic funds transfer systems. A depository's daily net debit
cap cannot exceed three times the depository's capital, and the
cap on its average daily net debit for a two-week period cannot
exceed twice the banks' capital. The board of directors of each
depository must approve these caps after a self-rating process.
The Federal Reserve will monitor banks' consistency with these
caps, will counsel any banks that exceed the limits, and may
ultimately restrict the use of FedWire for banks that cannot
operate properly within these procedures. In addition, the Federal
Reserve is implementing other measures to protect itself from
losses in the event a depository fails to cover a FedWire overdraft. These measures include collateral requirements in certain
situations.
To date, there is no evidence of payments system abuse by commercial
firms that own nonbank banks or thrifts. To the contrary, the
affiliation between a bank and a commercial firm reduced risk to
the payments system in 1981, when Chrysler Corporation received
federal and state approval to form a bank to obtain payments services
directly from the Federal Reserve. Commercial banks had refused
to accept Chrysler drafts drawn to collect payments from dealers,
so Chrysler had to form a bank to keep the payments flowing.
- 9 I do not wish to suggest that we would be unwilling to add to
these affiliate protections, if someone can specify particular
dangers to remedy. In fact, I consider it far more fruitful
to develop sensible regulation of new owners of depositories
than to try to ban their involvement. Even if one agrees with
the prohibition approach, which I do not, one has to contend
with the numerous unitary thrift holding companies and nonbank
banks already in existence.
2. New Owners Will Walk Away from A Troubled Depository
The second contention leveled against commercial and other nonbank holding company owners of depositories is that these owners
will be prone to "walk away" from their depository if it is in
trouble. The advocates of this point believe these parents
will not be as reliable as bank holding companies because these
new owners' depositories will supposedly be a less significant
aspect of their overall business.
We would not deny that depositories owned by bank or multiple
thrift holding companies are the cornerstones of their businesses.
But it is a substantial leap of logic to move from that point to
a finding that other owners will increase risk to the payments
system because they will refuse to assist their depositories.
First, these new parents may be just as likely to step in to
assist their depositories if they are in trouble, both because
the depositories are of value to them and because the parents
will want to avoid a besmirched business reputation. Indeed,
a number of commercial firms have sought to buy and recapitalize
distressed thrifts because of their value. These parents, with
more diversified operations, may be better positioned than a bank
holding company to infuse capital into an ailing depository.
Second, even if one assumes the new parents will let their
depositories fail, those depositories will be no worse off
than the thousands of banks and thrifts without a deep pocket
parent. They will still be fully regulated. They will still
be subject to capital directives and other supervisory action
if their performance slips. Only now they will have the option,
and I would think the probability, of getting assistance first
from their commercial or industrial owners. To be worse off,
these depositories would have to be susceptible to misuse from
their owners, the concern I just addressed.
3. Preserving the Franchise Value of the Payments System for Banks
The third argument made against expanding the ownership of
depositories is that the present owners need an exclusive franchise.
They are supposed to be in some sense more deserving of a position
as the sole sellers of access to the payments system.
- 10 Some proponents of this view maintain that these benefits "pay"
for the regulatory limits on bank holding company activities.
Their argument sees profits stemming not only from the direct
payments services, but also from ancillary fee activities —
such as charges for bad or returned checks. And the franchise
protected against competition includes the benefits from delaying
the availability of funds from deposited checks.
I am uncomfortable with "unfair competition" rationales, most
particularly when "fairness" is determined by a firm that would
lose business to competition. I am no more comfortable with the
prospect of regulators rationing business. Certainly, the franchise
to charge high service fees is not one many of us would wish to
preserve.
A significant purpose of the 1980 Act was to improve access to
the payments system, so as to increase competition among suppliers
of the service. Indeed, the importance of competition in this
area was then reaffirmed by a 1984 report of this Committee that
studied the effects of the 1980 Act on the payments mechanism.
Moreover, any new owner of an insured bank or thrift would still
have its depository subject to the full measure of regulation
and supervision, including its "costs". Indeed, the logic of
preserving this business service for existing banks would lead
us to refuse to charter new depositories, regardless of who owns
them.
I, too, would like bank holding companies to be free to compete
in more financial activities. My motivation, however, is to offer
more competitive services to the public, not just to enhance banks'
financial strength. I certainly cannot condone anti-competitive
protectionism of bank holding companies in the payment services
businesses just because they are enduring some anti-competitive
barriers. Delaying the penetration of anti-competitive barriers
until all firms attain some theoretical state of equality is a
formula for justifying an inefficient status quo and poor customer
service. Neither society nor individuals should have to pay more
for check, credit card, and other payment services when new entrants
want to fight for the business with lower prices.
4. Regulators' Control Over the Owners of Depositories
The fourth payments system issue may be the most significant
concern for some regulators. I believe they hold an honest and
deepfelt notion that expanded ownership of depositories will
undermine their ability to discharge some responsibilities fully.
Of course the regulators would still hold full supervisory sway
over the underlying depository. But under present law, the
- 11 -
Federal Reserve would not also regulate the owner at the holding
company level — "the second bite at the apple". And the
owner, if it were a large commercial or industrial firm, would
not be familiar with the regulatory relationship to which even
the biggest and most powerful bank holding companies have grown
accustomed.
I label this the "club-club" concern. The first "club" concern
is that these new owners will be more difficult to communicate
with because they are not members of the business fraternity: I
sense that the regulators want to ward off these new owners,
whatever the competitive benefits, because they are not part
of a familiar executive group with understood mores. Perhaps
this suspicion also feeds the concern I discussed earlier —
that the new owners are more likely to violate the affiliate
restrictions and other rules.
The second "club" refers to the regulatory stick, which for
consumer bank owners does not exist at the holding company level.
Some regulators seem to want that "extra" lever, a regulatory
buffer beyond the complete regulation of the depository. It
is true that most large banks are owned by holding companies.
But most banks, especially smaller ones, are not. That second
layer of regulation is already the exception, not the rule.
This concern is a difficult one to analyze. I recognize that
the regulators' motivation is to serve the public good by
protecting the financial system. They do an excellent job
under difficult circumstances. But I believe we must be careful
about accepting without question the interest of professional,
expert regulators to control their markets. This interest must
be balanced against the benefits of more diverse ownership and
active competition.
The subject of regulatory control obviously involves some
important precepts regarding the role of administrative agencies.
Certainly we want to protect the payments system. Certainly
we should regulate and examine the depositories that have
access to it. Certainly we should regulate the affiliations
between the depository and its owner. But do we really want
to prohibit certain owners of depositories simply because they
cannot be "controlled" in some generalized meaning of the word?
For what purposes does this power really exist, and do we wish
to accept them without inquiry?
I would submit the government should have something more specific
in mind when it comes to protecting the payments system.
- 12 III. Conclusion
My prime purpose today has been to encourage greater understanding
and analysis of the supposed risks to the payments system allegedly
posed by a broader set of depository institution owners. It is
not enough simply to say that protection of the payments system
demands that we shut off or even roll back certain businesses
from owning fully regulated depositories. We need to ask why.
And we need to evaluate the answers we get.
I know this Subcommittee shares this approach, because it never
has been afraid to pose the hard questions about our banking laws.
The payments system is not an easy subject to master. Perhaps my
remarks can begin to unmask some of its mysteries so we can understand its importance to policy.
My remarks are also an invitation. Others can supplement, refine,
and improve on my analysis. I welcome that process. It is the
only way we will fairly determine whether anti-competitive
restraints on depository ownership have a beneficial purpose. I
have yet to be persuaded of the advantages of these restrictions.
I also welcome a discussion of ways we might improve the regulation
of depositories owned by a diversity of firms. Some consumer bank
bills have called for a higher capital requirement. We may also '
consider a tightening of affiliate restrictions or requiring
specific reports by the parent. Much can be done in the world of
safety and soundness regulation that falls short of prohibition.
I look forward to working with this Subcommittee on this and
other matters as you inquire into the state of our financial
institution laws. The Administration shares your interest in
revamping these laws for the modern era. We will work with you
to hasten that statutory evolution.
I would be pleased to try to answer any questions you may have.
TREASURY MEWS
Department
of the
Treasury • Washington, D^C. e Telephone
April 21, 1986 566-2041
FOR IMMEDIATE
RELEASE
RESULTS OF TREASURY/' S' vAEKLYlSSi;L^i
Tenders for $7,005 million of 13-week, bills and fpr. $7,008 million
of 26-week bills, both to be issued on^f&trjil 24^-'Slftqf'jQfln we re accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing July 24, 1986
Discount Investment
Rate
Rate 1/
Price
5.84% a/
5.87%
5.86%
6 01%
6 04%
6 03%
'KE-.EASUfTf , tJ,,
-..ru^|6-week bills
maturing October 23, 1986
Discount Investment
Rate
Rate 1/
Price
c
5 .84%
5 .88%
5 .87%
98 524
98 516
98 519
6. 10%
6. 15%
6. 13%
97 .048
97 .027
97 032
a/ Excepting 1 tender of $3,,590, 000.
Tenders at the high discount rate for the 13-week bills were allotted 47%.
Tenders at the high discount rate for the 26-week bills were allotted 58%.
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
$ 22,960
5 ,368,300
34,035
101,340
34,705
40,160
169,185
61,280
11,945
51,670
40,560
92,755
356,275
22,960
18,819,700
15,605
19,260
32,755
26,600
1,614,720
74,440
34,250
36,075
30,055
1,362,520
383,770
$26,114,205
$7 ,005,035
$22,472,710
$7 ,008,230
$23,259,710
1,060,675
$24,320,385
$4 ,150,540
1,060,675
$5 ,211,215
$19,555,470
815,725
$20,371,195
$4 ,090,990
1,651,235
1,651,235
1,650,000
1,650,000
142,585
142,585
451,515
451,515
$26,114,205
$7,005,035
$22,472,710
$7,008,230
$
41,365
22,169,430
34,035
122,540
34,705
40,160
1,646,215
86,340
36,945
51,670
43,210
1,451,315
356,275
$ 41,365
5 ,969,760
$
Accepted
:
:
15,605
19,260
32,755
26,600
476,320
48,440
25,850
36,075
27,955
524,340
383,770
815,725
$4 ,906,715
An additional $116,115 thousand of 13-week bills and an additional $377,885
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield
B-552
TREASURY NEWS
Department of the Treasury e Washington, D.c. • Telephone 566-2041
UBF;A.'..YtIl00M:5c3IU)
FOR RELEASE AT 4:00 P.M. April 22, 1986
'PR N
3 ^ m 'SIR
TREASURY* S WEEKLY BILL OFFERIWGY
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 May 1, 1986.
This offering
will result in a paydown for the Treasury of about $400
million, as
the maturing bills are outstanding in the amount of $14,403 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 Daylight Saving time, Monday, April 28, 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
January 30, 1986,
and to mature
July 31, 1986
(CUSIP No.
912794 KY 9), currently outstanding in the amount of $7,238 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
October 31, 1985,
and to mature October 30, 1986
(CUSIP No.
912794 KS 2), currently outstanding in the amount of $8,316 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 May 1, 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 $1,167 million as agents for foreign and international monetary authorities, and $3,348 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-553
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 submittingvtenders 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 t h e Treasury • W a s h i n g t o n , D.c. • r e l a t i o n e 566-2041
. s lA 4 13 PH 'BR
:./ARIMCNT Of THE TREASURY
For Release Upon Delivery
Expected at 11:30 a.m.
Remarks by
Secretary of the Treasury
James A. Baker, III
At the United States Chamber of Commerce
International Forum
Chamber of Commerce Building
Washington, D.C.
April 23, 1986
I'm delighted to have this opportunity to give you an
accounting of where the United States stands before the Tokyo
Summit.
We and our Summit partners have a common stake in almost
every aspect of international economic life. We will discuss
goals nations should set for their domestic economies and better
ways to harmonize those individual efforts.
As the world's leading economy, the United States must
recognize the responsibilities that go along with that position.
But the tasks we face are collective in nature and that is why we
seek cooperation, a partnership if you will, with the major
industrial countries to promote international economic growth.
The economic environment in the industrial countries has
improved significantly since the last Summit. The dramatic
decline in oil prices should add as much as a point to real GNP
growth in West Germany this year and the rest of Europe should
benefit equally.
We expect inflation in the United States and the rest of our
Summit partners' economies to be cut by up to two points. West
Germany and Japan could actually see zero or negative inflation.
B-554
-2Basic improvement in growth and inflation in other countries
prompted the G-5 nations — Great Britain, West Germany, Japan,
France and the United States — to agree that some orderly
appreciation of the major non-dollar currencies was desirable.
Since the meeting of the G-5 representatives in New York last
September the dollar has declined, in generally orderly
conditions, by 24 percent against the deutschemark, and 30
percent against the yen. This should improve the competitive
outlook for U.S. businesses, both at home and abroad.
Interest rates are down to their lowest levels in years. The
recent series of discount rate cuts by the central banks of
Europe, Japan and the U.S. reinforce the favorable effects of
lower oil prices and are a sign of improved international
cooperation.
With the fall in oil prices and the decline in the value of
the dollar, we can reasonably expect the U.S. trade and current
account deficits to gradually diminish. But many politicians do
not have such learned patience, particularly in an election year.
The advocates of restrictive trade policies are already raising
their decibel level on Capitol Hill.
At the same time, threats of new import barriers are being
echoed in Europe. With the virus of protectionism spreading, it
is imperative that the Summit countries seek a remedy for this
disease. Only by addressing broader issues together do we have
any chance of finding a solution to the perennial problems of
trade imbalances.
The sharp drop in oil prices coupled with exchange rate
changes and stronger growth abroad should reduce the trade
deficit to $125 billion in 1986. By the end of 1987, we expect
both the trade and current account deficits to slip below the
$100 billion level.
But this is only good news for the near future. Our economic
forecasts indicate that by the end of 1987, the exchange rate
movements to date will have taken their full effect, and the
"growth gap" will reassert itself. This will cause our trade and
current account deficits to balloon once again.
Exchange rate changes alone will not reduce trade and current
account imbalances. The major industrial countries should place
greaer emphasis on achieving more balanced growth with the United
States and each other.
For Europe, a prerequisite to stronger, more sustained growth
continues to be removal of structural rigidities. These include
high minimum wages, high marginal tax rates, and other policies
that impede the efficient use of resources. It's worth
remembering that the flexibility of the U.S. economy added nearly
ten million new jobs in the last three years while European job
creation remained flat.
-3Japan also faces structural barriers to more rapid growth,
especially growth of domestic demand which is crucial to the
adjustment of Japan's large external imbalance. Increased demand
should be enhanced by the drop in oil prices and specific
policies undertaken to strengthen domestic investment and
consumption.
To promote more balanced trading patterns and improve
exchange rate stability the industrial nations need to develop
arrangements to foster the closer coordination of economic and
monetary policies.
The current system of floating rates has provided a flexible
framework for dealing with a number of global economic shocks.
While the system has strengths, it also has weaknesses. There is
a clear need for improvement, especially to deal with excessive
exchange rate volatility and large persistent trade imbalances.
The President has asked me to determine by the end of the
year whether an international monetary conference or meeting
should be held. We have not made any decisions on possible
improvements in the system or on the desirability of an
international conference. But we will be interested in progress
on monetary issues at the Summit.
Our goals for non-inflationary growth are not limited to the
major industrial countries. Without stronger growth, there can
be no solution to the debt problem. Debtor countries must be
able to accumulate resources — and export earnings — at a
faster pace than they are accumulating debt.
The debt initiative that we proposed last fall is designed to
accomplish this objective based on the adoption of
growth-oriented reforms by the debtor nations and increased
financial support from the international financial institutions
and the commercial banks. This initiative has received strong
support from the international community and is now being
implemented through individual debtor's negotiations with the
International Monetary Fund and the World Bank.
An improved global economic environment will contribute to
growth in the debtor countries and help reduce their debt service
repayments through lower interest rates, decreased oil bills, and
increased exports to the expanding economies of industrialized
nations.
To take better advantage of these developments a number of
debtor nations are moving to privatize state-run businesses,
freeing capital and labor for more productive enterprises and
allowing market forces to set exchange rates. Not too long ago
conventional wisdom held that capitalism could only exploit less
developed countries. I am confident that they will prove that it
can emancipate them from economic stagnation.
-4As Adam Smith observed, the system of free commerce promotes
"order and good government and, with them, the liberty and
security of individuals." That system promotes growth and
provides for the equality of opportunity — so Marx's working
class can become a middle or upper class.
In the concert of the West there is an inevitable dissonance
that may confuse some observers. We have our disagreements and
we will address them at the Summit.
Yet our nations remain great examples for others, despite our
often well-advertised problems. The rest of the world looks to
us, the great industrial democracies, for the keys to expanding
prosperity. Socialism has not satisfied this goal and it no
longer suffices for the hopes and needs of mankind.
The Summit partners have different priorities and cultures,
but similar political institutions — democracy and free
enterprise. Working together, we can serve the world well.
Thank you very much.
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
LIBRARY. Apri.53i9, 1986
RESULTS OF AUCTION OF 2-YEAR N0#KE3 PH 'SB
The Department of the Treasury has accepted ^9y752 million
of $18,300 million of tenders received from the public for the
2-year notes, Series Y-1988, auctioned today. The notes will be
issued April 30, 1986, and mature April 30, 1988.
The interest rate on the notes will be 6-5/8%. The range of
accepted competitive bids, and the corresponding prices at the 6-5/8%
interest rate are as follows:
Yield Price
Low
High
Average
Tenders at the high yield
6.63%17
6.73%
6.68%
were allotted 42%.
99.991
99.807
99.899
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Received
Accepted
Location
Boston
$
17,655
$
17,655
15,328,500
7,979,440
New York
20,350
20,350
Philadelphia
45,460
45,460
Cleveland
72,315
62,315
Richmond
91,955
90,955
Atlanta
1,557,700
972,700
89,455
73,455
Chicago
31,660
31,660
St. Louis
111,720
111,720
Minneapolis
21,225
21,225
Kansas City
907,680
320,680
Dallas
4,585
4,585
$18,300,260
$9,752,200
San Francisco
Treasury
The $9,752 million of accepted tenders includes $740
Totals
million of
noncompetitive tenders and $9,012 million of competitive tenders from the public.
In addition to the $9,752 million of tenders accepted in
the auction process, $385 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,129 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/ Excepting 1 tender of $2,000,000.
R-555
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
Address of The Honorable Francis A. Keating, II
Assistant Secretary (Enforcement)
U.S. Department of the Treasury
At the
Fourth Annual Judicial Conference
Washington, D.C.
April 23, 1986
The Customs Role in Trade Enforcement and Facilitation
I'm grateful for the opportunity to address this
distinguished group on a vital topic: that topic is the
future of the U.S. Customs Service in commercial operations
and enforcement.
My fellow panelist, Mr. Myles Ambrose, and I have differing
views on a number of issues concerning this topic. But I can
safely say that there is one matter on which we can agree: that
decisions on priorities and resources are very difficult decisions
indeed. This was certainly true when Mr. Ambrose was the Commissioner of Customs. And it is more than ever the case today.
The business of government has always been the need to make
hard choices. And I don't have to remind anyone here of the
severe resource constraints affecting our government right now.
It is the pervasive atmosphere in which we must work. Of necessity, it sobers our judgment and colors all our decisions.
This reminds me of a quotation from one of our Presidents
who, being a person who rarely spoke out, isn't often quoted.
I refer to Calvin Coolidge, who observed that there is no
achievement, and no satisfaction, quite like living within one's
means. Our entire government has learned, all too painfully,
how true these words are.
From the standpoint of the Treasury Department, we simply
do not have the luxury of providing the Customs Service with
all the resources we would like it to have for both its law
enforcement and its trade facilitation functions. We recognize
that both of these functions are essential. We also recognize
that only by being innovative can we hope to achieve them both
in these days of limited budgets.
R-557
- 2 -
Only by being innovative can we maximize the effectiveness
of the resources we have. As much as we would like to, we
cannot respond to all the demands for more Customs manpower,
more Customs offices, and increased levels of services.
As many of you know, I have been the Assistant Secretary
for Enforcement for about 90 days. That is not enough time to
become deeply immersed in every issue confronting Treasury
enforcement, or even the issues confronting the Customs Service
alone. However, it is enough time to get a feel for what
needs to be accomplished. And with respect to the latter,
I want to share with you the conclusions that I have reached.
Of the many law enforcement missions of the Customs Service,
three are paramount. These are drug interdiction, critical
technology, and commercial fraud. One conclusion I have reached
is that these will continue to be our enforcement priorities.
We should not, and will not, reduce our commitments in these areas.
It is undeniably true that Customs has substantially built
up its enforcement presence in these three areas since President
Reagan's Administration began in 1981. There are compelling
reasons why this has been done.
There are some things we cannot wish away. One is that our
country faces a drug trafficking and drug abuse problem of
staggering proportions. For this our society is, in so many ways,
paying an intolerable price. We are paying in lost lives, lost
productivity, and lost opportunity for our youth who fall prey
to the temptations of drug abuse. We are paying in the violent
crime that goes hand in hand with the drug trade and in the
support that drugs give to criminal organizations. We are paying
in the huge sums of dollars — tens of billions — lost in taxes
evaded by the underground economy, and in dollars that go abroad
to pay the enormous bill for our country's drug habit.
President Reagan has declared an all-out war on drugs and
drug abuse. U.S. Customs will continue to fulfill its commitment
to the President.
Operation Exodus, the Customs program to prevent the loss
of our country's technological secrets, is of critical importance
as well. Our strategic technology is the cornerstone of our
country's military superiority. To allow it to be eroded by
illegal exportations to the Eastern Bloc would be the height of
folly. If we do, we will pay a cost far higher than what Exodus
costs. We will pay in the form of higher defense budgets. Worse
yet, we will pay in the form of compromising our national security
itself.
- 3 A third enforcement priority, commercial fraud, is one that
I personally will be giving a lot of attention. Enforcement of
our country's trade laws is essential if we are to achieve
President Reagan's goals in international trade policy. It is
central to the overall mission of the Customs Service. It is
critical to many sectors of our economy. And as a matter of
trade policy, rigorous enforcement can ameliorate the demands
for protectionist legislation. In short, our country's goals
of free trade are meaningless unless there is also fair trade.
For this, Customs, more than any other agency, must fulfill
its mission.
I do not want to confine my emphasis to trade enforcement
alone. Trade enforcement is only one element of the traditional
Customs mission, which of course also includes trade facilitation
and the collection of revenue.
With regard to these two functions, there is no denying that
Customs has been faced with a challenging task. First, workload
is increasing. To give you some examples, entries increased from
approximately 6.1 million in 1976 to approximately 10.5 million in
1985. During that same time period, revenue collections increased
from approximately $5 billion to $15 billion. The value of imports
rose from $115 billion to $330 billion.
There is also no denying that, as many in the trade community
have pointed out, Customs has reduced its staffing in some areas.
For instance, Customs had approximately 1250 import specialists
in 1976. We have approximately 1000 today. Where Customs has made
reductions in staffing, it has done so in response to resource
limitations and in response to the need to direct resources toward
enforcement priorities. The largest resource reductions, however,
have not been at the expense of trade facilitation, as some have
suggested. They have occurred principally through the consolidation and streamlining of administrative functions and the
elimination of overhead.
In the brief time I have been at Treasury, I have not had
the opportunity to determine precisely which of the many elements
in Customs commercial operations may need more resources. And
I have not concluded that the present allocations of resources
are optimal in every instance. But I have concluded two things:
first, that this area of the Customs mission has in no sense been
ignored, as some would assert. Second, I have concluded that any
issues affecting the commercial operations function at Customs
will be of the highest priority in my office.
- 4 With respect to my first conclusion, that Customs has given
much attention to commercial operations, there are a number of
points that can be made. One of them is the Automated Commercial
System. The commitment here is unmistakable: Since 1983 Customs
has invested more than 60 million dollars and 290 staff years in
this system, which is really many systems all rolled into One.
When they are all in place, Customs will be able to administer
our trade laws better than it ever has before. ACS will improve
our ability to protect the interests of U.S. trade policy without
interfering with the flow of imported goods into the United States.
Just what is ACS? It is many things, too many to describe in
detail here. And I am not professing to be an expert in the subject
by any means. But I can tell you that the basic principle is
using automation to collect and process commercial data quickly,
efficiently, and cost-effectively. It is the application of
these data to select for detailed attention the high risk
cargo shipments. It is using the automated interfaces to reduce
paperwork, eliminate delays and speed the overall processing of
entries.
ACS will greatly increase the productivity of Customs
employees. But it will also benefit the importing community,
particularly those who tie into our systems so that data and information can be readily exchanged. Customs is working hard
to market this electronic trade interface to brokers, importers,
carriers, and port authorities. More than twenty brokers and
importers are on the system now. They represent about 22% of the
total Customs formal entries. Fifty more brokers, importers, and
service centers are in the process of developing and testing the
ACS linkage.
ACS has come a long way. Back in February of 1984, when
Customs first implemented the system, there were 700 terminals processing a volume of 110,000 transactions each day. Today, we have
1666 terminals on line. We do 260,000 transactions each day, and
these numbers are growing. To at least some extent, all Customs
revenue and entry processing is now accomplished through ACS.
Because it helps Customs select the high risk shipments for
detailed examination, ACS is a most useful enforcement tool. It
is also a tool for trade facilitation: right now, we inspect less
than 20% of all cargo, and 60% of entries need not be reviewed by
an import specialist. Routine, low risk shipments speed through
the system.
I do not want to leave anyone with the impression that we
are looking to ACS to meet all of the challenges ahead in commercial operations.
- 5 Customs is doing many other things as well to improve its
trade-related functions. An example is the intelligence capability that Customs has assembled and dedicated solely to the
commercial fraud area. Until recent years, Customs intelligence
was largely concerned with other enforcement matters. We now
have a distinct intelligence capability to support Operation
Tripwire, the Customs commercial fraud initiative, both at
headquarters and in the field.
Customs also has fraud teams — 41 of them — to conduct
the Tripwire investigations. These teams include special agents,
inspectors, import specialists, and intelligence specialists. At
headquarters, the Commercial Fraud Investigations Center tracks
and monitors all major fraud cases.
In commercial fraud enforcement, there is an area in which
we recognize a need for improvement, and that area is the training of Customs agents to conduct commercial fraud investigations.
Last winter, Customs held a major conference in New Orleans to
address this need. As a result, each of the seven regions are
now following up with this effort. Even more important, Customs
and another Treasury bureau, the Federal Law Enforcement Training
Center at Glynco, Georgia, have collaborated on new training
programs.
In short, we want to do everything we can to reverse a
perception that unfortunately has grown over a number of years:
the perception among agents that fraud cases are not as careerenhancing as investigations into drugs, money laundering, and
critical technology diversions. From the Treasury and Customs
management perspective, fraud cases should not and will not
take a back seat to our other missions.
There is another change Customs has made to improve
commercial enforcement. It is the Operational Analysis Staff,
which is made up of senior import specialists and inspectors in
the field. Their function is to identify irregular or suspicious
commercial transactions based on their operational experience.
Customs auditors serve a similar function, in feeding into the
ACS system the data on high risk shipments. This enables Customs
to be more selective in its enforcement function, as I described
earlier. Last fiscal year, over 28% of the total Customs audit
resources were in direct support of the commercial fraud program.
All of these steps I have mentioned have done more than
enhance commercial fraud enforcement. They have also enhanced
facilitation. What is often overlooked is the additional benefit
- 6 that comes from the initiatives Customs has spearheaded in Commercial fraud enforcement. They have enabled Customs to learn more,
indeed much more, about fraud schemes and about commercial
processing in general. From this knowledge, we are now able
to bypass a great volume of entries and cargo with little or
no processing. This, in my view, is what enhancing facilitation
is all about.
And, to return to a topic I mentioned a moment ago, I am
still considering the question of whether Customs commercial
resources are now optimally allocated. I have not had the
opportunity to reach a decision on this matter, but there are
a few thoughts I want to leave with you.
First, the matter of commercial fraud enforcement is
receiving attention at an extremely high level in this Administration. On February 14, Secretary Baker submitted to President
Reagan a report on textile and apparel imports, in response to
the President's request in his message accompanying his veto of
the Textile and Apparel Trade Enforcement Act.
The report reached a number of significant conclusions.
We don't have time to go into each of them. But two of these
recommendations address commercial fraud in general, and I
would like to highlight them specifically.
First, the Secretary told the President that the Customs
Commercial Fraud Enforcement Program should be maintained at
a high priority level, so that it, along with drug enforcement
and Exodus, is among the highest enforcement priorities.
Second, the Secretary recommended that the Attorney General
communicate to all U.S. Attorneys that prosecution of textile
and other commercial fraud cases should be designated as a high
priority, as well.
The White House has made this report public, and the
recommendations in it are now Administration policy. I mention
this only to reassure anyone who might still question whether
we are really serious about trade enforcement. I will work
with Secretary Baker in fulfilling our pledge to the President.
And to summarize on some of the points I have made, we
will pursue our trade enforcement policies without adversely
affecting the flow of import shipments into the United States.
- 7 The second point I will leave with you is this: despite
the initiatives in the commercial area that I have mentioned
this afternoon, I am not completely satisfied that we have
done everything possible to improve and streamline the commercial side of Customs.
Accordingly, I have taken, and am taking, a number of actions
designed to further our progress:
° I have reorganized my office to improve coordination
and oversight of Customs commercial functions.
° I have communicated to Commissioner von Raab my
position that commercial operations will be a high
resource priority. Specifically, I have established a
base, or floor, for commercial staffing at the current
levels. And I will use my best efforts to uphold our
commitment in this area in the overall government budget
process.
° I have designated commercial operations as one of the
top two priorities of this office for the rest of this
year. The other, by the way, is our responding to the
current narcotics crisis on the Southwest Border.
° I have established a regulatory review group that
will closely monitor Customs regulatory actions in
commercial matters. This group will be headed by
the Deputy Assistant Secretary for Regulatory,
Trade and Tariff Enforcement.
° Finally, I have given my commitment to the continued
development of ACS and to the implementation of a
user fee package that will ensure a level of Customs
commercial staffing to meet workload growth in the
coming years.
As a final thought, let me assure you that I am under no
illusions regarding the difficulty of the task ahead. As I
stated at the outset, it is a question of making difficult
choices. In expressing my commitment to the Customs commercial
function, I hope I have conveyed to you the overall outlook and
perspective with which I intend to make these choices.
In undertaking this effort, I welcome the opportunity to
hear your views as representatives of the trade community and
the international trade bar.
- 8 Finally, let me express my appreciation to the ABA and
particularly to David Cohen and David Busby, for the opportunity
to share my perspective with each of you today. I also want
to thank each of you for your kind attention this afternoon.
I look forward to your questions and comments.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
L!B?.A?,Y.R00i-1 5310
iY
I 8 oi AH "BR
ARIr;iHT OF ThE TREASURY
For Immediate Release
April 25, 1986
Contact:
Charlie Powers
566-8773
TREASURY DEPARTMENT ASSESSES PENALTY AGAINST
CONNECTICUT NATIONAL BANK UNDER BANK SECRECY ACT
The Department of the Treasury announced today that
Connecticut National Bank, Hartford, Connecticut, has agreed to
a settlement that requires the bank to pay a civil penalty of
$220,000 for failure to report in excess of 1,000 currency
transactions as required by the Bank Secrecy Act.
Francis A. Keating, II, Assistant Secretary (Enforcement),
who announced the penalty, said the penalty represented a
complete settlement of Connecticut National Bank's civil liability for these violations. Keating said that Connecticut
National Bank came forward voluntarily, cooperated fully with
Treasury in developing the scope of its liability, and has
instituted measures to ensure full compliance with the Bank
Secrecy Act in the future.
The Department of the Treasury has no evidence that
Connecticut National Bank engaged in any criminal activities in
connection with these reporting violations.
###
B-558
-2041
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
J 3 R April 28J 53&0
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
T „
, c 7 noQ
'^3(1 9 53 AH V.R
Tenders for $7,008 million of 13-week bills and for $7,018 million
of 26-week bills, both to be issued on
May 1, 1986,
were acceptetrtoda^RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing July 31, 1986
Discount Investment
Rate
Rate 1/
Price
6.04%
6.08%
6.08%
6.22%
6.26%
6.26%
26-week bills
maturing October 30, 1986
Discount Investment
Rate
Rate 1/
Price
6.12% £/
6.14%
6.14%
98.473
98.463
98.463
6.40%
6.42%
6.42%
96.906
96.896
96.896
a/ Excepting 1 tender of $530,000.
Tenders at the high discount rate for the 13-week bills were allotted 91%
Tenders at the high discount rate for the 26-week bills were allotted 78%
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
$
Accepted
182,465
19,331,570
22,325
38,285
40,115
50,290
1,512,040
78,905
36,330
58,885
44,820
1,836,130
334,845
$ 132,465
5,922,790
22,325
38,285
40,115
40,290
150,040
50,905
33,680
58,705
39,370
144,270
334,845
:
63,060
19,325,640
12,795
17,625
148,125
88,250
1,370,845
68,770
41,875
42,390
30,610
1,537,535
347,770
$
43,060
5,924,540
12,795
17,625
37,575
66,150
136,645
40,770
36,375
42,390
24,510
287,715
347,770
$23,567,005
$7,008,085
: $23,095,290
$7,017,920
$20,508,200
1,064,045
$21,572,245
$3,949,280
1,064,045
$5,013,325
: $19,610,080
:
965,610
$20,575,690
$3,532,710
965,610
$4,498,320
1,764,860
1,764,860
:
1,600,000
1,600,000
229,900
229,900
:
919,600
919,600
$23,567,005
$7,008,085
: $23,095,290
$7,017,920
$
An additional $76,100 thousand of 13-week bills and an additional $290,200
thousand of 26-week bill6 will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
R-^Q
2041
TREASURY NEWS
v
lepartment of the Treasury • Washington,
Telephone 566-2041
LIBRA :D.C.
ROOH• 5510
FOR RELEASE AT 4:00 P.M.
'SV
I 8 os AH T.S April
29
' 1986
"•!£ 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 May 8, 1986.
This offering
will result in a paydown for the Treasury of about $300
million, as
the maturing bills are outstanding in the amount of $14,304 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 Daylight Saving time, Monday, May 5, 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
August 8, 1985,
and to mature August 7, 1986
(CUSIP No.
912794 KP 8), currently outstanding in the amount of $15,821 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
May 8, 1986,
and to mature November 6, 1986
(CUSIP No.
912794 LJ 1 ) .
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 May 8, 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 $805
million as agents for foreign and international monetary authorities, and $3,039 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-560
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 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 pay.ment 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
department of the Treasury • Washington, D.C. • Telephone 566-2041
JBf^At'.ROOM 5310
For Immediate Release
April 2 9 , 1986
Contact: Bob Levine
(202) 566-20-4,1 n C
ML •., i-r 1HE TREASURY
U.S.-China Joint Economic Committee Meeting May 8-10
Secretary of the Treasury James A. Baker III will head an
inter-agency delegation to the sixth annual
U.S.-China
Joint Economic
session of the
Committee in Beijing May 8-10.
Finance Minister Wang Bingqian will head the delegation of the
Peoples Republic of China.
Other agencies represented on the U. S. delegation include the
Export-Import B a n k , the U. S. Trade R e p r e s e n t a t i v e , the National
Security C o u n c i l , the Department of State and the Board of
Governors of the Federal
Reserve
System.
The meeting will discuss macroeconomic policies of the U. S.
and Chinese g o v e r n m e n t s , including
foreign
# # #
B-561
prospects for the future,
i n v e s t m e n t , joint ventures and tax policy.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
TO BE RELEASED AT 4:00" p.m-J
PRESS CONFERENCE
B-fUaY. ROOM 5310
April 30, 1986
/ 8 25 Ail f'«
--5'3'JRY
TREASURY ANNOUNCES ELIMINATION OF 20-YEAR BONDS AND
CONSIDERATION OF REDUCTION IN SAVINGS BONDS INTEREST RATE FLOOR
20-year bond
The Treasury Department announced today that it will eliminate
the regular quarterly 20-year bond cycle. The Department announced
on March 18 the cancellation of the 20-year bond that it normally
would have auctioned in late March, because Congress had not yet
acted to increase the amount of Treasury's authority to issue longterm bonds without regard to the 4-1/4 percent statutory interest
rate ceiling. The Department stated at that time that it wished
to preserve its then remaining bond authority for the 30-year bond
to be offered in the May refunding, because the 30-year bond is
a more attractive issue in the market and thus less costly to the
Treasury. Over the past month Treasury has carefully assessed the
market's reaction to the cancellation of the March 20-year bond
and concluded that it would be more cost-effective for the Treasury
to issue larger amounts of 10- and 30-year securities rather than
20-year issues. That decision is reflected in the significant
increases in the amounts of the 10- and 30-year issues announced
today. While there will be no 20-year issues in the near future,
the maturities and timing of Treasury issues over the longer run
will, of course, depend upon market conditions and total financing
needs at the time.
Savings Bond rate
The Treasury also announced that it is considering the need
to reduce the guaranteed minimum interest rate on new issues of
cess of the market-based
U.S. Savings Bonds.
November 1982. Since
The Treasury is pleased with the sue
d a yield equivalent to
variable rate savings bond introduced in ble rate for savings bonds
then Series EE savings bonds have provide the previous EE bonds,
85 percent of the 5-year Treasury marketa vantages not offered on
have a guaranteed minimum
held at least 5 years. Such bonds, like ars. The new savings bond
have early redemption and tax deferral ad t the same time it has
Treasury marketable securities, and also a portion of the public
rate of 7.5 percent if held at least 5 ye tabl e securities. Sales
has been well received by savers, while a from $779 million in the
the first quarter of 1986.
been a cost effective means of financing
debt, as compared to financing with marke
of
savings
bonds
than
doubled,
-562
third
quarter
of have
1982 more
to $1.7
billion
in
- 2 Market yields have declined substantially since the
current terms of the market-based savings bond were established.
The market-based savings bond rates are calculated in six-month
blocks, and are announced early in May and November each year.
The first market-based rate announced in November 1982 was 11.09
percent. The rate for the current 6-month period is 8.36 percent,
for bonds purchased through today. The rate for the May-October
period, to be announced later this week, will be about 7 percent.
Thus, the variable market-based rate, for the first time, will be
lower than the 5-year floor rate of 7.5 percent.
In these circumstances, Treasury is considering a reduction in
the 7.5 percent floor for future issues of Series EE savings bonds,
in order to preserve the cost effectiveness of the program and to
avoid excessive competition with other savings forms. The Department
is not considering a change in the market-based formula, and any
reduction in the 7.5 percent guaranteed minimum rate will apply
only to bonds sold, or extended in maturity, after the reduction
is announced.
TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 56
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE.^ April 30, 1986
TREASURY MAY QUARTERLY FINANCING .
„
?
3
. •'
The Treasury will raise about $12,800 million of new cash
and refund $14,190 million of securities maturing May 15, 1986, by
issuing $9,000 million of 3-year notes, $9,000 million of 10-year
notes, and $9,000 million of 30-year bonds. The $14,190 million
of maturing securities are those held by the public, including
$1,025 million held, as of today, by Federal Reserve Banks as
agents for foreign and international monetary authorities.
The 10-year note and 30-year bond being offered today will
be eligible for exchange in the STRIPS program and, accordingly,
may be divided into their separate Interest and Principal Components and maintained on the book-entry records of the Federal
Reserve Banks and Branches. Once a security is in the STRIPS
form, the components may be maintained and transferred in multiples of $1,000. Financial institutions should consult their
local Federal Reserve Bank or Branch for procedures for requesting securities in STRIPS form.
The three'issues totaling $27,000 million are 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 prices of accepted competitive tenders.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $1,819 million
of the maturing securities that may be refunded by issuing additional amounts of the new securities at the average prices of
accepted competitive tenders .
Details about each of the new securities are given in the
attached "highlights" of the offering and in the official offering
circulars. The circulars, which include the CUSIP numbers for components of securities with the STRIPS feature, can be obtained by
contacting the nearest Federal Reserve Bank or Branch.
oOo
Attachment
B-563
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
MAY 1986 FINANCING TO BE ISSUED MAY 15, 1986
April 30, 1986
Amount Offered to the Public.
$9,000 million
Description of Security;
Term and type of security...., ....3-year notes
Series and CUSIP designation., ....Series R-1989
(CUSIP No. 912827 TP 7)
CUSIP Nos. for STRIPS Componei ts..Not applicable
$9,000 million
10-year notes
Series C-1996
(CUSIP No. 912827 TQ 5)
Listed in Attachment A
of offering circular
May 15, 1996
May 15, 1989
Maturity date
To be determined based on
....To be determined based on
Interest rate
the average of accepted bids
the average of accepted bids
To
be determined at auction
....To be determined at auction
Investment yield
To
be determined after auction
....To
be
determined
after
auction
Premium or discount
November
15 and May 15
....November 15 and May 15
Interest payment dates
$1,000
$5,000
Minimum denomination availabl
To be determined after auction
Amount Required for STRIPS... ....Not applicable
Terms of Sale:
Yield auction
....Yield auction
Method of sale
Must be expressed as
....Must
be
expressed
as
Competitive tenders
an annual yield with two
an annual yield with two
decimals, e.g., 7.10%
decimals, e.g., 7.10%
Noncompetitive tenders....... ....Accepted in full at the aver- Accepted in full at the average price up to $1,000,000
age price up to $1,000,000
Accrued interest
None
....None
payable by investor
Payment Terms:
Payment through Treasury Tax
Acceptable for TT&L Note
Acceptable for TT&L Note
and Loan (TT&L) Note Accounts
Option Depositaries
Option Depositaries
>ayraent by non-institutional
Full payment to be
Full payment to be
.nvestors
submitted with tender
submitted with tender
)eposit guarantee by
Acceptable
Acceptable
lesignated institutions
[ey Dates:
Receipt of tenders
ettleraent:
) funds immediately
available to the Treasury.
) readily-collectible check.
$9,000 million
30-year bonds
Bonds of 2016
(CUSIP No. 912810 DW 5)
Listed in Attachment A
of offering circular
May 15, 2016
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
November 15 and May 15
$1,000
To be determined after auction
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Acceptable for TT&L Note
Option Depositaries
Full payment to be
submitted with tender
Acceptable
Tuesday, May 6, 1986,
prior to 1:00 p.m., EDST
Wednesday, May 7, 1986,
prior to 1:00 p.m., EDST
Thursday, May 8, 1986,
prior to 1:00 p.m., EDST
Thursday, May 15, 1986
Tuesday, May 13, 1986
Thursday, May 15, 1986
Tuesday, May 13, 1986
Thursday, May 15, 1986
Tuesday, May 13, 1986
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
' 05 PH '-fa
STATEMENT OF THE HONORABLE FRANCIS A. KEATING, II
ASSISTANT SECRETARY (ENFORCEMENT)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE [
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
MAY 1, 1986
-, .
1c TR
EA$URY
The Treasury View on Legislation to Combat Money Laundering
Mr. Chairman and Members of the Committee:
I sincerely appreciate the opportunity to appear before
you to discuss legislative responses to the problems of money
laundering, especially legislative initiatives that will enhance
Treasury's enforcement of the Bank Secrecy Act. This is my first
opportunity to testify before* a Senate panel on this subject
since I assumed the position of Assistant Secretary last December
and to affirm to you my commitment to rigorous and efficient Bank
Secrecy Act enforcement.
I especially want to thank Senator D'Amato who early on
recognized the magnitude of the money laundering problem and
was the earliest proponent of measures to strengthen Treasury's
enforcement capability under the Bank Secrecy Act.
Before turning to the legislative measures under discussion,
I would like to discuss briefly the importance of the Bank
Secrecy Act to law enforcement and recent Treasury initiatives
to improve the compliance by financial institutions with the
requirements of the Act.
Importance of the Bank Secrecy Act
The enforcement and administration of the Bank Secrecy Act is
the centerpiece of Treasury's efforts to combat money laundering.
The reporting data generated pursuant to the Act and the regulations under it are essential to our country's investigations
into drug trafficking, organized crime, tax evasion and a host
of related offenses. The investigations that rely on the information are not Treasury's alone. Other federal agencies and
B-564
-2state and local law enforcement use this information to uncover
and attack the financial base of criminal enterprises.
Some of the most important uses of the information pertain to
the thirteen task forces created to investigate organized crime
and drug trafficking. Since becoming fully operational in July
of 1983, these task forces have initiated over 1200 cases. They
have resulted in the indictment of 8500 individuals and 3400
convictions.
These statistics are only part of:the story. Two out of
every three of those cases have a financial component, and an
even larger percentage use Treasury's financial analytical
capability in one way or another. This analytical capability, is
wholly dependent on the Bank Secrecy Act reporting information.
This information, when analyzed, can provide direct leads for new
investigations. It can provide support for ongoing investigations. And even where a specific investigation is not involved,
the information allows us to track currency flows and detect
abnormal patterns that could be an indication of illicit
financial activity. This information may reflect the need for
international law enforcement cooperation.
Treasury's Compliance Program
Treasury is committed to fulfillment of the statutory mandate
of the Bank Secrecy Act of requiring reports and records of
information "having a high degree of usefulness to criminal, tax,
and regulatory investigations or proceedings." In order to
maximize the utility of the required information, universal
compliance with the Bank Secrecy Act by all financial institutions is essential. To that end, Treasury has devoted
significant effort and resources to compliance enforcement.
For instance, Treasury has imposed a number of civil
penalties against financial institutions for past non-compliance.
In the wake of the publicity surrounding the Bank of Boston case,
and in good measure as a response to Congressional hearings,
over sixty banks or bank holding companies have come forward to
Treasury with past violations of the Bank Secrecy Act. Some
have come forward as a result of bank regulatory examinations,
particularly those of the Comptroller of the Currency. To date,
sixteen civil penalties have been assessed under 31 U.S.C.
§ 5321, ranging from $112,000 to $4.75 million in the case
of Bank of America.
We believe that Treasury's rigorous enforcement of the Bank
Secrecy Act, including the imposition of publicly announced,
substantial civil penalties, where appropriate, has contributed
to enhanced awareness of the requirements of the Bank Secrecy
Act. As a consequence, and as confirmed in our dealings with
-3many banks and the increased volume of Currency Transaction
Reports, we believe that overall compliance has improved and that
compliance has become a high priority with many major financial
institutions.
Improved Examination Procedures
Another major initiative to ensure full compliance with the
Bank Secrecy Act has been Treasury's work with bank supervisory
agencies to improve and standardize Bank Secrecy Act examination
procedures.
As many of the civil penalty cases and the Bank of Boston
case demonstrated, the procedures being used by the examiners
were not sufficient to ensure that all violations of the Act
would be detected, particularly failures to report international
bank-to-bank transactions. These procedures needed to be
improved, and a number of other issues also had to be considered
in order to make compliance examinations more effective. To
address these matters, we had a series of meetings with the
Federal bank supervisory agencies which resulted in the issuance
of uniform procedures for examiners for checking the compliance
of financial institutions with the Bank Secrecy Act.
Commitment of Treasury Resources
In July, 1985, the Treasury Department established the Office
of Financial Enforcement to assist in implementing and administering the Bank Secrecy Act regulations. The establishment of
this office provided a focal point for Bank Secrecy Act related
activity within the Treasury Department and acknowledged the
increasing importance of the Act in Treasury's law enforcement
efforts. The office has broad responsibilities for the compliance activities of all agencies that have been delegated
responsibilities under the Act, and there has been an increased
commitment of staff resources to the office.
In addition to the increase in the Office of Financial
Enforcement, there has been a very large commitment of resources
by both the Customs and the IRS. The IRS has established a
separate division in Detroit to handle BSA reporting matters. It
has taken a number of steps to meet the temporary backlog in
processing of Currency Transaction Reports that resulted from
the unanticipated surge in reporting following the Bank of Boston
case and the permanent increase in filing resulting from the
recent heightened awareness of Bank Secrecy Act requirements.
Regulatory Initiatives
Since last year, we have strengthened the Treasury Bank
Secrecy Act regulations in several respects. On May 7, 1985,
regulations became effective that designated casinos as
-4financial institutions subject to Bank Secrecy Act reporting
and recordkeeping requirements. As evidenced in hearings by
the President's Commission on Organized Crime last summer, money
laundering through casinos may have been even more widespread
than once thought. We believe that the new regulations have
reduced the attractiveness of the use of casinos for money
laundering.
A regulatory amendment pertaining to international transactions was published as a final rule last summer. Under the
regulations, Treasury will be able in the future to require a
financial institution or a selected group of financial institutions to report specified international transactions, including
wire transfers or cashier's checks, for defined periods of time.
We envision that this will require reporting of transactions with
financial institutions in designated foreign locations that would
produce information especially useful in identifying individuals
and companies involved in money laundering and tax evasion. The
Internal Revenue Service's Office of Criminal Investigations
is developing a plan for the initial use of this regulatory
authority.
We are also discussing a number of other regulatory
amendments, including regulatory solutions to problems of
"smurfing" and structuring transactions to avoid the reporting
requirements of the Bank Secrecy Act. These revisions are being
discussed within Treasury and with the Department of Justice and
should be published in the Federal Register within the next few
weeks. As with all amendments to the Bank Secrecy regulations,
Treasury will consider carefully the financial and operational
impact of regulatory changes on financial institutions as it
seeks to meet the needs of law enforcement.
Legislation
I would now like to address the various proposals under
discussion to bolster our attack against money laundering and
to improve Treasury's enforcement of the Bank Secrecy Act.
First is S. 1335, the "Money Laundering and Related Crimes
Act," which was developed jointly by the Departments of Justice
and Treasury. I would like to remark on the critical revisions
to the Bank Secrecy Act contained in the bill. I understand that
the Department of Justice will address the provisions of the bill
establishing the criminal offense of money laundering and related
revisions to Title 18.
Most important, under S. 1335 the Secretary would be given
for the first time summons authority both for financial
institution witnesses and documents in connection with Bank
Secrecy Act violations. This authority was among the legislative
-5recommendations in the October, 1984 report of the President's
Commission on Organized Crime on money laundering and is also
contained in S. 571 and S. 1385.
Under S. 1335, the Secretary may summon a financial
institution officer, or an employee, former officer, former
employee or custodian of records, who may have knowledge relating
to a violation of a recordkeeping or reporting violation of the
Act and require production of relevant documents. This authority
is essential both to investigate violations and to assess the
appropriate level of civil penalties once a violation is
discovered.
This authority is especially needed for enforcement of the
Bank Secrecy Act with respect to miscellaneous non-bank financial
institutions, such as casinos and foreign currency brokers, which
number in excess of 3,000. The responsibility for compliance
review of these institutions has been delegated to the Internal
Revenue Service. However, currently, the IRS summons authority
is restricted to Title 26 purposes. Therefore, in examining
these institutions IRS must rely on voluntary cooperation.
Under this bill, a summons would be issued only by the
Secretary or with his approval by a supervisory level official of
an organization to which the Secretary has delegated Bank Secrecy
Act enforcement authority, e.g., the Internal Revenue Service,
the Comptroller of the Currency or the Customs Service. An agent
or bank examiner in the field could not issue a summons on his or
her own authority.
The bill also provides for a civil penalty for negligent
violations of the Bank Secrecy Act. Currently, Treasury has
authority to assess civil penalties for "willful" violations
under 31 U.S.C. § 5321. "Willful" in a civil penalty context
means with specific intent or with reckless disregard of the
law. Nevertheless, mere negligent non-filing of currency reports
deprives the government of potentially useful law enforcement
information to the same extent as willful non-filings. The
prospect of penalties for negligent violations should encourage
financial institutions to give more attention to good compliance.
A provision is added to the civil penalty statute to clarify
that criminal penalties under § 5322 and civil penalties under
§ 5321 are cumulative. This provision makes explicit that if the
Secretary of the Treasury assesses a civil penalty in a case and
then refers the case to the Department of Justice for criminal
prosecution, a court should impose criminal penalties without
reference to whether a civil penalty has been imposed.
Similarly, if a criminal conviction were to come before
assessment of a civil penalty, the Secretary of the Treasury is
-6free to impose the full measure of civil penalties available.
I must emphasize that we do not view this provision as new
authority, but as a clarification of existing law.
Section 5(b) revises 31 U.S.C. § 5319 relating to disclosure
by the Secretary of the Treasury of information reported under
the Bank Secrecy Act. Currently, the Secretary is required to
make such information available to a Federal agency upon request.
The amendment clarifies that the Secretary may also make this
information available to a State or local agency and may make
disclosure to any Federal agency if he has "reason to believe"
the information would be useful to a matter within the receiving
agency's jurisdiction, with or without a request. The bill also
clarifies that disclosure may also be made to the intelligence
community for national security purposes.
Finally, section 5(f) amends the Bank Secrecy Act definition
of "monetary instrument" to eliminate any possibility that the
current definition could be viewed as a bar to the defining of
the term "monetary instrument" by regulation to include, for
example, cashier's checks and checks drawn to fictitious payees.
S. 1335 also provides important revisions to the Right to
Financial Privacy Act (RFPA). The revisions to the RFPA contained in the Administration's money laundering bill can be
considered as an adjunct to that bill, with application separate
from the subject of criminal money laundering legislation or
enforcement of the Bank Secrecy Act.
The most important and what should be the least controversial
of the RFPA revisions is the amendment to subsection 1103(c) of
the RFPA, 12 U.S.C. ^ 3403(c). Currently, § 3403(c) provides
that nothing in the Act shall preclude a financial institution
from notifying a government authority that the institution has
information "which may be relevant to a possible violation of any
statute or regulation." The statute gives no guidance on what
information can be given without running the risk of exposure to
civil liability under the RFPA. The proposed amendment sets out
explicitly that enough information can be given to enable Federal
law enforcement authorities to proceed with legal process, e .g. ,
summons, subpoena, or search warrant, in accordance with the
RFPA. This information at a minimum must include the nature of
the suspicious activity, the name of the customer, and other
identifying information necessary to identify the customer or the
account involved.
We believe you should find very little opposition in the
financial community to this particular revision of the RFPA.
The revision imposes no new legal duty on financial institutions,
clarifies the right of financial institutions to act as good
-7citizens without risk of civil liability, far outweighs any
jeopardy to legitimate privacy interests, and would be of major
assistance to Federal law enforcement.
For consistent application throughout the United States,
this amendment must be accompanied by the proposed preemption
provision so that a financial institution that complies with the
RFPA will not run afoul of any more restrictive state privacy
laws. The proposed clarification of the "good faith defense" to
civil liability is also needed to protect financial institutions
who cooperate with Federal law enforcement in good faith within
the confines of the RFPA.
In addition to the Administration's money laundering bill,
there is another legislative initiative fully supported by the
Administration on which I urge early and favorable action. This
is S. 2306 introduced last week by Senator D'Amato.
This bill would prohibit structuring of currency transactions
to avoid the $10,000 currency transaction reporting requirement.
Structuring includes the well-known practice of "smurfing."
Recent decisions in three Federal Circuits have made it clear
that the current law is inadequate to sustain consistent prosecutions for structuring. The proposal would make a person who
structures transactions to avoid the currency reporting requirements, or who causes a financial institution not to file a
required report, subject to the criminal and civil sanctions
of the Bank Secrecy Act.
The bill also provides seizure and forfeiture authority for
currency related to a domestic (CTR) reporting violation or
interest in property traceable to the currency. The forfeiture
would not affect bona fide purchasers who took the currency or
property without notice of a reporting violation. Currently,
there is forfeiture authority only for monetary instruments
underlying violations of the reporting requirements for
internationally transported monetary instruments. The forfeiture
would not be applicable to domestic financial institutions
examined by a federal bank supervisory agency or a financial
institution regulated by the Securities and Exchange Commission.
There have been a number of past cases in which the absence
of forfeiture authority allowed the proceeds of criminal
enterprise to allude the grasp of the government.
Treasury must respectfully take issue with one proposal in
S. 1385. This bill would require a financial institution to
submit its list of customers exempt from the requirements of the
Bank Secrecy Act to Treasury every quarter. Treasury would then
have to review and approve or revoke the list within 90 days.
-8The financial institution would consider the exempt list
approved, unless notified otherwise by Treasury within the 90-day
period.
Under the current regulations (31 C.F.R. § 103.22(b)), a bank
may exempt from reporting certain cash deposits and withdrawals
of accounts of retail businesses in amounts commensurate with the
lawful, customary conduct of such a business. The bank has a
continuing duty to monitor the qualifications for such
exemptions. It would be unwise, in our view, to shift the burden
of monitoring the eligibility of bank:customers for exemptions
away from the bank. The bank is in the best position to know its
customers, the normal course of their business operations, and
changes in their status. Moreover, the provision would take an
army of Treasury employees to enforce. The provision is
accordingly inefficient, overly burdensome and unnecessary.
We are exploring other solutions to past problems with banks'
improper placement of customers on exempt lists. For instance,
we are considering a regulation under which a customer would have
to attest to information contained in a bank's request for a
special exemption. Under S. 2306, a customer who causes a
financial institution to put it on the exempt list on the basis
of false information provided by the customer would be liable
under the Bank Secrecy Act.
We are also planning to work with the banking industry to
educate further banks on exemption procedures. We are
considering issuing a Treasury publication on the subject that
wouldThis
be available
to prepared
all financial
institutions.
concludes my
remarks.
I will be happy to
answer any questions the Committee may have.
TREASURY NEWS W
Department of the Treasury • Washington, D.C. • Teteflrirtittie 566-2041
FOR RELEASE AT 12:00 NOON
May 2, 1986
H*v h 4 o~, PH 'RB
TREASURY'S 52-WEEK BILL OFFERING IT O? THE TREASURY
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,250
million of 364-day Treasury bills
to be dated May 15, 1986,
and to mature May 14, 1987
(CUSIP No. 912794 MK 7 ) . This issue will provide about $700
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,550
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 Daylight Saving time, Tuesday, May 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 May 15, 1986.
In addition to the
maturing 52-week bills, there are $13,788 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 $1,561 million as agents for foreign
and international monetary authorities, and $5,408 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 $205
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-565
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 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
2041
Department of the Treasury • Washington, D.C. • Telephone 566FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S VEEXtVi §510AUCTIONS
May 5, 1986
Tenders for $7,079 million of 13-week bills and for $7,001 million
of 26-week bills, both to be issued on May 8,-^pSfe*,^
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
i m
13-week bills vf OF THE
maturing August 7, 1986
Discount Investment
Rate
Rate 1/
Price
6.05%
6.07%
6.07%
6.23%
6.25%
6.25%
26-week bills
maturing November 6, 1986
Discount Investment
Rate
Rate 1/
Price
98.471
98.466
98.466
6.08%
6.10%
6.09%
6.36%
6.38%
6.37%
96.926
96.916
96.921
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 54%.
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
Received
Accepted
:
Accepted
$
37,100
26,369,345
29,425
57,950
45,160
37,070
1,837,915
82,470
11,260
59,115
41,145
1,361,085
340,670
$
37,100
6,222,780
29,285
55,930
45,160
37,070
83,450
54,470
10,860'
59,115
31,145
71,710
340,670
$
29,045
20,130,815
16,320
24,615
50,000
47,505
1,431,000
74,550
11,770
45,960
31,690
1,550,990
374,075
$
29,045
5,380,715
16,320
24,615
38,620
33,205
246,310
46,550
11,770
45,925
21,690
732,010
374,075
$30,309,710
$7,078,745
• $23,818,335
$7,000,850
$27,497,005
1,095,120
$28,592,125
$4,266,040
1,095,120
$5,361,160
$20,832,205
:
859,790
: $21,691,995
$4,014,720
859,790
$4,874,510
1,540,925
1,540,925
1,500,000
1,500,000
176,660
176,660
626,340
626,340
$30,309,710
$7,078,745
$23,818,335
$7,000,850
:
An additional $45,240 thousand of 13-week bills and an additional $179,060
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
B-566
TREASURY NEWS
Department of the Treasury • Washington, D.C. • T^ephone
FOR RELEASE AT 4:00 P.M. May 6, 1986
TREASURY'S WEEKLY BILL OFFERING" Liil
«,,.
; --••- -;EA5URY
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 May 15, 1986.
This offering
will provide about $200
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,788 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 Daylight Saving time, Monday, May 12, 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
February 13, 1986, and to mature August 14, 1986
(CUSIP No.
912794 KZ 6 ) , currently outstanding in the amount of $7,046 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
May 15, 1986,
and to mature November 13, 1986 (CUSIP No.
912794 LK 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 May 15, 1986.
In addition to the maturing
13-week and 26-week bills, there are $8,550
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
amounts, foreign and international monetary authorities are considered to hold $1,340 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,545 million as
agents for foreign and international monetary authorities, and $5,428
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
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
B-567
(for 26-week series) or Form PD 4632-3 (for 13-week series).
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., 99.9 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.
4/85
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566
LIjRAaY.r;;-OM 5310
FOR IMMEDIATE RELEASE
May 6, 1986
"V "i :' rn P!' 'Of*
RESULTS OF AUCTION OF 3-YEAR NOTES
!n
°°
i-ii'AKT.MLNI OF T H E T-.ET *• 3U.1Y
The Department of the Treasury has accepted $9,013 million
of $24,964 million of tenders received from the public for the
3-year notes, Series R-1989, auctioned today. The notes will be
issued May 15, 1986, and mature May 15, 1989.
The interest rate on the notes will be 6-7/8%. The range of
accepted competitive bids, and the corresponding prices at the 6-7/8%
interest rate are as follows:
Yield Price
Low 6.94% 99.827
High
6.98%
99.720
Average
6.97%
99.747
Tenders at the high yield were allotted 8%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Boston
$
45,560
New York
21,515,165
Philadelphia
16,750
Cleveland
257,715
Richmond
45,065
Atlanta
42,385
Chicago
1,920,825
St. Louis
96,095
Minneapolis
31,095
Kansas City
91,685
Dallas
18,450
San Francisco
881,595
Treasury
2,085
Totals
$24,964,470
Accepted
$
15,560
7,886,005
16,750
49,315
33,385
40,465
656,545
76,095
25,595
89,685
14,450
107,395
2,085
$9,013,330
The $9,013 million of accepted tenders includes $685
million of noncompetitive tenders and $8,328 million of competitive tenders from the public.
In addition to the $9,013 million of tenders accepted in
the auction process, $388 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,019 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.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE , *1Q t oy, ***?"75~- ^86
RESULTS OF AUCTION OF 10-YEAR NOTES
n
_ p,, \QZ
The Department of the Treasury has
of $20,830 million of tenders received
10-year notes, Series C-199 6, auctioned
issued May 15, 1986, and mature May 15,
y
o o9 in L'n
accepted $,9,017 mi!6L.4Pn
from the 'public for the
today. The notes will be
1996.
The interest rate oh the notes will be 7-3/8%.!/ The range
of accepted competitive bids, and the corresponding prices at the
7-3/8% interest rate are as follows:
Yield Price
Low 7.45% 99-478
High
Average
7.48%
7.47%
99.270
99.339
Tenders at the high yield were allotted 80%.
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
Accepted
Received
$
44,318
18,542,363
$
4>318
8,405,363
605
605
30,676
16,394
28,057
1,303,456
70,728
20,131
28,805
5,916
738,434
25,676
9,394
22,457
380,056
54,728
18,131
26,805
1,916
67,434
324
324
$20,830,207
$9,017,207
The $9,017 million of accepted tenders includes $432
million of noncompetitive tenders and $8,585 million of competitive tenders from the public.
In addition to the $9,017 million of tenders accepted in
the auction process, $5 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $500 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.
B-56«
TREASURY NEWS
a p a r t m e n t of the Treasury • Washington, D.C. • Telephone 566-2041
-'"M.-ij.ROOM 5310
FOR RELEASE UPON DELIVERY ^ 9 3 57PM MR
Expected at 10:00 a.m.
May
8,
1986
" '""'-^OFTHETREASURY
TESTIMONY OF THE HONORABLE
GEORGE D. GOULD
UNDER SECRETARY FOR FINANCE
•U.&. DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I appreciate this opportunity to present, in conjunction with
Chairman Gray, the Administration-Federal Home Loan Bank Board
(FHLBB) proposal to recapitalize FSLIC.
We have developed this plan in alliance with the leadership
of the twelve Federal Home Loan Banks (FHLBanks), whose contribution of up to $3 billion of capital is at the core of this
effort to strengthen FSLIC. We also have worked closely with
the leaders of the thrift industry, to our substantial benefit.
In particular, the officials and staffs of the U.S. League of
Savings Institutions and the National Council of Savings Institutions have given us thoughtful and constructive counsel. The
result, I believe, is a popular proposal that will strengthen
FSLIC, free FSLIC to resolve its problem cases more expeditiously,
and increase depositor confidence.
Need for This Proposal
This Subcommittee is well informed about the problems of FSLIC
and the savings and loan (S&L) industry, so I will not dwell
long on the need for this proposal. Nevertheless, a brief
statement of need may give you the context within which we
developed this plan.
B-570
- 2 Estimates of the size of the problem confronting FSLIC.vary
widely: Most range from about $10 to $25 billion. The crux
of the problem is that the assistance costs, even under the
most conservative estimates, exceed FSLIC's present financial
reserves of about $6 billion.
If we do not recapitalize the fund, FSLIC would need to continue
deferring the resolution of many problem S&Ls. This deferral
would only increase the fund's ultimate costs. With the
appropriate financial and organizational resources, the FHLBB
and FSLIC could set more ambitious targets and resolve more
cases, more quickly.
This is a propitious time to act. The attractive interest rate
environment provides the ideal window of opportunity to move
ahead vigorously to deal with ailing S&Ls.
Action now on the thrift industry problem should reaffirm depositor
confidence in the health and stability of depository institutions
and the viability of the deposit insurance funds. Furthermore,
prompt handling of the most debilitated S&Ls should help healthy
S&Ls by lowering their cost of deposits, which have been bid up
by the feeble S&Ls1 call for funds at any price.
If we do not strengthen FSLIC now, we may place the S&L industry
at considerable risk in the future should interest rates rise
significantly.
Objectives Guiding the Recapitalization Proposal
Six major objectives guide our FSLIC recapitalization proposal.
First, the proposal balances the financing burden between the
Federal Home Loan Banks (FHLBanks) and the S&Ls. The cost will
be borne entirely by them, without any taxpayer funds.
Second, we transfer funds from these sources to FSLIC through
a combination of assessments and stock purchases (most of
which will be non-redeemable under all circumstances) to avoid
a negative budgetary effect. I will explain more about this
stock investment later in this statement.
Third, this plan can supply up to $25-30 billion to FSLIC over
approximately the next 5 to 6 years, with approximately $15 billion
available in the first 3 years. Given FSLIC's organizational
constraints, this infusion probably represents the maximum level
of resources that FSLIC can efficiently use to resolve problem
cases. Because the plan is flexible by design, FSLIC need not
draw this full amount if the size of the problem turns out
to be at the low end of the estimated range.
- 3 Fourth, the funds transfer to FSLIC is not dependent on any U.S.
Government or FSLIC guarantees of debt.
Fifth, the proposal seeks to accommodate the FHLBanks' concerns
about a substantial increase in their debt costs and the
accounting treatment of their capital contribution. It also
recognizes that the allocation of contributions among the
FHLBanks needs to take into account their proportions of FDICinsured members.
Sixth, this plan addresses the S&L industry's overwhelming
concern — the continuation of the FSLIC special assessment —
by creating the substantial likelihood that this extra assessment can be phased out over the next five years. (The special
assessment is one eighth of one percent of deposits, in addition
to the regular assessment of one twelfth of one percent. If
the size of the problem is within the range suggested by a major
industry task force — $8 to $15 billion — there should.be no
doubt that the special assessment could and would be phased out.)
We believe it is important to show the high probability of
eliminating this extra premium over time (even if the problem
cost turns out to be $25 to $30 billion), because it is a heavy
burden on the industry and we would like to decrease the incentive
for healthy thrifts to switch from FSLIC to FDIC insurance.
Description of the Proposal
In essence the recapitalization proposal leverages both the
current earned surplus of the FHLBanks and future FSLIC assessments to get equity funds into FSLIC more quickly. A separate
corporation (the "Financing Corporation") capitalized by the
FHLBanks will undertake a specially designed financing over time
to channel equity investments into FSLIC. The proposal contains
important safeguards to ensure that both the principal and interest
on the Financing Corporation's special borrowings will be repaid.
Most of the Financing Corporation's investment in FSLIC, however,
will be in the form of non-redeemable capital certificates that
will never be repaid. » The remainder of the Financing Corporation's
investment in FSLIC will be in the form of non-voting capital
stock that may or may not be repaid, with or without a return,
depending on FSLIC's financial performance (as measured through
FSLIC's reserve-to-deposits ratio).
The key elements of the proposal are as follows:
o The FHLBB charters a "Financing Corporation," capitalized
with no more than $3 billion of the FHLBanks' surplus over
about 5 to 6 years. (The FHLBanks had $1.8 billion in
earned surplus at year-end 1985; they earned over $1
billion in 1985 and added about $290 million to their
earned surplus.) The Financing Corporation will not
have its own paid staff.
- 4 o
o
o
o
o
o
o
The Financing Corporation borrows approximately $10 billion through long-term bonds (15 to 30-year maturities)
over these five to six years. It assures payment of
these bonds' principal, without passing any debt
obligation to FSLIC, by buying approximately $2 billion
of long-term, zero-coupon instruments, which will equal
the bond principal upon maturity. The Corporation will
be subject to stringent limits on activities, leverage
and life. (The FHLBanks estimate that the Corporation's
debt will yield 50-75 basis points, a half to three quarters
of a percentage point, above Treasuries of comparable
maturity.)
The Financing Corporation then invests the same amount
the FHLBanks invested in it (a maximum of $3 billion)
in non-voting capital stock of FSLIC and an additional
$8 billion (or more) in non-redeemable capital certificates of FSLIC. (The Financing Corporation could borrow
approximately an additional $5 billion, if needed, by
increasing its purchase of zero-coupon instruments from
$2 billion to the full $3 billion of its available
capital.)
FSLIC employs some of its assessment income to pay
dividends to the Financing Corporation/ which uses this
money to pay interest on its bonds. (When the Financing
Corporation's debt is extinguished, the dividends from
FSLIC end.)
FSLIC uses the rest of its assessment income to add to
its case resolution resources. The combination of
equity and assessments enables FSLIC to deploy about
$15 billion in case resolution funds in the first 3
years and about $10 billion more over the next 2 years.
The special assessment can be phased out gradually over
5 years, while still securing this $25 billion for FSLIC.
The Financing Corporation would repay its debt principal
(through the maturing zeros) around 2020. FSLIC would
not by repaying this debt, nor would it be contingently
liable for it.
FSLIC would retire its outstanding stock, held by the
Financing Corporation, after the Corporation repays all
its debt. (The book value of the FSLIC stock could be
as high as $3 billion, if the FHLBanks make their full
capital contribution to the Corporation.) The payoff
of both the book value and a return on this stock upon
retirement would be totally dependent on FSLIC's
- 5 financial performance (its reserve-to-deposits ratio).
After 1996, if FSLIC's reserve-to-deposits ratio reaches
certain levels, FSLIC would make contributions to an
equity return account. This account, which would be
held by FSLIC until the Financing Corporation paid off
all its debt, would be the sole source of funds for
paying off the FSLIC stock. The non-redeemable capital
certificates issued by FSLIC would be extinguished
without any repayment.
o The Corporation must sunset by 2026 (or earlier if it has
repaid all its debt); its ability to borrow net new funds
would end in 1996.
o The attached diagrams illustrate how the proposal would
operate.
Flexibility of the Proposal
This proposal incorporates some flexibility in the event the
industry problem is larger than estimated and FSLIC needs more
funds. Alternatively, the structure could employ less funds
from the FHLBanks and the industry if the problem proves less
costly.
First, the Financing Corporation could borrow more than $10
billion (by approximately another $5 billion), while continuing
to ensure that all the debt principal will be repaid by the
maturing zero-coupon instruments it purchases. This expansion
could be achieved by employing the Financing Corporation's
full $3 billion capital base (as opposed to just $2 billion,
as in the basic plan), to buy zero-coupon instruments that
will pay off the debt principal.
Second, in the event interest rates rise, the face value of the
zero-coupon instruments (the value at maturity) that can be
purchased by the Financing Corporation will increase. More face
value can be acquired ^because a zero-coupon instrument in effect
pays off all interest, at a compounded rate, together with the
amount originally invested, when the instrument matures; so a
higher interest rate compounded over time will produce a higher
face value amount of a zero-coupon instrument for a given initial
investment. This increased amount at maturity would enable the
Financing Corporation to use its initial capital to back a
larger amount of borrowings. Similarly, the Financing Corporation could generate a larger payoff from the zero-coupon
instruments it purchases by selecting ones with longer
maturities (more years to compound the interest).
- 6 Third, if absolutely necessary, FSLIC could maintain a portion
of the special assessment. While FSLIC should preserve this
additional assessment authority, its use beyond the 5-year
phaseout should be avoided if at all possible.
Budgetary Treatment
This proposal is structured carefully to create fair and
appropriate budgetary receipts that will offset FSLIC's case
resolution costs; these costs are scored as budgetary outlays.
Assessments always have been counted as budgetary receipts.
The" equity investment in FSLIC also should be counted as a
budget receipt for four primary reasons.
First, FSLIC would never repay, under any circumstances, the
bulk of the funds invested in it by the Financing Corporation.
These non-redeemable capital certificates will represent between
$8 to $12 billion of the funds invested in FSLIC.V
Second, FSLIC's responsibility to pay off the non-voting capital
stock owned by the Financial Corporation is completely dependent
on FSLIC's financial condition (its reserve-to-deposits ratio).
The size of this stock is exactly equal to the amount of capital
the FHLBanks have contributed to the Financing Corporation (a
maximum of $3 billion). There is no assurance that the Financing
Corporation, and hence the FHLBanks, will get this equity
investment back.
Third, like other forms of equity, the possible return on this
capital stock investment in FSLIC is dependent on higher levels
of FSLIC's financial performance. Even then, the FHLBB must
approve this return on investment.
Fourth, while this transaction does involve a borrowing (borrowings
are not budget receipts), the Financing Corporation, not FSLIC,
does the borrowing. The Financing Corporation, not FSLIC,
would be responsible lor paying off the principal on this debt.
Indeed, the proposed legislation will state that the Financing
Corporation's debt is not an obligation of the U.S. Government
or FSLIC. The payment of principal on the Financing Corporation's
V
There is an analogy between these certificates and the recent
one percent deposit that capitalized the National Credit
Union Fund, which is counted as a budget receipt. Neither
will ever be repaid. Both pay a rate of return. (Indeed,
the non-redeemable certificates in this plan will stop
paying a return when the Financing Corporation repays its
debt.) The dividends that provide the return will be scored
as outlays when paid out.
- 7 debt is assured by its purchase of the zero-coupon instruments.
(FSLIC will pay dividends, which will count as budget outlays
when they occur, on the equity invested in it, and these dividend
payments will be used by the Financing Corporation to pay the
interest on its debt. It is in the nature of equity, which
may or may not be paid off, to pay dividends.)
Benefits
To summarize the benefits of this FSLIC recapitalization proposal
o FSLIC will be able to employ about $25 billion over
5 years to resolve its case' load of problem thrifts.
These funds should be transferred to FSLIC about as
quickly as we can reasonably expect the FSLIC
organization to handle its problem cases effectively.
o By handling insolvent S&Ls more expeditiously, FSLIC can
halt the expansion of the problem.
o The certain availability of about $25 billion for FSLIC
should increase depositor confidence. This confidence,
plus the sale, merger, or liquidation of the weakest S&Ls,
should help the industry lower its cost of funds.
o The FSLIC recapitalization burden will be shared fairly
between the S&Ls and the FHLBanks. Moreover, the
contributions are structured to minimize the adverse
effects on both. There is a high probability that the
special assessment on the S&L industry can be phased out
over 5 years.
o Regular FHLBank debt should be protected from possibly
higher borrower spreads.
o The legislation requiring the FHLBanks' investment
in the Financing Corporation would resolve the FHLBanks1
concerns about fulfilling fiduciary duties.
o The equity nature of the FHLBanks' capital contribution
to the Financing Corporation — which links the repayment
of the stock and the possibilities of higher returns to
FSLIC's financial performance — should ease the FHLBanks'
accounting treatment. Moreover, it gives the FHLBanks
(whose Presidents are the FHLBB's principal supervisory
agents for each district) an additional future economic
interest in the condition of FSLIC and the industry.
o The formula that governs the FHLBanks' capital contribution
will accommodate FHLBanks with a large percentage of
FDIC-insured members.
- 8 -
o
Finally, the flexibility built into the proposal permits
the FHLBB to raise a range of funds for FSLIC, depending
on FSLIC's needs.
H.R. 4701 — The Financial Institutions Emergency Acquisitions
Amendments of 1986
Mr. Chairman, I understood that these hearings also are intended
to address H.R. 4701, the Financial Institutions Emergency
Acquisitions Amendments of 1986.
The Administration strongly .supports H.R. 4701. The emergency
acquisition provisions you authored in 1982 have proven most
beneficial — by reducing costs for the insurance funds, helping
to maintain financial services to communities, and assisting to
secure the stability of the financial system. We believe that
H.R. 4701 furthers these ends even more.
My prior statement before this Subcommittee emphasized some of
the benefits we believe would be served by a liberalization of
the emergency acquisition provisions of the Garn-St Germain Act.
The banking regulators are in a better position than I to explain
how the particular features of H.R. 4701 are designed to suit
their emergency needs. I know that Comptroller of the Currency
Clarke will address this subject in detail today, including some
minor technical suggestions.
I would, however, be pleased to assist the Subcommittee in any
way you consider constructive to secure the enactment of H.R. 4701.
Conclusion
I expect that the Administration will offer you the FSLIC
Recapitalization bill language within days. It is in the final
stages of our clearance process. After you receive this proposed
legislation, I would, of course, be pleased to address any
questions in any manner that would be most beneficial to you.
I know we share a deep interest in strengthening FSLIC as promptly
as possible. The need is clear, the time is auspicious. The
sooner this proposal becomes law, the sooner FSLIC can move its
case resolution effort into high gear — and the sooner depositors
will know that their government, the Congress and the Executive
branch, can act together to protect the safety and soundness of
the financial system.
I would be pleased to try to answer any questions you might have.
Attachments
Illustration of the FSLIC Recapitalization Proposal
1) Impact on the Government
F H L Bank
System
i
Dividends
S800 M • 1.2 B/yr.
Non-Voting C o m m o n
S3 B
Non-Redeemable
Capital S8-12 B
Ir
Common
Retirement
When Bonds Repaid
(e.g., 2020)
Assessments — — — —
Premiums
^r
FSLIC
Resources
Illustration of the FSLIC Recapitalization Proposal
2) Implementation Particulars
F H L Banks
Equity
$3 B
Purchase Zeros $2-3 B
Funding
Corporation
A. _
Borrowings $10-15 B
k
t
^
Interest $800 M - 1.2 B/yr.
->
[
Dividends
$800 M • 1.2 B/yr.
Non-Voting Common
$3 B
Non-Redeemable
Capital $8-12 B
1
Common
Retirement
When Bonds Repaid
(e.g., 2020)
Assessments - — — —
Premiums
*r
FSLIC
Resources
TREASURY NEWS
>\..»
Department of the Treasury • Washington, D.C. • Telephone
5310 566-204?
TESTIMONY
Robert A. Cornell
Deputy Assistant Secretary
Trade and Investment Policy
. Department of the Treasury
before the
Subcommittee on Telecommunications, Consumer
Protection and Finance
of the
Committee on Energy and Commerce
May 8 , 1986
I appreciate the opportunity to submit the Department of the
Treasury's views on foreign direct investment to the Subcommittee
today. In my testimony today I would like to:
Present a short summary of U.S. Government policy concerning
foreign investment;
Review the data .collection efforts of the U.S. Government
with respect to foreign investment in the United States and
their adequacy; and
Offer comments on H.R. 2582.
U.S. Investment Policy
Our country is now in the unique position of being the host to
more foreign direct investment—approximately $175 billion at the
end of 1985—than any other country in the world. We are also
now on balance a debtor country. At the same time the United
States remains, with over $250 billion in direct investment
abroad, the largest home country for corporations with foreign
affiliates. Foreign investments in the United States have
provided substantial benefits to this country, including
increased employment, new managerial and productive techniques,
B-571
- 2 -
improved efficiency for U.S. industries, strengthened U.S.
capital markets and increased productive capacity. Our outward
direct investment plays a vital role in the countries in which it
locates, is a very significant factor in U.S. trade, and provides
our companies with sizable income each year, $35 billion in 1985.
We, therefore, clearly have a substantial interest in the
conditions under which investment flows occur.
investment Policy Statement
On September 9, 1983, President Reagan issued an investment
policy statement which reflects our recognition of the important
role played by international investment in the United States and
world economies. It was the culmination of extensive interagency
discussions over a period of months.
It spells out the general principles of our free and open policy
on international investment, which are as follows:
Foreign investment contributes to economic growth and
development and promotes worldwide efficiency in production;
The maximum contribution from such investment occurs when it
flows according to market forces;
Foreign investment that flows according to market forces is
welcomed in the United States;
Foreign investors here generally receive national treatment,
which is treatment of the investments of foreign nationals
and companies that is no less favorable than that accorded
by the United States in like situations to the investments
of nationals or companies of the United States;
Our companies should receive similar treatment abroad;
We oppose the use by governments of distortive measures
designed to tilt the benefits of investment and trade in
their favor;
We intend to pursue an active policy toward international
investment designed to reduce government actions that impede
or distort investment flows; and
We will work to protect U.S. investors abroad.
We are actively implementing this policy by pursuing both
multilateral and bilateral initiatives. For example, in the
Organization for Economic Cooperation and Development (OECD) we
- 3 -
have a work program underway to study the impact of investment
incentives and performance requirements. We have encouraged the
multilateral development banks to explore ways to strengthen the
role of the private sector in facilitating direct investment
flows to the developing world. Such flows play a crucial role in
our strategy for promoting renewed growth in developing countries
with large external debts. We are working very hard to persuade
the contracting parties of the GATT to discuss investment issues
in the GATT New Round with a view to adopting a multilateral
framework that will reduce government interference with
investment flows, in particular to discipline the imposition of
performance requirements (such as to export or substitute local
content for imports) on foreign investors. We are pursuing an
active program regarding bilateral investment treaties which
calls for signatories to provide foreign investors with a stable
and predictable investment climate.
We are negotiating in the OECD with many other countries to get
them to reduce and eliminate their remaining limitations on
inward investment. The Code of Liberalization of Capital
Movements of the OECD has already achieved significant
liberalization and aims at further liberalization of investment
regimes. It is the intent of the Code that all liberalizing
measures be applied to all member countries in a
non-discriminatory manner. The related OECD National Treatment
instrument calls for national treatment of already established
foreign investors. As you may know, the United States has been
the leading proponent for expanding these national treatment
obligations. For example, we have spearheaded a successful
effort to add much of the so-called "right of establishment" to
the Code's obligations regarding direct investment. The United
States is leading efforts to arrange a standstill and rollback of
OECD reciprocity measures on the right of establishment.
Adoption of new, restrictive reciprocity measures would seriously
undermine these efforts.
Foreign Investment in the United States
The United States has long benefited from foreign investment. In
fact, the United States could not have developed the way it did
without heavy infusions of capital from abroad. A major
advantage we have enjoyed in attracting such investment is our
steadfast maintenance of an open investment policy. Despite the
large amount of foreign direct investment in the United States,
foreigners own a relatively small percentage of total U.S.
investment in the United States.
Foreign investment in the
United States is not concentrated in a few sectors; rather, it is
spread among a large number of diverse industries.
- 4 -
Safeguards
The United States has a number of safeguards to protect our
security and other national interests. Foreign investors, like
domestic investors, must comply with all U.S. laws, such as
Justice and Federal Trade Commission antitrust requirements, and
Securities and Exchange Commission disclosure requirements.
Furthermore, we have a number of restrictions on activities of
foreign investors in certain key sectors, such as radio and
television broadcasting, coastal and inland shipping, air
transportation within the United States, and the production and
use of nuclear power. In addition, we have an interagency body,
the Committee on Foreign Investment in the United States (CFIUS),
to review certain foreign investments in the United States.
CFIUS
In 1975 President Ford established by Executive Order the
Committee on Foreign Investment in the United States (CFIUS),
which the Treasury Department chairs. The CFIUS has the primary
Executive Branch responsibility for monitoring foreign investment
in the United States and for implementing U.S. policy towards
such investments. Its formal membership includes representatives
from the Departments of State, Defense and Commerce, the Office
of the United States Trade Representative, and the Council of
Economic Advisors. In addition, representatives of other
agencies participate regularly in CFIUS discussions.
The CFIUS is a monitoring body with authority to review foreign
investment which may have major implications for U.S. national
interests. It has not been given authority to approve or
disapprove foreign investments in the United States. However,
through its review and monitoring activities, the CFIUS does
focus Executive Branch attention on particular investments, and
may accordingly enable Executive Branch agencies to better
implement U.S. laws to protect the national interest. The CFIUS
has to a large extent focussed on investment by foreign
government-controlled firms.
We have since 1975 requested through the CFIUS that foreign
governments contemplating direct investment in the United States
consult with us in advance of such an investment. As part of the
CFIUS procedure we have also contacted the companies and
requested that they keep us informed about their negotiation for
such a government-owned or -controlled investment in the United
States. Our experience is that the companies provide us with the
information we need to assess the implications of the investment
for U.S. national interests.
- 5 -
Reciprocity
Let me say a few words about reciprocity, since it is an
important element of H.R. 2582—which requires a certification
from a foreign investor that the country of the foreign investor
(and the foreign country of any person that owns 5 percent of the
foreign investor) permits a U.S. resident to make an investment
of the same type and size and in the same industry as the
proposed investment in the United States.
We share the general concern for fair treatment of U.S. investors
abroad. However, we believe a policy of reciprocity would harm
U.S. interests and undermine U.S. efforts to achieve fair
treatment for our investors. Furthermore, we do not believe that
adopting a reciprocity policy would lead countries to drop their
impediments to foreign investment.
Threatening to close the U.S. market to investors whose home
countries restrict U.S. investment may not cause those countries
to relax their restrictions. Indeed, these governments might be
pleased to have us prevent their investors from investing in the
United States, because they want to keep that investment at
home—a mistaken view, but one which many governments
nevertheless hold.
It is also important to note that the United States has bilateral
and multilateral obligations to accord national treatment to
foreign investors. Our bilateral Treaties of Friendship,
Commerce and Navigation and our bilateral investment treaties
contain such obligations. We also have similar obligations under
the OECD.
Existing Data Collection on Foreign Investment
The International Investment and Trade in Services Survey Act of
1976 charged Treasury and the Department of Commerce with major
data collection and reporting responsibilities concerning foreign
investment. Treasury is charged with two major reporting
functions pertaining to international portfolio investment.
These functions are the operation of the Treasury International
Capital (TIC) Reporting System, an ongoing data collection
program to secure current information on international portfolio
capital flows, and the performance every five years of benchmark
surveys of foreign portfolio investment in U.S. securities.
International portfolio investment is defined as investment in
which there is less than 10 percent direct or indirect control or
ownership of an entity in one country by a person or associated
group of persons in another country.
- 6 -
The TIC reports are filed monthly or quarterly by banks,
securities dealers and nonbanking firms located in the United
States on their outstanding positions and securities transactions
with foreigners by country. Among other items, these reports
provide current data on foreigners' deposits in the United
States, their holdings of money market instruments, and their
purchases and sales of U.S. securities, by type. The Treasury is
currently completing a comprehensive benchmark survey of foreign
portfolio investment in the U.S. long-term, marketable securities
as of the end of 1984. This survey not only benchmarks the
monthly TIC data, but supplements them with detail on the sectors
of the economy into which the portfolio investment is flowing.
In these data collection programs, the Treasury does not seek to
identify individual foreign investors, but rather obtains
information about broad categories of investors such as official
institutions (central banks and other foreign government
institutions), banking offices and other foreign residents.
The Commerce Department's Bureau of Economic Analysis collects
data and requires reports when a foreign person establishes or
acquires directly or indirectly a 10 percent or more equity
interest in a U.S. business enterprise. Information is included
on the foreign parent and the means of financing. Five-year
benchmark studies and annual surveys are used to calibrate these
direct investment data and provide additional information about
the business operations and chain of ownership of the investment.
Treasury and Commerce collect, compile and publish international
investment data that are principally used for economic analyses,
particularly to construct the U.S. balance of international
payments account and for analysis of international investment
trends. These data are collected under assurances that they will
be treated as confidential by the respective collection
authorities and individual respondent data are protected by the
International Investment and Trade in Services Survey Act of 1976
against unauthorized disclosure.
Adequacy of Our Data Collection Efforts
We believe that the considerable information already collected
and reported on foreign investment in the United States under
the comprehensive Treasury and Commerce data systems, as well as
information of a specific nature reported to other government
agencies, is adequate for U.S. Government policy needs. The
volume of information collected, while considerable, takes
account of the costs to U.S. residents of providing this
information.
- 7 -
In addition to the international investment data gathered under
Treasury and Commerce data systems, foreign investors must comply
with disclosure requirements of several U.S. Government agencies.
Under SEC requirements, all acquisitions by U.S. and foreign
investors of the beneficial ownership of more than 5 percent or
more of the stock in companies registered under the 1934 Act,
which includes most public companies, must be reported to tne
Commission. Reports include both the identity, residence and
citizenship of the purchaser, the source of funding and the
purpose of the transaction. In addition, all beneficial owners
of more than 5 percent or more of the stock in registered
companies must file a detailed annual report. The SEC data are
available for public inspection.
•Also, in the direct investment sphere, the Agricultural Foreign
Disclosure Act of 1978 requires, subject to a de minimus
exception, that all foreign investors report acquisitions of
agricultural or timber land. The exception is for acquisitions
not exceeding ten acres if annual gross receipts do not exceed
$1,000). This act also requires reporting by U.S. entities in
which a foreigner holds a 5 percent or greater interest. The
names of the investors are publicly available at that agency.
H.R. 2582
H R. 2582 would drastically alter U.S. policy and practice with
respect to foreign investment in the United States. The major
provisions of the bill would:
Require prior, detailed, registration with the Commerce
Department by a foreign person making investments in
the United States that result in foreign ownership or
control, directly or indirectly, of 5 percent or more in
a U.S. person or property (including through holdings of
stock, securities, and short- or long-term debt obligations); $10,000 or more in a deposit in a bank; or
$10,000 or more in U.S. Treasury or U.S. Government
securities;
Require registration of existing investments;
Require reporting of and by foreign persons who directly or
indirectly control or own 5 percent or more of the foreign
investor (calculated as prescribed);
Require re-registration whenever there is a 5 percent
transfer of ownership in the foreign investor; and
- 8 -
Require certification that the laws of the country of the
foreign investor (and of the foreign country of any person
that owns the foreign investor 5 percent or more) would:
Permit U.S. residents to make an investment of the same
type and size and in the same industry as the investment
being made in the United States,
' - And not subject U.S. investments to restrictions
(broadly defined) other than those imposed in the United
States.
Provide for approval, by enactment of the Congress, of
investments when a foreign person is unable to make the
required certification;
Impose civil penalties for failure to register or file
subsequent reports,
Impose criminal penalties (on the foreign person, and any
U.S. or foreign agent, officer, director, or employee) for
willful failure to register or file subsequent reports,
— .. Require monitoring of compliance with the Act,
Require maintenance of a list of countries which impose more
restrictions on investments by U.S. persons than the United
States does on investments by foreign persons,
Require annual reports to Congress,
Make an inventory of registered investments available for
public inspection.
Treasury Views on Major Provisions of the Bill
Treasury strongly opposes this sweeping bill, which would subject
many types of foreign investments in the United States, including
very small ones, to an extraordinarily burdensome, costly and
impractical registration system.
The strict reciprocity standard contained in H.R. 2582 would
require a foreign investor's decision to invest in the United
States to turn in large part on the laws of his country and
possibly other foreign countries. The bill would deny the U.S.
economy the benefit of an investment here simply because the same
investment could not be made by a U.S. investor in a foreign
country. This application of reciprocity would be burdensome to
the United States economy if the foreign investor takes his
investment to another more favorable market.
- 9 -
As I mentioned earlier, the United States, by imposing a
reciprocity standard, would violate our international commitments
to accord national treatment and most favored nation on entry
under numerous bilateral investment treaties and bilateral
treaties of Friendship, Commerce and Navigation.
H.R. 2582 would make it more burdensome and expensive for foreign
persons to invest in the United States. Few investors are likely
to be willing to submit to a .regime of reporting that is itself
difficult to comply with, but also carries severely punitive
penalties for failure to register properly. The information
required may not be known to an investor or the information could
be subject to interpretation and rapid change. Investors could
not afford to make a mistake. It may in fact be impossible to
comply with some of the reporting. For example, the bill could
impose a reporting requirement on an unsuspecting foreign
individual investor who buys shares in a foreign company. The
individual may have no knowledge, or access to information, about
that company's holdings. The foreign company may already hold or
subsequently acquire the requisite shares for reporting foreign
ownership in a U.S. company under the bill. The investor would
unknowingly be subject to penalties under U.S. law.
H.R. 2582's registration and disclosure requirements would
discard confidentiality for foreign residents who deposit funds
in U.S. banks, purchase U.S. Treasury or government securities,
or who invest in privately held U.S. companies. Most investors—
private individuals and firms as well as government institutions
and central banks—expect that their investments will be kept
confidential. The effect of disclosure would be to discourage
investment and to divert investment to other markets where there
is respect for and protection of the privacy of investors.
A public registration requirement, as proposed here, which is not
also imposed on U.S.^domestic investors, would be discriminatory
and is likely to be perceived as onerous and not in the spirit of
our international agreements. The requirement could be subject
to formal complaints in the OECD on the grounds that it
frustrates U.S. obligations to liberalize our markets under the
Code of Liberalzation of Capital Movements. Such complaints
would undercut U.S. efforts to achieve a more open international
financial system. it would be more difficult to press others to
remove their barriers to U.S. investments.
The U.S. Government has been in the lead bilaterally and within
various international fora (the Organization for Economic
Cooperation and Development (OECD), and International Monetary
Fund (IMF) for the removal of barriers to international
investment, which benefits U.S. investors.
- 10 -
H.R. 2582 would impose reporting requirements on foreign
residents that ultimately cannot be enforced by U.S. authorities
without the cooperation of foreign governments. Such cooperation
would likely be hindered by serious objection to the bill's
extraterritorial reach. That reach, in itself, would cause
serious international friction.
H.R. 2582 would require a significant and costly regulatory
bureaucracy to administer, monitor, and enforce compliance with
the Act.
H.R. 2582 imposes "red-tape" that could greatly impair markets.
At a minimum the requirements are totally inconsistent with the
goal of efficient, smoothly functioning and stable financial
markets. They would abrogate traditional American economic
policy principles.
The requirement that there be public disclosure of a foreign
person's investment in U.S. Treasury securities could have
serious adverse effects on the liquidity of the U.S. Treasury
securities market and thus on the cost of financing the public
debt. Given the rapid pace and large volume of daily trading in
the Treasury market the disclosure requirements in the bill would
add substantial administrative costs to securities trading and
would undoubtedly inhibit trading activity and reduce market
liquidity. It is a crucial assumption of the U.S. Treasury
securities market that the positions and activities of specific
participants are confidential. Trading and investment strategies
in the Treasury market, which is the largest, most competitive,
and liquid financial market in the world, depend on this
confidentiality. Any market participant with access to data
concerning the positions of other participants would have a
significant competitive advantage.
The provisions of this bill would affect more than just foreign
participation in the U.S. Treasury securities market. If the
long tradition of confidentiality of the ownership of U.S.
Treasury securities were broken, all market participants would
question whether their positions and activities would remain
private.
H.R. 2582 would disadvantage U.S. financial institutions in their
competition with foreign institutions. The bill would impose
registration and reporting requirements on deposits of $10,000 or
more in any domestic or foreign branch of a U.S. bank. Because
foreign banks are not generally subject to comparable
requirements, these provisions could result in a signifiant
outflow of funds from U.S. financial institutions (particularly
those with foreign branches holding extensive foreign-source
deposits).
-li-
lt is Treasury's view that the costs of this bill clearly
outweigh any benefits that may be intended. The proposed scheme
for registering foreign investments would discourage future
investments and cause existing investments to be reconsidered.
Moreover, the costs to our economy from the loss of foreign
investment would be heavy and severe.
By raising the costs of investments from abroad, the bill would
deny the U.S. economy those investments that otherwise would have
come to this country based on a foreign investor's evaluations of
the risks and rewards involved. We would lose investments that
would otherwise have been attracted to finance economic growth
and create jobs in our economy, as investments flow to the more
efficient, unfettered markets.
Furthermore, a registration system for foreign investments would
be an impediment to the free flow of foreign investment to the
United States. It would discourage the flow of capital needed to
finance the continuing U.S. deficit on the current account of our
international balance of payments. The United States currently
is a net debtor vis a vis the rest of the world and has a current
payments deficit which needs to be financed. One way the deficit
can be financed is by .liquidation of U.S. investments abroad or
through a drawdown of U.S. Government reserves of gold and
foreign exchange. However, U.S. assets abroad need not be
reduced if the U.S. economy is able to attract sufficient lending
and investment from abroad. It would be a mistake to take steps
that would impede that flow of capital to the United States or to
drive up the interest cost of those flows.
Higher interest rates in the U.S. would increase domestic costs,
reduce domestic investment in plant and equipment, reduce output,
employment, profits and tax revenues. Small and weaker domestic
borrowers would be crowded out of financial markets. U.S. firms
would clearly be put at a disadvantage compared to their foreign
competition. Higher interest rates would also increase the cost
of financing Federal and state and local borrowing.
Conclusion
The bill is contrary to U.S. interests. There is no reason to
abandon our current policy of encouraging free markets and an
open international economic and financial system. We also
benefit from an economy open to foreign entrepreneurs and
financial institutions who undertake the risks and accept the
rewards of their independent decisions to invest in the United
States. We benefit through lower costs, higher production, and
increasing jobs.
- 12 -
It is our policy to provide national treatment to those who
invest in the United States and to work to achieve national and
MFN treatment for U.S. investors in foreign countries. We have
made international commitments to pursue national treatment
because we recognize that it is in our interest to do so. The
policy of national treatment accords to foreign investors the
same rights and privileges as are given to U.S. domestic
investors. It leaves us free to decide how to regulate our own
markets and free to welcome those foreign investments that come
to our markets to operate according
to our rules.
#####
F2.65
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2
. r>n-rv :n^li ITI 0
FOR IMMEDIATE RELEASE
LldK^Ui- U^tn JJAv
^
Q^
ig3g
RESULTS OF AUCTION OF JfJ-jY^ARS BONDS
The Department of the Treasury has :accepted $9,015 million of
$19,095 million of tenders received from the public for the 30-year
Bonds auctioned today. The bonds will be issued May 15, 198 6, and
mature May 15, 2016.
The interest rate on the bonds will be 7-1/4%.!/ The range
of accepted competitive bids, and the corresponding prices at the
7-1/4% interest rate are as follows:
Yield Price
Low 7.34% 98.915
High
Average
7.40%
7.37%
98.202
98.557
Tenders at the high yield were allotted 21%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location Received Accepted
Boston
22,187
$
New York
17,,464,856
Philadelphia
113
Cleveland
439
Richmond
6,245
Atlanta
15,761
Chicago
899,688
St. Louis
60,106
Minneapolis
8,402
Kansas City
9,656
Dallas
1,355
San Francisco
606,243
Treasury
58
Totals
$19,r095,109
6,187
8,,552,566
113
439
3,665
6,391
243,998
44,106
8,402
9,656
1,355
137,843
58
$9,,014,779
$
The $9,015 million of accepted tenders includes $337
million of noncompetitive tenders and $8,678 million of competitive tenders from the public.
In addition to the $9,015 million of tenders accepted in
the auction process, $300 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.
R-572
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
USRAfiY. R00l\ 5310
MM
9 ^ •- -< M*
ADDRESS OF THE HONORABLE FRANCIS A. KEAT'lNG^ II %
ASSISTANT SECRETARY (ENFORCEMENT)"EAS^y
AT THE
ANNUAL MEETING OF THE WINE AND SPIRITS WHOLESALERS
OF AMERICA, INC.
RENO, NEVADA
MAY 6, 1986
Recent Developments in the Regulation of Alcoholic Beverages
I am grateful for the opportunity to be here today, and
especially to take part in your annual meeting.
The theme you have selected for this year's program -"shaping tomorrow today" — is one that is particularly
appropriate, both with respect to your business, that of
wine and spirits wholesaling, and to mine, the business of
government.
The discussions and seminars in which you are
participating this week are about looking ahead to the
future, and preparing for that future as we meet the
challenges of today.
In government, just as in your industry, we have been
looking ahead. We are faced with adapting in a time of
fundamental change. From our perspective, that has meant
performing our statutory duties with relatively fewer
resources. The future will require that we continue to meet
the challenge of doing more with less.
As we confront this task, we are also dedicated to
achieving President Reagan's overall goals in the regulatory
area. To further those goals, we have reduced paperwork,
relieved regulatory burdens wherever possible, and removed
restrictions that stifle initiative and productivity.
In short, we must do more than reduce the size of
government. We must achieve the goals of government while
at the same time adhering to free market principles. And we
must make sure that the taxpayer is getting his money's
worth for his tax dollars.
B-573
- 2 All of these goals are incorporated into Treasury's
regulatory approach. They have particular relevance to the
Treasury regulatory program in which all of you have an
interest: the alcoholic beverage regulatory program of the
Bureau of Alcohol, Tobacco and Firearms.
With ATF, we have sought to meet the President's goals
by consolidating administrative functions and overhead, by
eliminating burdensome or inessential requirements, and by
automating and streamlining our procedures whenever
possible.
Of course, there is one overriding goal that governs
everything we do in the alcoholic beverage area. We must
regulate the industry in ways that best serve the public
interest. This means recognizing that alcohol is a special
case — and that regulation in this area is distinctly
different from regulation in other areas.
One reason alcohol is a special case is that alcoholic
beverages have always been, and probably always will be, the
subject of some controversy, particularly in the political
arena. Alcoholic beverages are, of course, the only
products that have ever been the subject of two
Constitutional Amendments: the Eighteenth, the Great
Experiment, and the Twenty-First, which repealed it.
And speaking of controversy, I am reminded of the
story of a legislator, who some years ago was asked how he
stands on drink. He replied: "If by drink you mean that
tool of the devil, that destroyer of families, that fuel of
criminality, disease, and death, then sir, I stand strongly
opposed; but, if by drink you mean, sir, that gentle
substance of social conviviality and good fellowship, the
liquid of celebration, success, and life, then I stand
strongly in favor of it."
In the relatively short time that I have served as
Assistant Secretary, I have seen already that the issues
arising in the alcohol regulatory area tend to be ones on
which the public, and those in the alcoholic beverage
industry, have strong views.
With this in mind, I would like to take this
opportunity today to discuss a few of the issues involving
Treasury and your industry.
One issue that has come to the fore recently is the
jurisdiction over Customs bonded warehouses used exclusively
for the storage of alcoholic beverages. Treasury has been
directed by the Congress to look into the feasibility of
transferring jurisdiction over these warehouses to ATF. I
- 3 know that this is an issue of interest to many of you, but
for the sake of those who may not be familiar with it, I
want to briefly discuss the background for this.
At present, under a 1984 agreement between Customs and
ATF, ATF verifies for Customs the distilled spirits that are
imported in bulk and shipped in bond to a distilled spirits
plant. This arrangement has worked out well, and it makes
good sense from a resource standpoint. ATF officers must
visit distilled spirits plants to fulfill their regulatory
and revenue collecting functions, and it promotes overall
government efficiency to have these ATF officers also
perform functions on behalf of Customs.
Because of the success of this approach, we have
expanded it to cover the audits and spot checks that Customs
performed at the distilled spirits plants to ensure that
taxes and duty were properly paid on imported case goods
shipments, as well as bulk shipments.
Here again, the responsibilities of the ATF officers
with respect to these plants facilitated a merging of these
functions. The question that arises, then, is this: Why
not do the same for the Customs bonded warehouses that are
not co-located with distilled spirits plants, but that
handle alcoholic beverages exclusively? In case you are
wondering, there are approximately 230 Customs warehouses in
this category. Only 30 Customs warehouses are co-located
with distilled spirits plants.
My office recently has considered expanding the concept
as I have described. ATF, rather than Customs, could then
perform the audits and spot-checks for all 260 distilledspirits warehouses. In my view, this would promote
efficiency, save government resources and be more convenient
for your industry as well.
Before final action can be taken, we need to arrange
for details such as bonding, duty and tax payment, staffing
and reporting procedures.
I want to move on to another issue over which members
of your industry have raised concerns: the proposed restrictions on the sale of alcoholic beverages to retailers
who do not have a current tax stamp. As some of you may
know, Treasury proposed legislation that would have made it
illegal to sell to a retailer who failed to produce such a
stamp. The need for this legislation was identified by the
Grace Commission.
After discussions with Congressional staff, Treasury
tax policy experts, ATF and the industry, it is now our view
- 4 that the purposes of the draft bill could also be achieved
through a reporting provision. A wholesaler would be free
to conduct a transaction with a retailer who failed to
produce evidence of payment, but the wholesaler would be
required to report such instances to ATF. Penalties would
attach to the failure to report rather than to the fact of
the sale.
Our objective, of course, is to see that the tax on
retail establishments is being paid. We believe an approach
involving reporting as I have described will meet this
objective.
An alternative to this plan has been suggested as well,
but it poses significant problems. This proposal is that
each wholesaler periodically report to ATF all the retail
establishments with which it does business. Needless to
say, these reports would be very duplicative, because any
given retailer will do business with a number of wholesalers. Second, and even more important, the reports
themselves would bear no relationship to whether or not the
tax has been paid. We, therefore, could not support this
proposal as an effective use of resources — government's or
the industry's.
Another area of interest is the matter of consumer
information about alcohol beverage products. More
specifically, we have published a proposal that distilled
spirits be labeled to show alcohol content as a percentage
of volume rather than by proof, as is now the case. I see
two advantages to this approach. Consumers who do not
understand the basis for the designation of proof would have
a clearer understanding of the alcohol content. Second,
alcohol content would then be stated in the same way it is
usually reflected on labels for beer and wine. Third, the
change would bring U.S. distilled spirits into harmonization
with the general practice for European spirits, and this
would eliminate one more inconsistency with our trading
partners.
Two points should be made, however. First, distillers
would be free to display a statement of proof as additional
information on the label. This would lessen any consumer
confusion that could result from any label change, as well
as alleviate any marketing concerns. Second, if the change
is adopted, Treasury and ATF would allow adequate lead time
so that the change would not be burdensome to the industry.
We are now addressing the alcoholic content issue through
the rulemaking process. The comment period on the proposal
closes on May 27.
- 5 There is another rulemaking in this area that is of
interest. That is the ATF proposal on reduced proof
distilled spirits. We have received over 70 0 comments on
this issue, and we are committed to addressing them promptly
so that a final regulation can be published. The comment
period on this proposal will close on June 13.
The final point I want to raise today concerns a topic
of paramount importance to us all: the prevention of
alcohol abuse. While government has a key role to play in
this area, the industry also is in a position of exerting
its influence to deter and prevent the abuse of alcoholic
beverages.
As you know, this Administration has taken a firm stand
against alcohol abuse, just as it has taken a firm stand
against drug abuse and drug-related crime. We welcome the
efforts of private industry in this important endeavor.
I would like to take this opportunity to acknowledge
the efforts of your organization in informing the public and
discouraging alcohol abuse. As your initiatives exemplify,
industry, as well as government, can do much to promote an
awareness of this serious social problem and reduce its
occurrence.
In conclusion, I want to add that I look forward to
working with your organization as we address the various
issues arising in the regulation of alcoholic beverages.
Together, there is much that we can accomplish as we prepare
for tomorrow's regulatory and business environment.
Thank you for your kind attention.
1^92
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