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Wasftfirgfon, D.C. 20220

TREAS.
HJ
10
.A13P4
v.288

U.S. DEPARTMENT OF THE TREASURY

PRESS RELEASES

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
FOR IMMEDIATE RELEASE
202/376-4350
January 3, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,214 million of 13-week bills and for $7,212 million
of 26-week bills, both to be issued on January 5, 1989,
were accepted today^
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing April 6, 1989
Discount Investment
Rate
Rate 1/
Price
8.22%
8.25%
8.24%

8.51%
8.54%
8.53%

26-week bills
maturing
July 6. 1989
Discount Investment
Price
Rate
Rate 1/
8.35% £/
8.38%
8.37%

97.922
97.915
97.917

8.84%
8.87%
8.86%

95.779
95.763
95.769

a/ Excepting 1 tender of $2,000,000.
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 44%

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

Accepted

$
45,160
24,305,975
35,295
39,395
68,330
47,660
2,314,260
66,635
14,260
58,570
42,890
1,572,310
447,135

44,850
$
6 ,107,185
35,295
39,395
58,330
46,725
175,860
45.350
12,310
58,570
32,890
109,655
447,135

38,710
$
21 126,955
25,210
40.840
46,930
34,430
944.025
44,675
13,955
49,300
' 31,195
1 355,690
451,845

38.710
$
6 ,056,435
25,210
40.660
46,930
34,430
206,825
39,405
13,955
49,300
21,195
186,690
451,845

$29,057,875

$7 ,213,550

: $24 203,760

$7 ,211,590

$25,174,135
1,314,755
$26,488,890

$3 329,810
1 314,755
$4 644,565

$19 095,850
:
1 109,960
$20 205,810

$2 103,680
1 109,960
$J 213,640

2,421,335

2 421,335

2 300,000

2 ,300.000

147,650

1 697,950

1 ,697,950

$29,057,875

$7 213,550

: $24 203,760

$7 ,211,590

An additional $19,350 thousand of 13-week bills and an additional $265,950
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
NB-96

TREASURY NEWS
lepartntent of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
January 3, 1989
TREASURY'S WEEKLY BILL OFFERING

CONTACT: Office of Financing
202/376-4350

The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued January 12, 1989.
This offering
will provide about $ 350
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,051 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, January 9, 19 89.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $ 7,200
million, representing an additional amount of bills dated
April 14, 1988,
and to mature t April 13, 1989
(CUSIP No.
912794 RS 5), currently outstanding in the amount of $16,491 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 7,200 million, to be dated
January 12, 1989,
and to mature July 13, 1989
(CUSIP No.
912794 SQ 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 January 12, 1989.
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 $ l, 80 8 million as agents for foreign
and international monetary authorities, and $ 3,878 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
NB-97

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry 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
10/87
tenders.

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
10/87

TREASURY NEWS
lepartment
of the Treasury • Washington, D.c.Office
• Telephone
566-2041
of Financing
FOR RELEASE AT 4:00 P.M.
January 4, 1989

CONTACT:

202/376-4350

TREASURY TO AUCTION $7,000 MILLION OF 7-YEAR NOTES
The Department of the Treasury will auction $7,000 million
of 7-year notes to refund $3,296 million of 7-year notes maturing
January 15, 1989, and to raise about $3,700 million new cash. The
public holds $3,296 million of the maturing 7-year notes, including
$535 million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
The $7,000 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 $212 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

NB-98

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
TO BE ISSUED JANUARY 17, 1989
January 4, 1989
Amount Offered:
To the public

$7,000 million

Description of Security:
Term and type of security
7-year notes
Series and CUSIP designation .... E-1996
(CUSIP No. 912827 XB 3)
Maturity date
January 15, 1996
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
July 15 and January 15
Minimum denomination available .. $1,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment Terms:
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, January 11, 1989,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury .. Tuesday, January 17, 1989
b) readily-collectible check .. Thursday, January 12, 1989

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
COR R E C T E D
FOR IMMEDIATE RELEASE
January 6, 19 89

COPY
CONTACT: Office of Financing
202/376-4350

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,000
million of 364-day Treasury bills
to be dated January 19, 1989,
and to mature January 18, 1990
(CUSIP No. 912794 TM 6). This issue will result in a paydown for
the Treasury of about $425 million, as the maturing 52-week bill
is outstanding in the amount of $9,437
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, January 12, 1989.
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 January 19, 1989.
In addition to the
maturing 52-week bills, there are $13,791 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $2,229* million as agents for foreign
and international monetary authorities, and $6,302 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 $ 380
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 5176-3.
*N0TE:NB-99
The original press release of 12:00 noon today misstated the
amount held on behalf of foreign and international monetary
authorities.
other particulars
The of
correct
the original
amount is
release
$2,229 remain
million.
the same.
All

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amourft 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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry 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
10/87
payment
by an incorporated bank or trust company accompanies the
tenders.

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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
10/87
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.

TREASURY NEWS _

Department of the Treasury • Washington, D.C. • Telephone 566-2041

Text As Prepared
Embargoed for Release
Upon Delivery Expected at 11:00 a.m. EST
Statement By
Secretary of the Treasury
Nicholas F. Brady
a
. . .
t the Press Briefing
On the Release of President Reagan's 1990 Budget
Monday, January 9, 1989
Good morning, ladies and gentlemen, and Happy New Year.
1988 was a year in which the longest peacetime economic
expansion m recent U.S. history continued. It was a year of
further constructive action in coordinating economic policies
with our major trading partners; and it wal a year in which we
continued to attack the problem of our fiscal deficit.
huda^a?nrn?oonat th-56 iS !lways more t0 do' President Reagan'
budget for 1990 provides a framework for continued progress!
In particular, it provides
framework
for reaching
Gramm-Rudman-Hollings
(GRH)atargets
without
resortingthe
to
increases in the taxes on the American people and outlin es a plan
to further reduce the fiscal deficit.
w*„e T h %? r 0 2 r e f!! W e h a v e m a d e i n 1 9 8 8 i s demonstrated in several
ways. First, the economy has completed the 73rd month of
3.3 percent excluding the effects of the drought.

982.
of

The vibrancy and strength of our economy helped once again to
reduce unemployment rates to the lowest levels in over a decade
as nonfarm payroll jobs increased more than 3.7 million in 1988
!!?£?-,*? im P° r tant, inflation has been held in check, at about
the 1987 levels despite effects of the drought, with growth in
the Consumer Price Index under 4-1/2 percent. It is no small
achievement to sustain growth, check inflation, and provide more
jobs for more people all at the sane time.
NB-100

-2Economic Outlook
The economic progress we made in 1988 has favorable
implications for the coming year. To briefly touch on the
economic forecast, about which Beryl Sprinkel will speak in
detail shortly, let me say this: We expect the current
expansion — the longest peacetime expansion in U.S. economic
history — to continue in 1989. However, to some small extent,
the underlying rate of real economic growth, excluding the
effects of the drought, is expected to moderate in the coming
year.
Nonetheless, continued above-average growth of U.S. exports
is expected to contribute significantly to economic expansion.
This assumes a monetary policy that will remain supportive of
sustainable economic growth, marked by further progress.toward
price stability.
External Imbalances and Economic Policy Coordination
A major element behind sustained economic growth during 1987
and 1988 was improvement in our trade balance. The strengthened
U.S. competitive position, reinforced by stronger growth in our
major trading partners, has generated a rise in U.S. exports of
28 percent in 1988, over three times the rate of increase of our
imports. This has contributed to a reduction in the U.S. trade
deficit of over $30 billion in 1988.
The improvement in our trade deficit reflected the efforts of
the industrial nations to make further progress in coordinating
their economic policies. During the course of 1988 the
United States has — , i n concert with our G-7 partners —
implemented economic measures that have resulted in a climate of
relatively stable exchange markets and further improvements among
the external imbalances in the major industrial countries.
Let me emphasize, however, that this is not the time to let
up. These efforts must continue. The United States and our
major trading partners must sustain our commitment to build on
the progress we have made thus far. And the United States must
do its part by continuing to reduce the fiscal deficit.
The 1990 Budget
Let me make only a few brief comments on President Reagan's
FY 1990 budget, since the Director of OMB, Joe Wright, is here to
provide a detailed outline.
To begin with, over recent years, progress has been made in
addressing the Federal budget deficit, reducing it as a share of
GNP from 6.3 percent in 1983 to 3.2 percent in FY 1988.

-3Further, President Reagan's budget presented today lays out a
plan for reducing the FY 1990 deficit to $98.6 billion, without
asset sales and $92.5 billion with asset sales, both below the
$100 million GRH target.
This reduction is to be achieved without resort to new taxes
and without touching social security. Rather the progress relies
on a combination of growth in receipts and significant curbs in
outlay growth. Growth of the economy accounts for a receipts
increase of nearly $84 billion in FY 1990.
Finally, many of you are interested in knowing how
President Reagan's budget relates to the budget plans of
President-elect Bush. I would like to make a brief comment
on that question.
First, the Reagan 1990 budget puts forward a reasoned,
determined plan to reduce the deficit in a way that meets the
GRH targets without new taxes. The twin goal — meeting the
GRH targets while avoiding new taxes — is fully shared by
President-elect Bush.
Second, work is actively underway on President-elect Bush's
budget plans, which he has stated he will outline to Congress
shortly after the Inauguration.
Third, although senior advisors to the President-elect are
spending significant time on the matter, no final decisions have
yet been made, and probably will not be made until after January
20. It is certainly possible that much of the current budget
will remain on the table, although it is too early at this stage
to offer more specific details.

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
202/37G-4350
FOR IMMEDIATE RELEASE
January 9, 1989 ^ ^ ^ 3

0F TREASURY'S

WEEKLY BILL AUCTIONS

Tenders for $7,220 million of 13-week bills and for $7,229 million
of 26-week bills, both to be issued on January 12, 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing April 13, 1989
Discount Investment
Rate
Rate 1/
Price
8.6^%
8.34%
97.892
8.36%
8.66%
97.887
8.36%
8.66%
97.887

26-week bills
maturing July 13, 1989
Discount Investment
Rate
Rate 1/ Price
8.4.6%
8.96%
95.723
8.4.8%
8.98%
95.713
8.4.8%
8.98%
95.713

Tenders at the high discount rate for the 13-week bills were allotted 69%.
Tenders at the high discount rate for the 26-week bills were allotted 72%.

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
$
57,490
$
57,465
: $
44,115
6,043,030
24,702,185
23,619,125
24,830
38,845
38,845
75,605
73,485
43,355
71,880
61,880
57,060
38,770
55,425
55,425
98,610
1,366,325
1,.127,515
82,130
42,130
62,375
14,215
14,215
12,795
68,070
60,685
78,615
50,615
40,615
42,495
110,050
1,839,205
1,624,715
520,810
523,795
523,795

Accepted
$

44,115
5,929,975
24,270
43,355
56,990
38,770
119,125
34,375
12,795
78,000
32,495
293,715
520,810

$28,945,785

$7,220,230

$27,296,575

$7,228,790

$25,238,000
1,627,555
$26,865,555

$3,512,445
1,627,555
$5,140,000

: $22,496,650
:
1,303,525
: $23,800,175

$2,428,865
1,303,525
$3,732,390

1,978,330

1,900,000

101,900

1,596,400

$28,945,785

$7,220,230

: $27,296,575

$7,228,790

An additional $30,800 thousand of 13-week bills and an additional $385,200
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
NB-101

TREASURY NEWS L
department of the Treasury • Washington, D.c. • Telephone 566-2041
'rVl
For Immediate Release
January 9, 1989

Contact:

Larry Batdorf
566-2041

TREASURY ASSESSES PENALTY AGAINST
UNITED ORIENT BANK, NEW YORK,
UNDER BANK SECRECY ACT
The Department of the Treasury on January 6th assessed a
civil penalty of $250,000 against United Orient Bank, New York,
based on in excess of 172 failures to file Currency Transaction
Reports as required by the Bank Secrecy Act. The penalty was
announced by Assistant Secretary for Enforcement Salvatore R.
Martoche. Rudolph W. Giuliani, United States Attorney for the
Southern District of New York, also announced that the bank, its
President and two officers have entered pleas of guilty to
related criminal violations of the Bank Secrecy Act. The bank
also agreed to the imposition of criminal fines of $750,000.
This case was developed through an investigation conducted by
the Criminal Investigation Division of the Internal Revenue
Service. In connection with resolution of the criminal case,
Treasury worked with the United States Attorney to resolve the
question of the bank's corresponding civil liability for the
criminal violations. Under the Bank Secrecy Act, criminal and
civil sanctions are cumulative.
Martoche praised the fine investigative work of Mr. Giuliani
and his staff and especially acknowledged the diligent work of
the Internal Revenue Service Special Agents who worked on the
case.

NB-102

BUDGET-IN-BRIEF
FISCAL YEAR 1990

Department of the Treasury
January 1989

DEPARTMENT OF THE TREASURY
FISCAL YEAR 1990
BUDGET-IN-BRIEF

January 9, 1989

DEPARTMENT OF THE TREASURY
FY 1990 BUDGET-IN-BRIEF
Table of Contents
PAGE
TOTAL TREASURY BUDGET
Funding Levels in Total FY 1990 Budget 1
Chart of Total Treasury FY 1990 Budget
Narrative Summary of FY 1990 Budget

2
3

OPERATING ACCOUNTS
Appropriation Estimates by Bureau 7
Chart of Appropriations by Bureau
Staffing (FTE) by Bureau
Chart of Staffing by Bureau
Chart of Funding History [1982 - 1990]
Chart of Staffing History [1982 - 1990]
Selected Workload Measures
Proposed FY 1989 Level Compared to FY 1990...
BUREAU HIGHLIGHTS
Departmental Offices 16
Statutory Inspector General
Federal Law Enforcement Training Center
Financial Management Service
Saint Lawrence Seaway Rebate
Bureau of Alcohol, Tobacco & Firearms
U.S. Customs Service
U.S. Mint
Bureau of the Public Debt
U.S. Savings Bonds Division
Internal Revenue Service
U.S. Secret Service
OTHER ACCOUNTS
Narrative Description of:
Interest Payments 4 0
Trust Funds
Permanent Indefinite Accounts
Offsetting Receipts

8
9
10
11
12
13
14

18
19
21
23
24
25
31
33
35
36
38

42
44
46

Proposed Legislation:
Credit Financing Service 47
U.S. Mint Revolving Fund

MULTILATERAL DEVELOPMENT BANKS
Table of U.S. Subscription by Bank
Summary of FY 1990 Request

48
49

FUNDING

DEPARTMENT OF THE TREASURY
LEVELS IN THE FY 1990 PRESIDENT'S
(IN MILLIONS OF DOLLARS)

BUDGET

ESTIMATE

PERCENT
INCREASE/
DECREASE

FY 1988
ACTUALS

1989

1990

7,406.6
0.0

7,679.0
0.0

7,976.3
4.3

3.9%
N/A

o Interest on Public Debt 214.145-0 235.542.1 248.115.1 5.3%
o
Interest on IRS Refunds
1,681.2
1,800.0
o
Interest on Uninvested Funds
20.1
19.9

1,776.0
21.4

-1.3%
7.5%

708.9
0.1
17.4

N/A
0.0%
1.2%

348.9
20.0

0.0%
0.0%

230.0
123.0
43.3
32.0
111.0
18.0

230.0
126.0
6.4
32.0
116.6
18.0

0.0%
2.4%
85.2%
0.0%
5.0%
0.0%

ANNUAL APPROPRIATIONS
UNDER PROPOSED LEGISLATION

INTEREST PAYMENTS 215,846.3 237,362.0 249,912.5 5.3%

TRUST FUNDS 7.2 17.6 726.9 4030.1%
o Gifts and Bequests 0.8 0.3 0.5 66.7%
o
Federal Financing Bank
o Miscellaneous Trust Funds
o Ref, Tran & Exp Abandonded Goods

0.0
0.1
6.2

0.0
0.1
17.2

OTHER 0.0 175.0 123.2 N/A
o Payments to Farm Credit System 0.0 175.0 123.2 N/A
PERMANENT AUTHORITY APPROPRIATIONS... 4,699.0 4,775.2 4,738.9 -0.8%
o Earned Income Credit 2,697.6 3,849.0 3,841.0 -0.2%
o Claims, Judgments & Relief
1,408.8
o Customs Forfeiture Fund
0.0
o Collection of Taxes for Puerto
Rico by:
ATF
257.5
U.S.Customs
118.9
o Coinage Profit Fund
58.6
o Pres. Election Campaign Fund
33.4
oCOBRA
107.2
o Contrib. for Annuity Benefits
17.0
OFFSETTING RECEIPTS (23,837.9) (22,706.0) (21,126.0) -7.0%
TOTAL, DEPARTMENT OF THE TREASURY.... 204,121.2 227,302.8 242,356.1 6.6%
MULTILATERAL DEVELOPMENT BANKS 1,205.6 1,314.6 1,637.4 24.6%
INTERNATIONAL MONETARY FUND 0.0 0.0 150.0 N/A

- 1-

Total Treasury Budget for 1990
$242.4 Billion
$ Billions
220

—
i

200 §j
180
160
140
120
100

$8.0
V VV M

Interest
Payments

$5.6
iv v v v I

Bureau
Perm. Indefinite
Appropriations Trust and Other

- 2 -

Offsetting
Receipts

DEPARTMENT OF THE TREASURY
SUMMARY OF THE FY 1990 PRESIDENTS BUDGET
TOTAL TREASURY BUDGET
o Treasury's FY 1990 budget request is for $242.4 billion
and 155,594 total full-time equivalent (FTE) staff
years and covers the following areas:
INTEREST PAYMENTS — $249.9 billion
These are funds for interest payments needed to
finance the public debt ($248.1 billion); interest
payments by the IRS on refunds of taxes to
taxpayers; and selected interest payments on
special accounts handled through the Treasury.
PERMANENT AUTHORITY APPROPRIATIONS AND TRUST FUNDS
— $5.6 billion
These are funds for special accounts for which the
Congress has given the Department permanent
authority to expend appropriations. These
accounts include repayments of taxes collected for
Puerto Rico, payment made when the earned income
credit exceeds the taxpayer's tax liability,
special claims and damage payments required as a
result of judgments against the U.S. government,
and payments to Presidential candidates and their
parties in accordance with Federal Election
Commission certification.
OFFSETTING RECEIPTS — -$21.1 billion
Treasury receipts from other government agencies
and private sources are subtracted from the total
Treasury budget as an offset.
ANNUAL OPERATING APPROPRIATIONS [FUNDING FOR ALL
TREASURY BUREAUS] — $8.0 billion
These are funds for the Treasury bureaus'
activities. Details of bureau operating budgets
are provided below.

- 3 -

OPERATING BUDGET

[TREASURY BUREAUS]

The Department's FY 1990 operating budget request is
$8.0 billion and 155,594 total FTE, an increase of
$3 01 million and 1,990 FTE compared to the FY 1989
enacted appropriation.
The FY 1990 budget has the following major objectives:
o OUR KEY PRIORITY IS TO MAINTAIN AN EFFECTIVE TAX
ADMINISTRATION THROUGH CONTINUED SUPPORT OF TAX REFORM
REQUIREMENTS AND THROUGH EFFECTIVE MODERNIZATION
EFFORTS.
The Internal Revenue Service (IRS) budget
addresses the natural growth in tax administration
workload. It also includes further improvements
to quality in tax returns processing, services to
individuals and organizations, and in the conduct
of internal investigations and research.
The IRS budget supports a continued major emphasis
on redesigning the tax processing and
administration system through the mid-1990s,
largely funded through a prudent reordering of
project priorities.
o OUR SECOND OBJECTIVE IS TO MAINTAIN THE ABILITY OF THE
IRS TO PROMOTE TAX COMPLIANCE AND GENERATE REVENUE,
WHILE ALSO SUPPORTING SPECIFIC AREAS OF IMPROVEMENT
THAT REQUIRE A MODEST INVESTMENT OF NEW RESOURCES.
— The Internal Revenue Service budget continues to
support prior year enforcement revenue
initiatives and augments efforts to reduce the
backlog of delinquent tax accounts.
The budget reinforces several low cost, high
yielding tax enforcement efforts that are
conducted primarily at the ten IRS service
centers, where some potential compliance problems
can be addressed more advantageously.
O OUR THIRD BUDGET OBJECTIVE IS TO SUPPORT THE
PRESIDENT'S WAR ON DRUGS.
— The Customs Service will strengthen the
President's War on Drugs through increased
inspections of imports and operation of air
interdiction assets acquired or modified in
previous years. The budget seeks increased
funding for drug interdiction over the FY 1989
enacted appropriation.
- 4 -

FOURTH, WE INTEND TO MEET OUR OTHER LAW ENFORCEMENT AND
PROTECTION RESPONSIBILITIES.
The Federal Law Enforcement Training Center budget
will fund the interagency training facility that
provides basic and advanced law enforcement
training for federal, state, and local agencies.
It provides funds for a new dormitory to ease the
current training capacity problem.
The Customs Service budget will enforce the
Nation's import and export laws and rapid
clearance of passengers and cargo. It will
support processing of 9.8 million formal
merchandise entries, 115 million carriers, and 370
million passengers. The Administration will
submit legislation to extend the passenger and
merchandise processing user fees and to make the
this fee consistent with the General Agreement on
Tariffs and Trade.
The Bureau of Alcohol, Tobacco and Firearms budget
will provide for collection of all alcohol and
tobacco excise taxes and programs to reduce the
criminal use of firearms and explosives.
— The Secret Service budget will enhance security at
the Vice President's residence, upgrade
information and communications systems and improve
administration.
o THE FIFTH OBJECTIVE IS TO SUPPLY THE RESOURCES NEEDED
TO MANAGE THE NATION'S FINANCES AND SERVICE THE
NATION'S DEBT.
The budget for fiscal services, through the
Bureau of the Public Debt and the
Financial Management Service, continues the
Administration's efforts to improve customer
service to holders of government securities, cash
management, debt collection and government-wide
financial information systems.
o SIXTH, WE MUST PRODUCE ENOUGH CURRENCY AND COINAGE TO
MEET THE NATION'S DEMANDS.
The budget for the U.S. Mint will provide funding
for an adequate level of coinage. We will also
develop a more efficient coin materials handling
system. The Bureau of Engraving and Printing does
not require annual appropriations for currency
production.
- 5-

SEVENTH, WE MUST PROVIDE POLICY FORMULATION AND
MANAGEMENT OVERSIGHT OF DEPARTMENTAL OPERATIONS.
The FY 1990 budget will permit the Department to
develop and carry out the Nation's economic,
financial, and tax policies. These
responsibilities will be met through the budget
for the Departmental Offices.
MULTILATERAL DEVELOPMENT BANKS
o The Multilateral Development Banks (MDBs) provide
technical assistance and project financing on both
near-market and concessional terms for development
projects in less developed countries. Funding is
provided by developed and some advanced developing
nations through replenishment of resources and
increases in capital.
INTERNATIONAL MONETARY FUND — ENHANCED STRUCTURAL ADJUSTMENT
FACILITY (ESAF)
o The Enhanced Structural Adjustment Facility (ESAF) was
created in 1987 to enable the International Monetary
Fund to provide balance of payments assistance on
concessional terms to low-income developing countries
with protracted payments problems which are prepared to
adopt multi-year economic and structural reform
programs.

- 6 -

3§

DEPARTMENT OF THE TREASURY
COMPARISON OF APPROPRIATIONS AND ESTIMATES FOR TREASURY BUREAUS
(IN THOUSANDS OF DOLLARS)
ESTIMATE
APPROPRIATION

FY 1988
ENACTED

FY 1989

FY 1990

DEPARTMENTAL OFFICES
,
OFFICE OF THE INSPECTOR GENERAL.,
FED. LAW ENFORCEMENT TRN. CENTER,
Salaries and Expenses
,
Acquisition
,
FINANCIAL MANAGEMENT SERVICE:
Salaries and Expenses
,
St. Lawrence Seaway *
,
ALCOHOL, TOBACCO AND FIREARMS
U.S. CUSTOMS SERVICE:
Salaries and Expenses
,
Aircraft Operations & Maint... ,
Forfeiture Fund
,
Grant to Puerto Rico
,
Small Airport User Fee
,
Subtotal, USCS
U.S. MINT
ADMINISTERING THE PUBLIC DEBT:
Bureau of the Public Debt
,
Savings Bonds Division
,
Subtotal, APD
,
Government Losses in Shipment.,
INTERNAL REVENUE SERVICE:
Salaries and Expenses
,
Tax Processing
,
SUBTOTAL
Examinations & Appeals
Taxpayer Service
PROPOSED LEGISLATION:
Subtotal, IRS
CREDIT FINANCING SERVICE
U.S. SECRET SERVICE
U.S. MINT REVOLVING FUND
TOTAL, DEPARTMENT OF THE TREASURY

7,406,609

7,679,043

7,980,649

MULTILATERAL DEVELOPMENT BANKS
INTERNATIONAL MONETARY FUND...

1,205,571
0

1,314,630
0

1,637,384
150,000

$78,803
0

$81 ,618

$83,091
13,605

28,672
0

34 ,664
20 ,000

34,158
9,880

265,000
9,037
217,531

277 r 230
10 ,700
241 ,000

289,695
10,084
227,133

966,000
140,000
10,000
7,800
486
1,124,286
42,000

1 r 033 ,911
149 262
10, 000
0
1, 588
1 ,194, 761
47, 000

1 ,021,490
128,128
10,000
0
1,588
1 ,161,206
50,735

195,200
19,800
215,000
400

199, 850
18, 880
218, 730
960

225,312
19,004
244,316
0

89,472
1,706,666
1,796,814
1,465,928
5,058,880
367,000

87, 542
1 ,795, 339
1 ,794, 818
1 ,517, 181
5 ,194, 880
357, 500

1
1
1
5

7,406, 609

7,679,043

7,976,323

72,382
940,640
898,515
572,482
484,019
368,401

4,326
0

*Considered by Subcommittee on Transportation.

- 7 -

Department of the Treasury
FY 1990 Funding
$ Millions
6,000
5,500 |

Treasury Department
Total Operating Budget - $8.0 Billion

15,,484.0
ftTHE UNITED STATES OF AUEJBCA
«B0821t8eB<(

5,000
4,500 i
4,000
3,500
^,000
2,500

5@l M~

DO
\G
FLETC
FMS
ATF

Departmental Offices
Inspector General
Federal Law Enforcement Training Center
Financial Management Service
Bureau of Alcohol, Tobacco and Firearms
United
States Customs Service
uses
Administering
the Public Debt
APD
Internal
Revenue
Service
IRS
USSS United States Secret Service
Proposed Legislation
PL

JBOS211H8

2,000
1,500
$1,161.2

1,000
500
0

$ 2 9 9 J $227. i

$244.3

^$i3.6$ijgFg^n
DO

$368.4
$4.3

IG FLETC FMSATF USCS USMAPD IRS USSS PL

1/ Includes St. Lawrence Seaway ($10.1 M).
2/ Proposed Legislation for Credit Financing Service ($4.3M),

- 8 -

DEPARTMENT OF THE TREASURY
TOTAL WORKYEARS (FTE) FOR TREASURY BUREAUS
ESTIMATE
T? V

APPROPRIATION
DEPARTMENTAL OFFICES
OFFICE OF THE INSPECTOR GENERAL..
FED. LAW ENFORCEMENT TRN. CENTER.
FINANCIAL MANAGEMENT SERVICE:
Salaries and Expenses
St. Lawrence Seaway
ENGRAVING AND PRINTING
ALCOHOL, TOBACCO AND FIREARMS
U.S. CUSTOMS SERVICE:
Salaries and Expenses
Aircraft Operations & Maint....
Forfeiture Fund
Grant to Puerto Rico
Misc. Permanent Appropriation..
Small Airport User Fee
Subtotal, USCS
U.S. MINT
ADMINISTERING THE PUBLIC DEBT:
Bureau of the Public Debt
Savings Bonds Division
Subtotal, APD
Government Losses in Shipment..
INTERNAL REVENUE SERVICE:
Salaries and Expenses
Tax Processing
Examinations & Appeals
SUBTOTAL, Service
Taxpayer
Subtotal,
IRS
PROPOSED
LEGISLATION:
U.S.
SECRET
SERVICE SERVICE,
CREDIT
FINANCING
COMPTROLLER
OF THE CURRENCY
U.S. MINT REVOLVING
FUND
TOTAL, DEPARTMENT OF THE TREASURY
MULTILATERAL DEVELOPMENT BANKS...
1/

1QQQ

r x iyoo

OMB CEILING

FY 1989

FY 1990

1,453
0
333

1,393
0
429

1,284
242
429

2,358
10
2,190
3,467

2,292
5
2,310
3,717

2,217
5
2,346
3,541

16,669
0
0
0
294
8
16,971
2,452

17,329
0
0
0
294
22
17,645
2,306

17,238
0
0
0
309
22
17,569
1,050

1,926
260
2,186
0

1,956
260
2,216
0

1,967
252
2,219
0

1,669
35,640
41,938
33,583
112,830
4,351
3,200

1,650
36,354
42,218
33,525
113,747
4,298
3,246

1,018
37,786
41,871
35,194
115,869
4,436
3,246

151,801

153,604

154,453
46
1,095

151,801

153,604

155,594

Total FTE request for the U.S. Mint is 2,145
legislation.

- 9 -

See proposed

Department of the Treasury
FY 1990 Staffing (Direct)
120,000

110,000

100,000
20,000 r

15,000 -

10,000 -

u
5,000 -

IG FLETC FMS ATF USCS USM APD IRS USSS PL

TREASURY DEPARTMENT
TOTAL DIRECT STAFFING - 146,450
DO
Departmental Offices
IG
Inspector General
FLETC Federal Law Enforcement Training Center
FMS Financial Management Service 1/
ATF Bureau of Alcohol, Tobacco and Firearms
USCS United States Customs Service
USM United States Mint
APD Administering the Public Debt
IRS Internal Revenue Service
USSS United States Secret Service
PL
Proposed Legislation 2 /
1/ Includes St. Lawrence Seaway (5 workyears).
2/ Includes Credit Financing Service (46 workyears).

- 10 -

Department of the Treasury
Operating Budget
Funding History: FY 1982 - FY 1990
! Millions
9,000
$7,981

84 85

89 90
Est. Est.

FISCAL YEAR

- 11 -

Department of the Treasury
Direct Staffing History: FY 1982 - FY 1990
Full-Time Equivalent Workyears in Thousands
Thousands
155
150
146.5
1*4.4 144.6

145
140

135
130
125
120
115
110
105
100
95
90
82 83 84 85 86 87 88
FISCAL YEAR

- 12 -

89 90
Est. Est.

DEPARTMENT OF THE TREASURY
SELECTED WORKLOAD MEASURES
(in Millions)
FY 1988 FY 1989

FY 1990

CHANGE

INTERNAL REVENUE SERVICE:
194.3
1.2
0.6
67.3

202.3
1.4
0.7
55.7

208.3
1.5
0.9
68.4

3.0%
7.1%
28.6%
22.8%

FORMAL ENTRIES OF MERCHANDISE 8.9 9.3 9.8 5.4
PROCESSED
345.2
ARRIVING PASSENGERS PROCESSED
106.9
ARRIVING CARRIERS PROCESSED
o U.S. MINT:

357.9
111.1

370.2
115.6

3.4
4.1

95.1
59.4

100.0
62.0

109.0
62.0

9.0
0.0

751.7

759.9

771.4

1.5!

6,013
38,421

6,329
37,652

6,600
36,000

TAX RETURNS FILED
RETURNS EXAMINED
SERVICE CENTER CONTACTS
TAXPAYERS ASSISTED
o U.S. CUSTOMS SERVICE:

COINS PRODUCED 14,705 18,000 19,500 8.3
o BUREAU OF THE PUBLIC DEBT:
SAVINGS-TYPE SECURITIES SOLD
SAVINGS-TYPE SECURITIES REDEEMED
o FINANCIAL MANAGEMENT SERVICE:
TOTAL PAYMENTS MADE [CHECKS &
ELECTRONIC FUNDS TRANSFERS]
o BUREAU OF ENGRAVING & PRINTING:
CURRENCY PRODUCED
POSTAGE STAMPS PRODUCED

- 13 -

4.3
-4.4

DEPARTMENT OF THE TREASURY
PROPOSED AUTHORIZED LEVEL FOR FY 1989 COMPARED TO FY 1990 REQUEST
(Dollars in Thousands)
FTE
Positions
FY 1989 APPROPRIATION (P.L. 100-440) 144,795 $7,679,043

Amount

PROPOSED FY 1989 LEVEL 144,795 7,679,043
Changes Proposed for FY 1990:
o PROPOSED PROGRAM INCREASES
International Affairs Support
Accounting System Development
Budget and Finance Studies
AFMIS, Data Center Improvements
Revenue Estimating
Dormitory Construction
System 90
Electronic Certification
Financial Information Systems Improvements
Facilities Modernization
Image Processing
Contraband Examinations
Automated Enforcement Information System
P3 Aircraft Radar Spare Parts
Citation Aircraft Radar Spare Parts
Aerostats Operating Funds
Helicopter Operating Funds
Albuquerque Hangar Maintenance
Increased Production of Coins
Asbestos Abatement
Building Repairs/Replace Obsolete Equipment
Engineering and Support Personnel
Protection of Monetary Assets
E/EE Systems Redesign
State and Local Government Securities
Computer Processing Capacity Expansion
Federal Reserve Bank Reimbursement
Returns Processing
Improved Quality of Taxpayer Service
Tax Enforcement Enhancements
Internal Investigation and Research
Information Systems Modernization
- 14 Vice President's Residence Improvements
Van Ness International Drive
Subtotal
ADP/Communications
HQ
Uniformed
Technical/Protective
Consolidation
Division Programs
Requirements

0
0
0
1
7
0
5
0
3
0
0
396
0
0
0
0
0
0
56
0
0
4
0
18
0
0
0
251
1,300
1,380
34
260
0
0
62
79
0
0

2,063
1,649
550
1,458
300
6,880
4,875
1,400
1,050
1,683
250
21,000
5,000
800
1,100
19,917
6,176
165
1,505
385
2,135
131
25
1,059
329
537
23,410
9,913
55,900
55,948
5,994
102,343
2,100
1,249
4,296
3,067
260
7,616

3,856

354,518

DEPARTMENT OF THE TREASURY
PROPOSED AUTHORIZED LEVEL FOR FY 1989 COMPARED TO FY 1990 REQUEST
(Dollars in Thousands)

O WORKLOAD INCREASES
o MAINTAIN CURRENT PROGRAM LEVELS
Mandatory Cost Increases
January 1989 Pay Raise Annualization
Subtotal 1,011 259,256

849

42,945

1,011
0

170,967
88,289

o REDUCTIONS, NONRECURRING COSTS AND SAVINGS. . (3,486) (290,476)
o TRANSFERS
Statutory Inspector General
(Non-Add)
Organized Crime Drug Enforcement Task Force
State Depart. Foreign Affrs. Admin. Support
Census Bureau
E2C Aircraft to Coast Guard
Subtotal (614) (47,000)

237
(614)
0
0
0

13,605
(37,485)
1,47 0
(585)
(10,400)

o PROGRAM REDUCTIONS (7) (21,963)
Total FY 1990 Changes 1,609 297,280
FY 1990 PRESIDENT'S BUDGET ' 146,404 7,976,323
o PROPOSED LEGISLATION
Credit Financing Service
U.S. Mint Revolving Fund
Subtotal 46 4,32 6

46
0

TOTAL, DEPARTMENT OF THE TREASURY 146,450 $7,980,649
January 9, 1989

- 15 -

4,32 6
0

a; J

DEPARTMENTAL OFFICES
SALARIES AND EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
($000's)
FY 1989 APPROPRIATION (P.L. 100-440). .
1,190
$81,618
PROPOSED FY 1989 LEVEL 1,190 81,618
Changes Proposed for FY 1990:
o PROGRAM INCREASES 8 6,02 0
o MAINTAIN CURRENT PROGRAM LEVELS ... 0 2,650
O REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(1,090)

o NET TRANSFERS (117) (5,506)
o PROGRAM REDUCTIONS (601)
Total FY 1990 Changes (109) 1,473
FY 1990 PRESIDENT'S BUDGET 1,081 $83,091

Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Program Increases: Increases are 8 $6,02 0
requested to fund restoration of
the International Affairs reduction
taken in FY 1989 (0 FTE, $2,063),
upgrade the Data Center (1 FTE, $1,308),
develop a new financial management and
accounting system (0 FTE, $1,649),
upgrade the Automated Financial
Management Information System (AFMIS)
(0 FTE, $150), improve tax policy
revenue estimates (7 FTE, $300), and
contract costs for budget and finance
studies (0 FTE, $550).

- 16 -

Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
(SOOO's)
Maintain Current Program Levels:
An increase is requested for the
costs of inflation, pay annualization,
and other uncontrollable increases
(e.g., benefits, contracts, equipment)
($2,049), and an FY 1990 pay
comparability increase ($601).
Reductions for Nonrecurring Costs and (1,090)
Savings: A decrease is requested for
nonrecurring costs relating to completion
of the annex move.
Net Transfers: The Departmental Offices (117) (5,506)
is transferring resources to the Statutory
Inspector General appropriation
(-117 FTE, -$6,134). Further, funds have
been transferred in from the State
Department which reflect Treasury's share
of expenses for overseas administrative
support ($628).
Program Reductions: Reductions taken (601)
against travel, training, supplies, and
other administrative support, to offset
annualization of the January 1989 pay
increase.

- 17 -

$2,650

OFFICE OF INSPECTOR GENERAL
SALARIES AND EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions

(SOOO's)

FY 1989 APPROPRIATION (P.L. 100-440). .
PROPOSED FY 1989 LEVEL ^^
Changes Proposed for FY 1990:
o NET TRANSFERS 237 13,605
Total FY 1990 Changes 237 13,605
FY 199 0 PRESIDENT'S BUDGET 237 $13,605

Highlights of FY 199 0 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Net Transfers: Pursuant to Public
Law 100-504, resources have been
transferred from various Treasury
bureaus to the Office of the Inspector
General.

- 18 -

237

$13,60.5

FEDERAL LAW ENFORCEMENT TRAINING CENTER
SALARIES AND EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440). .

Positions
425

(SOOO's)
$34.664

PROPOSED FY 1989 LEVEL 425 34,664
Changes Proposed for FY 1990:
o WORKLOAD INCREASES 919
o MAINTAIN CURRENT PROGRAM LEVELS . . . 984
o REDUCTIONS, NONRECURRING COSTS
AND SAVINGS

(2,409)

Total FY 1990 Changes .... (506)
FY 1990 PRESIDENT'S BUDGET 425 $34,158
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Workload Increases: An increase
is requested to fund more rapid
replacement of training equipment.
Maintain Current Program Levels:
An increase is requested for the costs
of inflation and other uncontrollable
increases (e.g., equipment, supplies)
(0 FTE, $813) and annualization of the
FY 1989 pay comparability increase
(0 FTE, $171).
Reductions for Nonrecurring Costs and
Savings: A decrease is requested for
nonrecurring costs of Permanent Change
of Station moves.

- 19 -

$919

984

(2,409)

FEDERAL LAW ENFORCEMENT TRAINING CENTER
ACQUISITION, CONSTRUCTION, IMPROVEMENTS AND RELATED EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
FY 1989 APPROPRIATION (P.L. 100-440). .

(SOOO's)
$20,000

PROPOSED FY 1989 LEVEL 20,000
Changes Proposed for FY 1990:
o PROGRAM INCREASES 6,88 0
o REDUCTIONS, NONRECURRING COSTS
AND SAVINGS

(17,000)

Total FY 1990 Changes .... (10,120)
FY 1990 PRESIDENT'S BUDGET =^ $9,880
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Proposed Program Increases:
An increase is requested to fund
construction of an additional
dormitory (0 FTE, $6,4 00) and
increased building maintenance (0 FTE,
$480).
Reductions for Nonrecurring Costs and
Savings: A decrease is requested for
nonrecurring construction costs of a
driver training course (0 FTE, $1,500),
a firearms range (0 FTE, $5,000),
expanded physical training facilities
(0 FTE, $1,600), expansion of the
cafeteria (0 FTE, $1,300), dormitory
preparations (0 FTE, $600) and the new
Artesia training center (0 FTE, $7,000).

- 20 -

$6,880

(17,000)

FINANCIAL MANAGEMENT SERVICE
SALARIES AND EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440). . .

Positions
2,240

(SOOO's)
$277,230

PROPOSED FY 1989 LEVEL 2,240 277,230
Changes Proposed for FY 1990:
o PROGRAM INCREASES 8 9,258
o MAINTAIN CURRENT PROGRAM LEVELS .... 15,517
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(86)

(5,886)

o NET TRANSFERS (200)
o PROGRAM REDUCTIONS (6,224)
Total FY 1990 Changes. . . . (78) 12,465
FY 1990 PRESIDENT'S BUDGET 2,162 $289,695
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Program Initiatives: An increase 8 9,258
is requested to fund third year
development of System 90 (5 FTE, $4,875),
implementation of electronic certification
($1,400), and improved financial
information systems (3 FTE, $1,050).
Additional funds are requested for
facilities modernization (0 FTE, $1,683)
and development of image processing system
for checks (0 FTE, $250).

- 21 -

Change from Proposed
FY 1989 Levels
. FTE
Amount
Positions
(SOOO's)
Maintain Current Program Levels: $15,517
An increase is requested for the
costs of inflation, pay annualization,
and other uncontrollable increases
(e.g., benefits, check supplies,
equipment) ($8,307). The request
also includes, for System 90, the
restoration of base funding in FY 1990,
and funds for hardware acquisition,
reprogrammed in FY 1989 to cover the
the FY 1988 postal rate increase ($7,210).
Reductions for Nonrecurring Costs and (86) (5,886)
Savings: A decrease is requested for
nonrecurring costs, (e.g., contract
support, furniture and equipment)
(0 FTE, -$4,232), and productivity savings
(-86 FTE, -$1,654).
Net transfers: A decrease is requested (200)
for the transfer of funds for the
Statutory Inspector General.
Program Reductions: A decrease is (6,224)
requested for a projected reduction in
the volume of check payments (0 FTE, -$3,224)
and a phased reduction in Federal Tax
Deposit fee payments through the TT&L
program (0 FTE, -$3,000).

- 22 -

FINANCIAL MANAGEMENT SERVICE
ST. LAWRENCE SEAWAY TOLL REBATE PROGRAM
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440). . .

Positions
5

($000's)
$ 10,700

PROPOSED FY 1989 LEVEL 5~ 10,700
Changes Proposed for FY 1990:
o MAINTAIN CURRENT PROGRAM LEVELS .... 8
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(124)

o PROGRAM REDUCTIONS (500)
Total FY 1990 Changes (616)
FY 1990 PRESIDENT'S BUDGET 5 $10,084
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Maintain Current Program Levels: $8
An increase is requested for the
costs of inflation, pay annualization,
and other uncontrollable increases
(e.g., benefits, contracts, services).
Reductions for Nonrecurring Costs (124)
and Savings: A decrease is requested
for non-recurring administrative and
equipment costs.
Program Reductions: A decrease is (500)
requested for toll rebates based on
revised projections.

- 23 -

BUREAU OF ALCOHOL, TOBACCO & FIREARMS
Analysis o€ Fiscal Year 1990 President's Budget
(Dollars in Thousands)

FY 1989 APPROPRIATION (P.L. 100-440). .

FTE
Positions
3,701

Amount
($000's)
$234,000

Anti-Drug Abuse Act (P.L. 100-690) 7,000
PROPOSED FY 1989 LEVEL 3,701 241,000
Changes Proposed for FY 1990:
o MAINTAIN CURRENT PROGRAM LEVELS . . . 6,907
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(157)

(11,2 57)

o NET TRANSFERS (147) (9,517)
Total FY 1990 Changes (304) (13,867)
FY 1990 PRESIDENT'S BUDGET 3,397 $227,133
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Maintain Current Program Levels: $6,907
An increase is requested for the costs
of inflation and other uncontrollable
increases (e.g., benefits and equipment)
($5,479), and an FY 1990 pay
comparability increase ($1,428).
Reductions for Nonrecurring Costs and (157) (11,257)
Savings: A decrease is requested for
nonrecurring costs, (e.g., contract
support and equipment) (-$3,030), A-76
study savings (-27 FTE, -$227) and
reduction in the Alcohol Compliance
Operations Program (-130 FTE, -$8,000).
Net Transfers: A decrease is requested (147) (9,517)
for a transfer to the Statutory
Inspector General (-19 FTE, -$905),
and a transfer to the Department of Justice
for the Organized Crime Drug Enforcement
Task Force (-128 FTE, -$8,612).
- 24 -

U.S. CUSTOMS SERVICE
SALARIES AND EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440) .

Positions
16,739

($000's)
$1,025,411

Anti-Drug Abuse Act (P.L. 100-690) . . 8,500
PROPOSED FY 1989 LEVEL 16,739 1,033,911
Changes Proposed for FY 1990:
o PROGRAM INCREASES 396 26,000
o MAINTAIN CURRENT PROGRAM LEVELS . . 20,418
O REDUCTIONS, NONRECURRING COSTS
AND SAVINGS

(396)

(32,893)

o NET TRANSFERS (317) (19,642)
o PROGRAM REDUCTIONS (6,304)
Total FY 1990 Changes . . . (317) (12,421)
FY 1990 PRESIDENT'S BUDGET 16,422 $1,021,490
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Program Increases: An increase is
requested to fund initiatives for
increased contraband examinations of
high-risk cargo (396 FTE, $21,000) and
hardware purchases for an automated
enforcement information system (0 FTE,
$5,000).
Maintain Current Program Levels:
An increase is requested for the
costs of inflation and other
uncontrollable increases (e.g.,
equipment, supplies) ($14,114)
and annualization of the FY 1989
pay comparability increase ($6,304).

- 25 -

396

$26,000

20,418

Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
(SOOO's)

Reductions for Nonrecurring Costs and
Savings: A decrease is requested for
nonrecurring costs, (e.g., Automated
Commercial System and drug bill
equipment purchases) (0 FTE, -$18,549),
productivity savings attributable to
the Automated Commercial System (-14 0 FTE,
-$5,588), savings from A-76 studies to
be conducted (-129 FTE, -$1,097) and a
shortfall in use of the FY 1989 staffing
add-on (-127 FTE, -$7,659).
Net Transfers: A decrease is requested for
the net effect of transfers to the new
Statutory Inspector General (-91 FTE,
-$5,642), to the new Organized Crime Drug
Enforcement Task Force account (-226 FTE,
-$14,4 61) and from the State Department
for Foreign Affairs administrative support
(0 FTE, $461).
Program Reductions: A decrease is
requested to offset the annualization
of the January 1989 pay increase.

- 26 -

(396)

(32,893)

(317)

(19,642)

(6,304)

U.S. CUSTOMS SERVICE
AIRCRAFT OPERATIONS AND MAINTENANCE
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
FY 1989 APPROPRIATION (P.L. 100-440). .

($000's)
$142,262

Anti-Drug Abuse Act (P.L. 100-690) 7,000
PROPOSED FY 1989 LEVEL 149,262
Changes Proposed for FY 1990:
o PROGRAM INCREASES 28,158
o MAINTAIN CURRENT PROGRAM LEVELS . . . 1,967
o REDUCTIONS, NONRECURRING COSTS
AND SAVINGS

(40,859)

o NET TRANSFERS (10,4 00)
Total FY 1990 Changes .... (21,134)
FY 1990 PRESIDENT'S BUDGET ^^ $128,128
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Program Increases: An increase is
requested to fund initiatives for
radar spare parts for P3 aircraft
(0 FTE, $800) and Citation aircraft
(0 FTE, $1,100). Increases are also
requested to provide operating funds
for new aerostats (0 FTE, $19,917),
additional operating funds for helicopters
(0 FTE, $6,176) and additional maintenance
funding for the Albuquerque hangar
(0 FTE, $165).
Maintain Current Program Levels: An
increase is requested for the costs of
inflation and other uncontrollable
increases (e.g., equipment, supplies).

- 27 -

28,158

1,967

Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
(SOOO's)
Reductions for Nonrecurring Costs and
Savings: A decrease is requested for
nonrecurring costs of Citation aircraft
modification (0 FTE, -$9,045), radar sensor
spare parts (0 FTE, -$6,434), over-thehorizon radar (0 FTE, -$14,800),
Albuquerque hangar construction (0 FTE,
-$3,580) and drug bill equipment purchases
(0 FTE, -$7,000).
Net Transfers: A decrease is requested
for the transfer of operating costs for
two E2C aircraft to the Coast Guard.

- 28 -

(40,859)

(10,400)

U.S. CUSTOMS SERVICE
FORFEITURE FUND
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
(SOOO's)
FY 1989 APPROPRIATION (P.L. 100-440). .
$10,000
PROPOSED FY 1989 LEVEL

10,000

FY 1990 PRESIDENT'S BUDGET ^^ $10,000

- 29 -

U.S. CUSTOMS SERVICE
SMALL AIRPORT USER FEE FUND
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
(SOOO's)
FY 1989 APPROPRIATION (P.L. 100-440). .
22
$1,588
PROPOSED FY 1989 LEVEL

FY 1990 PRESIDENT'S BUDGET 22 $1,588

- 30 -

1,588

U.S. MINT
SALARIES & EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440)

Positions
901

(000's)
$47,000

PROPOSED FY 19 89 LEVEL 9uT~ 47,000
Changes Proposed for FY 1990:
o PROGRAM INCREASES 60 4,181
o MAINTAIN CURRENT PROGRAM LEVELS .... 1,729
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(73)

(1,808)

o NET TRANSFERS (36)
o PROGRAM REDUCTIONS (331)
Total FY 1990 Changes (13) 3,735
FY 1990 PRESIDENT'S BUDGET ^88 $50,735
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
(000f s)
Program Increases: Increases are 60 4,181
requested for increased production of
1.5 billion coins (56 FTE, $1,505)
replacement of worn-out and obsolete
equipment (0 FTE, $1,935) asbestos
removal (0 FTE, $385) buildings and
improvements (0 FTE, $200) engineering
and support personnel (4 FTE, $131) and
protection of monetary assets (0 FTE, $25).
Maintain Current Program Levels: 1,729
An increase is requested for the costs
of inflation (e.g., benefits, supplies,
contracts, equipment) ($1,193) and
annualization of the January 1989
pay increase ($536).
- 31 -

Change from Proposed
FY 1989 Levels
Amount
FTE
(OOP's)
Positions
Reductions for Nonrecurring Costs and
Savings: A decrease is requested for
productivity savings (-8 FTE, -$226)
savings associated with an A-76 Security
study (-63 FTE, -$537) and other A-76
studies (-2 FTE, -$380) and research
and development costs (0 FTE, -$665).
Net Transfers: The Mint is transferring
funds to the Statutory Inspector
General.
Program Reductions: Reductions will be
taken in the Equipment Activity to offset
the annualization of the January 1989
pay increase.

- 32 -

(73)

($1,808)

(36)

(331)

BUREAU OF THE PUBLIC DEBT
ADMINISTERING THE PUBLIC DEBT
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
(SOOO's)
FY 1989 APPROPRIATION (P.L. 100-440). . .
1,956
$200,550
Transfer to Natl. Economic Commission (700)
PROPOSED FY 1989 LEVEL 1,956 199,850
Changes Proposed for FY 1990:
o PROGRAM INCREASES 18 25,335
o WORKLOAD INCREASE 4 4,600
o MAINTAIN CURRENT PROGRAM LEVELS .... 5,725
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(9)

(4,429)

o NET TRANSFERS (2) (223)
o PROGRAM REDUCTIONS (5,546)
Total FY 1990 Changes 11 25,462
FY 1990 PRESIDENT'S BUDGET 1,967 $225,312
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
(SOOO's)
Program Increases: Increases 18 $25,335
are requested to fund new and
improved systems that provide
investor services (e.g., for
savings bonds and state and
local government securities),
(18 FTE, $1,925) and to fully
reimburse the Federal Reserve
Banks for services performed
for the Bureau (0 FTE, $23,410).
Workload Increase: An increase 4 4,600
is requested to handle anticipated
sales of college savings bonds.
- 33 -

Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
(SOOO's)
Maintain Current Program Levels: 5,725
An increase is requested for the
costs of inflation, pay annualization,
and other uncontrollable increases
(e.g., benefits, contracts, equipment).
Reductions for Nonrecurring Costs (9) (4,429)
and Savings: A decrease is requested
for nonrecurring costs (e.g., ADP
equipment) (0 FTE, -$211), and
productivity savings from EZ Clear
and A-76 (-9 FTE, -4,218).
Net Transfers: A decrease is requested (2) (223)for the transfer of funds for the
Statutory Inspector General.
Program Reductions: A decrease is (5,546)
requested to reflect revised
savings bonds workload projections
for FY 1990 (0 FTE, -$5,000) and
pay-related program reductions to
the marketable and savings securities
programs (0 FTE, -$546).

- 34 -

SAVINGS BONDS DIVISION
ADMINISTERING THE PUBLIC DEBT
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440).

. .

Positions
260

($000's)
$ 18,880

PROPOSED FY 1989 LEVEL 260 18,880
Changes Proposed for FY 1990:
o MAINTAIN CURRENT PROGRAM LEVELS .... 641
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(1)

(171)

o PROGRAM REDUCTIONS (7) (346)
Total FY 1990 Changes (8) 124
FY 1990 PRESIDENT'S BUDGET 252 $19,004
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Maintain Current Program Levels: $641
An increase is requested for the
costs of inflation, pay annualization,
and other uncontrollable increases
(e.g., benefits, contracts, services)
($641).
Reductions for Nonrecurring Costs (1) (171)
and Savings: A decrease is requested
for A-76 productivity savings.
Program Reductions: A decrease is (7) (346)
requested for a reduction in sales
promotion staff (-7 FTE, -$235) and
for pay-related reductions in the
sales program (0 FTE, -$111).

- 35 -

INTERNAL REVENUE SERVICE
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
FY 1989 APPROPRIATION (P.L. 100-440). . .

Positions
113,811

($000's)
$5,194,880

Staffing Reduction To Support Pay Raise (753)
PROPOSED FY 1989 LEVEL 113,058 5,194,880
Changes Proposed for FY 1990:
o PROPOSED PROGRAM INCREASES 3,225 230,080
o WORKLOAD INCREASE 845 37,426
o MAINTAIN CURRENT PROGRAM LEVELS .... 1,011 190,023
o REDUCTIONS, NONRECURRING COSTS
AND SAVINGS

(2,764)

(153,409)

o NET TRANSFERS (265) (14,981)
Total FY 1990 Changes 2,052 289,139
FY 1990 PRESIDENT'S BUDGET 115,110 $5,484,019
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Program Increases: Includes 3,22 5 $2 3 0,08 0
improvements to returns processing
(251 FTE, $9,913, including wage report
analysis, more taxpayer service support
(1,300 FTE, $55,882), tax enforcement
enhancements (1,380 FTE, $55,948), improved
internal investigation and research
capability (34 FTE, $5,994), and modernizing
computerized information systems, especially
in tax system redesign (260 FTE, $102,343).
Workload Increase: Processing 5.2 million 845 37,426
more tax returns and 0.8 million more
supplemental documents, handling more
tax forms and data requirements resulting
from tax reform.

- 36 -

Change from Proposed
FY 1989 Levels
Amount
FTE
(SOOO's)
Positions
Maintain Current Program Levels:
1,011
An increase is requested for the costs
of inflation, project annualizations,
and other uncontrollable increases
(e.g., benefits, contracts, equipment)
(1,011 FTE, $108,324) and completion
of funding for the FY 1989 pay
comparability increase (0 FTE, $81,699).
Reductions for Nonrecurring Costs (2,764) (153,409)
and Savings: A decrease is requested
for nonrecurring costs and discontinued
projects, primarily in automated systems
(-959 FTE and -$132,793), contracted-out
work and productivity savings (-1,805 FTE
and -$20,616).
Transfers: To Justice Department (265) (14,981)
(-260 FTE, -$14,413 to Organized Crime
and Drug Enforcement Task Force),
to Treasury Inspector General (-5 FTE,
-$308) to Census Bureau (0 FTE, -$585); and
from State Department (0 FTE and $325).

- 37 -

$190,023

U.S. SECRET SERVICE
SALARIES AND EXPENSES
Analysis of Fiscal Year 1990 President's Budget
(Dollars in Thousands)
FTE Amount
Positions
($000's)
FY 1989 APPROPRIATION (P.L. 100-440). .
4,468
$357,500
FTE Ceiling Adjustment (170) —
PROPOSED FY 1989 LEVEL

4,298

357,500

Changes Proposed for FY 1990:
o PROGRAM INCREASES 141 18,588
o MAINTAIN CURRENT PROGRAM LEVELS . . . 11,090
o REDUCTIONS, NONRECURRING COSTS,
AND SAVINGS

(16,566)

o NET TRANSFERS (3) (100)
o PROGRAM REDUCTIONS (2,111)
Total FY 1990 Changes 138 10,901
FY 1990 PRESIDENT'S BUDGET 4,436 $368,401
Highlights of FY 1990 Budget Changes
Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
Program Increases: An increase 141 $18,588
is requested to fund Enhancements
to the Vice President's Residence
(0 FTE, $2,100), Consolidated
Building (0 FTE, $7,616), Technical
Security Countermeasures (0 FTE, $1,480),
Van Ness International Drive
(0 FTE, $1,249), ADP Program (0 FTE, $160),
Technical Security Program (0 FTE, $350),
Communications (0 FTE, $100), Permanent
Protection (55 FTE, $2,194), Uniformed
Division (79 FTE, $3,067) and Protective
Research (7 FTE, $272) .

- 38 -

Change from Proposed
FY 1989 Levels
FTE
Amount
Positions
($000's)
$11,090

Maintain Current Program Levels:
An increase is requested for the
costs of inflation, pay annualization,
and other uncontrollable increases
(e.g., benefits, supplies, equipment).
Reductions for Nonrecurring Costs and
Savings: A decrease is requested for
nonrecurring costs, (e.g., Candidate
Protection, WH South Barriers, Remote
Delivery Site, MCI PCs/Peripherals,
Intrusion System, WH Windows, WH Video III,
System, Butler Storage Building, Fixed
Site Security, Space Renovations, STUWHCA (-$14,066) and construction at
Rowley Training Center (-$2,500).
Net Transfers: A decrease is requested (3) (100)
for the transfer to fund the Statutory
Inspector General (-3 FTE, -$156)
and an increase is requested for the
State Department Foreign Affairs
Administrative Support (0 FTE, $56)
transfer.
Program Reductions: Reductions to offset (2,111)
the annualization of the January 1989
pay increase will be taken from equipment
and travel.

- 39 -

(16,566)

PS Is

!§
Orj

DEPARTMENT OF THE TREASURY
DETAIL OF OTHER ACCOUNTS
INTEREST PAYMENTS
1. INTEREST ON THE PUBLIC DEBT:
The Government's current deficit and outstanding debt
requirements are financed through borrowing; e.g.,
auctions of Treasury Bills, Notes, and Bonds. Funds
paid to lenders for the use of their money is paid from
the appropriation Interest on the Public Debt.
The Interest on the Public Debt appropriation is a
permanent indefinite appropriation. This means that an
annual appropriation request is not required to obtain
this budget authority.
Interest on the Public Debt includes all interest paid
on Treasury securities sold to the public (which
includes foreign and domestic financial institutions,
individuals, insurance companies, state and local
governments, etc.) and to Federal Government trust
funds, revolving funds and deposit funds.
Interest on the Public Debt is not the sole interest
activity of the Federal Government. The Federal
Government both pays and receives interest and in some
cases pays itself. As a result, a better picture of
the Federal Government's interest cost is seen in net
interest outlay estimates. Essentially, these
estimates are composed of:
Interest on the public debt, plus interest on tax
collection refunds;
Interest collections from Federal agencies and the
public (interest on loans to the Federal Financing
Bank is the largest item of offsetting interest
collections), and interest received by Federal
trust funds for securities held by these funds.

- 40 -

INTEREST ON IRS REFUNDS:
Under certain conditions set forth in the tax law, IRS
must pay interest on Internal Revenue collections which
must be refunded — amended returns, delayed refunds of
more than 45 days from the due date of the return,
corporation losses covering prior year returns, results
of tax audits, etc. The rate of interest changes every
three months to reflect the prime interest rate then in
effect.
INTEREST ON UNINVESTED FUNDS:
Under select legislation, some trust accounts direct
that the receipt account represents an outlay for the
Treasury and is recorded under this heading. In
FY 1990, it is estimated that the following accounts
will receive payment:
Bequest of Gertrude M.* Hubbard,
Library of Congress
Library of Congress Trust Fund
National Gallery of Art Trust Fund
Education of the Blind
Soldiers' Home Permanent Fund
Immigration Bonds Deposit Fund
Oliver Wendell Holmes Deposit Fund

- 41 -

TRUST FUNDS AND OTHER
1.

GIFTS AND BEQUESTS:

The Secretary of the Treasury is authorized to accept,
hold, administer and utilize gifts and bequests of
property, both real and personal, for the purpose of
aiding or facilitating the work of the Department of
the Treasury. Property and proceeds thereof are used
as nearly as possible in accordance with the terms of
the gift or bequest.
2. MISCELLANEOUS TRUST FUNDS (FINANCIAL MANAGEMENT
SERVICE):
Consistent of expenses associated with three longstanding trust funds...
Esther Cattell Schmitt Gift Fund — Authorizes the
acceptance of gifts made to the United States by the
will of Esther Cattell Schmitt. The income received
from the gift to the United States is paid by the
Secretary of the Treasury to beneficiaries named in the
provisions of the will.
National Defense Conditional Gift Fund — The
Secretary of the Treasury accepts on behalf of the
United States, "conditional" gifts of money and other
intangible property to be used for a particular defense
purpose. Intangibles other than money are converted at
the best terms available. The moneys held in trust are
paid to those appropriation accounts which best
implement the intent of the donors.
Pershing Hall Memorial Fund — This fund was
established to pay the American Legion for the
maintenance of Pershing Hall in Paris, France, which
honors veterans of World War I.
3. REFUNDS, TRANSFERS AND EXPENSES; UNCLAIMED, ABANDONED
AND SEIZED GOODS:
Unclaimed, abandoned or seized goods are held in
storage under Customs Service's custody for one year
from the date of impoundment or seizure. At the end of
that period, all merchandise upon which duties,
storage and other charges have not been paid is
appraised and sold at public auction. The expenses
shown in this fund represent the net expenses
associated with holding this merchandise after
receipts from public- auction.
42 -

PAYMENTS TO FARM CREDIT SYSTEM:

The Agriculture Credit Act of 1987 (P.L. 100-233)
authorized such sums as necessary to be appropriated to
the Secretary of the Treasury for payments to the Farm
Credit System Assistance Corporation. These payments
reimburse the Assistance Corporation for interest
expenses on U.S. guaranteed debt issued by the
Corporation. The Assistance Corporation debt proceeds
will be used to provide assistance to financially
troubled institutions.
Beginning in FY 1989, Treasury will annually reimburse
100 percent of the Assistance Corporation interest
expenses incurred between now and January 1993.
Between January 1993 and the ensuing five years,
Treasury will reimburse 50 percent of the Assistance
Corporation's interest expense with the Systems Banks
paying the balance. Thereafter, all Assistance
corporation interest expense will be paid by the System
Bank.

- 43 -

PERMANENT AUTHORITY APPROPRIATIONS
1.

PAYMENT WHERE CREDIT EXCEEDS TAX LIABILITY (EARNED
INCOME CREDIT):
The earned income credit (originally authorized under
the Tax Reduction Act of 1975) calls for absolute tax
credits to low income taxpayers who meet certain
qualifications. Only when the tax credit exceeds the
taxpayer's total liability for taxes is this account
used, and then, only by the amount that the tax
liability is exceeded.
2. CLAIMS, JUDGMENTS AND RELIEF ACTS:
Appropriations are made for payment of claims and
interest for damages not chargeable to appropriations
of individual agencies, and for payment of private and
public relief acts. In FY 1988, $1,408.8 million in
claims were paid as a result of such judgments; most of
these judgments were handled through the Department of
Justice.
3. CUSTOMS FORFEITURE FUND:
The Anti-Drug Abuse Act of 1988 (P.L. 100-690) revised
the treatment of the Customs Forfeiture Fund. A
permanent appropriation was created for payment of the
non-discretionary costs of seizing and maintaining
assets from suspected criminal enterprises. A current
definite appropriation is to be considered separately
to pay for the discretionary costs associated with
seizing these assets.
4. DUTIES, TAXES AND FEES (PUERTO RICO):
Both the U.S. Customs Service and the Bureau of
Alcohol, Tobacco and Firearms collect duties and excise
taxes for Puerto Rico. These funds are deposited in a
receipt account in the Treasury. After the bureaus
deduct their cost of collecting these funds, the
balance is refunded back to Puerto Rico through this
account, which is shown as a Treasury outlay. In
total, the activity (receipts/outlays) generally
balances to zero, although the repayment is required to
be included in total Treasury expenditures.

- 44 -

COINAGE PROFIT FUND:
This represents the portion of the gain from
manufacturing coins that is used to cover wastage,
recoinage losses incurred in minting coins, and the
cost of distributing coins.
PRESIDENTIAL ELECTION CAMPAIGN FUND:
The fund represents payments to the candidates running
for President during the primaries and the general
election, as well as support of nominating conventions.
Appropriations to the fund represent receipts from the
Presidential Election check-off on taxpayers' income
tax returns. Upon certification by the Federal
Election Commission, payments are made for the above
purposes. Major expenditures occur during the year of
the Presidential election—appropriations shown
represent collections from the check-off.
CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT OF
1985 (COBRA):
COBRA established a user fee to cover the U.S. Customs
Service's overtime cost for inspection. The fee is
levied primarily as a $5 per passenger charge on those
entering the country, but is also collected in varying
amounts from different vessels and vehicles entering
the United States. Fees are deposited in the Customs
User Fee Account and are available without annual
appropriation and apportionment limitation to
reimburse the Customs Service's Salaries and Expenses
appropriation.
CONTRIBUTION FOR ANNUITY BENEFITS:
This fund reimburses the District of Columbia for
benefit payments made from the revenue of the District
of Columbia to or for members of the Secret Service
Uniform Division under the Policemen and Firemen's
Retirement and Disability Act (4 D.C. Code 521).

- 45 -

OFFSETTING COLLECTIONS
In general, amounts collected by the Government are classified
in two major categories:
Governmental receipts, which are compared with outlays in
calculating the surplus or deficit.
Offsetting receipts, which are deducted from gross
disbursements in calculating outlays.
These two types of collections are described below.
Governmental receipts - arise from the sovereign and
regulatory powers unique to the Government. They consist
primarily of tax receipts, but also include customs duties,
court fines, certain licenses, etc. All governmental
receipts are deposited into receipt accounts. These
receipts are always reported in total (rather than as an
offset to budget authority and outlays).
Offsetting receipts - are all collections that are
offset against the budget authority and outlays of the
collecting agency rather than reflected as governmental
receipts in computing budget totals. Offsetting receipts
are comprised of:
PROPRIETARY RECEIPTS - These receipts from the public
are market-oriented and are derived from activities
operated as business-type enterprises.
INTRAGOVERNMENTAL RECEIPTS - These are collections from
other governmental accounts deposited in receipt
accounts. These are further classified as follows:
1. Interfund Receipts - These are amounts derived
from payments between Federal and trust funds.
2. Intrafund Receipts - These are amounts derived
from payments within the same fund group (i.e.,
within the Federal fund group or within the trust
fund group).
($ in Millions)
FY 1988
FY 1989
FY 1990
ACTUAL
ESTIMATE
ESTIMATE
Proprietary 3.3 3.7 3.4
Interfund
1.5
1.6
.5
Intrafund
19.0
17.4
17.2
TOTAL 23.8 22.7 21.1

- 46 -

PROPOSED LEGISLATION
CREDIT FINANCING SERVICE:
To be created in the Department of the Treasury,
the Credit Financing Service would be responsible for
maintaining an accounting and control system to keep
track of all loans in the Federal Credit Direct Loan
Revolving Fund and the Federal Credit Guaranteed Loan
Revolving Fund. The Service would calculate loan
subsidies as the basis for agency loan subsidy
appropriation requests, and provide oversight of agency
loan servicing activities. To handle the projected
workload, 46 FTE workyears and $4.3 million are
requested in FY 1990.
U.S. MINT REVOLVING FUND:
Legislation will be proposed to create a public
enterprise fund, the Mint Revolving Fund, to finance
numismatic and bullion coin operations for the United
States Mint beginning with FY 1990.
The Mint would retain profits for FY 1989 reimbursable
programs to support start-up operations at
October 1, 1990. During FY 1990 and thereafter, sales
proceeds would be deposited into the revolving fund and
operating and capital expenditures would be charged
against the fund. At year's end, numismatic and
bullion program net profits would be deposited into the
General Fund of the Treasury, with exception of a
stated amount of funding to be retained to finance
start-up operations for the subsequent fiscal year.

- 47 -

Sea
HZ
<H
JO
^>

a
Q

MULTILATERAL DEVELOPMENT BANKS

FY 1988
Appropriation
IBRD
Paid-in
Callable

40,176,393
437.320.185 >
477,496,578

FY 1989
Appropriation

FY 1990
Reguest
90,251,869

50,,000,,795
< 2,292,,972,,540 >

< 2.241.863.586 >

2,342,,973,,335

2,332,115,455

IDA

915,000,000

995,,000,,000

965,000,000

IFC

20,300,000

4,,891,,528

114,936,472

MIGA
Paid-in
Callable

44,403,116
177.612.464 >
222,015,580

0
0 >
0

IDB
Paid-in
Callable

31,600,000
119.403.576 >
151,003,576

0
0 >
0

31,617,983
0 >
31,617,983

FSO

25,732,371

63,724,629

IIC

1,303,000

25,500,000

ADB
Paid-in
Callable

ADF

15,057,220
276.503.941 >
291,561,161

0
0 >

28,000,000

152,392,036

230,711,964

8,999,371
134.918.184 >
143,917,555

7,345,371
135.062.946 >
142,408,317

10,641,308
134.809,613 >
145,450,921

105,000,000

3,742,665,216

4,014,057,424

1,314,629,730
< 2,428,035,486 >

1,637,384,225
< 2,376,673,199 >

AFDB
Paid-in
Callable

AFDF

75,000,000

TOTAL MDBS

0
0 >

2,351,329,821

Budget Authority
1,205,571,471
Limitation
< 1,145,758,350 >

- 48 -

MULTILATERAL DEVELOPMENT BANKS
The Multilateral Development Banks (MDBs) provide technical
assistance and project financing on both near-market and
concessional terms for development projects in less developed
countries. Funding is provided by developed and some advanced
developing nations through replenishments of resources and
increases in capital.
The soft-loan windows (the World Bank's International
Development Association, the Asian Development Fund and the
Inter-American Development Bank's Fund for Special Operations)
make loans on concessional terms.
MDB hard-loan windows have two types of capital — "paid-in" and
"callable." In contrast to the soft-loan windows, where donor
countries share the financial burden, the loans from the MDB
hard-loan windows are largely financed by MDB borrowings from the
private capital markets. These borrowings are backed by the
capital subscriptions of the member governments of the Banks.
Callable capital is a pledge or subscription by member
governments to meet a call if an MDB were to become unable to
adequately service its financial market borrowings. It has never
been necessary to call on member governments for their callable
capital subscriptions, nor is any call envisioned in the future.
Program statements by institution are as follows:
I. The International Bank for Reconstruction and Development
(IBRD) known as the World Bank, applies banking principles to
the achievement of development goals. A major purpose of the
Bank is to promote increased economic productivity and help
developing economies meet more of the basic needs of their
peoples. Cumulative lending since 1945 totaled $160.0 billion as
of June 30, 1988.
The Bank's 1988 lending program included 118 loan commitments to
37 countries for a total of $14.7 billion. More than twice this
amount was contributed to these projects by recipient countries,
commercial lenders, and other multilateral or bilateral agencies.
For FY 1990, the Administration is requesting $90.3 million for
paid-in capital subscriptions and $2,241.9 million in program
limitations for callable capital subscriptions to the 1988
General Capital Increase.
II. The International Development Association (IDA) is the World
Bank Group affiliate which provides development financing on
highly concessional terms to the world's poorest nations - mainly
those with an annual per capita gross national project of less
than $400. IDA is the largest source of multilateral lending
extended on concessional terms to developing countries. Projects
have to meet the same economic and financial standards as other
- 49 -

World Bank projects. As of June 30, 1988, IDA had extended
credits totaling $47.8 billion for development projects in 85
countries.
The Eighth Replenishment of IDA will provide resources of nearly
$12.5 billion. The United States has pledged $2,875 billion to
the replenishment and the $965.0 million requested in 1990 is to
complete payment on that contribution.
III. The U.S. Contribution to Sub-Saharan Africa Facility
supports the World Bank's Special Facility for Africa which was
established in April 1985 to provide credits to IDA-eligible
countries in Sub-Saharan Africa which have undertaken or are
committed to undertake an appropriate medium-term program of
policy reform. In FY 1987, Congress provided $64.8 million in a
U.S. contribution to the Facility.
IV. The International Finance Corporation (IFC) a member of the
World Bank Group, was established in 1956 to further economic
development by encouraging the growth of private enterprise in
developing countries. IFC provides and mobilizes loans and
equity investments for promising ventures, and provides technical
assistance. As of June 30, 1988, IFC had 133 member countries
and had commitments of $4.5 billion, resulting from investments
in over 450 enterprises in 78 countries. The FY 1990 request of
$114.9 million is to complete payment toward the U.S. share of
$175.0 million for the increase in IFC resources.
V. The Multilateral Investment Guarantee Agency (MIGA) is an
international development institution which is designed to
encourage the flow of investment to and among developing
countries by: (1) issuing guarantees against non-commercial
risks; (2) carrying out a wide range of investment promotional
activities; and (3) encouraging sound investment policies in
member countries.
The capital stock of the MIGA is $1.P8 billion and the U.S.
share is $222 million or 2P.5 percent of the total. The U.S.
subscription of $44.4 million to paid-in capital and $177.6
million to callable capital was provided in FY 1988.
VI. The Inter-American Development Bank (IDB) was established
in 1959 to promote economic and social development in the
developing countries in the Western Hemisphere by extending loans
for specific development projects. Cumulative loan commitments
from the capital window were $27.4 billion as of
September 3P, 1988. During FY 1988, 26 loans to 14 different
countries were extended from the IDB's capital window for a total
of $1.9 million.
o The Fund For Special Operation (FSO) is that part of the
IDB which extends loans in circumstances where financing at
- 5P
near market rates of interest
is-not appropriate. FSO loans
are made on concessional terms and are extended entirely

from contributions provided by the United States and other
members of the Bank. The FSO was established in 1959 as an
integral element in the Bank's lending operations.
As of September 3P, 1988, cumulative loan commitments from
the FSO totalled $9.7 billion. During FY 1988, IP loans to
8 different countries were extended from the FSO for a total
of $3P4.P million.
o The Inter-American Investment Corporation (IIC) was
designed to support private sector activities in Latin
America through equity and loan investments that focus
primarily on small-and medium-scale enterprises. During
1983 and 1984, the U.S. and the other interested member
countries of the IDB worked out the creation of this new
multilateral organization. The new organization, (IIC) is
linked to the IDB, and was formally established in 1986.
The FY 1990 request for the IDB includes: (1) budget authority
of $31.6 million for paid-in capital subscriptions to complete
the U.S. share of the Sixth Replenishment of the Bank's capital;
(2) budget authority of $63.7 million to complete the U.S. share
of the current replenishment of the Fund for Special Operations;
and (3) budget authority of $25.5 million to complete the U.S.
share of the initial capitalization of the Inter-American
Investment Corporation.
VII. The Asian Development Bank (ADB) is a multilateral
organization whose capital stock is owned by its 47 member
governments. It was established in 1966 and began ordinary
capital lending operations in 1968. The ADB assists in the
financing of economic development in Asia and the Pacific region.
The Bank makes loans at near market interest rates from its
ordinary capital resources. As of September 3P, 1988, the ADB
had cumulative ordinary capital loan commitments of
$12.8 billion.
o The Asian Development Fund (ADF) extends loans at
concessional rates from funds provided by ADB member
governments, in addition to its ordinary lending operations.
These special funds are used to finance priority economic
development projects in the poorest ADB member countries.
As of September 3P, 198 8 cumulative loan commitments from
the Asian Development Fund (ADF) totaled $8.3 billion.
In April 1986, negotiations were completed for the fourth
ADF replenishment (ADF V ) , for an amount of $3.6 billion
over the period 1987-199P. The U.S. share of the
replenishment is 16.23 percent, or $584.28 million.
In FY 199P, $23P.7 million is being sought for payment
toward the U.S. contribution to ADF V.
- 51 -

VIII. The African Development Bank (AFDB) was established in
1963 to make loans on near-market terms for the economic and
social development of its fifty African members. Membership in
the Bank was restricted to African nations until 1982. The
United States became a member in 1983.
In 1986, agreement was reached on a $13.P billion increase in
AFDB capital. The U.S. share of the increase is $719.6 million
of which $44.97 million would be paid-in over the FY 1988-92
period. A second installment on that subscription ($1P.6 million
of paid-in capital and $134.8 million for callable capital
subscriptions) is being requested in FY 199P.
IX. African Development Fund (AFDF) was established in 1973 to
complement the operations of the AFDB by providing concessional
financing for high priority development projects in Africa. Fund
lending is restricted to the poorest of its members with 8P
percent going to countries with a per capita GNP of $51P or
less. Fund membership includes 25 non-regional donor countries
and the AFDB representing all of its African members. During
FY 1988, the AFDF lent $6P5.P million to 27 countries.
A fifth replenishment (AFDF V) was negotiated in 1987 to fund
AFDF lending for 1988-9P and a target figure of $3.P billion was
established. The 199P request for the AFDF is $105.0 million —
the second installment of the U.S. share of replenishment.

- 52 -

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
202/376-4350
FOR RELEASE AT 4:00 P.M.
January 10, 1989
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,4-00 million, to be issued January 19, 1989.
This offering
will provide about $600
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,791 million.
Tenders will be received at Federal Reserve Banks and Branches and at
the Bureau of the Public Debt, Washington, D. C. 20239, prior to 1:00
p.m., Eastern Standard time, Tuesday, January 17, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
October 20, 1988,
and to mature April 20, 1989
(CUSIP No.
912794 RU 0 ) , currently outstanding in the amount of $ 14,418 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
January 19, 1989,
and to mature July 20, 1989
(CUSIP No.
912794 SR 6 ).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing January 19, 1989.
In addition to the maturing
13-week and 26-week bills, there are $9,437
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 $1,767 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $2,147 million as
agents for foreign and international monetary authorities, and $6,302
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
NB-103
Tenders for bills to be maintained on the book-entry records of the
Department
of series)
the Treasury
should
be submitted
on Form
PD 5176-1
(for 13-week
or Form
PD 5176-2
(for 26-week
series).

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry 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.
10/87

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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
10/87
of
the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.

TREASURY NEWS

Bpartment of the Treasury • Washington, D.c. • Telephone 566-2
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
January 11, 1989
(202) 376-4350
RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $7,021 million of
$22,572 million of tenders received from the public for the 7-year
notes, Series E-1996, auctioned today. The notes will be issued
January 17, 1989, and mature January 15, 1996.
The interest rate on the notes will be 9-1/4%. The range
of accepted competitive bids, and the corresponding prices at the
9-1/4% interest rate are as follows:
Yield
Price
Low
9.29%*
99.798
High
9.30%
99.747
Average
9.30%
99.747
•Excepting 2 tenders totaling $101,000.
Tenders at the high yield were allotted 41%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
27,373
Boston
$
New York
20 ,000,925
Philadelphia
11,117
Cleveland
25,790
Richmond
120,706
Atlanta
18,446
Chicago
1 ,423,803
St. Louis
42,020
Minneapolis
16,535
Kansas City
45,307
Dallas
14,710
San Francisco
822,950
Treasury
2.691
Totals
$22 ,572,373

Accepted
$
27,373
6,181,617
11,117
25,790
62,916
18,421
387,973
19,020
16,524
43,717
14,710
209,423
2.691
$7,021,292

The $7,021 million of accepted tenders includes $647
million of noncompetitive tenders and $6,374 million of competitive tenders from the public.
In addition to the $7,021 million of tenders accepted in
the auction process, $150 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $212 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.
NB-104

TREASURY NEWS _
Dtpartment of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
202/376-4350

FOR IMMEDIATE RELEASE
January 12, 198
SULTS OF TREASURY'S 52-WEEK BILL AUCTION

Tenders for $9,042 million of 52-week bills to be issued
January 19, 1989,
and to mature January 18, 1990, were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate
(Equivalent Coupon-Issue Yield) Price
Low
8.43%
9.14%
91.476
High
8.46%
9.17%
91.446
Average 8.45%
9.16%
91.456
Tenders at the high discount rate were allotted 28%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TV££
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

NB-105

$
50,760
30,054,845
49,770
72,180
82,105
82,300
2,297,045
70,855
41,680
113,720
37,480
1,968,815
203,020
$35,124,575

$ 5P,760
7,893,P7P
49,770
71,080
79,945
81,300
189,395
54,855
39,680
112,000
37,48P
179,775
203,020
$9,042,130

$31,141,465
1,573,110
$32,714,575
2,20P,PPP

$5,059,020
1,573,110
$6,632,130
2,200,000

21P,PPP
$35,124,575

210,000
$9,042,130

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
MARK SULLIVAN III January 12, 1989
GENERAL COUNSEL
TO LEAVE TREASURY
Secretary of the Treasury Nicholas F. Brady announced that
Mark Sullivan III, General Counsel of the Treasury, will
leave his post at the Treasury Department, effective
February 10, 1989.
In announcing his departure, Secretary Brady commended Mark
for his outstanding public service. "His service is
characterized by high professional standards and dedication
to the American people. Mark's many contributions to the
Treasury are well known, and we wish him well in his future
endeavors".
Mr. Sullivan was confirmed as General Counsel of the
Treasury on March 23, 1988, where he serves as principal
legal adviser to the Secretary, Deputy Secretary, and other
senior officials. He supervises the Department's Legal
Division, which comprises approximately 2000 attorneys in
Washington and regional offices throughout the country. Mr.
Sullivan's responsibilities center on the legal dimensions
of banking, enforcement, trade, investment, economic
sanctions, and tax matters before the Department. President
Reagan also appointed Mr. Sullivan to be a member of the
Board of Directors of the Federal Financing Bank on April
12, 1988.
Before assuming his duties as General Counsel of the
Treasury, Mr. Sullivan served on the White House staff as
the Associate Director of Presidential Personnel for Legal
and Financial Affairs. In addition to his White House
responsibilities, Mr. Sullivan was selected in 1986 by the
President to be a Member of the Council of the
Administrative Conference of the United States and serves on
its Committee on Judicial Review and its Special Committee
on Financial Services.
Prior to joining the Administration, Mr. Sullivan was a
partner in the law firm of Baker & Hostetler from 1984 to
1985. Previously, he had been a partner with Hamel & Park
from 1975-1984.
Mr. Sullivan graduated from Yale University (B.A. 1964) and
NB-106
the University of Virginia (LL.B. 1967). He resides in
Bethesda, Maryland with his wife Susan and their two
children, Jamie and Abby.

TREASURY NEWS
Department of the Treasury • Washington,CONTACT:
D.c. • Telephone
566-2041
Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
January 17, 19 8 9 R £ S U L T S

WEEKLY BILL AUCTIONS
,*-J
Tenders for $7,202 million of 13-week bills and for $7,223 million
of 26-week bills, both to be issued on January 19, 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing April 20, 1989
Discount Investment
Price
Rate
Rate 1/

Low
High
Average
a/ Excepting 1
b/ Excepting 3
Tenders at the
Tenders at the

0 F TREA suRY'S

26-week bills
maturing July 20, 1989
Discount Investment
Rate
Rate 1/
Price

8.28%a/
8.57%
97.907
8.33% y
8.82%
95.789
8.35%
8.31%
8.61%
97.899
8.84%
95.779
8.35%
8.84%
95.779
8.30%
8.60%
97.902
tender of $10,000.
tenders totaling $1,290,000.
high discount rate for the 13 -week bills were allotted 82%,
high discount rate for the 26 •week bills were allotted 58%
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received

Accepted

47,060
19, 842,580
28,595
54,460
57,225
58,910
903,590
71,495
14,725
69,880
38,870
724,735
1
231,935

47,060
$
6 190,080
28,595
54,180
57,225
58,910
138,990
48,495
14,725
69,880
28,870
253.735
231,935

$7 ,202,150

$23 144,060

$7 222,680

$21,091,465
1,307,920
$22,399,385

$3 464,310
1 307,920
$4 772,230

$18 ,497,170
1 ,147,410
$19 ,644,580

$2 ,575,790
1 147,410
$3 ,723,200

2,302,000

2 302,000

1 800,000

1 ,800.000

127,920

1 699,480

1 ,699,480

$24,829,305

$7 ,202,150

: $23 144,060

$7 ,222.680

$
50,415
20,737,410
30,715
55,055
58,525
47,385
1,049,475
75,375
11,900
62,885
39.790
2,315,185
295,190

$24,829,305

50,415
5 ,982,020
30.715
55,055
58,525
47,385
150,035
35.375
11,900
61,960
29,790
393,785
295,190

An additional $29,780 thousand of 13-week bills and an additional $333,720
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
U

Equivalent coupon-issue yield.
MB-107

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT:
FOR RELEASE AT 4:00 P.M.
January 17, 1989
TREASURY'S WEEKLY BILL OFFERING

Office of Financing
202/376-4350

The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued January 26, 1989.
This offering
will provide about $ 50
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $ 14,349 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, January 23, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
October 27, 1988,
and to mature April 27, 1989
(CUSIP No.
912794 RV 8), currently outstanding in the amount of $7,295 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 7,200 million, to be dated
January 26, 1989,
and to mature July 27, 1989
(CUSIP No.
912794 SS 4 ).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing January 26, 1989.
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 $ 2,038 million as agents for foreign
and international monetary authorities, and $3,723 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
5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series),
NB-108

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

• < *

federal financing ban.c

CD CO
in CO
CO m
co
CD

m
a. u_

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

January 18, 19 89

FEDERAL FINANCING BANK ACTIVITY

Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
April 1988.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $150.0'billion on April 30, 1988,
posting an increase of $0.3 billion from the level on March 31,
1988.
This net change was the result of increases in holdings of
agency debt of $156.2 million and agency-guaranteed debt of
$166.5 million, and a decrease in holdings of agency assets of
$0.4 million. FFB made 51 disbursements during April.
Attached to this release are tables presenting FFB
April loan activity and,FFB holdings as of April 30, 1988.

NB-109

o
co
CM •«fr
co CM

Page 2 of 4
FEDERAL FINANCING BANK
APRIL 1988 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
INTEREST INTEREST
MATURITY RATE
RATE
(semi(other than
annual) semi-annual)

AGENCY DEBT
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquiditv Facility

4/7

•Note #463
+Note #464

4/27

$ 16,625,000.00
5,000,000.00

7/8/88
5/27/88

6.435%
6.198%

86,000,000.00
11,000,000.00
165,000,000.00
99,000,000.00
10,000,000.00
20,000,000.00
102,000,000.00
81,000,000.00
23,000,000.00
45,000,000.00
62,000,000.00
175,000,000.00
144,000,000.00

4/11/88
4/11/88
4/15/88
4/20/88
4/18/88
4/19/88
4/25/88
4/29/88
4/29/88
5/2/88
5/3/88
5/6/88
5/9/88

5.995%
6.305%
6.355%
6.315%
6.025%
6.025%
6.025%
6.105%
6.125%
6.120%
6.120%
6.259%
6.277%

6,080,965.40
372,111.24
688,013.00
27,703.49
200,419.39
9,344,940.65
43,726.00
1,430,067.94
5,269,368.04

9/1/13
5/31/96
9/1/13
9/12/96
9/1/13
8/25/14
5/5/94
9/V13
8/25/14

8.955%
8.205%
8.875%
7.765%
8»855%
8.807%
8.575%
9.092%
9.044%

TENNESSEE W I £ Y AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance

#877
#878
#879
#880
#881
#882
#883
#884
#885
#886
#887
#888
#889

4/4
4/6
4/8
4/11
4/15
4/15
4/15
4/20
4/22
4/25
4/25
4/29
4/30

GOVERNMENT - GUARAtfTFFT) TfiANS
DEPARTMENT OF DEFENSE
Foreian Military Sales
Greece 16
Morocco 13
Greece 16
Philippines 11
Greece 16
Greece 17
Kenya 10
Greece 16
Greece 17

•rollover

4/6
4/7
4/8
4/8
4/13
4/13
4/21
4/25
4/26

Page 3 of
FEDERAL FINANCING BANK
APRIL 1988 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

600,000.00
2,001,918.20
35,000.00
279,142.00
30,000.00
130,000.00
234,836.64
194,000.00

4/1/91
5/2/88
11/1/88
10/3/88
10/3/88
6/15/88
10/3/88
8/31/04

7.549%
6.156%
6.672%
6.555%
6.599%
6.135%
6.586%
8.958%

7.691% ann.

12,107,000.00
365,000.00
3,205,000.00
1,530,000.00
10,000.00
7,269,000.00
223,000.00
2,632,000.00
1,271,000.00
1,011,000.00
1,973,000.00
6,237,000.00
1,376,000.00
8,808,000.00
1,027,695.00
8,696,000.00

4/4/90
4/4/90
1/2/90
7/2/90
12/31/12
12/31/15
4/11/90
7/2/90
1/2/90
1/2/90
12/31/16
12/31/16
7/2/90
7/2/90
7/2/90
7/2/90

7.535%
7.535%
7.428%
7.757%
8.750%
8.853%
7.595%
7.637%
7.510%
7.510%
8.821%
8.821%
7.777%
7.783%
7.796%
7.803%

7.465%
7.465%
7.360%
7.683%
8.656%
8.757%
7.524%
7.565%
7.441%
7.441%
8.726%
8.726%
7.703%
7.709%
7.721%
7.728%

4/1/08
4/1/08

8.843%
8.843%

7/29/88

6.173%

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
*Fulton, GA
Toa Baja, PR
Lincoln, NE
Ponce, PR
Lincoln, NE
Kansas City, MO
San Juan, PR
Rochester, NY

4/1
4/14
4/19
4/19
4/21
4/21
4/27
4/29

6.687% ann.

9.159% ann.

RTTRAT, FTFCTRIFICATION ADMINISTRATION
>N
•Wabash Valley Power #206
*Wabash Valley Power #206
*Wolverine Power #182A
Colorado Ute-Electric #276
So. Miss. Elec. Power #90
•San Miguel Electric #110
•Wabash Valley Power #206
•Mlegheny Electric #175A
•Wolverine Power #183A
*Wolverine Power #182A
•Wabash Valley Power #206
*Wabash Valley Power #104
•Colorado Ute-Electric #203A
Associated Electric #328
•Colorado Ute-Electric #168A
Cglethrope Power #320

4/4
4/4
4/4
4/5
4/7
4/8
4/11
4/11
4/11
4/11
4/14
4/14
4/18
4/18
4/28
4/28

SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
East Boston Local Dev Corp. 4/6 208,000.00
Metropolitan Growth & Dev Corp
4/6
227,000.00
TENNESSEE VRT.TFV MTIHORITY
Seven States Energy Corporation
Note A-88-07 4/29

•maturity extension

674,455,867.69

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

Page 4 of 4

Program

FEDERAL FINANCING BANK HOLDINGS
( n millions)
Net Change FY '88 Net Change
April 30. 1988
March 31. 1988
4/1/8B-4/30/88

Agency Debt:
Export-Import Bank
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total* 34,207.5
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total* 63,948.6
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes +
General Services Administration -tDOI—Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +•
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
•figures may
not total due to rounding
suU-total*
51,887.4
+-does
not
include
capitalized interest
grand total* $ 150,043.5

11,488.5
114.6
16,751.0
5,853.4

59,674.0
84.0
102.2
-04,071.2
17.2

18,453.3
4,94 0.0
321.7
-02,037.0
391.6
32.6
26.7
949.4
1,758.9
19,203.2
703.3
888.8
1,952.4
51.2
177.0

10/1/87-4/30/88

-4.8
161.0
-0-

-975.0
3.2
365.0
1,500.0

34,051.2

156.2

893.2

59,674.0
84.0
102.2
-04,071.2
17.6

-0-0-0-0-0-0.4

-5,335.0
-0-0-0.7
-170.0
-2.4

63,949.0

-0.4

-5,508.0

18,307.2
4,940.0
319.8
-02,037.0
391.6
32.6
26.7
949.4
1,758.9
19,184.2
711.8
891.8
1,941.6
51.2
177.0

146.1
-01.8
-0-0-0-0-0-0-019.0
-8.5
-2.9
10.9
-0-0-

-710.6
-0-2.6
-30.6
-37.3
-3.8
-0.5
-0.4
140.8
-29.4
-1,993.7
-37.3
-10.9
128.8
-4.1
-0-

51,720.9

166.5

-2,591.8

322.4

$ -7,206.6

11,488.5
119.4
16,590.0
5,853.4

149,721.2

-o-

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone
FOR RELEASE AT 4:00 P.M.
January 18, 1989

CONTACT:

Office of Financing
202/376-4350

TREASURY TO AUCTION $9,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,250 million
of 2-year notes to refund $10,946 million of 2-year notes maturing
January 31, 1989, and to pay down about $1,700 million. The public
holds $10,946 million of the maturing 2-year notes, including $774
million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
The $9,250 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 $789 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

NB-110

2041

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JANUARY 31, 1989
January 18, 1989
Amount Offered:
To the public

$9,250 million

Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... V-1991
(CUSIP No. 912827 XC 1)
Maturity date
January 31, 1991
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
July 31 and January 31
Minimum denomination available .. $5,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment Terms:
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, January 25, 1989,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury .. Tuesday, January 31, 1989
b) readily-collectible check .. Friday, January 27, 1989

TREASURY NEWS _
Department of the Treasury • Washington, D.C. • Telephone 566-2041
For Immediate Release
January 19, 1989

Contact:

Larry Batdorf
566-2041

TREASURY ASSESSES PENALTIES AGAINST
THE FIRST WOMEN'S BANK OF NEW YORK
UNDER THE BANK SECRECY ACT
The Department of the Treasury, on January 19, 1989, announced
that The First Women's Bank of New York, New York, has agreed to
pay penalties of $80,000 for failure to file thirty-five (35)
currency transaction reports as required by the Bank Secrecy
Act. The violations were discovered during a series of
examinations by the Federal Deposit Insurance Corporation.
Salvatore R. Martoche, Assistant Secretary for Enforcement, who
announced the penalties, said that the penalties represented a
settlement of The First Women's Bank's civil liability under the
Bank Secrecy Act. Martoche stated that the severity of the
penalties imposed was the result of The First Women's Bank not
voluntarily reporting the violations to the Department of the
Treasury.
The Department of the Treasury has no evidence that The First
Women's Bank engaged in any criminal activities in connection
with these reporting violations.
Martoche stated that all of the reporting violations occurred
prior to the installation of The First Women's Bank's present
management and that the present bank management has cooperated
fully with Treasury. No reporting violations have been
discovered since the new management took over in 1986. Martoche
added, "Based on the compliance procedures the bank has
instituted and the attitude of the present bank management
towards compliance, we look forward to full Bank Secrecy Act
compliance by The First Women's Bank in the future."

NB-111

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
January 19, 1989

CONTACT:

KENNETH W. BUTLER
(202) 376-4306

TREASURY APPROVES NEW DELIVERY SYSTEM FOR SAVINGS BONDS
The Treasury Department has announced that it will expand the use
of a new system for issuing United States Savings Bonds.
Recently tested in Ohio, as part of that effort, the Treasury's
Bureau of the Public Debt and the Cleveland Federal Reserve Bank
conducted a pilot in the State to test the feasibility of issuing
savings bonds from regional offices rather than over-the-counter
at 40,000 financial institutions. During the pilot, banks,
savings and loan associations, and credit unions continued to
receive bond purchase applications and payments from their
customers. However, instead of each financial institution
issuing bonds directly, the purchase information was forwarded to
the Pittsburgh Federal Reserve Branch where the bonds were issued
and then mailed to the customer. A certificate was provided to
the bond buyer at the time of purchase which could be given to
those who were to receive the bond as a gift when issued.
The results of the year-long test in Ohio clearly support the
adoption of a regional delivery mechanism. During the pilot,
over 500,000 Ohioans purchased bonds valued at $193.5 million.
This is approximately the same level of bond sales as was
recorded in Ohio immediately prior to the pilot.
Before
starting the pilot, Treasury stated that bonds would be mailed
within three weeks from the time the customer submitted an
application. This goal was consistently met or exceeded
throughout the entire test. Since interest on the bonds begins
on the first day of the month in which the customer submits an
application, the new delivery system does not affect the earnings
of bond purchasers.
Financial institutions in Ohio have responded very favorably to
the new regional delivery system. They are still able to service
their customers while no longer having the expense of maintaining
and accounting for savings bond stock. Tellers are also able to
complete bond purchase transactions more quickly. In addition,
Treasury has found that there are significant cost savings and
cash management benefits from the regional delivery system.
As a result of the success of the pilot, the regional delivery
system will be continued in Ohio and will be implemented
nationwide over the next few years. In 1989, Treasury and the
Federal Reserve will expand the new system to include the rest of
the Cleveland Federal Reserve District. Besides Ohio, this
covers
NB-112 western Pennsylvania, eastern Kentucky and the northern
panhandle of West Virginia.

TREASURY NEWS
iportment of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
January 23, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,211 million of 13-week bills and for $7,207 million
of 26-week bills, both to be issued on January 26, 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing April 27, 1989
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing July 27. 1989
Discount Investment
Rate
Price
Rate 1/

8.22%
8.27%
8.26%

8.29%
8.31%
8.31%

8.51%
8.56%
8.55%

97.922
97.910
97.912

8.77%
8.79%
8.79%

95.809
95.799
95.799

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 52%.
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
$

40,210
19,617,040
42,630
48,560
55,395
37,715
1,176,020
53,090
8,360
52,635
34,605
1,911,145
516,165

Accepted
$

40,210
5,527,990
42,630
48,440
55,385
37,715
203,710
33,090
8,360
52,635
25.555
619,045
516,165

Received
$

43,795
25,132,295
27,265
49,275
50,590
33,660
924,985
39,005
11,270
53,975
31,515
1.781,960
532,475

Accepted
$

43,795
6,173,565
26,305
49,275
50,590
33,660
49,505
31,005
11,270
53,975
21,465
129,860
532,475

$23,593,570

$7,210,930

$28,712,065

$7,206,745

$20,153,440
1,316,500
$21,469,940

$4,070,800
1,316,500
$5,387,300

$23,880,585
1,225,450
$25,106,035

$2,675,265
1,225,450
$3,900,715

1,922,960

1.622,960

1,800,000

1,500,000

200,670

1,806,030

$23,593,570

$7,210,930

$28,712,065

$7,206,745

Type
Competitive
Noncompe t i t ive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $26,430 thousand of 13-week bills and an additional $159,370
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
U

Equivalent coupon-issue yield.
NB-l 1 1

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
Text as Prepared
Embargoed For Release Upon Delivery
Expected at 8:45 a.m., E.S.T.

Testimony By
The Secretary of the Treasury
Nicholas F. Brady
Before the Senate Finance Committee
Tuesday, January 24, 1989
Mr. Chairman and Members of the Committee:
It's a pleasure to be here today to discuss with you the
growing phenomenon of Leveraged Buyouts (LBOs) and related
transactions. The effect of LBOs on the American economy has
become a matter of increasing concern both to Wall Street and
Main Street as the size and number of LBOs have grown. One
recent transaction approached $25 billion in size, suggesting
that, if anything, the pace of LBO activity continues to
accelerate. The business sections of our newspapers and nightly
TV stock market reports abound with stories of the returns earned
by investors in LBOs. As might be expected, that level of
success attracts additional capital. There is now an estimated
$30 billion in funds organized for equity investment in LBOs,
which, when expanded by the associated debt, would support
between $250 and $300 billion in future LBOs. The availability
of such capital generates its own demand, as the pressure on
managers to invest their assets spawns a search for new LBO
candidates.
In examining the LBO phenomenon, we should not restrict our
concern to LBOs alone. Just as investors pool their funds to
create LBO equity funds, companies using the equity in their own
operations leverage themselves up in order to engage in exactly
the same activity. I call these transactions Leveraged Takeovers
— LTOs. As a matter of simplicity, in the course of my
NB-114
testimony I will address my remarks to LBOs, although they should
be read to include LTOs as well.

-2I.

OVERVIEW

Competitiveness. Perhaps the issue that should guide our
analysis of LBOs is the competitive position of the U.S.
corporate sector. Increasingly we find ourselves in a global
economy, with American businesses under pressure to compete and
maintain the markets for their products. Their ability to remain
competitive is, of course, central to our economic future. If we
are competitive in the world economy, we will be able to provide
the standard of living that our citizens desire and the jobs that
they deserve. We ought, therefore, to focus on whether LBOs and
the changes they produce in corporate financial structures hurt
or improve our competitive position. That same standard should
also be applied to measures which might be proposed to regulate
LBOs in the future. Thus, even if we conclude that LBOs have
adversely affected the corporate sector, we should weigh
carefully whether proposals to restrict LBO activity will, in
fact, aid American business, or only make more difficult the
competitive challenges we face.
Need for More Data. The Committee will hear much testimony
on the effects of LBOs. Some contend that LBOs reflect ordinary
market forces and result in a more efficient corporate structure
with improved investment of industrial resources. Others see a
pattern of increasingly risky transactions, a sign that LBO
activity, as with prior speculative markets, has begun to spiral
out of control. They foretell a series of overpriced,
overleveraged transactions, leaving the corporate sector
increasingly vulnerable to an economic downturn.
These hearings will enable the Committee to get beyond much
of the rhetoric that surrounds LBOs to examine and develop the
data we need in order to reach an informed judgment on how LBOs
have affected the American economy. Given what is at stake, we
should proceed carefully through the evidence, and ensure
thorough consideration of what is plainly a complex question.
II. BACKGROUND
LBO Structure. The typical LBO involves the acquisition of
a public corporation by a small investor group, frequently
including the target corporation's management and/or one of the
LBO funds that pool capital for this purpose. The investors
would ordinarily operate through a shell acquisition corporation,
which would either merge with the target or make a tender offer
for its stock. In either event, the target shareholders would
surrender their equity, common stock, for cash and/or debt of the
acquisition corporation.

-3The equity supplied by the investor group typically
represents 15 percent of an LBO's total capitalization. Around
one-third of an LBO's total capital would be subordinated debt,
initially in the form of bridge loans which would later be
replaced with so-called junk bonds. The bridge financing
(roughly 30 percent) often comes from an investment bank, with
the junk bonds purchased by pension funds, specialized limited
partnerships, insurance companies, bank subsidiaries and
tax-exempt institutions. The largest part (roughly 55 percent)
of the total LBO financing would ordinarily be debt secured by
the assets and receivables of the target corporation. This
senior debt would typically come from a syndicate of banks, but
may to a smaller extent involve insurance companies and
specialized limited partnerships.
Corporate Trends. The surge in LBO activity in recent years
can be seen as the convergence of two trends in the structure and
capitalization of American corporations. The first, and more
fundamental, is the replacement of corporate equity with debt and
the consequent leveraging of corporate balance sheets. This
trend is in part a product of LBOs and similar transactions such
as LTOs. Independent of an acquisition, however, a corporation
may repurchase its outstanding stock with indebtedness or with
cash attributable to indebtedness. LBOs are, however, a
principal occasion for corporations incurring new indebtedness,
and many corporations that have issued debt to repurchase stock
have done so as a defensive maneuver to head off a possible LBO
or LTO.
The growing number of LBOs also represents a trend toward
privatization of formerly public corporations. The movement by
large U.S. corporations to operate privately rather than through
public equity markets would not necessarily be a matter of
concern. Private ownership frees a corporation from the
pressures and the short-term perspective of the stock markets and
may well be a prudent strategy, depending on a corporation's
business and its need for investment capital.
III. LEVEL OF ACTIVITY
LBOs. The significance of the corporate trends toward
additional leverage and private ownership is reflected in recent
data concerning LBO activity. From 1978 to 1983, the total
value of LBOs was around $11 billion dollars. In the five years
since, LBOs totaled $160 billion, with 1988 alone accounting for
over $60 billion.
The data also reveals a lesser trend of LBO activity
concentrated in industries better able to support substantial
leverage. Thus, a disproportionate share of LBOs have occurred
in nondurables manufacturing, retailing, and services, all
relatively noncyclical industries with characteristically strong
cash flows.

_4Corporate Debt. An analysis of individual LBOs suggests
that these transactions have introduced unprecedented levels of
corporate leverage. Thus, the level of debt in some recent LBOs
leaves the corporations unable to service their debt with
existing cash flows. It is becoming apparent that many such
transactions require immediate asset sales at higher prices in
order to reduce the debt to a manageable level. In other cases,
the corporation will be required to cut back on non-interest
expenditures; for example, expenditures for research and
development and replacement of capital goods, in order to provide
an effective debt retirement schedule.
The extreme leverage in recent LBOs is only partly reflected
in aggregate data concerning corporate debt. Most balance sheet
measures of corporate debt indicate a significant increase in
leverage over the past few years, with current levels at a
historical high. Other measures, however, suggest more moderate
increases in leverage. For instance, if debt and equity are
taken at market rather than book value, current leverage ratios,
although rising, remain well below the peak levels of the
mid-1970s, and are in line with the average over the last fifteen
years. This is consistent with the ratio of net interest expense
to cash flow, perhaps the most accurate measure of a
corporation's ability to service its debt. The ratio, although
currently rising, remains below the peak levels reached in the
early 1980s.
Ultimately, however, the significance of corporate leverage
is a question of individual corporations' capacity to service
their debt. Aggregate data concerning debt ratios reflect
averages. And just as one may drown in water that averages two
feet deep, average debt ratios cannot answer whether there are
significant individual situations of dangerous overleverage. It
is important to know whether individual cases of extreme leverage
are isolated, and perhaps attributable to special circumstances,
or reflect instead an accelerating trend in American industry.
Data addressing these and related questions is being
developed at Treasury and by some in the private sector. We
should recognize, however, that past experience is not a
particularly good measure of the future prospects for a highly
leveraged corporation. Existing LBOs have thrived in a period of
extended economic expansion. They have not been subjected to the
test of leaner times. It is certainly not the policy of the Bush
Administration to arrange such a test. But how well these highly
leveraged entities survive can not be answered by past data
alone.

-5IV.

CAUSES FOR CURRENT LEVEL OF LBO ACTIVITY

Some view LBOs as a rational strategy to maximize the value
of corporations and their assets. Part of this strategy relates
to the tax system and its discriminatory treatment of equity
versus corporate debt. Since interest payments are deductible,
but corporate dividends are not, there is a substantial tax
advantage that accrues to LBOs and other transactions that
effectively substitute corporate debt for equity. It should come
as no surprise that removing the burden of a 34 percent tax rate
from a corporation's income stream can arithmetically increase
the value of a corporation's capitalization. The substitution of
interest charges for pre-tax income is the mill in which the
grist of takeover premiums is ground.
In addition, LBOs may generate new efficiencies in corporate
management and financial structures. For corporations in mature
industries, where cash flows are strong but opportunities for
internal growth limited, an LBO may be a logical mechanism for
distributing excess cash resources, allowing the market to
reinvest the funds in more productive activities. Similarly,
LBOs in some cases force corporate managers to abandon
unproductive investments or extraneous lines of a corporation's
business. Thus, some have seen in LBOs and the divestitures they
trigger a process of corporate deconglomeration, reversing the
conglomerate merger activity prevalent in the 1960s and early
1970s.
Although tax and efficiency considerations may be an
important part of an LBO, they do not fully explain the extent
and timing of LBO activity. The tax advantages of debt
capitalization have existed for most of the history of the
corporate income tax. Some analysts believe that the changes in
the 1986 Tax Reform Act, including the reduction in the corporate
tax rate and the elimination of the so-called General Utilities
doctrine, may actually have diminished the tax benefits available
from leveraged acquisitions.
Similarly, there does not appear to be anything in recent
corporate management that would have suddenly made LBOs
attractive. On the contrary, the corporate circumstances that
arguably permit efficiency gains as a result of an LBO predate by
a number of years the surge in LBO activity.
In sum, viewing LBOs as transactions that maximize
shareholder value does not explain why it is only in the last few
years that LBO activity has taken off. So what has happened?
Our own analysis suggests that other factors have contributed
importantly to the development of LBO activity at its current
level. In part, these factors, which I will discuss here, have
simply facilitated a market in which LBOs were made feasible.

-6junk Bond Market. A key factor in the increase in LBO
activity is the emergence of a junk bond market, which has
supplied much of the debt capital on which LBOs are based. Prior
to the late 1970s, junk bonds were generally fallen angels -obligations that had been of investment grade when issued but
were later downgraded because of problems that had arisen with
the issuer's credit. More recently the junk bond market has
developed into a market for corporate debt that, because of the
debt's subordinated status and the corporation's substantial
other indebtedness, is below investment grade when issued.
A central purpose of the present-day market for junk debt
has been to facilitate directly LBOs and LTOs. The substantial
leverage characteristic of LBOs dictates that much of the debt
capital will necessarily be of an extremely junior grade. In the
past, neither banks nor the traditional bond markets provided for
such transactions and consequently, an alternative source of
financing evolved. In sum, the junk bond market has vastly
facilitated increased LBO and LTO activity.
Arbitrageurs. The current volume in LBOs is also partly
attributable to the growth in arbitrage activity. Arbitrageurs
purchase the stock of corporations thought to be acquisition
candidates, hoping to sell the stock at a higher price if and
when the acquisition is concluded. By definition, arbitrageurs
are not long-term investors, and the nature of their activity and
the demand for high rates of return on their available capital
require that they turn over their investments in a reasonably
short period of time. Because of arbitrage activity, the
perception that a corporation is "in play" tends to become a
self-fulfilling prophesy. Once arbitrageurs buy up the stock of
a corporation, the willingness of the corporation's shareholders
to sell is established, and management's ability to resist an
acquisition is effectively reduced. The certain knowledge that
arbitraguers own working control of the target company's stock in
turn makes sure that the potential acquirers bidding for the
corporation's stock will succeed.
Bargain Stock Prices. A third factor responsible for recent
LBO activity is the perception that many stocks remain
undervalued. As LBO and LTO operators have come to focus on the
value placed on a corporation by the stock market, as compared
with the replacement cost of its assets, and the higher sales
values of component parts, the opportunity for bargain purchases
has become apparent.
Strong Economy/Speculative Returns. Much of the current
momentum behind LBO activity may simply reflect that, to this
date, prior LBOs have largely been successful. Many have
questioned whether the same pattern of success would have
developed if the economy had been less robust in the last several
years. At the moment, however, investors do not seem discouraged
by such concerns, since they have rushed to get in on the
spectacular returns that some prior LBOs have generated.

-7Advisory Fees. A final contributing factor in the
proliferation of LBO activity is the ability of investment
advisers, banks, underwriters and LBO fund managers to earn
substantial up-front fees in the transactions. Such fees can
total nearly 6 percent of the corporation's purchase price, and
lend considerable momentum to LBO activity. These fees are
earned up front, largely divorced from the long-term risks in the
transaction. The LBO sponsor, investment banks, bond
underwriters, syndicating bank and others earn substantial income
if an LBO is completed, and thus have strong incentives to
identify LBO candidates, arrange financing, and conclude
transactions. Sadly these same parties may have relatively
little, if any, investment in the long-term success of the new
enterprise. Given this arrangement, it may very well be that the
net effect of LBOs is a financial snipe-hunt, where the new
long-term investors, flashlight in hand, are left holding the
bag.
V. THE EFFECTS OF LBOs ON THE CORPORATE SECTOR
Corporate Management. LBOs have been defended by some as a
positive check or discipline on corporate managers. In some
cases, LBOs may well correct some of the deficiencies in the
formal mechanisms of corporate governance.
Our system of
corporate democracy provides for a balance between continuity and
change although it is viewed by some as exceedingly difficult for
management of a public corporation to be removed by shareholder
vote. Thus, management, once established, may pursue growth
policies that aggrandize the corporation's position, but do not
necessarily maximize the shareholders' investment. An LBO can be
viewed as a sanction of such policies, since it replaces old
management with a new team.
The entrenchment of corporate managers, free of effective
control by the shareholders, may be a matter of legitimate
concern. I find it difficult to accept, however, that LBOs and
the psychology that feeds them are a sensible form of corporate
governance. As the pace and scope of LBO activity have grown, I
fear we are reaching a point where management is simply not
disciplined toward more productive investment, but is robbed of
any ability to pursue policies not in step with current market
attitudes. In particular, to the extent markets become
preoccupied with current earnings and cash flow, managers lose
the flexibility to pursue long-term investment strategies. At a
minimum, the corporate manager that pursues growth at the expense
of short-term earnings may be threatened with the loss of his
company.
We should not be surprised if corporate managers choose not
to run that risk, and instead embrace what is currently
fashionable, even though not in the long-term interest of their
corporations. If that attitude becomes prevalent, we should be
concerned whether U.S. corporations will make the commitment to
research and development and other growth oriented strategies
necessary to maintain their future competitiveness in a global
economy.

-8We should also recognize that the plight of the corporate
manager may not be relieved by privatization of the company.
A buyout of a corporation's public shareholders does free it of
stock market pressures, and thus in theory permits the
corporation to pursue growth oriented policies without regard to
the short-term effect on its earnings or stock price. As a
practical matter, however, we are concerned that the financing in
a typical LBO leaves management still focused on short-term
performance, since substantial cash flow must be generated simply
to meet debt service requirements.
Vulnerability to Business Cycle. The cash flow burdens of
substantial leverage make a corporation more vulnerable to
cyclical movements in the economy or to periods of slow economic
growth. Debt service that may be manageable in periods of
economic growth may become unmanageable if a corporation's
revenues fall. Some argue that LBO debt can be restructured in
the event of a downturn. Where a bankruptcy is forced, however,
there may be significant costs in lost jobs, forced sales, and
distraction of management. Moreover, the costs of bankruptcy may
extend to the government, which effectively guarantees certain of
a corporation's pension obligations for defined benefit plans
through the Pension Benefit Guaranty Corporation.
Corporations and their lenders obviously take some account
of bankruptcy potential, and what level of debt is prudent
remains dependent on a particular corporation's situation. The
many individual instances in which an LBO has dramatically
increased a corporation's leverage, and the apparent market
acceptance of these transactions, suggest that corporate managers
and the financial markets have placed greater emphasis on the
benefits than the risks of leverage. This attitude may be
attributable to the sustained economic growth of the last six
years, which has permitted the optimistic assumptions that appear
to underlie some transactions to remain untested.
Risk to Banking System/Financial Institutions. The risks
attributable to increased corporate debt fall also on investors.
Some level of risk is inherent in all investment, and there would
seem to be no reason for concern where individuals or business
investors knowingly undertake the risks involved in acquiring LBO
debt. However, much of the capital invested in LBOs comes from
banks, savings and loans, pension funds, insurance companies and
other institutional investors which are in effect investing on
behalf of the individuals whose savings they control. It should
be noted that depositors in banks and savings and loans and
participants in defined benefit pension plans have the benefit of
a federal guarantee of their deposits.
Many observers have questioned whether LBOs are appropriate
investments for financial institutions, given the levels of risk
involved. Although there is an understandable desire on the part
of such institutions to maximize returns on their invested
capital, such desires must be balanced against their fiduciary
obligations to avoid substantial commitments of capital to high
which
overcommitment,
risk investments.
subsequently
driven
This
proved
by
concern
to
fees
be and
problems.
is sharpened
fashion, to
by types
a history
of loans
of

-9In this regard, a number of state insurance regulators have
proposed restrictions on the extent to which insurance companies
can hold such debt. I am also encouraged to see that Chairman
Greenspan of the Federal Reserve Board and Comptroller of the
Currency Clarke have indicated their intent to review carefully
the level of LBO investments by federally chartered banks.
Fairness to Shareholders. A concern expressed by some is
whether LBOs permit Wall Street insiders and corporate managers
to profit at the expense of ordinary investors. This is a
legitimate concern, but one which was more relevant in the early
days of LBO transactions.
More recently, however, we have seen that in most cases the
market will operate to ensure that shareholders receive full
value for their stock. As we have witnessed in recent
transactions, a management initiated LBO may trigger offers from
outside interests, with the ultimate price for the company's
stock determined in an auction-like bidding process. This
process works best to establish a fair price when all bidders
have access to the relevant information concerning the
corporation's business. And, corporate boards of directors, with
the encouragement of the courts, have tended to insist that the
corporation's books be opened to all potential bidders.
Other Constituencies. A final but important area of concern
is the effect of LBOs on corporate constituencies other than the
shareholders. In previous testimony to the Senate I have
cautioned that we should be careful not to march to the drumbeat
of single dimension philosophies. Thus, while shareholders may
realize large premiums from an LBO, the corporation's employees,
bondholders and the communities in which the corporation is
located may all be adversely affected. Employees may lose their
jobs if the corporation is forced to retrench or if divisions are
sold in order to retire debt. Such job losses have significant
collateral effects on the communities in which the employees
work.
The clearest losers from a financial viewpoint in some LBOs
are the corporation's pre-existing bondholders. The drop in the
corporation's credit rating translates directly into a reduction
in the value of their bonds. However, this is arguably a
situation where the affected can take care of themselves, since a
variety of contractual devices are available to protect
bondholders in the event of an LBO or similar transaction
affecting the corporation's credit rating.

-10VI.

REMEDIAL MEASURES

A. Tax Proposals. As I indicated earlier, I do not
believe the recent surge in LBOs should be seen as driven only by
tax considerations. The tax incentives for debt capitalization
are long standing, and recent legislative changes may have
actually diminished the tax benefits available from leveraged
acquisitions. However, tax considerations remain an important
part of corporate financial planning, and we should be concerned
about the tax system's bias against equity capitalization.
Because we subject income on corporate equity to double
taxation, while interest payments, like wages, are taxed only
once, a corporation throughout its existence is encouraged to
raise capital in the form of debt rather then equity. The new
corporation is encouraged to load its initial capital structure
with debt; the growing corporation is encouraged to raise new
capital through debt; and the mature corporation is encouraged to
replace its existing stock with debt either through a stock
buyback or LBO.
Dividend Relief. Many have concluded that the way to
correct the tax bias for debt capitalization is to limit
corporate interest deductions. This approach, however, would
simply increase the cost of capital for American acquirers by
effectively raising their interest rates on an after tax basis.
Moreover, since such restrictions would not affect borrowing
costs of foreign corporations, the net effect would be a
competitive disadvantage for U.S. corporations. Finally, the
long history of attempts to define problems out of existence has
proved that the definees are more adept than the definors.
Just
as soon as new regulations are written, efforts are underway to
render them irrelevant.
A more logical approach to the biases in our tax system
would focus on our overtaxation of corporate equity. We stand
virtually alone in the industrial world in the extent to which we
apply a double tax regime to corporate income. Thus, although
each of our major trading partners imposes a separate tax on
corporate income, most also provide substantial relief from that
tax when dividends are distributed. We should not ignore this
fact as we are every day forced to compete in an increasingly
global economy. Germany, Italy, Australia, and New Zealand allow
shareholders full credit for the corporate tax paid. France
provides full relief through the combination of a partial
deduction for dividends paid and a partial shareholder credit.
Other countries, including the United Kingdom, Japan and Canada,
provide significant partial relief from double taxation.

-11The Treasury proposals for Tax Reform in 1984 and 1985 would
have reduced the tax burden on corporate equity by permitting
corporations to deduct a portion of the dividends they
distribute. The House of Representatives included a scaled-back
version of these proposals in its 1985 Tax Reform bill. Although
dividend relief was eventually dropped in the final Tax Reform
legislation, we should not accept this as the last word on the
merits of such proposals. I well recognize that at this juncture
revenue considerations limit our ability to provide fundamental
relief from double taxation of corporate income. But the fact
remains that market forces have created their own solution to the
double taxation of dividends. At the same time, tax as well as
economic policy would be ill served if we were to address the
current imbalance in the taxation of debt and equity without
seriously considering proposals to mitigate in some significant
way the double tax on corporate equity income.
Revenue Effects. Part of the concern with the tax incentive
for leveraged acquisitions and stock repurchases relates to
possible revenue losses from a broad substitution of debt for
existing corporate equity. A corporation replacing nondeductible
dividend distributions with deductible interest payments will of
course achieve a savings in its income tax liability for many
years. If such substitution were to occur on a broad scale,
there would be a correspondingly large reduction in corporate
income tax receipts.
It is important to recognize, however, that LBOs and
leveraged share buybacks typically generate three effects
offsetting the increase in corporate interest deductions. An LBO
or stock repurchase represents a taxable sale of stock for
shareholders, generally at a substantial premium, and the gains
recognized effectively accelerate income that might have been
deferred for a number of years, or even exempted altogether if
the shareholder held the stock until death. In addition, an LBO
or substantial share repurchase would typically require taxable
asset sales by the corporation in order to retire indebtedness.
It is also important to recognize that to the extent that LBOs or
other leveraged recapitalizations lead to a more efficient
allocation of resources, the overall level of national income
will be increased, and this will generate additional tax revenues
which will further offset the adverse revenue impact of the
substitution of debt for equity by those transactions.
B. Financial Institution Regulation. The substantial fees
that banks can command for arranging LBO financing, as well as
the higher interest rates they can charge, may lead some banks to
commit an inappropriately large portion of their portfolios to
LBO debt. Moreover, there is concern that some of the banks
participating in a syndicate do not examine the loans carefully
and simply rely on the judgment of the lead bank. Chairman
Greenspan's recent warning to banks that they should examine
closely the prospects of LBO loans under a wide range of economic
and financial circumstances is thus particularly apt.

-12C.
Securities Law. An additional and important source of
regulation is the securities laws. In a recent testimony before
the House Telecommunications and Finance Subcommittee, SEC
Chairman David Ruder outlined several regulatory changes being
considered by the SEC. Among the most important is a discussion.
of the rules governing so-called fairness opinions. In this
regard, a standard practice that should receive scrutiny is
linking the size of the fee paid for the opinion to successful
completion of the transaction. Such linkage raises serious
questions as to the objectivity of the opinion.
VII. CONCLUSION
My testimony has been necessarily general, but I admit that
I have a growing feeling that we are headed in the wrong
direction when so much of our young talent and the nation's
financial resources are aimed at financial engineering while the
rest of the world is laying the foundation for the future.
We have always done best in this country when our savings
have been used to create new jobs, new products, and new services
at lower prices. LBOs produce fundamental changes in the
financial structures of this country's corporations. They, in
turn, raise basic questions about our economic future, whether we
will continue to grow and create jobs and whether we will remain
competitive.
Mr. Chairman, I know you share my concerns. By holding this
series of hearings, you have issued a call to the brightest mindsin both government and the private sector to examine and evaluate
this trend.
I commend your efforts and I would like to join you today in
this endeavor, by issuing a challenge to those who make the
financing decisions and the financial institutions which advise
them — to the gladiators in the arena.
I call on them to put the same intensity and effort into
evaluating where we are going as they have into taking us there.
Let them bring forward the evidence and make proposals about what
should be done.
I think it is entirely appropriate that we together — the
Congress and the Administration — call upon the private sector
to take on this responsibility. It is in the finest tradition of
our democratic system that government look first to the people
themselves for solutions and only act when it is clear the people
can not solve the problem themselves.

TREASURY NEWS

2041
itpartment of the Treasury • Washington, D.c. • Telephon
FOR IMMEDIATE RELEASE , January 24, 1989
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of December 1988.
As indicated in this table, U.S. reserve assets amounted to
$47,802 million at the end of December, down from $48,944 million in
November.

U.S . Reserve Assets
(in mi llions of dollars)

End
of
Month

Total
Reserve
Assets

Gold
Stock J_/

Special
Drawing
Rights 2/3/

Foreign
Currencies 4/

Reserve
Position
in IMF 2/

48,944
47,802

11,059
11,057

9,785
9,637

17,997
17,363

10,103
9,745

1988
Nov.
Dec.

1/ Valued at $42.2222 per fine troy ounce.
2/ Beginning July 1974, the IMF adopted a technique for valuing the SDR
based on a weighted average of exchange rates for the currencies of
selected member countries. The U.S. SDR holdings and reserve
position in the IMF also are valued on this basis beginning July
1974.
3/ Includes allocations of SDRs by the IMF plus transactions in SDRs.
4/ Valued at current market exchange rates.

NB-115

TREASURY NEWS
2041
apartment of the Treasury • Washington, D.c. • Telephone

For Immediate Release
January 24, 1989

Contact: Larry Batdorf
566-2041

TREASURY REISSUES CURRENCY TRANSACTION REPORT
FORM AND GIVES NOTICE TO FINANCIAL
INSTITUTIONS THAT A NEW FORM WILL BE ISSUED
The Department of the Treasury announced today that it is
reissuing the current Form 4789, the Currency Transaction Report,
but will be publishing a revised form later this year. The form
is used by financial institutions to report deposits,
withdrawals, exchanges of currency, payments or other transfers
of more than $10,000 in currency, as required by the Bank Secrecy
Act.
The Office of Management and Budget extended use of the present
form, originally set to expire on September 30, 1988, until
January 31, 1989. The form is being reissued without change.
Filers of the form may use the September 1988 version until the
January version becomes available.
Filers should note that the reissued form will contain a
December 31, 1989, expiration date. Treasury plans to introduce
a revised Form 4789 by mid-year. Treasury will not require
filers to use the revised form for six months from the date of
issuance. This six-month lead time will allow both financial
institutions and Treasury adequate time to adjust procedures to
handle the revised form.
Those wishing additional information should contact Amelia
Gomez, Deputy Director, Office of Financial Enforcement,
Department of the Treasury, at (202) 566-8022.

NB-116

TREASURY NEWS W
ipartntent of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
FOR RELEASE AT 4:00 P.M.
January 24, 1989
TREASURY'S WEEKLY BILL OFFERING

202/376-4350

The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued February 2, 1989.
This offering
will result in a paydown for the Treasury of about $ 250 million, as
the maturing bills are outstanding in the amount of $14,641 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, January 30, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $ 7,200
million, representing an additional amount of bills dated
November 3, 1988,
and to mature
May 4, 1989
(CUSIP No.
912794 RW 6), currently outstanding in the amount of $ 7,587 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $ 7,2 00
million, representing an additional amount of bills dated
August 4, 1988,
and to mature August 3, 1989
(CUSIP No.
912794 SJ 4 ) , currently outstanding in the amount of $ 9,287 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 February 2, 1989.
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 $ 1,854 million as agents for foreign
and international monetary authorities, and $3,987 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series).
NB-117

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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
10/87
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.

TREASURY NEWS
leportment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
January 25, 1989

CONTACT:

Office of Financing
202/376-4350

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,289 million
of $25,976 million of tenders received from the public for the
2-year notes, Series V-1991, auctioned today. The notes will be
issued January 31, 1989, and mature January 31, 1991.
The interest rate on the notes will be 9%. The range
of accepted competitive bids, and the corresponding prices at the
9%
rate are as follows:
Yield Price
9.06%*
99.892
Low
High
9.08%
99.857
Average
9.08%
99.857
•^Excepting 1 tender of $25,000.
Tenders at the high yield were allotted 79%.
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
81,435
20,866,290
74,655
120,255
544,700
91 ,550
2,211,200
155,290
59,895
221,905
54,060
1,482,045
12,465
$25,975,745

Accepted
81,335
6,753,800
74,655
120,255
385,780
88,340
928,875
115,765
59,895
220,695
48,010
398,875
12,465
$9,288,745

The $9,289
million of accepted tenders includes $1,992
million of noncompetitive tenders and $7,297 million of competitive tenders from the public.
In addition to the $9,289 million of tenders accepted in
the auction process, $860 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $789 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.

NB-118

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
CONTACT: Office of Financing
FOR IMMEDIATE RELEASE
202/376-4350
January 30, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,207 million of 13-week bills and for $7,232 million
of 26-week bills, both to be issued on February 2, 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing
May 4, 1989
Discount Investment
Price
Rate 1/
Rate
8.29%
8.34%
8.33%

8.59%
8.64%
8.63%

26-week bills
maturing August 3, 1989
Discount Investment
Rate
Price
Rate 1/

97.904
97.892
97.894

8.36%
8.39%
8.39%

8.85%
8.88%
8.88%

95.774
95.758
95.758

Tenders at the high discount rate for the 13-week bills were allotted 75%.
Tenders at the high discount rate for the 26-week bills were allotted 61%.

TENDERS RECEIVED AND AC(:EPTED
(In Thousands)
Received
Accepted
Received

Accepted

$
45,905
20,006,565
33,340
55,735
65,835
42,975
1,522,750
61,800
11,795
48,315
39,420
1,827,005
465,985

$
45,905
5,073,315
33,340
55,735
65,835
42,775
720,250
51,800
11,795
48,315
29,410
562,985
465,985

$
38,700
23,247,205
25,870
53,080
55,375
44,060
858.925
44,335
11,970
60,900
:
38,095
1,678,815
:
517,440

$
38,700
6,137,015
25,870
49,240
55,365
43,380
82,645
36,335
11,970
60,900
28,095
145.120
517,440

$24,227,425

$7,207,445

: $26,674,770

$7,232,075

$20,588,915
1,375,275
$21,964,190

$3,868,935
1,375,275
$5,244,210

$21,845,735
1,265,945
$23,111,680

$2,703,040
1,265,945
$3,968,985

2,086,625

1,786,625

1,900,000

1,600,000

176,610

1,663,090

$24,227,425

$7,207,445

: $26,674,770

$7,232,075

An additional $6,390 thousand of 13-week bills and an additional $54,310
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
V

Equivalent coupon-issue yield.

NB-119

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041

Text as Prepared
Embargoed for Release Upon Delivery
Expected at 10 a.m., EST
Testimony By
The Secretary of the Treasury
Nicholas F. Brady
Before the Committee on Ways & Means
of the U.S. House of Representatives
Tuesday, January 31, 1989
Mr. Chairman and Members of the Committee:
It's a pleasure to be here today to discuss with you the
growing phe nomenon of Leveraged Buyouts (LBOs) and related
transaction s. The effect of LBOs on the American economy has
become a ma tter of increasing concern both to Wall Street and
Main Street as the size and number of LBOs have grown. One
recent tran saction approached $25 billion in size, suggesting
that, if an ything, the pace of LBO activity continues to
accelerate. The business sections of our newspapers and nightly
TV stock ma rket reports abound with stories of the returns earned
by investor s in LBOs. As might be expected, that level of
success att racts additional capital. There is now an estimated
$30 billion in funds organized for equity investment in LBOs,
which, when expanded by the associated debt, would support
between $25 0 and $300 billion in future LBOs. The availability
of such cap ital generates its own demand, as the pressure on
In examining
LBO assets
phenomenon,
should not
restrict
their
spawns we
a search
for new
LBO
managers
to invest the
our
concern to LBOs alone. Just as investors pool their funds
candidates.
to create LBO equity funds, companies using the equity in their
own operations leverage themselves up in order to engage in
exactly the same activity. I call these transactions Leveraged
Takeovers — LTOs. As a matter of simplicity, in the course of
my testimony I will address my remarks to LBOs, although they
should be read to include LTOs as well.
NB-120

-2I.

OVERVIEW

Competitiveness. Perhaps the issue that should guide our
analysis of LBOs is the competitive position of the U.S.
corporate sector. Increasingly we find ourselves in a global
economy, with American businesses under pressure to compete and
maintain the markets for their products. Their ability to remain
competitive is, of course, central to our economic future. If we
are competitive in the world economy, we will be able to provide
the standard of living that our citizens desire and the jobs that
they deserve. We ought, therefore, to focus on whether LBOs and
the changes they produce in corporate financial structures hurt
or improve our competitive position. That same standard should
also be applied to measures which might be proposed to regulate
LBOs in the future. Thus, even if we conclude that LBOs have
adversely affected the corporate sector, we should weigh
carefully whether proposals to restrict LBO activity will, in
fact, aid American business, or only make more difficult the
competitive challenges we face.
Need for More Data. The Committee will hear much testimony
on the effects of LBOs. Some contend that LBOs reflect ordinary
market forces and result in a more efficient corporate structure
with improved investment of industrial resources. Others see a
pattern of increasingly risky transactions, a sign that LBO
activity, as with prior speculative markets, has begun to spiral
out of control. They foretell a series of overpriced,
overleveraged transactions, leaving the corporate sector
increasingly vulnerable to an economic downturn.
These hearings will enable the Committee to get beyond much
of the rhetoric that surrounds LBOs to examine and develop the
data we need in order to reach an informed judgment on how LBOs
have affected the American economy. Given what is at stake, we
should proceed carefully through the evidence, and ensure
thorough consideration of what is plainly a complex question.
II. BACKGROUND
LBO Structure. The typical LBO involves the acquisition
of a public corporation by a small investor group, frequently
including the target corporation's management and/or one of the
LBO funds that pool capital for this purpose. The investors
would ordinarily operate through a shell acquisition corporation,
which would either merge with the target or make a tender offer
for its stock. In either event, the target shareholders would
surrender their equity, common stock, for cash and/or debt of the
acquisition corporation.

-3-

The equity supplied by the investor group typically
represents 15 percent of an LBO's total capitalization. Around
one-third of an LBO's total capital would be subordinated debt,
initially in the form of bridge loans which would later be
replaced with so-called junk bonds. The bridge financing
(roughly 30 percent) often comes from an investment bank, with
the junk bonds purchased by pension funds, specialized limited
partnerships, insurance companies, bank subsidiaries and
tax-exempt institutions. The largest part (roughly 55 percent)
of the total LBO financing would ordinarily be debt secured by
the assets and receivables of the target corporation. This
senior debt would typically come from a syndicate of banks,
but may to a smaller extent involve insurance companies and
specialized limited partnerships.
Corporate Trends. The surge in LBO activity in recent years
can be seen as the convergence of two trends in the structure and
capitalization of American corporations. The first, and more
fundamental, is the replacement of corporate equity with debt and
the consequent leveraging of corporate balance sheets. This
trend is in part a product of LBOs and similar transactions such
as LTOs. Independent of an acquisition, however, a corporation
may repurchase its outstanding stock with indebtedness or with
cash attributable to indebtedness. LBOs are, however, a
principal occasion for corporations incurring new indebtedness,
and many corporations that have issued debt to repurchase stock
have done so as a defensive maneuver to head off a possible LBO
or LTO.
The growing number of LBOs also represents a trend toward
privatization of formerly public corporations. The movement by
large U.S. corporations to operate privately rather than through
public equity markets would not necessarily be a matter of
concern. Private ownership frees a corporation from the
pressures and the short-term perspective of the stock markets
and may well be a prudent strategy, depending on a corporation's
business and its need for investment capital.
III. LEVEL OF ACTIVITY
LBOs. The significance of the corporate trends toward
additional leverage and private ownership is reflected in recent
data concerning LBO activity. From 1978 to 1983, the total value
of LBOs was around $11 billion dollars. In the five years since,
LBOs totaled $160 billion, with 1988 alone accounting for over
$60 billion.
The data also reveals a lesser trend of LBO activity
concentrated in industries better able to support substantial
leverage. Thus, a disproportionate share of LBOs have occurred
in nondurables manufacturing, retailing, and services, all
relatively noncyclical industries with characteristically strong
cash flows.

-4Corporate Debt. An analysis of individual LBOs suggests
that these transactions have introduced unprecedented levels of
corporate leverage. Thus, the level of debt in some recent LBOs
leaves the corporations unable to service their debt with
existing cash flows. It is becoming apparent that many such
transactions require immediate asset sales at higher prices in
order to reduce the debt to a manageable level. In other cases,
the corporation will be required to cut back on non-interest
expenditures; for example, expenditures for research and
development and replacement of capital goods, in order to provide
an effective debt retirement schedule.
The extreme leverage in recent LBOs is only partly reflected
in aggregate data concerning corporate debt. Most balance sheet
measures of corporate debt indicate a significant increase in
leverage over the past few years, with current levels at a
historical high. Other measures, however, suggest more moderate
increases in leverage. For instance, if debt and equity are
taken at market rather than book value, current leverage ratios,
although rising, remain well below the peak levels of the
mid-1970s, and are in line with the average over the last fifteen
years. This is consistent with the ratio of net interest expense
to cash flow, perhaps the most accurate measure of a
corporation's ability to service its debt. The ratio, although
currently rising, remains below the peak levels reached in the
early 1980s.
Ultimately, however, the significance of corporate leverage
is a question of individual corporations' capacity to service
their debt. Aggregate data concerning debt ratios reflect
averages. And just as one may drown in water that averages two
feet deep, average debt ratios cannot answer whether there are
significant individual situations of dangerous overleverage. It
is important to know whether individual cases of extreme leverage
are isolated, and perhaps attributable to special circumstances,
or reflect instead an accelerating trend in American industry.
Data addressing these and related questions is being
developed at Treasury and by some in the private sector. We
should recognize, however, that past experience is not a
particularly good measure of the future prospects for a highly
leveraged corporation. Existing LBOs have thrived in a period of
extended economic expansion. They have not been subjected to the
test of leaner times. It is certainly not the policy of the Bush
Administration to arrange such a test. But how well these highly
leveraged entities survive can not be answered by past data
alone.

-5IV.

CAUSES FOR CURRENT LEVEL OF LBO ACTIVITY

Some view LBOs as a rational strategy to maximize the value
of corporations and their assets. Part of this strategy relates
to the tax system and its discriminatory treatment of equity
versus corporate debt. Since interest payments are deductible,
but corporate dividends are not, there is a substantial tax
advantage that accrues to LBOs and other transactions that
effectively substitute corporate debt for equity. It should come
as no surprise that removing the burden of a 34 percent tax rate
from a corporation's income stream can arithmetically increase
the value of a corporation's capitalization. The substitution of
interest charges for pre-tax income is the mill in which the
grist of takeover premiums is ground.
In addition, LBOs may generate new efficiencies in corporate
management and financial structures. For corporations in mature
industries, where cash flows are strong but opportunities for
internal growth limited, an LBO may be a logical mechanism for
distributing excess cash resources, allowing the market to
reinvest the funds in more productive activities. Similarly,
LBOs in some cases force corporate managers to abandon
unproductive investments or extraneous lines of a corporation's
business. Thus, some have seen in LBOs and the divestitures they
trigger a process of corporate deconglomeration, reversing the
conglomerate merger activity prevalent in the 1960s and early
1970s.
Although tax and efficiency considerations may be an
important part of an LBO, they do not fully explain the extent
and timing of LBO activity. The tax advantages of debt
capitalization have existed for most of the history of the
corporate income tax. Some analysts believe that the changes in
the 1986 Tax Reform Act, including the reduction in the corporate
tax rate and the elimination of the so-called General Utilities
doctrine, may actually have diminished the tax benefits available
from leveraged acquisitions.
Similarly, there does not appear to be anything in recent
corporate management that would have suddenly made LBOs
attractive. On the contrary, the corporate circumstances that
arguably permit efficiency gains as a result of an LBO predate
by a number of years the surge in LBO activity.
In sum, viewing LBOs as transactions that maximize
shareholder value does not explain why it is only in the last
few years that LBO activity has taken off. So what has happened?
Our own analysis suggests that other factors have contributed
importantly to the development of LBO activity at its current
level. In part, these factors, which I will discuss here, have
simply facilitated a market in which LBOs were made feasible.

-6Junk Bond Market. A key factor in the increase in LBO
activity is the emergence of a junk bond market, which has
supplied much of the debt capital on which LBOs are based. Prior
to the late 1970s, junk bonds were generally fallen angels —
obligations that had been of investment grade when issued but
were later downgraded because of problems that had arisen with
the issuer's credit. More recently the junk bond market has
developed into a market for corporate debt that, because of the
debt's subordinated status and the corporation's substantial
other indebtedness, is below investment grade when issued.
A central purpose of the present-day market for junk debt
has been to facilitate directly LBOs and LTOs. The substantial
leverage characteristic of LBOs dictates that much of the debt
capital will necessarily be of an extremely junior grade. In the
past, neither banks nor the traditional bond markets provided for
such transactions and consequently, an alternative source of
financing evolved. In sum, the junk bond market has vastly
facilitated increased LBO and LTO activity.
Arbitrageurs. The current volume in LBOs is also partly
attributable to the growth in arbitrage activity. Arbitrageurs
purchase the stock of corporations thought to be acquisition
candidates, hoping to sell the stock at a higher price if and
when the acquisition is concluded. By definition, arbitrageurs
are not long-term investors, and the nature of their activity and
the demand for high rates of return on their available capital
require that they turn over their investments in a reasonably
short period of time. Because of arbitrage activity, the
perception that a corporation is "in play" tends to become a
self-fulfilling prophesy. Once arbitrageurs buy up the stock of
a corporation, the willingness of the corporation's shareholders
to sell is established, and management's ability to resist an
acquisition is effectively reduced. The certain knowledge that
arbitraguers own working control of the target company's stock in
turn makes sure that the potential acquirers bidding for the
corporation's stock will succeed.
Bargain Stock Prices. A third factor responsible for
recent LBO activity is the perception that many stocks remain
undervalued. As LBO and LTO operators have come to focus on the
value placed on a corporation by the stock market, as compared
with the replacement cost of its assets, and the higher sales
values of component parts, the opportunity for bargain purchases
has become apparent.
Strong Economy/Speculative Returns. Much of the current
momentum behind LBO activity may simply reflect that, to this
date, prior LBOs have largely been successful. Many have
questioned whether the same pattern of success would have
developed if the economy had been less robust in the last several
years. At the moment, however, investors do not seem discouraged
by such concerns, since they have rushed to get in on the
spectacular returns that some prior LBOs have generated.

-7Advisory Fees. A final contributing factor in the
proliferation of LBO activity is the ability of investment
advisers, banks, underwriters and LBO fund managers to earn
substantial up-front fees in the transactions. Such fees can
total nearly 6 percent of the corporation's purchase price,
and lend considerable momentum to LBO activity. These fees are
earned up front, largely divorced from the long-term risks in
the transaction. The LBO sponsor, investment banks, bond
underwriters, syndicating bank and others earn substantial income
if an LBO is completed, and thus have strong incentives to
identify LBO candidates, arrange financing, and conclude
transactions. Sadly these same parties may have relatively
little, if any, investment in the long-term success of the new
enterprise. Given this arrangement, it may very well be that
the net effect of LBOs is a financial snipe-hunt, where the new
long-term investors, flashlight in hand, are left holding the
bag.
V. THE EFFECTS OF LBOs ON THE CORPORATE SECTOR
Corporate Management. LBOs have been defended by some as
a positive check or discipline on corporate managers. In some
cases, LBOs may well correct some of the deficiencies in the
formal mechanisms of corporate governance. Our system of
corporate democracy provides for a balance between continuity and
change although it is viewed by some as exceedingly difficult for
management of a public corporation to be removed by shareholder
vote. Thus, management, once established, may pursue growth
policies that aggrandize the corporation's position, but do not
necessarily maximize the shareholders' investment. An LBO can
be viewed as a sanction of such policies, since it replaces old
management with a new team.
The entrenchment of corporate managers, free of effective
control by the shareholders, may be a matter of legitimate
concern. I find it difficult to accept, however, that LBOs and
the psychology that feeds them are a sensible form of corporate
governance. As the pace and scope of LBO activity have grown,
I fear we are reaching a point where management is simply not
disciplined toward more productive investment, but is robbed of
any ability to pursue policies not in step with current market
attitudes. In particular, to the extent markets become
preoccupied with current earnings and cash flow, managers lose
the flexibility to pursue long-term investment strategies. At a
minimum, the corporate manager that pursues growth at the expense
of short-term earnings may be threatened with the loss of his
company.
We should not be surprised if corporate managers choose
not to run that risk, and instead embrace what is currently
fashionable, even though not in the long-term interest of their
corporations. If that attitude becomes prevalent, we should be
concerned whether U.S. corporations will make the commitment to
research and development and other growth oriented strategies
necessary to maintain their future competitiveness in a global
economy.

-8We should also recognize that the plight of the corporate
manager may not be relieved by privatization of the company.
A buyout of a corporation's public shareholders does free it
of stock market pressures, and thus in theory permits the
corporation to pursue growth oriented policies without regard
to the short-term effect on its earnings or stock price. As a
practical matter, however, we are concerned that the financing
in a typical LBO leaves management still focused on short-term
performance, since substantial cash flow must be generated simply
to meet debt service requirements.
Vulnerability to Business Cycle. The cash flow burdens of
substantial leverage make a corporation more vulnerable to
cyclical movements in the economy or to periods of slow economic
growth. Debt service that may be manageable in periods of
economic growth may become unmanageable if a corporation's
revenues fall. Some argue that LBO debt can be restructured in
the event of a downturn. Where a bankruptcy is forced, however,
there may be significant costs in lost jobs, forced sales, and
distraction of management. Moreover, the costs of bankruptcy may
extend to the government, which effectively guarantees certain of
a corporation's pension obligations for defined benefit plans
through the Pension Benefit Guaranty Corporation.
Corporations and their lenders obviously take some account
of bankruptcy potential, and what level of debt is prudent
remains dependent on a particular corporation's situation. The
many individual instances in which an LBO has dramatically
increased a corporation's leverage, and the apparent market
acceptance of these transactions, suggest that corporate managers
and the financial markets have placed greater emphasis on the
benefits than the risks of leverage. This attitude may be
attributable to the sustained economic growth of the last six
years, which has permitted the optimistic assumptions that appear
to underlie some transactions to remain untested.
Risk to Banking System/Financial Institutions. The risks
attributable to increased corporate debt fall also on investors.
Some level of risk is inherent in all investment, and there would
seem to be no reason for concern where individuals or business
investors knowingly undertake the risks involved in acquiring LBO
debt. However, much of the capital invested in LBOs comes from
banks, savings and loans, pension funds, insurance companies and
other institutional investors which are in effect investing on
behalf of the individuals whose savings they control. It should
be noted that depositors in banks and savings and loans and
participants in defined benefit pension plans have the benefit
of a federal guarantee of their deposits.
Many observers have questioned whether LBOs are appropriate
investments for financial institutions, given the levels of risk
involved. Although there is an understandable desire on the part
of such institutions to maximize returns on their invested
capital, such desires must be balanced against their fiduciary
obligations to avoid substantial commitments of capital to high
which
overcommitment,
risk investments.
subsequently
driven
proved
This by
concern
to
fees
be and
problems.
is sharpened
fashion, to
by types
a history
of loans
of

-9In this regard, a number of state insurance regulators have
proposed restrictions on the extent to which insurance companies
can hold such debt. I am also encouraged to see that Chairman
Greenspan of the Federal Reserve Board and Comptroller of the
Currency Clarke have indicated their intent to review carefully
the level of LBO investments by federally chartered banks.
Fairness to Shareholders. A concern expressed by some is
whether LBOs permit Wall Street insiders and corporate managers
to profit at the expense of ordinary investors. This is a
legitimate concern, but one which was more relevant in the early
days of LBO transactions.
More recently, however, we have seen that in most cases
the market will operate to ensure that shareholders receive
full value for their stock. As we have witnessed in recent
transactions, a management initiated LBO may trigger offers
from outside interests, with the ultimate price for the company's
stock determined in an auction-like bidding process. This
process works best to establish a fair price when all bidders
have access to the relevant information concerning the
corporation's business. And, corporate boards of directors,
with the encouragement of the courts, have tended to insist that
the corporation's books be opened to all potential bidders.
Other Constituencies. A final but important area of concern
is the effect of LBOs on corporate constituencies other than the
shareholders. In previous testimony to the Senate I have
cautioned that we should be careful not to march to the drumbeat
of single dimension philosophies. Thus, while shareholders may
realize large premiums from an LBO, the corporation's employees,
bondholders and the communities in which the corporation is
located may all be adversely affected. Employees may lose their
jobs if the corporation is forced to retrench or if divisions are
sold in order to retire debt. Such job losses have significant
collateral effects on the communities in which the employees
work.
The clearest losers from a financial viewpoint in some LBOs
are the corporation's pre-existing bondholders. The drop in the
corporation's credit rating translates directly into a reduction
in the value of their bonds. However, this is arguably a
situation where the affected can take care of themselves, since
a variety of contractual devices are available to protect
bondholders in the event of an LBO or similar transaction
affecting the corporation's credit rating.

-10-

VI.

REMEDIAL MEASURES

A. Tax Proposals. As I indicated earlier, I do not
believe the recent surge in LBOs should be seen as driven only by
tax considerations. The tax incentives for debt capitalization
are long standing, and recent legislative changes may have
actually diminished the tax benefits available from leveraged
acquisitions. However, tax considerations remain an important
part of corporate financial planning, and we should be concerned
about the tax system's bias against equity capitalization.
Because we subject income on corporate equity to double
taxation, while interest payments, like wages, are taxed only
once, a corporation throughout its existence is encouraged to
raise capital in the form of debt rather then equity. The new
corporation is encouraged to load its initial capital structure
with debt; the growing corporation is encouraged to raise new
capital through debt; and the mature corporation is encouraged
to replace its existing stock with debt either through a stock
buyback or LBO.
Dividend Relief. Many have concluded that the way to
correct the tax bias for debt capitalization is to limit
corporate interest deductions. This approach, however, would
simply increase the cost of capital for American acquirers by
effectively raising their interest rates on an after tax basis.
Moreover, since such restrictions would not affect borrowing
costs of foreign corporations, the net effect would be a
competitive disadvantage for U.S. corporations. Finally, the
long history of attempts to define problems out of existence has
proved that the definees are more adept than the definors. Just
as soon as new regulations are written, efforts are underway to
render them irrelevant.
A more logical approach to the biases in our tax system
would focus on our overtaxation of corporate equity. We stand
virtually alone in the industrial world in the extent to which we
apply a double tax regime to corporate income. Thus, although
each of our major trading partners imposes a separate tax on
corporate income, most also provide substantial relief from that
tax when dividends are distributed. We should not ignore this
fact as we are every day forced to compete in an increasingly
global economy. Germany, Italy, Australia, and New Zealand allow
shareholders full credit for the corporate tax paid. France
provides full relief through the combination of a partial
deduction for dividends paid and a partial shareholder credit.
Other countries, including the United Kingdom, Japan and Canada,
provide significant partial relief from double taxation.

-11The Treasury proposals for Tax Reform in 1984 and 1985
would have reduced the tax burden on corporate equity by
permitting corporations to deduct a portion of the dividends they
distribute. The House of Representatives included a scaled-back
version of these proposals in its 1985 Tax Reform bill. Although
dividend relief was eventually dropped in the final Tax Reform
legislation, we should not accept this as the last word on the
merits of such proposals. I well recognize that at this juncture
revenue considerations limit our ability to provide fundamental
relief from double taxation of corporate income. But the fact
remains that market forces have created their own solution to the
double taxation of dividends. At the same time, tax as well as
economic policy would be ill served if we were to address the
current imbalance in the taxation of debt and equity without
seriously considering proposals to mitigate in some significant
way the double tax on corporate equity income.
Revenue Effects. Part of the concern with the tax incentive
for leveraged acquisitions and stock repurchases relates to
possible revenue losses from a broad substitution of debt for
existing corporate equity. A corporation replacing nondeductible
dividend distributions with deductible interest payments will of
course achieve a savings in its income tax liability for many
years. If such substitution were to occur on a broad scale,
there would be a correspondingly large reduction in corporate
income tax receipts.
It is important to recognize, however, that LBOs and
leveraged share buybacks typically generate three effects
offsetting the increase in corporate interest deductions.
An LBO or stock repurchase represents a taxable sale of stock for
shareholders, generally at a substantial premium, and the gains
recognized effectively accelerate income that might have been
deferred for a number of years, or even exempted altogether if
the shareholder held the stock until death. In addition, an LBO
or substantial share repurchase would typically require taxable
asset sales by the corporation in order to retire indebtedness.
It is also important to recognize that to the extent that LBOs
or other leveraged recapitalizations lead to a more efficient
allocation of resources, the overall level of national income
will be increased, and this will generate additional tax revenues
which will further offset the adverse revenue impact of the
substitution of debt for equity by those transactions.
B. Financial Institution Regulation. The substantial fees
that banks can command for arranging LBO financing, as well as
the higher interest rates they can charge, may lead some banks to
commit an inappropriately large portion of their portfolios to
LBO debt. Moreover, there is concern that some of the banks
participating in a syndicate do not examine the loans carefully
and simply rely on the judgment of the lead bank. Chairman
Greenspan's recent warning to banks that they should examine
closely the prospects of LBO loans under a wide range of economic
and financial circumstances is thus particularly apt.

-12-

C.
Securities Law. An additional and important source of
regulation is the securities laws. In a recent testimony before
the House Telecommunications and Finance Subcommittee, SEC
Chairman David Ruder outlined several regulatory changes being
considered by the SEC. Among the most important is a discussion
of the rules governing so-called fairness opinions. In this
regard, a standard practice that should receive scrutiny is
linking the size of the fee paid for the opinion to successful
completion of the transaction. Such linkage raises serious
questions as to the objectivity of the opinion.
VII. CONCLUSION
My testimony has been necessarily general, but I admit
that I have a growing feeling that we are headed in the wrong
direction when so much of our young talent and the nation's
financial resources are aimed at financial engineering while
the rest of the world is laying the foundation for the future.
We have always done best in this country when our savings
have been used to create new jobs, new products, and new services
at lower prices. LBOs produce fundamental changes in the
financial structures of this country's corporations. They, in
turn, raise basic questions about our economic future, whether we
will continue to grow and create jobs and whether we will remain
competitive.
Mr. Chairman, I know you share my concerns. By holding this
series of hearings, you have issued a call to the brightest minds
in both government and the private sector to examine and evaluate
this trend.
I commend your efforts and I would like to join you today
in this endeavor, by issuing a challenge to those who make the
financing decisions and the financial institutions which advise
them — to the gladiators in the arena.
I call on them to put the same intensity and effort into
evaluating where we are going as they have into taking us there.
Let them bring forward the evidence and make proposals about what
should be done.
I think it is entirely appropriate that we together — the
Congress and the Administration — call upon the private sector
to take on this responsibility. It is in the finest tradition of
our democratic system that government look first to the people
themselves for solutions and only act when it is clear the people
can not solve the problem themselves.

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
!:"U0
January 31, 1989
0. DONALDSON CHAPOTON
ASSISTANT SECRETARY (TAX POLICY)
TO LEAVE TREASURY
0. Donaldson Chapoton, Assistant Secretary (Tax Policy)
will leave the Treasury Department to rejoin, on February 1,
the Houston-based law firm of Baker & Botts. Mr. Chapoton
will be the partner-in-charge of the firm's Washington
office.
In announcing Mr. Chapoton's upcoming departure,
Secretary of the Treasury Nicholas F. Brady noted, "Don has
been a tremendous asset to the Department. His tax knowledge
and experience have been invaluable in the important area of
Tax Policy and we wish him well."
As Assistant Secretary for Tax Policy, Mr. Chapoton has
served as the chief Treasury spokesman and advisor to the
Secretary in the formulation and execution of domestic and
international tax policies and programs.
Mr. Chapoton joined the Treasury Department in May of
1986. Prior to th at time, he was a Senior Partner with the
law fir m of Baker & Botts in Houston specializing in the
areas o f corporate reorganizations, acquisitions and
liquida tions, oil and gas and partnership tax law, and tax
aspects of foreign investment in the United States. From
1961-63 , Mr. Chapoton served in the Judge Advocate General's
Corps, U.S. Army. He also served as a law clerk to Judge
John R. Brown, Fif th Circuit Court of Appeals, Houston,
Texas, after recei ving his LL.B. from the University of Texas
960.
Mr. of
Chapoton,
Law in 1 a
native of Houston, Texas, is married to
School
the former Mary Jo Kelley of San Antonio. They have two
children, a daughter Kelley, age 13, and a son Hunt, age 10.

###

NB-121

TREASURY NEWS

lepartment off the Treasury • Washington, D.c. • Telephone 566*
FOR RELEASE AT 4:00 P.M. CONTACT: Office of Financing
202/376-4350
January 31, 1989
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued February 9, 1989.
This offering
will result in a paydown for the Treasury of about $225
million, as
the maturing bills are outstanding in the amount of $14,635 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard•time, Monday, February 6, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
May 12, 1988, ::
and to mature May 11, 1989
(CUSIP No.
912794 RX 4 ) , currently outstanding in the amount of $16,324 million,
the additional and original-bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
February 9, 1989,
and to mature August 10, 1989
(CUSIP No.
912794 ST 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 February 9, 1989.
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 $1,922 million as agents for foreign
and international monetary authorities, and $4,362 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series).
NB-122

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry 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
10/87
tenders.

Final 1/27/89*
Opening Statements by
M. Peter NcPherson
Deputy Secretary of the Treasury
and
David Walker
Assistant Secretary, Pension and Welfare Benefits Administration
Department of Labor
at the Press Briefing on ERISA and Takeovers
Monday, January 30, 1989
DEPUTY SECRETARY MCPHERSON: Due to the Secretary of the
Treasury's role as chief economic adviser to the President and
our responsibility for certain ERISA rules, Treasury has received
a number of questions lately about what ERISA rules require or
permit pension plan fiduciaries to do with regard to tender
offers, takeovers, and mergers. In brief, there is some
confusion about these matters so we spoke to officials of the
Department of Labor. The Department of Labor has primary
responsibility for the relevant ERISA rules. They had recently
received many of the same questions; so we agreed that it would
be useful to clear up this confusion today. So that he can do
so, I will now turn the podium over to Assistant Secretary of
Labor David Walker, who heads the Pension and Welfare Benefits
Administration.
ASSISTANT SECRETARY WALKER: We are here today to clear up
certain misperceptions regarding ERISA's requirements as they
relate to tender offers including cash offers at premiums above
the market and merger proposals.
Given the size and growth of pension plan assets over the
past 15 years, pension plans are playing an ever increasing role
in the capital markets. In addition, whether they want to be or
not, they are major players in tender offer and proxy contests.
Some have asserted that ERISA requires plan fiduciaries to
accept any tender offers that involve a premium over the
prevailing market price. This is not the case. While ERISA does
require that fiduciaries manage plan investments prudently and
solely in the interest of plan participants and beneficiaries, it
does not mandate that plan fiduciaries automatically tender
shares held by the plan in order to capture any premium
represented by the tender offer.
Rather than an automatic tender mandate, ERISA requires plan
fiduciaries to make investment decisions, including tender offer
decisions, based on the facts and circumstances applicable to the
investment and the plan. Fiduciaries are required to take the
pension
course of
plan,
action
recognizing
that is in
the
the
pension
economic
trust
best
asinterest
a separate
of the
legal

entity designed to provide retirement income. Plan fiduciaries
are not required to take the "quick buck" if they believe, based
on an appropriate and objective analysis, the plan can achieve a
higher economic value by holding the shares than by tendering the
shares and re-investing the proceeds. For example, in making
such an investment decision, plan fiduciaries may weigh, among
other things, the long-term value of the target company. In
making that determination, the long-term business plan of the
target company's management would be relevant. A similar
analysis would be involved in evaluating whether to support or
oppose a merger offering the possibility of an immediate gain.
Given the size and growth of pension plan assets and their
related equity holdings, it is clear they will continue to play a
significant role in contests for corporate control. The
Department of Labor will continue to monitor plan fiduciaries,
corporate management, and other interested parties to assure they
do not violate ERISA's requirements and are aware of the
liability that can result from any such violations.
We are sensitive to the need to assure that government
policies and actions do not prevent the huge pools of capital
represented by pension plans to be invested in manners that will
facilitate our continued economic growth, provide corporate
accountability, and enhance our nation's competitiveness. At the
same time, we must not lose sight of the fact that pension plans
are established and maintained for the purpose of providing
retirement income. We will, therefore, continue to vigorously
enforce ERISA's fiduciary requirements. This is essential if we
are to maintain the credibility and ensure the security of our
voluntary private pension system, on which millions of Americans
rely.
DEPUTY SECRETARY MCPHERSON: Thank you, Dave. These issues are
complex and precision is important so the Departments have
prepared a longer written statement which should answer most
questions relating to these matters., Assistant Secretary Walker,
Michael Darby, Assistant Secretary of the Treasury for Economic
Policy, and I will be glad to handle any technical questions you
may have regarding the statement.
Thank you for your time and interest in this matter.

Final 1/27/89**

Joint Department of Labor/Department
of Treasury Statement on Pension Investments
Questions have recently been raised with the Departments of
Labor and Treasury as to the duties of pension fund fiduciaries
with respect to tender offers including cash offers at premiums
above the market and merger proposals.

Given the size and growth

of private pension fund equity portfolios in the past 15 years,
the significant role that they play in the capital markets, and
the recent increase in public attention accorded to related
pension investment issues, the Departments would like to
reiterate the duties of fiduciaries of pension plans covered by
the Employee Retirement Income Security Act of 1974 (ERISA) with
respect to tender offers and merger proposals.1

Assertions have been made that because a tender offer
represents a premium over the prevailing market price for shares
of the target company's stock, the fiduciary responsibility provisions of ERISA require that pension fund fiduciaries

Under ERISA, every plan is required to provide for a "named
fiduciary" who has the authority to control and manage the
operation and administration of the plan. This named fiduciary
may be a person or persons such as corporate directors and
officers who can have other relationships to the plan sponsor
(e.g., corporate officers, directors). In acting as a named
fiduciary, however, they are not representing the sponsor or any
other organization, but rather are subject to provisions of
ERISA, including the requirement that they act solely in the
interest of plan participants and beneficiaries.

2
automatically tender their shares.

This is not the case.

ERISA

does require that fiduciaries manage plan investments prudently
and solely in the interest of plan participants and
beneficiaries.

It does not, however, mandate that the plan

fiduciary automatically tender shares held by the plan to capture
the premium over market represented by the tender offer.

The Department of Labor defines prudence under ERISA with
reference to what is in the economic best interest of a plan's
participants and beneficiaries, in their capacity as participants
and beneficiaries of the plan.

Therefore, such decisions must be

based on what is in the economic interest of the pension plan,
recognizing that the pension trust is a separate legal entity
designed to provide retirement income.

ERISA's prudence rule

also requires fiduciaries to make investment decisions, including
tender offer decisions, based on the facts and circumstances
applicable to a particular plan.

Thus, in evaluating a tender

offer, a fiduciary would have to evaluate it on its merits.

doing so, among other things, it would be appropriate to weigh a
tender offer against the underlying intrinsic value of the target
company, and the likelihood of that value being realized by
current management or by a possible subsequent tender offer.

would also be proper to weigh the long-term value of the company
against the value presented by the tender offer and the ability
to invest the proceeds elsewhere.

In making these determina-

tions, the long-term business plan of the target company's

3
management would be relevant.

A similar process should lead to

the fund's decision to support or oppose a proposed merger.

The Department of Labor has been and will continue to be
particularly watchful for attempts by corporate management to
utilize the assets of their own plans either as an offensive or
defensive tool in battles for corporate control.

The Department

wishes to reiterate that any such actions would violate both the
requirement that pension funds be managed solely in the interest
of plan participants and beneficiaries and the prohibited
transaction provisions of ERISA.

In conclusion, the Department of Labor will continue to
monitor plan fiduciaries, corporate management, and other
interested parties to assure they do not violate ERISA's
requirements governing pension plans and are aware of the
potential liability for any related violations.

The Departments

are sensitive to the need to ensure that government policies and
actions do not prevent the huge pools of capital represented by
private pension plans from being invested in manners that will
facilitate our continued economic growth, provide corporate
accountability, and enhance our nation's competitiveness.

will insist that plan fiduciaries adhere to ERISA's fiduciary
standards and prohibited transaction rules.

This is essential if

we are to assure the credibility of the private pension system
and safeguard the benefit security for the millions of Americans

4
who will rely on their private pension benefit during their
retirement years.

•3-

o
CM

federal financing bank
WASHINGTON, DC. 20220

FOR IMMEDIATE RELEASE

CD
CO
IT)
co

*fr
eg
CO
CO
to

0)
CD

CD
LL

Q. LL

February 1, 19 89

FEDERAL FINANCING BANK ACTIVITY

Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
May 1988.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $150.0 billion on May 31,
1988, posting a decrease of $0.1 billion from the level on
April 30, 1988. This net change was the result of decreases
in holdings of agency debt of $252.3 million and in agency
assets of $0.5 million. Agency-guaranteed debt increased
by $194.8 million. FFB made 52 disbursements during May.
Attached to this release are tables presenting FFB May
loan activity and FFB holdings as of May 31, 1988.

NB-123

00
CO

Page 2 of 5
FEDERAL FINANCING BANK
MAY 1988 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST INTEREST
RATE
RATE
(semi(other than
annual)
semi-annual)

$ 10,200,000.00
9,640,000.00

8/4/88
8/18/88

6.438%
6.522%

37,000,000.00
209,000,000.00
26,000,000.00
55,000,000.00
10,000,000.00
319,000,000.00
26,000,000.00
5,000,000.00
100,000,000.00
65,000,000.00
21,000,000.00
118,000,000.00
112,000,000.00
131,000,000.00
200,000,000.00

5/9/88
5/13/88
5/16/88
5/19/88
5/18/88
5/19/88
5/24/88
5/23/88
5/24/88
5/27/88
5/27/88
5/30/88
6/6/88
6/8/88
11/15/02

6.380%
6.489%
6.601%
6.601%
6.525%
6.525%
6.506%
6.522%
6.522%
6.522%
6.458%
6.558%
6.756%
6.756%
9.280%

5,136,977.00
556,013.72
33,017.02
124,760.44

8/25/14
6/15/12
10/15/90
5/15/95

9.162%
9.329%
8.173%
8.957%

AGENCY DEBT
NATIONAL CREDIT UNION ALKLNISTRATION
Central Liquidity Facility
•Note #465 •
+Note #466

5/4
5/19

TENNESSEE v&TfTirv AT mjnprrv
Advance #890
Advance #891
Advance #892
Advance #893
Advance #894
Advance #895
Advance #896
Advance #897
Advance #898
Advance #899
Advance #900
Advance #901
Advance #902
Advance #903
Power Bond 1988-B

5/3
5/6
5/9
5/9
5/13
5/13
5/17
5/19
5/19
5/19
5/20
5/24
5/30
5/31
5/19

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Greece 17
Greece 15
Niger 2
Niger 3

•rollover

5/6
5/12
5/13
5/13

Page 3 of 5

FEDERAL FINANCING BANK
MAY 1988 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

556,013.72
147,016,575.45
249,878.14
7,752.24
1,964,025.70
30,039,991.13
8,771,777.19
863,933.80

6/15/12
8/25/14
6/15/12
5/31/96
9/1/13
8/25/14
8/25/14
8/25/14

9.236%
9.335%
9.336%
8.697%
9.435%
9.419%
9.480%
9.439%

2,742,000.00
70,889.00
2,000,001.00
10,000.00
470,000.00
345,148.08

5/1/93
8/15/88
5/15/96
2/15/89
6/15/88
10/3/88

8.212%
6.400%
7.088%
7.197%
6.558%
6.860%

7.152% ann.
7.283% arm.

1,056,000.00
915,000.00
2,500,000.00
1,750,000.00
2,336,000.00
3,255,000.00
2,526,000.00
846,000.00
203,000.00
3,364,000.00
1,968,000.00

1/3/17
1/3/17
12/31/21
1/2/90
1/2/90
7/2/90
1/3/17
1/3/17
5/14/90
7/2/90
1/2/18

9.157%
9.153%
9.210%
7.988%
7.988%
8.146%
9.285%
9.285%
8.075%
8.186%
9.379%

9.055%
9.051%
9.106%
7.910%
7.910%
8.065%
9.180%
9.180%
7.995%
8.104%
9.272%

GOVERNMENT - GUARANTFFn T H A N S (Cont'd.)
Greece 15
Israel 17
Greece 15
Morocco 13
Greece 16
Greece 17
Israel 17
Greece 17

5/17
5/18
5/18
5/18
5/23
5/23
5/24
5/24

DEPARTMENT OF ENERGY
Geothermal Loan Guarantees
Ormesa-Geothermal 5/20 49,980,00.00 5/19/08 9.300%

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
*Toa Baja, FR 5/2
Rochester, NY
•Montgomery Cty., PA
Newport News, VA
Kansas City, MO
Ponce, PR

5/2
5/16
5/17
5/24
5/24

8.381% ann.

PTTRAT. TTT PETRIFICATION ADMINISTRATION
*Tex-La Electric Coop #208A 5/2
•Northwest Electric Power #176
Brazos Electric #333
•Wolverine Power #182A
•Wolverine Power #183A
•Allegheny Electric Coop #175A
•Wabash Valley Power #104
•Wabash Valley Power #206
•Wabash Valley Power #206
•Colorado Ute-Electric #203A
New Hampshire Electric #270

•maturity extension

5/2
5/6
5/11
5/11
5/11
5/12
5/12
5/12
5/19
5/20

qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr

Page 4 of 5
FEDERAL FINANCING BANK
MAY 1988 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST INTEREST
RATE
RATE
(semi(other than
annual)
semi-annual)

PTTPAT. TrrrTPTFTrATTON ADMINISTRATION (Cont'd.)
Oglethorpe Power #320 5/26 $ 9,728,000.00 7/2/90 8.313% 8.228%
Alaska Electric #310
5/31
294,000.00
1/3/17

9.415%

SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
Crossroads Econ. Dev. Corp. 5/4 71,000.00 5/1/08 9.101%
Columbus Citywide Dev. Corp.
5/4
239,000.00
TENNESSEE VET.TFV AUTHORITY
Seven States Energy Corporation
Note #A-88-08 5/31 657,457,234.04 8/31/88 6.786%

5/1/13

9.177%

9.307%

FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
Agency Debt:
Export-Import Bank
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total*
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total*
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
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
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
•figures
may not total due to rounding
grand
total*
• does not include capitalized interest

May 31, 198B
$

11 ,488.5
106.5
16 ,768.0
5 ,592.2

April
$

30. 1988

11,488.5
114.6
16,751.0
5,853.4

Net Chanae
5/1/88-5/31/88

-0-8.1
17.0
-261.2

Page 5 of 5
FY '88 Net Change
10/1/87-5/31/88

33 ,955.1

34,207.5

-252.3

-975.0
-4.9
382.0
1,238.0
640.9

59 ,674.0
84.0
102.2
-04 ,071.2
16.8

59,674.0
84.0
102.2
-04,071.2
17.2

-0-0-0-0-0-0.5

-5 ,335 .0
—0— i 0-0 .7
-170 .0
-2 .8

63,,948.2

63,948.6

-0.5

-5 ,508 .5

18,, 588.6
4,,940.0
50.0
320.7
-02,,037.0
390.7
32.6
26.7
949.4
1, 758.9
19, 217.7
693.1
885.8
1, 965.4
48.5
177.0

18,453.3
4,940.0
-0321.7
-02,037.0
391.6
32.6
26.7
949.4
1,758.9
19,203.2
703.3
888.8
1,952.5
51.2
177.0

135.3
-050.0
-1.0
-0-0-0.9
-0-0-0-014.5
-10.2
-3.0
12.9
-2.7
-0-

-575 .4
-(350 .0
-3 .5
-30,.6
-37,.3
-4,.8
-0..5
-0..4
140.,8
-29.,4
-1,,979.,2
-47.,5
-14. 0
141. 7
-6. 8
-0-

52, 082.3

51,887.4

194.8

~ 2 , 396. 9

-58.0

$ " 7 , 264. 5

====: ==== =

$ 149, 985.6

150,043.5

TREASURY NEWS
Itpartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
February 1, 1989
CONTACT: Office of Financing
202/376-4350

TREASURY FEBRUARY QUARTERLY FINANCING
The Treasury will raise about $13,625 million of new cash and
refund $15,130 million of securities maturing February 15, 1989, by
issuing $9,750 million of 3-year notes, $9,500 million of 10-year
notes, and $9,500 million of 30-year bonds. The $15,130 million
of maturing securities are those held by the public, including $678
million held, as of today, by Federal Reserve Banks as agents for
foreign and international monetary authorities.
The three issues totaling $28,750 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, Federal Reserve Banks hold
$1,411 million of the maturing securities for their own accounts,
which may be refunded by issuing additional amounts of the new
securities at the average prices of accepted competitive tenders.
The 10-year note and 3 0-year bond being offered today will
be eligible for the STRIPS program.
Details about each of the new securities are given in the
attached highlights of the offering and in the official offering
circulars.
oOo
Attachment

NB-124

HIGHLIGHTS O F TREASURY OFFERINGS T O THE FUBLIC
FEBRUARY 1989 QUARTERLY FINANCING
Amount Offered t o t h e Public
Description o f Security:
Term a n d type o f security
Series and CUSIP designation

$9,750 million

$9,500 million

10-year notes
Series A-1999
(CUSIP No. 912827 X E 7)
Listed in Attachment A
of offering circular
February 15, 1989
Issue date February 15, 1989
February 1 5 , 1999
Maturity date
February 1 5 , 1992
T
o b e determined based o n
Interest rate
T o b e determined based o n
the
average o f accepted bids
t h e average o f accepted bids
T
o
b
e determined a t auction
Investment yield
T o b e determined a t auction
T
o
b
e determined after auction
Premium o r discount
T o b e determined after auction
August
15 and February 15
Interest payment dates
August 15 and February 15
$1,000
Minimum denomination available... $5,000
T o b e determined after auction
Amount required f o r STRIPS
N o t applicable
Terms o f Sale:
Yield auction
Method o f sale
Yield auction
Must b e expressed a s
Competitive tenders
M u s t b e expressed a s
an annual yield with t w o
a n annual yield with t w o
decimals,
e.g., 7.10%
decimals, e.g., 7.10%
Accepted
in
full a t t h e averNoncompetitive tenders
Accepted in full a t t h e average
price
u
p
t o $1,000,000
age price u p t o $1,000,000
Accrued interest
None
payable b y investor
None
Payment Terms:
Payment b y non-institutional
Full payment t o b e
jj
Full payment t o b e
submitted with tender
submitted with tender
3-year notes
Series R-1992
(CUSIP N o . 912827 X D 9)
CUSIP N o s . for STREPS Components. N o t applicable

Pi
ai

JUC^I Treasury T a x

r>
d<

"antee by
nstitutions

X L ) Note Accounts.

February 1, 1989
$9,500 million
30-year bonds
Bonds of 2019
(CUSIP No. 912810 EC 8)
Listed in Attachment A
of offering circular
February 15, 1989
February 15, 2019
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
August 15 and February 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

Full payment to be
submitted with tender

Acceptable for T T & L Note
Option Depositaries

Acceptable for TT&L Note
Option Depositaries

Acceptable

p lenders Tuesday, February 7, 1989, Wednesday, Februarys, 1989, Thursday, February 9, 1989,
w
prior t o 1:00 p.m., E S T
prior t o 1:00 p.m., E S T
prior t o 1:00 p.m., E S T
S
[final payment
a
stitutions):
TVBCiiEl'tjSlY

tLwJTT^wTo to t h e T r e a s u r v

Wednesday, February 15, 1989

Wednesday, February 15, 1939

^2idLi.W-^«=.^XectitoXe c^ecOc

M o n d a y , Febrrxary 1 3 , 1 9 8 9

Monday, February 13, 1989

Monday, Ketorxiai^n . 1 9 8 9 _

TREASURY NEWS
Mpartment
of the Treasury • Washington, D.C. February
• Telephone
566-2041
1, 1989
FOR IMMEDIATE RELEASE
PETER T. MADIGAN
LEAVES TREASURY TO BECOME
DEPUTY ASSISTANT SECRETARY OF STATE
Secretary of the Treasury Nicholas F. Brady announced
today that Deputy Assistant Secretary of Legislative Affairs,
Peter T. Madigan, is leaving the Department to assume a similar
position at the State Department in the Bush Administration,
Principal Deputy Assistant Secretary of State for Legislative
Affairs.
Secretary Brady said, "Peter has made many valuable
contributions to the Treasury Department and will be missed". He
was deeply involved with the passage of the 1986 Tax Reform Act,
the creation of the Financial Working Group on the Stock Market
Break, the negotiations on the 1988 Trade Bill and the Bipartisan
Budget Summit Agreements, and with Savings and Loan reform.
"Peter will be a major asset to the Bush Administration,"
Secretary
Brady added.
has served as Principal Deputy Assistant
Mr. Madigan
Secretary for Leg islative Affai rs for the last year. Prior to
that he was Speci al Assistant t o the Assistant Secretary of the
Treasury ifor Legi slative Affair s. From 1984 to 1985 he was
Legislative Direc
From 1983--1985 he tor of the Nat ional Association of Realtors.
of legislative po served in the Reagan Administration in a number
Assistant Secreta sts, including Special Assistant to the
Assistant to the ry of Health a nd Human Services and Legislative
Director
of th e Administration,
Office of Management
and Budget.
Prior to joining
the Reagan
Mr. Madigan
served as Floor Assistant to the House Republican Chief Deputy
Whip.
Mr. Madigan received his Bachelor of Arts degree in
Broadcasting & Political Science from the University of Maine at
Orono in 1981. A native of Maine, he now resides in the District
of Columbia.

oOo

MB-125

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON
February 3, 1989

CONTACT: Office of Financing
202/376-4350

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,000
million of 364-day Treasury bills
to be dated February 16, 1989, and to mature February 15, 1990
(CUSIP No. 912794 TR 5 ) . This issue will result in a paydown for
the Treasury of about $900
million, as the maturing 52-week bill
is outstanding in the amount of $9,907
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Standard time, Tuesday, February 14, 1989.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. This series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing February 16, 1989.
In addition to the
maturing 52-week bills, there are $14,639 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $2,371 million as agents for foreign
and international monetary authorities, and $7,963 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 $880
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 5176-3.
NB-126

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

TREASURYNEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
^
FOR IMMEDIATE RELEASE

CONTACT: Office of Financing
202/376-4350

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,205 million of 13-week bills and for $7,210 million
of 26-week bills, both to be issued on February 9. 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing
May 11, 1989
Discount Investment
Price
Rate 1/
Rate
8.53% £/
8.58%
8.57%

8.84%
8.89%
8.88%

97.844
97.831
97.834

26-week bills
maturing August 10, 1989
Discount Investment
Price
Rate
Rate 1/
8.51%
8.54%
8.53%

9.02%
9.05%
9.04%

95.698
95.683
95.688

a/ Excepting 1 tender of $200,000.
Tenders at the high discount rate for the 13-week bills were allotted 51%.
Tenders at the high discount rate for the 26-week bills were allotted 7%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Tjrpe
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received

Accepted

44,895
19,767,980
29,260
54,205
63,425
45,505
1,187,725
39,560
12,260
45,535
36,180
2,067,545
474,580

$ 44,895
5,937,330
29,260
54,205
63,425
45,505
163,725
39,560
12,260
45,535
31,180
263,545
474,580

$
33,760
20,101,490
24,980
44,220
58,265
43,180
1,134,405
36,335
14,435
64,270
36,145
1,573,615
525,790

$
33,760
5,940,840
24,980
44,220
58,265
43,180
219,905
36,335
14,435
64,260
31,145
173,115
525,790

$23,868,655

$7,205,005

$23,690,890

$7,210,230

$20,191,660
1,364,320
$21 ,555 ,980

$3,828,010
1,364,320
$5,192,330

$18,468,805
1,301,345
$19,770,150

$2,288,145
1,301,345
$3,589,490

1,900,415
2 200 ,415

2,162,000

1,862,000

112,260
112 ,260

1,758,740

$23,868,655 $7,205,005

$.23,690,890 $7,210,230

An additional $33,540 thousand of 13-week bills and an additional $3-1,860
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
y

Equivalent coupon-issue yield

NB-12^

Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Transcript

Number of Pages Removed: 16

Author(s):
Title:

Department of Treasury Oral Communique

Date:

1989-02-03

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

TREASURY NEWS _
Itportment of the Treasury • Washington, D.c. • Telephone 566-2041
'•- Av.r

FOR RELEASE AT 3:00 PM
February 6, 1989

Contact: Peter Hollenbach
(202) 376-4302

TREASURY ANNOUNCES ACTIVITY IN
SECURITIES IN THE STRIPS PROGRAM FOR JANUARY 1989
The Department of the Treasury announced activity figures for the
month of January 1989 of securities within the Separate Trading
of Registered Interest and Principal of Securities program,
(STRIPS). The principal outstanding for eligible securities was
$307,630,412,000 with $234,223,102,000 held in unstripped form
and $73,407,310,000 held in stripped form. The gross amount
reconstituted through January was $17,170,680,000. The attached
table gives a breakdown of STRIPS activity by individual loan
description.
These monthly figures are included in Table VI of the Monthly
Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form." These can also be obtained through
a recorded message on (202) 447-9873.
oOo

NB-128

TABLE VI-HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JANUARY 31, 1989
(In thousands)
Principal A m o u n t Outstanding
Q r o s a Amount
Reconstituted to
Date

- •

Maturity Date

Loan Description

Portion Hatd in
Unatnppad Form 1

7 ota:

Portion Held in
Stripped Form'

11-5/8% Note C-1904

11/15/94

S6.656.554

S5.496.554

SI.160.000

11-1/4% Note A-1995

2/15/95

6.933.861

6.269.381

664.480

948.96I

11-1/4% Note B-1995

5/15/95

7.127.086

5.448.846

1.678.240

910.401

10-1/2% Note C-1995

8/15/95

7,955.901

7,005.101

950.800

62800(

9-1/2% Note D-1995

11/15/95

7.318.550

6.792.550

526.000

883W

2/15/96

8.410.929

8.140.529

270.400

960C

7-3/8% Note C-1996

5/15/96

20.085,643

19,959.243

126.400

-0-

7-1/4% Note D-1996

11/15/96

20.258.810

19.918.810

340.000

-0-

9.776,037

145.200

-0-

8-7/8% Note A-1996

•2.25600I

8-1/2% Note A-1997

5/15/97

9.921.237

8-5/8% Note B-1997

8/15/97

9.362.836

- 0 -

-0-

8-7/8% Note C-1997

11/15/97

9.808.329

9.718.729

89.600

-0-

8-1/8% Note A-1998

2/15/98

9,159.088

9.159.068

—

0 -

-0-

9 % Note B-1998

5/15/98

9.165.387

—

0 -

-0-

9-1/4% Note C-1998

8/15/98

11.342.646

—

0 -

-0-

8-7/8% Note 0-1998

11/15/98

9.902.835

11-5/8% Bond 2004

11/15/04

8.301.806

2.692.206

5.609.600

1 2 % Bond 2005

5/15/05

4,260.758

1,725.608

2.535.150

129.400

10-3/4% Bond 2005

8/15/05

9.269,713

6,245.713

3.024.000

676.000

.2/15/06

4.755.916

4,755.916

0 -

-0-

6.005.584

1,475.184

4.530.400

1.222.400

9-3/8% Bond 2006

11/15/14

11-3/4% Bond 2009-14

- 0 -

—

-01,143,200

11-1/4% Bond 2015

2/15/15

12.667,799

2,713.719

9.954.080

401 .MO

10-5/8% Bond 2015

.8/15/15

7.149,916

1.946,716

5.203.200

429760

6.899.859

3.263.059

3.636,800

261.600

.2/15/16

7.266,854

5.156,854

2.108.000

554.400

.5/15/16

18,823.551

13.559,551

5.264,000

2.496,600

11/15/15

9-7/8% Bond 2015
9-1/4% Bond 2016
i

7-1/4% Bond 2016
7-1/2% Bond 2016

.11/15/16

18.864.448

10.309.088

8.555.360

2.756.640

8-3/4% Bond 2017

.5/15/17 ..

16,194.169

8.489.369

9.704.800

945.260

10.349.658

3.667.200

169.600

2.767.200

67.200

896.400

50 400

8-7/8% Bond 2017

.8/15/17

9-1/8% Bond 2018

.5/15/18

8.708.639

5,941,439

11/15/18

9.032.870

8.136.470

9 % Bond 2016

14,016.858

I
Total

i
j

307.630.412

234,223.102 i

73,407,310

17.170.680

'Effective M a y 1. 1987. securities held in stripped form were eligible for reconstitution to their unstripped form T h e amounts in this column represent the net aflect of strippingar»e
reconstituting securities
Note O n the 4th workday of each month a recording of Table VI will be available after 3.00 p m T h e telephone number is (202) 447-9873
The balances in this table are subject to audit and subsequent adjustments

0*5 B"«

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 6, 1989

Statement by
The Secretary of the Treasury
Nicholas F. Brady
Regarding the President's Savings and Loan Reform Program

Thank you, Mr. President.
From the day five months ago that I was sworn in as
Secretary of the Treasury, achieving a sound, responsible
resolution to the savings and loan crisis has been a top
priority.
As the President has said, there are no simple or
painless solutions to this problem. When he took office eighteen
days ago, the President reaffirmed our commitment to fix it now,
fix it right, and fix it for good.
He also directed me to
consult with Congress, and we have done so.
Two watch words guided us as we undertook to solve this
problem—NEVER AGAIN.
o Never again should we allow a federal insurance fund
that protects depositors to become insolvent.
o Never again should we allow insolvent federally insured
deposit institutions to remain open and operate
without sufficient private capital at risk.
o Never again should we allow risky activities
permitted by the states to put the federal deposit
insurance fund in jeopardy.
o Never again should we allow fraud committed against
financial institutions or depositors to be anything but
a serious white collar crime.

NB-129

- 2 -

The plan I am about to describe to you meets all these
requirements. It is a blueprint for comprehensive reform and
financing. It is supported by all the federal bank regulators —
the Federal Reserve, the Comptroller of the Currency, the Federal
Home Loan Bank Board and the Federal Deposit Insurance
Corporation. I will first describe the crucial reform program,
then turn to the financing structure.
But before I begin, let me stress that insured depositors
need not worry, insured deposits are as safe today as they were
yesterday, regardless of whether these savings are in savings
and loans or commercial banks; savers with insured accounts will
continue to be protected in the future. The banks that are open
today will be open tomorrow. Our aim is to ensure that there
will be no disruption of services in local communities. Above
all, federally insured savings are, and will remain, backed by
the full faith and credit of the federal government.
Now for the reform program. The current organization of the
thrift system dates to the New Deal era. As the events of the
1980s have demonstrated, this system is antiquated. The Federal
Home Loan Bank Board, under the leadership of Chairman M. Danny
Wall, has addressed this crisis in an expedited manner under
extremely difficult circumstances—with inadequate funding and
limited staff. The men and women who work at the Bank Board and
the FSLIC deserve our thanks for their tireless efforts. But, to
correct long-term structural problems, we propose the creation of
an independent insurance agency to protect depositors. FSLIC
will be consolidated with the FDIC. The existing expertise and
manpower of FSLIC will be incorporated into the FDIC. However,
and I stress this point, two separate insurance funds, with
separate premium streams, one for S&Ls and one for banks, will be
maintained. The two separate funds cannot be commingled.
In conjunction with this step, we propose to reorganize the
existing regulatory structure to ensure the availability of home
financing in the future. The entire supervisory structure will
be accountable to the Chairman of the Federal Home Loan Bank
System, instead of to the industry they regulate. And the
Chairman of the revitalized Federal Home Loan Bank System, like
the Comptroller of the Currency, will report to the Secretary of
the Treasury.
In a further measure to put our financial institutions on a
sound footing, we will require that the level of private capital
be uniform for all banks and S&Ls in adequate quantities to act
as a buffer to the deposit insurance funds. Therefore, by
June 1, 1991, all insured institutions must meet the uniform
capital standards applicable to FDIC-insured banks. For the
savings and loans this will mean roughly doubling the required

- 3 -

savings and loans this will mean roughly doubling the required
capital.
We are upgrading safety and soundness measures. If this
plan is enacted, in the future depositors will be protected
through a range of new measures, including:
o A capital requirement that will be pegged to the
risk of S&L investments;
o Stricter standards for granting insurance;
o Prohibitions and restrictions on growth and risktaking by undercapitalized institutions;
o And, where risky activities authorized by the states
pose a threat to the insurance fund, federal deposit
insurance standards will prevail.
Requirements for receiving federal deposit insurance will be
determined by the FDIC.
There will be no more windmill farms
financed by federally guaranteed deposits; and new uniform
accounting, supervisory and disclosure standards will help
enforce these measures.
Lest anyone have any doubts about how serious we are about
cleaning up the thrift industry and keeping it clean, we are
upgrading enforcement and increasing penalties to make fraud
against financial institutions and depositors a most serious
white collar crime. Under our plan, the maximum civil penalty
will be increased from the current $1,000 per day to $100,000 per
day. Under our plan, the U.S. government will make every effort
to recover squandered funds by increasing funding for
enforcement.
These reform measures are vitally important to the future of
the thrift industry. Without them, we will not have a healthy
private savings and loan industry to provide home financing for
Americans.
But as we are all acutely aware, reform and a
financial solution to the problems of the current system go hand
in hand. When combined with the $40 billion already spent, the
$50 billion in new funds provided by this program will bring to
$90 billion the total amount available to address the problems
of insolvent S&Ls.
We believe it is essential that we resolve, with all
deliberate speed, the cases of the insolvent S&Ls. We will do so
through the creation of the Resolution Trust Corporation (the
RTC) . It will be a corporation whose function is to isolate
insolvent S&Ls from healthy ones and resolve them in an orderly

- 4 -

fashion. The RTC mechanism will allow one consolidated
resolution process where accounting for — and controlling the
funds will be a clear and straightforward process. In short,
strict accountability will be ensured. The RTC will not have a
large staff and the FDIC will manage the resolutions. The work
of the RTC will be overseen by a board consisting of the
Secretary of the Treasury, Chairman of the Federal Reserve, and
the Comptroller General. A funding corporation will sell $50
billion in bonds over the next three years to finance the
resolutions.
Our plan for financing the recovery and restructuring of the
S&L industry uses both private and public funds to resolve
insolvent thrifts. This plan is on-budget, in other words, every
cent of additional public funds spent counts as an increase in
budget outlays. Funds for the payment of principal will come
from S&L industry sources.
In all, this plan provides funds for three purposes. First,
S&L industry and Treasury funds are used to finance the RTC's
resolution of insolvent thrifts. Second, S&L insurance premiums
are used to create an insurance fund for healthy S&Ls. Third,
increased commercial bank insurance premiums help bring the FDIC
insurance fund for commercial banks up to a fully funded level.
But let me reiterate, no commercial bank insurance premiums are
used to resolve insolvent S&Ls or go into the S&L insurance fund.
The S&L industry financing comes from three sources:
retained earnings of the Federal Home Loan Banks, funds from the
disposal of assets received by the insurance fund from insolvent
S&Ls, and deposit insurance premiums charged to individual S&Ls.
Commercial bank resources required to bring the FDIC fund up
to a fully funded level will also come from an increase in
insurance premiums. The FDIC will reduce insurance premiums to
both commercial banks and S&Ls, once it determines that their
respective funds are fully financed and pegged to a more
historical reserve-to-deposit ratio of 1.25 percent.
The FSLIC and FDIC will immediately begin a joint
supervisory program with personnel also contributed by the
Federal Reserve and Office of the Comptroller of the Currency.
Over the next several weeks FDIC personnel will assume
supervisory control of insolvent S&Ls to protect depositors.
This program will stabilize these institutions by curbing losses
and will give a head start for the tough job ahead.
This, then, is the Bush Administration's solution to the
savings and loan crisis. If enacted by Congress in a timely
manner, it will provide a sound, long-term solution to the S&L

- 5 -

crisis. I call on Congress to work with us to turn this plan
into law as soon as is possible.
Working together, we can
recreate and rejuvenate the vital thrift industry which served
our country so well in the past.

* * * * * * * *

THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release

February 6, 1989

STATEMENT BY THE PRESIDENT

For more than a half century, the United States has operated
a deposit insurance program that provides direct government
protection to the savings of our citizens. This program has
enabled tens of millions of Americans to save with confidence.
In all the time since creation of deposit insurance, savers have
not lost one dollar of insured deposits. I am determined that
they never will.
Deposit insurance has always been intended to be self-funded.
This means that the banks, savings and loans and credit unions
that are insured pay a small portion of their assets each year
into a fund that is used to protect depositors. In every case
these funds are spent to protect the depositors, not the
institutions that fail.
For the last twenty years, conditions in our financial
markets have grown steadily more complex, and a portion of
the savings and loan industry has encountered steadily
growing problems. These financial difficulties have led to
a continuous erosion of the strength of the Federal Savings
and Loan Insurance Corporation. Economic conditions have
played a major role in this situation. However,
unconscionable risk-taking, fraud, and outright criminality
have also been factors. Congress, previous Administrations, the
regulators and the industry were not prepared to be tough on
those who risked the public's money or abused the system.
Because of the accumulation of losses at hundreds of thrift
institutions, additional resources must be devoted to
cleaning up this problem. We intend to restore our entire
deposit insurance system to complete health.
While the issues are complex, and the difficulties manifold,
we will make the hard choices, not run from them. We will
see that the guarantee to depositors is forever honored, and
we will see to it that the system is reformed comprehensively so
that this situation is not repeated ever again.
To do this, I am today announcing a comprehensive and
wide-ranging set of proposals. The Secretary of the Treasury
Nicholas Brady will describe these proposals to you in detail in
a few minutes. However, I think it is important to summarize the
major points.
The proposals include four major elements. First, currently
insolvent savings institutions will be placed under the joint
management of the FDIC and FSLIC pursuant to existing law. This
will enable us to control future risk-taking, and to begin
reducing ongoing losses.
Second, the regulatory mechanism will be substantially
overhauled to enable it to more effectively limit risk-taking.
The FDIC would become the insurance administrator for both banks
and thrifts under this system. These funds will not be
commingled. The insurer will have the authority to set minimum
standards for capital and accounting. Uniform disclosure
standards would also be implemented. The chartering agency for
thrifts would come under the general oversight of the Secretary
of the Treasurv.

2
Third, we will create a financing corporation to issue $50
billion in bonds to finance the cost of resolving failed
institutions, which will supplement approximately $40
billion that has already been spent.
All of the principal of these bonds, and a portion of the
interest on them, will be paid from industry sources.
However, the balance would be paid from on-budget outlays of
general revenues. Hopefully some of these revenues vill be
recovered in the future through sales of assets and recovery
of funds from wrongdoers.
Fourth, we plan to increase the budget of the Justice
Department by approximately $50 million per year to enable
it to create a nationwide program to seek out and punish
those that have committed wrongdoing in the management of
the failed institutions. These funds will result in almost
doubling the personnel devoted to the apprehension and
prosecution of individuals committing fraud in our financial
markets.
As you can see, these proposals are based upon several
overriding principles:
First, I will not support any new fee on depositors.
Second, we should preserve the overall federal budget
structure, and not allow the misdeeds and wrongdoing of
savings and loan executives and the inadequacy of their
regulation to significantly alter our overall"budget
priorities.
Third, I have concluded that this proposal, if promptly
enacted, will enable our system to prevent any repetition of
this situation.
Fourth, I have decided to attack this problem head-on, with
every available resource of this government. Because it is
a national problem, I have directed that the combined
resources of our federal agencies be brought together in a
team effort to resolve the problem.
Fifth, I believe that banks and thrifts should pay the real
cost of providing the deposit insurance protection. The
price the FDIC charges banks for their insurance has not
been increased since 1935. We propose to increase the bank
insurance premium by less than seven cents per $100 of
insurance protection they receive. Every penny collected
would be used to strengthen the FDIC so that the taxpayers
will not be called on to rescue it a few years from now.
I make to you a solemn pledge that we will make every effort
to recover assets diverted from these institutions, and to
place behind bars those who have caused losses through
criminal behavior. Let those who would take advantage of
the public trust and put at risk the savings of American
families anticipate that we will seek them out, pursue them
relentlessly and demand the most severe penalties.
In closing, I wish to speak to the small savers of America.
Across this great land families and individuals work and
save, and we hope to encourage even greater rates of savings
to promote a brighter future for our children. Your
government has stood behind the safety of insured deposits
before, it does today, and it will do so at all times in the
future. Every insured deposit will be backed by the full
faith and credit of the United States of America, which
means that it will absolutely be protected.

3 For the future, we will seek to achieve a safe, sound and
profitable banking system. However, integrity and prudence
must share an equal position with competition in our
financial markets. Clean markets are an absolute
prerequisite to a free economy, and to the public confidence
that is its most important ingredient.
I have determined to face this problem squarely, and to ask
for your support in putting it behind us. I have ordered
that the resources of the Executive Branch be brought to
bear on cleaning up this problem. I have personally met
with the leadership of the Congress on this issue. My*
Administration will work cooperatively with Congress as the
legislation we will submit in a few days time is considered.
I call on Congress to join me in a determined effort to
resolve this threat to the American financial system
permanently, and to do so without delay.
# #»

THE WHITE HOUSE
OFFICE OF THE PRESS SECRETARY
FOR IMMEDIATE RELEASE

February 6, 1989

FACT SHEET
THE PRESIDENT'S REFORM PLAN
FOR THE SAVINGS AND LOAN INDUSTRY
President Bush announced that he will send Congress a major
reform and financing initiative to resolve the nation's savings
and loan industry problems. The President emphasized that all
insured savings and loan and bank deposits are and will continue
to be backed by the full faith and credit of the federal
government.
The President's proposal has the support of all the federal
agencies that regulate financial institutions: the Federal
Reserve Board, the Comptroller of the Currency, the Federal Home
Loan Bank Board and the Federal Deposit Insurance Corporation.
The President's proposal contains these elements:
o The plan will fundamentally restructure the way the savings
and loan industry is regulated and insured to prevent such a
situation from ever reoccurring.
o It will improve supervisory controls so that regulators will
be able to prevent future abuses.
o It will increase the financial integrity of the federal
deposit insurance funds for the future.
o It will enhance enforcement and increase penalties aimed at
fraud against financial institutions.
o It will create and fund a new corporation to pay the cost of
closing all insolvent savings and loan institutions. I have
rejected any new fee on deposits as part of this program.
o It v/ill begin placing these institutions under the control
of the federal government in an orderly manner.
Structural Reform
The Federal Savings and Loan Insurance Corporation (FSLIC)
will be separated from the Federal"Home Loan Bank Board and
attached administratively to the Federal Deposit Insurance
Corporation (FDIC). This will create one strong independent
insurer with an overriding mission of providing insurance to
protect depositors and maintaining the security of the deposit
insurance fund. The considerable expertise of the two
corporations will be available to deal with financial insurance
and regulatory issues. However, while a single agency will be
created, separate insurance funds will be maintained for
commercial banks, and for S&Ls.. .The separate insurance funds will

not be commingled, and premiums from each industry will be used
only for its own insurance fund.
The current Federal Home Loan Bank Board (FHLBB) will be
renamed the Federal Home Loan Bank System (FHLBS). Its current
board will be replaced by a single chairman. The Chairman of the
FHLBS will be subject to the general oversight of the Secretary
of the Treasury in the same manner as the Comptroller of the
Currency, who regulates national banks. The system of 12 Federal
Home Loan Banks will be maintained to support housing finance.
However, supervisory responsibilities will be strengthened,
current pay standards for supervisory personnel of the FHLBB will
not be altered.
By separating the insurer from the chartering agency, more
serious disciplinary standards are likely to be maintained in the
future. In addition, by subjecting the actions of the FHLBS to
oversight by the Treasury department, the interests of the
taxpayers can be more fully and consistently protected. This
Treasury oversight has existed for national banks since the
Administration of President Abraham Lincoln. These steps will
create a system of checks and balances for savings and loans that
more closely parallels that for commercial banks.
Improved Supervisory Controls
The President's plan will increase safety and soundness
standards for savings and loan institutions. In effect, these
institutions will be brought up to commercial bank standards over
a two-year period.
All S&Ls will be required to meet the capital requirements
applicable to FDIC-insured banks by June 1, 1991. That is, their
capital must be increased to approximately six percent of assets,
almost double the current capital requirement. Risk-based
capital standards would be utilized. The increase of private
capital will stand ahead of the government's guarantee of
deposits, giving taxpayers an enhanced level of protection.
The FDIC will be given enhanced authority to set insurance
standards for all S&Ls, both federal and state-chartered. It
will be able to restrict risky activities that have been
authorized by some.states in the past. In addition, the FDIC
would be authorized to take appropriate measures on an expedited
basis when unsound practices are found.
Financial Integrity
The President's plan will require increased insurance
premiums to put federal deposit insurance on a sound financial
basis for the future, funded by the industry.
V

It will recapitalize the deposit insurance fund for S&Ls,
with S&L premium..income of' a billion dollars :a year beginning in1.

1991. The annual premium rate payable to the FDIC by S&Ls will
be increased to 0.23 percent of deposits (from 0.208 percent)
from 1991 until 1994, when it will decline to 0.18 percent.
The plan also will require increased premiums for commercial
banks to bring the separate FDIC fund more in line with its own
historic reserve-to-deposit ratio. When a target reserves level
of 1.25 percent of total insured deposits is achieved, excess net
premium income will be rebated. The FDIC premium paid by
commercial banks will increase to 0.12 percent (from 0.083
percent) in 1990, the first year and to 0.15 percent in
succeeding years. Commercial bank premiums will not be used to
resolve insolvent S&Ls or to shore up the S&L insurance fund.
Enhanced Enforcement
The President's plan will add new enforcement authorities,
increase penalties for fraud, and increase funding to provide for
dramatically increased law enforcement staff and prosecutions.
The scope of federal regulators* enforcement authority will
be broadened to include all insiders, in addition to those
directly involved in running an institution. It will give
regulators broader power to impose temporary cease-and-desist
orders.
It will increase maximum civil penalties to $1,000,000 per
day, and maximum criminal penalties to 20 years or more, with new
sentencing minimums. It will provide authority for regulatory
agencies to pay rewards to informants.
Most importantly, approximately $50 million per year will be
provided from the proceeds of the funding program to the Justice
Department to fund a new national program to attack financial
institution fraud. This program wilT include new investigators,
auditors, analysts, and prosecutors. Indeed, the number of
personnel devoted to investigating and prosecuting bank and
thrift fraud will be approximately doubled.
Resolution of Remaining Insolvents
The President's plan will create a new Resolution Trust
Corporation to resolve currently insolvent S&Ls in an orderly
fashion. The creation of this new private corporation is
proposed for practical business reasons. It will allow isolation
of insolvent S&Ls during the resolution process, and will
facilitate a full and precise accounting of all funds that are
used.
The RTC will have an Oversight Board comprised of the
Secretary of the Treasury, the Chairman of the Federal Reserve
Board and the Comptroller General of the United -States. It will
not have a large staff of its own, but will contract with FDIC to
manage the insolvent institutions-. The RTC would.-seek to- •

complete the resolution or other disposition of all institutions
and their assets over a period of five years.
The RTC will require $50 billion in funding to resolve the
remaining insolvent S&Ls. Another $40 billion has already been
committed in past FSLIC resolutions. Much of the funding
required will come from S&L industry sources, but general
revenues will also be required. All Treasury funds will be
counted on-budget.
A separate Resolution Funding Corporation ("REFCO") will be
authorized to issue $50 billion in 30-year bonds. The principal
will be repaid entirely with S&L industry funds, and taxpayer
funds or guarantees or commercial bank funds will not be required
for repayment of the principal of the REFCO bonds. Approximately
$5-6 billion of existing S&L industry funds, retained earnings of
the Federal Home Loan Banks and special assessment premiums will
be used to purchase zero coupon Treasury securities, which when
they mature in 30 years will pay off the $50 billion in principal
of the REFCO bonds.
Ongoing REFCO bond interest payments and payments on the $40
billion previously committed will be covered first by S&L
industry funds with the shortfall made up by Treasury funds. The
Treasury funds will increase budget outlays as they are spent,
but the outlays were anticipated in President Reagan's FY 1990
budget.
Immediate Joint Supervisory Cooperation
The President announced that the FDIC and FSLIC immediately
will begin joint supervisory cooperation to bring the expertise
of the FDIC as well as the FSLIC to bear on the effort to address
the expensive problem of resolving insolvent S&Ls.
The FSLIC and FDIC will immediately begin a joint
supervisory program with personnel also contributed by the
Federal Reserve and Office of the Comptroller of the Currency.
Over the next several weeks FDIC personnel will assume
supervisory control ,of insolvent S&Ls to protect depositors.
This program will stabilize these institutions by curbing losses
and it will provide a head start for the tough job ahead.

THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release February 6, 1989
PRESS BRIEFING
BY
SECRETARY OF TREASURY NICHOLAS BRADY;
DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET RICHARD DARMAN;
ATTORNEY GENERAL RICHARD THORNBURGH;
CHAIRMAN OF THE FEDERAL RESERVE ALAN GREENSPAN;
CHAIRMAN OF FEDERAL HOME LOAN BANK BOARD DANNY WALL;
HEAD OF FEDERAL DEPOSIT INSURANCE CORPORATION WILLIAM SEIDMAN;
COMPTROLLER OF CURRENCY
Room 450
Old Executive Office Building
4:35 P.M. EST
Q

What's this going to cost the taxpayers?

SECRETARY BRADY: Thank you, Mr. President.
From the day five months ago that I was sworn in as
Secretary of the Treasury, achieving a sound and responsible
resolution to the savings and loan crisis has been a top priority.
As the President has said, there are no simple or painless solutions
to the problem. When he took office just 18 days ago, the President
reaffirmed our commitment to fix it now, fix it right, and fix it for
good. He also directed us to consult with Congress, and this we have
done.
Two watch words guided us as we undertook to solve this
problem: never again. Never again should we allow a federal
insurance fund that protects depositors to become insolvent. Never
again should we allow insolvent federally insured deposit
institutions to remain open and operate without sufficient private
capital at risk. Never again should we allow risky activities
permitted by the states to put the Federal Deposit Insurance Fund in
jeopardy. Never again should we allow fraud committed against
financial institution* or depositors to be anything but a serious
white collar crime. We're going to find the wrongdoers, as the
President said, recover the assets they've stolen, and put them in
jail for a very long time.
The plan I'm about to describe to you meets all of these
requirements. It is a blueprint for comprehensive reform and
financing. It is supported by all the federal bank regulators — the
Federal Reserve, the Comptroller of the Currency, the Federal Home
Loan Bank Board, and the Federal Deposit Insurance Corporation.
I will first describe the reform program and then turn to
the financing structure. But before I begin, let me stress that
insured depositors need not worry. Insured deposits are as safe
today as they were yesterday, regardless of whether these savings are
in savings and loans or commercial banks. Savers with insured
accounts will continue to be protected in the future. The banks that
are open today will be open tomorrow. Our aim is to ensure that
there will be no disruption of services in local communities. Above
all, federally insured savings are and will remain backed by the full
faith and credit of the federal government.
Now for the reform program. The current organization of
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the thrift system dates back to the New Deal era. However, as the
events of the 1980s have demonstrated, this system is antiquated.

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The Federal Home Loan Bank Board, under the leadership of Chairman
Danny Wall, has addressed this crisis in an expedited manner, under
extremely difficult circumstances, with very low funding, and a
limited staff. The men and women who work at the Bank Board and the
FSLIC deserve our thanks for this tireless effort under difficult
circumstances.
But to correct the long-term structural problems
inherent, we proposed the creation of an independent insurance agency
to protect depositors. FSLIC will be consolidated with the FDIC.
The existing expertise and manpower of the FSLIC will be incorporated
into the FDIC. However ~ and I stress this point — two separate
insurance funds, with separate premium screens, one for the S&Ls and
one for the commercial banks, will be maintained. The two separate
funds cannot be comingled.
In conjunction with this step, we propose to reorganize
the existing regulatory structure to ensure the availability of home
financing in the future. The entire supervisory structure will be
accountable to the Chairman of the Federal Home Loan Bank System
instead of to the industry they regulate. And the Chairman of the
revitalized Federal Home Loan Bank System, like the Comptroller of
the Currency, will report to the Secretary of the Treasury.
In a further measure to put our financial institutions on
a sound footing, we will require that the level of private capital be
uniform for all banks and S&Ls in adequate quantities to act as a
buffer to the federally insured deposit funds. Therefore, by June 1,
1991, all insured institutions must meet the uniform capital
standards applicable to FDIC insured banks. For the savings and
loans, this will mean roughly doubling the required capital.
Further, we are upgrading safety and soundness measures.
If this plan is enacted, in the future, depositors will be protected
through a range of new measures, including a capital requirement that
will be pegged to the risk of the S&L investments; stricter standards
for granting insurance, prohibitions in restrictions on growth and
risk-taking by undercapitalized institutions; and where risky
activities authorized by the states pose a threat to the insurance
fund, federal deposit insurance standards will prevail.
Requirements for receiving federal deposit insurance will
be determined by the FDIC. There will be no more windmill farms, no
prize cattle herds financed by federally guaranteed deposits. And
the new uniform accounting, supervisory and disclosure methods will
help enforce these measures.
Lest anyone have any doubts about how serious we are
about cleaning up the thrift industry and keeping it clean, we are
upgrading enforcement and increasing penalties to make fraud against
the financial institutions and depositors a most serious white collar
crime. Under our plan, the maximum civil penalty will be increased
from the current $1,000 per day to $100,000 per day. Under our plan,
the U.S. government will make every effort to recover the squandered
funds by increasing funds available for enforcement.
These reform measures are vitally important to the future
of the thrift industry. Without them we will not have a healthy
private savings and loan industry to provide home financing to
Americans. But, as you all are acutely aware, reform and a financial
solution to the problems of the current system go hand in hand.
When combined with the $40 billion already spent, the $50 billion of
new funds provided by this program will bring to $90 billion the
total amount available to address the problems of insolvent S&Ls.
We believe it is essential that we resolve with all
deliberate speed the cases of the insolvent S&Ls you've all read
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about. We will do so through the creation of a new organization
called the Resolution Trust Company, the RTC. It will be a
corporation whose function is to isolate insolvent S&Ls, separate

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them from healthy ones, and resolve them in an orderly fashion. The
RTC mechanism will allow one consolidated resolution process where
accounting for and controlling the funds will be a clear and
straightforward process.
In short, strict accountability will be ensured. The RTC
will not have a big staff and the FDIC will manage the resolutions.
The work of the RTC will be overseen by a board consisting of the
Secretary of the Treasury, the Chairman of the Federal Reserve, and
the Comptroller General. And a funding corporation will sell $50
billion in bonds over the next three years to finance the
resolutions.
Our plan for refinancing the recovery and restructuring
of the S&L industry uses both private and public funds to resolve
insolvent thrifts. This plan is on budget. In other words, every
set of additional public funds spent counts as an increase in budget
outlays. Funds for the payment of principal will come from the S&L
industry itself.
In all, this plan provides funds for three purposes.
First, S&L industry and Treasury funds are used to finance the RTC's
resolution of the insolvent thrifts. Second, S&L insurance premiums
are used to create an insurance fund for healthy S&Ls. And third,
increase commercial bank insurance premiums help bring the FDIC
insurance fund for commercial banks up to a fully funded level. But
let me reiterate, no commercial bank insurance premiums are used to
resolve insolvent S&Ls or to go into the S&L insurance fund.
The S&L industry financing comes from three sources —
retained earnings of the Federal Home Loan Banks, funds from the
disposal of assets received by the insurance fund from insolvent
S&Ls, and deposit insurance premiums charged to individual S&Ls.
Commercial bank resources required to bring the FDIC fund up to a
fully funded level will also come from an increase in insurance
premiums. The FDIC will reduce insurance premiums to both commercial
banks and S&Ls once it determines that their respective funds are
fully financed and pegged to the more historical reserve-to-deposit
ratio of 1.25 percent.
FSLIC and the FDIC will immediately begin a joint
supervisory program — by "immediately," I mean tomorrow — with
personnel also contributed by the Federal Reserve and the officer of
the Comptroller of the Currency. Over the next several weeks, FDIC
personnel will assume supervisory control of insolvent S&Ls to
protect depositors. This program will stabilize these institutions
by curbing losses and will give a head start for the tough job ahead.
This then is the administration's solution to the savings
and loan crisis. If enacted by Congress in a timely manner, it will
provide a sound, long-term solution to the S&L problem. I join the
President's call on Congress to work with us to turn this plan into
law as soon as possible. Working together, we can recreate and
rejuvenate the vital thrift industry which has served our country so
long and so well in the past.
Q How much is it going to cost?
Q How much money do you think it's going to cost the
taxpayers? I mean, we know about the $90 billion. If you could give
us an idea of what it's actually going to cost out of our pockets.
SECRETARY BRADY: Well, $90 billion is both — it counts
for money that's been spent and the $50 billion that will be spent.
Our best estimates in the first 10 years is that it will come roughly
half from the industry and half from the taxpayers.
Q Is that all the money that it's going to cost us —
$90 billion?
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- 4 -

SECRETARY BRADY: That's what we think. We think the
problem — the size of the problem is $90 billion. Actually there is
a slight reserve in there so that if there are any unforeseen
unpleasant circumstances that show up, we've got some room in there
to take care of it.
Q Let me make certain I understand that. If it's half
from the taxpayers and half from the S&Ls, that's $45 billion from
the taxpayers and over 10 years it's $4.5 billion a year?
SECRETARY BRADY: That's about right.
Q Mr. Secretary, there — in the fact sheets we were
given, it says there is — of the $40 billion already committed that
the S&L industry will pick up part of that and that Treasury the
rest. I don't understand how you get the $40 billion.
SECRETARY BRADY: I'm going to let Dick Daman comment on
that. (Laughter.)
Q can you explain the relationship of the $45 billion
to the estimate here that there was a $40 billion already committed
and that Treasury will pick up the rest of that?
DIRECTOR DARMAN: You people are too tall for me.
Let me try to give you a more detailed breakdown. In
Fiscal Year '90, the net budget outlays associated with this,
everything considered, the new element that has to go to cover some
interest and Treasury contribution to some funding of the old piece
which is still left over for funding, which is what I think you are
referring to, would be $1.9 billion for Fiscal Year '90, $6.0 billion
for '91, $3.8 billion for '92, $3.7 billion for '93, $1.5 billion for
'94. That's a total of, if you add $11.1 for Fiscal Year '89, which
deals with some of what has already happened — a good deal of what
has already happened — that's not new — the total for '89 through
'94 would be $28.1 billion. I think you may have that in the fact
sheet. I haven't seen the latest version.
The number for '89 to '99 — comparable number — would
actually be $39.9 billion on our estimates.
Q I take it you're estimating the funds — a couple of
funds will be capitalized by that? Is that the reason, and that the
premiums would decline or what? Or that the amount — the
contributions would decline?
DIRECTOR DARMAN: No. These numbers bounce around for a
variety of reasons, and — you mean, over time? All that's left to
pay for as you move out is the — or, the main thing left to pay for
is the Treasury contribution to interest. It's offset by some other
things that are happening — some asset sales along the way, some
premiums coming in, things going out. There are a lot of flows, but
the nets are the ones that I gave you. We can give you a more
detailed backup if you'd like to see it all the way across.
The Treasury payments for the bond interest itself — and
then I'll retire from the podium and let it get back to substance,
not numbers — for the bond interest itself, those numbers go in
Fiscal Year '91, .4; '91, 1.6; '92, 0.9; '93, 0.8; '94, 1.1; and the
five-year total for that component is $6.3 billion. So that is part
of the 28 billion.
Q And that is taxpayer payments to help pay for the
bond interest? That's separate and beyond what the savings and loans
have contributed?
DIRECTOR DARMAN: It is in addition to what they will
have contributed. Let me just clarify one thing. There is zero
Treasury or public or taxpayer ~MORE
whatever label you want to use —

- 5

money that is involved with respect to the principal of these bonds.
Those are covered entirely and in advance by private sources. There
is, however, a shortage when it comes to servicing the interest, a
projected shortage, when it comes to serving the interest on these
bonds. And to make sure that the bonds can be sold at a low cost in
the market, the Treasury is saying it will cover the difference
between what will be covered by the premium flow for that interest
and the total interest burden. That's the number that I gave you for
interest. And it's only the interest that is the public money.
Indeed, it's not all of the interest, as your question suggests.
It's only a portion of the interest, and it's none of the principal
— zero on the principal.
Q I take it that number is the 39.9 — that's the
taxpayers number? Not 45, it's 39.9?
DIRECTOR DARMAN: The 39.9 is the total net of everything
over a 10-year period, that's correct. And it bounces around year to
year.
Q Secretary Brady, President Bush said that he did not
know — said there was no guarantees that this higher cost for
bailing out the S&Ls would be passed on to the consumer. Do you have
any concern at all about the recent trend towards higher interest
rates in the United States and the affect that has on the dollar?
SECRETARY BRADY: Well, to get to President Bush's
question, it was asked first of all, there's no way of knowing
that'll be passed on to the depositor. But competition is a very
hard force in this country, and perhaps those who pass it on won't
get the deposits; the guys that might absorb it will get the
deposits. So I don't think there's any way of saying whether it will
or won't be passed on until we see how it works. My own private
opinion is competition will take over and the guys that don't pass it
on are — will be able to give the depositors more money.
Q Are you concerned about interest rate levels at
present, though? The trend towards higher rates?
SECRETARY BRADY: I think you better wait until Chairman
Greenspan gets up here. I don't want to comment on that.
Q You said that $40 billion has already been spent.
But $40 billion has been committed, at least the way I understand
this. Can you explain why you're only having to raise $50 billion?
SECRETARY BRADY: Well, the problem is somewhere between
$80 billion and $90 billion big. When people say that, and all the
estimates that you've been reading over the past months, they also
include in that figure that amount of resolutions that have already
been taken care of by Danny Wall and FSLIC. So you shouldn't add
that to the total. You add the 40 that's been in the past and what
we say is some 40 to 50 to go, and that gets to the 80 and the 90.
Q But the money — what has been committed in the
future, but that money hasn't already been laid out by the
government.
SECRETARY BRADY: Well, in a sense, it has been laid out
by the government because it's been committed in bonds and
resolvements that the FSLIC has made. So someday you've got to pay
those off, so it's committed.
Q But there will be adequate funds in the FSLIC to —
SECRETARY BRADY: There are adequate funds in this
program to pay off not only what has been committed before December
31st, 1988 and what we are proposing from here on.
Q How much of this will require congressional
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legislation and how much of it can be done administratively without
congress' approval?
SECRETARY BRADY: In terms of congressional legislation,
all the first part of what I mentioned to you this afternoon, which
is the creation of the Resolution Trust Company and certainly all of
the reforms that go along with that — increasing the penalties and
the like, take congressional action. But starting tomorrow morning,
Chairman Wall and Chairman Seidman have said that they're going to
put the two funds together — FSLIC from an administrative standpoint
will start to go into FDIC, although the two funds will remain
separate.
Q Mr. Secretary, I'm puzzled by the fact that the fact
sheet there's a small, only 10-percent increase in the insurance
premium to be paid by the S&Ls and an increase of nearly 50 percent
to be paid by the banks. Since you're saying that these premiums are
not going to be comingled, why are the bank proportionately taking a
much bigger hit than the S&Ls?
SECRETARY BRADY: Well, to start off with, the banks come
from a much lower level and the funds that are generated out of the
bank premiums to take a fund which is at a historical low level
compared to what it should be and bring it back up. And you can't do
that in one year; it takes some time.
Q If I may follow up, what are some of the problems
that have accrued apparently in recent years with the banks that
require a virtual doubling of the bank's insurance premium?
SECRETARY BRADY: Well, we can get into that a little bit
later; Bill Seidman can tell you. But the same problems that the
banks have had — I mean the same problems that the S&L industry have
had, the bank industry has also had. It isn't just particular to the
S&L industry.
Q Mr. Secretary, when you reorganize the Bank Board,
do you anticipate Mr. Wall will remain as Chairman?
SECRETARY BRADY: He will remain as Chairman.
Q Mr. Secretary, I know when you fellows start talking
about a billion here and a billion there, to paraphrase Ev Dirksen,
you're not yet talking about real money. But I need the difference
between the $39.9 billion that Dick Darman talked about and the $45
billion that you talked about clarified, please.
SECRETARY BRADY: Dick?
Q Is that just difference in estimates or is that part
of round figuring the other more precise figure?
DIRECTOR DARMAN: I think the Secretary was rounding, if
I'm correct.
SECRETARY BRADY: Correct.
Q Is that right, Mr. Secretary?
Q Could we get the total figure that the taxpayer is
going to have to pay? Mr. Darman only gave us the five-year figure.
What is the total amount?
DIRECTOR DARMAN: I gave you a five-year figure of $28.1
billion and a 10-year figure of $39.9. I don't have the figure over
the whole life, but the proportion of the interest that is covered by
the public sector rises as you go beyond 10 years. But the present
value of that is an extremely small number because, obviously, you're
talking about 20, 30 years from now.
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Overall, just to give you a rough feel, if you looked at
the total expenditures involved and you said, what percent is public?
In five years it's about 25 percent. Over the 10-year period it's
about 42 percent. Over the 30-year period, in nominal terms, it's
about 54 percent. That is not the correct way to look at this. If
you looked at it in present value terms, the public share would be
substantially smaller. But if you looked at it the way people
ordinarily look at it, you would say over the 30-year life, it would
be about half and half.
Q Dick, in terms of your short-term problem and what
the President has to do on February 9th, this will require a line for
additional outlays in the Fiscal '90 budget, is that correct?
DIRECTOR DARMAN: This will be included in the February
9th presentation with, I hope, exactly the numbers I've read to you
now. And we will, I hope, still meet the Gramm-Rudman-Hollings
targets.
Q So to be specific, that means $1.9 billion
additional in Fiscal '90?
DIRECTOR DARMAN: Obviously, if you're going to spend
this money and it's treated as outlays and you're going to budget it,
then it means it's got to be in the budget. It will be in the budget
and I would hope and expect we will still meet the
Gramm-Rudman-Hollins targets.
That said, I might note that the baseline estimates that
have been done prior to our doing this analysis presumed that there
would be about this level of expenditure required. So it is not
something which suddenly shows budget planning way off. It fits
roughly within the funds that have been allocated.
Q But to be specific, that's $1.9 billion over and
above what the Reagan administration left you?
DIRECTOR DARMAN: No, that's incorrect. No, it's $1.9
billion in '90 period. In fact, in the Reagan budget, that number
was $2.1 billion. So it's slight — it's almost the same as in the
Reagan budget.
Q To follow that, the Reagan budget also had $10
billion for '89 and you've got $11.1 billion. So you've dumped some
of your current costs that went over it, you dumped it back into the
past.
DIRECTOR DARMAN: Rich, if you'll pardon my saying so,
the word "dump" is not really appropriate. (Laughter.) The November
estimates were done before the December action. When we put out our
budget, you will see that we take account of the December action.
And because the December action was taken after the November
estimates, it wasn't in those estimates, but it will be in our
estimates. We haven't dumped anything. We will properly account for
what has already been done.
Q Mr. Brady, the competitive implications of requiring
the S&Ls to be brought up to a standard of financial management that
banks meet is likely to produce fewer of the benefits that bring
deposits to them in the first place. Has this contingency been taken
into effect in assessing future ability to contribute to this deposit
premium fund?
SECRETARY BRADY: Yes. I think that the fact that we're
requiring more capital in the system and that the whole system is
sounder will, in effect, reduce the amount of money they have to pay
for their deposits. It should come down.
Q Do you expect them to — there be a failure rate as
they try to bring themselves —
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SECRETARY BRADY: Well, there may be some, oat in the
long run we'll have a much sounder and safer system. We've got some
assumptions for institutions not being able to stand the competitive
climate in our assumptions. It's accounted for in the figures. But
I don't think it's going to be all that big.
Q sir, are you anticipating to continue the moratorium
on S&Ls and the banks going from one fund to the other, or ~
SECRETARY BRADY: We are — that moratorium, if the
legislation is enacted, will be part of the legislation.
Mr. Attorney General, they want to ask you a question.
ATTORNEY GENERAL THORNBURGH: There are really two
important roles that the law enforcement community can play here.
One is the obvious prosecution of those persons who have violated the
laws in connection with failures and shortfalls in the system as it
presently exists. The other is to provide some suggestions for
remediation as we develop these cases and uncover patterns that can
be dealt with better within the regulatory structure.
The review of the Department of Justice activities in
this area began shortly after I assumed office, and we are able to be
fairly precise about where the needs are and how we can utilize the
figure that has been announced today as a goal for increased
resources for the Department of Justice. The $50 million will be
allocated to increasing our investigative capability through the
Federal Bureau of Investigation, providing more prosecutors and more
support personnel in the areas in which these problems exist. And in
addition to resources, the increased civil and criminal penalties
which Secretary Brady spoke about, the addition of new seizure and
forfeiture language which will enable us to recoup some of the
resources that have been diverted out of the system all provide a
package that we are, I think, confident will greatly enhance the
ability to contribute to restoring the credibility and integrity of
the system as a whole.
Q Are those, sir, who mismanaged in the past, largely
beyond your reach?
ATTORNEY GENERAL THORNBURGH: We have a number of
indictments that have resulted in convictions thus far, a number
awaiting trial, and a number of investigations in various stages.
It's been clear, however, that lack of resources has been a major
problem in providing the deterrent capability that we ought to have
in our law enforcement operations.
Q Since about half, or 40 percent or half of these
frauds or collapses have occurred in Texas, do you plan to allocate
about 40 percent or half of the enforcement resources to Texas, too?
ATTORNEY GENERAL THORNBURGH: Well, as you know, we
already have a substantial commitment to the Dallas task force and we
will be looking at ways in which to bring that up to the level
necessary to pursue every allegation within that jurisdiction, but we
have the advantage there of not only having a head start in terms of
the placement of resources, but a laboratory within which this
special effort has been undertaken that can be used in replicating in
other districts across the country.
Q If I could ask Secretary Brady — President Bush in
his opening remarks said that broader factors in the economy figured
into the S&L crisis that we have now. Many people feel that this
proposal will be simply throwing good money after bad unless some
more steps are taken to deal with the highly-leveraged position that
the overall economy is in. ThatMORE
is, the creation of unsecured notes,
the junk bonds that are used in leveraged buyouts, and so forth,
which they believe has actually contributed to the condition that the

- 9

S&Ls find themselves in now.
SECRETARY BRADY: Well, I don't really think that's what
caused the problem i~. the S&L industry. The S&L industry problem was
caused by mismanagement to some extent, fraud to some extent, but
also some severe depressions in some of the industries that these
people did business in.
Also, it's a mistake, we have found out, to federally
insure one side of the balance sheet and on the other side of the
balance sheet let the institutions who can go and get federally
insured funds invest in any kind of activity that they want. So the
main stem of this program is to make sure that two things happen —
if people want to do that, they've got an awful lot sore of their own
money at risk first so that the federal government has some cushion
there before they have to come up with their guarantees, but also to
make sure that the type of investments that these people can get into
is severely restricted from what they were.
Q How about the LBOs? Do you think that there should
be any actions taken to divert the level of activity that's going on
now?
SECRETARY BRADY: We've had extensive hearings on this
subject. I'm sure you read about the results of those hearings —
Chairman Greenspan testified, I testified. I think the general
conclusion, not only from the people in Congress who listened, but to
those of us that testified, is that this is a trend that we should
watch very closely, that some of the reasons that we should be
concerned about it are more philosophical reasons, which are that so
much of our talent and expertise in this country is used to come up
with financial engineering when the rest of the world is setting long
term plans. But for a fix right now, I think the general conclusion
so far, from the people that I've talked to that come out of those
hearings, is people want to watch and wait some more.
We'll just take a couple sore questions. We're going to
— we have a complete briefing for those who want to stay and some
fact sheets to hand out, but why don't we take two or three more
questions.
Q Mr. Secretary, can we go back to the $40 billion?
As I understand it, is the amount of notes that were issued under Mr.
wall's resolution ~ right?
SECRETARY BRADY: I'm going to let Mr. Darman come up
here and repeat what he said before to you.
Q How is that going to be repaid?
DIRECTOR DARMAN: It's the — the $40 billion is not the
amount of the notes. About 20 is the amount of the notes, and the
remainder is an estimate of the value of the yield maintenance
agreements that are associated with those notes, and other costs
associated with those deals. The notes — the roughly $20 billion in
notes have already been scored as outlays in the federal budget. The
remaining portion has not yet been scored because in most cases the
remaining portion has not yet been paid. The deals have been
concluded, the obligations are there, but the additional funds are
paid over time and it's a projection as to what those expenses will
be. So some of those are costs that continue into the future even
though these deals have already been concluded and the $40 billion
has already been committed.
Some of that continuing stream can be funded from the S&L
premiums, but that — when you add up everything that has to be
funded, with the premium structure that is projected, you still come
up short by the amount that I indicated over the period. So part of
the amount that I indicated you MORE
could think of — and I identified it
specifically — as paying the interest. The remainder is filling a

- 10 -

aao which exists above and beyond the interest in part from the
ISensis -- fSture expenses associated with deals already done.
o so what you're saying is that the principle -- no
nrinciole will be repaid, that's limited to the $50 billion in
bonalf There is a portion of those note, and deal, that you will
have to cover out of general revenue funds?
DIRECTOR DARMAN: Well, this takes all of that into
account. The 30 year cost, the 10 year, 15 -- all of that takes
fully into account a presumption as to what the r•P*Y^fP* •<*** ule ...
and how that's going to be financed and so on. And I think that will
all be laid out in the detailed fact sheets you'll get.
SECRETARY BRADY: We're going to take one more question
from this lady here. But I just want to comment on one thing. The
$50 billion that's going to be raised by the Resolution Trust Company
is coming all from S&L industry funds, that is not coming from the
taxpayers.
Q I have a two-part question. First of all, I just
want to understand — the $40 billion that Danny Wall committed last
year, the GAO estimates that the Bank Board is going to have a short
fall of about $26 billion. Is that what you're saying you have
included in your estimate?
DIRECTOR DARMAN: No, we don't have exactly the same
estimate, but we have a little bit different estimate than was used,
I think, by Danny Wall, and we are taking our revised estimate into
account. But what you say is the amount of the shortfall depends on
where you say your allocating what's coming in. What's coming in —
Q They said over ten years — the GAO said over 10
years —
DIRECTOR DARMAN: I understand, but there's a question of
whether — what you assume else is being paid for with the stream of
money coming in. What you'll see, I think, in the sheets that we'll
hand out is an easier way to look at it. Just separate out the
pieces, look at all collections coming in, all obligations for things
going out, and you can see what the gap is there and which portion is
paid publically and which is —
Q But regardless of what the short fall is, you're
saying it will only be interest rates —
DIRECTOR DARMAN: No, —
Q That the taxpayers will only pay ~
DIRECTOR DARMAN: No, that's with respect to the $50
billion that Secretary Brady has correctly said will be raised, and
the principle of — with that $50 billion, the principle obligation
— $50 billion ~ will be covered entirely and in advance by private
sources. It's not dependent on any future stream because it will be
covered, if I might say, it would be covered by the purchase of zero
coupon bonds immediately from private sources, from industry sources.
And those zeros mature and fully cover the $50 billion. This isn't
some promise dependent upon a future income stream.
Q Well, what about the $40 billion? We understand
that for the 50, but the 40 —
DIRECTOR DARMAN: Some of that is not adequately covered
and a portion —
Q How much?
DIRECTOR DARMAN: Well the difference, roughly speaking,
the net amount that isn't covered is the difference between the
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11 -

number I gave you for the interest portion and the bottom line for
total outlays.
Q Can you give us a number? How much are taxpayers
going to have to pay of the $40 billion?
DIRECTOR DARMAN: I can't break it up that way for you.
I gave you the amount that really matters which is how such the
taxpayers are going to have to pay, period.
Q And second, the follow-up question on that is, when
you talk about a $90 billion problem, that's on principle, that
doesn't count the interest payments, correct?
DIRECTOR DARMAN: That is a way of putting it that would
be correct. If you looked at the total debt servicing associated
with it, the number would be larger than 90, which is why some of
these numbers we've been using here don't correctly add.
Q What's the number if you add the total amount —
SECRETARY BRADY: Let me just say, you know, that is a
way to look at it, but it — I mean if you buy a house and the person
sells it to you for $100,000 you don't — and somebody asks you how
much it cost, you don't say $100,000 plus all the interest that it
cost you.
Q I do when I'm thinking about tax dollars.
SECRETARY BRADY: Well, you know, when we account for an
aircraft carrier or some capital item in the budget we don't — we
say what the thing cost when you buy it from the guy that sells it to
you and not what the financing charges are and the portion of the
deficit over ~
Q Just humor me, how much is the total payment,
principle and interest?
Q Can somebody else ask a question.
Q Yes, please.
DIRECTOR DARMAN: Maybe this would humor you. I have
already given you that. The total I gave you is for all of the
above, it is the way you would want it, not the small way. If we
wanted to give it the way people normally think about a house, the
number would be lower.
SECRETARY BRADY: We're going to — thank you all very
much. We've got Richard Breeden and Bob Glauber here who have got
fact sheets and all of the backups and we urge you to stay here and
work with them and get the subject cleared up.
5:15 P.M. EST
END

iiiiSd^lXiCcJiMiJisiiiiiiilJ ii U i

LHUU'IUli!

THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release February 6, 1989
NEWS CONFERENCE OF THE PRESIDENT
Room 450
Old Executive Office Building
4:10 P.M. EST
THE PRESIDENT: Well, for the more than half a century,
the U.S. has operated a deposit insurance program that provides
direct government protection to the savings of our citizens. This
program has enabled tens of millions of Americans to save with
confidence. In all the time since creation of the deposit insurance,
savers have not lost one dollar of insured deposits. And I am
determined that they never will.
Deposit insurance has always been intended to be
self-funded. And this means that the banks, the savings and loans
and credit unions that are insured pay a small amount of their assets
each year into a fund that's used to protect depositors. In every
case these funds are spent to protect the depositors, not the
institutions that fail.
For the last twenty years, conditions in our financial
markets have grown steadily more compiex, and a portion of the
savings and loan industry has encountered steadily growing problems.
These financial difficulties have led to a continuous erosion of the
strength of the Federal Savings and Loan Insurance Corporation —
FSLIC. Economic conditions have played a major role in this
situation. However, unconscionable risk-taking, fraud, and outright
criminality have also been factors.
Because of the accumulation of losses at hundreds of
these thrift institutions, additional resources must be devoted to
cleaning up this problem. We intend to restore our entire deposit
insurance system to complete health.
While the issues are complex, and the difficulties
manifold, we will make the hard choices, not run from them. We will
see that the guarantee to depositors is forever honored, and we will
see to it that the system is reformed 'comprehensively so that the
situation is not repeated again.
To do this, I am today announcing a comprehensive and
wide-ranging set of proposals. The Secretary of the Treasury,
Nicholas Brady, will describe these proposals to you in detail in a
few minutes. However, I think it's important to summarize some of
the major points..
The proposals include four major elements. First,
currently insolvent savings institutions will be placed under the
joint management of the FDIC and FSLIC pursuant to existing law.
This will enable us to control future risk-taking and to begin
reducing ongoing losses.
Second, the regulatory mechanism will be substantially
overhauled to enable it to more effectively limit risk-taking. The
FDIC would become the insurance agency for both banks and thrifts
under this system, although there's no commingling of funds. The
insurer, will. have, the authority; to. set minimum standards' for, capital.
and accounting. Uniform disclosure standards will also be
implemented. The chartering agency for thrifts would come under the
MORE
general oversight of the Secretary
of the Treasury.

Third, we will create a financing corporation to issue
$50 billion in bonds to financs the cost of resolving failed
institutions, which will supplement approximately $40 billion that
has already been spent.
All of the principal of these bonds, and a portion of the
interest *n them, will be paid from industry sources. However, the
balance would be paid from on-budget outlays of general revenues.
Hopefully, some of these revenues will be recovered in the future
through sale of assets and recovery of funds from the wrongdoers.
Fourth, we plan to increase the budget of the Justice
Department by approximately $50 million to enable it to create a
nationwide program to seek out and punish those that have committed
wrongdoing in the management of these failed institutions. These
funds will result in almost doubling the personnel devoted to the
apprehension and prosecution of individuals committing fraud in our
financial marksts.
As you can see, these proposals are based upon several
overriding principles.
First, I will not support any new fee on depositors.
Second, we should preserve the overall federal budget
structure, and not allow the misdeeds and the wrongdoings of savings
and loan executives and the inadequacy of their regulation to
significantly alter our overall budget priorities.
And third, I have concluded that this proposal, if
promptly enacted, will enable our system to prevent any repetition of
this situation.
And fourth, I have decided to attack this problem
head-on, with every available resource of our government because it
is a national problem. I have directed that the combined resources
of our federal agencies be brought together in a team effort to
resolve the problem.
And fifth, I believe that banks and thrifts should pay
the real cost of providing the deposit insurance protection. The
price the FDIC charges banks for their insurance has not been
increased since 1935. We propose to increase the bank insurance
premium by less than seven cents per $100 of insurance protection
that they receive. Every penny collected would be used to strengthen
the FDIC so that the taxpayers will not be called on to rescue it a
few years from now.
And I make you a solemn pledge that we will make every
effort to recover assets diverted from these institutions, and to
place behind bars those who have caused losses through criminal
behavior. Let those who would take advantage of the public trust and
put at risk the savings of. American families anticipate that we will
seek them out, pursue them and demand the most severe penalties.
In closing, I want to just say a word to the small savers
of America. Across this great land families and individuals work and
save, and we hope to encourage even greater rates of savings to
promote a brighter future for our children. Your government has
stood behind the safety-of.insured deposits before, it does today,
and it will do so at all times in the future. Every insured deposit
will be backed by the full faith and credit of the United States of
America, which means that it will be absolutely protected.
For the future, we will-seek to. achieve a safe*, sound.and.
profitable banking- system. However, integrity and prudence must
share an equal position with competition in our financial markets.
Clean markets are an absolute prerequisite to a free economy, and to
the public confidence that is the
most — that is its most important
MORE
ingredient.

- 3 -

I've determined to face this problem squarely, and to ask
for you support in putting it behind us. I have ordered that the
resources of the Executive Branch be brought to bear on cleaning up
this problem. I have personally met with the leadership of Congress
on this issue. My administration will work cooperatively with
Congress as the legislation that we will submit in a few days' time
is considered. I call on the Congress to join me in a determined
effort to resolve this threat to the American financial system
permanently, and to do so without the delay.
I welcome the leaders that are with me here on this
platform. I think their support says a lot about the efficacy of our
proposal. And now I propose to take just a few questions. On the
technical aspects, I will defer to these people, and then I'll be
glad to turn this over to Secretary Brady. I believe we start with
Helen and then Terry and then get going —
Q Mr. President, are you guaranteeing that the extra
costs — premiums, increases and so forth — will not be past on to
the depositors and taxpayers? And also, what is your responsibility
in this debacle — I mean, the Reagan-Bush zeal for deregulation of
business and banking?
THE PRESIDENT: On the first place, we're not
guaranteeing that. I would hope that wouldn't happen, but there is
no guarantee what the institutions will do.
Secondly, there is
enough to be said for everybody in this together trying to solve this
problem, so I can't equate any personal — not inclined to go into
any personal blame, simply to say that we've got to solve this
problem and we're on the path to doing that.
Q Mr. President, the House votes tomorrow on that
controversial pay raise plan, and the Senate has already voted
against it. Would you sign a bill that vetoes the pay raise, not
only for the members of Congress, but also for federal judges and
other high officials in the government?
THE PRESIDENT: I've said I support it.
Q Mr. President, there is a feeling that part of this
problem is attributable to deregulation of the financial industry.
In retrospect, do you think that deregulation might have gone too far
in the last ten years or so? And in the future, is your marching
order to your administration to be a little sore careful in
regulating this particular industry?
THE PRESIDENT: Jerry, I don't know the answer. I'd be
most interested to know what our experts here feel about whether —
how much of the problem could be attributed to deregulation. I just
don't know the answer to your question, so I can't reply.
Q Mr. President, you have•placed considerable stress.
in these early days of your presidency on ethics and propriety, yet
in recent days there has been controversy on Capitol Hill concerning
the propriety of some of Tower's alleged behavior, questions raised
over the weekend about the financial investments on the private funds
of the man in charge of ethics, your counsel, Boyden Gray, and other
questions involving members of the administration — or members-to-be
of the administration. And I wonder, sir, what has happened here?
Is it too harsh behavior on our part, too lax behavior on your part?
What?
THE PRESIDENT: I don't think anything has happened. I
learned, long ago in public life not to make judgments based on
allegations;• But. having said that, I want to have my administration'
aspire to the highest possible ethical standards. And we have
appointed a commission to go outMORE
there now and try to detail what
these standards should be. And we are in a new era on these matters.
Matters that might have been approved and looked at one way, may have

- 4 -

. a different perception today. And so what I want to do is finalize
our standards and then urge everybody in all branches of government
to aspire to those standards. But I do think, Brit, that it's fair
that we not reach judgment on Senate hearing, before the Senate
hearing, are concluded becauae it', very hard to filter cart fact from
fiction, spurious allegation, from fact. And I am not about to make
a judgment based on a sensationalized newspaper story. I "a simply
not going to do that. That wouldn't be fair and I'm not sure how
ethical it would be. So let's wait and see this — you're referring
to the Tower matter up there — that matter has been looked at by the
FBI, the committee now has that, they have the responsibility to make
determinations, and I'll be very interestsd to see what they say.
But I am not going to make — jump to conclusions based on stories
that may or may not have any validity at all.
Q Mr. President, even if, as your spokesmen says you
do, you continue to back Senator Tower for the position, there are
those you've heard who say that the best thing he could do for you is
to stsp aside because even if confirmed he then would become damaged
goods, weaker in administering a very, very tough job on your behalf.
How do you respond to that suggestion?
THE PRESIDENT: Well, I think people would not want a
person to step aside in a rumor, particularly if the rumor is
baseless. And the process — what the problem is — the process is
taking a little longer than I would like, and yet I think the Senate
has got to do what they're doing — looking at these allegations very
carefully. But you know, as I said here at this same podium a while
back, the American people are basically fair. And if these
allegations prove to be allegations, without fact behind them, I
think the people are going to say wait a minute, what went on here,
how come it was all this — we read this ons day and then kind of a
puff of saoks the next. And so, I don't think in your substantive
question though, that if it proves — if the Senate committee gives
its endorsement to the Senator, particularly after all of these
allegations, that there is any danger at all of damage to his
credibility or his ability to do the job.
Q Mr. President, there are new and substantive
allegations that Senator Tower lost control over the highly
classified security documents and computer disks that were used in
Geneva under his watch. If those allegations prove to be founded,
would you then withdraw his nomination?
THE PRESIDENT: I would not answer hypothetical questions
of that nature. You're telling me something that I haven't heard
before. And we did have access to FBI reports. So if this matter is
now before the Congress, let them investigate it. But I can't go
into a hypothesis. All I would be doing would be adding to I think
speculation that is not helpful at this juncture.
Q But, sir, will you pursue these allegations in the
Executive Branch? Are you going to track what the FBI is looking
into? Are you going to personally surveil these kinds of allegations
yourself?
THE PRESIDENT: Every rumor and every innuendo, no. But
if you're making — if there's some substantive allegation of this
nature, of course it would concern me.
Q Mr. President, back to S&Ls if we might, millions ol
— (laughter) — millions of Americans save alternatively. That is
they save in mutual funds, stocks, and that kind of thing. As I reac
it, you've now outlined a plan that places a lot of the S&L bailout
on the backs of. the general treasury. How fair is that?.
THE PRESIDENT: We've got a majorMORE
problem and something
has to be done. And this is the fairest system that the best minds
in this administration can come up with. And so I again would ask
you to ask the specifics of the treasury burden, to the Chairman of

5 -

the Federal Reserve, or the Secretary of the Treasury, ask how they
see that. But look, as I've said, there is no easy answer to this.
All I want to do is make a sound proposal, work to put it into
effect, and have that proposal such that the country won't have to
face this problem again.
Q Mr. President, you said you dropped the deposit fee
idea, but this plan you've given us has an increase in premiums that
may be paid by consumers, as well as a large amount of taxpayers
funds. Isn't that the same thing — consumers and taxpayers are
still going to have to pay the price for this?
THE PRESIDENT: Well, as I indicated earlier on, there is
no guarantee of passing this on to the consumer, nor is there a
guarantee it won't be passed on. But this arrangement has been there
since — for 50 years, and you might argue whether it's been passed
on or not. I just don't know, I haven't seen the flow through in the
industry. But nothing is without pain when you come to solve a
problem of this magnitude.
Q Mr. President, you've talked to several members of
Congress in various receptions and dinners and personal conversations
over the past couple of weeks, and in many of them you have discussed
this — your plan for this problem. What is your feeling of the
reception that it's going to get on Capitol Hill and of the selling
job that awaits you now to get it passed?
THE PRESIDENT: We may have a big selling job, but I've
been encouraged so far with the spirit epitomized by the members of
Congress, particularly at the joint leadership meeting the other day.
We didn't go into every detail of this. These plans were still being
formulated and I wanted to get their views. I was encouraged by what
Bill Seidman told me earlier on about how he — what he felt the
receptivity of the plan will be. But I don't think it's fair to the
Congress to say that they have signaled to me that they are going to
be enthusiastic on this plan, although I hope they are.
Q Mr. President —
THE PRESIDENT: I'm going to take about three more and
then turn this over to these gentlemen here who are prepared to go
into as much detail as you want.
Q Mr. President, these allegations that surround Tower
now, at least variations on the theme, surfaced early in the
transition — allegations of womanizing and taking money from defense
contractors — that sort of thing. Have you satisfied yourself that
he is still the nominee you want? Can you give us at this time a
full-hearted endorsement of Tower?
THE PRESIDENT: Yes, I can and I will right now because
some of the very same allegations that were floated that long ago
apparently have been looked at and examined by the best possible
examiners — and I'm talking about the FBI — and found to be
groundless. So therefore I'm not about to change my view. If
somebody comes up with facts, I hope I'm not narrow-minded enough
that I wouldn't take a look. But I am not going to deal in the kinds
of rumors that I've seen reported and then knocked down and then
reported and then knocked down.
Q Mr. President"1*-'
THE PRESIDENT: One ~ two to go.
Q There have been hints that Gorbachev may propose
steps.to diffuse.the situation in Central America. I wonder if .you'
see the possibility of superpower deals in Central America, and if
so, what — if you could suggest what would be acceptable for you?
THE PRESIDENT: I don't know about a deal, but I can see
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- 6 -

a possibility of cooperation in Central America because I would like
the Soviets to understand that we have very special interests in this
hemisphsre, particularly in Central America, and that our commitment
to democracy and to freedom and free elections and these principles
is unshakeable, and I don't think they really have substantive
interests in this part of the world — certainly none that rival
ours. So I would like to think they would understand that and there
are so many areas where we could desonstrats a new spirit of
cooperation, and this would clearly be one of them. So I'd like to
think that is the way that the matter would be approached by the
Soviets.
Yes, follow-up.
Q If I could follow up and ask you whether an
understanding on Central America — whether you'd be willing to
include abandonment of aid to the Contras as part of such an
understanding?
THE PRESIDENT: I wouldn't make a deal on that with the
Soviets, nor would that come up. I don't believe we'd ever have a —
I can't see a situation of that nature arising, knowing as I do
what will be negotiated and discussed with the — so I think that's
so hypothetical as to not even be a possibility of any kind.
Yes, Charles. And then I do have to run.
Q Mr. President, we still don't know what the
taxpayers' burden is in here. Out of this $40 billion, it says first
from S&L funds and the shortfall from Treasury funds. How big is it,
and have you, in going through your budget had to knock out some
things to pay for this?
THE PRESIDENT: We've had to knock out a lot of things on
the overall budget for a lot of different reasons. But I'd like to
leave this for Dick, for the questioning, to give the specific
amounts. It is shared, as I've indicated, and he can give you the
amounts that are involved.
Listen, thank you all very such, and now I'm going to
turn this over to Secretary Brady. And then in order I guess they'll
refer to each of these others.
Q Mr. President, one sore word for the small —
Q — seats back here, Mr. President?
THE PRESIDENT: What was that substantive question?
(Laughter.)
area.

In the back —

we didn't, see. you get back in this

THE PRESIDENT: We didn't get that far back, no, but if
there's been an egregious offense to those in the back benches, I
will take one parting question. And inasmuch as you raised it, fire
away.
Q Thank you very such, sir. Back on the ethics issue,
a couple of —
THE PRESIDENT: Mindful that the last questions always
does get you in great trouble ~ (laughter) — go ahead.
Q Your perspective nominees — one of your perspective
nominees and your counsel have just recently changed their minds on
matters that would have violated the ethics rules undsr the Reagan
administration. Did you have difficulty in getting the word out that
times would be tougher under your administration?
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7 -

THE PRESIDENT: No, I don't think so. For example, if
you're referring to the Boyden Gray matter, which I think you are,
that matter was reviewed every single year by the Office of
Government Ethics, and he was deemed in compliance every single year.
But now we've got a new ball game here. He's the General Counsel here
in the White House and I'm the President, and I've set out
rhetorically the highest possible standards and we're trying to back
that up by findings from this commission. And so I do think that
we've got to be very careful about perceptions of impropriety when it
comes to conflict of interest. Not rumors or innuendos of one sort
or another. I don't think you can — I should deal in those things.
But when it comes to perceived conflicts of intsrsst, I'd like our
people to bend over backwards.
And I think that's what has happened in both the question
of Lou Sullivan, whether he's entitled to — all he did was ask, am I
entitled to continue these arrangements with this small university.
And all Boyden did, in my view now, is to try to go a step beyond
what the government ethics office has said to avoid the perception of
impropriety. But — so I think it sight be different now. I have to
approach it differently as President. Not that you have lower
standards, but I just think that again this whole question of
perception we've got to look at it very, very carefully. But I want
to be fair. I do not want to have the loudest charge, no matter how
irresponsible, be that that sets the standards. We've got to achieve
more objective standards. And that's why I'm putting a lot of faith
in the — hope to put a lot of faith in the findings of Judge Wilkey
and former Attorney General Griffin Bell. And they will be looking
at all these matters in terms of rsality, and then, to some degree
I'm sure, in terms of perception. So what might be legal and might
be perfectly sound ethically sight have to be altered given this new
approach because of perception. It's a delicate one. I don't want
to have the standards set in such an irresponsible way that good
people just throw up their hands and say, look, who needs that kind
of grief, who needs it, why should I have to give up all my whatever
it is — a health plan from the XYZ company. And yet, on the other
hand, we're in a different time now. We're in a time when we've got
to try to set these standards as high as possible. So I think Dr.
Sullivan did the right thing in asking what was proper. I think
Boyden Gray did the correct thing every year in asking what was
proper and reviewing his own personal holdings in a family company
with the Ethics Office, but now taking another step because of
perception in this case.
So we've got to reach — we've got to work with these
individuals to find the proper answer and we've got to work with the
commission to try to codify these standards.
Q Sir, by following, you said during the campaign very
clearly that your staffers would not take outside income. I wonder
why they need a legal opinion to understand that?
THE PRESIDENT: They had. a legal opinion saying it. was
perfectly proper from this family company, and so now we're changing
that and saying, look, there is this different perception problem
here in this new era, so let's bend over as far backwards as we
possibly can to — you know, to recognize that.
Thank you all very much.
Q What about leveraged buy-outs, Mr. President?
4:35 P.M. EST
THE PRESIDENT: There's your LBOEND
man right there.
THE PRESS i. Thank you..

TREASURY NEWS
Dtpartment of the Treasury • Washington,
D.c. • Telephone 560-2041
CONTACT: Office of Financing
FOR IMMEDIATE RELEASE
February 7, 19 89

202/376-4350

RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $9,761 million
of $31,264 million of tenders received from the public for the
3-year notes, Series R-1992, auctioned today. The notes will be
issued February 15, 1989, and mature February 15, 1992.
The interest rate on the notes will be 9-1/8%. The range
of accepted competitive bids, and the corresponding prices at the
9-1/8% rate are as follows:
Yield Price
Low
9.17%*
99.884
High
9.19%
99.833
Average
9.18%
99.859
^Excepting 1 tender of $10,000.
Tenders at the high yield were allotted 26%.
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
61,855
$
27 ,434,830
53,895
114,265
85,980
81,170
1 ,733,045
108,310
63,070
189,170
51,650
1 ,277,770
9,410
$31 ,264,420

AcceDted
$
61,855
8,410,835
53,895
114,260
84,500
78,590
359,545
88,310
63,070
189,160
47,950
199,310
9,410
$9,760,690

The $9,761
million of accepted tenders includes $1,750
million of noncompetitive tenders and $8,011 million of
competitive tenders from the public.
In addition to the $9,761 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 $1,111 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.
NB-130

TREASURY NEWS

piportment of the Treasury • Washington, D.C. • Telephone 560FOR RELEASE AT 4:00 P.M. CONTACT: Office of Financing
202/376-4350
February 7, 1989
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued February 16, 1989.
This offering
will result in a paydown for the Treasury of about $ 250 million, as
the maturing bills are outstanding in the amount of $ 14,639 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Monday, February 13, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
November 17, 1988, and to mature May 18, 1989
(CUSIP No.
912794 RZ 9), currently outstanding in the amount of $7,800 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
February 16, 1989, and to mature August 17, 1989
(CUSIP No.
912794 SU 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 February 16, 1989.
In addition to the maturing
13-week and 26-week bills, there are $ 9,907 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 $1,488 million of the original 13-week and 26-week
Issues. Federal Reserve Banks currently hold $ 2,368 million as
agents for foreign and international monetary authorities, and $7,884
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders
NB-131 for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 5176-1
(for 13-week series) or Form PD 5176-2 (for 26-week series).

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
February 8, 1989

CONTACT:

Office of Financing
202/376-4350

RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $9,502 million of
$22,740 million of tenders received from the public for the
10-year notes, Series A-1999, auctioned today. The notes will be
issued February 15, 1989, and mature February 15, 1999.
The interest rate on the notes will be 8-7/8%. —' The range
of accepted competitive bids, and the corresponding prices at the
8-7/8% interest rate are as follows:
Yield
Price
8.90%
99.837
Low
8.92%
99.706
High
8.91%
99.771
Average
Tenders at the high yield were allotted 76%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Acceoted
$
20,633
$
20,633
Boston
20,196,324
8,775,444
New York
5,805
5,805
Philadelphia
Cleveland
11,277
11,277
14,056
13,910
Richmond
10,402
10,182
Atlanta
1,412,913
574,963
Chicago
St. Louis
28,460
12,425
8,216
8,216
Minneapolis
Kansas City
12,920
12,900
Dallas
10,484
6,474
1,006,362
47,962
San Francisco
1,841
1,841
Treasury
Totals
$22,739,693
$9,502,032
The $9,502 million of accepted tenders includes $522
million of noncompetitive tenders and $8,980 million of competitive tenders from the public.
In addition to the $9,502 million of tenders accepted in the
auction process, $200 million of tenders was also accepted at the
average price from 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.
NB-132

TREASURY NEWS
Department
of theUpon
Treasury
For Release
Delivery• Washington, D.c. • Telephone 566-2041
Expected at 10:00 a.m., E.S.T.
February 9, 1989

STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON LABOR
FOR THE
COMMITTEE ON LABOR AND HUMAN RESOURCES
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am here today at your request to present the Treasury
Department's views regarding an employer's ability to recover
assets from a terminated defined benefit plan. The Department
continues to believe that an employer who terminates a defined
benefit plan should be entitled to receive any assets remaining
in the trust related to the plan after the satisfaction of all
plan liabilities ("excess assets") as specified under law. The
ability of an employer to recover excess assets upon termination
of a plan should be preserved in order to ensure sound funding of
pension plans and, ultimately, to protect employees' retirement
security.
Background
A fundamental principle of the tax law applicable to
pension plans is that plan assets must be used for the exclusive
benefit of plan participants and their beneficiaries prior to the
satisfaction of all plan liabilities. The term "liabilities"
includes both the fixed and contingent liabilities that are
provided under a plan. Generally, fixed liabilities are the
vested benefits accrued under the plan benefit formula as of the
date of plan termination, taking into account current salary and
years of service. Contingent liabilities include those benefits
for which the vesting requirements have not been satisfied as of
the date of plan termination.
If a pension plan is terminated, plan assets must first be
applied to satisfy plan liabilities. Upon the satisfaction of
such liabilities, plan assets remaining in the trust related to
NB-133

-2the plan may be distributed to the employer. The ability of an
employer to recover excess assets has long been the law. During
its deliberations prior to the enactment of the Employee
Retirement Income Security Act of 1974 ("ERISA"), Congress
rejected proposals to prevent or limit an employer's ability to
recover excess assets. In fact, Title IV of ERISA specifically
provides that an employer may recover excess assets if all plan
liabilities have been satisfied and certain conditions are
satisfied.
Excess assets may arise upon termination of a defined
benefit plan because of changes in interest rates and investment
performance and because of the actuarial nature of plan funding.
In determining the amount of contributions that may be made to a
plan, an actuary makes certain assumptions regarding the rate of
return on plan investments, salary increases until participants'
projected retirements, the rate of employee turnover and
mortality and other factors, which may prove to be untrue.
Moreover, these assumptions are made on the basis of an ongoing
plan. Thus, the anticipated expense of benefits that the actuary
projects to be earned by participants is not incurred when a plan
is terminated. Furthermore, the funding methods that may be used
for budgeting the cost of projected benefits generally require
minimum contributions that exceed the accrued benefits under the
plan. For example, if a level funding method is adopted by an
employer, the employer makes contributions to the plan over the
working lives of its employees in such a manner that the employer
may avoid large increases in annual costs. An employer
contributing to a plan under a level funding method typically
contributes more in each of the plan's early years than the value
of the benefits earned in each such year. In sum, when a plan is
terminated, excess assets may exist because (i) the actual
experience of the plan may be different from the assumptions made
by the actuary, (ii) the accrued .benefits, both fixed and
contingent, are less than those projected to be earned upon
participants' retirements, and (iii) the funding method adopted
by the employer generally would have required prefunding of those
projected benefits.
Treasury regulations published prior to the enactment of
ERISA provide that an employer may reserve the right to receive
any excess assets if they are due to erroneous actuarial
computations. Excess assets are due to erroneous actuarial
computations if the liabilities under the plan upon its
termination are less than the projected plan liabilities
determined by a competent actuary using reasonable assumptions.
If any excess assets are the result of decreases in benefits
earned under plan or changes to vesting requirements for such
benefits, the assets are not considered attributable to erroneous
actuarial computations. Thus, excess assets due to such
amendments may not be distributed to an employer. The only other
constraint on reversions of excess assets is the requirement that
excess assets attributable to employee contributions be returned
to participants.

-3Recent Legislation
The concept of excess assets attributable to erroneous
actuarial computations as set forth in the regulations has not
been changed over the years. In fact, Congress has reaffirmed an
employer's right to recover excess assets upon plan termination
several times during its deliberations of recent tax bills.
Congress recognized this right in the Tax Reform Act of
1986 ("TRA '86") when it imposed a 10% nondeductible excise tax
upon reversions received by employers. See Senate Report No.
99-313. The Conference Committee Report to the Pension
Protection Act (Omnibus Budget Reconciliation Act of 1987 (OBRA
'87), Title IX, Part II) states that present law permits an
employer to recover excess assets if such excess is due to
actuarial error and to the extent such excess is not attributable
to employee contributions. The Senate Finance Committee Report
relating to the Pension Protection Act states that the terms of
the plan document determine whether an employer has the right to
recover excess plan assets or is required to share the excess
assets with plan participants. The Report concludes that present
law standards regarding reversions and the 10% excise tax on
reversions are the appropriate rules for addressing the issue of
employer access to excess plan assets. The Technical and
Miscellaneous Revenue Act of 1988 increased the excise tax from
10% to 15%.
The Pension Protection Act affected reversions in two
ways. First, the Act imposed an additional limit on deductible
contributions to a defined benefit plan. Under this limit, an
employer may not deduct contributions to the extent they result
in plan assets exceeding 150% of a plan's current liabilities.
Current liabilities are those fixed and contingent liabilities
that must be satisfied upon plan termination. Since this limit
on deductible contributions is based on liabilities earned to
date, an employer's ability to contribute on a deductible basis
to a plan based on benefits to be provided upon employees'
projected retirement may be curtailed significantly. Moreover,
because this limitation restricts an employer's ability to
prefund its future liabilities under a level funding method, the
amount of excess assets upon plan terminations occurring in the
future will be reduced.
Second, Congress amended Title IV of ERISA to provide that
any plan amendment providing for a reversion or increasing the
amount of the reversion is not effective for five years. If a
plan is terminated within the five year period following an
amendment to permit a reversion, the excess assets must be
distributed to participants and their beneficiaries. This
provision was intended to prevent an employer from amending its
plan prior to termination to obtain a reversion.

-4Treasury Department Position Regarding Reversions
The Treasury Department believes that current law
correctly permits an employer to recover excess assets upon plan
termination. If reversions were precluded and an employer
followed a prudent method of funding on a level basis for
projected benefits, the employer's actual cost could increase
significantly on plan termination beyond the effect of vesting
upon termination because the employer would be obligated to
provide employees with larger benefits than earned under the
plan. Such a result is inappropriate when the employer is
assuming the ultimate risk for funding the plan. Moreover, the
incentive of an employer to fund a plan adequately and to cause
its investment earnings to be maximized would be decreased by a
rule requiring that excess assets be used to fund extra benefits
for its employees.
In a letter to Senator Byrd dated June 29, 1988, former
Secretary of Treasury James A. Baker III and former Secretary of
Labor Ann McLaughlin urged Congress to delete a provision from
the Labor-HHS-Education Appropriations Bill requiring a
moratorium on asset reversions. Secretaries Baker and McLaughlin
stated that the moratorium was intended to force Congress to
reconsider legislation requiring employers who terminate
overfunded plans to pay greater benefits to participants than
were promised. The Secretaries pointed out that this proposal
was opposed by the Reagan Administration and rejected by Congress
during consideration of OBRA '87. The letter warned that such
legislation would deter sound pension funding, decrease
employees' retirement income security, discourage employers from
establishing and maintaining defined benefit plans and pose
serious risks to the Pension Benefit Guaranty Corporation's
financial security. The Treasury Department continues to adhere
to the policy position stated in the June 29, 1988 letter of
former Secretaries Baker and McLaughlin.
Current law strikes a delicate balance among the various
goals of pension policy, i.e., to protect employees' retirement
income security, to encourage the sound funding of plans and to
encourage employers to establish and maintain pension plans for
their employees. We believe it is premature to take additional
steps restricting an employer's ability to recover excess assets;
the effects of the recent tax law changes cannot yet be
determined. The 10% nondeductible excise tax on reversions was
enacted to recapture the tax benefit received by an employer
recovering plan assets that were not used to provide retirement
benefits to plan participants. This tax was increased to 15%
only a few months ago. The new limitations on deductible
contributions have only been effective for one year and, in fact,
not all employers have made contributions under the new
limitation. Finally, the limitation on plan amendments to
increase reversions was also recently enacted.

-5Sound public policy should encourage the optimal funding
of defined benefit plans. Any further restrictions on an
employer's ability to fund its plan or recover excess assets due
to the prior funding of its plan may jeopardize the sound funding
of defined benefit plans. Promoting the sound funding of plans
is the most desirable way to ensure employees' retirement income
security under a voluntary, private pension system.
This concludes my prepared remarks. I would be pleased to
respond to your questions.

TREASURY NEWS

.partment of the Treasury • Washington, D.C. • Telephone S66FOR IMMEDIATE RELEASE CONTACT: Office of Financing
February 9, 1989
202/376-4350
RESULTS OF AUCTION OF 30-YEAR BONDS
The Department of the Treasury has accepted $9,508 million of
$17,163 million of tenders received from the public for the 30-year
Bonds auctioned today. The bonds will be issued February 15, 1989,
and mature February 15, 2019.
The interest rate on the bonds will be 8-7/8%.i/ The range
of accepted competitive bids, and the corresponding prices at the
8-7/8% interest rate are as follows:
Yield
Price
Low 8.90% 99.740
High
Average

8.95%
8.91%

99.223
99.636

Tenders at the high yield were allotted 12%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
1,002
$
1,002
New York
15,229,896
9,011,656
Philadelphia
1,459
1,134
Cleveland
9 39
939
Richmond
12,194
12,164
Atlanta
4,745
4,725
Chicago
1,143,168
455,168
St. Louis
13,993
5,993
Minneapolis
3,577
3,327
Kansas City
2,830
2,810
Dallas
2,602
2,602
San Francisco
746,253
6,128
Treasury
246^
246
Totals
$17,162,904
$9,507,894
The $9,508 million of accepted tenders includes $307
million of noncompetitive tenders and $9,201 million of competitive tenders from the public.
In addition to the $9,508 million of tenders accepted in
the auction process, $100 million of tenders was also accepted
a
t the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
y The minimum par amount required for STRIPS is $1 600,00 0
Larger amounts must be in multiples of that amount.

NB-134

General Explanations
of the

President's Budget Proposals
Affecting Receipts

Department of the Treasury
February 1989

CONTENTS

General Explanations
Capital Gains Tax Rate Reduction for
Individuals

Permanent Research and Experimentation
Tax Credit

R&E Expense Allocation Rules

Energy Tax Incentives

Enterprise Zone Tax Incentives

Proposed Child Tax Credit and Refundable Child
and Dependent Care Tax Credit

Deduction for Special Needs Adoptions

Medicare Hospital Insurance (HI) for State and
Local Employees

Repeal of the Airport and Airway Trust Fund
Tax Trigger

Extension of the Communications (Telephone)
Excise Tax

Miscellaneous Proposals Affecting Receipts . . . .

Revenue Effects of Proposed Legislation

CAPITAL GAINS TAX RATE REDUCTION FOR INDIVIDUALS
Current Law
Under current law, capital gains of individuals are taxed at
the same rates as ordinary income. Thus, capital gains are
subject to a 15 percent, 28 percent, or 33 percent marginal rate,
although the overall rate on all income cannot exceed 28 percent.
Prior to the Tax Reform Act of 1986 (the "1986 Act"), the tax
code provided an exclusion for capital gains. The elimination of
the capital gains exclusion had the effect of increasing the rate
of tax on capital gains. While the 1986 Act eliminated the
capital gains exclusion, it did not eliminate the legal
distinction between capital gains and ordinary income. Thus, the
tax code retains most of the pre-1987 structure that implemented
the capital gains tax rate differential.
Gains or losses from the sale or exchange of capital assets
held for more than one year are treated as long-term capital
gains or losses. A taxpayer determines net capital gain by first
netting long-term capital gain against long-term capital loss and
short-term capital gain against short-term capital loss. The
excess of any net long-term capital gain over any net short-term
capital loss equals net capital gain. Individuals with an excess
net capital loss may generally take up to $3,000 of such loss as
a deduction against ordinary income. A net capital loss in
excess of the deduction limitations may be carried forward
indefinitely, retaining its character in the carryover year as
either a short-term or long-term loss. Special rules allow
individuals to treat losses with respect to a limited amount of
stock in certain small business corporations as ordinary losses
rather than as capital losses.
A capital asset is defined generally as property held by a
taxpayer other than (1) inventory, stock in trade, or property
held primarily for sale to customers in the ordinary course of
the taxpayer's trade or business; (2) depreciable or real
property used in the taxpayer's trade or business; (3) rights to
literary or artistic works held by the creator of such works, or
acquired from the creator in certain tax-free transactions;
(4) accounts and notes receivable; and (5) certain publications
of the government.
Special rules apply to gains and losses with respect to
"section 1231 property." Section 1231 property is defined as
(1) depreciable or real property held for more than 6 months and
used in a taxpayer's trade or business, but not includable in
inventory or held primarily for sale in the ordinary course of a
trade or business; (2) certain-1property subject to compulsory or
involuntary conversion; and (3) special 1231 property, including
certain interests in timber, coal, domestic iron ore, certain
livestock, and certain unharvested crops. Gains and losses from
all transactions involving section 1231 property are netted for

each taxable year. Only gains that are not subject to recapture
as ordinary income are included in the netting. If there is a
net gain from section 1231 property, all gains and losses from
section 1231 property are treated as long-term capital gains and
losses and are combined with the taxpayer's other capital gains
and losses. If there is a net loss from section 1231 property,
all transactions in section 1231 property produce ordinary income
and ordinary loss. However, net gain from section 1231 property
is converted into ordinary income to the extent net losses from
section 1231 property in the previous 5 years were treated as
ordinary losses.
Depreciation recapture rules recharacterize a portion of
gain realized upon the disposition of depreciable property as
ordinary income. These rules vary with respect to the type of
depreciable property. Under ACRS, for all personal and
nonresidential rental real property, all previously allowed
depreciation, not in excess of total realized gain, is recaptured
as ordinary income. However, if a taxpayer elects straight-line
depreciation over a longer recovery period, there is no
depreciation recapture upon disposition of the asset. With
respect to residential rental property, only the excess of ACRS
deductions over the straight-line method is recaptured as
ordinary income. Depreciation recapture also is imputed to a
partner who sells a partnership interest if recapture would have
been imposed upon disposition by the partnership of depreciable
property. There are also recapture rules applicable to
depletable property.
Capital gains and losses are generally taken into account
when "realized" upon sale, exchange, or other disposition of the
property. Certain dispositions of capital assets, such as
transfers by gift, are not generally realization events for tax
purposes. Thus, in general, in the case of gifts, the donor does
not realize gain or loss and the donor's basis in the property
carries over into the hands of the donee. In certain
circumstances, such as the gift of a bond with accrued market
discount or of property that is subject to indebtedness in excess
of the donor's basis, the donor may recognize ordinary income
upon making a gift. Gain or loss also is not realized on a
transfer at death.
The amount of a seller's gain or loss is equal to the
difference between the amount realized by the seller and the
seller's adjusted basis (i.e., the cost or other original basis
adjusted for items chargeable against or added to basis). Under
various nonrecognition provisions, however, realized gains and
losses in certain transactions are deferred for tax purposes.
Examples of such nonrecognition
-2-transactions include certain
like-kind exchanges of property, involuntary conversions followed
by an acquisition of replacement property, corporate
reorganizations, and the sale of a principal residence.
Generally,
treatment
defers
or from
loss the
forold
tax
purposes bynonrecognition
providing for a
substitution
of gain
basis

property to the new or for a carryover basis from the old holder
to the new holder.
Reasons for Change
Restoring a capital gains tax rate differential is essential
to promote savings, entrepreneurial activity, and risk-taking
investments in new products, processes, and industries that will
help keep America competitive and economically strong. At the
same time, investors should be encouraged to extend their
horizons and search for investments with long-term growth
potential. The future competitiveness of this country requires a
sustained flow of capital to innovative, technologically advanced
activities that may generate minimal short-term earnings but
promise strong future profitability. A preferential tax rate
limited to long-term commitments of capital will encourage
investment patterns that favor innovations and long-term growth
over short-term profitability.
A capital gains differential will also provide a rough
adjustment for taxing inflationary gains that do not represent
any increase in real income. In addition, the Administration
believes it is appropriate to provide further capital gains
benefit to low and moderate income individuals, who less
frequently make direct investments in capital assets and whose
capital gains tend to be disproportionately attributable to
inflation.
Long-range Investment'and Competitiveness. The Administration is committed to maintaining and enhancing American leadership in employment growth and entrepreneurial activity. A great
strength of the American economy has been the rate of new
business formation, product and process innovation, and
leadership in new and emerging technologies. This has led to
record new job creation this decade, a period for which most
other major industrial economies have suffered stagnant
employment.
By reducing the top individual income tax rate to its lowest
level in more than half a century and by introducing the lowest
marginal tax rates among the major industrial economies of the
world, the 1986 Act created strong incentives for individual
work, savings, and investment that will lead to long-term
economic growth. These low tax rates are now being emulated by
our major trading partners — including especially Canada, the
United Kingdom, Germany, and Japan — who wish to get back in
step with the United States. While low marginal tax rates were
an enormous step forward, the Tax Reform Act of 1986 also raised
the rate of tax on capital gains.
-3- In this area, our major
competitors now have the upper hand: none of them taxes
long-term capital gains in full. Restoring a tax differential
for capital gains will solidify the favorable tax position of the

United States relative to the major industrial nations of the
world.
Some of the soundest investments in America's future do not
have immediate payoffs. Thus, it is important to the future
competitive position of this country that investors look beyond
short-run profit to an investment's long-term potential.
Consequently, restoration of a capital gains tax rate
differential should be tailored to encourage sound, long-term
investments that require multi-year commitments of capital.
Moreover, a tax rate differential will promote personal savings
to finance long-term investment and will ameliorate the built-in
bias of the income tax against corporate equity financing.
Inflationary Gains. Although inflation has been kept low
under policies of the past eight years, even low rates of
inflation mean that individuals who sell capital assets at a
nominal profit are paying tax on a "fictional" element of profit
represented by inflation. High rates of inflation, such as those
that existed in the mid and late 1970s, exacerbate the problem.
An income tax should consider only "real" changes in the value of
capital assets — after adjusting for inflation — in order to
avoid unintended high effective rates of tax that actually lower
the real after-tax value of assets. Current law taxation of
nominal capital gains in full has the perverse result that real
gains are overstated (and taxed too highly) and real losses are
understated and, in some cases, actually converted for tax
purposes from losses to gains. A partial exclusion for long-term
capital gains provides a rough adjustment for the inflationary
element of capital gains without creating the complexities and
additional record-keeping that a precise inflation adjustment
would require.
Low and Moderate Income Taxpayers. Low and moderate income
individuals typically do not directly realize capital gains as
frequently as those with higher incomes. In 1985, the latest
year for which detailed tax return data are available, nearly 60
percent of all returns reported adjusted gross incomes" less than
$20,000, but, as shown on table 1, only 30 percent of the returns
with net long-term capital gains fell into this group, and their
gains were only 11.4 percent of the total dollar value of gains
realized that year. Economic studies of the behavioral reactions
of individuals to changes in the taxation of capital gains
suggest that lower income individuals are much less responsive
than higher income taxpayers to capital gains tax rate changes,
thus an extra measure of incentive is required to encourage lower
income individuals to make direct capital investment in America's
future. Further, analysis of capital gains realized by
-4-levels shows that lower income
individuals at different income
individuals are much more likely than higher income individuals
to have large fractions of their gains represented by inflation.
For these two reasons — targeted extra incentive and fairness —

it is appropriate to provide special capital gains tax relief for
lower income taxpayers.
Collectibles. Investment in so-called collectibles, which
include works of art, stamp and coin collections, antiques,
valuable rugs, and similar items does relatively little to
enhance the nation's economic growth or productivity.
For this reason collectibles do not warrant the preferential
treatment accorded other capital investments.
Treatment of Gain on Depreciable and Depletable Assets.
Gains and losses from sales or other dispositions of depreciable
and depletable property should be treated in the same manner as
other business income or loss and gains or losses from sales of
other business property (e.g., inventory). The asymmetrical
treatment of gains and losses from such depreciable or depletable
property provided by pre-1987 law, i.e., the availability of
capital gain treatment for gains and ordinary loss treatment for
losses, is without justification as a matter of tax policy.
Historically, the availability of capital gain treatment for
gains from sales of depreciable assets stems from the
implementation of excess profits taxes during World War II. Many
depreciable assets, including manufacturing plants and
transportation equipment, had appreciated substantially in value
when they became subject to condemnation or requisition for
military use. Congress determined that it was unfair to tax the
entire appreciation at the high rates applicable to wartime
profits. Accordingly, gains from wartime involuntary conversions
were taxed as capital gains. The provision was extended to
voluntary dispositions of assets because it was not practical to
distinguish condemnations and involuntary dispositions from sales
forced upon taxpayers by the implicit threat of condemnation or
wartime shortages and restrictions. These historical
circumstances offer no justification for returning to the
pre-1987 treatment of depletable or depreciable assets used in a
trade or business, given the absence of exceptional wartime gains
and the low, historically unprecedented (in the post-World War II
era) statutory tax rates.
The timing of sales of depreciable or depletable business
assets is more likely to be determined by the condition of the
particular asset or by routine business cycles of replacement
than would be true of capital assets held by investors. As a
consequence, taxation of gains on sales of depreciable or
depletable business assets at ordinary rates is less likely to
affect taxpayer decisions about sales and reinvestment.
Conversely, taxation of gains on sales of depreciable or
depletable assets at preferential rates would create an
-5-sources of business income.
undesirable bias toward certain
Depletion and depreciation deductions provide a current
benefit in the years in which they are claimed. The effect of
the recapture rules may be to offset this benefit, in whole or in

part, by preventing the conversion of ordinary income into
capital gain, which was a significant issue under pre-1987 law.
Such rules are complex, however, and one of the significant
policy advantages of current law is the greatly reduced
significance of recapture rules. Excluding gains on depletable
and depreciable business property from preferential treatment
would preserve the limited significance of current recapture
rules.
Finally, the availability of a capital gain preference prior
to 1987 for depreciable and depletable business property
contributed significantly to tax shelter activity- Although the
passive loss rules adopted in the 1986 Act have liaiited tax
shelter benefits, restoration of a capital gain preference for
depreciable and depletable business property would siake tax
shelter investments more attractive.
Treatment of Gain on Special Section 1231 Property. Under
pre-1987 law, gains on dispositions of certain interests in
timber, coal, iron ore, livestock and unharvested crops, were
eligible for favorable capital gain treatment without regard to
whether the property was held for sale in the ordinary course of
the taxpayer's business. This special treatment violated the
distinction, which is inherent in the definition of a capital
asset, between investment property and business property.
Business income, whether derived from the sale of property used
in a trade or business or from the sale of property to customers
in the ordinary course of business, should be taxed as ordinary
income. The preferential tax rate on capital gains should apply
only to investment assets.' Gains from dispositions of interests
in certain natural and agricultural resources should be taxed in
accordance with these generally applicable rules.
Description of Proposal
General Rule. An exclusion would be allowed to individuals
for 45 percent of the gain realized upon the disposition of
qualified capital assets. The maximum tax rate applicable to any
gains on qualified assets would be 15 percent. A qualified asset
would generally be defined as any asset that qualifies as a
capital asset under current law and satisfies the phased-in
holding periods. For example, assuming the holding period is
satisfied, an individual's residence would be a qualified asset
and gain on its disposition would be eligible for the lower
capital gains rate proposed by the budget (and continued rollover
of gain and the $125,000 one-time exclusion). Disposition of a
qualified asset by an RIC, REIT, partnership, or other
passthrough entity would continue to be treated as capital gain
under the budget proposal and would be eligible for the exclusion
in the hands of individual investors.
-6-

Holding Period and Effective Date. To be treated as
qualified assets eligible for the lower capital gains rate,
assets will need to satisfy the following holding periods: more
than 12 months for assets sold in 1989, 1990, 1991, and 1992;
more than 24 months for assets sold in 1993 and 1994; and more
than 36 months for assets sold in 1995 and thereafter.
The proposal would be effective generally for dispositions of
qualified assets after June 30, 1989. Dispositions of qualified
assets after that date would be fully protected by the exclusion
or maximum rate — that is, there would be no blended rate for
gains realized in 1989 after June 30. Conversely, gains realized
on or before June 30, 1989, would not be eligible for the
exclusion, maximum rate, or any of the other provisions of the
proposal and would be taxable under current law.
15 Percent Maximum Rate. A 15 percent maximum tax rate would
apply to capital gains on qualified assets. This maximum rate
would apply for purposes of both regular and minimum tax. Thus
while a taxpayer's ordinary income may be subject to a 33 percent
marginal rate (due to phase-out of the 15 percent rate or
personal exemptions), capital gains would not be subject to a
marginal rate exceeding 15 percent. In some cases, the
application of a 45 percent exclusion would result in an
effective tax rate lower than 15 percent; for example, if the
taxpayer's marginal rate is 15 percent, a 45 percent exclusion
would result in an effective tax rate of 8.25 percent.
100 Percent Exclusion for Certain Taxpayers. A taxpayer
would be eligible for a 100 percent exclusion on sales of
qualified assets if the taxpayer's adjusted gross income is less
than $20,000 and the taxpayer is not subject to the alternative
minimum tax. The $20,000 amount wouldbe calculated taking the 45
percent capital gains exclusion into account. Thus, if a
taxpayer's adjusted gross income is $22,000 (including the full
amount of gains realized on capital assets), and a 45 percent
exclusion on capital gains would reduce the taxpayer's taxable
income to less than $20,000, the taxpayer would be eligible for
the 100 percent exclusion.
The $20,000 figure applies to married taxpayers filing
jointly and heads of households. Single taxpayers and married
taxpayers filing separately would be eligible for the 100 percent
exclusion if their adjusted gross incomes are less than $10,000.
Taxpayers who are subject to the alternative minimum tax
would not be eligible for the 100 percent exclusion. In making
this determination, a taxpayer's tentative minimum tax would be
compared with his regular tax computed using a 45 percent
exclusion. If the tentative minimum tax exceeds the regular tax,
the taxpayer has liability under
-7- the alternative minimum tax and
would not be eligible for the 100 percent exclusion. The
ineligibility for the 100 percent rate would have no other effect
on the taxpayer. Consideration will given to the need for other

rules to restrict the 100 percent exclusion to true low-income
families.
Collectibles Not Treated as Qualified Assets. The budget
proposal would deny capital gain treatment for gains realized
upon the disposition of collectibles, as defined under the
individual retirement account (IRA) rules. These rules prohibit
investments by IRAs in collectibles, which are defined to include
works of art, rugs, antiques, metals, gems, stamps, alcoholic
beverages, and most coins. The Secretary of the Treasury is also
given authority to specify other tangible personal property to be
treated as collectibles. Proposed regulations define
collectibles to include musical instruments and historical
objects. Consideration would also be given to rules denying the
capital gains preference to sales of corporate stock to the
extent collectibles had been contributed to the corporation by
the selling shareholders.
Definition of Capital Asset and Treatment of Assets Used in a
Trade or Business. The budget proposal would not alter the
definition of a capital asset; however, gain from the sale,
exchange, or other disposition of depreciable or depletable
property used in a trade or business would not be treated as gain
eligible for the lower capital gains rates. For this purpose,
depreciable property refers to any property which is of a
character subject to an allowance under Code sections 167 or 168.
Thus, gains realized on the disposition of intangible property,
the cost of which may be recovered through amortization
deductions (see section 1.167(a)-3), such as sports player
contracts, would be treated as ordinary income if the intangible
property is used in the taxpayer's trade or business. The fact
that cost recovery of an intangible asset may be referred to as
"amortization" would not prevent its being treated as depreciable
property under this provision. Depletable property refers to any
property of a character that is subject to an allowance for
depletion, whether cost or percentage depletion.
Under current law, gains on dispositions of special section
1231 assets, which include certain interests in timber, coal,
iron ore, livestock, and unharvested crops, are eligible for
capital gain treatment regardless of whether the property is held
for investment or used in the ordinary course of the taxpayer's
trade or business. Under the budget proposal, gains from such
assets would not automatically be treated as capital gain
eligible for the lower rate. Instead, the character of gain upon
the sale, exchange, or other disposition of such assets would
depend on generally applicable principles.
Gains on nondepreciable property that is used in a trade or
-8- in the ordinary course of
business and is not held for sale
business would be eligible for the lower capital gains rates.
Losses on such property would also be treated as capital losses.
Thus, for example, gain or loss realized on the disposition of

land that is used in a trade or business and is not held for sale
to customers would be treated as capital gain or loss.
Effects of Proposal
The proposal would restore incentives for investment and risk
taking that may have been discouraged by elimination of a capital
gains tax differential in the Tax Reform Act of 1986. The
proposal would especially encourage long-run investments, which
would lead to new jobs, the creation of new technologies, and
economic growth. By more narrowly defining assets eligible for
preferential treatment and by lengthening the prior-law holding
period to 3 years, the proposal targets tax benefits to assets
which are most responsive to a change in tax rate.
Under the proposal most taxpayers would be eligible for the
45 percent or 100 percent exclusions; however, most gains would
be taxed at the alternate 15 percent rate. The following
examples illustrate how the proposal would effect typical
taxpayers. (Taxes have been computed using current law rates and
other provisions applicable to 1989.)
Example A. Taxpayer A is a single individual earning $16,000.
For some years he has been making modest investments in a
mutual fund that in 1990 reports his share of long-term
capital gain to be $750.
Under current law his tax on the $750 capital gain would be
15% of the full $750 gain, or $112.50.
Under the proposed general 45 percent exclusion his tax on
the gain would be 15 percent of $412.50 (after excluding
$337.50), or $61.88; however because Taxpayer A has adjusted
gross income that is less then $20,000, he is eligible for
the special 100 percent long-term capital gains exclusion,
resulting in a tax of zero, a 100 percent reduction from
current law tax.
Example B. Couple B both work and earn $90,000 between them.
They also have interest income of $3,200 and dividend income
of $1,800. They have two dependent children and have
itemized deductions of $7,000.
In 1995 they sell corporate stock, realizing an $1,800
capital gain on stock held 15 months and a $3,700 capital
gain on stock held 38 months.
Under current law both gains are subject to full taxation at
the 33 percent effective marginal tax rate. Tax on the
$1,800 gain would be $594, and tax on the $3,700 gain would
be $1,221, for a combined tax of $1,815. Under the proposal,
the gain from the 1995 sale of stock held 15 months will be
short-term capital gain taxable
at ordinary income rates, but
-9-

the gain from the sale of stock held 38 months is subject to
the 15 percent maximum alternate capital gains tax rate
(which for them is more beneficial than the 45 percent
exclusion). Their tax on the latter gain will be $555.00,
representing a reduction from current law of $666, or 55
percent.
Example C. Taxpayer C is a widow with dividend income of
$23,000 and $7,000 of taxable pension income. In 1993 she
sells corporate stock she had purchased over a number of
years. The most recent purchase had been made more than
2 years previously. Her realized capital, gains total
$18,000.
Under current law her tax on that gain would be $5,040
(28 percent of $18,000). Under the proposal, the 15 percent
rate cap will lower this capital gains tax to $2,700, a
reduction of $2,340, or 46 percent.
Revenue Estimate
The effect on Federal tax revenues of changes in capital
gains tax rates is controversial. Studies using different data,
different explanatory variables, and different statistical
methodologies have reached opposite conclusions on the effect of
capital gain rate reductions on Federal revenues.
The Treasury Department estimates that the revenue effect of
the President's proposal will be positive, during the budget
period, as well as in the long-run, after the phase-in of the
three-year holding period requirement. The methodology used for
these estimates is described below in more detail than usual
since the President's proposal is different from proposals
previously evaluated and generalizing from previous proposals can
be misleading.
The revenue estimate for the budget proposal is generally
consistent with the Treasury Department's estimate of the capital
gains tax changes included in the 1986 Act; however, the
proposal differs significantly from a simple reversal of the
general increase in capital gains tax rates in the 1986 Act: (1)
The proposal excludes gains on certain assets whose realizations
are less responsive to changes in capital gains tax rates; (2)
the proposal requires a longer holding period for gains to
benefit from the lower rates; and (3) the proposal has a
different time pattern between the announcement and effective
date.
Most importantly, in terms of its impact on revenues, the
proposal creates a much smaller differential between the tax rate
on capital gains and the tax rate on ordinary income than existed
prior to the 1986 Act.
As described below, the Treasury revenue estimates assume
-10significant behavioral effects as taxpayers adjust their capital

gain realizations, their financial portfolios and income sources,
and the timing of their realizations to the new tax rules. These
behavioral effects are the subject of continued empirical
research. Studies will differ on the magnitude of these
behavioral effects, in part due to the scarcity of data on timing
and on the ultimate conversion of ordinary income to capital gain
income, and in part due to the responsiveness of taxpayers'
capital gains realizations to influences other than tax rates.
The Office of Tax Analysis incorporates all effects believed to
be important and presents its best estimate of the expected
effects.
Table 2 shows the separate revenue effects of the various
elements of the capital gains proposal. In addition, it shows
the "static" and behavioral effects incorporated in the estimate.
Additional revenues resulting from positive macroeconomic effects
of the proposal are not included in the revenue estimate. It is
useful to describe the different effects incorporated in the
revenue estimate before considering the targeting and
growth-oriented features that distinguish the budget proposal.
The revenue estimate is broken into seven different elements.
Effect of Tax Rate Reduction on the Level of Current Law
Realizations. First, a tax loss results from reducing tax rates
on capital gains that would be realized at current law tax rates;
i.e., realizations that would have occurred regardless of a
reduction in tax rates. This is what the "static" revenue
estimate would be.
Effect of Increased Realizations. Second, lower tax rates
will increase taxes due to additional realizations that would not
otherwise occur in the current year. These "induced" gains are
accelerated from realizations in future years, are due to
portfolio shifting to capital gain assets from fully taxable
income sources, or are taxable realizations that would otherwise
have been tax-exempt because they would have been held until
death, donated to charities, or realized but not reported.
The estimate is based on a responsiveness by taxpayers which
results in additional revenue from induced gains more than
sufficient to offset the revenue loss from lower rates on current
gains. The responsiveness of capital gains realizations to
changes in tax rates is one of the most important revenue
estimating issues. The estimate of induced realizations is based
on a survey of academic and government studies that examine
taxpayers as a group over a number of years and other studies
that examine individual tax returns over several years. With
respect to the assumed degree of responsiveness of realizations
to changes in the tax rate, the estimate takes a conservative
position; there are studies that
-11-show both lower responses as
well as higher ones. The response is greater in the initial
years than in the long run due to the unlocking of gains accrued
before the effective date.

The responsiveness of capital gains realizations to a general
45 percent exclusion from current law would be lower than that
used to estimate the effect of the 1986 Act, where the top
effective tax rate on capital gains increased from 20 percent to
33 percent. Most empirical studies have found that
responsiveness decreases at lower marginal tax rates.
Effect of Deferring Gains Until After Effective Date.
Third~ the proposal will induce some taxpayers to defer
realizations in the first half of 1989 until after the effective
date of the proposal. With the announcement of the proposal in
February and the assumed enactment and effective date of July 1,
1989, some realizations that otherwise would occur between the
announcement date and the effective date will be delayed in order
to benefit from the lower tax rate. The estimate predicts that
revenue will be lost only over the fiscal year 1989-1990 period
due to realizations deferred until the effective date.
Effect of Conversion of Ordinary Income to Capital Gain
Income"! Fourth, the proposal will induce taxpayers to realize
additional capital gains currently and will encourage taxpayers
to earn income in the form of lower taxed capital gains. Since
the advent of preferential tax rates on capital gains in 1922,
taxpayers have found various ways to convert ordinary taxable
income into capital gains. Many of the most obvious conversion
techniques have been stopped, but a capital gains tax rate
differential will encourage taxpayers to shift to sources of
income with lower tax rates.
Methods of converting ordinary income to capital gain income
include shifting away from wages and salaries to deferred
compensation, such as incentive stock options; shifting out of
fully taxable assets, such as certificates of deposits, to assets
yielding capital gains; shifting away from current yield assets
to growth assets, including corporations reducing their dividend
payout ratios; and investing in tax shelter activities. It is
assumed that the conversion of ordinary income to capital gain
income will occur gradually, increasing over the first 5 years.
The capital gains estimate for the 1986 Act included a large
revenue gain from stopping the conversion of ordinary income to
capital gain income by elimination of the differential. In fact,
most of the revenue gain from reduced income shifting resulted
from the drop in the top ordinary income tax rate from 50 percent
to 28 percent. Before the 1986 Act, a 30 percentage point
differential existed between the top ordinary tax rate and the
top capital gains tax rate. Under the President's proposal, only
a 13 percentage point differential will separate the 15 percent
maximum rate on capital gains and the top 28 percent statutory
marginal tax rate on ordinary -12income and only an 18 percentage
point differential using the 33 percent effective marginal tax
rate that applies to certain higher income taxpayers.

Effect of Excluding Depreciable Assets and Collectibles. The
revenue estimate of the proposal is significantly affected by the
exclusion of depreciable assets and collectibles from the lower
rate. The 1985 Office of Tax Analysis study of capital gains
found the responsiveness of capital gain realizations from assets
other than corporate shares to be relatively low. That is, for
some classes of assets the additional tax from induced
realizations will not offset the tax loss from lower tax rates on
gains that would occur under current law on such assets. By
restricting the lower rates to more responsive assets, the
proposal raises an incremental amount of additional net revenue.
Effect of Phasing In the 3-Year Holding Period Requirement.
The 3-year holding period requirement is phased in gradually
beginning in 1993. Any holding period encourages taxpayers to
defer realizations until they are eligible for the lower rate.
During the transition to the 3-year holding period, a one-time
revenue loss will occur as realizations are deferred. After the
transition is completed, the 3-year holding period raises revenue
because it, like the depreciable asset exclusion, tends to limit
the lower rate to assets more responsive to changes in capital
gains tax rates. Assets sold after only 1 or 2 years for
consumption or other purposes, rather than deferred to 3 years,
would generally be less responsive to lower tax rates.
The phase-in of the 3-year holding period will encourage
many taxpayers to defer realizations that would otherwise occur
after 1 or 2 years until they become eligible for the lower tax
rates. In addition, the phase-in will provide an incentive
during the transition for some taxpayers to accelerate the
realization of some gains. For instance, taxpayers who might
realize gains held for 18 months in early 1993 might choose to
accelerate those gains into calendar year 1992 to be eligible for
the lower rate as 1-year assets. Thus, the phase-in will
increase realizations in 1992 and revenues in fiscal years 1992
and 1993.
Due to the two-step phase-in (the jump to 2 years in
1993 and to 3 years in 1995), the revenue pattern creates
temporary incremental revenue losses in fiscal years 1994 and
1996.
Effect of 100 Percent Exclusion for Low-Income Taxpayers.
The additional provision to exclude all qualified capital gain
realizations from tax for taxpayers with low incomes will lose
approximately $0.3 billion annually. In 1985, taxpayers with
adjusted gross incomes of less than $20,000 accounted for 11.4
percent of net long-term capital gain realizations. Some of
these taxpayers, however, were taxpayers with low adjusted gross
income due to large tax preferences. The potential cost of this
feature is reduced by limiting-13the zero tax rate to individuals
who are not subject to the alternative minimum tax rate. The
provision is considered after the initial 45 percent exclusion so
the revenue loss is due only to the rate reduction from 8.25
percent (55 percent times 15 percent) to zero, not the full
reduction from 15 percent to zero.

Total Effect of the Proposal. The President's proposal is
estimated to increase Federal revenues in fiscal years 1989
through 1993 due to the large induced realizations in the initial
years from the unlocking of previously accrued gains. During
fiscal years 1994 through 1996, a one-time revenue loss will
occur as the 3-year holding period requirement is phased in,
causing taxpayers to defer short-term realizations. After fiscal
year 1996, the proposal will increase Federal receipts between $1
and $2 billion annually.
These estimates do not include potential increases in the
rate of macroeconomic growth expected from a lower capital gains
tax rate. This conforms to the general budget practice of
including macroeconomic effects of revenue and spending proposals
in the underlying economic forecast and hence the budget revenue
and outlay totals but excluding such estimates from budget lines
showing revenue impacts of any particular proposal. In the case
of the proposed lower capital gains tax rate, the investment,
savings, and national income growth will be most significant over
the longer term. Although not yet estimated, it is likely that
positive revenues from macroeconomic improvements will be
significant in the long run.

Office of Tax Policy

-14-

Table 1

Distribution of Net Long Term Capital Gains
For Returns With Long Term Capital Gains in 1985
(In Percent)

Adjusted Gross Income Class

Less than
$10,000
$10,000 to
$19,999
$20,000 to
$29,999
$30,000 to
$49,999
$50,000 to
$99,999
$100,000 to $199,999
$200,000 or more
TOTAL
Department of the Treasury

Office of Tax Analysis
Source: 1985 IRS Statistics of Income

Distribution of
Returns With
Long Term Gains

14.6%
15.6
15.6
24.9
21.3

5.5
2.4
100.0%

Distribution of
Long Term Gains

Percentage of
Total Returns With
Long Term Gains

8.0%

4.4%

3.4
3.7
8.3

6.2
9.6

16.1
14.1
46.4
100.0%

13.7
31.2
61.1
80.7
9.9%
February 9, 1989

Table 2

Revenue Effects of The President's Capital Gains Proposal
Fiscal Years 1989-1999
Fiscal Years (Sbillions)
Longer Run'

Budget Period

Effects of Proposal

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Effect of Tax Rate Reduction on Existing Gains
Projected For Current Law Realizations

-1.6

-11.9

-17.6

-19.1

-20.2

-21.0

-21.5

-22.0

-22.5

-23.0

-23.5

Effect of Increased Realizations

2.4

17.1

21.8

21.5

22.3

22.9

23.4

23.9

24.5

Effect of Delaying Gains Until the Effective Date.

-0.2

-1.2

0.0

Effect of Conversion of Ordinary Income to Capital Gain Income

0.0

-0.1

-0.6

-1.3

-1.9

-2.5

-2.6

2.7

-2.8

Effect of Excluding Depreciable Assets and Collectibles

0.2

1.2

1.7

1.9

2.1

2.3

2.4

2.5

1.5

1.8

1.6^

Effect of Phased in Three Year Holding Period 0.0

0.0 0.0 0.4 1.0 -7.4 -2.3 -11.7 -0.1

Effect of 100% Exclusion for Certain Low Income Taxpayers -0.0

-0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3

TOTAL R E V E N U E EFFECT OF PROPOSAL

4.6

4.9

6.6

2,2

,*&6^

Department of the Treasury
Office of Tax Analysis
Notes:

-40

*11«3

0,2

February 9.1989

These estimates include changes in taxpayer behavior but do not include potential increases in the level of macroeconomic
Details may not add due to rounding.
Disaggregated effects are stacked in sequence.
* Longer run estimates assume 1994 growth extends past the budget forecast period.

growth.

PERMANENT RESEARCH AND EXPERIMENTATION TAX CREDIT
Current Law
Present law allows a 20 percent tax credit for a certain
portion of a taxpayer's "qualified research expenses." The
portion of qualified research expenses that is eligible for the
credit is the increase in the current year's qualified research
expenses over the base amount. The base amount is the taxpayer's
average annual amount of qualified research and experimentation
(R&E) expenditures over the prior three years (or if the taxpayer
has not been in existence for three years, the average of the
expenditures for its years in existence). This base, however, is
subject to the limitation that it can never be less than 50
percent of current qualified expenditures.
In general, qualified expenditures consist of (1) "in-house"
expenditures for wages and supplies used in research; (2) 65
percent of amounts paid by the taxpayer for contract research
conducted on the taxpayer's behalf; and (3) certain time-sharing
costs for computers used in research. Restrictions further limit
the credit to expenditures for research that is technological in
nature and that will be useful in developing a new or improved
business component. In addition, certain research is
specifically excluded from the credit, including research
performed outside the United States, research relating to style,
taste, cosmetic, or seasonal design factors, research conducted
after the beginning of commercial production, research in the
social sciences, arts, or humanities, and research funded by
persons other than the taxpayer.
The credit is available only for research expenditures paid
or incurred in carrying on a trade or business of the taxpayer.
With one exception, relating to certain research joint ventures,
the "trade or business test" for purposes of the credit is the
same as for purposes of the business deduction provisions of
section 162. As a result, new corporations and corporations
entering a new line of business cannot claim the credit for
qualified R&E expenses until the expenses relate to an ongoing
trade or business.
Present law also provides a separate 20 percent tax credit
("the University Basic Research Credit") for corporate funding of
basic research through grants to universities and other qualified
organizations performing basic research. The University Basic
Research Credit is measured by the increase in spending from
certain prior years. This basic research credit applies to the
excess of (1) 100 percent of corporate cash expenditures
(including grants or contributions) paid for university basic
research over (2) the sum of a fixed research floor plus an
amount reflecting any decrease in nonresearch giving to
-17-

universities by the corporation as compared to such giving during
a fixed base period (adjusted for inflation). A grant is tested
first to see if it constitutes a basic research payment; if not,
it may be tested as a qualified research expenditure under the
general R&E credit.
The R&E credit is aggregated with certain other business
credits and made subject to a limitation based on tax liability.
The sum of these credits may reduce the first $25,000 of regular
tax liability without limitation, but may offset only 75 percent
of any additional tax liability. Taxpayers may carry credits not
usable in the current year back three years and forward fifteen.
The amount of any deduction for research expenses is reduced
by 50 percent of the amount of the tax credit taken for that
year.
The research credit (including the University Basic Research
Credit) expires on December 31, 1989.
Reasons for Change
The tax credit for research is intended to create an
incentive for technological innovation. Although the benefit to
the country from such innovation is unquestioned, the market
rewards to those who take the risk of research and experimentation are not sufficient to support the level of research
activity that is socially desirable. The credit is intended to
reward those engaged in research and experimentation of unproven
technologies.
The credit cannot induce additional R&E expenditures unless
it is available at the time firms are planning R&E projects and
projecting costs. R&E activity, by its nature, is long-term, and
taxpayers should be able to plan their research activity knowing
whether the credit will be available. Thus, if the credit is to
have the intended incentive effect, the R&E credit should be made
permanent.
It is now widely acknowledged that the present incremental
credit with a base equal to a moving average of previous
expenditures amounts to an effective rate of credit which is much
lower than the 20 percent statutory rate. (A credit's effective
rate is the effective reduction in price for an additional
expenditure undertaken by a firm and is a measure of the credit's
incentive effect.) The credit's low effective rate is primarily
attributable to the moving base, since additional R&E in one year
increases the base and thereby decreases the credit in subsequent
years. Thus, R&E generating one dollar of credit in the first
-18-

year will cause a 33.3 cent reduction in credit in each of the
following three years, so that the credit's only benefit to a
firm is a deferral rather than a reduction in taxes.
In some situations the moving base can actually turn the
effective rate of credit negative, so that the credit encourages
a firm to reduce R&E expenditures. This occurs both when a firm
is growing slowly and current R&E expenditures are below the base
and when a firm is growing quickly and is subject to the 50
percent base limitation. For firms with R&E expenditures below
the base, negative effective rates of credit result because
increases in R&E expenditures yield no current credit but reduce
credits in future years. For firms subject to the base
limitation, negative effective rates of credit result because
each 50 cents of credit earned in the current year is followed by
33.3 cents less credit in each of the following three years.
Under the current credit structure, the availability of the
credit, the amount of credit, and the revenue loss from the
credit are positively related to the rate of inflation.
High rates of R&E growth in the early 1980s (due both to real
growth and to inflation) minimized the problem of the limited
availability of the current credit to firms performing R&E,
because inflation kept many slow-growing firms from falling below
the base. A slowdown in R&E growth in the late 1980s, however,
has made it increasingly apparent that an increase in the
availability of the credit would improve its effectiveness.
Under current law, a new firm or a firm entering a new line
of business may not earn credits until qualified expenses are
incurred "in carrying on" a trade or business. Since it may be
several years between initial research expenditures and the sale
of products resulting from such expenditures, the tax system puts
start-up firms at a competitive disadvantage vis-a-vis
established firms who are already "carrying on" a trade or
business.
Under present law, alternative sources of Federal government
support for research receive different tax treatment. A tax
credit is economically equivalent to a grant (but administered
through the tax system). However, a firm's research costs funded
through grants are not deductible while 50 percent of research
costs offset by credits are deductible. Grants and tax credits
should receive similar tax treatment.
Description of Proposal
The proposed R&E credit would retain the incremental feature
of the present credit and its 20 percent rate, but would make the
credit permanent and modify calculation of the base amount. The
-19new base would be a fixed historical base equal to the average of

the firm's qualified R&E expenditures for the years 1983 through
1987, and would be indexed annually by the average increase in
gross national product (GNP). Firms also would have the option
of a separate seven percent credit for expenditures which exceed
75 percent of the base amount. In addition, for the first year
the base would receive a one-time upward adjustment of two
percent. As with current law, all firms would be subject to a 50
percent base limitation.
Under the proposal, the "trade or business" test would be
made less stringent so that new firms and firms entering new
lines of business could claim the credit without regard to the
trade or business test if the taxpayer intended to use the
results of the research in the active conduct of a present or
future trade or business. The credit would not be available,
however, for research undertaken for investment rather than
business purposes. Thus, research intended solely to be licensed
to unrelated parties for use in their businesses would not be
eligible for the credit. In addition, the liberalized trade or
business rules would apply only to in-house research and not to
research contracted out to unrelated parties.
Finally, a taxpayer's section 174 research deductions would
be reduced by the total amount of credit taken.
The proposal would apply to expenditures for research and
experimentation on or after January 1, 1990.
Effects of Proposal
The proposed credit has the following advantages: (1) it
makes the credit permanent; (2) it increases the incentive of the
R&E credit; (3) it increases the percentage of R&E-performing
firms that are eligible for the credit; (4) it eliminates the
relationship between the availability of the credit and the rate
of inflation; (5) it extends to new firms R&E incentives which
had previously been available only to established firms; and (6)
it rationalizes the tax treatment of alternative funding sources
for research.
Stable tax laws that encourage research allow taxpayers to
undertake research with greater assurance of tax consequences. A
permanent R&E credit (including the University Basic Research
Credit) permits taxpayers to establish and expand research
facilities without the fear that tax rules will suddenly change.
The proposal would increase the credit's incentive effect by
replacing the current credit's moving-base with a fixed-base
structure. The critical feature of this "fixed" base is that a
firm's current spending will have no effect on future credits.
Thus, unlike the current credit, a dollar of credit earned in the
-20current year does not reduce credits
in the following year.

The proposal would also significantly increase the percentage
of R&E-performing firms eligible for the credit. This increase
is achieved through the design of the primary and alternative
bases, which results in a larger number of firms with R&E
expenditures above the base. Since the credit base is indexed to
GNP, the amount of the credit allowable to any firm and the cost
of the credit to the government no longer depends on the rate of
inflation. In this way, the credit is provided only for real
increases in R&E spending.
The proposal greatly expands the number of firms eligible for
the credit by allowing new firms and firms beginning a new line
of business to claim the credit for qualified R&E expenses that
relate to the active conduct of a present or future trade or
business. The proposal would allow expenditures of new firms and
firms entering new lines of business to claim the credit without
regard to the trade or business test if the taxpayer intends to
use the results of the research in the active conduct of a
present or future trade or business. Thus, a firm that intends
merely to lease or license the results of research would continue
to be ineligible for the credit.
Finally, the proposal disallows a deduction for R&E expenses
to the extent of R&E credits taken. Disallowing a deduction for
R&E expenses to the extent of R&E credits would provide similar
tax treatment for all sources of Federal support for R&E. For
example, assume Firm A conducts $100 in qualifying research and
receives $20 from the government as a 20 percent matching grant.
Under current law, Firm A is entitled to deduct only the $80 R&E
expenses it actually incurred. By contrast, Firm B conducts $100
of research and receives $20 of tax credit rather than a $20
grant. Under current law, Firm B is entitled to deduct $90 of
R&E expense ($100 expenditure minus 50 percent of the R&E credit)
Revenue
Estimate
even though
the $20 tax credit to Firm B is equivalent to $20
grant received by Firm A.
Under
the proposal, Firm B would be
Fiscal
Years
allowed to deduct
the same amount
as1993
firm A.
1990 $80, 1991
1992
($ billions)
-0.4 -0.7 -1.0 -1.2

Office of Tax Policy

-21-

R&E EXPENSE ALLOCATION RULES
Current Law
Research and experimentation (R&E) allocation rules generall
expired on May 1, 1988. Under those rules, U.S. firms were
allowed to deduct 64 percent of their expenses for R&E performed
in the United States from their U.S. income. (The technical
terminology is that 64 percent of the expenses were allocated to
U.S. source income.) The remaining 36 percent of expenses were
allocated between U.S. and foreign source income on the basis of
either gross sales or gross income. (The amount allocated
to foreign source income on the basis of gross income had to be
at least 30 percent of the amount allocated to foreign source
income on the basis of gross sales.)
Since expiration of the R&E allocation rules, R&E expenses
have been allocated between U.S. and foreign source income under
detailed 1977 Treasury regulations, which were designed to match
R&E expenses with the foreign and domestic source income
related to the expenses.
Reasons for Change
The current allocation regulations do not provide sufficient
incentives for U.S.-based research activity. In fact, a return
to the 1977 Treasury regulations might actually reduce R&E
expenditures in the United States from their current levels and
might shift some research from the United States to overseas. T
encourage U.S.-based R&E, more favorable allocation rules are
needed.
The Tax Reform Act of 1986 increased the significance of the
allocation rules for many taxpayers by expanding the number of
U.S. firms that have excess foreign tax credits and by increasin
the size of such excess credits. Firms derive greater tax
benefits by using these credits to offset their current U.S. tax
liability rather than carrying them forward or deducting them.
Firms can use more of their foreign tax credits to offset their
U.S. tax liability to the extent that R&E expenses are allocated
to U.S. source income rather than to foreign source income. The
proposal would allow more R&E expenses to be allocated to U.S.
source income.
The new rules should be made permanent because after more
than 10 years of instability, taxpayers need certainty.
Temporary rules for allocating R&E expenses were passed in 1981,
1984, 1985, 1986, and 1988. U.S. firms need permanent rules so
they can be certain of the long-term tax ramifications of their
R&E expenses. Stable tax laws would encourage growth in U.S.
research activity.
-23-

Description of Proposal
The proposal would permit 67 percent of R&E expenses to be
allocated to U.S. source income. The remaining 33 percent would
be allocated on the basis of either gross sales or gross income.
No limitation would be placed on the allocation to U.S. source
income under the gross income method.
The proposal would apply retroactively to the expiration of
the earlier rules, generally May 1, 1988.
Effects of Proposal
The proposal would result in greater tax savings than current
law for U.S. firms from their U.S.-based R&E expenses. Current
law allocates more R&E expenses to foreign source income and less
to U.S. source income than the proposal. The higher allocation
to foreign source income under current law reduces the amount of
foreign tax credits that firms can use to offset their U.S. tax
liability. Because many firms have excess foreign tax credits,
the existing allocation regulations can reduce firms' U.S.-based
R&E expenditures.
The difference in the effects of the current regulations and
the proposal is best illustrated by an example. Assume that
before deductions a firm has $1,075 in U.S. source income and
$1,075 in foreign source income. Assume also that the firm has
$100 in R&E expenses and $500 in foreign tax credits. Assume
under current law, $25 of expenses are allocated to U.S. source
income and $75 to foreign source income. Thus, for U.S. tax
purposes, the firm is considered to have $1,050 ($1,075 - $25) in
U.S. source income and $1,000 ($1,075 - $75) in foreign source
income. Assuming the firm pays tax at a 34-percent rate, the
firm would have a U.S. tax liability of $697 [($1,050 + $1,000)
* .34]. But the firm can offset $340 ($1,000 * .34) of its U.S.
tax liability by using its foreign tax credits. Thus, the firm
would have to pay U.S. tax of $357 ($697 - $340). The firm could
carryover the remaining $160 ($500 - $340) in foreign tax
credits.
Under the proposal, $75 of R&E expenses would be allocated to
U.S. source income and $25 to foreign source income. (The
example assumes that the amount of foreign tax paid is unaffected
by changes in U.S. allocation rules.) Thus, for U.S. tax
purposes, the firm would be considered to have $1,000 ($1,075 $75) in U.S. source income and $1,050 ($1,075 - $25) in foreign
source income. The firm would still have a U.S. tax liability of
$697 [($1,000 + $1,050) * .34]. But the firm would now be able
to offset $357 ($1,050 * .34) of
its U.S. tax liability by using
-24its foreign tax credits. Thus, the firm would only have to pay
U.S. tax of $340 ($697 - $357). The firm would carryover the
remaining $143 ($500 - $357) in foreign tax credits.

The net result is that the proposal would reduce the amount
of U.S. tax that the firm must pay by $17.
Revenue Estimate
Fiscal Years
1990

1991
1992
($ billions)

1993

-1.7* -0.7 -0.8 -0.9
*The FY 1990 revenue loss includes the retroactive application of
this proposal.

Office of Tax Policy

-25-

ENERGY TAX INCENTIVES

Current Law
Summary. Current law provides incentives for domestic oil
and gas exploration and production by allowing the expensing of
intangible drilling costs ("IDCs") and the use of percentage
depletion. These two incentives are subject to certain
limitations and their benefits are included as preferences in the
alternative minimum tax ("AMT"). Current law does not provide
any further tax incentives for either exploratory drilling or
tertiary enhanced recovery techniques.
Exploratory Drilling vs. Development Drilling. The search
for new oil and gas reserves typically begins with certain
preliminary tests (e.g., geological and geophysical tests)
designed to determine the likelihood of discovering commercial
quantities of hydrocarbons. If such tests suggest that oil and
gas may be present, further tests may be conducted. New oil and
gas reserves, however, are typically identified only by
exploratory drilling (i.e., drilling in a property not previously
drilled and not located next to another producing property).
About 55 percent of exploratory well drilling expenditures result
in dry holes. A dry hole results if commercially recoverable oil
and gas is not found. A taxpayer is allowed to expense all costs
of a dry hole upon abandonment of the dry hole. If exploratory
drilling is successful in locating oil and gas in commercial
quantities, additional drilling, termed development drilling, is
done to recover the maximum amount of oil and gas. Current law
does not provide any special incentive for exploratory drilling.
Tertiary Enhanced Recovery Techniques. Tertiary enhanced
recovery techniques increase available reserves by producing oil
and gas that cannot be recovered economically with conventional
pumping or water flooding. Tertiary enhanced recovery projects
use steam, C02, or chemical injectants. Current law does not
provide any special incentive for these projects.
Intangible Drilling Costs (IPCs). Current law generally
requires the capitalization of expenditures for permanent
improvements or betterments made to increase the value of any
property. An exception to the capitalization requirement permits
the expensing of IDCs paid in connection with the drilling of
oil, gas, and geothermal wells. IDCs include amounts paid for
labor, fuel, repairs, and site preparation. IDCs do not include
geological and geophysical costs ("G&G costs") and surface casing
costs (e.g., the cost of casings, valves, pipelines, and other
-27facilities required to control, transport, or store the oil and
gas). Costs that do not qualify as IDCs must be capitalized and
recovered through depreciation or depletion.

Percentage Depletion. Cost recovery with respect to oil and
gas properties is allowed by means of depletion deductions. The
depletion deduction may be calculated under the cost depletion
method or, with significant restrictions, under the generally
more favorable percentage depletion method. Under cost
depletion, the amount of the depletion deduction is equal to the
portion of the taxpayer's basis equal to the percentage of total
oil or gas reserves produced during the year. Cost depletion
deductions may not exceed the taxpayer's basis in the property.
Under percentage depletion, the amount of the depletion
deduction is equal to a statutory percentage of gross income from
the property (15 percent in the case of oil and gas production).
Percentage depletion deductions over the life of a property may
exceed the cost of the property. Independent producers and
royalty owners may use percentage depletion, but only with
respect to 1,000 barrels of production per day. Percentage
depletion with respect to oil and gas is not permitted for
retailers or refiners of oil or gas products. Percentage
depletion is also unavailable for oil and gas properties that
have been transferred after they have been "proven" (i.e., shown
to have oil or gas reserves). The percentage depletion deduction
may not exceed either 50 percent of the taxpayer's net income
from the property or 65 percent of the taxpayer's net taxable
income for the year.
Alternative Minimum Tax (AMT). An alternative minimum tax is
imposed on certain taxpayers. fHis tax is calculated with
respect to alternative minimum taxable income ("AMTI"), which is
calculated by making certain adjustments and adding tax
preference items to regular taxable income. Both IDCs and
percentage depletion deductions are preference items for both
corporate and non-corporate taxpayers, and thus are included in
AMTI.
The percentage depletion tax preference item is the amount by
which the depletion deduction claimed for regular tax purposes
exceeds the taxpayer's basis in the property at the end of the
taxable year (disregarding the depletion deduction for the year).
Treating such amounts as a preference item in computing AMTI may
reduce or eliminate the benefit of permitting percentage
depletion for certain taxpayers.
The IDC tax preference is the amount by which a taxpayer's
"excess IDCs" claimed with respect to successful wells exceed 65
percent of his net income from oil, gas, or geothermal
properties. The "excess IDCs" are the amount by which the IDC
deductions claimed for the year exceed the deductions that would
have been claimed had the IDCs -28been capitalized and either
amortized over 120 months or recovered through cost depletion.
Thus, for AMT purposes, the IDC deduction for incremental IDC
expenditures in excess of the net income limit is reduced to
zero.

Reasons for Change
The sharp reduction in world oil prices and the increasing
levels of oil imports may raise both energy security and national
security concerns. Our increased dependence on foreign oil may
leave the nation vulnerable to potential foreign supply
disruptions. The Administration supports an energy policy that
is designed to address these concerns by improving our long-term
energy security and strengthening the domestic oil industry.
An increase in domestic oil and gas reserves would improve
our energy security. The level of proven domestic reserves is
closely related to the level of domestic exploratory drilling.
The level of domestic exploratory drilling, however, has fallen
by 70 percent from recent levels, largely due to uncertainty
concerning low world oil prices. In addition, over the same time
period, development drilling has increased 20 percent, resulting
in a substantial decline in domestic oil and gas reserves.
Special tax incentives are appropriate to encourage higher levels
of exploratory drilling which may lead to increased domestic
reserves.
Current law limits the incentive effects of IDC expensing and
percentage depletion, particularly for independent producers,
which have historically drilled a majority of our exploratory
wells. Current rules for the use of percentage depletion by
independent producers limit the use to properties acquired by or
transferred to an independent producer before the property is
shown to have oil or gas reserves (the "transfer rule").
The transfer rule discourages the transfer of producing wells
that are uneconomic in the' hands of current owners to owners that
may be more efficient, more willing to bear current losses, or
better able to use the tax benefits of current depletion. Repeal
of the transfer rule would encourage the continued operation of
such properties by small producers with lower overhead. By
keeping marginal wells in production, U.S. oil production would
be maintained without additional drilling costs. Current law
also provides that percentage depletion may not exceed 50 percent
of the net income of a property calculated before depletion. At
current oil and gas prices, the 50 percent net income limitation
may significantly reduce the benefits of percentage depletion for
production from properties generating a small amount of net
income. Raising the net income limitation to 100 percent would
allow some oil producers to claim greater depletion deductions,
thus encouraging them to operate marginal properties. Moreover,
raising the limit might also encourage added investment in
exploratory drilling projects. In addition, the current
-29alternative minimum tax (AMT) severely
limits the incentive
effects of IDC expensing, particularly for independent producers.
The level of exploratory drilling and domestic reserves would
be increased by providing a program of temporary IDC credits,
less restrictive rules for the use of percentage depletion, and
AMT relief, all targeted to exploratory drilling in general and

to independent producers in particular. A temporary tax credit
for new tertiary enhanced recovery projects would encourage the
recovery of known energy deposits that are currently too costly
to produce.
Description of Proposal
Four incentives are proposed to encourage exploration for new
oil and gas fields and the reclamation of old fields. Two
proposals would provide temporary tax credits. The temporary tax
credits would be phased out if the average daily U.S. wellhead
price of oil is at or above $21 per barrel for a calendar year.
First, a temporary 10 percent tax credit would be allowed for
the first $10 million of expenditures (per year per company) on
exploratory intangible drilling costs and a 5 percent credit
would be allowed for the balance effective January 1, 1990.
Second, a temporary 10 percent tax credit, effective January 1,
1990, will be allowed for all capital expenditures on new
tertiary enhanced recovery projects (i.e., projects that
represent the initial application of tertiary enhanced recovery
to a property).
These tax credits could be applied against both the regular
tax and the alternative minimum tax. However, the credits, in
conjunction with all other credits and net operating loss
carryforwards, could not eliminate more than 80 percent of the
tentative minimum tax in any year. Unused credits could be
carried forward.
Third, the proposal would eliminate the "transfer rule,"
which discourages the transfer of proven properties to
independent producers and royalty owners, and would increase the
percentage depletion deduction limit for independent producers to
100 percent of the net income of each property. These changes
would increase the availability to independent producers of the
percentage depletion tax incentive. The proposed effective date
of each change would be January 1, 1990.
Fourth, the proposal would eliminate 80 percent of current
AMT preference items generated by exploratory IDCs incurred by
independent producers effective January 1, 1990. Thus,
independent producers would be allowed to deduct 80 percent
(rather than zero, as under current law) of exploratory excess
IDCs in excess of the net income limit for purposes of the AMT.
As under current law, the net income limit would be equal to 65
percent of oil and gas net income determined without regard to
excess IDC deductions.
-30-

Effects of Proposal
The proposed new incentive program for the oil and gas industry
would encourage exploration for new oil and gas fields and the
reclamation of old fields. The incentives would strengthen the
financial health of the smaller independent producers in
particular. The incentives would help the nation achieve greater
energy independence and greater national security.
Revenue Estimate
Fiscal Years

10 percent credit
for exploratory
drilling
10 percent credit
for tertiary enhanced recovery
Eliminate the
transfer rule and
increase the net
income allowance
to 100 percent for
percentage depletion
by independent
producers and royalty
owners
Eliminate 80 percent of exploratory
IDC tax preferences
from minimum tax for
independent producers

1990

1991
1992
($ billions)

1993

-0.2

-0.3

-0.4

-0.1

*-$50 million or less.

Office of Tax Policy

-31-

ENTERPRISE ZONE TAX INCENTIVES
Current Law
Existing Federal tax incentives generally are not targeted to
benefit specific geographic areas. Although the Federal tax law
contains incentives that may encourage economic development in
economically distressed areas, they are not limited to use with
respect to such areas.
Among the existing general tax incentives that aid
economically distressed areas is the targeted jobs tax credit.
This credit, which provides an incentive to employers to hire
economically disadvantaged workers, often is available to firms
locating in economically distressed areas. An investment credit
also is allowed for certain investment in low-income housing or
the rehabilitation of certain structures. Another type of tax
incentive permits the deferral of capital gains taxation upon
certain transfers of low-income housing and certain exchanges of
business or investment property for property of the same kind.
As a final example of a general tax incentive benefitting
economically distressed areas, state and local governments are
permitted to issue a limited number of tax-exempt private
activity bonds that provide low-cost financing for businesses to
begin or expand their ventures.
Reasons for Change
Despite sustained national prosperity and growth, certain
areas have not kept pace. To help these areas share in the
benefits of continued economic growth, this Administration
proposes enterprise zones to stimulate local government and
private sector revitalization of economically distressed areas.
Enterprise zones would encourage private industry investment
and job creation in economically distressed areas by removing
regulatory and other barriers inhibiting growth. They would also
promote growth through selected tax incentives to reduce the
risks and costs of expanding in severely depressed areas.
Enterprise zones would let business and innovation bloom in
places where there has been little hope and little opportunity.
A new era of public/private partnerships is needed to help
distressed cities and rural areas help themselves. The
enterprise zone initiative will help determine the effectiveness
of selected Federal tax incentives and reduced Federal
regulations in stimulating the private and local public
investment needed to revitalize economically deprived areas.
-33-

Description of Proposal
The proposed enterprise zone initiative would include
selected Federal employment and investment tax credits. These
tax credits will be offered in conjunction with Federal, state,
and local regulatory relief. Up to 70 zones will be selected
between 1990 and 1993.
There would be both capital-based and employment-based tax
credits, although the details of the tax credits have not been
specified. The extent of the tax subsidies will vary, with
larger subsidies in the early years that decline over time.
Total Federal revenue losses will gradually rise, however, as
more zones are designated.
The willingness of states and localities to "match" Federal
incentives will be considered in selecting the special enterprise
zones to receive these additional Federal incentives.
Revenue Estimate
Fiscal Years
1991
1992
( $ mi H i ons)
-150 -200 -300 -400
1990

1993

Office of Tax Policy

-34-

PROPOSED CHILD TAX CREDIT AND
REFUNDABLE CHILD AND DEPENDENT CARE TAX CREDIT
Current Law
The Internal Revenue Code provides assistance to low-income
working parents through both the earned income tax credit (EITC)
and the child and dependent care tax credit.
Earned Income Tax Credit. Low-income workers with minor
dependents may be eligible for a refundable income tax credit of
up to 14 percent of the first $6,500 in earned income. The
maximum amount of the EITC is $910. The credit is reduced by an
amount equal to 10 percent of the excess of adjusted gross income
(AGI) or earned income (whichever is greater) over $10,240. The
credit is not available to taxpayers with AGI over $19,340. Both
the maximum amount of earnings on which the credit may be taken
and the income level at which the phase-out region begins are
adjusted for inflation (1989 levels are shown).
Earned income eligible for the credit includes wages,
salaries, tips and other employee compensation, plus the amount
of the taxpayer's net earnings from self-employment. Eligible
individuals may receive the benefit of the credit in their
paychecks throughout the year by electing advance payments.
Child and Dependent Care Credit. Taxpayers may also be
eligible for a nonrefundable income tax credit if they incur
expenses for the care of a qualifying individual in order to
work. A qualifying individual is (1) a dependent who is under
the age of 13 for whom the taxpayer can claim a dependency
exemption; (2) the spouse of the taxpayer if the spouse is
physically or mentally incapable of caring for himself or
herself; or (3) a dependent of the taxpayer who is physically or
mentally incapacitated and for whom the taxpayer can claim a
dependency exemption or could claim as a dependent except that he
or she has more than $1,500 in income.
To claim the child and dependent care credit, taxpayers must
be married and filing a joint return or be a head of household.
Two-parent households, with only one earner, do not qualify for
the credit unless the non-working spouse is disabled or a
full-time student.
The amount of employment-related expenses that is eligible
for the credit is subject to both a dollar limit and an earned
income limit. Employment-related expenses are limited to $2,400
for one qualifying individual and $4,800 for two or more
qualifying individuals. Further, employment-related expenses
cannot exceed the earned income-35of the taxpayer, if single, or
for married couples, the earned income of the spouse with the
lower earnings.

Taxpayers with AGI of $10,000 or less are allowed a credit
equal to 30 percent of eligible employment-related expenses. For
taxpayers with AGI of $10,000 to $28,000, the credit is reduced
by one percentage point for each $2,000, or fraction thereof,
above $10,000. The credit is limited to 20 percent of
employment-related dependent care expenses for taxpayers with AGI
above $28,000.
Reasons for Change
Current law does not adequately provide for the child care
needs of low-income working families. Many low-income families
do not incur a federal income tax liability and as a consequence
are unable to claim the child and dependent care credit.
Further, many low-income families rely on relatives and neighbors
to provide care for their children, and thus these families can
not claim the child and dependent care credit. The EITC, while
refundable, does not adjust for differences among working
families in the costs of providing care according to the age of
the dependent child. Pre-school children generally require more
extensive care than older children who may be in a school setting
for much of of
the Proposal
day.
Description
Proposed Child Tax Credit. Low-income families, containing
at least one worker, would be entitled to take a new tax credit
of up to $1,000 for each dependent child under age four. For
each child under the age of four, families could receive a credit
equal to 14 percent of earned income, with a maximum credit equal
to $1,000 per child. Initially, the credit would be reduced by
an amount equal to 20 percent of the excess of AGI or earned
income (whichever is greater) over $8,000. As a consequence, the
credit would not be available to families with AGI or earned
income greater than $13,000. In subsequent years, both the
starting and end-points of the phase-out range would be increased
by $1,000 increments. In 1994, credit would phase-out between
$15,000 and $20,000.
The credit would be refundable and would be effective for
tax years beginning January 1, 1990. Families would have the
option of receiving the refund in advance through a payment added
to their paycheck.
Refundable Child and Dependent Care Credit. The existing
child and dependent care tax credit would be made refundable.
Families could not claim both the new child credit and the child
and dependent care credit with respect to the same child but
could choose the larger of the two*credits. The refundable child
and dependent care credit would-36be effective for tax years
beginning January 1, 1990.

Effects of the Proposal
The proposal would increase the resources available to
low-income families, better enabling them to choose the
child-care arrangements which best suit their needs and
correspond to their personal values. About 2.5 million working
families with children under the age of four will initially be
eligible for the new child tax credit. When the proposal is
fully implemented, eligibility will be expanded to approximately
1 million additional families. These families will also have the
option of claiming the refundable child and dependent care
credit, although they will not be able to claim both credits with
respect to the same child. In addition, low-income parents of
children between the ages of four and twelve would benefit from
the refundabilty
of example,
the childa and
dependent
credit two
if they
Consider, for
single
working care
mother'of
incur
child-care
expenses
in
order
to
work.
children, ages three and six years old. The mother ea rns $10,000
a year and has no other sources of taxable income. She pays a
neighbor $20 a week to care for her younger child. He r older
child is enrolled in a latchkey program during the sch ool year
and a neighborhood park program during the summer at a total cost
of $500 per year. In total, she spends $1,540 a year for child
care in order to work. Under current law, she is not entitled to
claim the child and dependent care credit. At a 30 pe rcent
credit rate on dependent care expenses, the credit wou Id be $462.
However, she has no tax liability as a consequence of the
standard
deduction
and personal
exemptions,
theref
ore cannot
Under
the proposal,
the mother
would be and
able
to claim
the
claim
the
credit.
proposed child tax credit. In 1990, she would be entitled to a
credit equal to $600. (A mother in similar circumstances in 1992
would be entitled to the full $1,000 credit.) In addition, the
mother would be able to claim the child and dependent care tax
credit of $150 based on the expenses associated with the day care
of her older child. In total, she would be entitled to a refund
of $750.
Revenue Estimate
Fiscal Years
1990
1993
1991
1992
($ billions)
Revenue loss
Outlays1
*

1.8

2.2

.1
2.4

$50 million or less.

Increased outlays attributable to refunds payable to eligible
individuals with no tax liability.
Office of Tax Policy
-37-

DEDUCTION FOR SPECIAL NEEDS ADOPTIONS

Current Law
Expenses associated with the adoption of children are not
deductible under current law. However, expenses associated with
the adoption of special needs children are reimbursable under the
Federal-State Adoption Assistance Program (Title IV-E of the
Social Security Act). Special needs children are those who by
virtue of special conditions such as age, physical or mental
handicap, or combination of circumstances, are difficult to place
for adoption. The Adoption Assistance Program includes several
components. One of these components requires states to reimburse
families for costs associated with the process of adopting
special needs children. The Federal government shares 50 percent
of these costs up to a maximum Federal share of $1,000 per child.
Reimbursable expenses include those associated directly with the
adoption process such as legal costs, social service review, and
transportation costs. Some children are also eligible for
continuing Federal-State assistance under Title IV-E of the
Social Security Act. This assistance includes Medicaid. Other
children may be eligible for continuing assistance under
State-only programs.
Reasons for Change
The Tax Reform Act of 1986 (the "1986 Act") repealed the
deduction for adoption expenses associated with special needs
children. Under prior law, a deduction of up to $1,500 of
expenses associated with the adoption of special needs children
was allowed. The 1986 Act provided for a new outlay program
under the existing Adoption Assistance Program to reimburse
expenses associated with the adoption process of these children.
The group of children covered under the outlay program is
somewhat broader than the group covered by the prior deduction.
The prior law deduction was available only for special needs
children assisted under Federal welfare programs. Aid to
Families with Dependent Children (AFDC), Title IV-E Foster Care,
or Supplemental Security Income (SSI). The current adoption
assistance outlay program provides assistance for adoption
expenses for these special needs children as well as special
needs children in private and State-only programs.
Repeal of the special needs adoption deduction may have
appeared to some as a lessening of the Federal concern for the
adoption of special needs children.
-39-

An important purpose of the Adoption Assistance Program is to
enable families in modest circumstances to adopt special needs
children. In a number of cases the children are in foster care
with the prospective adoptive parents. The prospective parents
would like to formally adopt the child but find that to do so
would impose a financial hardship on the entire family.
While the majority of eligible expenses are expected to be
reimbursed under the continuing expenditure program, the
Administration is concerned that in some cases the limits may be
set below actual cost in high cost areas or in special
circumstances. Moreover, inclusion in the tax code of a
deduction for special needs children may alert families who are
hoping to adopt a child to the many forms of assistance provided
to families adopting a child with special needs.
Description of Proposal
The proposal would permit the deduction from income of
expenses incurred associated with the adoption of special needs
children up to a maximum of $3,000 per child. Eligible expenses
would be limited to those directly associated with the adoption
process that are eligible for reimbursement under the Adoption
Assistance Program. These include court costs, legal expenses,
social service review, and transportation costs. Only expenses
for adopting children defined as eligible under the rules of the
Adoption Assistance Program would be allowed. Expenses which
were deducted and reimbursed would be included in income in the
year in which the reimbursement occurred.
Effects of Proposal
The proposal when combined with the current outlay program
would assure that reasonable expenses associated with the process
of adopting a special needs child do not cause financial hardship
for the adoptive parents. The proposed deduction would
supplement the current Federal outlay program. In addition, the
proposal highlights the Administration's concern that adoption of
these children be specially encouraged and may call to the
attention of families interested in adoption the various programs
which help families adopting children with special needs.
There is currently uncertainty regarding whether Federal and
State reimbursements are income to the adopting families. The
proposal would clarify the treatment of reimbursements by making
them includable in'income but also deductible, up to $3,000 of
eligible expenses per child. Additionally, qualified expenses up
to this limit would be deductible even though not reimbursed.
-40-

While the costs of adoption of a special needs child are only
a small part of the total costs associated with adoption of these
children> the Administration believes that it is important to
remove this small one-time cost barrier that might leave any of
these children without a permanent family.
Revenue Estimate
Fiscal Years
($ millions)
1990
1991
1992
-*
-3
-3
* less than $500,000

1993
-3

Office of Tax Policy

-41-

MEDICARE HOSPITAL INSURANCE (HI) FOR STATE AND LOCAL EMPLOYEES
Current Law
State and local government employees hired on or after
April 1, 1986, are covered by Medicare Hospital Insurance and
their wages are subject to the Medicare tax (1.45 percent on both
employers and employees). Employees hired prior to April 1,
1986, are not covered by Medicare Hospital Insurance nor are they
subject to the tax.
Reasons for Change
State and local government employees are the only major group
of employees not assured Medicare coverage. A quarter of state
and local government employees are not covered by voluntary
agreements nor by law. However, eighty-five percent of these
employees receive full Medicare benefits through their spouse or
because of prior work in covered employment. Over their working
lives, they contribute only half as much tax as is paid by
workers in the private sector. Extending coverage would assure
that the remaining 15 percent have access to Medicare and would
eliminate the inequity and the drain on the Medicare trust fund
caused by those who receive Medicare without fully contributing.
Description of Proposal
As of October 1, 1989, all state and local government
employees would be covered by Medicare Hospital Insurance.
Effects of Proposal
An additional 2 million state and local government employees
would be contributing to Medicare. Of these, roughly 300,000
employees would become newly eligible to receive Medicare
benefits subject to satisfying the minimum 40 quarters of covered
employment.
Revenue Estimate1
Fiscal Years
1990

1991

1992
1993
($ billions)

1994

1.8 1.9 1.9 1.9 1.9
Net of income tax offset.
Office of Tax Policy
-43-

REPEAL OF THE AIRPORT AND AIRWAY TRUST FUND TAX TRIGGER
Current Law
The Airport and Airway Safety and Capacity Expansion Act
of 1987 established a trigger that would reduce by 50 percent
several of the airport and airway trust fund taxes. The trigge
would take effect in calendar year 1990 if the 1988 and 1989
appropriations for the capital programs funded by these taxes
were less than 85 percent of authorizations. The trigger would
reduce by 50 percent the 8 percent air passenger tax, the 5 per
cent air freight tax, and the 14 cents per gallon noncommercial
aviation fuels tax. It would also substantially reduce the
aviation gasoline tax.
Reasons for Change
Given congressional action for 1988 and 1989, the trigger
would take effect and reduce by 50 percent these airport and
airway trust fund taxes. The receipts from these taxes are
required to modernize airport and airway facilities in the
United States in the early 1990s.
Description of Proposal
The proposal would repeal the tax
resulting in increased airport and
$1.2 billion in 1990 and increased
income and employment tax offsets)

reduction trigger,
airway trust fund receipts o
governmental receipts (net o
of $0.9 billion.

Effects of Proposal
Repealing the trigger is required for the accumulation of
funds for the modernization of airport and airway facilities
in the United States in the early 1990s.
Revenue Estimate1
Fiscal Years
1990

1991

1992

1993

(T~Blllions)
0.9 1.6 1.7 1.8
Net of income tax offsets. The estimates shown are relative t
current services receipts which assume continuation of trigger
rates through 1994.
Office of Tax Policy
-45-

EXTENSION OF THE COMMUNICATIONS (TELEPHONE) EXCISE TAX
Current Law
The Omnibus Budget Reconciliation Act of 1987 extended the
communications excise tax until the end of 1990. The tax is
imposed at a rate of three percent on local and toll (longdistance) telephone service and on teletypewriter exchange
service.
Reasons for Change
The communications excise tax was originally enacted in 1914
and has been imposed continuously since 1932, even though it has
been scheduled to expire continuously since 1959. Allowing the
tax to expire would reduce Federal tax receipts by approximately
$2.5 billion annually.
Description of Proposal
The proposal would permanently extend the three percent
Federal communications excise tax. The tax rate is substantially
less than the ten percent rate that was in effect between 1954
and 1972, and as low or lower than the rate in effect for any
year since 1932 (except for 1980-82). The base of the tax would
not be broadened.
Effects of Proposal
Extension of the communications excise tax would maintain
a revenue source that has been in existence continuously since
1932, and would avoid the disruption that would occur if the tax
were allowed to expire and then were reenacted.
Revenue Estimate1
Fiscal Years
1990

1991
1992
($ billions)

0 1.6 2.6 2.8
Net of income tax offset.
Office of Tax Policy

-47-

1993

MISCELLANEOUS PROPOSALS AFFECTING RECEIPTS
Current Law
Internal Revenue Service (IRS) Enforcement Initiative. IRS
currently allocates some of its funding for tax law enforcement.
Increase Nuclear Regulatory Commission (NRC) User Fees.
The proportion of the NRC's costs incurred in regulating nuclear
power plants will decline from 45 percent in 1989 to 33 percent
in 1990.

Initiate Federal Emergency Management Agency (FEMA) User
Fees" The costs that FEMA incurs as NRC's agent in regulating
the evacuation plans of nuclear power plants are financed through
general revenues.
Increase District of Columbia (D.C.) Employer Contributions
to the Civil Service Retirement System (CSRS). The D.C. government contributes 7 percent of wages and salaries to CSRS and D.C.
employees contribute an additional 7 percent.
Initiate Federal Marine Fishing Licenses and Fees. The costs
of Federal efforts to conserve and manage the Nation's marine
fishery resources are financed through general revenues.
Extend Reimbursable Status to Amtrak. The Technical and
Miscellaneous Revenue Act of 1988 exempts public commuter railroads from paying the full railroad unemployment tax rate in
1989 and 1990 and permits them to reimburse the unemployment
fund for the actual costs of their employees. The exemption
does not extend to Amtrak.
Eliminate Superfund Petroleum Tax Differentials. The
superfund petroleum tax is 8.2 cents per barrel for domestic
crude oil and 11.7 cents per barrel for imported products.
Other Proposals. Pay raise proposals; extending customs
processing fee; establish a fee for U.S. Travel and Tourism
Administration; user fee on taxpayer telephone information
services.
Reasons for Change
Internal Revenue Service (IRS) Enforcement Initiative. The
gap between taxes owed and taxes voluntarily paid contributes to
the Federal deficit and undermines the system of voluntary
compliance.

-49-

Increase NRC User Fees. Costs of regulating the nuclear
power industry should be fully borne by the users of the
services.
Initiate FEMA User Fees. Costs of regulating the evacuation
plans o£ the nuclear power industry should be borne by the users
of the services, as are the general regulatory costs.
Increase D.C. Employer Contributions to CSRS. Retirement
costs exceed the current combined contributions of the employer
and employee. The excess costs should be financed by the D.C.
government.
Initiate Federal Marine Fishing Licenses and Fees. The
costs of Federal conservation and management of marine fishery
resources should be paid by the commercial fishermen who directly
benefit from the services.
Extend Reimbursable Status to Amtrak. The reimbursement
arrangement ensures that commuter railroads use the public
subsidies they receive to hold down fares rather than paying
for the high unemployment costs of private freight railroads.
Amtrak is in much the same position as the commuter railroads.
Eliminate Superfund Petroleum Tax Differentials. The
current tax differential could subject the United States to
retaliation or possible compensatory damage payments under the
General Agreement on Tariffs and Trade (GATT).
Description of Proposal
IRS Enforcement Initiative. Increase IRS funding for tax
law enforcement.
Increase NRC User Fees. Increase fees to cover 100 percent
of NRC's regulatory costs, effective October 1, 1989.
Initiate FEMA User Fees. Recover 100 percent of regulatory
costs through user fees, effective October 1, 1989.
Increase D.C. Employer Contributions to CSRS. The D.C.
government will pay retirement cost-of-living adjustments (COLAs)
to its retirees and their survivors. The initial annual payment
would begin in 1991 because of a proposed budget COLA freeze for
government annuitants in 1990.
Initiate Federal Marine Fishing Licenses and Fees. Establish
a permit and an ad valorem fee on commercial sales, effective
January 1, 1990. Applicable only to fishermen who fish in the
fishery conservation zone (3 to 200 miles offshore) or who fish
for federally managed species.
-50-

Extend Reimbursable Status to Amtrak. Require Amtrak to
reimburse the unemployment fund for actual costs of their
employees rather than paying the full railroad industry
unemployment tax.
Eliminate Superfund Petroleum Tax Differentials. Equalize
the excise taxes through a slight increase in the tax rate on
domestic crude oil and a slight decrease in the rate on imported
petroleum products.
Other Proposals. Additional changes affecting receipts
include the Administration's pay raise proposals; extension
of the customs processing fee, which is scheduled to expire
September 30, 1990, at current rates; and the establishment
of a fee for the U.S. Travel and Tourism Administration (USTTA).
A user fee on taxpayer telephone information services is proposed for 1991; a design evaluation will be conducted in 1989
and 1990 that will include an actual demonstration of the
technologies and systems capabilities.
Effects of Proposal
IRS Enforcement Initiative. Ensure that taxpayers correctly
report their income for tax purposes and improve collection of
past due taxes.
Increase NRC User Fees. Users of NRC regulatory services
pay the full costs of regulation.
Initiate FEMA User Fees. Users of FEMA regulatory services
pay the full costs of regulation.
Increase D.C. Employer Contributions to CSRS. Requires the
D.C. government to bear more of the retirement costs of its
employees.
Initiate Federal Marine Fishing Licenses and Fees. Requires
users of Federal fishery research, conservation, and management
services to pay the costs of the services.
Extend Reimbursable Status to Amtrak. Helps to reduce the
Amtrak operating deficiency and prevents public funds intended
to subsidize public commuter railroad fares from unintentionally
cross-subsidizing high unemployment freight railroads.
Eliminate Superfund Petroleum Tax Differentials. Achieves a
system of excise taxes on petroleum that is consistent with GATT.

-51-

Revenue Estimates

1990

Fiscal Years
1991
1992
($ billions)

1993

IRS Enforcement Initiative 0.3 0.6 0.7 0.7
Increase NRC User Fees 0.3 0.3 0.3 0.3
Initiate FEMA User Fees * * * *
Increase D.C. Government
CSRS Contributions

0.0

0.1

Extend Reimbursable Status to
Amtrak

- *

Eliminate Superfund Petroleum
Differential

0.0

Initiate Federal Marine Fishing
Licenses and Fees

Other Proposals - 0.1 0.1 0.1 0.2

$50 million or less.

Office of Tax Policy

-52-

REVENUE EFFECTS OF PROPOSED LEGISLATION

REVENUE EFFECTS OF PROPOSED LEGISLATION
PROPOSAL

Fiscal Years ($ billions)
1993
1992
1991

1989

1990

0.7

4.8

4.9

3.5

2.2

Permanent Research and Experimentation Tax Credit

0.4

-0.7

-1.0

-1.2

R&E Expense Allocation Rules

1.7

-0.7

-0.8

-0.9

Energy Tax Incentives

0.3

-0.4

-0.5

Enterprise Zone Tax Incentives

0.2

-0.2

-0.3

-0.4

Capital Gains Tax Rate Reduction for Individuals

Proposed Child Tax Credit and Refundable Child and Dependent
Care Tax Credit 1/
VJ1
KJ-\

-0.1

Deduction for Special Needs Adoption
Medical Hospital Insurance (HI) for State and Local
Employees
,

—

1.8

1.9

Repeal of the Airport and Airway Trust Fund Tax Trigger.

—

0.9

1.6

1.7

1.8

Extension of the Communication (Telephone) Excise Tax

—

1.6

2.6

2.8

Miscellaneous Proposals Affecting Receipts

_»

0.6

1.2

1.0

0.7

5.6

9.0

8.3

6,7

TOTAL REVENUE EFFECTS OF PROPOSALS
Department of the Treasury
Office of Tax Analysis

February 9,1989

* = less than $50 million
1/ Refundable tax credits involving refunds which exceed tax liability are shown as increased outlays. Outlays will increase
by $0.2 billion in FY90, $1.8 billion in FY91, $2.2 billion in FY92, $2.4 billion in FY93, and $2.8 billion in FY94.

TREASURY NEWS .
Deportment of the Treasury • Washington, D.c. • Telephone 566-2041
C O N T A C T : O f f i c e of F i n a n c i n g
202/376-4350
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,205 million of 13-week bills and for $7,213 million
of 26-week bills, both to be issued on February 16, 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing May 18. 1989
Discount Investment
Price
Rate
Rate 1/

Low
8.47%
8.78%
High
8.49%
8.80%
Average
8.49%
8.80%
a/ Excepting 1 tender of $10,000.

97.859
97.854
97.854

26-week bills
maturing August 17, 1989
Discount Investment
Rate
Rate 1/
Price
. 52%a/
55%
.54%

9.03%
9.06%
9.05%

95.693
95.678
95.683

Tenders at the high discount rate for the 13-week bills were allotted 77%.
Tenders at the high discount rate for the 26-week bills were allotted 6%.

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
Received
Accepted

$23,891,965

; 44,660
5,875,905
22,735
57,015
52,915
49,230
394,020
36,425
12,180
63,005
35,845
101,565
467,900
$7,213,400

: $18,828,135
:
1 .290.225
:
$20,118,360
:
2,300,000

$2,349,570
1T290.225
$3,639,795
2,100,000

14,88514,885

: 1,473,605

1,473,605

$28,937,990 $7,204,890

: $23,891,965

$7,213,400

$ 53,440
53,570
24,792,980
27,850
61,165
65,380
62,730
1,457,505
74,295
12,730
64,980
49,850
1,721,935
493,020

TOTALS

5,879,005
27,850
61,150
65,380
62,300
286,955
39,295
12,730
64,980
39,850
118,935
493,020

$7,204,890
$28,937,990

Type
Competitive
$3,229,025
$24,762,125
Noncompetitive
1,^76,970
Subtotal, Public
Federal Reserve
Foreign Official
Institutions

& 44,660
20,224,145
22,735
57,060
52,915
49,230
1,113,420
44,305
12,180
63,005
40,845
1,699,565
467,900

Accepted

$26,339,095
2,584,010

1.576.970
$4,805,995
2,384,010

An additional $15,515 thousand of 13-week bills and an additional $787,895
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
y Equivalent coupon-issue yield.
NB-135

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
"February 14 , 1989

CONTACT-

LARRY BATDORF

HTQIT 566-2041

U.S.-PORTUGAL INCOME TAX TREATY
The Treasury Department today announced that negotiations of
a proposed income tax treaty between the United States and
Portugal are scheduled to take place in Washington during the
week of April 3-7, 1989.
There is not now an income tax treaty in effect between the
United States and Portugal. The negotiations will take as their
starting point the model draft texts published by the United
States and the Organization
for Economic Cooperation and
Development.
They will also take into account the U.S. Tax
Reform Act of 1986 and recent treaties concluded by each country.
The issues to be discussed include the taxation of income from
business, investment, and employment derived in one country by
residents of the other, provisions to ensure nondiscrimination
and the avoidance of double taxation, and provisions for
administrative cooperation between the tax authorities of the two
countries.
Interested persons are invited to send written comments
concerning
the
forthcoming
negotiations
to
Leonard
Terr,
International Tax Counsel, U.S. Treasury, Room 3064, Washington,
notice will appear in the Federal Register on February
D.C.This
20220.
14, 1989.

o 0 o

NB-136

TREASURY NEWS
CONTACT:
Deportment of the Treasury • Washington,
D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
February 14, 1989

Office of Financing
202/376-4350

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued February 23, 1989. This offering
will result in a paydown for the Treasury of about $ 325
million, as
the maturing bills are outstanding in the amount of $ 14,72 0 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Standard time, Tuesday, February 21, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
November 25, 198 8, and to mature May 25, 198 9
(CUSIP No.
912794 SA 3 ) , currently outstanding in the amount of $7,650 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
February 23, 1989, and to mature August 24, 198 9
(CUSIP No.
912794 SV 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 February 23, 1989.
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 $ 2,746 million as agents for foreign
and international monetary authorities, and $ 4,480 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series).
NB-137

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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
10/87
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.

TREASURY NEWS
Department of the Treasury e Washington,
D.c.
e Telephone
566-2041
CONTACT:
Office
of Financing
202/376-4350
FOR IMMEDIATE RELEASE
February 14, 1989
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,032 million of 52-week bills to be issued
February 16, 1989, and to mature February 15, 1990, were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Rate

Low

Investment Rate
(Equivalent iCoupon--Issue Yield)

8. 54% a/
8. 59%
8. 59%

9. 2 6%
High
9. 32%
Average 9. 32%
a/ Exceptin g 1 tender of $10,000.
Tenders at the high discount rate were allotted 78%.
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
$

52,695
23,899,200
42,255
69,270
78,100
54,930
1,265,420
53,265
31,090
92,935
49,580
1,783,800
264,790

Accepted
$

52,695
7,770,790
42,255
69,270
78,100
54,930
263,365
43,265
31,090
92,665
43,455
225,100
264,790

$27,737,330

$9,031,770

$23,040,670
1,436,660
$24,477,330

$4,335,110
1,436,660
$5,771,770

3,000,000

260,000

$27,737,330

$9,031,770

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Officiail
Institutions
TOTALS

NB-138

Price
91.365
91.315
91.315

February 14. 1989
The Financial Institutions Reform. Recovery.
and Enforcement Act of 1989
Consolidating the FSLIC with the FDIC; Separate Insurance
Pools.
A. The FSLIC would be consolidated with the FDIC for
insurance and case resolution purposes. The FDIC would
maintain the existing FDIC and the FSLIC funds as
separate insurance pools that could not be commingled.
B. As insurer of a new category of depository
institutions, the FDIC would be provided with new
supervisory and regulatory authority to deal with these
responsibilities:
1. Setting Insurance Premiums
The FDIC Board would have specific authority to
set insurance premiums as set forth in Section II
to put the funds on a sound financial basis for
the future.
2. Denial or Revocation of Insurance
The FDIC Board would be entitled to deny initial
insurance coverage or revoke insurance for any S&L
institution, state or federal.
3. Examination Authority
The FDIC Board would receive copies of all
examination reports prepared or filed with the
Federal Home Loan Bank System (FHLBS) as
restructured in Section III. The FDIC also would
have the right:
(a) to examine, after notification to the FHLBS,
institutions insured by it (whether state or
federally-chartered) that in the view of the
FDIC are troubled, as well as a reasonable
sample of non-troubled institutions; and
(b) to accompany the FHLBS on other examinations
of non-troubled insured institutions.
4. Enforcement Authority of the FDIC
(a) The FDIC Board would have authority, subject
to an expedited hearing-procedure, to

- 2 terminate insurance for both state and
federally chartered savings and loan
institutions engaging in significant unsafe
or unsound practices, operating in an unsafe
or unsound condition, or otherwise posing
undue risks to the insurance fund. Such
termination proceedings would be handled
under an expedited hearing procedure that
would permit revocation (e.g., within 90
days) of the filing of a notice of intent to
terminate. Following revocation of insurance
eligibility, new insured deposits could not
be accepted, but insurance already in effect
would remain in force to protect depositors
for a minimum of six months following the
date of insurance revocation. Existing long
term deposits would maintain insurance.
(b) The FDIC would have the authority to request
the FHLBS or any state supervisory authority
to take any other enforcement action
applicable to any insured thrift, or its
officers and directors. Where the FHLBS or
any state supervisory authority declines to
take such action or fails to correct the
problem within a reasonable time period, the
FDIC would be entitled to initiate such
action independently if the FDIC Board of
Directors, based upon an examination of any
such savings and loan, determines such action
to be necessary under statutory standards.
5. Applications for Insurance
(a) The FDIC Board would have authority to review
and to deny any application for a federal
savings and loan charter that would result in
eligibility for federal insurance. The
FHLBS would be required to furnish a copy of
the individual application to the FDIC for
its review. In reviewing any such
application for insurance, the FDIC would be
limited to consideration of the following
factors: 1) financial history and condition;
2) capital adequacy; 3) future earnings
prospects; 4) character and experience of
management; and 5) risk to the insurance
fund.
(b) The FHLBS would advise the FDIC of its
determination regarding such factors, and in

- 3 the normal course the FDIC would rely on such
determination. In any event where the FDIC
Board of Directors does not concur in any
such determination by the FHLBS, it would be
required to advise the FHLBS promptly that it
intends to decline to provide insurance
coverage.
(c) State-chartered thrifts must apply directly
to the FDIC for insurance. In reviewing any
such application, the FDIC shall establish
governing procedures and shall include the
criteria in the FDI Act, including the
factors listed I.B.5.a.
6. Issuing Regulations
(a) The FDIC would have authority to issue
regulations governing (i) all aspects of the
provision, rates, cancellation, and payment
of insurance for thrifts formerly insured by
FSLIC, (ii) thrifts' actions that pose a
serious threat to the insurance fund, and
(iii) internal operations of the RTC and the
functions and activities transferred to the
FDIC by the FSLIC.
(b) The power to issue regulations governing
thrifts1 actions that pose a serious threat
to the insurance fund would not preclude the
FHLBS from issuing regulations to promote
safety and soundness or to enforce compliance
with other laws, but would specifically
include the power to issue regulations (i)
setting minimum capital requirements below
which a thrift could be declared to be
operating per se in an unsafe and unsound
condition and, therefore, subject to
appointment of a receiver or conservator,
(ii) powers that a State-chartered thrift
would be prohibited from exercising while
enjoying insured status, and (iii) capital
levels below which the FDIC would impose
higher premium charges than those otherwise
specified under section II (c) hereunder.
D. The FDIC would be required to prohibit or restrict any
growth of assets by any savings and loan institution
that does not meet minimum capital standards
established by the FDIC for such institutions.

- 4 E.

Within 3 months after enactment, the FHLBS shall
establish capital standards for savings and loan
institutions that shall be not less stringent than
capital standards applicable to national banks.

2. The capital standards required pursuant to
paragraph E.(1) shall be phased-in according to a
schedule determined by the FHLBS. Such capital
standards shall be fully implemented not later
than June 1, 1991.
3. From the date of enactment to June 1, 1991, the
Chairman of the Federal Home Loan Bank System
shall restrict the growth of any formerly FSLICinsured savings and loan which does not meet
applicable capital standards.
F. All appropriate administrative functions of the FSLIC
and all insurance-related personnel would be
transferred to the FDIC.
G. The FDIC's financial operating plans (including
estimates of actual and future spending, with
consideration of financial commitments, guarantees and
other forms of contingent liabilities) must be reported
to the Secretary of the Treasury. Estimates of actual
and future non-cash obligations must be included in the
operating plan. Conditions would be placed on the
FDIC's ability to issue notes or similar debt
obligations in an aggregate amount outstanding at any
one time.
H. The FDIC Board would have the power to determine that
certain activities pose an undue risk to the insurance
fund and to require that a savings and loan institution
cease conducting such activities.
II. Organization of the FDIC.
A. The FDIC would have an integrated management structure,
with an agency staff reporting to the Chairman and the
Board of Directors. The FDIC Board of Directors would
be expanded to include five members. These would
include the Comptroller of the Currency, the Chairman
of the Federal Home Loan Bank System and three public
members, of which no more than two can be of the same
political party.

- 5 Notwithstanding the single agency, two separate
insurance pools would be maintained, with the current
reserves of the FDIC and FSLIC being transferred to the
respective FDIC and FSLIC pools. The two separate
pools could not be commingled.
The insurance premium base payable by any insured
institution would be as set forth below:
1.
1990
1991
1992
1993
1994 and later

1fDIC-Pool
12 BP
15
15
15
15

FSLIC-Pool
20.8 BP
23
23
23
18

The premium would be assessed against a base of
total domestic deposits and collateralized
borrowings (collateralized borrowing does not
include retail or wholesale repurchase
agreements). This change would be phased-in over
five years.
(a) The insurance premiums set forth in II.C.I
will remain in effect until each fund reaches
a "target reserve level" of 1.25 to insured
deposits.
(b) The new FDIC would have authority to raise
the premium for institutions in either pool
if: (i) a fund has aggregate reserves of
less than a specified minimum level of
deposits (e.g. 1.20) and collateralized
borrowings, in effect at any time (the
"target reserve level"); or (ii)
extraordinary circumstances exist that raise
a reasonable risk of serious future losses in
the opinion of the Board of Directors. Any
annual increase in premiums charged could not
exceed 50 percent, and in no event could the
maximum premium exceed 75 basis points.
To the degree that the funds of either insurance pool
exceeded the target reserve level plus specific
contingency reserves established by the Board, annual
net premium income of each such pool, after expenses
and expenditures, would be rebated to participants of
such pool in
accordance
with current
Accounting
for
all the federal
depositlaw.
insurance funds
would be on comparable terms. Over an 8 year

- 6 transition period, credit unions would be required to
expense the one-percent of deposits that federallychartered credit unions maintain with the NCUSIF. The
existing statutory 1/12 of one-percent premium would
remain unchanged. The NCUSIF would have comparable
authority set forth in II.C.2.b.
F. The FDIC would report annually to the President and the
Congress on its status and condition and would continue
to be subject to any applicable reporting requirements
of the Government Corporation Control Act.
III. Organization and Functions of the FHLBS.
A. Basic Structure and Authority
The FHLBB would be renamed the Federal Home Loan Bank
System ("FHLBS"). The Board of the FHLBB would be
dissolved and replaced by a single Chairman of the
Federal Home Loan Bank System. The FHLBS would remain
the chartering authority for all federal S&Ls and
primary federal supervisor for all federal and statechartered S&Ls and their holding companies. The
Chairman would be subjected to Senate confirmation,
would have a fixed 5 year term of office, and would not
be subject to removal except for cause or misconduct.
The Chairman of the FHLBB would be subject to the
general oversight of the Secretary of the Treasury to
the same degree as is currently true for the
Comptroller of the Currency who regulates national
banks.
(1) Qualifying S&Ls (as defined in the Competitive
Equality Banking Act) would retain their current
powers, existing tax treatment, and access to
FHLBank advances to finance housing.
(2) The Chairman of the Federal Home Loan Bank System
would be the regulator of the FHLBank System.
The FHLBS shall have the authority to limit or
prohibit growth by savings and loan institutions
that are taking excessive risks or are paying
excessive rates for deposits.
(3) Wherever current law mandates promotion of home
financing, such requirement would be amended to
make it consistent with standards of safety and
soundness for the institutions supervised.
(4) The FHLBS shall require all savings and loan
institutions to conform to accounting and

- 7 disclosure standards applicable to banks and shall
apply equivalent supervisory policies as are
applicable to banks.
(5) The FHLBS would have authority to issue
regulations (i) governing its own internal
operations, (ii) implementing federal statutes
providing for the chartering, safe and sound
operation, and appointment of receivers and
conservators of all federally-insured state and
federally chartered thrifts, (iii) implementing
federal laws providing for the regulation of
savings and loan holding companies, and (iv)
implementing the Federal Home Loan Bank Act, as it
is to be amended.
(6) The FHLBS would have full enforcement authority,
as currently provided to be combined FHLBB and
FSLIC, over state and federal thrifts, their
holding companies, affiliates, officers,
directors, employees, agents, and persons
participating in the conduct of their affairs.
FHLBank System Functions
The FHLBank System would remain in place to support
housing finance by providing liquidity (advances). The
aggregate amount of consolidated obligations would be
determined by the Chairman of the Federal Home Loan
Bank System.
FHLBank Boards of Directors
FHLBank directors would be modeled after the Federal
Reserve System.
(1) Instead of the current typical regional FHLBank
board of directors (14 members, 8 of whom are
selected by the S&L industry), the Federal Reserve
model would apply.
(2) The FHLBank board of directors would consist of 9
board members of 3 different types
classifications:
Class A: 3 members from the savings
industry;
Class B: 3 public members representing the
housing industry (chosen by Class A
and C directors); and

- 8 -

Class C:

3 public members chosen by the
Chairman of the FHLBS (cannot be
from the savings industry).

The Chairman of the FHLBS designates the
Chairman and Deputy Chairman from the Class C
public members (not a savings industry
representative).
D. Pricing of FHLBank Services
Explicit pricing of FHLBank services, comparable to
Federal Reserve pricing (Federal Reserve Act, Section
11A) would be required within six months after the date
of enactment.
E. Separate Supervisory Structure
The senior supervisory employee of the FHLBank would
report directly to the chief supervisory official of
the FHLBS and could be removed for cause by the
Chairman.
F. Transition Requirement for Non-Qualified Thrifts
Non-qualified S&Ls would be treated in all respects as
banks with an appropriate transition period. That is,
they could only engage in activities permissible for
banks, would be subject to bank capital standards,
would be subject to bank regulations, and company
owners would become bank holding companies. There
would be no diminution of insurance premiums or FDIC
enforcement or supervisory powers during the transition
period.
G. Affiliate and Insider Rules
S&Ls would be subject to Section 23A, Section 23B, and
Section 22H (insider lending) of the Federal Reserve
Act as if they were banks.
H. Examination Staff
Staff compensation of the FHLBS and the OCC shall be
competitive with compensation established by the other
federal bank regulators. The FHLBS and the OCC shall
have flexibility to establish compensation levels,

- 9 including granting of regional pay differentials,
hiring at any step within a given grade and using their
own competitive hiring registers. There would be no
exemption to the President's authority to control
personnel levels.
I. Freddie Mac
The Federal Home Loan Mortgage Corporation remains in
place. [Freddie Mac board to be determined.]
J. FHLBS adjudicatory and enforcement decisions pertaining
to specific institutions would not be subject to review
or alteration by the Treasury Department.
Additional Insurance Rules
A. When deposit insurance is granted automatically as a
result of actions by the Comptroller of the Currency
and the Federal Reserve (e.g., granting a national bank
charter or membership in the Federal Reserve System),
the FDIC must be notified and given an opportunity to
comment regarding risk to the insurance fund, prior to
such action.
B. Movement between funds would be permitted for FSLICinsured institutions 5 years after the date of
enactment upon payment of an appropriate exit fee as
determined by the Secretary of the Treasury. The FDIC
would have discretionary authority to establish an
appropriate entrance fee to preclude excessive dilution
of the fund.
C. All insured depository institutions owned by a holding
company will guarantee the insurer against loss in the
event of failure of any other insured institutions
owned by such holding company.
D. Logos, properly representing the facts, to be
determined.
Resolution of Currently Insolvent Thrifts through a new
Resolution Trust Corporation (RTC).
A. The Resolution Trust Corporation (RTC) would be
created and managed by the FDIC. The RTC would be
charged with assuming responsibility for managing the
orderly resolution of all insolvent thrift institutions
formerly insured by the FSLIC. In its resolution
activities, the RTC would be authorized to take
warrants, equity, or other participation in resolved

- 10 institutions. The RTC would manage the resolution of
all additional FSLIC-insured institutions that become
capital insolvent as defined by FDIC within three years
of enactment. RTC would assume management and
authority over all existing FSLIC cases, and all assets
owned by FSLIC, as of the date of enactment. FADA
would be wound down and eliminated over a 6 month
period.
B. Organization of the RTC
1. The RTC Oversight Board, comprised of the
Secretary of the Treasury (Chairman), the
Chairman of the Federal Reserve Board, and the
Comptroller General of the United States, would be
created to review the work and progress of the
RTC. The RTC would be authorized to employ such
staff as may be necessary.
2. The RTC Oversight Board would be authorized to
review, and with the vote of the Chairman and one
other board member would be authorized to
disapprove, any purchase and assumption agreement,
merger agreement or other transaction in which any
person or entity acquires a failed savings and
loan institution under management by RTC.
3. Funding would be provided directly to the RTC to
resolve currently insolvent institutions under the
review of the Oversight Board.
4. The RTC would contract with the new FDIC and
private sources to provide management of the
institutions (and their assets) conveyed to RTC or
RTC's portfolio. All institutions managed by the
RTC would be subject to legal restrictions on all
growth, lending activities and asset acquisition
(except as necessary to serve the existing
customer base with residential mortgage or
consumer loans), use of brokered deposits without
specific approval, and payment of deposit rates
beyond ceilings established by the RTC Oversight.
Board. Any institution taking insured deposits
would remain subject to the normal supervision by
the FHLBS and the FDIC.
5. The RTC would be authorized to analyze any FSLIC
resolutions completed since January 1, 1988, and
report its conclusions to the Secretary of the
Treasury. The RTC would actively review all means
by which it can reduce costs under existing FSLIC

- 11 agreements, including through the exercise of
rights to restructure such agreements, subject
only to monitoring by the Oversight Board.
6. The RTC would sunset five years after the date of
enactment. All remaining assets and liabilities
after the date of sunset, if any, would be
managed by the FDIC. Net proceeds, if any, would
go first to repay Treasury expenditures to REFCORP
and the RTC, and then into the FSLIC pool.
7. All RTC case resolutions shall be considered in
light of the statutory cost test in the FDI Act,
which would be amended to include immediate and
long term expenditures, contingent liabilities,
and tax revenues foregone.
C. Funding for Case Resolution
1. A new entity, the Resolution Funding Corporation
(REFCORP), would be created to finance the
additional funds necessary for case resolution.
2. This separate entity would be patterned after the
Financing Corporation created by Congress in the
Competitive Equality Banking Act.
VI. Enhanced Acguisition of Thrift Institutions
A. Barriers to entry of traditional financial services
companies and other sources of private capital would be
lifted.
(1) Sec. 4(c)(8) of the Bank Holding Company Act would
be amended to permit, effective 2 years after the
date of enactment, the acquisition not only of
failed or failing S&Ls by a bank holding company
as provided under present law and Federal Reserve
policy, but also healthy institutions as well, and
without tandem operations restrictions.
(2) The cross-marketing restrictions in the
Competitive Equality Banking Act would be
repealed.
(3) Savings and loan holding companies would be
authorized to acquire up to five percent of the
outstanding shares of an unaffiliated federally
insured thrift or savings and loan holding company

- 12 on the same conditions that bank holding companies
can acquire such interests. Current law prohibits
any such ownership other than a controlling
interest.
(4) Provisions in the National Housing Act concerning
management interlocks would be repealed, thereby
eliminating a redundancy created by the passage of
the Management Interlocks Act of 1978.
VII. Enhanced Enforcement Authorities and Penalties.
A. New enforcement authorities and significant penalties
would be added.
(1) The scope of the federal regulators' authority
over individuals would reach all insiders, as well
as all directors, officers, employees, agents, and
others participating in the conduct of the affairs
of the regulated financial institution.
(2) Temporary cease-and-desist orders would be
allowed without requiring a showing that the
activities in question threaten the institution or
depositors. Regulators would be permitted to
issue such orders against institutions whose books
and records are so incomplete or inaccurate that
the regulators cannot determine the institution's
financial condition.
(3) An individual suspended or removed from an
institution would be prohibited from participating
in any other insured financial institution or any
affiliate of an insured institutions, rather than
from only the institution involved.
(4) Enforcement authority would specifically reach
those who resign or otherwise leave an institution
before initiation of an enforcement action.
(5) Civil penalties would be raised for violations of
laws, regulations, cease and desist orders, and
reporting requirements. Civil money penalties
would also be assessed against individuals for
unsafe and unsound banking practices or breaches
of fiduciary duty. Proportionality based on loss
to the institution or gain to the individual would
apply to the application of such penalties.

- 13 (a)

Maximum civil penalties of $1,000,000, per
day, would be added in cases of reckless
disregard.

(b) Other violations would be subject to a
maximum civil penalty of $25,000 per day or
$250,000, whichever is greater.
Civil Penalties for Willful Violations
(1) Civil penalties, parallel to banking crime
provisions (fraud, embezzlement and
misapplication, bribery, false entries, false
statements) would be added for violations made
with reckless disregard.
(a) These civil penalties could be imposed by
the appropriate regulatory agency or by the
Attorney General following a criminal
investigation or proceeding.
(b) Civil penalties and criminal sanctions would
be cumulative.
Civil and Criminal Seizure and Forfeiture Authority
(1) Civil and criminal seizure and forfeiture
authority would apply in banking crime (fraud,
embezzlement, and misapplication, bribery, false
entries, false statements) cases and parallel
civil penalty cases. (At the point there was
probable cause for a violation, the Attorney
General could move forward to seize assets.)
(2) Following conviction of a bank crime, criminal
forfeiture would be required. Unlike victim
restitution, forfeiture would not be discretionary
with the court.
(3) The law would require forfeited property (both
civil and criminal) to be transferred to the
Treasury where an institution is insolvent and
otherwise, to the institution as restitution,
where appropriate. The agencies pursuing such
cases would be able to recover their expenses.
(a) The amount paid the institution would be set
off against any amount later, recovered as
compensatory damages in a private action

- 14 under State or Federal law or as restitution
in any subsequent action by the deposit
insurer.
(b) Forfeiture must be satisfied before a
criminal fine or civil penalty is paid.
(Criminal and civil fines are credited to the
general fund.)
(4) Both civil and criminal forfeiture would include
the tracing of funds to all property purchased
with the proceeds of the activity (substitute
assets) by the wrongdoer.
Informant's Rewards and Employee Protection
(1) Authority for regulatory agencies to pay
informant's rewards to any person who provides
original information leading to a recovery of a
criminal fine, civil penalty or forfeiture would
be added.
(2) Employees who provide information would be
protected (e.g.. if wrongfully discharged because
of actions, the person would be able to seek an
administrative remedy from the regulatory agency
or reinstatement with back pay or the right to
three years salary).
Other Criminal Enhancements
(1) Maximum terms for most bank crimes would be
increased to 20 years or more, with new sentencing
minimums.
(2) Financial institution misapplication and fraud
would be added as RICO predicates.
(3) The statute of limitations for financial
institution crimes would be extended to ten years.
More Resources for Enforcement
$50 million per year would be provided in budget
authority from the general fund of the Treasury to the
Justice Department to fund a new national Financial
Institution Strike Team.

- 15 VIII.Review of Broader Deposit Insurance and Banking Regulation
Issues.
A. Study: The Secretary of the Treasury, in consultation
with the federal financial regulators, shall review the
deposit insurance system, including an appropriate
structure for the offering of competitive products and
services consistent with safety and soundness
considerations. The Secretary shall make any
recommendations for change to Congress within 18 months
of enactment.
B. Topics will include (but not be limited to): the risk
and rate structure with deposit insurance; incentives
for market discipline; methods to reduce the scope of
deposit insurance coverage and resulting liability of
the insurance fund; the feasibility of market value
accounting, assessments on foreign deposits, and
limitations on brokered deposits and multiple insured
accounts; policies to be followed regarding the
recapitalization or closure of insured depositories
whose capital is depleted to, or near the point of,
insolvency; and the efficiency of housing subsidies
through FHLB System.
IX. Publicly Offered Securities of Banks and Thrifts
The registration requirements of the Securities Act of 1933
would be made applicable to publicly offered securities of
banks and thrifts (but not deposit instruments), and the
administration and enforcement of disclosure and other
requirements of the Securities Exchange Act of 1934 for bank
and thrift securities would be transferred from the bank
and thrift regulatory agencies to the SEC, as is currently
the case for securities of all other types of companies
(including bank and thrift holding companies). This
provision would be submitted as separate legislation.

February 14, 1989
S & L RESOLUTION FUNDING PLAN
o Provides $50 billion in new funds for resolving the
remaining insolvent thrifts. To date, FSLIC has resolved
approximately $40 billion in insolvent S&Ls and an
additional $50 billion should be more than adequate for
resolving the remaining institutions. Of the additional
funds, an estimated $10 billion would be spent in FY 89, $25
billion in FY 90 and $15 billion in FY 91.
o The plan provides funding both to resolve all insolvent S&Ls
and to establish viable, on-going insurance funds in the
future. S&L industry and Treasury funds are applied to
cleaning up the current S&L problem. Industry insurance
premiums are raised to put federal deposit insurance on a
sound financial basis for the future.
Resolution Trust Corporation (RTC) Financing
o S&L Resolution Financing. The $50 billion in bonds are to
be issued by a new entity, the Resolution Funding
Corporation (REFCORP) to finance the proposed Resolution
Trust Corporation (RTC) — the separate corporation charged
with the responsibility of resolving all currently insolvent
S&Ls and those which become insolvent during the 3 years
after enactment.
The Resolution Funding Corporation is an entity
patterned after the Financing Corporation created by
Congress in the Competitive Equality Banking Act of
1987.
REFCORP Bond Principal
o The $50 billion principal of REFCORP bonds will be paid with
S&L industry funds. Roughly $5-6 billion of S&L industry
funds (FHLBank retained earnings plus S&L assessment
premiums) would be used to buy long-term zero coupon
Treasury obligations, which, when they mature, would pay-off
(defease) the $50 billion principal. No taxpayer funds or
guarantees will be involved in the payment of REFCORP bond
principal.
REFCORP Bond Interest
0

Proceeds from new S&L liquidations, and additional FHLBank
retained earnings would be first used to pay the interest
on REFCORP bonds with Treasury funds making up the
shortfall. Treasury funds used to service REFCORP bond
interest would be scored for budget purposes in the year

- 2 -

expended. The proceeds, if any, from the sale of warrants
or other equity participations acquired in RTC case
resolutions will be used to repay Treasury for REFCORP
interest expenditures.
REFCORP Bond Financing Cost
o REFCORP bonds are similar to existing FICO bonds, but would
have a lower financing cost. The RTC financing mechanism
would be similar to FSLIC's Financing Corporation (FICO),
established in the Competitive Equality Banking Act of 1987.
However, because no Treasury funds or guarantees were
involved in FICO, the interest cost on FICO bonds was 3/4%
to 1% higher than direct Treasury financing. REFCORP bond
interest cost should be only marginally higher than direct
Treasury borrowing cost because Treasury funds would pay any
shortfall in interest not available from industry funds, and
the principal would be fully collateralized by Treasury
bonds purchased with S&L industry funds. S&L industry funds
used to pay interest effectively offset any incremental cost
REFCORP financing over direct Treasury financing.
o This separate funding mechanism segregates S&L resolution
financing, allowing a clear and tractable accounting of all
public and private funds employed in resolving the S&L
problem.
Servicing Past FSLIC Resolutions
o Treasury funds would also be reguired to service past FSLIC
resolutions. Any shortfall in FSLIC resources needed to pay
past FSLIC resolutions would be paid with Treasury funds.
Existing FSLIC resources would be applied to servicing the
$40 billion in past FSLIC resolutions. These resources
include S&L assessments premiums (net of funds used for
REFCORP principal defeasance and payments to a new S&L
insurance fund), proceeds from remaining FICO bond issuance
authority, proceeds from liquidation of past resolutions,
and other miscellaneous FSLIC income.
Recapitalization of Deposit Insurance Funds
0
Establishes a sound S&L insurance fund for the future. S&L
premium income would be used to build a new deposit
insurance fund to protect currently healthy thrifts that
choose to remain primarily mortgage lenders.

- 3 -

Shores up commercial bank insurance fund. A higher
commercial bank deposit insurance premium would increase the
level of the FDIC fund to bring it back in line with its
historical reserve-to-deposit ratio to protect depositors
and taxpayers. Deposit insurance premiums would be reduced
when the FDIC fund exceeds a reserve to deposit ratio of
1.25 percent. Commercial bank insurance premiums would be
available for use only to resolve FDIC member institutions.
No commercial bank insurance premiums would be used in any
S&L resolution or recapitalization of the S&L insurance
fund.
Budget Impact of Financing Plan
o Total budget outlays under this plan for 1990 and near term
out-years will not exceed those projected for FSLIC in the
Reagan 1990 budget.
o The outlays called for in the plan should not interfere with
the Administration's commitment to meet G-R-H targets.

TREASURY NEWS
Department off the Treasury • Washington, D.C. • Telephone 566-2041
For Immediate Release
February 15, 1989

Contact:

Larry Batdorf
566-2041

TREASURY ASSESSES PENALTY AGAINST
PONCE FEDERAL BANK, F.S.B., PONCE, PUERTO RICO
UNDER THE BANK SECRECY ACT
The Department of the Treasury on February 9, 1989, assessed a
civil penalty of $500,000 against Ponce Federal Bank, F.S.B.,
formerly known as the Ponce Federal Savings and Loan Association
of Puerto Rico, Ponce, Puerto Rico, based on in excess of 50
failures to file Currency Transaction Reports as required by the
Bank Secrecy Act. The civil penalty was announced by Assistant
Secretary for Enforcement Salvatore R. Martoche. This is the
largest civil penalty for violations of the Bank Secrecy Act
assessed against a savings institution.
These unreported transactions involved the purchase by customers
of the bank of bearer certificates of deposit with cash, the
failure of the bank to maintain a confidential list with the true
identities of the owners of the bearer certificates of deposit,
and the borrowing of cash by the bank from its own clients. The
Bank Secrecy Act regulations require that deposits, withdrawals,
and exchanges of currency in excess of $10,000 be reported by the
financial institution involved in the transaction.
On February 13, 1989, the bank entered pleas of guilty to five
related criminal violations of the Bank Secrecy Act. The
District Court for the District of Puerto Rico, in its discretion,
imposed a criminal fine of $500,000 on each count for a total
criminal fine of $2,500,000. Under the Bank Secrecy Act, criminal
and civil sanctions are cumulative.
This case was developed through an investigation conducted by
Special Agents of the Internal Revenue Service assigned to
Assistant Commissioner (International), Criminal Investigation
Division, working with the Operation Greenback task force of the
Justice Department in San Juan, Puerto Rico. In connection with
resolution of the criminal case, Treasury worked with the Justice
Department to resolve the question of the bank's corresponding
civil liability for the criminal violations.

NB-139

TREASURY NEWS
Department off the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
February 15, 1989

CONTACT:

Office of Financing
202/376-4350

TREASURY TO AUCTION 2-YEAR AND 5-YEAR 2-MONTH NOTES
TOTALING $17,000 MILLION
The Treasury will raise about $6,375 million of new cash
by issuing $9,250 million of 2-year notes and $7,750 million
of 5-year 2-month notes. This offering will also refund $10,626
million of 2-year notes maturing February 28, 1989. The $10,626
million of maturing 2-year notes are those held by the public,
including $971 million currently held by Federal Reserve Banks
as agents for foreign and international monetary authorities.
The $17,000 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
'-hat amount. Tenders for such accounts will be accepted at the
average price of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
for their own accounts hold $897 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 each of the new securities are given in the
attached highlights of the offerings and in the official offering
circulars.
oOo
Attachment

NB-140

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR 2-MONTH NOTES
February 15, 1989
Amount Offered to the Public

$9,250 million

Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation ... Series W-1991
(CUSIP No. 912827 XF 4)
Issue date
February 28, 1989
Maturity date
February 28, 1991
Interest rate
To be determined based on
the average of accepted bids
Investment yield
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
August 31 and February 28
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 Terms:
Payment by non-institutional
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
Kev Dates:
Receipt of tenders
Wednesday, February 22, 1989,
prior to 1:00 p.m., EST
Settlement (final payment
due from institutions):
a) funds immediately
to the Treasury
February 24,
28, 1989
1989
b) available
readily-collectible
check ... Tuesday,
Friday, February

$7,750 million
5-year 2-month notes
Series J-1994
(CUSIP No. 912827 XG 2)
March 3, 1989
May 15, 1994
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 (first
payment on November 15, 1989)
$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

Full payment to be
submitted with tender
Acceptable for TT&L Note
Option Depositaries
Acceptable
Thursday, February 23, 1989,
prior to 1:00 p.m., EST

Friday, March 3, 1989
Wednesday, March 1, 1989

TREASURY NEWS

uportment off the Treasury • Washington, D.c. • Telephone 566-2041
February 16, 1989
TREASURY DEPARTMENT DECISION
ON THE CLASSIFICATION OF SPORT UTILITY VEHICLES AND VANS

SUMMARY

The Treasury Department has made the following determinations
on the tariff classification of imported sport-utility
vehicles and vans:
Two-door sport-utility vehicles generally will now be
classified as "motor vehicles for the transport of
goods", which are dutiable at 25 percent.
Four-door sport-utility vehicles generally will now be
classified as "motor vehicles principally designed for
the transport of persons", dutiable at 2.5 percent.
Vans with side windows and rear seats to accommodate at
least two persons generally will continue to be
classified as motor vehicles designed for the transport
of persons, dutiable at 2.5 percent. This was basically
the manner in which they were classified in 1988 and
for many years prior to 1988.
These determinations result from the Treasury Department's
application of the relevant language of the Harmonized
Tariff Schedule of the United States (HTSUS), which went
into effect on January 1, 1989. Treasury's approach was to
make a technical and legal classification decision.
In 1988, approximately 239,000 imported sport-utility
vehicles and vans entered the United States. In 1988, under
the previous tariff schedule, approximately 4 4 percent of
the vehicles were classified at the 25 percent rate and
approximately 56 percent were classified at the 2.5 percent
rate. Were these same vehicles to be classified under the
principles announced today, approximately 62 percent would
be classified at the 25 percent rate, and approximately 38
percent would be classified at the 2.5 percent rate. These
percentages are based on a static analysis; actual
quantities of vehicles entered in 1989 at the higher rate
may be smaller.

MB -/V/

-2II.

BACKGROUND

The classification principles announced today result from an
intensive six-week review by Treasury Department officials.
That review, which was focused on the legal classification
issues, included meetings with representatives of the
importers, domestic manufacturers, and automobile dealers.
All of these representatives were invited to submit legal
arguments and technical information pertaining to the tariff
classification issues at stake. Treasury officials also
examined the vehicles in question at the port of Baltimore,
at an importer's facility near the port, in dealers'
showrooms, and during a technical session held in Detroit
with engineers and other staff of the domestic automakers.
The Harmonized Tariff Schedule of the United States
(HTSUS) became effective this year as a result of the
enactment of the Omnibus Trade and Competitiveness Act of
1988. Under this Act, the United States became a
contracting party to an international convention that brings
under a common system, or "harmonizes", the commodity
descriptions that govern classification of merchandise under
the various tariff schedules of the world's major trading
countries.
In 1988, under the previous U.S. tariff schedule, the U.S.
Customs Service had been reviewing its criteria for
classifying sport-utility vehicles and vans. However, after
the enactment of the law implementing the new tariff
schedule, the Customs Service discontinued that review and
began a study of the proper tariff classification of the
vehicles in question under the new tariff system.
On January 4, 1989, the Customs Service issued a ruling
letter (the "Suzuki ruling") classifying the Suzuki Samurai,
the Suzuki Sidekick and the GEO Tracker as motor vehicles
for the transport of goods dutiable at 25 percent. Upon
issuing the ruling, Customs announced that all other
imported sport-utility vehicles and most small vans would
also be classified under this provision and therefore be
subject to the 25 percent rate.
The Treasury Department began its legal review immediately
after the Customs announcement. Treasury officials arranged
the meetings described above in response to expressed
concerns that the Suzuki ruling was not legally and
technically correct and that there had not been sufficient
opportunity for input by the affected parties.

-3III#

THE TREASURY DEPARTMENT'S REVIEW OF THE CUSTOMS SERVICE
DECISION

The Treasury Department has concluded its review of the
Suzuki ruling and also has reached conclusions on the proper
tariff classification of the other imported vehicles at
issue. The vehicles in question are as follows:
Sport-utility vehicles:
Dodge Raider
GEO Tracker
Isuzu Trooper and Trooper II
Mitsubishi Montero
Nissan Pathfinder
Range Rover
Suzuki Samurai
Suzuki Sidekick
Toyota 4Runner
Toyota Land Cruiser
Vans:
Mazda MPV
Mitsubishi Wagon and Van
Nissan Van
Toyota Van
Volkswagon Vanagon
Other:
Nissan Stanza Wagon
Plymouth/Dodge Colt Vista Wagon
The tariff provisions at issue are as follows:
Heading 8703: Applicable Duty Rate
"Motor cars and other motor vehicles
principally designed for the transport
of persons (other than those of
heading 8702) , including station
wagons and racing cars"
2.5 percent ad valorem
Heading 8704:
"Motor vehicles for the transport
of goods"
25 percent ad valorem

-4The Treasury Department has concluded that the two-door
sport-utility vehicles at issue should be classified under
heading 870 4, at 25 percent. All of these vehicles have
designs that are either derived directly from pick-up trucks
or that incorporate design features of cargo vehicles,
including flat floors in the rear portion of the interior,
rear doors or tailgates that are large enough to facilitate
the loading and unloading of cargo, and chassis and suspension
designs that are more rugged than those found on ordinary
passenger vehicles of the same general size. In brief, the
integral design features of these two-door sport-utility
vehicles compel a conclusion that cargo transport was a high
priority in their design and that they are not principally
designed to transport persons. In accordance with this
conclusion, the Treasury Department has decided that the
Customs Service was correct in its determination that the
Suzuki Samurai, Suzuki Sidekick, and the GEO Tracker, which
are two-door sport-utility vehicles, should generally be
classified under heading 8704 and therefore subject to the
2 5 percent rate of duty.
Upon review, Treasury has reached a different conclusion
regarding the four-door sport-utility vehicles in question.
These vehicles should be classifiable under heading 8703 at
2.5 percent duty because their design features, particularly
the presence of rear passenger access doors, favor the
transport of persons. Unlike the two-door sport-utility
vehicles, the four-door sport-utility vehicles generally are
not direct derivatives of pick-up truck designs. As a
matter of basic structure, the body style of these vehicles
is one for which the transport of persons was a principal
design consideration. Therefore, four-door sport-utility
vehicles generally will be classified as motor vehicles
principally designed for the transport of persons under
heading 8 703, at a duty rate of 2.5 percent.
With respect to vans, Treasury has examined the relevant
design features of vans and has concluded that many of the
relevant design features are equally well suited for the
transport of passengers or goods. The basic physical
structure of these vehicles, consisting of a box-like body
and a chassis configuration for which compact exterior
dimensions and the highly efficient use of space are
principal design considerations, is one that is advantageous
and readily adaptable for both a cargo-carrying and a
passenger-carrying function. Manufacturers add other
features to this basic structure in designing a vehicle
principally for the transport of persons. Such a design

-5will have large windows around the rear compartment, for
example, whereas a van for the transport of goods may or may
not have such windows. In addition, vans designed
principally for passenger use will always be fitted with one
or more rows of additional seats behind the front seats and
will frequently have other passenger amenities as well.
When configured in passenger form, even a small van (or
"minivan", as a vehicle of this type is often called) can
carry up to seven persons with spacious interior
accommodations.
For these reasons, Treasury has concluded that vans with
seating for two or more passengers behind the front seat
area, one or more rear side doors, windows on the rear side
door(s) and on the side panels of both sides of the vehicle,
should be classified as motor vehicles principally designed
for the transport of persons, subject to a duty of 2.5
percent. A van without all of these design features should
be classified as a motor vehicle for the transport of goods
under heading 8704, at 25 percent duty.
IV. SUMMARY OF THE TREASURY DEPARTMENT'S CONCLUSIONS
Of the vehicles mentioned above, the following sport-utility
vehicles, which are two-door models, generally will be
classified under heading 8704 at 2 5 percent duty:
Dodge Raider
GEO Tracker
Isuzu Trooper and Trooper II, two-door models
Mitsubishi Montero, two-door models
Nissan Pathfinder
Suzuki Samurai
Suzuki Sidekick
Toyota 4Runner
The following sport-utility vehicles, which are four-door
models, generally will be classified under heading 870 3, at
2.5 percent duty:
Isuzu Trooper and Trooper II, four-door models
Mitsubishi Montero, four-door models
Range Rover
Toyota Land Cruiser

-6The following vans will be classified under heading 8703, at
2.5 percent duty, when entered with rear seating for two or
more persons, at least one rear side door, and windows on
the rear side door(s) and on the side panels on both sides
of the vehicle:
Mazda MPV
Mitsubishi Wagon
Nissan Van
Toyota Van
Volkswagon Vanagon
The following vehicles technically are neither sport-utility
vehicles nor vans. Under the principles discussed above,
they will be classified under heading 8703:
Nissan Stanza Wagon
Plymouth/Dodge Colt Vista Wagon
The percentages of vehicles entered under the two relevant
tariff provisions, as set forth on page 1, were calculated
based only on the sport-utility vehicles and vans listed
above. Certain sport-utility vehicles assembled in North
America are not included for purposes of this analysis
because, although imports in a technical sense, they contain
a high percentage of domestic content.

TREASURY NEWS
Department off the Treasury • Washington, D.c. • Telephone 566-2041

Embargoed For Release Until Delivery
Expected at 11:30 a.m. EST
STATEMENT BY
FRANK VUKMANIC
DIRECTOR OF THE OFFICE OF
MULTILATERAL DEVELOPMENT BANKS
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FOREIGN OPERATIONS
COMMITTEE ON APPROPRIATIONS
U.S. HOUSE OF REPRESENTATIVES
FEBRUARY 21, 1989
Mr. Chairman:
It is a pleasure to participate in this series of
panels on Global Climate Change. My statement this morning
will deal with the activities of the multilateral development
banks (MDBs) and how we have been attempting through our
participation in these institutions to address environmental
issues including those that have implications for global
warming.
As members of this subcommittee are aware, we already
have extensive legislation in place directing us to seek very
specific environmental reforms in the multilateral
development banks. The reforms that we have been seeking
include: restructuring and strengthening of environmental
units; hiring of environmentally-qualified staff; greater
emphasis on staff training on environmental implications of
development; increased coordination with non-governmental
groups affected by development projects in borrowing
countries; and the preparation of additional projects that
will have a positive and beneficial effect on the environment
in general. We have also sought to protect fragile ecosystems such as tropical moist forests and wetlands that may
be at risk from specific development projects and to
encourage programs for energy efficiency and conservation.
Last year, this subcommittee developed legislation directing
us to instruct U.S. Executive Directors to promote and
encourage energy conservation measures. Last week we
submitted to the Congress a report setting out in more
detail the progress we have made in implementing legislative
NB-142
provisions over the past year.

-2It is fair to say that a great deal has been
accomplished in the MDBs particularly with regard to
organizational changes, staffing, training, and in the
preparation of more environmentally-beneficial projects.
Additional reforms still need to be made, however, and we
will be pressing the banks to improve their performance in
these areas and in other areas. For example, we recognize
that the MDBs need to strengthen their assessment of
environmental impact, review their information policies with
a view to providing more and earlier access to relevant
information, cooperate and coordinate more with nongovernmental organizations in borrowing countries, and
promote energy efficiency and conservation programs.
DESTRUCTION OF TROPICAL FORESTS
There has been mounting concern in recent years over the
destruction of tropical rain forests, particularly those in
the Amazon Basin of South America. It is estimated that up
to ten percent of the increases in greenhouse gases are the
result of deforestation in this and other regions.
The multilateral development banks inadvertently
contributed to this problem in the past by funding electric
power projects and penetration roads in these regions without
securing adequate environmental safeguards. The banks have
been moving, however, to correct those particular problems.
They have financed subsequent projects designed to protect
forests and to replant depleted areas. In 1987 and 1988,
projects were initiated in the Ivory Coast, Costa Rica, and
Nepal to replant and improve the management of large areas of
tropical forest. I believe the banks have come to realize
the importance of following sustainable strategies for
development of forest regions and of protecting forests from
the detrimental effects of development projects. Therefore,
we must continue to press in the MDBs, in our bilateral
contacts, and in other multilateral fora for an increased
awareness of the severity of the problems and the need to
address them. The ultimate key to solving these problems is
for borrowing countries to realize that it is in their own
long-term U.S.
interest
to do FOR
so. EVALUATING MDB PROJECTS
STANDARDS
Last year we took significant steps that should help us
achieve these goals, developing U.S. standards to evaluate
environmental aspects of MDB projects that may adversely
affect tropical moist forests. Those standards were

-3undertaken at the initiative of Secretary Baker when he was
at Treasury. They have the full support of many
environmental groups in this country. Indeed, in drafting
the standards, we worked very closely with the Tropical
Forest Working Group, which included representatives from
over fifty groups in this country. I would like to provide a
set of the standards for the record.
I want to emphasize that these are standards for U.S.
evaluation of MDB projects. They were adopted in April,
1988, and made available immediately to management and staff
in all of the multilateral development banks. The U.S.
Executive Directors in all of the banks have been instructed
to use the standards in their evaluations of projects.
The standards have also been distributed to governments
of other countries in order to promote greater international
support for measures to protect tropical moist forests. In
May, the standards were tabled at an ad hoc meeting of
experts held under the auspices of the Organization for
Economic Cooperation and Development (OECD). The meeting was
called at our initiative to draft an environmental checklist
for multilateral and bilateral assistance decision-makers,
including executive directors from OECD countries at the
MDBs. Following adoption of the checklist, we sought to get
wider acceptance of our standards. We continued this
initiative at a working group of the OECD's Development
Assistance Committee in December, 1988, and we are now
hopeful that it will be taken up at a June, 1989, meeting of
that working group.
I should also mention that we have adopted U.S.
standards for evaluating MDB projects that may adversely
affect wetlands and Sub-Saharan savannas. We are now working
with a special committee chaired by the Natural Resources
Defense Council to perfect standards for projects affecting
marine areas. Our overall objective is to use these
standards to achieve a broad international consensus on
guidelines to help protect all sensitive eco-systems that may
be threatened by development projects.
ENERGY EFFICIENCY AND CONSERVATION
A second major initiative that we have taken is in the
area of energy efficiency and conservation. As I mentioned,
we have a strong mandate from Congress and from this
subcommittee, in particular, to encourage greater emphasis on
projects of this type and to make provision for least-cost
analysis in choosing among alternative technologies.

-4The multilateral development banks have already taken
several steps to improve their performance in this area.
Their efforts to promote more realistic tariff schedules and
to rehabilitate transmission and distribution systems,
lowering physical losses and losses from theft, are two
important examples I can cite that will increase efficiency.
However, the banks have not always been successful in
securing agreement on adequate tariffs and the benefits from
rehabilitation have frequently been lost over time as a
result of mismanagement and inadequate maintenance.
The World Bank also reports that it is carrying out
energy-related preinvestment activities in more than 50
countries and is providing institutional and policy guidance
on energy matters to decision-makers in developing countries.
These activities span a wide spectrum including studies of
energy investment priorities and energy efficiency
assessments both on the supply side and in end uses in
households and industries.
We would like the Bank to put more emphasis on these
types of activities. It should play a more innovative and
catalytic role in searching out new and wider opportunities
for investments in energy conservation and efficiency,
including renewable energy particularly where it is the least
cost alternative.
Internally, we are working to develop practical
initiatives in this area that we can pursue in the MDBs.
Treasury, in September, 1988, proposed the establishment of
an informal working group on energy efficiency and
conservation, to be composed of experts from the Departments
of Treasury and Energy, EPA, AID, and environmental groups.
The mandate of the group is to consider what specific steps
the U.S. might take to advance the case for energy efficiency
and conservation in all of the MDBs. The first meeting of
the group, held in October, amounted to a preliminary
exchange of views on how we might proceed. A second meeting
of the group was held last week to air in more detail the
views of some of the non-governmental
organizations.
MONTREAL PROTOCOL
A third initiative I want to mention concerns U.S.
obligations under the Montreal Protocol and the international
effort to cut back on CFCs and halons. Up to twenty percent
of the increase in greenhouse gases is thought to be due to
CFCs. Since the Montreal Protocol came into effect on
January 1, 1989, representatives from Treasury, State, and

-5EPA have met with World Bank staff on two occasions to
discuss ways in which the Bank can promote uses of
alternative technologies and substitute products as well as
ensure that it does not provide inadvertent assistance for
programs that would aid production of CFCs or halon. The
initial response from Bank staff has been positive. They
have expressed interest in the possibility of providing
financing for retro-fitting of manufacturing facilities in
the Bank's borrowing countries. There is also an obligation
to refrain from financing projects that would assist in the
production of CFCs or halons. Bank staff reported that the
IFC had turned down a proposal in the early 1980's
specifically because it would have contributed to the
production of CFCs. Our objective is to strengthen Bank
practice in this area and to work for a policy that would
clearly preclude any such financing.
The World Bank itself is not a signatory to the
Montreal Protocol. However, most of its developed member
countries have ratified the protocol and a number of its
developing member countries have become signatories. We will
strongly encourage our protocol partners to work with us in
helping to develop a work program in the World Bank. The
next meeting of participants to report on measures to
implement the protocol will take place in May.
The World Bank also participated as an observer at a
working group meeting earlier this month of the InterGovernmental Panel on Climate Change. The Bank should
continue to participate in the panel's work over the next
eighteen months in areas that are appropriate to its
expertise. We will strongly suggest through our executive
directors that the regional MDBs be invited to participate as
well.
In conclusion, Mr. Chairman, I want to reiterate that
the multilateral development banks can make important
contributions to our efforts to address the complicated
issues of global climate change. The most important of these
contributions is to take steps early in the project cycle to
mitigate or eliminate environmentally-adverse effects of
projects and to take the initiative in financing
environmentally-beneficial projects, particularly those that
will protect tropical moist forests, and promote greater
reliance on energy efficiency and conservation. There is
widespread agreement in the scientific community that these
are two critical areas in which we can begin to make
important progress now. We see that we need to work
constructively within the MDBs to bring about the changes

-6-

that we seek. We
from other member
and work in other
acceptance of our
Thank you.

also believe that we have to enlist support
countries through our bilateral contacts
multilateral fora in order to gain wider
ideas.

TREASURY NEWS
ppartment off the Treasury • Washington, D.c. • Telephone 566-2041
February 17, 1989

JOHN K. MEAGHER
ASSISTANT SECRETARY (LEGISLATIVE AFFAIRS)
TO LEAVE TREASURY
Assistant Treasury Secretary for Legislative Affairs John K.
Meagher announced today that he will leave the department around
April 1, 1989 to practice law in Washington.
Secretary of the Treasury Nicholas F. Brady commended Mr. Meagher
for his dedication and abilities. "John informed me in November
of his desire to return to the private sector but agreed to stay
at his post through the transition," he said. "I am personally
grateful for his help during this period. He has been a
tremendous asset, and I wish him well."
Mr. Meagher became Assistant Secretary for Legislative Affairs on
October 2, 1987, and has been responsible since that time for the
smooth coordination between the Department and Congress.
Before assuming his post at Treasury, Mr. Meagher served as Vice
President - Government Relations for The LTV Corporation since
1981. He also served as Chairman of the Basic Industries
Coalition, Inc. (BIC), a trade association of large American
corporations.
Prior to joining The LTV Corporation, Mr. Meagher served as
minority counsel of the Committee of Ways and Means of the U. S.
House of Representatives.
A native of Syracuse, New York, Mr. Meagher is a graduate of
William and Mary College and its law school.

NB-143

THE SECRETARY OF THE TREASURY
WASHINGTON

February 16, 1989

Dear Congressman:
We note with concern that a House vote has been scheduled
on H.R. 5, the "Foreign Ownership Disclosure Act of 1989", which
would mandate registration and disclosure of foreign investment in
the United States. It goes to the floor without hearings or mark
up in this Congress.
This legislation would not contribute in any meaningful
way to our ability to determine the extent and effects of foreign
investment in the United States. Virtually all the data which the
legislation would require are already collected by the Department
of Commerce. The data are voluminous and are adequate for
statistical and policy analysis.
H.R. 5 would impose registration and disclosure
requirements and potential penalties on foreign direct investors
that are not imposed on domestic investors. The disclosure
requirements in H.R. 5 would be tantamount to public disclosure.
Singling out foreign direct investors constitutes a sharp change in
U.S. policy from one of open investment to one of discrimination.
This shift in policy would discourage foreign direct investment in
the United States resulting in slower economic growth, productivity
and job creation and triggering higher interest rates that could
hurt a wide range of Americans, including homebuyers and farmers.
It is noteworthy that none of the other major
industrialized countries finds it necessary or desirable to require
disclosure of foreign direct investment as required by H.R. 5.
Passage of H.R. 5 would run counter to our longstanding efforts to
encourage freer investment practices in other countries.
If foreign registration and disclosure legislation such as
H.R. 5 is presented to the President, we will recommend that he
veto it.
Sincerely,

Nicholas F. Brady f James A. Baker, III
Secretary of Treasury
Secretary of State

- 2 -

f Justice

Robert A. Mosbacher
Secretary of Commerce

ycM^\
Carla A. Hills
U.S. Trade Representative

Richard G. Darman, Director
Office of Management and Budget

Michael J. Boskin, Chairman
Council of Economic Advisers

TREASURY NEWS
apartment off the Treasury • Washington,
• Telephone
566-2041
C O N T A C TD.c.
: Office
of Financing
202/376-4350
FOR IMMEDIATE RELEASE
February 2 1 , 19 89
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,213 million of 13-week bills and for $7,209 million
of 26-week bills, both to be issued on February 23, 1989, were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing
May 25, 1989
Discount Investment
Rate
Rate 1/
Price
8.49%
8.52%
8.51%

8.80%
8.83%
8.82%

26-week bills
maturing August 24, 1989
Discount Investment
Rate
Rate 1/
Price

97.854
97.846
97.849

8.48%
8.51%
8.50%

8.98%
9.02%
9.00%

95.713
95.698
95.703

Tenders at the high discount rate for the 13-week bills were allotted 26%
Tenders at the high discount rate for the 26-week bills were allotted 69%,

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
34.225
18,888,680
17,780
41,055
50,365
43,650
1,390,795
47,625
9,395
58,595
36,650
1,740,110
504,825

34,225
$
5 ,840,550
17,780
41,055
50,365
43,650
376,845
45,005
9,395
58,595
31,650
155,110
504,825

$7,212,650

. $22,863,750

$7 ,209,050

$22,213,150
1,387,990
$23,601,140

$3,477,975
1,387,990
$4,865,965

$17,385,440
1,210,710
$18,596,150

$1 730,740
1 ,210,710
$2 ,941,450

2,279,785

2,200,000

2 ,200,000

66,900

2,067,600

2 ,067,600

$25,947,825

$7,212,650

: $22,863,750

$7 ,209,050

$
43,170
21,985,255
23,340
43,045
63,690
44,750
1,243,765
53,675
9,455
42,240
46,225
1,883,695
465,520

$
43,170
6,091,335
23,340
43,045
63,680
42,485
104,555
33,305
9,455
42,240
36,225
214,295
465,520

$25,947,825

U Equivalent coupon-issue yield.

NB-144

Accepted

TREASURY NEWS
Department off the Treasury • Washington,
D.c.
• Telephone
566-2041
CONTACT:
Office
of Financing
FOR RELEASE AT 4:00 P.M.
February 21, 19 89

202/376-4350

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued March 2, 1989.
This offering
will result in a paydown for the Treasury of about $ 2 50 million, as
the maturing bills are outstanding in the amount of $ 14,644 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, February 27, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $ 7,200
million, representing an additional amount of bills dated
December 1, 19 88,
and to mature June 1, 1989
(CUSIP No.
912794 SB 1), currently outstanding in the amount of $ 7,467 million,
the additional and original bills to be freely interchangeable.
182-day bills ("to maturity date) for approximately $ 7,200
million, representing an additional amount of bills dated
September 1, 19 88, and to mature August 31, 1989
(CUSIP No.
912794 SK 1), currently outstanding in the amount of $ 9,211 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing March 2, 1989.
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 $2,251 million as agents for foreign
and international monetary authorities, and $4,289 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)

NB-145

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 one-half hour
prior to the closing time for receipt of tenders 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 bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
10/87
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.

TREASURY NEWS
Department
the Treasury • Washington, D.c. • Telephone 566-2041
Text off
as Prepared
Embargoed for Release Upon Delivery
Expected at 10 a.m., EST

TESTIMONY OF THE HONORABLE
NICHOLAS F. BRADY
SECRETARY OF THE DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
WEDNESDAY, FEBRUARY 22, 1989
INTRODUCTION
Mr. Chairman, Senator Gam, and Members of the Committee.
From the day when I was sworn in as Secretary of the
Treasury, a top priority has been to achieve a sound, responsible
response to the savings and loan crisis. President Bush is
correct: No simple or painless solution to this problem exists.
Only eighteen days after he was inaugurated, however, he
announced the Administration's plan. In doing so, President Bush
reaffirmed our commitment to fix it now, fix it right, and fix it
once and for all.
Two watch words guided us as we prepared a plan to solve
this problem—NEVER AGAIN.
o Never again should a federal insurance fund that
protects depositors become insolvent.
o Never again should insolvent federally-insured
depository institutions remain open and operate
without sufficient private risk capital.
o Never again should risky activities permitted by
individual states put the federal deposit insurance
fund in jeopardy.
o Never again should fraud committed against financial
institutions or depositors be punished as if it were a
victimless white-collar crime.
o Never again should the nation's savings and loan
system, which is important to our commitment to
available, affordable housing, be put in jeopardy.
NB-146

- 2 The Administration plan meets these standards. It serves
as a blueprint for comprehensive reform and sound financing. It
assures the emergence of a healthy and strong S&L industry and
for this reason is pro-industry ~ both for S&Ls and for the
housing industry they serve. Moreover, it has the strong support
of the federal regulators — the Federal Reserve Board (Federal
Reserve), the Federal Deposit Insurance Corporation (FDIC), the
Federal Home Loan Bank Board (Bank Board), and the Comptroller of
the Currency (OCC).
When the President announced his plan, he also called on
Congress to join him — with all possible speed ~ to solve the
savings and loan crisis. Today I can report to you that a key
part of the administrative reform is already underway.
On February 7, the day after the President announced his
plan, the Federal Savings and Loan Insurance Corporation (FSLIC) ,
FDIC, OCC, and the Federal Reserve worked together to stabilize
control of the remaining insolvent institutions and impede them
from enlarging the S&L deficit. By that action we should begin
to reduce the cost of funds over time — for banks, as well as
for savings and loans — and to control the losses in the
insolvent S&Ls. Moreover, our quick action will give us a head
start on consummating the resolutions, which will be executed as
soon as Congress provides the necessary financing.
This joint supervisory operation was designed with several
purposes in minds first, to conserve the assets of troubled
savings institutions? and second, to preserve day-to-day banking
services for the public until a permanent resolution of the
institutions' problems can be put in place.
Our objectives are to minimize operating losses, restrict
unwarranted or unsound growth, eliminate speculative activities
and destructive competition in deposit rates, and to get rid of
waste, fraud, and insider abuse wherever it exists.
I would like to emphasize that during this interim period,
insured depositors remain fully protected, basic customer
services will not change, and each institution's employees will
continue to conduct the normal day-to-day operations of the
institution. These institutions are open, with deposits backed
by the federal government, and ready to do business with their
customers.
The supervisory and resolution personnel of the FDIC and the
other agencies are preparing for resolutions and are in a good
position to act swiftly once the legislation is in place. This
early start on the cooperative supervisory process saves us both
time and money. Fast action by all parties — the

- 3 Administration, the regulators, and the Congress — will help
reduce the industry's cost of funds by getting the insolvent
institutions resolved, out of the marketplace, and out of the
business of needlessly bidding up interest rates.
Given the magnitude of the problems we face, expedited and
stabilizing action provides an orderly transition to the new
regulatory structure we propose. We now need legislative action
by the Congress to put the reform and financing plan into place
to finish the job.
In short, we have proposed a blueprint for reform. We now
need your help to build a solid structure for the savings and
loan industry to ensure a strong foundation for housing finance
in the future. The President has asked me to deliver to the
bipartisan leadership of this Committee our comprehensive plan.
We respectfully request that you introduce it today. In his
budget message to the joint session of Congress on February 9,
President Bush called on the Congress to deliver a reform package
to him in 45 days. Once Congress acts, we will be ready to move
to stem the hemorrhaging.
This is a tall order, but I pledge to you the full
cooperation of the Administration. Cooperative and expedited
action by the Congress and the Executive branch will help to
reassure the millions of American savers, who rely on deposit
insurance protection, that we indeed have a safe and sound
financial system that will continue to meet their saving and
borrowing needs in the future.
THE SAVINGS AND LOAN PPQRT.FM
Our plan attempts to right the wrongs of the past.
Consequently, an understanding of how the current problem arose
will not only place our plan in the proper context, but also
explain why we have come forward with the detailed package we
present to you today.
Causes of the Problem
Inflation. Interest Rates, and Regulation Q. In the middle
1960s, savings and loans began experiencing liquidity and
earnings problems caused by increased inflation and the resulting
high, volatile interest rates. Mainly to protect these
institutions from the effects of rising interest rates and
excessive competition for funds from commercial banks, Congress,
in 1966, placed commercial banks, mutual savings banks and
savings and loans under deposit interest rate regulation
(Regulation Q ) .

- 4 Consumer Demands for Market Rates. In the late 1970s, when
rising inflation and interest rates exceeded Regulation Q
ceilings, many savers became unwilling to limit themselves to the
returns allowed under these artificially low interest rate
ceilings. These savers withdrew their deposits from traditional
savings accounts — a process called disintermediation — and
invested them in newly-emerging, uninsured money market mutual
funds. As a result of market forces, both consumers and
depository institutions pressured Congress to remove the
Regulation Q ceilings, which it did in the Depository
Institutions Deregulation and Monetary Control Act of 1980.
Changes in Technology. Starting in the 1970s, the
development of electronic technologies made it possible for
funds to be withdrawn or shifted between institutions and across
geographic boundaries instantaneously. Devices such as
repurchase agreements for securities and certificates of deposit,
marketed aggressively through brokers and underwriters, made it
possible for institutions to draw depositors from a broad
geographic base. They also enable depositors to withdraw their
money from those institutions very quickly, thus permitting
funds to flow to the highest bidder.
Furthermore, technological innovations made possible the
securitization of mortgage loans. This development has allowed
thrifts and non-thrifts to originate mortgages and sell them in
the broader capital markets to investors such as insurance
companies and pension funds. This, in turn, has increased
competition and reduced the interest rate spreads and profit
margins at banks and savings and loans.
Spread Problem. The high, short-term cost of deposits and
lower embedded fixed rates on mortgages produced losses and
drained capital from the S&L industry during the late 1970s and
early 1980s. The industry^ tangible capital fell from $28
billion in 1978 to $4 billion in 1982, a reduction of 85 percent.
Broadened Powers. In 1982, responding to the interest rate
problems of thrifts, Congress passed the Garn-St Germain
Depository Institutions Act. This law gave the Federal Home Loan
Bank Board authority to substantially broaden the powers of
Federally chartered thrift institutions. Subsequently, the Bank
Board relaxed controls on consumer and commercial real estate
lending.
Direct Investments. In response to the reduced spreads
available in mortgage lending, some states permitted statechartered savings and loans to diversify their asset portfolios.
That change pulled capital away from residential mortgage loans
and equity
into significant
securitiesamounts
not permitted
of direct
to investment
federally-chartered
in real estate

- 5 institutions. State-chartered savings and loans that took
advantage of these investments were still insured by the FSLIC,
even though many of their investments extended beyond traditional
home financing and were riskier than the activities Congress has
authorized for federally-chartered institutions.
In the new regulatory environment, some institutions moved
too quickly into activities for which they were unprepared.
Regulators at all levels were slow to strengthen their
supervision and enforcement capabilities. Diversification can be
a healthy business practice, but proper supervisory practices are
also required.
Inadequate Supervision Exacerbated by Deregulation.
Supervisory and regulatory laxity in oversight also contributed
to the current FSLIC problem. Inadequate capital requirements
allowed thrifts to grow quickly with almost no "at-risk"
capital. Low equity, in turn, encouraged greater risk taking.
Belated authorization to issue adjustable rate mortgages
prevented savings and loans from properly adjusting the maturity
gap between deposits and mortgage loans. High turnover of the
supervisory and examination personnel reduced the number and
experience of much-needed industry watchdogs. And perhaps most
disturbingly, the agency regulating the industry faced the often
conflicting statutory goals of supervising, advocating, and
insuring depository institutions in the name of promoting a
stable housing finance market.
Imprudent Managers and Fraud. Compounding these problems
has been the entry of some imprudent operators into the savings
and loan industry. Managers used S&Ls and their authority to
further their own business and other interests and not to foster
traditional home financing.
Moreover, many of these "high fliers" used their
institutions to finance lavish lifestyles and to engage in
speculative and fraudulent business activities. Testimony to
this effect was prepared by the Bank Board for presentation to
the House Financial Institutions Subcommittee on June 9, 1987.
An excellent report has been prepared by the House Government
Operations Subcommittee chaired by Representative Doug Barnard.
The Justice Department continues to conduct large scale
criminal investigations of financial institution fraud and
embezzlement. As of September 30, 1988, 7,385 such
investigations were open. Of these, 3,446 involved losses to
institutions of $100,000 or more.
Attorney General Richard Thornburgh already has testified on
the fraud problem confronting us. Estimates by the General
Accounting Office (GAO) and others reveal that fraud may account

- 6 for more than one-third of the failures in the S&L industry that
we must now finance.
The Federal Home Loan Bank Board's list of
"significant" fraud cases turned over to the Justice Department
involve institutions with total assets of $160 billion.
Economic Downturn in the Southwest. Finally, the economic
downturn and general price deflation in the agricultural, real
estate, and oil and gas sectors of the economy have created
serious problems in the Southwest. Even well-managed thrift
institutions in the Southwest now face widespread non-accruing
loans, collateralized, in many cases, with non-salable
properties.
Summary. In sum, consumer demand for increasing market
interest rates on deposits, combined with both technological
changes as well as high and volatile interest rates, resulted in
negative interest rate spreads in the late 1970s and early
1980s. This, in turn, drastically reduced the industry's
aggregate capital-to-asset ratio from 5.6 percent in 1979 to 2.9
percent in 1982. Once market interest rates declined, most
institutions became profitable again. They started to rebuild
their capital holdings. Other institutions, however, took
advantage of the expanded state-authorized asset powers, the low
capital requirements, and inadequate examination and supervision.
The resulting problem portfolios were characterized by excessive
risk and poor asset quality due to rapid growth. The economic
downturn in the Southwest quickly reduced such portfolios to
collections of non-earning assets.
OBJECTIVES OF THE ADMINISTRATION'S PLAN
To ensure that the tremendous losses in the industry never
happen again and to minimize the total cost of resolving the
problem, the Administration plan makes structural reforms a
prerequisite for the use of any taxpayer funds and provides for
the necessary funding to solve the problem now. The following
Administration objectives guided the development of our plan:
o Reform — a prerequisite to additional funding;
o A flexible financing plan of sufficient capacity to
repair the damage;
o Institutional arrangements that lessen the disruption
in the industry and avoid creating new government
bureaucracies;
o Utilizing a fair level of S&L industry sources of funds
before using taxpayer funds;

- 7 o

Precise and trackable accounting for all public and
private funds employed in resolving the S&L problem;

o Structural reforms that are sound, but practical enough
to accommodate the market-driven changes that develop
in any competitive industry;
o Funding for an adequate, on-going, self-financed
savings association insurance fund, so that Treasury
funds will not be needed again to bolster the deposit
insurance funds;
o Protecting American taxpayers by assuring full
financial and regulatory accountability through
Treasury oversight; and
o Finally, sufficient private capital and industryfinanced insurance funds standing between financial
institution failures and the taxpayers.
OUTLINE OF THE PLAN
Let me summarize the Administration's comprehensive reform
proposal in the following manner: first, by delineating the
major structural reforms we seek; second, by providing an
overview of the other reforms we propose; and, finally, by
explaining how the resolution of the remaining insolvent
institutions, which we have already begun, will be financed.
The President's legislative package and the section-by-section
analysis to be provided later give you all of the necessary
details.
Structural Reforms
One Strong. Independent Insurance Administrator. The
current organization of the thrift system dates from the New
Deal. As the events of the 1980s have demonstrated, this system
is antiquated. Furthermore, the goals of the regulator as an
industry advocate and insurer are inherently in conflict. To
correct this systemic problem, the FSLIC will be separated from
the Bank Board and attached administratively to the FDIC (see
Chart 1). This will create a strong, independent insurer with
the over-arching mission to protect depositors and to maintain
the integrity of the deposit insurance fund.
The considerable administrative expertise of the two
corporations will be available to manage financial, insurance,
and regulatory issues. While a single agency will be created,
however, separate insurance funds will be maintained for

- 8 commercial banks and for savings and loans. The separate
insurance funds will not be commingled, and premiums from each
industry will be used only for its own insurance fund.
The FDIC Board will be expanded from three to five members.
Three members, including the Chairman, will be private citizens
appointed by the President and confirmed by the Senate. The two
remaining members will be the Comptroller of the Currency and
the Chairman of the newly-renamed Federal Home Loan Bank System
(FHLBS).
The Chairman of the FHLBS will continue to be the chartering
authority for federal savings and loan associations and mutual
savings banks, will supervise the Federal Home Loan Mortgage
Corporation, and it will be the primary federal supervisor of
savings and loans (see Chart 1). The current board will be
replaced by a single chairman. The Chairman of the FHLBS will be
subject to the general direction of the Secretary of the Treasury
in the same manner as the Comptroller of the Currency. The new
FHLBS Chairman will also be the head of the system of 12 Federal
Home Loan Banks (FHLBanks), which currently make loans to member
institutions and supervise and examine them as well. The chief
supervisory employee of each FHLBank will report directly to the
chief supervisory officer in Washington.
By separating the insurer from the chartering agency, more
serious disciplinary standards designed to protect the integrity
of federally-insured deposits can be maintained. In addition, by
subjecting the actions of the FHLBS to oversight by the Treasury
Department, the interests of the taxpayers can be more fully and
consistently protected. This Treasury oversight has existed for
national banks since the Administration of President Abraham
Lincoln. These steps will create a system of checks and balances
for savings and loans that more closely parallels that for
commercial banks.
Some observers have already expressed reservations about
Treasury oversight of the primary thrift supervisor in a manner
that parallels our authority over national banks. Let me assure
the Committee that we do not intend to micro-manage the
revitalized Federal Home Loan Bank System. That concern led to
our designating a chairman who would serve and function as a
chief executive officer.
It is critical, however, that we exercise the proper degree
of oversight. The reason is clear: Treasury funds are being
used for the first time as part of the clean-up operation.
Treasury oversight is essential to ensure that these problems and
the strain they place on our financial system do not occur again.
Treasury oversight is essential to ensure a strong and safe
system for readily available home financing.

- 9 -

Enhanced Safety and Soundness Standards
Capital Requirements. We are experiencing the results today
of an industry that collectively has not been adequately
capitalized. We have learned a valuable lesson: Deposit
insurance simply will not work without sufficient private capital
at risk and up front.
The Administration plan will increase safety and soundness
standards for savings and loan institutions by requiring these
institutions to meet standards equivalent to commercial bank
capital and regulatory standards within a two-year period. This
is consistent with the on-going efforts of all the federal
financial regulators, including the current Bank Board, to
implement risk-based capital to ensure that sufficient private
capital is at risk ahead of the deposit insurance fund. Again,
private capital is the best assurance that the federal insurance
of deposits will not be exposed to undue risk and imprudent
investment behavior.
All savings and loans will be required to meet capital
requirements equivalent to those for national banks by June 1,
1991. Some 1,240 savings and loans with total assets of $319
billion already meet this capital requirement, while the
remaining 1,368 solvent institutions will be expected to raise
the necessary capital internally or externally or by merging with
stronger institutions.
The Chairman of the FHLBS will oversee and manage this
transition period. When S&L capital standards become equivalent
with those for banks, S&Ls could have a 50 percent break in the
amount of required capital because of the treatment of home
mortgage assets under the Basle capital agreement. Moreover,
S&Ls will be given 10 years to amortize the goodwill on their
balance sheets.
Some stockholders may suffer dilution of their holdings, but
appropriately we are achieving a safer and stronger system where
private capital stands ahead of the government's insurance of
deposits, giving taxpayers enhanced protection. At the same
time, we expect a lower cost of funds for the solvent portion of
the industry once unfair competition from insolvent institutions
is removed.
Incentives for New Capital. Incentives for attracting new
capital will further increase the amount of private capital
protecting depositors. Several barriers to the entry of
traditional financial services companies will be eliminated. For
example, bank holding companies will be permitted to acquire a

- 10 failed or failing savings and loan without the existing crossmarketing and tandem restrictions. After two years, bank holding
companies will be able to acquire any savings and loan without
these restrictions.
Additional Supervisory Powers. The FDIC will be given
enhanced authority to set insurance standards for all savings and
loans, both federal and state-chartered. It will be able to
restrict risky activities that have been authorized by some
states in the past. The FDIC also would have a "fast whistle"
to halt unsafe and unsound practices, while still protecting
insured depositors. Furthermore, all insured depository
institutions within holding companies would guarantee the
insurance fund against loss in the event of the failure of any
insured depository institution owned by the same holding company.
Putting Deposit Insurance on a Sound Financial Basis for the
Future
There is a fundamental requirement that the federal deposit
insurance funds are put on a sound financial basis. This can be
accomplished by reestablishing the basic principle of industryfinanced deposit insurance funds standing between any future
industry problems and the taxpayer.
The cost of the S&L solution underscores the importance of
requiring all federal deposit funds to be adequately capitalized.
Consistent with this mandate is the creation of a sound savings
association insurance fund, not just after-the-fact financing for
insolvent S&Ls. It is equally important that we shore up the
commercial bank insurance fund. The FDIC insurance fund's
reserve-to-insured deposit ratio has fallen to an estimated alltime low of 0.83 percent from its historical average of 1.40
percent.
We propose increasing commercial bank premiums to bring the
FDIC fund back in line with its historical reserve-to-deposit
ratio to protect depositors and taxpayers. Specifically, we
propose a gradual rise in the deposit insurance premiums paid by
commercial banks from $.08 per $100 in deposits to $.15 per $100
in deposits by 1991. Premiums would be rebated when the bank
insurance fund is in excess of a 1.25 percent reserve-to-deposit
ratio.
It is important to point out that this is the first
statutory increase in the FDIC's deposit insurance premium since
1935. During the intervening years, the amount of deposits
insured per depositor in any one institution has increased from
$2,500 in 1933 to the current level of $100,000.

- 11 Let me emphasize, however, that all of the increased
premium revenue paid by commercial banks will go to the FDIC
insurance fund; not one penny from commercial banks will go to
anv S&L resolution or to the new savings association insurance
fund.
Emergency special assessment authority will be granted to
the FDIC. The FDIC will be permitted to raise the overall
premium level when the fund is too low, as well as to lower
premiums when it is fully funded. Thus, risk-based capital and
experience cost-based premiums will ensure that the costs to the
funds are covered. The maximum cap on the premiums paid by
commercial banks or S&Ls would be 35 basis points.
The Administration's reform plan also proposes to strengthen
the National Credit Union Share Insurance Fund (NCUSIF) by
having it use accounting procedures comparable to those used by
the FDIC and FSLIC. The NCUSIF is currently structured such that
each insured credit union places and maintains one percent of its
shares on deposit in the fund and treats the contribution as an
asset on its balance sheet. This contrasts with the practices of
both the FSLIC and the FDIC in which insured institutions treat
their premium contributions as expenses. As long as credit
unions consider their contributions as assets, they will resist
the using of these assets to cover insurance losses.
Therefore, we recommend that credit unions be required to
expense the one percent of deposits they maintain at the NCUSIF
over an 8-year transition period. During this transition period,
no additional premiums would be collected. At the end of 8
years, the NCUSIF would avail itself of its existing statutory
authority to collect a 1/12 of one percent premium.
Enhanced Enforcement Authority
As part of the comprehensive reform package, we must ensure
that fraud and financial institution crimes are pursued and
punished as befitting their grave societal costs. The fraud and
abuse are widespread and well-known to the American public
through news accounts. Our proposal will add new enforcement
authorities, increase penalties for fraud, and increase funding
to provide for dramatically increased law enforcement staff and
prosecutions. The scope of federal regulators' enforcement
authority will be broadened to include all insiders, in addition
to the managers of an institution. It will also grant regulators
broader power to impose temporary cease-and-desist orders.
We have borrowed a page from the Administration's war on
drugs and drug money laundering in drafting our new enforcement
authority. Maximum civil penalties will be raised to $1,000,000
per day, and maximum criminal penalties to 20 years, with

- 12 mandatory minimum sentencing. Authority will also be provided
for regulatory agencies to pay rewards to informants. Civil
penalty authority will be given to the Justice Department for the
first time. These civil penalties will be cumulative to criminal
sanctions. Also, we propose to add civil and criminal seizure
and forfeiture authority similar to the forfeiture authority for
drug and drug money laundering.
Most importantly, approximately $50 million per year would
be authorized for three years for the Justice Department to fund
a new national program to search out financial institution fraud.
This program will include new investigators, auditors, analysts,
and prosecutors trained in specialized and sophisticated methods
of financial institution fraud. Indeed, the number of personnel
devoted to investigating and prosecuting bank and thrift fraud
will be approximately doubled.
A Revitalized Housing Finance System
Today, as in the past, the S&L industry plays an important
role in housing finance. The S&L industry's problems do not stem
fundamentally from their traditional business of mortgage
financing. Nonetheless, problems in the S&L industry are a
threat to the viability of our housing finance system.
The Administration's plan is designed explicitly to promote
housing finance by revitalizing the S&L industry and the FHLBS.
The regulatory reforms outlined earlier as well as oversight by
Treasury of the FHLBS help insure a financially viable S&L
industry to serve housing finance. We believe the best thing for
housing finance in this country is a strong and sound S&L
industry.
Moreover, the plan provides for explicit representation for
the housing industry on the boards of directors of the regional
Federal Home Loan Banks. The objective is to ensure that the
concerns of the housing industry play a direct role in the
policies and practices of these government sponsored
enterprises.
Finally, the plan provides funding not just to resolve
insolvent S&Ls, but also includes funding to establish a new S&L
insurance fund for the future. The majority of future S&L
insurance premiums are allocated to this insurance fund; none pay
for REFCORP interest. And Treasury funds are allocated to the
insurance fund as well, giving tangible proof of our commitment
to the future of the S&L industry as a provider of housing
finance.

- 13 Restoring the Industry to Financial Health
During 1988, the Bank Board resolved 205 institutions and
stabilized 17 others. But the factors I have outlined combined
to create such a problem that there still remain a total of about
350 S&Ls insolvent according to generally accepted accounting
principles, or GAAP, and an additional roughly 150 which, while
GAAP solvent, have negative tangible net worth. These
institutions held about $265 billion in assets and had negative
net worth on the order of $18 billion as of September 1988, the
latest available figures.
Let me describe in some detail the Administration plan for
restoring the S&L industry to financial health. It has three
components. The first $50 billion is to resolve currently
insolvent institutions and any other marginally solvent
institutions which may become insolvent over the next several
years. Secondly, the plan ensures adequate servicing of the $4 0
billion in past FSLIC obligations. And third, and perhaps most
important, the plan provides $33 billion in financial resources
necessary to put S&L deposit insurance on a sound financial basis
for the future.
At the heart of our plan is the creation of a Resolution
Trust Corporation (RTC), for which the FDIC will be the primary
manager directed to resolve all S&Ls which are now GAAP insolvent
or become so over the next three years (see chart 2). The
creation of this new corporation will serve several practical
business purposes: it will allow the isolation and containment
of all insolvent S&Ls during the three-year resolution process
and will facilitate a full and precise accounting of all the
funds that are used. The RTC will seek to complete the
resolution or other disposition of all insolvent institutions and
their assets over a period of five years. An Oversight Board
consisting of the Secretary of the Treasury, the Chairman of the
Federal Reserve Board of Governors, and the Attorney General will
monitor all RTC activities to ensure the most effective use of
both private and public financial resources.
To accomplish its task, the RTC will have available $50
billion in new funding, which is provided by the Administration
plan. The plan also provides funds to pay for the $40 billion
that already has been committed in past FSLIC resolutions.
Finally, the plan will provide additional funds for handling
insolvencies in the post-RTC period from 1992 to 1999, as well as
to help build an insurance fund for the healthy S&Ls — the
Savings Association Insurance Fund (SAIF) — which will be
operating during this period.

- 14 Let me discuss now some specifics of the financing of the
various component parts of our plan. Further details are
contained in the Appendix to my testimony which includes
materials provided to this Committee by the Office of Management
and Budget.
To provide the $50 billion to the RTC, we will create a new,
separate, privately-owned corporation, the Resolution Funding
Corporation (REFCORP), which will issue $50 billion in long-term
bonds to raise the needed funds. REFCORP will purchase zerocoupon, long-term Treasury securities whose maturity value will
be $50 billion — growing through compound interest — to assure
the repayment of the principal of the bonds issued by REFCORP.
Funds to purchase these zero-coupon bonds will come exclusively
from private sources (see Chart 2 ) :
o The FHLBanks will contribute about $2 billion of their
retained earnings — which are currently allocated to,
but not needed by, the existing Financing Corporation
(FICO) — plus approximately 20% of their annual
earnings, or $300 million, in 1989, 1990 and 1991;
o The S&Ls will contribute a portion of their insurance
premiums; and
o If necessary, proceeds from the sale of FSLIC
receivership assets will be used.
No Treasury funds or guarantees will be used to repay any
REFCORP principal.
Interest payments on the REFCORP bonds will come from a
combination of private and taxpayer sources:
o The FHLBanks, beginning in 1992, will contribute $300
million a year;
o The RTC will contribute a portion of the proceeds
generated from the sale of receivership assets, and
proceeds from warrants and equity participations taken
in resolutions; and
o Treasury funds will make up any shortfall.
All Treasury funds used to service REFCORP interest will be
scored for budget purposes in the year expended.
Funds for the second component of our plan — servicing the
cost of the $40 billion in resolutions already completed by
FSLIC — also will come from a combination of S&L industry and
taxpayer sources:

- 15 -

FICO will issue bonds under its remaining authority
and contribute the proceeds;

o The S&Ls will contribute a portion of their insurance
premiums;
o FSLIC will contribute the proceeds realized from the
sale of receivership assets taken in already completed
resolutions, as well as miscellaneous income; and
o Treasury funds will be used to make up any shortfall.
The final component of the plan — managing future S&L
insolvencies and building SAIF, the new S&L insurance fund,
during the post-RTC period — is funded again from a combination
of S&L industry and taxpayer sources:
o The S&Ls contribute a portion of their insurance
premiums; and
o Treasury will contribute funds as needed.
These sources together provide about $3 billion per year to
handle any insolvencies which occur in the 1992-99 period and in
addition contribute at least $1 billion per year to building the
new Savings Association Insurance Fund. Assuming that $24
billion is used for post-RTC resolutions, by 1999 the SAIF fund
will still contain just under $9 billion at a minimum to support
the healthy S&Ls. Overall the plan contains $33 billion in postRTC funds from 1992 to 1999 to manage future insolvencies and
contribute to building a healthy new S&L insurance fund. Found
in the appendix are a chart (Chart 3) and a listing of sources
and uses of funds.
Throughout the plan, all Treasury funds used are fully
scored for budget purposes and increase budget outlays as
expended. The level of expected outlays falls within the margin
provided for in President Reagan's FY 1990 budget and should not
interfere with President Bush's commitment to meet the GrammRudman deficit reduction goals in future years. Over the 19891999 period, we estimate the net increase in the deficit to be
roughly $40 billion.
The S&L industry will be a major beneficiary of restoring
its own financial health. From the outset, the Administration
has stated that the S&L industry must therefore contribute its
fair share — before the Federal government makes good on its
pledge to protect insured depositors. As you can see, the plan
requires a combination of private industry and public sources
throughout. We believe that the share demanded of the industry

- 16 is indeed fair, but not so great as to jeopardize the viability
of the healthy S&L industry which will emerge from the RTC
resolution process. And it will indeed be a healthy industry
that emerges — one with an attractive and viable charter, with a
clean insurance fund, and one prepared to provide its traditional
support for home financing.
Is the capacity of the Administration's plan sufficient to
resolve those S&Ls presently insolvent and those marginal
institutions which will become insolvent? The answer is surely
yes.
To address the immediate problem, the Bank Board has already
handled about 222 institutions in 1988. Funding for the
estimated cost — about $40 billion — is contained in our plan.
What remains to resolve in the near future is the roughly
350 institutions which are insolvent by GAAP measures and about
150 additional institutions which, while GAAP solvent, have
negative tangible net worth. These 500 institutions have about
$18 billion of negative net worth and about $265 billion of
assets. Importantly, the problems are concentrated in a
relatively few institutions — over 80% of the negative net worth
is held in the most troubled 100 institutions.
How much will it cost assuming all of this caseload of 500
institutions have to be resolved? That, of course, depends on a
number of factors — future interest rates, real estate prices
and the speed with which the FDIC can get to work on the job.
Under likely scenarios, we estimate the size of the immediate
problem at well under the $50 billion available to the RTC to
handle it. To get our estimate, we start with the $18 billion of
negative tangible net worth. To that cost we add some fraction
of the assets which will be lost in the process of liquidation or
merger. Our present estimate of the total cost is about $40
billion. Even under less likely scenarios which would make the
problem worse, it is within the $50 billion available to the RTC.
Our best estimate of the size of the current problem — $40
billion for the resolutions completed by the Bank Board last year
plus something under $50 billion for the current caseload, a
total of about $90 billion — is in line with estimates from the
FDIC, GAO, Federal Reserve, and the Bank Board.
What happens if in the future even more that 350 GAAP
insolvent and 150 GAAP solvent and tangible with negative
tangible net worth must be resolved, as a number of commentators
have suggested? Our plan already contains a substantial amount
of funds to support the S&L industry during the post-RTC period,

- 17 1992-99. A total of about $24 billion will be available during
this period to resolve any S&Ls which become insolvent. This
amount is in addition to about $9 billion which is allocated by
the plan to building a new insurance fund for the healthy S&Ls.
Should a presently implausible economic scenario occur which
markedly increases the cost of the RTC resolution task — either
by increasing the cost of resolving the roughly 500 institutions
with negative tangible net worth or by adding a large number of
presently solvent institutions to its caseload — some portion of
the additional $24 billion capacity could be used. If they are
not needed for resolutions, these funds will be available for use
in further building the new S&L insurance fund.
CONCLUSION
The Administration's activity of the past few weeks should
illustrate clearly our commitment to a long-lasting resolution of
the S&L crisis. We have presented a structurally sound plan. We
have delivered to you a balanced financing package that requires
contributions from the S&L industry and also lives within the
government's means. If there is one recurring theme that I hear
from my G-7 finance colleagues, it is this: They •— like all
investors in our capital markets — are closely watching our
commitment to budget discipline and financial responsibility.
Our expedited action will enhance financial stability both now
and in the future.
In conclusion, the President's comprehensive solution to the
savings and loan crisis — if enacted by Congress in a timely
manner -- will provide a sound, long-term answer to the savings
and loan problem. We already have made a head start. The time
to act is now.
The cooperative supervisory action already being implemented
by the FSLIC and the FDIC paves the way to begin case resolutions
immediately once the Congress acts. We stand ready and eager to
work with the Members of this Committee and others to enact this
plan into law as soon as possible. Working together, we can
recreate and rejuvenate the vital savings and loan industry,
which has served the nation's home owners so well in the past.
I will be happy to answer any questions the Members of the
Committee may have.
# # # # #

Priority of Sources of Funds
rmrnnprcial bank premiums:
1) Bank Insurance Fund (Old FDIC fund)
Savings and Loan premiums:
1) Interest on FICO bonds
2)
Principal for REFCORP bonds
3)
FSLIC Resolution Fund (Old FSLIC assets and
liabilities)*
4)
Savings Association Insurance Fund*
* 3 and 4 above switch to 4 and 3 in 1992
Old Receivership Proceeds:
1) Principal for REFCORP
2)
Interest on FICO bonds
3)
FSLIC Resolution Fund
New Receivership Proceeds:
1) Interest on REFCORP bonds
Warrants and Participations:
1) Interest on REFCORP bonds
Miscellaneous FSLIC Income:
1) FSLIC Resolution Fund
FHLBank Retained Earnings and $300 million in FHLBank
Profits:
1) Principal on FICO bonds
2)
Principal on REFCORP bonds
3)
Interest on REFCORP bonds
Treasury funds:
1) Interest on REFCORP bonds
2)
FSLIC Resolution Fund
3)
Savings Association Insurance Fund (Schedule of
estimated resolution costs plus $1 billion starting in
1991 until earlier of 1999 or reaching 1.25 ratio)
REFCORP Proceeds
1)

Resolution Trust Corporation (RTC)

Priority of Uses of Funds
1.

FDIC —

Bank Insurance Fund:

1) Commercial bank premiums
2. FDIC — Savings Association Insurance Fund:
1) Savings and Loan premiums
2)
Treasury funds
3)
Offices and office supplies of FSLIC Resolution Fund
(upon dissolution)
3. FSLIC Resolution Fund:
1) Miscellaneous FSLIC income
2)
Proceeds of FICO bonds
3)
Old receivership proceeds
4)
S&L premiums
5)
Treasury funds
4. FICO Principal:
1) FHLBank Retained Earnings and $300 million in FHLBank
Profits
5. FICO Interest:
1) S&L premiums
2)
Old receivership proceeds
6. REFCORP Principal:
1) FHLBank Retained Earnings and $300 million in FHLBank
Profits
2)
S&L premiums
3)
Old receivership proceeds
7. REFCORP Interest:
1) New receivership proceeds
2)
Warrants and Participations
3)
FHLBank Retained Earnings and Profits
4)
Treasury funds
8 . Resolution Trust Corporation (RTC):
1) REFCORP proceeds ($50 billion)
9. Treasury:
1) FSLIC Resolution Fund proceeds upon dissolution (net of
offices and office supplies)
2)
REFCORP proceeds upon dissolution

Chart 1
General Organizational Structure

OVERSIGHT BOARD:
SECRETARY OF THE TREASURY
FEDERAL RESERVE BOARD
ATTORNEY GENERAL
Resolution Trust Corporation

Management
Contract

FSLIC Resol.
Fund

FDIC

Savings Assn.
Ins. Fund

Bank Ins.
Fund

naaouij

FHLBS

OCC

Chartering
Authority

FICO/
REFCORP

FHLBank
System

Examination/
Supervision

Chart 2
Insurance and Financing Structure

OVERSIGHT BOARD:
SECRETARY OF THE TREASURY
FEDERAL RESERVE BOARD
ATTORNEY GENERAL
Resolution Trust
Corporation

Management

FDIC

Contract

$50 Billion

$50 billion in bonds
Resolution
Funding
Corporation
(REFCORP) **

$5-6 billion for principal
$113 billion for interest

Capital
Markets

* The RTC will resolve all GAAP-insolvent S&Ls over a threeyear period and will sunset after five years. NOTE:
Although the RTC will contract with the FDIC, it will be
subject to an Oversight Board composed of the Treasury
Secretary, the Federal Reserve Chairman, and the Attorney
General.
** The REFCORP will raise $50 billion in the capital markets,
transfer that sum to the RTC for resolution costs for GAAPinsolvent S&Ls, and repay the principal and interest costs
on the $50 billion.

Chart 3
SOURCES AND USES OF FUNDS
Resolution Trust Corporation * and
Resolution Funding Corporation (REFCORP) **
Sources
Miscellaneous F8LIC Income
Proceeds of FICO Bonds
Old Receivership Proceeds
Portion of 8&L Premiums
Treasury Funds
FHLBank Retained Earnings
Old Receivership Proceeds
Portion of 8&L Premiums

Additional FHLBank Earnings
New Receivership Proceeds
Treasury Funds
Warrants and Participations
Portion of 8&L Premiums
Treasury Funds

Increased Commercial
Dank Premiums

Purpose

Uses

FSLIC Resolution Fund

Principal Costs of REFCORP
Resolution Trust
Corporation
Interest Costs of REFCORP

Post-RTC Resolutions and
New Savings Assn.
Insurance Fund

New Bank
Insurance Fund

* The Resolution Trust Corporation will resolve GAAP insolvent savings and loans

I . ii .• ;! r«.i«i

Administration Proposal: Cash Flow for Government
($ in hi It ions)
2/15/89
FY B9 FY 90 FY 91 FY 92 FY 91 FY 94 R9-94 B9-99

Cash Inflows (-) :
FSLIC/RTC collections
-3.B
from FICO
FSLIC/RTC collections
-10.0
from REFCORP
SfcL Premiums and other
-3.3
FSLIC Collections
0.0
Additional Collections
-17.0
to FDIC
TOTAL CASH INFLOWS
Cash Outflows:
Old Cases and administrative
expenses — cash
8.3
RTC cases
10.0
Post-RTC Cases
Contribution to REFCORP
interest costs
0.5
TOTAL CASH OUTFLOWS
18. B
Net cash outflows l.B
Debt transaction adjustments:
New FSLIC debt issued
9.7
Redemption of FSLIC
debt
NET COST TO GOVERNHENT

-0.4

(Budget Outlays)

11.1

-3.3

-7. 1

-50.0

-25.0

-15.0

-1.5

-3.2

-3.6

-3.5

-16.4

-31.2

-O.fl
-30.6

-1.6
-18. 1

-1.7
-4.9

-1 .B
-5.4

-1 .9
-5.5

-7 .9
-B1.4

-19.9
-10B.2

6.5
25.0

5.6
15.0
2.0

5.4

5.7

3.B

2.4

3.6

2.0

35. 1
50.0
10.0

61 .6
50.0
24.0

1.6
24.?

0.9
B.7

0.8
10. 1

1. 1
7.0

6. 3
101 .7

22.0
157.6

1.4
32.9
2.3

6. 1

3.9

4.B

1.5

20.2

49. 3

0.0

9.7

-0. 3

-0. 1

0.0

-1 . 1

0. 0

-1.9

-19.2

1.9

6.0

l.n

l./

1 '•

2R.1

19.q

.. ./J

FUNDING SUMMARY
($ in billions)

2/20/89
FSLIC/RTC
Disbursements

FY 89

FY 90

FY 91

FY 92

FY 93

FY 94

89-94

89-99

27.7

31.2

22.5

7.8

8.3

5.8

103.2

126.2

4.7
3.6

3.8
2.0

43.2
60.0

52.2
74.0

-1.5
-0.3
-1.8

2.0
0.4
1.9

-50.0
-5.6
-0.4
-17.5

-50.0
-19.0
2. 1
-21.4

0.8

1.1

6.3

22.0

Old Cases &
Other Expenses
17.7
6.2
5.5
5.4
New Cases
10.0
25.0
17.0
2.4
Collections (-) -17.0 -29.8 -16.5 -3.2 -3.6 -3.5 -73.5 -88.3
New FICO(REFCORP) Bonds -10.0 -25.0 -15.0
Old Premiums (Net)
-1.4
0.4
Additional Premium 1/
Other Old Collections
-5.6
-5.2
FSLIC/RTC Net Outlays 10.7 1.4 6.0 4.6 4.7 2.3
Treasury Payments for
Bond (REFCORP) Interest

0.5

1.4

0.3
-1.5
-0.3
-0.3
-1.6
-1.4
29.7 37.9
1.6

0.9

Add'l FDIC Collections 0.0 -0.8 -1.6 -1.7 -1.8 -1.9 -7.9 -19.9
TOTAL BUDGET OUTLAYS 11.1 1.9 6.0 3.8 3.7 1.5 28.1 39.9
1/ A (-) indicates increase in premiums, a (+) indicates a decrease.

rin ? u V W J
NfcW FICO (REFCORP) FINANCING
($ in bi1 Lions)

02/20/89
FY 89

FY 90

FY 91

FY 92

FY 93

FY 94

89-94

0.8
0.0
0.8

1.1
1.7
2.8

0.8
1.7
2.5

0.0
0.0
0.0

2.7
3.3
6.0

0.0
0.0
0.5
0.5

0.0
0.5
1.4
1.9

0.0
1.8
1.6
3.4

0.3
2.6
0.9
3.8

0.3
2.7
0.8
3.8

0. 3
2.4
1. 1
3.8

0.9
10.0
6.3
17.2

89-99

NEW FICO (REFCORP) 1/
PRINCIPAL covered by
zeros paid with
private funds:
FHLB Retained Earnings
S&L Insurance Premiums
TOTAL DEFEASANCE

2.7
3. 3
6.0

INTEREST covered by
private & public funds:
FHLB future income
Receivership Proceeds
Treasury funds
TOTAL INTEREST

1/ Sells long-terra bonds: $10B in FY 89, $25B in FY 90, $15B in FY 91.

2.4
12.0
22.0
36.4

1.1) ? :i 1<)B9
2/15/69
»» 89

It 90

»¥ 91

i»9 oc

•••••••••••••••••••••••••••••••.•••«••••••.irc:::r.r.c......:

•«•«•=«••*•

fSHC i tlC ACCOM I
OlSOUIISfNfNfS
Old Co*** t OtHar fiponaoo
Adiln w d alic » p
Not** laauad
Interact an H*t*«
Outatondlno.
•opoy not** laauad
prior to n 87
•••let one o h | w n n
liquidation*
lotol Old

O.S
9.7

0.1

0.5

0.1

0.2

1 6
9 7

2.0
9.7

1.4

1.1

0 9

0.8

0.7

6.4

9.2

0.0
5.2
1.0

0.0
it

0.2
5.ft

0 0
4?

0 2
3.4

0 0
2.9

0.5
24 0
1.0

05
28.8
1.0

17.7

6.2

3.5

5.4

4.7

3.8

43.?

52.2

1.2
1.2
2.4
7.8

1.8
1.8
3.6
8.3

1.0
1.0
2.0
5.8

30.0
30 0
60.0
103.2

44.0
30.0
74 0
126.2

7 1
50.0

7.1
50.0

COOM

and Otnor f ip
A**l*t«d ftoroar* 5.0 12.) 0.1
liquidation*
lotol Mow Ceoee
tOIAl OlSOlMSfWNIf
COUfCTIOJrS <-J
H C O proceode (CEBA) <•)
Now H'COftP »rocooda <-»
Inouranco Pranluaa
bofaro daductlona <•)
i Ooduct < • ) :
M C O (C10AJ Interaet
tec. ftoeorvo Credit
Oefeoe* Now Bond
Principal
Not •roattoa Incase (-)
Procooda frea •ecolvara
and Corporete-hetd
A««at« Cold caooa) <•>
Incoaw on InwaC bal (-)
Other Colloctlona < )
V O U 1 COUICflONS

rsuc/ttc NII a m M S

5.0
10.0
27.7

I? 5
25.0
11.2

8.3
17.0
22.)

1.8
-10.0

3.)
25.0

15.0

-2.1

2.1

-2.7

Oo
0.1

0 9
0.1

1.4

-1.4
-0.1
0 4
-17 0

10.7

•epoyaont of Note* l**u*d
•l|«r fV 6»
0 4
Balance ol r U I C Nolo*
Outstandino fend yr)
19.2
rsilC/HC Ca«H/lnvoataant
end-yr balance* <9/10/0t-t1.ft)
bolonc* for caaaa:
0.*
balanca for new fund:
0.0

2.9

•1.1

2.6

15.6

31.6

10
C

1.0
n y

1.0
O.S

1.0
0.0

55
0.7

10.7
0.7

1.7
0 4

1.7
0.1

1.8

-1.7

-1.6

3.3
6 0

11
16.9

14
0.0
-0 4
W l

-1.2
0.0
0 4
-16.3

10
0.0
01
1.2
4.6

•1.4
•0.1
•0.3
-3.6
4.7

1.3
0.1
0.4
•3.3
2.J

•7.8
0 4
•2.1
71 5
29.7

9 7
•11
33
88 3
17.9

0 1

0.1

0.0

1.1

0.0

19.2

M 9

18.6

18.3

17.3

0 0

0 5
0 0

0.5
0.0

0.5
1.0

0 5
2.1

0 5
1.2

0 5
1?

0 5
ft 8

6 0

4 6

4.7

?.l

?Q r

17 9

16
16

0 9
1.7

0 8
1.8

I1
1.9

A 1

22.0
19 V

1 ft

i r

i s

SUNMAftV Of ACC0UNIS AMtCTfO
f S U C / M C Not Outlay*
traaaury Contribution to
•ffCOR* |nt*r»*t
Add'l fOIC Collection*

10.7
0.5
0 0

^
0

, -..a...••..••••••••••••••••«•••IIIHIII!:!-

tOIAl 800011 OUHAVS

111

-TTTI.••••...

A 0

\» v

r L H :'u nt39
2/20/89
Assumptions
FICO (CEBA) Rates
REFCORP Rates
Int Rate on LT Treasuries
Discount on zeros
Int Rate on FSLIC Notes

FY 89
FY 90
======= ========
9.8%
8.6%
9. 1%
7.9%
8.8%
7.6%
8.8%
7.6%
9.5%
7.8%

FSLIC Deposit Base
($ in trillions)
1989-99 Growth Rate

1.0
7.2%

1.1

FDIC Deposit Base
($ in trillions)
1989-99 Growth Rate

2.1
6.9%

2.3

FY 91 FY 92 FY 9 3 FY 94
Wtd avq (88-90): 9.5%
6.5%
Wtd avq (89-91):
6.2%
wtd avq (89-91):
6.2%
Wtd avq (89-91):
6.1%
4.9%
4.3%
4.0%
1.2 1.2 1.3 1.4

2.4

2.6

2.8

Recovery on receivership assets (new cases):
40 cents on each dollar over the 4 years subsequent to liquidation

2.9

7.7%
7.4%
7.4%

TREASURY NEWS
Dtpartment of the Treasury • Washington, D.C. • Telephone 560-2041
Uu?!>.,;" *e9M 5^10

FOR IMMEDIATE R E L E A S E R j?] 8 55 'H ' -Q
February 22/ 1989
'
": '"

CONTACT:

LARRY BATDORF
(202) 566-2041

PROTOCOL TO U.S.-FRANCE INCOME TAX TREATY RATIFIED
The Treasury Department today announced that ratification
procedures have been completed of the Protocol to the U.S.-France
income tax treaty, which was signed on June 16, 1988
("the
Protocol").
The Protocol amends the Convention between the
United States of America and the French Republic with Respect to
Taxes on Income and Property of July 28, 1967, as previously
amended by Protocols of October 12, 1970, November 24, 1978, and
January 17, 1984.
The Protocol was ratified on December 29, 1988 and entered
into force on that day. Its provisions apply:
a) with respect to taxes withheld at the source, to amounts
payable on or after February 1, 1989;
b) with respect to taxes referred to in paragraph 2 of
Article 13 (Branch P r o f i t s ) , as added by Article VIII of the
Protocol, to profits realized in any taxable year ending on or
after December 29, 1988;
c) with respect to subparagraphs (c), (d) and (e) of
paragraph 2(a)(ii) and subparagraph (e) of paragraph 2 of Article
23 (Relief from Double Taxation), as added by Article IX of the
Protocol, to income described therein derived on or after January
1, 1988; and
d) with respect to all other modifications made by the
Protocol, for taxable years beginning on or after
1988.

o 0 o

NB-147

December

29,

TREASURY NEWS
jtpartivient of the Treasury • Washington, D.C. • Telephone 566-2041
February 22, 1989

C. EUGENE STEUERLE
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
LEAVES TREASURY

C. Eugene Steuerle, Deputy Assistant Secretary of the
Treasury for Tax Analysis, has left the Treasury Department to
become President of the Government Finance and Budget Institute
and to write a column in conjunction with work with Tax Analysts,
a non-profit organization located in Arlington, Virginia.
As Deputy Assistant Secretary for Tax Analysis, Mr. Steuerle
served as the principal deputy on economic matters to the
Assistant Secretary for Tax Policy. He directed the activities
of the Office of Tax Analysis, which included economic analyses
of tax proposals, preparation of approximately 25 mandated
studies for the President and the Congress, and estimation of
receipts for the U.S. Budget. He also represented the department
on numerous issues related to revenue bills and proposals, as
well as to tax components of catastrophic health, welfare,
environmental and other bills.
Before accepting the appointment as Deputy Assistant
Secretary for Tax Analysis, Mr. Steuerle was Director of Finance
and Taxation Projects and a Resident Fellow at the American
Enterprise Institute for Public Policy Research. During a
previous Treasury tenure, he had also served as Economic Staff
Coordinator for the Treasury's Project for Fundamental Tax
Reform, and was the original organizer and a principal designer
of the Treasury Department's 1984-86 tax reform effort.
Mr. Steuerle is the author of over 50 books, articles and
reports on public finance and taxation. He holds a doctorate in
economics (with distinction in public finance) and two masters
degrees from the University of Wisconsin. His bachelor's degree
is from the University of Dayton, where he was named the outstanding graduate of the College of Arts and Sciences. He and
his wife and two children reside in Alexandria, Virginia.
NB-148

Report to Congress

on the
Taxation of Income Earned by Members
of Insurance or Reinsurance Syndicates "

Department of the TreasuryFebruary 1989
/'

p»

DEPARTMENT OF THE TREASURY
WASHINGTON

FEB 2 2 *»9
The Honorable Dan Rostenkowski
Chairman, Committee on Ways and Means
U. S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Enclosed is a Report to Congress on the taxation of income
earned by members of insurance or reinsurance syndicates. The
Report was mandated by Section 10244 of the Omnibus Budget
Reconciliation Act of 1987.
As you know, the Treasury Department was requested to make
the study because of Congressional concern that a 1980 closing
agreement between the Internal Revenue Service and underwriters
at Lloyd's, London may require revision to account for changes in
the U.S. taxation of insurance income since 1980. Congress was
also concerned about the possibility that the closing agreement
might create an inappropriate disparity between the taxation of
underwriters at Lloyd's of London and U.S. underwriters who are
members of Lloyd's-type syndicates formed in the United States.
As a result of the study, we have concluded that the 1980
closing agreement with the underwriters at Lloyd's of London
should be revised and we have begun discussions with their
counsel on a new agreement. We will keep you informed of further
developments.
Similar letters and copies of the Report are being sent to
the Honorable Bill Archer, ranking minority member of your
committee, the Honorable Lloyd Bentsen, Chairman, Senate Finance
Committee, and the Honorable Bob Packwood, ranking minority
member of the latter committee. If you have any questions about
the Report, we would be pleased to answer them.
Sincerely,

Dennis E. Ross
Acting Assistant Secretary (Tax Policy)
Enclosures
cc: Ronald A. Pearlman
Chief of Staff
The Joint Committee on Taxation

Report to Congress
on the
Taxation of Income Earned by Members
of Insurance or Reinsurance Syndicates

Department of the Treasury
February 1989

DEPARTMENT OF THE TREASURY
WASHINGTON

ASSISTANT SECRETARY

F E B 2 2 1989

The Honorable Lloyd Bentsen
Chairman, Senate Finance Committee
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
Enclosed is a Report to Congress on the taxation of income
earned by members of insurance or reinsurance syndicates. The
Report was mandated by Section 10244 of the Omnibus Budget
Reconciliation Act of 1987.
As you know, the Treasury Department was requested to make
the study because of Congressional Goncern that a 1980 closing
agreement between the Internal Revenue Service and underwriters
at Lloyd's, London may require revision to account for changes in
the U.S. taxation of insurance income since 1980. Congress was
also concerned about the possibility that the closing agreement
might create an inappropriate disparity between the taxation of
underwriters at Lloyd's of London and U.S. underwriters who are
members of Lloyd's-type syndicates formed in the United States.
As a result of the study, we have concluded that the 1980
closing agreement with the underwriters at Lloyd's of London
should be revised and we have begun discussions with their
counsel on a new agreement. We will keep you informed of further
developments.
Similar letters and copies of the Report are being sent to
the Honorable Bob Packwood, ranking minority member of your
committee, the Honorable Dan Rostenkowski, Chairman, Committee on
Ways and Means, and the Honorable Bill Archer, ranking minority
member of the latter committee. If you have any questions about
the Report, we would be pleased to answer them.
Sincerely,

Dennis E. Ross
Acting Assistant Secretary (Tax Policy)
Enclosures
cc: Ronald A. Pearlman
Chief of Staff
The Joint Committee on Taxation

CONTENTS
I.

INTRODUCTION

II. OPERATION OF LLOYD'S OF LONDON 5
A. History and Development 5
B. Lloyd's of London Today 7
C. The 1968 Closing Agreement 9
D. The 1980 Closing Agreement 11
III. OPERATION OF LLOYD'S (U.S.) 12
A. General 12
B. Deposits and Premiums . . . .~ 13
IV. QUESTION ONE: WHAT 15 THE APPROPRIATE TAXABLE ENTITY? .. 14
A. Background 14
B. Lloyd's of London 15
1. Corporation of Lloyd's 15
2. Lloyd's of London Membership 16
3. Syndicates 18
4. Members 22
5. Premiums Trust Funds , 23
C. Lloyd's (U.S.) 24
1. Corporation of Lloyd's 24
2. Lloyd's (U.S.) Membership 25
3. Syndicates 29
4. Members 29
5. Underwriting Account 29
V. QUESTION TWO: WHAT TAX ACCOUNTING RULES SHOULD BE
APPLIED TO MEMBERS OF INSURANCE SYNDICATES?
- v -

A. Timing of Income Recognition

B. Tax Accounting for Future Benefit Claims 32
1. Undiscounted current deduction 33
2. Pre-tax discounting 34
3. After-tax discounting 35
4. Deferral of deduction 36
5. Lloyd's of London's three-year accounting method .. 37
C. Subchapter S Treatment for Individual Insurance
Underwriters

D. Application of Passive Activity Loss Rules 40
1. Treatment of investment income 40
2. Disposition of activity 41
3. Straddle transactions 42
VI. QUESTION THREE: DO THE NONRESIDENT UNDERWRITERS AT LLOYD'S
OF LONDON HAVE A U.S. PERMANENT ESTABLISHMENT?
43
A. General 43
B. Application of Treaties 44
C. Context in Which the Issue Must Be Considered .... 46
D. Factors that May Cause Nonresident Underwriters at
Lloyd's of London to Have a U.S. Permanent
Establishment
1. Illinois and Kentucky 49
a. Do the underwriters have permanent establishments
in Illinois and Kentucky?

b. Is income earned by nonresident underwriters
outside Illinois and Kentucky "attributable to" the
permanent establishments in those states? . . .
52
2. Dependent Agents 53
E. Reexamination of the U.S./U.K. Treaty 58
VII. CONCLUSIONS 58
- vi -

REPORT TO CONGRESS
on the
TAXATION OF INCOME EARNED BY MEMBERS
OF INSURANCE OR REINSURANCE SYNDICATES
Section 10244 of the Omnibus Budget Reconciliation Act of
1987 directed the Secretary of the Treasury (or his delegate) to
conduct a study of the proper federal income tax treatment of
income earned by members of insurance or reinsurance syndicates.
The study was requested because of Congressional concern that a
closing agreement executed in 1980 between the Internal Revenue
Service and underwriters at Lloyd's, London (hereafter referred
to as "Lloyd's of London") may require revision to account for
changes in the taxation of insurance income since 1980. Congress
also wanted Treasury to consider whether U.S. underwriters who
are members of Lloyd's of London and U.S. underwriters who are
members of Lloyd's-type syndicates formed in the United States
are similarly situated, and, if so, whether the 1980 agreement,
which imposes only one level of tax on underwriters at Lloyd's of
London, creates an inappropriate disparity between the two groups
of U.S. underwriters. The Treasury Department agreed with
Congress that the 1980 agreement should be revisited and is
pleased to submit this report.
I. INTRODUCTION
Lloyd's of London is a 300-year-old insurance market, based
in London, in which insurance and reinsurance is purchased for
risks located around the world and in space. As described in
more detail below, the more than 30,000 underwriters who are
members of Lloyd's of London, participating through one or more
syndicates, accept shares in insured risks and pledge all of
their personal assets as security. Underwriters at Lloyd's of
London have insured risks arising in the United States since at
least 1892.
The Internal Revenue Service's study of the appropriate
taxation of income (including both underwriting income and
investment income) earned by underwriters at Lloyd's of London
dates back at least to the 1930s. In 1968, the IRS and the
underwriters at Lloyd's of London entered into a closing
agreement that provided certain guidelines for the taxation of
income earned by the underwriters from their U.S. insurance
activities. The 1968 closing agreement was revised in 1980 and
this second agreement remains in effect. A companion agreement
signed in 1981 provides rules for taxing income that is subject
to the U.S. excise tax on insurance premiums paid to foreign
insurers. The current agreements, in brief, provide as follows:

-2—

Underwriters at Lloyd's of London are to be taxed as
individuals.

— Individual underwriters (both U.S. and foreign) are deemed
to have a "permanent establishment" in the U.S., which
means that the income attributable thereto (both
underwriting income and investment income) is subject to
income tax on a net basis. There is only one level of
U.S. tax imposed.
- All U.S. source investment income earned from premiums
placed in U.S.-based trust accounts is taxed annually to
each underwriter; underwriting profit and losses are
taxed using the so-called 3-year accounting method
applied to Lloyd's of London underwriters under British
law.
— Under source rules agreed to in the closing agreement,
some premiums paid in U.S. dollars (as the currency of
convenience between the parties) are deemed to be for U.S.
insurance (and subject to net-basis taxation under the
agreement) even though the risk is not located in the U.S.
and the insurance income would not otherwise be subject to
U.S. tax. Conversely, a small amount of business, written
in currencies other than the U.S. dollar is exempted from
tax, even though it involves U.S. situs risks.
— U.S. dollar premiums paid for U.S. reinsurance placed
without the use of a U.S. broker are deemed not to be
earned through a U.S. permanent establishment and are
subject instead to the gross-basis insurance premium
excise tax imposed under section 4371 of the Internal
Revenue Code of 1986. (The U.S./U.K. income tax treaty
relieves British residents from the excise tax, however.)
All such reinsurance premiums are placed in a U.S. trust
fund, and investment income earned by the premiums is
subject to U.S. taxation under a formula set forth in the
closing agreement. In addition, excise tax is collected
on certain reinsurance policies obtained by underwriters
at Lloyd's of London for reinsurance of U.S. risks.
Prior to enactment of the Omnibus Budget Reconciliation Act
of 1987, counsel for Lloyd's, U.S. (hereafter referred to as
"Lloyd's (U.S.)"), a U.S.-based insurance exchange organized
under Texas law and patterned after Lloyd's of London, urged the
Treasury Department and Congress to revise the 1980 closing
x
agreement with underwriters at Lloyd's of London on the ground
that the 1980 agreement provided underwriters at Lloyd's of
London a competitive advantage. As described more fully below,
underwriters at Lloyd's (U.S.) are subject to two levels of ta*'
on their insurance income: corporate tax treatment under
subchapter L of the Code and taxation at the "shareholder" level
on net profits. Both the underwriting and investment income are
determined annually at the corporate level, and the net profits
are deemed immediately distributed to the individual underwriter.

-3The underwriters at Lloyd's (U.S.) would prefer to be taxed only
once, like underwriters at Lloyd's of London; as a secondary
solution, Lloyd's (U.S.) urges that the 1980 closing agreement
should be revised to subject underwriters at Lloyd's of London to
two levels of tax, with both investment income and underwriting
income determined on an annual basis (rather than using a
3-year accounting method for underwriting income). Lloyd's
(U.S.) continued to press its position as this study progressed.
Both before and after enactment of the 1987 legislation, Lloyd's
of London has maintained that the 1980 closing agreement
represents an appropriate compromise for the U.S. taxation of its
underwriters and should be retained, although it has expressed
throughout a willingness to consider modifying the agreement.
Both Lloyd's of London and Lloyd's (U.S.) provided
substantial assistance to the Treasury Department in conducting
this study. Lloyd's (U.S.) is not the only Lloyd's-type plan
operating in the United States, and we invited other U.S.-based
Lloyd's-type insurance plans to submit comments. No other group
chose to participate.
Lloyd's of London has not challenged the current tax
treatment of Lloyd's (U.S.) or changes in that treatment that
Lloyd's (U.S.) has sought for itself; rather, Lloyd's of London
generally has limited its submissions to an explanation and
justification of the tax treatment its underwriters receive under
the 1980 closing agreement. Nonetheless, it is important to note
that Lloyd's of London and Lloyd's (U.S.) agree on very little
regarding each other's operations, except in one respect. Each
group asserts that its underwriters should be subject to one —
and only one — level of tax on their insurance income; they both
assert that, since insurance is a risk business, this tax should
be computed on the basis of accounting principles that permit the
establishment of reasonable reserves. Beyond this common goal,
the differences between them on issues of both fact and law are
marked. For instance, they disagree as to:
— Whether the structure and operation of Lloyd's (U.S.) and
those of Lloyd's of London are so different as to warrant
the imposition of different tax regimes.
- Lloyd's (U.S.) contends that its structure and
operations are substantially indistinguishable from
those of Lloyd's of London. Lloyd's of London
responds that its operation and structure differ
substantially from that of Lloyd's (U.S.), and
these differences explain any differences in
taxation.
— Whether nonresident alien underwriters at Lloyd's of
London conduct insurance operations through a permanent
establishment in the U.S., absent the application of the
closing agreement, and the extent to which underwriting

-4profit or loss and investment income is attributable to
such a permanent establishment.
- Lloyd's of London asserts that, with possible minor
exceptions, it does not conduct its U.S. insurance
operations through a permanent establishment.
Lloyd's (U.S.) asserts that Lloyd's of London
clearly has a permanent establishment in the United
States to which most, and possibly all, of its U.S.
income is attributable.
— Whether the Lloyd's of London accounting method results in
a competitive advantage.
- Lloyd's (U.S.) argues that the 3-year accounting
method for underwriting profits and losses used by
underwriters at Lloyd's of London provides those
underwriters a substantial competitive advantage.
Lloyd's of London responds that the 3-year method
usually operates to defer underwriting losses, so
that tax collections are accelerated and its
underwriters are often disadvantaged economically
by this method of accounting; Lloyd's of London
adheres to the 3-year method because it must use
that method for U.K. regulatory and tax purposes
and because it believes that method more clearly
reflects income.
— Whether current law is consistent with imposing a single
level of tax on the underwriters at Lloyd's of London.
- Lloyd's of London asserts that its underwriters do
business as individuals, lack corporate
characteristics, and do not utilize subchapter L of
the Code, and thus should not be subject to two
levels of tax. Lloyd's (U.S.) agrees that, as a
conceptual matter, individuals engaged in the
insurance business should be subject to only one
level of tax; but, it argues that under current law
as applied by the IRS even an individual is
effectively subject to two levels of tax on income
earned through an insurance operation.
In this study, we have not sought to reconcile each of the
s
differences of opinion on factual and legal issues between
Lloyd's of London and Lloyd's (U.S.). Nor have we attempted to
determine with finality the appropriate taxation of underwriter
at either Lloyd's of London or Lloyd's (U.S.). To do so would
require the resolution of factual questions to which the answers
may change over time and which, in any event, should be left to
the Internal Revenue Service to resolve on audit. Rather, we
have tried to examine — in light of the factual patterns
presented by the operations of Lloyd's of London and Lloyd's
(U.S.) — the question posed by Congress: under current law,

-5what is the appropriate U.S. tax treatment of members of
insurance (or reinsurance) syndicates such as underwriters at
Lloyd's of London who insure U.S. risks?
In examining this question, we have considered three major
issues:
1. What is the appropriate taxable entity for a Lloyd's-type
insurance group: (a) the individuals who accept the risks; (b)
the syndicates through which specific risks are insured or
accounted for; or (c) the umbrella group that provides the
marketplace (such as the entire membership of Lloyd's of London
or Lloyd's (U.S.))?
2. What are the tax accounting rules that should apply to
participants in a Lloyd's-type program?
3. Absent a closing agreement, would the underwriters at
Lloyd's of London be subject to U.S. net-basis taxation? Do the
underwriters have a permanent establishment in the United States?
If so, what are the tax consequences? If not, what are the tax
consequences? What is the significance of tax treaties between
the United States and some of the countries in which underwriters
at Lloyd's of London are residents?
SUMMARY
The CONCLUSIONS to this report (see page 58)
summary of findings.

provide a brief

II. OPERATION OF LLOYD'S OF LONDON
A. History and Development
Lloyd's of London is an insurance marketplac
e in which more
than 30,000 individual underwriters carry on the business of
underwriting insurance. It is not an insurance company. It
traces its roots to 1688 when Edward Lloyd's cof feehouse in
London became a center for marine underwriters a nd shipowners
wishing to insure their vessels and cargoes. Be cause it often
was not economical for an individual underwriter to assume 100
percent of a particular risk, the practice devel oped whereby more
than one underwriter would assume parts of a sin gle risk. From
these activities, a society of underwriters deve loped, known
collectively as Lloyd's. Over the years, Lloyd' s of London has
evolved into a major insurance institution in th e United Kingdom
present the
structure
and The
throughout
world. and operation of Lloyd's of London is
set out in British legislation, particularly the Lloyd's Act of
1982, which requires that underwriting at Lloyd's of London be by
individuals, trading each for his own account. As described more

-6fully below, individual underwriters who are members of Lloyd's
of London select a member's agent and, through that agent, one or
more managing agents who operate insurance "syndicates"; a
syndicate may include hundreds of underwriters, or only a few.
The managing agent for a syndicate (who may further delegate
authority to one or more underwriting agents) has authority to
bind each underwriting member of the syndicate to a risk; each
underwriting member has unlimited liability, but only for his own
account, that is, there is several, not joint, liability. An
individual underwriter's percentage of the risks insured by a
syndicate to which he or she belongs is fixed at the beginning of
the "year of account" (which is the calendar year), according to
the portion of the underwriter's premium limit that he or she
allocates to the syndicate; the percentage applies to every risk
insured through the syndicate during the year and generally does
not change during the year. Lloyd's of London has grown in
capacity by admitting additional underwriters, whose capital
expand the market's total premium income limits.
After 1850, the Lloyd's of London business expanded beyond
marine insurance. By 1900, Lloyd's of London had evolved into a
sophisticated insurance market, and the early years of this
century were marked by rapidly increasing regulation and improved
procedures. In 1902, Lloyd's of London began requiring deposits
or guarantees from members. In 1903, the Committee of Lloyd's
began requiring each new underwriter to put a portion of his
premium income and investment yield in irrevocable 3-year trusts
for the payment of underwriting liabilities and to assure the
protection of policyholders. About 1908, Lloyd's of London began
requiring audits of all syndicate accounts by an approved
independent auditor. In 1909, the British Parliament enacted the
Assurance Companies Act, which required deposits of money to be
set aside by insurance companies and by every individual
underwriter in relation to the amount of the risks underwritten.
The Lloyd's Committee obtained an exemption from the deposit
requirement for any underwriter who could produce a certificate
of solvency and had provided the Committee with a deposit or
guarantee equal to a year's premium income. This is the origin
of the "means" test for qualification as a Lloyd's underwriter
and of the deposit requirement that new members must satisfy; the
"means" test and deposit requirement are more fully explained
below.
Underwriters at Lloyd's of London began insuring U.S. risks
at least by 1892. In 1939, the Committee of Lloyd's established
the Lloyd's American Trust Funds ("LATF"), maintained by Citibank
as trustee, into which all dollar premiums must be paid. The
assets of the trust fund currently exceed $8 billion.
Originally, Lloyd's of London syndicates tended to be small;
in 1856, most of the syndicates had no more than three members
with the largest having approximately six members. In 1952,
sixteen syndicates had 100 members or more, and one syndicate had
300 members. Syndicates have continued to grow in number and

-7size; for 1988 there were 376 syndicates, some of which included
more than 1,000 members. Approximately 10 percent of the more
than 33,500 Lloyd's of London underwriters in 1988 were U.S.
residents or citizens.
B. Lloyd's of London Today
The Corporation of Lloyd's provides facilities and services
to assist underwriters in carrying on their business. This
Corporation does not underwrite any insurance. It acts within
limits established by a Council composed of twelve active
underwriting members of Lloyd's of London, eight nonworking
members of Lloyd's and eight nonmembers of Lloyd's of London
approved by the Governor of the Bank of England. The 1982
Lloyd's Act empowered the Council to control the admission and
discipline of members; to set the members' reserve requirements
beyond the amounts in the premiums trust fundsl./ (i.e., the
Deposit Guaranty Funds, and the Central Fund); to set the fees
and deposits required; to control and^provide central accounting,
claims adjustment, collections, and special services; to set
restrictions on and standards for brokers, managing agents, and
underwriters; to check for conformity and process all policies;
and to have the power of general assessment on its members. The
1982 Act does not authorize the Council to direct the day-to-day
insurance business transacted at Lloyd's of London.
Each member of Lloyd's of London must select a member's agent
who assists the underwriter in selecting one or more managing
agents; each managing agent directs the operation of one or more
syndicates. Through agency agreements, the member grants
authority for underwriting activities to be conducted on his
behalf. Members cannot conduct their insurance business
directly. It is typical for a member to join a number of
syndicates, which can vary from year to year, in order to spread
his risks.
To obtain insurance at Lloyd's of London, a potential insured
or his broker must contact a broker in London who is authorized
by Lloyd's of London to place business at Lloyd's of London, or
contact a broker outside London to whom, through an authorized
London broker, certain Lloyd's of London underwriters have given
written binding authority.
To be eligible to underwrite insurance at Lloyd's of London,
an individual must apply and be sponsored by an existing member.
The applicant must meet a "means" or net worth test to ensure
that he will have sufficient assets to satisfy possible claims
and to provide a basis for setting the member's premium limit.
17 These reserves are not reserves for tax purposes, but amounts
required by Lloyd's of London to be set aside as security to
ensure the payment of claims.

-8After acceptance to membership, a member has an affirmative
obligation to notify Lloyd's of London of any material change in
his financial position that affects his declared means. An
applicant chooses a member's agent who will help with the
application process and advise the new member on the available
syndicates. A new member of Lloyd's of London pays a
nonrefundable entrance fee and must pay an annual subscription
that is used to meet expenses of the Corporation of Lloyd's. A
new member must also make certain deposits with Lloyd's of
London; the amount of the deposit as well as the member's means
determines the member's premium limit.
All premiums received by underwriters and all investment
income earned on the premiums are required by British law to be
placed initially in premiums trust funds. Funds in the trust may
be used solely to pay claims and underwriting expenses. Members'
agents control all reserves and premium trusts, subject to
guidelines established by the Corporation of Lloyd's. Profits
are released to underwriters only after the three-year period of
account is concluded and reinsurance is obtained to cover all
future claims. A member may deposit all or part of his profits
in a Personal or Special Reserve Fund to cover ascertained losses
or estimated deficiencies on his underwriting account. Such
deposits are not deductible for U.S. tax purposes (although
deposits to the Special Reserve Fund are deductible to a limited
extent for purposes of U.K. tax).
Each member is required to contribute annually, by means of a
levy on premium income, to a Central Fund. This Fund, which
exists for the protection of all policyholders, is held and
administered under a Trust Deed by the Corporation of Lloyd's.
The purpose of the Central Fund is to meet underwriting
liabilities of any member in the event that his deposits and
personal assets are insufficient to meet his underwriting
commitments.
Investment of premiums and investment income is made under
guidelines set by the Council of Lloyd's. These guidelines,
which are basically standards of prudence, require generally that
investments be in government securities, "AA"-rated corporate
bonds, prime commercial paper, or cash. Members' agents control
the investment of these funds and authorize all releases of
amounts to pay claims, expenses, reinsurance or net profits to
members.
Under British law, the Lloyd's of London accounting system
must use a three-year period. Each calendar year is a separate
"year of account" for each syndicate; underwriting profit or loss
with respect to a year of account normally is determined after
the end of the third year. At that time, a syndicate's entire
portfolio of insurance is reinsured to cover future claims that
may be made against the reinsured syndicate's year of account.
This is almost always accomplished by transferring the entire
remaining underwriting portfolio to a reconstituted syndicate by

-9means of reinsurance, a process known as obtaining "reinsurance
to close." The ceding syndicate's year of account is then closed
and underwriting profit or loss is ascertained. The reinsuring
syndicate — which generally is a successor to the closing
syndicate and includes many of the same underwriting members2/ —
receives reinsurance premium income, salvages, reinsurance recoveries, and late-arriving direct insurance premiums, and
assumes liability for all subsequent claims and expenses.
C. The 1968 Closing Agreement
Prior to 1968, premiums paid to Lloyd's of London
underwriters attributable to insurance policies on U.S. risks
were subject to the insurance premium excise tax imposed by
section 4371 of the Internal Revenue Code. Withholding tax was
imposed on the U.S.-source, non-effectively connected investment
income of the trust funds (i.e., the premium trust funds of the
members insuring U.S. and U.S.-dollar risks) and net-basis income
tax was imposed on the underwriting profits and losses from
Illinois and Kentucky, the only states in which the Lloyd's of
London underwriters were licensed to do business and the only
U.S. business with respect to which the IRS considered the
underwriters at Lloyd's of London to have permanent
establishments. The members of Lloyd's of London were not
otherwise subject to U.S. income tax, because all (or almost all)
members before 1968 were nonresident aliens who were considered
by the IRS not to be engaged in a trade or business in the U.S.
through a permanent establishment, except in Illinois and
Kentucky.
In 1966, negotiations began that culminated in a 1968 closing
agreement between the Underwriters at Lloyd's of London and the
Commissioner of the IRS. The U.S. Treasury Department and the
U.K. Inland Revenue were closely involved. Under the closing
agreement, the underwriters agreed to be taxed as if they
conducted their U.S. situs business through a permanent
establishment located in the United States, and they agreed on a
set of rules to determine what income would be attributble
thereto. Thus, the nonresident alien underwriters became subject
to the graduated U.S. net-basis income tax on their underwriting
profits and losses and on the related premiums trust fund
investment income attributable to the United States permanent
establishment (as defined by formula in the closing agreement).
The nonresident underwriters remained liable for withholding tax
2/ Members may underwrite a different proportion of the total
on U.S.-source investment income not attributable to the
risks in the two years of account; in addition, members
permanent establishment and hence not effectively connected;
resign or die, and new members often join. The reinsurance
to close has the effect of reinsuring each member's initial
liability with all members of the syndicate in the earliest
open succeeding year of account.

-10reinsurance premiums paid to the underwriters were subject to the
insurance premium excise tax only if those premiums for
reinsurance were placed without the intervention of a U.S.
broker, because those reinsurance premiums were deemed not to be
attributable to the U.S. permanent establishment.
The 1968 closing agreement resulted from ruling requests
(dated November 15, 1966 and December 15, 1966) that the
underwriters at Lloyd's of London made through their U.S.
attorneys. These ruling requests were prompted by the 1966
Supplementary Protocol to the United States/United Kingdom Tax
Convention. T.D. 5569, 1947-2 C.B. 100; T.D. 6898, 1966-2 C.B.
567. It was in part the uncertainty of Lloyd's of London as to
the effect of these treaty changes that caused the underwriters
to request rulings and a closing agreement. At the time of the
ruling requests (and at the time the 1968 closing agreement was
entered into), the vast majority of the 6,000 underwriters who
conducted business at Lloyd's of London were British persons
entitled to benefits under the U.S./U.K. treaty and few if any of
the underwriters were U.S. citizens or residents.
The relevant portions of the U.S./U.K. Tax Convention as
amended by the 1966 Supplementary Protocol that were in effect at
the time of the ruling requests are as follows. Article III(l)
of the Convention provided that industrial and commercial profits
of an enterprise of one of the Contracting Parties would be
exempt from tax by the other Party unless the enterprise was
engaged in a trade or business in the territory of the other
Party through a permanent establishment situated therein. If
such enterprise was so engaged, tax could be imposed by such
other Party on the industrial or commercial profits of the
enterprise but only on so much of them as were directly or
indirectly attributable to the permanent establishment.
Article VI of the Convention provided that the rate of U.S.
tax on dividends beneficially owned by a U.K. resident which were
derived by such resident from a U.S. corporation would not exceed
15 percent of the gross amount of the dividends unless the
individual receiving the dividends had a permanent establishment
in the U.S. and the holding giving rise to the dividends was
effectively connected with such permanent establishment.
Article VII of the Convention provided that interest derived
and benefically owned by a U.K. resident would be exempt from tax
by the U.S. unless the recipient of the interest had a permanent
establishment in the U.S. and the indebtedness giving rise to the
interest was effectively connected with the permanent
establishment.
During its consideration of the Lloyd's of London ruling
requests, the IRS concluded that, rather than imposing the excise
tax on the premiums paid to underwriters at Lloyd's of London, it
was preferable to view all of the Lloyd's of London members who
underwrite insurance placed in the Lloyd's market through U.S.

-11brokers as being engaged in the conduct of a trade or business in
the U.S. and as having U.S. permanent establishments. It was
noted at the time that choosing one approach over the other would
not substantially affect tax revenues. During the period from
1955 through 1965, excise taxes of approximately $66.2 million
were imposed on premiums paid to Lloyd's of London underwriters;
income tax on Illinois and Kentucky underwriting profits and the
investment income of the New York trust fund during this period
totaled approximately $18.6 million, for a total tax burden of
approximately $84.8 million. It was estimated that if the
underwriters had been subject to net-basis federal income tax,
their tax liability would have been approximately $82.6 million.
D. The 1980 Closing Agreement
The 1968 closing agreement was renegotiated in 1980. One
reason for the renegotiation was the uncertainty caused by the
enactment of section 861(a)(7) of the Code by the Tax Reform Act
of 1976, P.L. 94-455, § 1036(a). Section 861(a)(7) provides that
"[ajmounts received as underwriting income (as defined in section
832(b)(3)) derived from the insurance of United States risks (as
defined in section 953(a))" shall be treated as income from
sources within the U.S. Other changes also had occurred since
1968 that spurred interest in renegotiation, including proposed
amendment of the U.S./U.K. tax treaty to exclude certain
insurance premiums from liability for the insurance premium
excise tax, uncertainty about treatment under the 1968 agreement
of reinsurance to close, and the addition of U.S. residents and
citizens as members of Lloyd's of London. (As noted above, in
1968 there were few if any U.S. residents or citizens who were
members of Lloyd's of London and there was some question whether
the 1968 agreement applied to U.S. residents or citizens.)
The 1980 closing agreement is summarized in the Introduction.
It applies to all Lloyd's of London underwriters, including U.S.
citizens or residents. In the agreement, it was agreed that the
underwriters at Lloyd's of London are taxable as individuals and,
for purposes of U.S. income and excise taxes, that neither the
members nor their premiums trust funds constitute "insurance
companies" for purposes of subchapter L of the Internal Revenue
Code. The underwriters and the IRS agreed that the underwriters'
U.S.-source underwriting profit or loss (as defined in the
closing agreement) and related investment income (as determined
under the closing agreement) would be taxed as if it were
attributable to a U.S. permanent establishment. The 1980 closing
agreement accepts, for determining underwriting profit or loss,
the three-year accounting method required of Lloyd's of London
members for U.K. regulatory and tax purposes: underwriting profit
or loss is determined after the end of the three-year period of
account. Investment income in the premiums trust funds continued
to be taxed annually. In determining underwriting profit or
loss, a reasonable deduction for reinsurance premiums to close
out a year of account is expressly allowed to the underwriters on
the ceding syndicate and the closing reinsurance premiums are

-12includible as income in the computation of profit by the
underwriters on the assuming syndicate. The closing agreement
may be terminated with six months' notice.
The 1980 closing agreement was reexamined by the IRS, in
consultation with Lloyd's of London, in 1984-85; a decision was
made not to reopen the agreement at that time.
III. OPERATION OF LLOYD'S (U.S.)
A. General
Lloyd's (U.S.), like its U.K. counterpart, is an insurance
marketplace that brings together individual underwriters who
agree to insure specific portions of a stated risk. It was
organized in 1983 under the laws of Texas, pursuant to a Texas
statute authorizing "Lloyd's-plan" insurance arrangements. (A
substantial number of the Lloyd's-plan insurance groups in the
United States are located in Texas, where certain pricing rules
that apply to insurance companies do not, under Texas law, apply
to Lloyd's plans.) Lloyd's (U.S.) differs from virtually every
other Lloyd's-plan insurer in Texas or elsewhere in the United
States in that it is not owned or controlled by a stock or mutual
insurance company. Its underwriting members, who currently
number approximately 30, are all individuals. The annual premium
volume for underwriters at Lloyd's (U.S.) is currently about $15
million.
Underwriters at Lloyd's (U.S.) must sign Articles of
Agreement, which are drafted to bring the plan within the scope
of the applicable Texas statute. The underwriters share a common
attorney-in-fact, known as Lloyd's, U.S. Corporation, which
provides central services for all underwriters, including
bookkeeping and issuing policies. The attorney-in-fact does not
subscribe to a portion of any risk and is compensated solely by
service fees.
presented
by a broker, each member underwriter assesses the risk
either directly or through his appointed agent and determines how
much, if any, of the risk he is willing to assume. Some
underwriters assess risks themselves; others have designated one
or more agents to make underwriting decisions. Informal
syndicates may arise, because a group of underwriters may
designate a single agent to assess risks or may tend to take
similar positions for specific kinds of risks. But it is also
possible for a single risk to be insured by a group of
underwriters that do not subscribe to any other risk together.
When an underwriter agrees to assume a portion of a risk, the
attorney-in-fact issues the policy in the name of Lloyd's (U.S.)
and invoices, collects and holds the entire premium in trust. If

-13one or more members desire to reinsure part of a particular risk,
they may do so provided the reinsurance meets the requirements of
state legislation. The cost of such reinsurance is not paid from
the initial premium, which remains in trust.
In practice, each member of Lloyd's (U.S.) makes individual
and disparate underwriting decisions, either personally or
through his agent(s). For example, there are two members who
specialize in certain types of property and liability insurance
and who regularly assume risks which the other members do not.
Conversely, there are certain risks presented to the underwriters
that tend to be underwritten by a majority of the members of
Lloyd's (U.S.), albeit in different amounts.
Texas law provides that an underwriter in a Lloyd's plan, by
making certain deposits, can obtain limited liability for his
insurance business. Lloyd's (U.S.) states that its underwriters
presently do not secure limited liability under this law, because
the deposit requirements are considered too onerous; thus, the
underwriters presently each have unlimited personal liability.
Lloyd's (U.S.) submitted a letter from Texas counsel supporting
its statement. Lloyd's of London submitted letters from Texas
counsel opining that underwriters at Lloyd's (U.S.) do indeed
have limited liability. We have not attempted to resolve this
legal matter.
B. Deposits and Premiums
In order to become an underwriter at Lloyd's (U.S.), an
individual must post with the attorney-in-fact 100 percent of his
"underwriting position" in liquid assets, such as cash, publicly
traded stocks and bonds. The "underwriting position" determines
the underwriter's capacity. The underwriter's capacity generally
is limited to risks for which the premiums do not exceed three
times the amount of the deposit. The attorney-in-fact is the
custodian of the deposited funds and the deposited funds of all
member underwriters are available as security to guarantee
payment of policy claims of any underwriter in the event the
underwriter's account (consisting of premiums received and
investment income) is insufficient to pay claims. (If the
security deposits of other members are used to pay policyholder
claims against a member, the other members may later seek
indemnification.)
Once an individual is admitted as an underwriter at Lloyd's
(U.S.), the individual must adhere to the restrictions applicable
to all members, such as the ratio of premiums written to his
deposited funds and the percentage of capital that may be
committed to a single risk.
In accordance with Texas law, the attorney-in-fact determines
annually the necessary reserves (in accordance with state
regulations generally applicable to all insurers) for claims made
and for incurred but not reported losses. The net of earned

-14premiums less loss reserves is deemed to be each member's net
underwriting profit. For insurance purposes, this amount is
deemed to be surplus against which the member may write new
business. If the amount is not withdrawn, this additional deemed
surplus will permit the underwriter to write additional business.
Investment income derived from each underwriter's deposited funds
belongs to the individual; the underwriter is taxed on this
amount annually and may withdraw the income or leave it on
deposit to increase his premium writing capacity.
Under current law, each member of Lloyd's (U.S.) is deemed to
be an insurance company taxable under subchapter L of the
Internal Revenue Code. The member's taxable income is computed
annually, using the accounting principles applicable to all
insurance companies, including deductions for reserves. The net
income is subject to a corporate-level tax, and then, because it
is deemed distributed immediately to the individual, the
distributable profits are subject to individual taxation.
IV. QUESTION ONE: WHAT IS THE APPROPRIATE TAXABLE ENTITY?
A. Background
The starting point in evaluating the proper taxation of
income from the insurance activities of either underwriters at
Lloyd's of London or those participating in Lloyd's-type plans is
to determine the individual or organization that is properly
treated as earning the income, or bearing the loss, from such
insurance transactions. This determination is made difficult by
the fact that both Lloyd's of London and Lloyd's (U.S.) consist
of several separate levels of persons, organizations, or
arrangements. Although significant differences exist between
Lloyd's of London and Lloyd's (U.S.), in each case, the following
five levels can be identified: (1) the individuals 3/ who bear
the ultimate economic risk (limited or unlimited) with respect to
some portion of the insurance underwritten through the plans (the
"members"); (2) the trust funds or accounts maintained with
respect to each member that receive, hold, and invest premium and
investment receipts; (3) the groups of members who, by sharing a
common agent or other arrangement, underwrite insurance risks in
a coordinated manner for some period of time (the "syndicates");
(4) the group of all members (the "Membership"); and (5) the
incorporated entity that provides services in connection with the
3/ Although Texas
law permits individuals, partnerships, or
underwriting
of insurance.
unincorporated associations of individuals to be underwriters
in a Lloyd's plan, we understand that all members of Lloyd's
(U.S.) are individuals.

-15Each of these five levels of individuals, organizations, or
arrangements could conceivably be regarded, in the case of either
Lloyd's of London or Lloyd's (U.S.), as the person or persons
appropriately taxed on the income from insurance activities. The
determination of who is the proper taxpayer requires resolution
of the following three interrelated questions. (Because of
differences between the operation of Lloyd's of London and of
Lloyd's (U.S.), such determination must be made independently for
each group, and the analysis will not necessarily be the same.)
First, which of the different levels of individuals,
organizations, or arrangements that comprise a Lloyd's-type plan
should be given effect (i.e., treated as a potential taxpayer)
for federal income tax purposes? Second, which of those persons
that are given effect for tax purposes are actually engaged in
the activity of underwriting insurance? Third, are such persons
properly classified as individuals, partnerships, trusts, or
corporations for federal income tax purposes?
Resolution of these questions is difficult, particularly in
the case of Lloyd's of London. With respect to each question,
difficult conceptual issues are raised and there is little
guidance directly on point. As a result, while we express our
view as to how these questions would be resolved in the absence
of a closing agreement, we caution that this resolution is
uncertain. Bearing this caution in mind, we will proceed by
analyzing separately each of the different levels of individuals,
organizations, or arrangements that comprise Lloyd's of London
and Lloyd's (U.S.).
B. Lloyd's of London
1. Corporation of Lloyd's. The Corporation of Lloyd's
(the "U.K-; Corporation") is a nonprofit, nonstock corporate
entity financed by annual subscriptions from the members of
Lloyd's of London. It provides premises, administrative staff,
and services that enable insurance business to be transacted in
London at Lloyd's of London. In addition, the U.K. Corporation
implements the rules and regulations established by the Council
of Lloyd's. It underwrites no insurance (and is not empowered to
do so under British law) and it conducts no business operations
in the United States. For U.K. tax purposes, the U.K.
Corporation is not taxed on subscription income and may not
deduct expenditures made with respect to the insurance market.
In the case of the U.K. Corporation, answers to the first and
third questions raised above are easily answered. The U.K.
Corporation is an organization that should be given effect for
federal income tax purposes, and it would properly be classified
as an association taxable as a corporation if it were a taxable
entity in the United States. The more important question,
however, is whether the U.K. Corporation is engaged in the
activity of underwriting insurance, and therefore is the entity

-16properly taxed on the income or loss from the insurance
activities of Lloyd's of London.
Several factors may be viewed as supporting the proposition
that the U.K. Corporation is engaged in an insurance underwriting
activity. First, the U.K. Corporation implements the rules and
framework required under British law for undertaking the
insurance underwriting activities of Lloyd's of London. Second,
through its centralized services, it arguably plays a significant
role in the insurance transactions. Third, the Central Fund,
which it administers, stands as security for the payment of
claims on insurance underwritten at Lloyd's of London, and the
U.K. Corporation is empowered (but not obligated) to pledge its
substantial assets as additional security for the payment of
claims.
We do not believe that these facts support a conclusion that
the U.K. Corporation is engaged in an insurance underwriting
activity or that it bears the benefits or burdens associated with
such activity. Although the U.K. Corporation performs
significant regulatory and administrative services, it performs
them in the capacity of an agent acting on behalf of other
persons, rather than as a principal. Although the Central Fund
(and, at least potentially, its own assets) is ultimately
available to pay claims of policyholders, this occurs only in
unusual circumstances and the Central Fund becomes subrogated to
the claims of the policyholders against the defaulting member or
members. Thus, it appears that the U.K. Corporation has only an
indirect risk of loss with respect to the insurance underwritten
at Lloyd's of London. Moreover, the U.K. Corporation has no
direct interest in the profits from such insurance. The absence
of any interest in the potential profits, or any substantial risk
of loss, from the insurance underwritten at Lloyd's of London is
convincing evidence that the U.K. Corporation is not
appropriately taxed on this income.
2. Lloyd's of London Membership. The members of Lloyd's of
London form a membership organization, the Society of Lloyd's
(the "U.K. Membership"). Under U.K. law, the U.K. Membership is
not a corporation, partnership, or other juridical entity.
The factors
cited asis supporting
the propos:
lition
Nonetheless,
the that
U.K.were
Membership
an identifiable
organization,
that well-established
the U.K. Corporation
should rules
be taxed
on the insurant-ice
with
operating
and bylaws.
The central
activitiesregarding
of Lloyd's
London
also support
(with this
somewhat
question
the of
U.K.
Membership
is whether
greater
force)
the proposition
that the
Membership should be
organization
should
be given effect
for U.K.
tax purposes.
treated as a taxpayer subject to tax on this income. The U.K.
Membership, through the Council of Lloyd's, exercises overall
responsibility for and control over the affairs of the Lloyd's
market, including the regulation of the business of insurance at
Lloyd's, the election of new members, and the approval of those

-17wishing to act as agents or Lloyd's brokers. Moreover, the U.K.
Membership has established the Central Fund, administered by the
U.K. Corporation, which exists for the purpose of meeting the
underwriting obligations of members who fail to meet their own
policy obligations. Although the Central Fund becomes subrogated
to the claims of the policyholders against the defaulting member
or members upon payment of a claim, the Central Fund has in some
instances paid claims and not obtained reimbursement from a
defaulting member. In these instances, the Central Fund can be
viewed as having effected a sharing of the losses among all of
the members of Lloyd's of London.
Although some underwriting losses are shared among members
through the operation of the Central Fund, representatives of
Lloyd's of London have provided materials indicating that this
occurs rarely. The materials indicate further that the Central
Fund generally has failed to obtain reimbursement only in those
cases in which the member has exhausted all his personal assets
(or all except those he is permitted to retain for humanitarian
reasons). The materials include specific examples of cases in
which substantially all personal assets of members have been
seized by the Central Fund.4/ It thus appears that any sharing
of losses among members occurs not as a result of local law but
rather as a result of a defaulted obligation.
Apart from the quite limited sharing of loss resulting from
the operation of the Central Fund, there is no sharing of profits
or losses among the U.K. Membership as a whole. As discussed
more fully in the following section, one of the identifying
characteristics of a partnership is a contemplated sharing of
profits by two or more persons. This requirement distinguishes a
partnership from an arrangement merely to share expenses. See
Reg. sec. 301.7701-3(a ) . Similarly, the existence of associates
and an objective to carry on business for joint profit are
essential characteristics of an association. See Reg. sec.
301,7701-2(a)(2). We believe that the absence of an objective to
carry on business for the joint profit of the U.K. Membership as
4/whole
Although
no reason to
we an
a
makesweithave
inappropriate
to question
treat thethis
U.K. information,
Membership as
note that we have not attempted independently to verify
information provided by interested parties to us, and
representatives of Lloyd's (U.S.) have expressed doubt
regarding the practice of the Central Fund to recover losses
from the personal assets of members.

-18entity taxable on the insurance underwritten at Lloyd's of
London.5/
3. Syndicates. Unlike the U.K. Membership, smaller groups of
members who underwrite insurance risks in a coordinated manner
for some period of time through a syndicate do share severally,
although not jointly, in the profits and losses of the insurance
underwritten at Lloyd's of London. There appears to be a strong
argument that the syndicates, although not juridical entities
under U.K. law, are organizations that should be given effect for
federal income tax purposes. If this is the answer to the first
of the three questions listed at the outset of this section, we
believe it is clear that the answers to the second and third
questions would be that the syndicates are engaged in the
activity of underwriting insurance and that, under the general
entity classification rules, they should be classified as
partnerships. If syndicates are treated as partnerships under
the general classification rules, it is unclear whether the
syndicates should be treated as "insurance companies" within the
meaning of section 7701(a)(3), and hence taxed as corporations.
Determining the tax status of a syndicate presents the issue
of whether a syndicate is a partnership or merely a cluster of
agent-principal relationships. One treatise states that "the
boundary between partnerships and arrangements lacking sufficient
'jointness' to be classified as partnerships is a shifting
no-man's land." McKee, Nelson, Whitmire, Federal Taxation of
Partnerships and Partners, 3-6 (1977).
Syndicates are not, under U.K. law, partnerships or other
juridical entities. This is not, however, required for
classification as a partnership for federal income tax purposes.
See, e.g., Hect v. Malley, 265 U.S. 144 (1924). Rather, the
definition of a partnership is very broad. Reg. sec.
301.7701-3(a) provides that "the term 'partnership' includes a
5/ There is
some pool,
authority
the other
proposition
that an
syndicate,
group,
jointsupporting
venture, or
unincorporated
organization the owners of which have separate interests in
different activities conducted by the organization may be
treated as a single taxable entity. See Union Trusteed Funds
v. Commissioner, 8 T.C. 1133 (1947); MaxweTF Hardware Co. v.~"
Commissioner, 343 F.2d 713 (9th Cir. 1965). We do not
believe this authority should apply in this context.
Whatever reluctance existed in the Union Trusteed case to
subdivide a single state law corporate entity should not
exist in the case of an unincorporated, non-juridical
organization such as the U.K. Membership. In addition,
attempting to treat the U.K. Membership as a single taxable
entity would produce the inappropriate tax result of shifting
of tax benefits and detriments among the members. Similar
concerns led to the overturning of the Union Trusteed case
through enactment of section 851(h) of the Code.

-19organization through or by means of which any business, financial
operation, or venture is carried on, and which is not a
corporation or a trust or estate . . . ."
Three requirements for classification of an arrangement as a
partnership have been identified. First, the arrangement must be
formed for the purpose of producing profits. The syndicates have
a profit motive and thus satisfy this requirement. Second, the
arrangement must contemplate the sharing of profits by two or
more persons. This requirement distinguishes a partnership from
an arrangement "merely to share expenses." See Reg. sec.
1.761-l(a); Reg. sec. 301.7701-3(a). Unlike~tEe U.K. Membership,
it appears that the syndicates meet this requirement since the
syndicates contemplate the earning and sharing of a single
profit. With respect to the sharing of profits, as opposed to
losses, we do not believe there is any meaningful distinction
between sharing severally and sharing jointly. The third
requirement is that two or more of the persons sharing the
profits must do so as proprietors. This requirement
distinguishes a partnership from other investment arrangements,
such as the co-ownership of property, in which the participants
have retained the right to make separate decisions with respect
to the property. Although the answer is not clear, we believe
this requirement is satisfied by the syndicates.
Several factors that have been regarded as relevant in
distinguishing a partnership from other arrangements for the
division of profits are the following: (1) whether the parties
intend to be treated as, or represent to others that they are,
partners or joint venturers; (2) whether the parties divide the
net income generated by the activity; (3) whether* the parties
have an obligation to share losses; (4) the extent of the
parties' control over income and capital and the right of each to
make withdrawals; (5) whether business is conducted in the joint
names of the parties; (6) whether separate books of account are
maintained for the activity; and (7) whether the parties exercise
mutual control over and assume mutual responsibilities for the
activity. See, e.g., Luna v. Commissioner, 42 T.C. 1067 (1964).
In the case of the syndicates, there are some indications of
an absence of partnership status. First, it appears that the
members do not intend to be treated as partners or joint
venturers. Section 8(2) of the 1982 Lloyd's Act mandates that
each member underwrite insurance for his own account and not for
another. Materials provided to prospective members state that "A
member (Name) underwrites for his own account on a syndicate: he
is not in partnership and does not have any joint liability with
any other members underwriting on that syndicate." Second, it is
arguable the members do not assume mutual responsibility for the
underwriting activity. This factor is somewhat in doubt,
however, because of the contribution by all members to the
Central Fund and the assurance to policyholders that all valid
claims have in the past been and in the future will be paid,

-20regardless of the solvency of any particular member.6/ Third,
the members have several, rather than joint, liability for losses
and expenses.
It is this third factor of unlimited several liability that
is relied upon by Lloyd's of London as conclusive support for the
proposition that the syndicates should not be recognized for
federal income tax purposes. The courts have in several cases
characterized arrangements in which the participants had several
rather than joint liability as mere co-ownership arrangements.
In these cases, however, both the holdings and the basis for the
holdings are unclear.
C. A. Everts, et al., Jamison Lease Syndicate v.
Commissioner, 38 B.T.A. 1039 (1938) , and T. A. Johnston, Trustee,
Victory Lease v. Commissioner, 38 B.T.A. 1199 (1938) , addressed
the classification of fractional undivided interests in oil and
gas leases. In holding that the interests were co-ownership
interests in the leases, rather than associations taxable as
corporations, the courts cited the fact that the leaseholders had
unlimited proportionate liability. On the other hand, the courts
also noted as significant the fact that the leaseholders, as a
group, had no form of organization. Moreover, the courts did not
address the issue of whether the interests might be classified as
partnerships. Similarly, in Commissioner v. Gerstle, 95 F. 2d
587 (9th Cir. 1938), the court held that several real estate
syndicates, the members of which had unlimited proportionate
personal liability for losses, represented co-ownership
arrangements (although the court also referred to them as joint
ventures).
Nonetheless, the courts have not viewed any one factor
distinguishing partnerships from other arrangements as
conclusive. For example, in Luna, the court stated that a number
of factors "none of which is conclusive, bear on the issue." 42
T.C. at 1077. Moreover, courts have held that a partnership can
exist even where there is no risk of loss shared by a particular
partner. For example, in wHeeler y. Commissioner, 37 T.C.M. 883
(1978), a "service partner" and a "money partner" joined together
to develop real property; losses were allocated entirely to the
6/
The partner"
relevanceuntil
of the
Central of
Fund
determining
whether
"money
operation
the in
venture
resulted
in a
members profit.
in a particular syndicate are joint venturers may be
cumulative
questioned in light of the fact that all members, not just
those in a particular syndicate, contribute to the Central
Fund. We believe, however, that in evaluating the status of
a syndicate the actions of the Membership as a whole are
relevant, notwithstanding that each syndicate is only a
subset of the larger U.K. Membership.

-21The absence of an intention to be treated as joint venturers,
the absence of an assumption of substantial mutual
responsibilities, and the existence of unlimited several
liability of members are significant factors weighing against
classification of the syndicates as partnerships. Balanced
against these factors, however, are other factors indicative of
partnership classification. The strongest of these is the fact
that the members have joined in an organization with a well
established set of rules and regulations. (As indicated earlier,
we believe it is proper to view this as mutual action by members
of syndicates notwithstanding that each syndicate is only a
subset of the larger U.K. Membership.) Second, each syndicate
exists for a significant period of time (one year in which it
assumes direct risks and two additional years in which it pays
claims and assumes and purchases reinsurance) and actively
engages in a substantial number of separate insurance
transactions. Third, each member of a syndicate is entitled to
his proportionate share of the aggregate net income. As
indicated earlier, we see no meaningful distinction between
sharing profits severally and sharing "profits jointly. Fourth,
the activities of the syndicate are conducted in the name of the
syndicate rather than in the names of the individual members.
(It should be noted, however, that each policy states that it is
written by the members of the syndicate "each for his own part
and not one for another," and litigation on claims proceeds
against the members individually in the name of a
representative.) Finally, the ability of members to withdraw
their capital (e.g., their required minimum deposits) is
controlled by the rules and regulations of the Council of
Lloyd's. On the whole, we believe that the factors indicative of
partnership status outweigh the factors indicative of the absence
of partnership status.
Section 761 and the regulations thereunder permit certain
unincorporated organizations, at the election of all of the
members of the organization and provided that the income of the
members may be adequately determined, to be excluded from the
application of all or part of subchapter K of the Code. This
election applies only if the organization is availed of (1) for
investment purposes only and not for the active conduct of a
business, (2) for the joint production, extraction, or use of
property, but not for the purpose of selling services or property
produced or extracted, or (3) by dealers in securities for a
short period for the purpose of underwriting, selling, or
distributing a particular issue of securities. None of these
potential exceptions would be applicable to a syndicate.
If each syndicate is a partnership for federal income tax
purposes, the further issue is presented whether the syndicate is
an "insurance company" within the meaning of section 7701(a)(3)

-22of the Code. Section 7701(a)(3) defines the term "corporation"
to include "associations, joint-stock companies, and insurance
companies."7/ Rev. Rul. 83-132, 1983-2 C.B. 270, considered the
classificatTon of an unincorporated business entity that was
engaged in the business of issuing insurance contracts through an
insurance exchange. Under applicable state law, insurers not
organized in corporate form, including partnerships and
individuals, were permitted to operate on the exchange, and were
subject to basic accounting rules imposed on all insurers under
state law. The ruling held that a business entity that is
primarily engaged in the business of issuing insurance contracts
(and hence meets the definition of an insurance company in Reg.
sec. 1.801-3(a)(1)) is an insurance company, and therefore is a
corporation under section 7701(a)(3).
The terms of section 7701(a)(3) and Rev. Rul. 83-132 support
the view that the term "insurance company" as used in section
7701(a)(3) may include unincorporated business entities such as
partnerships. We recognize however, that both the legislative
history and judicial interpretations of the statutory precursors
to section 7701(a)(3) contemplate that the term "insurance
company" refers to an entity that is organized under federal or
state law. See Flint v. Stone Tracy Co., 220 U.S. 107 (1911);
Eliot v. Freeman, 220 U.S. 178 (1911). In the case of an
organization that is not a juridical entity, is not subject to
basic accounting rules imposed on all insurers under the
applicable law, and does not seek to benefit from the favorable
tax rules applied to insurance companies under subchapter L of
the Code, we think it is questionable whether section 7701(a)(3)
is applicable. In other words, it may be appropriate to
characterize a syndicate as a partnership that is not an
insurance company within the meaning of section 7701(a)(3) or
subchapter L of the Code.
4. Members. The proper tax treatment of the members of
Lloyd's of London in the absence of a closing agreement depends
largely on the characterization of the syndicates. If, as we
believe most likely, the syndicates were characterized as
partnerships in the absence of a closing agreement, the members
would be treated as partners and, by virtue of the rules of
subchapter K, would be required to include in computing their
taxable income their distributive share of the syndicate's items
of income, gain, loss, deduction, or credit.
Alternatively, if the syndicates were treated as insurance
companies, and hence as corporations, under section 7701(a)(3)
and Rev. Rul. 83-132, the members would be treated as
shareholders of such corporations. As a third alternative, if
the syndicates were characterized as mere co-ownership
arrangements, the members would be treated as conducting the
77 Although not discussed herein, we do not believe that the
syndicates have sufficient corporate characteristics to be
classified as associations within the meaning of section 7701
of the Code. See Reg. sec. 301. 7701-2(a).

-23insurance underwriting activities directly. This would present
the issue of whether the individual members are "insurance
companies," and hence taxable as corporations. As discussed
above in connection with the syndicates, although Rev. Rul.
83-132 would support such a result, application of section
7701(a)(3) to a person who is not a juridical entity, is not
subject to basic accounting rules imposed on all insurers under
local law, and does not seek to benefit from the favorable tax
rules applicable to insurance companies under subchapter L of the
Code is questionable.
5. Premiums Trust Funds. During the three-year accounting
period that is utilized by Lloyd's of London, premium and
investment receipts with respect to each member are received,
held, and invested by, and claims are paid from, a separate
Premiums Trust Fund. The Closing Agreement "deems" each Premiums
Trust Fund to be a grantor trust, the owner of which is the
member. Lloyd's of London asserts, however, that absent the
Closing Agreement these funds would not be treated as grantor
trusts "since the Underwriters have none of the rights, benefits
or powers enumerated in sections 673 through 677 of the Code."
Lloyd's of London further asserts that, while premium and
investment receipts that are received prior to the expiration of
the three-year accounting period are receipts of the Premiums
Trust Fund, rather than of the member, these receipts do not
constitute taxable income to the Fund.
In our view, it is quite clear that the Premiums Trust Funds
are properly treated as grantor trusts, the owners of which are
the respective members (either in their individual capacities or,
if the syndicates are treated as partnerships, in their capacity
as partners). Accordingly, under section 671 of the Code, all of
the items of income, deduction, and credit of the Funds are taken
into account in computing the taxable income of the members.
This conclusion is based on section 677(a), which provides,
in part, that "the grantor shall be treated as the owner of any
portion of a trust . . . whose income without the approval or
consent of any adverse party is, or, in the discretion of the
grantor or a nonadverse party, or both, may be—(1) distributed
to the grantor . . . ." Reg. sec. 1.677(a)-(1)(d) provides that
"under section 677 a grantor is, in general, treated as the owner
of a portion of a trust whose income is, or in the discretion of
the grantor or an nonadverse party, or both, may be applied in
discharge of a legal obligation of the grantor . . . ." The
trustees of the Premiums Trust Funds do not have a substantial
beneficial interest in the trusts, and hence are not "adverse
parties" as defined in section 672(a) of the Code.
The Premiums Trust Funds are established to hold assets of
the members, earn investment income for the benefit of the
members, discharge liabilities of the members, and at the end of
the three-year accounting period distribute any remaining assets
to the members. Lloyd's of London asserts that the Premiums

-24Trust Funds exist solely for the benefit of the policyholders.
There is no doubt that the Funds provide security to assure the
payment of claims. No policyholder is entitled to any
distribution from the Funds, however, except in payment of a
claim. The members have full personal liability to policyholders
for their shares of claims. Thus, payment of a claim out of a
Premiums Trust Fund discharges the legal liability of the member
on a dollar-for-dollar basis. Moreover, in the event of a claim,
payment is unrelated to the amount of assets of the Fund; no
claims have ever gone unpaid.
The characterization of a trust established for similar
purposes was considered in Rev. Rul. 85-158, 1985-2 C.B. 175.
This ruling involved a commodity futures exchange clearing
organization that guaranteed payment to exchange customers in the
event of a default by exchange members on exchange-traded
contracts. To "meet this legal obligation, protect investors,
and promote public confidence," the clearing organization created
a trust which would "provide funds to.be used solely for the
purpose of preventing or mitigating losses of public customers
having claims against defaulting clearing members" (and hence
against the clearing organization). The ruling held that
"because [the trust's] income and corpus may be used to discharge
[the clearing organization's] legal obligations arising out of
the purchase or sale of any trade cleared and the trustee is not
an adverse party, [the clearing organization] is considered to be
the owner of the entire trust under section 677(a) of the Code."
See also, Douglas v. Willcuts, 296 U.S. 1 (1935); Helvering v.
Stuart, 317 U.S. 154 (1942) .
Treatment of the Premiums Trust Funds as grantor trusts is
also supported by recent legislation. Section 468B(g) of the
Code, as amended by the Technical and Miscellaneous Revenue Act
of 1988, provides as follows:
Nothing in any provision of law shall be construed as
providing that an escrow account, settlement fund, or
similar fund is not subject to current income taxation.
The Secretary shall prescribe regulations providing for
the taxation of any such account or fund whether as a
grantor trust or otherwise.
C. Lloyd's (U.S.)
1. Corporation of Lloyd's. Administrative and other services
to facilitate the underwriting of insurance at Lloyd's (U.S.) are
provided by the Lloyd's, U.S. Corporation (the "U.S.
Corporation"). As in the case of the U.K. Corporation, the U.S.
Corporation does not have an economic interest in the profits or
losses from the insurance underwriting it facilitates. Moreover,
the U.S. Corporation is a for-profit corporation the stock of
which is not owned by the members of Lloyd's (U.S.). For both of
these reasons, it is clear that the U.S. Corporation is not

-25properly taxable on the income from insurance underwritten at
Lloyd's (U.S).
2. Lloyd's (U.S.) Membership. In the case of Lloyd's of
London, this study concludes that the U.K. Membership, considered
as a group, lacks sufficient "jointness" to be properly treated
as a partnership or association. In the case of Lloyd's (U.S.),
we believe that the facts are sufficiently different to justify,
at least as a theoretical matter, treatment of the U.S.
Membership as a corporation. The proper treatment of the U.S.
Membership is, however, subject to significant doubt, and
corporate treatment would create certain practical and conceptual
problems.
The members of Lloyd's (U.S.) have executed Articles of
Agreement under Texas law. The Articles of Agreement purport not
to create a corporation, partnership, or other joint business
association. Article I states that:
It is expressly agreed and hereby declared that it is
not the purpose of the individuals subscribing to these
Articles of Agreement . . . to form or to assume the
powers of a partnership, limited or otherwise, a joint
stock company, a corporation or quasi-corporation; that
there shall be no joint funds or capital stock and that
no joint rights or obligations shall be planned,
claimed, or created . . .
As discussed earlier, the declaration of an intention not to
create a partnership or association, although a factor to be
taken into account, is not controlling for federal tax purposes.
Based on the facts provided to us, which in several respects
do not enable us to make a definitive determination, it appears
that the U.S. Membership constitutes an organization that could
properly be given effect for tax purposes. The key factor in
this determination is the apparent objective of the U.S.
Membership to carry on business for joint profit. Materials
submitted by Lloyd's (U.S.) state that "pursuant to Texas law,
the sum total of all Underwriters' security deposits lodged with
the corporate attorney-in-fact are available to pay claims
against any single Underwriter." This joint liability, resulting
under state law, is distinct from the joint liability resulting
from the failure of defaulting members of Lloyd's of London to
repay debts to the Central Fund of Lloyd's of London.
Treating the U.S. Membership as a separate entity is
consistent with various authorities recognizing Lloyd's-type
plans formed under Texas law to be separate from their
constituent members for purposes other than federal income tax.
See, e.g. , Gaunt v. Lloyqis America of San Antonio, 11 F. Supp.
'87, 790 (W.D. Tex. 1935) (Lloyds America is an association
constituting a "legal entity not only provided for and recognized

-26by, but licensed under, the state laws," and may be sued like any
other association); In re Lloyds of Texas, 43 F.2d 383 (N.D. Tex.
1930) (Lloyd's plan held to be an "insurance corporation" under
the Bankruptcy Code); Tex. Att'y Gen. Op. No. 2897 (9/23/32)
(Lloyd's insurance associations constitute insurance companies
subject to gross premiums tax). One decision concluded that a
Lloyd's-type plan was not a corporation, but it is not clear
whether the court rejected partnership classification. Harris v.
Prince, 121 S.W.2d 983, 985 (Comm'n App. Tex. 1938) ("Properly
speaking," defendant was not a stockholder, but rather an
individual underwriter; under the statute and the articles of
association, the underwriters merely pool their individual
liability for convenience in making contracts).
If the members of Lloyd's (U.S.) are viewed as associates
having an objective to carry on business for joint profit, the
U.S. Membership would be classified as an association taxable as
a corporation if the Membership possesses a majority of the four
corporate characteristics set forth in Reg. sec. 301.7701-2(a ) .
These corporate characteristics are limited liability,
centralization of management, free transferability of interests,
and continuity of life.
It is unclear whether the U.S. Membership has the corporate
characteristic of limited liability. Texas law provides the
members of Lloyd's (U.S.) with the opportunity to obtain limited
liability. Article IV of the Articles of Agreement states that
"The total liability of each Underwriter shall not be greater
than the total of his contributions to the guaranty deposit fund
plus his additional contributions, financial guarantees, and his
share of profits or undivided surplus." Lloyd's (U.S.) has
suggested, however, that this appearance of limited liability is
misleading, because the cost of achieving limited liability is
too high. They state that Texas law "gives underwriters in a
Texas Lloyd's-plan insurer the option to limit their liability by
depositing one-half of their capital in a Guarantee Fund under
the custody of the State. Lloyd's, U.S. has not elected that
option . . . ." Lloyd's (U.S.) has submitted an opinion of Texas
counsel supporting their position. Lloyd's of London has
disputed the assertions of Lloyd's (U.S.). Counsel for the
Lloyd's of London underwriters point out that membership
solicitation materials that have been used by Lloyd's (U.S.) in
the past make representations to the contrary, and have obtained
opinion letters from Texas counsel supporting their position.
Second, Reg. sec. 301.7701-2(c)(1) provides that "An
organization has centralized management if any person (or any
group of persons which does not include all the members) has
continuing exclusive authority to make the management decisions
necessary to the conduct of the business for which the
organization was formed." Under the Articles of Agreement of

-27Lloyd's (U.S.), the Attorney-in-Fact has authority to make the
management decisions necessary to the conduct of the business.
Under Article V, the actions of the Attorney-in-Fact are
supervised by the "Committee of Lloyd's, U.S.", a group
consisting of no more than 10 persons, no more than eight of whom
are members. Under Article XII, however, the Attorney-in-Fact
may not be removed, except that if the Attorney-in-Fact is
"adjudged in any suit, action, or proceeding liable for its own
gross negligence, bad faith, fraudulent intent or willful
malfeasance," then the Attorney-in-Fact may be removed by members
holding not less than 75 percent of the aggregate guaranty fund.
We believe that these facts indicate that the U.S. Membership has
centralized management.
Third, Reg. sec. 301. 7701-2(e )(1) provides that "An
organization has the corporate characteristic of free
transferability of interests if each of its members or those
members owning substantially all of the interests in the
organization have the power, without the consent of other
members, to substitute for themselves in the same organization a
person who is not a member of the organization." Members of
Lloyd's (U.S.) do not appear to have the power to substitute
others for themselves without the consent of other members.
Article XV states that "Any underwriter may also sell his
insurance business, provided the purchaser is acceptable to the
Committee of Lloyd's . . . "
Moreover, such sales are subject to
certain restrictions imposed under Texas law. Accordingly, it
appears that the U.S. Membership does not have the corporate
characteristic of free transferability of interests.
Fourth, Reg. sec. 301.7701-2(b)(1) provides that an
organization has the characteristic of continuity of life "if the
death, insanity, bankruptcy, retirement, resignation, or
expulsion of any member will not cause a dissolution of the
organization." Under Article XIII, it appears that a dissolution
of the Membership will not be caused by these events.
Depending on whether the U.S. Membership has limited
liability under Texas law, the Membership appears to have either
three of the four corporate characteristics (and therefore to be
properly classified as an association), or only two of the four
corporate characteristics (and therefore to be properly
classified as a partnership). If the U.S. Membership is properly
classified as a partnership, it might nonetheless be treated as

-28an insurance company that is taxable as a corporation under
section 7701(a)(3) . 8/
Classification of the U.S. Membership as a corporation is,
thus, possible, although rendered doubtful by uncertainties
regarding the extent of personal liability of members of Lloyd's
(U.S.) under Texas law and the scope of section 7701(a)(3).
Moreover, a conclusion that the U.S. Membership is properly
taxable as a corporation is inconsistent with the current
treatment of the organization and its members. Currently, in
reliance on Rev. Rul. 83-132, the U.S. Membership is not
recognized for federal income tax purposes; rather, each member
is taxed as a separate corporation.
Treating the U.S. Membership as an organization that is not
recognized for tax purposes has certain practical and conceptual
advantages. The interests of the members are joint, but only to
a limited degree. Among the members, different members or groups
of members have differing interests in different underwriting
activities. Treating the U.S. Membership as a single corporation
would create an undesirable shifting of tax benefits and
detriments among members. For example, taxable income that is
economically attributable to one member would be offset by
taxable losses economically attributable to another member.
Because the Membership would be taxed as a corporation rather
than a partnership, special allocations of income and deduction
items could not be utilized to achieve consistency between the
tax attributes and the underlying economic results. As noted
earlier, similar concerns in the case of "series" mutual funds
led to the enactment of section 851(h) of the Code.
In light of the significant doubt regarding the proper
treatment of the U.S. Membership and the practical and conceptual
problems that would result from treating the U.S. Membership as a
single corporation, we believe that, as in the case of Lloyd's of
London, it is appropriate to continue to ignore the existence of
8/
Classification
U.S. Membership
as a corporation is
the U.S.
Membership offorthefederal
tax purposes.
consistent with an early court decision holding a
Lloyd's-type plan formed under Texas law to be an association
taxable as a corporation for tax purposes. See Harris v.
United States, 51 F.2d 382 (S.D. Tex. 1931). Incidentally,
one Lloyd's-type plan which elected to file corporate tax
returns was ruled eligible to participate in a tax-free
corporate reorganization. Rev. Rul. 58-218, 1958-1 C.B. 185.
But see Liberty Lloyd's v. United States, 49-2 U.S.T.C. 9424
(N.D. Tex. 1949) (Guarantee Fund interest is directly taxable
to each underwriter)..

-293. Syndicates. In the case of Lloyd's of London, this study
concludes that, In the absence of a closing agreement, the
syndicates probably would be treated as taxable entities. Among
the factors that supported this conclusion were the formalized
operating rules and sustained period of existence of particular
syndicates. The syndicates formed by the members of Lloyd's
(U.S.) appear to be rather informal and transitory, often
changing composition on a transaction-by-transaction basis. At
least at the present time (and assuming that the U.S. Membership
is not treated as a taxable entity), the syndicates more closely
resemble clusters of agent-principal relationships than
partnerships or associations. This conclusion could change if
the syndicates become more formalized and stable in the future.
4. Members. As discussed above, at the present time, each
member of Lloyd's (U.S.) is treated as a separate corporation.
In light of the practical and conceptual problems that would
result from treating the U.S. Membership as a single corporation,
we believe that such treatment of the-members is appropriate.
Moreover, in light of the facts that the members are subject to
basic accounting rules imposed on all insurers under local law
and seek to benefit from the favorable tax rules applicable to
insurance companies under subchapter L of the Code, it appears
that the members are properly treated as corporations under Rev.
Rul. 83-132.
5. Underwriting Account. Under Article VI of the Articles of
Agreement of Lloyd's (U.S.), a separate Underwriting Account is
maintained with respect to each member. The Underwriting Account
is credited with all premium and investment receipts, and is
charged with all losses and expenses, with respect to the member.
Under Article X, profits may be withdrawn from the Underwriting
Account "on such occasions and in such amounts as shall be
determined by a majority vote of the Committee of Lloyd's . . .
."
For the reasons discussed above with regard to the Lloyd's
of London Premiums Trust Funds, we believe it is clear that these
Underwriting Accounts are grantor trusts, the owners of which are
the members.

-30V.

QUESTION TWO: WHAT TAX ACCOUNTING RULES SHOULD BE APPLIED TO
MEMBERS OF INSURANCE SYNDICATES?

A. Timing of Income Recognition.
The closing agreement permits use of the so-called three-year
accounting method for underwriting income.9/ Lloyd's of London
asserts that use of the three-year accounting method is proper
because (i) its use is required for regulatory and tax purposes
under British law, (ii) it has been accepted by the Internal
Revenue Service for almost fifty years, and (iii) "it is the only
method which clearly reflects the income of individuals writing
insurance with unlimited liability because it reflects the
earliest time at which true economic profit or loss is
determinable."
The fact that a method of accounting is permissible or
required for regulatory purposes does not give rise to a
presumption that the method clearly reflects income for federal
income tax purposes. See Thor Power Tool Co. v. Commissioner,
439 U.S. 522 (1979). Nor is the fact that the Service has
accepted the three-year accounting method in the past conclusive;
the purpose of this study is to examine whether prior conclusions
should be modified. Thus, we are left with the issue of whether
the three-year accounting method clearly reflects income.
Representatives of Lloyd's of London make several related
arguments in support of the position that income of the members
can be clearly reflected only through use of the three-year
accounting method. First, they argue that the members, as
individuals using the cash receipts and disbursements method,
cannot be taxed on income before it is actually or constructively
received. They claim that the members do not actually or
constructively receive premium or investment income before the
end of the three-year accounting period because the members "have
no beneficial interest either in the premiums or in the earnings
thereon until, by its term, the trust is released following the
final claim payment or the final provision for incurred but
unreported losses . . . at the end of the year of account." As
9/ Although tax on the income from premiums received in the first
year of the account is deferred for three years, there is a
lesser amount of deferral, or no deferral, with respect to
other income. Under the closing agreement, all U.S. source
investment income, whether or not effectively connected, is
taxed annually. Premiums from reinsurance to close
transactions are received in the third year of the account.
Accordingly, there is only a one-year deferral in reporting
this income. Although varying by syndicate, the premiums on
reinsurance to close transactions are, on average, over 50
percent of the total effectively connected premiums received.
It should be further noted that not all of the other premium
income would be received in the first calendar year of the
account.

-31discussed above, we believe it is clear that the Premiums Trust
Funds are grantor trusts the owners of which are the members.
Under the grantor trust rules, the members would be treated as
receiving the premiums and investment income at the time they are
received by the trust.
A related argument of Lloyd's of London is that the premium
and investment receipts are not "income" in the year of receipt
because these amounts are being held for the benefit of the
policyholders. In support of this argument, Lloyd's of London
cites Seven-Up Co. v. Commissioner, 14 T.C. 965 (1950), acq, in
result only, Rev. Rul. 74-318, 1974-2 C.B. 15, and its progeny.
The Internal Revenue Service has not acquiesced in the theory of
these cases. Even if these cases are assumed to be correct,
however, they do not support the argument of Lloyd's of London.
In Seven-Up Co., the taxpayer received funds from 7-Up
bottlers for use in conducting a national advertising campaign.
The court held that the receipts were'not income to the taxpayer
on the ground that "it was the intention of all of the parties
concerned that these contributions were to be used to acquire
national advertising for the 7-Up bottled beverage and for that
purpose only, and that petitioner was to be a conduit for passing
on the funds contributed to the advertising agency . . . ." 14
T.C. at 977. Similarly, in Broadcast Measurement Bureau, Inc. v.
Commissioner, 16 T.C. 988 (1951) , the court held that a
corporation formed to contract for radio audience survey studies
was not taxed on the receipt of subscription fees where the
corporation "was obligated to return to subscribers either as a
refund or as a credit on future studies, any excess of fees over
the actual cost" of the study. 16 T.C. at 997. See also
Dri-Powr Distributors Association Trust v. Commissioner, 54 T.C.
460 (1970) .
Illinois Power Co. v. Commissioner, 792 F.2d 683 (7th Cir.
1986), addressed the treatment of amounts received by a public
utility pursuant to a rate surcharge the purpose of which was to
encourage energy conservation. At the time of ordering the
surcharge, the utility regulatory commission made clear that the
utility would not be able to keep the money collected. On the
basis of this fact, the court held the amounts were not
includible in income, stating that "it was apparent back when the
order was issued that the company would not be able to profit
from the higher rates. The company was to be a custodian, a tax
collector, with no greater beneficial interest in the revenues
collected than a bank has in the money deposited with it." Id.,
at 688, 689. The court further stated that, "Where, unlike the
case of a trustee or a collection agent or a borrower, the
taxpayer's obligation to refund or rebate or otherwise repay
money that he has received is contingent, the money is taxable as
income to him." Id., at 689.

-32In the case of Lloyd's of London, a member is in no sense a
mere conduit, collection agent, or borrower. The assets held in
the Premiums Trust Fund will be paid to policyholders only to the
extent of their claims. Any excess amounts will be paid to the
member. Indeed, the only reason for the member to enter into an
underwriting transaction is the hope that the assets in the Fund
will exceed the claims. Applying the standard of the Illinois
Power court, the member's obligation to repay money held in the
Premiums Trust Fund is contingent on the claims of policyholders.
Accordingly this money is not excludable from gross income.
The income received from underwriting insurance policies is
"pre-paid" income, in that many of the expenses associated with
the earning of that income may be paid in a later taxable year.
Taxable income is, however, calculated on an annual basis.
Except in the case of certain financial products, taxpayers are
generally not permitted to defer recognition of prepaid income.
Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957);
American Automobile Association v. United States, 367 U.S. 687
(1961); Schlude v. Commissioner, 367 U.S. 911 (1961). Deferral
of prepaid* income for services is permitted only in the
"specified and limited circumstances" described in Rev. Proc.
71-21, 1971-2 C.B. 549. The circumstances of Lloyd's of London
are not among those described in Rev. Proc. 71-21.
In recognition of the fact that, under the annual accounting
system, the difference in timing between the receipt of premium
income and the payment of claims produces a mismatching of income
and deduction items, insurance companies are allowed a deduction
for additions to a reserve for incurred losses. Such reserve
deductions are allowed, however, only if the taxpayer is an
insurance company subject to tax under subchapter L of the
Internal Revenue Code.
B. Tax Accounting for Future Benefit Claims
The preceding section suggests that, absent the closing
agreement, and assuming they would not be treated as insurance
companies, the members of Lloyd's of London would be required to
include premiums in taxable income when received and would not be
permitted to deduct benefit claims until paid. This section
discusses whether such a result is appropriate as a matter of tax
policy. The basic issue raised is the proper method of
accounting for benefit claims and future costs, a subject that
has received substantial attention in recent years. Five
alternative methods of accounting for future costs can be
identified. As will be demonstrated, the approaches differ in
the extent to which investment income on the assets used to fund
the future cost is subject to tax.

-33Each of the approaches is illustrated using an example that
assumes the following facts:
(i) X receives premiums of $100 on the last day of year 1;
(ii) X incurs in year 1 a liability to make (and ultimately
does make) a $121 payment on the last day of year 3;
(iii) X has a pre-tax rate of return on its investment assets
of 10 percent;
(iv) X is subject to income tax at a marginal rate of 34
percent and can fully utilize any deductible losses realized with
respect to the insurance activity; and
(v) any tax liability or benefit is paid or received on the
last day of the taxable year to which it relates.
It should be emphasized that these 'examples do not take
account of underwriting and related expenses.
!• Undiscounted current deduction. The first method is to
allow a current deduction equal to the undiscounted estimated
amount of the future benefit payments. Prior to the 1986 Act,
property and casualty insurance companies accounted for incurred
losses using this method. Under this method, the cash flows of X
would be as follows:
Undiscounted Current Deduction
(cash flows in bold)
Year 1
Premiums
Investment Income
Reserve (Increase)

$100
0
(121)

Claims (Paid)

Taxable Income

(21)

Tax (Paid)
Net Portfolio Assets

7.14
$107.14

Year 2

Year 3

10.71

11.42

121

(121)

10.71

11.42

(3.64)
$114.21

(3.88)
$

0.75

-34The effect of allowing a current undiscounted deduction for a
future benefit payment is to tax the investment income on the
assets funding the liability at a negative rate. While the
investment income earned by X is subject to tax, an offsetting
deduction for the future cost is allowed. The deduction ($121)
is equal to the sum of the initial payment ($100) plus the
pre-tax investment income earned during the two-year period prior
to payment of the cost ($21). The negative tax rate results from
the accelerated allowance in year 1 of a deduction for the $21 of
investment income to be earned in years 2 and 3, which produces a
tax deferral in year 1 of $7.14. (An "extra" tax of $3.40 (34
percent of $10) is paid in year 2 as a result of the acceleration
of the deduction from year 2 to year 1.) The after-tax
investment income earned on the year 1 tax saving (reduced by the
extra tax paid in year 2) is $0.75, the amount of X's ending
assets. If the undiscounted method of accounting for future
benefit payments applies, the issuer would be able to charge a
premium less than $100.
2. Pre-tax discounting. The second method of accounting for
future benefit payments is to allow a current deduction equal to
the present value of the future payment, calculated using a
discount rate equal to a pre-tax rate of investment return.
Additional deductions are allowed in future years in an amount
equal to the annual growth in this present value. Following the
1986 Act, property and casualty insurance companies account for
(cashunder
bold) discounting method.
incurred but unpaid losses
pre-tax
flowsa in
Under this method, the cash flows of X would be as follows:
Year 1
Year 2
Year 3
Pre-Tax Discounting
Premiums
$100
0
0
Investment Income
Reserve (Increase)

0
(100)

(10)

110
(121)

Claims (Paid)

Taxable Income

Tax (Liability)

$100

$110

Net Portfolio Assets

-35The effect of the pre-tax discounting method of accounting
for benefit payments is to attribute the insurer's portfolio
income to the insured. This method provides a true accrual: eac
period's investment income in the accounts of the insurer exactl
matches the accrual of the insurer's benefit payment liability,
and, hence, is not an accretion to the insurer's net worth, i.e.
not a measure of its income. Indeed, the interest rate which
generates the investment income is precisely the discount rate
used to determine the $100 premium the insured would have to pay
No practical way has been devised to attribute and tax the
portfolio investment income to insured parties, however. Thus,
application of the pre-tax discounting method to insurers
effectively exempts from tax the investment income on the assets
funding the future benefit claim during the period prior to the
payment.
3. After-tax discounting. The third method is to allow a
current deduction equal to the present value of the future
liability, calculated using a discount rate equal to the
after-tax rate of investment return. No additional deductions
are allowed in future years for the increase in the present valu
of the liability. Thus, the taxpayer is allowed a deduction
equal to the amount that would have to be set aside to grow
(after taxes) to satisfy the future liability. An after-tax
discounting method applies to nuclear decommissioning funds unde
section 468A. In addition, an after-tax discounting method was
proposed for property and casualty insurance companies in the
President's Tax Proposals to the Congress for Fairness, Growth,
and Simplicity (May 1985) in order to ensure that the investment
income was subject to one level of tax. Under an after-tax
discounting method, the cash flows of X would be as follows:
Year 3
Year 2
Year 1
After-Tax Discounting
(cash flows in bold)
0
0
$100
Premiums
Investment Income

10..22

10.89

Reserve (Increase)

(106.48

(7.,03)

121

Claims (Paid)

Taxable Income

(6.48

10.,22

10.89

Tax (Paid)

2.20

(3..47)

3.70

Net Portfolio Assets

$102.20

$108.95

(121)

4.86)

-36The effect of the after-tax discounting method is that the
investment income used to fund the future benefit payment
liability is taxed at the marginal tax rate of X. The deduction
allowed to X for the future payment does not offset the
investment income earned by X. If an after-tax discounting
method is applied, X presumably will have to increase the amount
of the premium charged to assume the liability to make a future
payment of $121. In order to have sufficient funds to pay the
future liability, X should demand a premium of at least $106.48.
This is the amount that will grow in two years at an after-tax
rate of return of 6.6 percent to $121.10/
4. Deferral of deduction. The fourth method is to defer
allowance of a deduction until the liability is actually paid.
This approach applies to taxpayers using the cash method of
accounting and, following the enactment of section 461(h) in
1984, generally also applies to accrual method taxpayers.
Section 461(h) does not apply to items with respect to which the
Code specifically allows a deduction for estimated expenses
(e.g., insurance reserves specifically allowed under subchapter
L). Under this approach, the cash flows of X would be as
(cash fl ows in bold)
follows:
Deferral of Deduction
Year 1
Year 2
Year 3
Premium Income

$100

0
7.04

Investment Income

6.60

Claims (Paid)

Taxable Income

100

Tax (Paid)

(34)

Net Portfolio Assets

$ 66

121

6.60

(113.96)

(2.24)

38.75

$ 70.36

($ 4.85)

10/ Just as the pre-tax discounting method yields a precise
measure of the insurer's and insured party's economic income,
the after-tax discounting method yields precise measures in
the case of prepaid expenses. In the cases of expected
underwriting expenses such as brokers', legal, administrative
and litigation costs to be incurred, the "premium load" will
be determined as the present value of the expected future
cost stream. An after-tax discount rate is appropriate
because the portfolio funded by the "load", and its cumulated
after-tax earnings, must be sufficient to pay the costs as
they occur over the term of the insurance contract.

-37The effect of the deduction deferral method, like the
after-tax discounting method, is to tax the investment income
used to fund the future cost at the marginal tax rate of X. As
illustrated by the amount of ending assets, the overall effect of
the after-tax discounting method and the deduction deferral
method is the same. Although the timing and amount of the
allowed deductions differ, they are the same in present value
terms. As under the after-tax discounting method, X presumably
will increase the premium charged to assume the liability to make
a future payment of $121 from $100 to $106.48.11/
5. Lloyd's of London's three-year accounting method. Under
the method of accounting used by Lloyd's of London pursuant to
the closing agreement, premium income and benefit payment
deductions are accounted for in the year after the third year of
a three-year accounting period. Investment income is reported as
it is earned. Under this method, the cash flows of X would be as
follows:
Lloyd's Three-Year Accounting Method
(cash
in bold)
Year flows
1
Year
2
Year 3
Year 4
$100

Investment Income

Claims (Paid)

Taxable Income

10.66

(3..40)

(3.62)

Premiums

Tax (Paid)
Net Portfolio Assets

(0)
$100

$106..60

0
10.66
(121)

($ 7.36)

0
0
0
(21)
7.14
($0.22)12/

11/ The deferral of deduction method (section 461(h)) is
algebraically equivalent to the previously described
after-tax discounting method. It therefore yields precise
measures of periodic income, but only for pre-paid costs of
service.
12/ This example is not directly comparable to the previous
examples, since it continues through year 4 and investment
income for year 4 (which would be negative) is not taken into
account. The example can be compared to the previous
examples by adding to the net cash at the end of year 3 the
present value of the year 4 tax savings, $6.70 ($7.14/1.066).
Thus, the value of X's assets at the end of year 3 is
negative $0.66.

-38On these facts, the three-year accounting method is less
advantageous than the undiscounted current deduction and pre-tax
discounting methods, but significantly more advantageous than the
after-tax discounting and deduction deferral methods. Because
the three-year accounting method affects the timing of income, as
well as loss, recognition, the relative advantage of the method
would, on other facts, vary. For example, the three-year
accounting method would be relatively more favorable if benefit
claims were more favorable than expected as reflected in premium
income and would be relatively less favorable if loss claims were
greater than expected, particularly if the claims were paid
before the final year of the accounting period. Moreover,
closing reinsurance transactions (the premiums for which are
calculated on an undiscounted basis) may, in situations where the
memberships of the ceding and assuming syndicates substantially
overlap, have the effect of allowing in the final year of the
accounting period a current undiscounted reserve deduction for
future claims.
In summary, under the after-tax discounting and the deferred
deduction methods, investment income earned on the assets used to
fund a future benefit claim is, during the period prior to
payment, taxed to the person liable to make the payment. In
contrast, this investment income is taxed at a negative rate
under the current undiscounted deduction method, taxed at a zero
rate under the pre-tax discounting method, and, in general, only
partially taxed under the three-year accounting method. Under
none of the methods is the investment income taxed currently to
any other person (i.e., the person from whom the liability was
assumed).
Although it is clear that the latter three methods fail to
impose a current tax on the investment income earned in an
insurance transaction, it is less clear that this investment
income should be taxed to the insurer. It may be argued that in
an insurance transaction the insurer invests premium income for
the benefit of the insureds and receives no economic benefit
itself from the anticipated investment income that is taken into
account in setting the premium. Under this argument, the
insurer, like a bank, should be allowed the economic equivalent
of an interest deduction, leaving it taxed only on the spread
between the investment income earned and the amount needed to
fund the future cost.
Absent the taxation of investment income at the policyholder
level, we cannot accept this argument. We believe that the
failure to impose a current tax on investment income earned in
insurance transactions is inconsistent with basic income tax
principles. This investment income cannot as a matter of
practicality be taxed to the insured party. In contrast, the
income can as a matter of practicality be taxed to the insurer.
Unlike the indebtedness that exists between a bank and a
depositor, an insurer has no fixed obligation to return to
insurers the premiums it receives. The existence of a fixed

-39obligation between a bank and a depositor justifies the accrual
of a deduction to the bank and income to the depositor.
Conversely, we believe that the absence of a fixed liability
between an insurer and insured justifies denial of a deduction to
the insurer and failure to accrue income to the insured.
C. Subchapter S Treatment for Individual Insurance Underwriters
An individual underwriter of insurance may account for
insurance losses under a pre-tax discounting method if the
underwriter is, as provided in Rev. Rul. 83-132, treated as an
insurance company under subchapter L of the Code. Such treatment
carries with it, however, the disadvantage of a corporate level
tax. Although corporations owned by a single individual
generally may elect to be taxed under the pass-through rules of
subchapter S, section 1361(b)(2)(C) provides that an insurance
company subject to tax under subchapter L is ineligible for
subchapter S status. This restriction was adopted in 1982 on the
ground that insurance companies "are entitled to certain
deductions not generally allowed to individuals." S. Rept. No.
97-640, 97th Cong. 2d Sess. 9 (1982).
One reason for denying access to subchapter S to insurance
companies and other corporations entitled to special deductions
not allowed individuals is the concern that corporate level
losses attributable to the allowance of such deductions would be
passed through to individuals and used to shelter from tax income
from unrelated investments or personal services. This concern
has, to a substantial extent, been addressed by the adoption in
1986 of the passive activity loss rules. It can therefore be
argued that Congress should reconsider the issue of whether
insurance companies and other currently ineligible corporations
may qualify as S corporations.
We believe, however, that a second reason exists for denying
insurance companies access to subchapter S — the concern that
the insurance company tax rules fail to tax properly all of the
income earned by the parties to an insurance transaction. As
discussed in the previous section, the rules for taxing property
and casualty insurance companies nave the effect of exempting
certain investment income from tax. We believe that it would be
inappropriate to extend access to these favorable rules by
permitting them to be used at the individual level. Accordingly,
despite the enactment of the passive loss rules, we believe that
insurance companies should continue to be ineligible for S
corporation status.
Although we do not favor expanding access to the favorable
rules of subchapter L, individual underwriters of insurance would
have a strong basis to object if they were taxed on a less
favorable basis than other insurers. We believe that applying
cash method or section 461(h) rules to an insurer would result in
proper taxation of the insurance transaction in cases of prepaid
expenses and where the investment income is not taxed to the

-40policyholders. The current rules of subchapter L that permit the
deduction of reserves are more favorable, however, and individual
underwriters of insurance should not be placed at a competitive
disadvantage to other insurers by being denied access to the tax
rules that govern their competitors. If other insurers are
permitted to claim reserve deductions under subchapter L, we
believe that individual underwriters should be permitted to
achieve similar treatment. As discussed above, Rev. Rul. 83-132
allows individual underwriters access to these rules. It does
not follow, however, that individual underwriters are entitled to
more favorable treatment than other insurers. That is, if on
grounds of fairness individual underwriters should be allowed
access to the favorable tax rules of subchapter L, we believe
they should also be subject to a corporate level tax or its
equivalent.
D. Application of Passive Activity Loss Rules
The enactment of the passive activity loss rules, contained
in section 469 of the Code, is one of the most significant
changes in the U.S. tax laws that has occurred since the
negotiation of the 1980 closing agreement. A number of issues
are raised by the application of these rules to members of
Lloyd's of London. The purpose of this section is not to analyze
the application of these rules in the absence of a closing
agreement but rather to note certain issues and discuss how they
should be addressed in any renegotiated closing agreement.
The passive activity loss rules apply to members of Lloyd's
of London who are U.S. residents or who otherwise have
effectively-connected U.S. trade or business income from their
Lloyd's insurance operations. A typical member's insurance
operations constitute a passive activity because insuring risks
is a trade or business and the typical member does not materially
participate in the conduct of that trade or business. The
passive activity rules are designed to prevent individuals from
deducting tax losses from passive activities, except to the
extent of income from passive activities in the same year. Any
excess net passive activity loss may be carried forward subject
to the same rules. Because Congress did not intend to deny true
economic losses incurred in closed and completed transactions,
the taxpayer may deduct any remaining suspended passive loss from
an activity at the time he disposes of his entire interest in the
activity to an unrelated party in a taxable transaction.
1. Treatment of investment income. The passive loss rules
prohibit an individual from reducing "nonpassive" income by
passive activity losses. For this purpose, "nonpassive" income
includes (a) income from a trade or business in which the
taxpayer materially participates, and (b) portfolio income, such
as interest, dividends, and gains from the sale of property held
for investment that are not derived in the ordinary course of a
trade or business.

-41Investment income earned on "working capital" generally is
treated as portfolio income, notwithstanding that the capital may
be needed to conduct a trade or business. Thus, a taxpayer
generally is unable to use a passive loss from a trade or
business in which he does not materially participate to offset
investment income from working capital used in that trade or
business. Regulations interpreting the passive loss rules,
however, contain a special rule for the investment income of
insurance businesses. Specifically, the regulations treat as
trade or business income (rather than as portfolio income)
H
[i]ncome from investments made in the ordinary course of a trade
or business of furnishing insurance or annuity contracts or
reinsuring risks underwritten by insurance companies . . . ."
Temp. Reg. sec. 1.469-2T(c)(3)(ii)(C). Thus, investment income
from an insurance business may be treated as passive income that
may be offset by underwriting losses.
In the case of the members of Lloyd's of London, this
treatment appears to be appropriate with respect to income earned
from the investment of policyholder premiums. This investment
income is an indivisible part of an insurance transaction. The
treatment might not be appropriate, however, with respect to
income earned from the investment of capital provided by a
member. U.S. members may have an incentive to increase the
amount of capital used in or otherwise characterized as part of
an insurance activity in order to change the nature of the income
generated by that capital from portfolio to passive. We
understand that most, if not all, of the capital deposited by
U.S. members with Lloyd's of London at the present time is in the
form of letters of credit. Thus, it appears that a problem does
not exist at the present time. Nonetheless, the issue should be
addressed in a renegotiated closing agreement.
2. Disposition of activity. As discussed earlier, upon
disposition of his entire interest in a passive activity to an
unrelated party in a fully taxable transaction, a taxpayer may
deduct any remaining suspended passive losses from the activity.
In the case of the members of Lloyd's of London, it is unclear
whether entry into a closing reinsurance transaction should be
treated as a disposition of the member's entire interest in an
activity in a taxable transaction with an unrelated party. For
example, the closing reinsurance transaction might not be viewed
as a disposition of the entire interest in the activity, the
transaction might not be viewed as a taxable transaction to the
extent the members of the reinsuring syndicate are not required
to include the reinsurance premiums in taxable income in the year
of the transaction, and the transaction might not be viewed as a
disposition to an unrelated party if the member of the reinsured
syndicate also holds an interest in the reinsuring syndicate.

-42The Conference Committee Report to the 1986 Act contains the
following statement on the disposition issue:
"Certain insurance transactions. — Clarification
is provided with respect to certain transactions
involving dispositions of interests in syndicates
that insure U.S. risks. Generally, when an owner
of an interest in such a syndicate that is treated
as a passive activity enters into a transaction
whereby he disposes of his interest in the
syndicate in a fully taxable closing transaction,
he is treated as having made a disposition of his
interest in the passive activity."
H.R. Rept. 841 (Vol. II), 99th Cong., 2d Sess. 11-143 (9/18/86).
In light of this legislative history, we believe that any
renegotiated closing agreement should^clarify that any suspended
passive losses attributable to an interest in a particular
syndicate generally should be "freed-up" upon entry into a
closing reinsurance transaction, regardless of whether the member
continues to hold interests in other syndicates and regardless of
the method of accounting used by the reinsurer. Any renegotiated
closing agreement should also address whether this general rule
should apply if the member of the reinsured syndicate (or a
related party) is a member of the reinsuring syndicate. The
freeing up of suspended losses in the latter situation would
appear to be inconsistent with the statutory requirements that
the disposition be complete and that it involve a transaction
with an unrelated party.
3. Straddle transactions. Some practitioners have suggested
that taxpayers may avoid the effect of the passive loss rules by
engaging in so-called "straddle" transactions. These are passive
activities in which income and losses are mismatched — passive
income (which can be offset by otherwise unusable passive losses)
is generated in one year and passive losses are generated in a
later year in which the activity is disposed of. The tax
accounting rules under the closing agreement have the effect of
creating a straddle for members of Lloyd's of London. Under the
closing agreement, investment income is taxed currently, while
underwriting income or loss is determined in the year following
the third year of the accounting cycle. Thus, with respect to
any single three-year accounting cycle, members will always have
positive income in the first three years. Any loss will occur
only in the fourth year.
The Treasury Department has explicit regulatory authority to
prevent abuses resulting from straddle transactions. Independent
of any exercise of this regulatory authority, however, we believe
that any renegotiated closing agreement should ensure that the
tax accounting rules applied to members of Lloyd's of London do
not create an opportunity to avoid the effect of the passive loss
rules.

-43VI. QUESTION THREE: DO THE NONRESIDENT UNDERWRITERS AT LLOYD'S
OF LONDON HAVE A U.S. PERMANENT ESTABLISHMENT?
A. General
Under U.S. tax law, the taxation of income earned by a
foreign person turns in part on whether the income is
"effectively connected with the conduct of a trade or business

interest, wages and annuities, but only to the extent the amount
so received is not effectively connected with the conduct of a
U.S. trade or business. If a foreign person is engaged in a U.S.
trade or business, that person is subject to income tax on a net
basis, at graduated rates, with respect to all the income
effectively connected. Business profits (i.e., income that is
not "fixed or determinable annual or periodical" income) are not
subject to U.S. tax if the profits are" not effectively connected
with the conduct of a U.S. trade or business.
A special rule applies to premiums paid to foreign insurers
and reinsurers; under section 4371, a gross-basis excise tax is
imposed at the rate of (1) 4 cents on each dollar (or fraction
thereof) of the premium paid on a policy of casualty insurance or
indemnity bond; (2) 1 cent on each dollar (or fraction thereof)
of the premium paid on a policy of life, sickness or accident
insurance, or annuity contract on the life or hazards to the
person of a U.S. citizen or resident, unless the insurer is
subject to tax under section 842(b) (relating to the taxation of
foreign insurance companies); and (3) 1 cent on each dollar (or
fraction thereof) of the premium paid on a policy of reinsurance
covering any of the contracts taxable under (1) or (2).
Prior to December 1988, premiums were exempt from this excise
tax if the policy, indemnity bond or annuity contract was signed
or countersigned by an officer or agent of the insurer in a
State, or in the District of Columbia, where the insurer was
authorized to do business. This exemption was intended to
coordinate the gross-basis excise tax with the net-basis income
tax imposed on foreign insurers engaged in the conduct of a U.S.
trade or business. But see Neptune Mutual Association, Ltd. vs.
United States, 13 Cl.Ct. 309 (1987) (providing a different
coordination rule), aff'd in part and rev'd in part, 862 F.2d
1546 (Fed. Cir., 1988~T Under that prior rule, however, there
was a possibility that both taxes would be imposed — or neither
-- because the signing or countersigning of a policy in the U.S.
did not determine whether the issuer was engaged in the conduct
of a U.S. trade or business. The Technical and Miscellanous
Revenue Act of 1988 ("TAMRA") contained a provision, effective
December 1988, that ensures appropriate coordination in the
future between the insurance premium excise tax and the regular
U.S. net-basis income tax on nonresidents engaged in the conduct

-44of a U.S. trade or business. The new rule, amending Code section
4373(1), provides that the insurance premium excise tax will not
apply to "[a]ny amount which is effectively connected with the
conduct of a trade or business within the United States unless
such amount is exempt from [net-basis tax] pursuant to a treaty
obligation of the United States." TAMRA of 1988, Section
1012(q)(13)(A).
The United States often changes the tax rules applicable
under the Code by using a bilateral income tax treaty. In
particular,
— Treaties usually provide that business profits of a
foreign person will be subject to tax in the United States only
if that person has a "permanent establishment" in the U.S. and
the profits are "attributable to" the permanent establishment.
The permanent establishment test provides a more certain — and
generally more demanding — standard for determining whether a
foreign corporation is subject to U.S.~ net-basis tax than the
statutory standard of "effectively connected with the conduct of
a trade or business."
— Some treaties, such as the treaty between the United
States and the United Kingdom, waive the insurance premium excise
tax under certain circumstances.
— Treaties usually reduce the rate of tax on actual or
deemed distributions of dividends, interest, and other periodical
income.
B. Application of Treaties
The U.S./U.K. income tax treaty, consistent with most U.S.
tax treaties, provides that business profits earned by a U.K.
resident are subject to U.S. tax only if the profits are
attributable to a permanent establishment in the United States.
As noted, the insurance premium excise tax is waived on payments
made to a U.K. resident entitled to the benefits of the treaty.
Thus, for an underwriter at Lloyd's of London who is a U.K.
resident (and not a U.S. citizen), the question whether the
underwriter has a U.S. permanent establishment is pivotal.
Under the 1980 closing agreement, all underwriters at Lloyd's
of London are taxed by the United States on their Lloyd's
insurance income in the same manner. In the absence of a closing
agreement, that would not be the case. There are several
different categories of underwriters, each of which could be
subject to different tax rules:
1. U.S. citizens and resident aliens would be subject to tax
on their worldwide income in every case. The tax accounting
rules for determining the insurance income and tax are discussed
at pp. 30-39.

-452. U.K. residents and residents of some other countries with
which the U.S. has tax treaties are entitled to the benefits of a
"standard" permanent establishment clause, so that business
profits would be taxed only if there is a permanent
establishment.
There would be significant differences for underwriters from
different countries, however, even if each treaty has a permanent
establishment clause. In some cases (such as the U.K.), the
treaty waives the insurance premium excise tax; in other cases,
the treaty does not. Thus, for income that is not subject to
net-basis taxation (because there is no permanent establishment),
there may or may not be an excise tax imposed.
In addition, treaties differ in whether they permit a branch
profits tax or a second withholding tax to be imposed on income
effectively connected with a U.S. trade or business when that
income is deemed distributed to the foreign person. The
U.S./U.K. treaty, for instance, prohibits imposition of a branch
profits or second-tier withholding tax; other treaties permit
application of a branch tax or a second withholding tax on
dividends, at varying rates.
3. Some U.S. treaties include a permanent establishment
clause but have special rules that may be relevant. In most U.S.
treaties, for instance, a foreign person will not be deemed to be
conducting business in the United States through a permanent
establishment if the business is concluded by an independent
agent. The U.S. treaty with Belgium, however, to take one
example, has an exception for insurance companies, if the
independent agent "has, and habitually exercises, an authority to
conclude contracts." Thus, a Belgian resident who conducts
business through an agent such as the brokers who hold binding
authorities from underwriters at Lloyd's of London may have a
U.S. permanent establishment, even though the same broker/agent
would not constitute a permanent establishment for a resident of
another country with a different treaty. (The Belgium treaty has
an exception to the special rule for reinsurance, which is the
principal business conducted by Lloyd's of London; under the
treaty, an insurance company writing reinsurance contracts in the
other State through an independent agent will not, for that
reason alone, be treated as having a permanent establishment.)
The underwriters at Lloyd's of London include residents from
more than 80 countries, including most of the jurisdictions with
which the U.S. has treaties, so the nuances of each separate
treaty would have to be considered in determining the appropriate
tax treatment of underwriters.
4. Some Lloyd's of London underwriters would not be entitled
to the benefits of any treaty with the U.S. These underwriters
would be subject to net-basis U.S. tax on their effectively
connected business profits if they are "engaged in the conduct of
a U.S. trade or business." There is no bright line for

-46determining when a taxpayer meets this standard, nor is the
relationship between this test and the permanent establishment
test entirely clear. But it is possible that an underwriter from
a non-treaty jurisdiction would be subject to U.S. net-basis
taxation on some income because he would be engaged in the
conduct of a U.S. trade or business with respect to that income,
even though other underwriters in the same syndicate (and thus
conducting business in exactly the same way) who are residents of
treaty countries would not be subject to net-basis tax because
they would not have U.S. permanent establishments. In addition,
if underwriters at Lloyd's of London are deemed to be doing
business in the United States as corporations, underwriters from
non-treaty jurisdictions that earn income subject to net-basis
taxation would be subject to the U.S. branch profits tax on
deemed remittances of their U.S. income.
In a letter to the IRS dated December 10, 1984, which was
resubmitted in connection with this study, counsel for Lloyd's of
London stated that placement of insurance with Lloyd's of London
through licensed agents in Illinois and Kentucky "clearly rises
to the level of being engaged in trade or business in the U.S.,
and the I.R.S. has so ruled." Letter to IRS from counsel for
Lloyd's of London dated December 10, 1984, p. 42. In the same
letter, counsel concedes that some other activities of
underwriters at Lloyd's of London in the U.S. may constitute a
"trade or business." At the same time, counsel argues that
underwriters at Lloyd's of London do not have a U.S. permanent
establishment. Thus, diverse tax treatment of underwriters in a
single syndicate earning income from a single risk could well
occur.
If an underwriter in a non-treaty jurisdiction earned income
that was not subject to U.S. tax on a net basis (because the
income was not effectively connected with the conduct of a U.S.
trade or business), the underwriter would be subject to
gross-basis tax on that income through the insurance premium
excise tax imposed by section 4371.
C. Context in Which the Issue Must Be Considered
Lloyd's of London argues vigorously that its underwriters do
not conduct business through a U.S. permanent establishment, at
least as that term is defined for purposes of the U.S./U.K.
treaty. Lloyd's (U.S.) asserts with equal vigor that the
underwriters at Lloyd's of London do have a permanent
establishment in the U.S. The issue is crucial, and the answer
is not certain.
Before examining the specific factors that may (or may not)
cause underwriters at Lloyd's of London to have a permanent
establishment, it is important to consider the context in which
this question must be considered.

-471. In the 1980 closing agreement — as in the 1968 agreement
— the underwriters at Lloyd's of London agreed that they would
be deemed to have a U.S. permanent establishment. However,
Lloyd's of London argues persuasively that this concession was
solely for purposes of negotiating those closing agreements and
is not relevant in determining whether, absent a closing
agreement, the underwriters have a U.S. permanent establishment.
In 1968, the U.S./U.K. treaty did not waive the U.S. excise
tax on insurance premiums. Thus, a U.K. citizen who was an
underwriter at Lloyd's of London was subject to either the
gross-basis excise tax or a net-basis income tax on business
profits. The burden of a gross-basis tax will exceed the burden
of a net-basis tax in years of loss or low profits; in the
insurance industry, loss years are not uncommon, because of the
cyclical nature of the business. (In profitable years, of
course, a net-basis tax may exceed a gross-basis tax.) It was
not unreasonable for the underwriters at Lloyd's of London to
agree to a U.S. permanent establishment — and thus subject
themselves to net-basis income tax in~all years — whether or not
that was in fact the case.
In 1980, when the closing agreement was revised, the
U.S./U.K. treaty provided for a waiver of the excise tax.
However, in view of (1) the earlier agreement to be taxed on the
basis of a permanent establishment; (2) the possibility that at
least some underwriters at Lloyd's of London did indeed have a
U.S. permanent establishment to which at least some of their U.S.
income was attributable; (3) the fact that not all Lloyd's of
London underwriters qualify for taxation under the U.K. treaty
and there are strong administrative advantages to providing a
single U.S. tax regime for all underwriters; and (4) other
advantages offered by continuation of the closing agreement with
relatively few changes (including certainty of tax treatment and
IRS acceptance of the special accounting rules imposed by U.K.
law), it was not unreasonable for underwriters at Lloyd's of
London to agree to be taxed as though they operated through a
permanent establishment and thus were subject to a net-basis
income tax.
2. The United States is a strong proponent of a high standard
for determining whether a taxpayer has a permanent establishment.
Because the U.S. favors a free flow of capital investment and
U.S.-owned businesses traditionally have had greater sales and
investments in other countries than foreign-owned businesses have
had in this country, the U.S. has resisted efforts by some
countries to erode the protection that is provided foreign
taxpayers by means of a permanent establishment test. Although
treaty differences in the permanent establishment test are not
great, there is some variance in the standards. The U.S./U.K.
treaty, reflecting the U.S. (and U.K.) view of permanent
establishments, adopts a more rigorous version of the test than
is used in some U.S. treaties.

-483. If it is determined that underwriters at Lloyd's of London
do not have a permanent establishment in the United States, the
U.S. situs business conducted in this country by Lloyd's of
London — with an annual gross premium volume estimated by
Lloyd's of London of more than $3 billion — would probably
represent the largest single bilateral business activity in the
world conducted without a permanent establishment. On the other
hand, because of the nature of the insurance business and the
widespread reliance on brokers, U.S. and foreign insurers often
conduct substantial business activities in other countries
without operating through a permanent establishment.13/
D. Factors that May Cause Nonresident Underwriters at
Lloyd's of London to Have a U.S. Permanent Establishment
The U.S./U.K. treaty, as is common, defines a permanent
establishment as "a fixed place of business through which the
business of an enterprise is carried on." The treaty states that
the term shall include especially "a branch, an office, a
factory, a workshop, a mine . . . or a building or construction
or installation project which exists for more than 12 months."
Certain fixed sites are excluded from the definition,
particularly sites used solely for storage of goods or for
activities of a "preparatory or auxiliary character."
In addition, the U.S./U.K. treaty provides that a person
acting in one contracting State on behalf of an enterprise in the
other contracting State generally shall be deemed to be a
permanent establishment if that person has, and habitually
exercises, an authority to conclude contracts in the name of the
enterprise unless the person so acting is a "broker, general
commission agent or any other agent of independent status, where
such persons are acting in the ordinary course of their
business."
With the possible exception of the operations in Kentucky and
Illinois, the underwriters at Lloyd's of London do not 'operate
from a "fixed place of business" in the United States, at least
in the sense of a specific office building or other business
location. Rather, as described above, underwriters at Lloyd's of
London obtain business through several thousand brokers and
agents. If underwriters at Lloyd's of London do have a permanent
establishment (or permanent establishments) in the United States
through which they earn some or all of their business income, we
believe it will be for one or both of the following reasons:
13/ The ability of insurers to conduct large-scale operations
without creating a permanent establishment has resulted in
some international tax treaties (including some U.S.
agreements) providing special permanent establishment rules
for insurance activities. See the Commentary to the OECD
Model Double Taxation Convention, Art. 5, Para. 38;
discussion of U.S. treaties at p.45, supra, and p.56, infra.

-491. The Illinois and Kentucky operations are determined to be
permanent establishments and the operations in other states are
sufficiently related to those operations that some or all of the
income from other states is "attributable to" the Illinois and
Kentucky permanent establishments. (Gross premium income
directly attributable to Illinois and Kentucky business currently
is about seven percent of the U.S. business, within the meaning
of the 1980 closing agreement, conducted by underwriters at
Lloyd's of London.)
2. One or more of the agents or brokers with binding
authority for underwriters at Lloyd's of London is a "dependent
agent" that constitutes a permanent establishment, rather than an
"independent agent" acting in the ordinary course of its
business. (Gross premium income directly attributable to binding
authority business currently is about 12 percent of the U.S.
business, within the meaning of the 1980 closing agreement,
conducted by underwriters at Lloyd's of London.)
Although Lloyd's (U.S.) urged us to conclude definitively
that Lloyd's of London does have a permanent establishment in the
U.S. — and underwriters at Lloyd's of London urged us with equal
vigor to conclude that they do not — we believe resolution of
this inherently factual issue, if necessary, should be made by
the Internal Revenue Service and the courts. Nonetheless, we
want to discuss the factors that could result in a conclusion
that underwriters at Lloyd's of London have a permanent
establishment in the U.S.
1. Illinois and Kentucky. As discussed above, underwriters
at Lloyd's of London are licensed to do business in Kentucky and
Illinois. Their presence in these states results from historical
business interests: Lloyd's of London is a leader in insuring
race horses, for which Kentucky is the most important location;
likewise, Lloyd's of London is a major marine insurer and Chicago
is a principal port for ships operating on the Great Lakes.
Two sets of issues are raised in connection with the Lloyd's
of London operations in Illinois and Kentucky:
— Are these permanent establishments? And, if so, do they
constitute a permanent establishment for each underwriter at
Lloyd's of London?
— If the Illinois and Kentucky operations are permanent
establishments, is income earned in other states "attributable
to" those permanent establishments?

-50a. Do the underwriters have permanent establishments in
Illinois and Kentucky?
The IRS examined the presence of Lloyd's of London in
Illinois and Kentucky during the 1930s and concluded in private
letter rulings that the operations constituted permanent
establishments. Lloyd's of London has not challenged the
validity of these conclusions, because the rulings are not
relevant so long as tax is imposed pursuant to a closing
agreement. However, Lloyd's of London does not concede that
these rulings are still correct and has reserved the right to
reexamine whether it has permanent establishments in Illinois and
Kentucky if the issue is relevant in the future.14/
Underwriters at Lloyd's of London maintain attorneys-in-fact
in Illinois and Kentucky who function as agents for service of
process, process policy documentation, and handle the accounting
and annual statement filings for the licensed business written in
those two states. The attorneys-in-fact do not underwrite
insurance. The insurance operations of the Lloyd's of London
underwriters in Kentucky and Illinois are similar to their
operations elsewhere; the business generally is provided to the
underwriters though brokers, and a majority of the business
consists of reinsurance or surplus lines. However, the
underwriters at Lloyd's of London are fully licensed in these two
states, which permits the underwriters to write direct insurance
and not limit their policies to reinsurance or surplus lines
coverage. The licenses for Illinois and Kentucky are, in effect,
group licenses for all underwriters at Lloyd's of London;
individual underwriters are not required to obtain separate
licenses and the two states do not even know the identities of
the underwriters.
14/ It should be noted that in a letter dated December 17, 1984,
which was resubmitted in connection with this study, counsel
for Lloyd's of London stated that the Illinois and Kentucky
operations constituted permanent establishments: "Were it not
for the Closing Agreement, none of those U.K. resident
Underwriters would have a 'permanent establishment' in the
U.S. . . . except to the limited extent that an Underwriter
accepts risks on licensed business in Illinois and Kentucky,
the only two states in which Underwriters at Lloyd's are
licensed and maintain attorneys-in-fact and deposits."
Letter to the IRS from counsel for Lloyd's of London dated
December 17, 1984, p.2. In the same letter, at page 3,
counsel describes certain U.S. income and states " . . . nor
would such income be attributable to Underwriters' Illinois
and Kentucky establishments." See also, same letter p. 7.

-51Lloyd's of London states that "[t]he existence of an
attorney-in-fact solely for purposes of service of process does
not constitute a permanent establishment." Letter of April 15,
1988, at page 13 n.16. That statement, while possibly correct,
does not answer the question whether underwriters at Lloyd's of
London in fact have a permanent establishment in Illinois or
Kentucky.
There is no single test for determining whether activities
constitute a "permanent establishment" and resolution of this
issue, if necessary, should be left to the Internal Revenue
Service and the courts. However, it is certainly possible that
Lloyd's of London has permanent establishments in Illinois and
Kentucky. The language of the U.S./U.K. treaty and the technical
explanation of the treaty provide some guidance in determining
what is meant by a "permanent establishment"; in addition, the
"permanent establishment" provision of the U.S./U.K. treaty is
similar to that provision in the OECD-Model Double Taxation
Convention and the OECD commentaries are useful on this issue.
From these sources, it can be noted:
— The attorney-in-fact may constitute a "fixed place of
business" for the underwriters at Lloyd's of London; providing an
agent and address for service of process is one function of the
attorneys-in-fact.
— A "fixed place of business" will not constitute a
permanent establishment if the activities at that place are
merely "preparatory or auxiliary" to the enterprise. The
services provided by the attorneys-in-fact may not be "auxiliary"
if they are regular and on-going and are essential to the
continuing legal right of Lloyd's of London to operate as a
licensed insurance entity in Illinois and Kentucky.
— Even if Lloyd's of London does not have a fixed place of
business in Illinois or Kentucky, it could have permanent
establishments in those states if the attorneys-in-fact are
considered to be "dependent agents."
In sum, there is reason to conclude that — as the. IRS held
fifty years ago and as Lloyd's of London seemingly conceded four
years ago (and, by implication, this year) — the Lloyd's of
London operations in Illinois and Kentucky are "permanent
establishments" as that term is used in the U.S./U.K. treaty.

-52b. Is income earned by nonresident underwriters outside
Illinois and Kentucky "attributable to" the permanent
establishments in those states?
If the Illinois and Kentucky operations are permanent
establishments, then most (or all) of the income earned by
Lloyd's of London from operations in those states would be
"attributable to" those permanent establishments. A second
question is whether income earned elsewhere in the United States
is "attributable to" those permanent establishments. Lloyd's of
London argues that such other income would not be attributable to
the two permanent establishments, and, on balance, that argument
is probably correct. But there is at least a question presented
which merits exploration.
Until the 1960s, the United States and most other nations
followed a "force of attraction" theory for purposes of taxing
business profits that arose in a country. Under this approach,
if a taxpayer had a permanent establishment (or, in a non-treaty
situation, engaged in a trade or business) in a jurisdiction for
any of its business, all other income of that entity was deemed
"attracted" to that permanent establishment (or trade or
business) and subjected to net-basis income tax. The "force of
attraction" theory is no longer applicable, and the test today is
whether the business profits are "attributable" to the permanent
establishment (in the presence of a treaty) or "effectively
connected" to the trade or business (in the absence of a treaty.)
Under this approach, a taxpayer may be found to have a permanent
establishment (or a trade or business) for some lines or types of
business activity, but not for others. See, • e.g., Rev. Rul.
84-17, 1984-1 C.B. 308; Rev. Rul. 83-144TT983-2 C.B. 295; Rev.
Rul. 81-78, 1981-1 C.B. 604.
The Illinois and Kentucky insurance operations generally are
operated independently of the other Lloyd's of London insurance
businesses in the United States; there are separate books and
records, separate trust funds, and some separate product lines.
In Illinois and Kentucky, Lloyd's of London underwriters write
some direct insurance, whereas the business in other states is
limited to surplus lines insurance and reinsurance. Thus, it
would appear that business profits arising outside Illinois and
Kentucky generally should not be deemed to be "attributable to"
the permanent establishments in those states.
The issue is clouded, however, by the question whether the
the licenses in Illinois and Kentucky are material in enabling
underwriters at Lloyd's of London to compete for business
elsewhere. In one submission, counsel for Lloyd's of London
explained the historical reasons for the operations in Illinois
and Kentucky as follows:
Many states' "credit for reinsurance" provisions require
a reinsurer to be licensed in at least one U.S.
jurisdiction in order for its cedents to be able to take

-53credit on their annual statements for that reinsurance.
It is for this reason that Underwriters [at Lloyd's of
London] have maintained a licensed status in Illinois
and Kentucky.
Letter of February 18, 1988, Attachment 8, p. 1. Unless an
insurer qualifies for a "credit for reinsurance" for reinsurance
placed with another insurer, the initial insurer must set aside
reserves for claims notwithstanding the reinsurance agreement.
This nullifies much of the advantage of reinsurance to the
initial insurer and, as a practical matter, an insurer generally
will not place reinsurance unless the reinsurance will be
"credited" by state regulators. Thus, based on this statement by
Lloyd's of London, it could be argued that the Illinois and
Kentucky operations are a linchpin for income derived by Lloyd's
of London in other states.
Subsequently, underwriters at Lloyd's of London provided
information that (i) every state will allow a non-admitted
insurer to qualify for a "credit for reinsurance" by posting a
sufficient letter of credit, or other security device, in lieu of
evidence that it is admitted in another state, and (ii) every
state but two will allow a non-admitted insurer to provide
surplus lines coverage by posting a sufficient letter of credit,
or other security device, in lieu of evidence that it is admitted
in another state. Thus, the U.S. trust funds may provide a
sufficient basis for the Lloyd's of London underwriters to
qualify to write reinsurance and surplus lines coverage in the
various states, without regard to whether they are admitted in
Illinois or Kentucky. In addition, the underwriters at Lloyd's
of London argued that it is not sufficient that the permanent
establishment be a "material factor" in earning the income for
the income to be "attributable to" the permanent establishment;
rather, the income must also be realized in the course of
business carried on through that office — and business outside
of Illinois and Kentucky is not carried on by the offices in
those states. These arguments have merit. Nonetheless, Lloyd's
of London underwriters historically have used their admissions in
Illinois and Kentucky to qualify to offer reinsurance and surplus
lines coverage in other states and there is a non-frivolous
argument that at least some income earned by the underwriters
outside Illinois and Kentucky is "attributable to" the operations
in those states.
2. Dependent Agents. Lloyd's of London argues that all its
U.S. business is conducted through independent agents acting in
the ordinary course of their business. Indeed, it is clear that
independent agents — independent in the sense they are insurance
brokers who are permitted to place policies with many insurance
companies — are extensively involved in placing U.S. business
with underwriters at Lloyd's of London and handling claims from
that business. Well-known insurance brokerage firms are included
among, and according to Lloyd's of London, constitute the
majority of, the approximately 1,000 "coverholders" empowered to

-54bind underwriters at Lloyd's of London on risks. Other U.S.
insurance brokers, with less authority than "coverholders," also
assist insureds in placing insurance for U.S. risks with Lloyd's
of London underwriters.
Lloyd's (U.S.) argues, however, that some of the "independent
agents" engaged in business with Lloyd's of London underwriters
are, in fact, not-so-independent agents. On this issue, as on so
many, Lloyd's (U.S.) and Lloyd's of London hold dramatically
different views. For instance, they disagree on the following
points:
— Whether any binding authority coverholders operate
exclusively as agents for underwriters at Lloyd's of London.
- Lloyd's (U.S.) asserts that some binding authority
coverholders for Lloyd's of London operate
exclusively, or almost exclusively, as agents for
Lloyd's of London and have no significant base of
business independent of that work. Counsel for
Lloyd's of London contends that in no instance is any
coverholder restricted to placing business with
underwriters at Lloyd's of London and states that it
is unaware of any U.S. coverholder, of whatever size,
who uses Lloyd's of London exclusively.
— The scope of the authority of such coverholders to bind
underwriters on risks and to settle claims.
- Lloyd's (U.S.) asserts that coverholders for
Lloyd's of London have authority to conclude
contracts in the name of Lloyd's of London on certain
kinds of risks, up to certain limits, without review
in London; after a policy is submitted to London, a
U.K. agent may reject a contract, but the agreement
is binding for any claim that arises prior to the
rejection. Counsel for Lloyd's of London asserts
that the scope of authority for a coverholder to bind
underwriters is closely limited; in any event,
coverholders do not have authority to prepare or
issue policies. Counsel for Lloyd's of London notes
that coverholders typically have similar authority to
bind other foreign insurers to policies and such
authority generally has not been deemed to be
sufficient to cause those foreign insurers to have a
permanent establishment in the United States.
— The significance of the net accounting procedures used by
brokers and the underwriters at Lloyd's of London.
- Lloyd's (U.S.) asserts that coverholders have
authority, in some cases, to disburse funds on behalf
of Lloyd's of London to settle claims, without prior
review or approval by Lloyd's of London; brokers may
retain premium payments for a period, invest them in

-55short-term accounts, use the premiums to settle
claims, and remit only a net balance to the Lloyd's
of London trust fund. Counsel for Lloyd's of London
responds that the settlement authority of
coverholders is closely limited; underwriters may
override the coverholder in the adjustment and
settlement of any claim. Moreover, remitting only
net premiums is typical for the industry.
There is, of course, no bright-line test for when an agent is
a dependent agent (so that he may constitute a permanent
establishment) and when an agent is an independent agent. It is
not necessary for a person to be an employee of an enterprise in
order to be a dependent agent; likewise, the fact that a person
operates his own business (such as an insurance brokerage firm)
does not guarantee that he will be an independent agent for a
company that he represents.
Neither the text nor the technical explanation of the
U.S./U.K. treaty provides useful guidance on the distinction
between a dependent and an independent agent. The commentary to
the OECD model convention — the text of which is substantially
identical on this point to the text of the U.S./U.K. treaty — is
helpful, but not determinative. The commentary states, in part:
A person will come within the scope of paragraph 6
— i.e. , he will not constitute a permanent
establishment of the enterprise on whose behalf he acts
— only if
(a) he is independent of the enterprise both legally
and economically, and
(b) he acts in the ordinary course of his business
when acting on behalf of the enterprise.
Whether a person is independent of the enterprise
represented depends on the extent of the obligations
which this person has vis-a-vis the enterprise. Where
the person's commercial activities for the enterprise
are subject to detailed instructions or to comprehensive
control by it, such person cannot be regarded as
independent of the enterprise.
Lloyd's of London argues that this language compels a
conclusion that the U.S. coverholders are independent agents. It
asserts that most coverholders are large insurance brokerage
firms that carry on business for many companies in addition to
underwriters at Lloyd's of London; thus, the coverholders are
not economically dependent on Lloyd's of London. In addition,
the instructions to and control of coverholders provided by
underwriters at Lloyd's of London is typical of the industry and
not equivalent to the control exerted over an employee.

-56Lloyd's of London also raises two other arguments in support
of its conclusion that its business operations should not be
deemed to constitute a permanent establishment within the meaning
of the U.S./U.K. treaty:
1. Other U.S. treaties, such as those with Belgium and
France, have special terms applicable to the permanent
establishments of insurance companies that lower the threshold
for certain insurance income to be taxable on a net basis. There
is no such special term in the U.S./U.K. treaty.
2. The OECD commentary recognizes that an insurance
enterprise may have extensive operations in another country
without creating a permanent establishment. The OECD commentary
notes that countries may wish to alter their treaties to prevent
this result. The U.S./U.K. treaty, which took effect after the
OECD commentary was published, does not have a special insurance
provision in the permanent establishment article.
Lloyd's of London argues that, by not providing special
rules for insurance agent binding authorities, the U.S./U.K.
treaty intended to treat this type of agent as an independent
agent that would not create a permanent establishment.
The assertions by Lloyd's of London may be correct, but that
is not clear. There is a dearth of useful guidance on the
distinction between independent and dependent agents, and,
ultimately, the distinction is so bound by facts and
circumstances that the conclusions to be drawn for a particular
taxpayer often could only be resolved by a court. Nonetheless,
in response to the arguments advanced by the underwriters at
Lloyd's of London, we note:
1. The absence of a special insurance provision in the
U.S./U.K. treaty could have resulted, in part, from the fact that
Lloyd's of London — the most significant British insurance
enterprise active in insuring U.S. risks — was subject to a
specially negotiated taxing regime under a closing agreement.
2. Reg. sec. 1.864-7(d)(3), which was cited by Lloyd's of
London and which attempts to distinguish dependent agents from
independent agents, states:
Exclusive agents. Where an agent who is otherwise
an independent agent within the meaning of subdivision
(i) of this subparagraph acts in such capacity
exclusively, or almost exclusively, for one principal
who is a nonresident alien individual or a foreign
corporation, the facts and circumstances of a particular
case shall be taken into account in determining whether
the agent, while acting in that capacity, may be
classified as an independent agent.

-57Lloyd's (U.S.) asserted that at least some individual U.S.
agents for Lloyd's of London work, as a practical matter, "almost
exclusively" for underwriters at Lloyd's of London.15/ Counsel
for the underwriters at Lloyd's of London expressed-cfoubt about
this assertion, but could not, of course, refute it. (The
underwriters at Lloyd's of London would have no basis for knowing
whether a U.S. broker with binding authority has discontinued its
work for non-Lloyd's of London underwriters.)
3. The fact that an individual operates, at times, as an
independent agent does not prevent a conclusion that other
actions can cause the individual to be deemed to be a dependent
agent who will give rise to a finding that his foreign principal
has a permanent establishment. See, e.g., OECD Commentary to the
Model Double Taxation Convention, Art. 5, Para. 37 (1977).
In sum, the issue whether some or all of the U.S.
coverholders (and other agents) for the underwriters at Lloyd's
of London are dependent agents is not clear. But it appears, on
balance, that there is a reasonable argument that (i) the decree
of control exercised by Lloyd's of London over the coverholders;
(ii) the scope of authority (to conclude contracts and settle
claims) exercised by some coverholders; (iii) the economic
interdependence that some coverholders may have upon the Lloyd's
of London market; and (iv) the frequent and sustained nature of
some coverholders' actions on behalf of underwriters at Lloyd's
of London in the United States supports a conclusion that the
underwriters at Lloyd's of London have a permanent establishment
(or establishments) .in the United States.
Assuming that at least some of the U.S. agents are dependent
agents, an extremely difficult issue would arise as to how to
determine what U.S. insurance income is "attributable to" the
permanent establishment. A thorough analysis would require a
determination of the status of each U.S. agent (as a dependent or
independent agent) for purposes of each individual transaction.
Such an analysis would, of course, be virtually impossible. The
difficulty presented, however, does not eliminate the fact that,
for at least certain transactions, we believe it is likely that
some of the U.S. insurance income earned by nonresident
underwriters
of Lloyd's
ismean
earned
through
a permanent
15/ The regulation
could of
be London
read to
that,
because
numerous
establishment.
individual underwriters at Lloyd's of London subscribe to
each risk, no U.S. coverholder could ever work "exclusively
or almost exclusively" for one principal. We do not believe
that is a proper reading of the regulation in the context of
an entity structured like Lloyd's of London.

-58-

Reexamination of the U.S./U.K. Treaty

If the analysis above is incorrect — so that underwriters at
Lloyd's of London do not have a permanent establishment (or
establishments) in the U.S. — and an appropriate closing
agreement is not reached with the underwriters, the Treasury
Department and Congress would need to reexamine the terms of the
U.S./U.K. tax treaty. We do not make this statement lightly, nor
is it intended as a threat; indeed, the underwriters at Lloyd's
of London repeatedly have stated their willingness to enter into
a reasonable closing agreement. Nonetheless, it is important to
acknowledge that we would necessarily be required to consider
whether the treaty strikes an appropriate division of taxing
authority if an estimated $3 billion in insurance premiums for
U.S. situs business were paid annually to U.K. underwriters (and
deducted, for the most part, by U.S. taxpayers) without
collection of either a net-basis income tax or an excise tax by
the United States.
As a general matter, the U.S. historically has favored (i) a
high threshold for determining when a nonresident entity is
subject to net-basis tax (i.e. , a high threshold for finding
there is a permanent establishment) and (ii) no special taxing
regimes on insurance companies. These positions reflect the fact
that (i) the U.S. tends to have more direct investment abroad
than foreign investors have in the U.S., and (ii) U.S. insurance
entities tend to insure more foreign risks than foreign entities
insure U.S. risks. More generally, the U.S. favors tax rules
that encourage the free flow of investment. The U.S./U.K. treaty
reflects these views. But, if it is concluded that the U.S. must
forgo any tax revenues on the premiums paid to U.K. underwriters
in Lloyd's of London, that would significantly affect the balance
of benefits that the Treasury Department understood it was
securing in negotiating the current treaty.
VII. CONCLUSIONS
As is evident from the analysis, there are many questions and
few clear answers in seeking to respond to Congress's question:
What is the proper Federal income tax treatment of income earned
by members of insurance or reinsurance syndicates? In addition,
what, if anything, should be done with the 1980 closing agreement
between the IRS and underwriters at Lloyd's of London?
Despite the uncertainties, we believe it is appropriate to
suggest several conclusions:
1. The operations of Lloyd's of London are so unique, and so
resistent to conventional tax categorization, that treatment
under an appropriate closing agreement offers substantial
advantages to both the Internal Revenue Service and the
taxpayers. The same conclusion may not apply to other insurance
syndicates, particularly U.S.-based syndicates, where the tax

-59status of participants is likely to be less diverse and where the
interests of foreign governments are likely to be less
significant.
2. It is appropriate to treat individual underwriters as the
taxable entities in insurance syndicates structured in the
general manner employed by Lloyd's of London. Arguments can be
made that the appropriate taxable entity is either the separate
syndicates or the entire organization (that is, treating each
underwriter as a "shareholder" of the entity). However, there
does not appear to be any sufficient justification to challenge
the taxpayers' characterization of the individual as the
appropriate taxable entity.
3. In the absence of a closing agreement, there appear to be
two alternative methods of tax accounting that could be applied
to determine the insurance income (underwriting income or loss
and investment income) of an underwriter in Lloyd's of London or
Lloyd's (U.S.) under the Internal Revenue Code.
a. The underwriter could be^treated as or deemed to be
a corporation and then taxed as an insurance company under
subchapter L. This would permit the underwriter to take
deductions for reserves. Tax would be imposed at the corporate
level, using corporate rates; a second tax would be imposed upon
an actual or deemed distribution of corporate profits.
b. Alternatively, an underwriter could be treated as an
individual doing business as a sole proprietor. Such an
individual would not be permitted to take reserve deductions,
which are available only to insurance companies taxed under
subchapter L. The individual could deduct claims in the years
payments are made.
We are not persuaded by the assertion of Lloyd's of London or
Lloyd's (U.S.) that individual underwriters should be subject to
only one level of tax but be permitted to claim reserve
deductions (or to delay recognition of premium income by placing
premiums in a trust, which is similar in effect to establishing a
reserve). We do not believe, and we do not think Congress
believes, that it is appropriate for individuals, either as sole
proprietors or as shareholders in a subchapter S corporation, to
use a tax accounting method that allows reserve deductions and
still be subject to only one level of tax. Congress may, of
course, choose to revisit this issue in the future.
Significantly, the passive loss rules adopted in 1986 reduced the
magnitude of one problem that Congress saw with permitting
individuals to claim reserve deductions — the use of reserve
deductions to shelter income from other, unrelated activities.
4. The 1980 closing agreement between the IRS and
underwriters at Lloyd's of London should be revised in light of
changes in the law since 1980 for the taxation of both U.S.
persons and foreign persons. In particular, underwriters at

-60Lloyd's of London should not be permitted for U.S. tax purposes
to use an accounting method that provides for reserves without
being subject to a corporate level tax, or the equivalent
thereof.
5. We believe that, as a matter of policy, nonresident
underwriters at Lloyd's of London generally should be taxed on
their U.S. insurance income (premium income and investment
income) as if it were effectively connected with the conduct of a
U.S. trade or business (or, in the case of underwriters eligible
for treaty benefits, as if the income were attributable to a U.S.
permanent establishment). This is the approach adopted in the
current closing agreement. If nonresident underwriters are
deemed to be conducting their activities as corporations,
insurance income subject to net-basis U.S. taxation when it is
earned should be subject to a second-level tax, the branch
profits tax, upon its deemed distribution, unless an applicable
treaty bars collection of the branch tax.
We recognize that, in the absence of a closing agreement,
a significant amount of U.S. source income earned by underwriters
at Lloyd's of London from U.S. situs business might not be
subject to U.S. tax. Nonetheless, we conclude that taxing
nonresident underwriters at Lloyd's of London on a net basis for
their insurance income from U.S. business should be the primary
premise for a closing agreement. We note, in particular, the
following:
a. In the absence of a closing agreement and under
existing law, net-basis taxation would be applicable to (i) some
of the U.S. source income earned by most nonresident underwriters
at Lloyd's of London (e.g., income attributable to licensed
operations in Illinois and Kentucky), and (ii) most of the U.S.
source income earned by some nonresident underwriters (e.g.,
underwriters not eligible for treaty benefits.)
i. Lloyd's of London underwriters are almost
certainly engaged in the conduct of a U.S. trade or business for
some, and perhaps a substantial portion, of their business
operations. Thus, underwriters not eligible for treaty benefits
would be subject to net-basis taxation on some, and perhaps a
substantial portion, of their U.S. income.
ii. The operations of Lloyd's of London in Illinois
and Kentucky most likely constitute permanent establishments.
Thus, even nonresident underwriters eligible for treaty benefits
probably are subject to net-basis taxation on at least some of
their U.S. insurance income. It is possible that some
non-Illinois, non-Kentucky insurance income is "attributable to"
the permanent establishments in those two states.
iii. Some U.S. coverholders with binding authority to
represent Lloyd's of London probably would be found by a court to
be "dependent agents" so that they constitute a permanent

-61establishment within the meaning of the U.S./U.K. treaty. Thus,
some additional amount of non-Illinois, non-Kentucky insurance
income of nonresident underwriters eligible for treaty benefits
would be subject to U.S. net-basis tax.
b. In the absence of a closing agreement, income earned by
nonresident underwriters that is not subject to net-basis U.S.
taxation would, in some instances, be subject to the insurance
premium excise tax imposed by section 4371 of the Code. Although
the U.S./U.K. treaty limits collection of this excise tax, many
other treaties do not.
c. Without a closing agreement, it would be extremely
difficult for the underwriters at Lloyd's of London (or the IRS)
to determine what income is subject to U.S. net-basis tax, what
income is subject to the insurance premium excise tax, and what
income is not subject to U.S. tax at all. The enforcement
procedures that would be required to ensure collection of the
appropriate U.S. tax, in the absence of a closing agreement,
would be disruptive to the underwriters and expensive for the
IRS. A closing agreement offers an opportunity for certainty and
fairness to the underwriters and IRS that could not be achieved
otherwise.
6. In the event that U.S. citizens and resident aliens who
are underwriters at Lloyd's of London are subject to U.S. tax
under a closing agreement, the terms of that agreement must not
cause a material difference in the tax that would otherwise be
due on their insurance income.
7. If an appropriate closing agreement is not reached with
the underwriters at Lloyd's of London and it is determined that,
absent a closing agreement, premiums paid to U.K. resident
underwriters in Lloyd's of London are not subject to either
net-basis taxation or the insurance premium excise tax, the
Treasury Department and Congress would need to reexamine the
terms of the U.S./U.K. income tax treaty.
* * *

The legislation directing Treasury to conduct this study also
requires Treasury to renegotiate the closing agreement with the
underwriters at Lloyd's of London to reflect the conclusions of
the study. We intend to do so. In particular, we intend to
pursue the following objectives:
— Income earned by nonresident underwriters of Lloyd's of
London generally should be subject to net-basis taxation, and,
where applicable, a branch profits tax.
— The closing agreement should not create a material
disparity between the taxation of U.S. citizens and resident
aliens who are underwriters at Lloyd's of London and the taxation
Of U.S. resident underwriters in U.S. based Lloyd's-type
syndicates who earn income in an equivalent manner.

-62— The tax accounting rules applied to all Lloyd's of London
underwriters should be reexamined, and, if necessary, modified to
ensure that use of special accounting rules does not result in a
material difference in the tax due.

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
•9

FOR IMMEDIATE RELEASE

Feburary 22, 1989

Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of January 1989.
As indicated in this table, U.S. reserve assets amounted to
$48,190 million at the end of January, up from $47,802 million in
December.

U.S. Reserve Assets
(in millions of dollars)

End
of
Month

Total
Reserve
Assets

Gold
Stock 1/

Special
Drawing
Rights 2/3/

Foreign
Currencies 4/

Reserve
Position
in IMF 2/

47,802

11,057

9,637

17,363

9,745

48,190

11,056

9,388

18,324

9,422

1988
Dec.
1989
Jan.

1/ Valued at $42.2222 per fine troy ounce.
2/ Beginning July 1974, the IMF adopted a technique for valuing the SDR
based on a weighted average of exchange rates for the currencies of
selected member countries.
The U.S. SDR holdings and reserve
position in the IMF also are valued on this basis beginning July
1974.
3/ Includes allocations of SDRs by the IMF plus transactions in SDRs.
4/ Valued at current market exchange rates.

NB-149

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-204
TESTIMONY OF THE HONORABLE
NICHOLAS F. BRADY
SECRETARY OF THE DEPARTMENT OF THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
THURSDAY, FEBRUARY 23, 1989
INTRODUCTION
Mr. Chairman, Mr. Wylie, and Members of the Committee.
From the day when I was sworn in as Secretary of the
Treasury, a top priority has been to achieve a sound, responsible
response to the savings and loan crisis. President Bush is
correct: No simple or painless solution to this problem exists.
Only eighteen days after he was inaugurated, however, he
announced the Administration's plan. In doing so, President Bush
reaffirmed our commitment to fix it now, fix it right, and fix it
once and for all.
Two watch words guided us as we prepared a plan to solve
this problem—NEVER AGAIN.
o Never again should a federal insurance fund that
protects depositors become insolvent.
o Never again should insolvent federally-insured
depository institutions remain open and operate
without sufficient private risk capital.
o Never again should risky activities permitted by
individual states put the federal deposit insurance
fund in jeopardy.
o Never again should fraud committed against financial
institutions or depositors be punished as if it were a
victimless white-collar crime.
o Never again should the nation's savings and loan
system, which is important to our commitment to
available, affordable housing, be put in jeopardy.

NB-150

- 2 The Administration plan meets these standards. It serves
as a blueprint for comprehensive reform and sound financing. It
assures the emergence of a healthy and strong S&L industry and
for this reason is pro-industry — both for S&Ls and for the
housing industry they serve. Moreover, it has the strong support
of the federal regulators — the Federal Reserve Board (Federal
Reserve), the Federal Deposit Insurance Corporation (FDIC), the
Federal Home Loan Bank Board (Bank Board), and the Comptroller of
the Currency (OCC).
When the President announced his plan, he also called on
Congress to join him — with all possible speed — to solve the
savings and loan crisis. Today I can report to you that a key
part of the administrative reform is already underway.
On February 7, the day after the President announced his
plan, the Federal Savings and Loan Insurance Corporation (FSLIC),
FDIC, OCC, and the Federal Reserve worked together to stabilize
control of the remaining insolvent institutions and impede them
from enlarging the S&L deficit. By that action we should begin
to reduce the cost of funds over time — for banks, as well as
for savings and loans — and to control the losses in the
insolvent S&Ls. Moreover, our quick action will give us a head
start on consummating the resolutions, which will be executed as
soon as Congress provides the necessary financing.
This joint supervisory operation was designed with several
purposes in mind: first, to conserve the assets of troubled
savings institutions; and second, to preserve day-to-day banking
services for the public until a permanent resolution of the
institutions' problems can be put in place.
Our objectives are to minimize operating losses, restrict
unwarranted or unsound growth, eliminate speculative activities
and destructive competition in deposit rates, and to get rid of
waste, fraud, and insider abuse wherever it exists.
I would like to emphasize that during this interim period,
insured depositors remain fully protected, basic customer
services will not change, and each institution's employees will
continue to conduct the normal day-to-day operations of the
institution. These institutions are open, with deposits backed
by the federal government, and ready to do business with their
customers.
The supervisory and resolution personnel of the FDIC and the
other agencies are preparing for resolutions and are in a good
position to act swiftly once the legislation is in place. This
early start on the cooperative supervisory process saves us both
time and money. Fast action by all parties — the

- 3 Administration, the regulators, and the Congress — will help
reduce the industry's cost of funds by getting the insolvent
institutions resolved, out of the marketplace, and out of the
business of needlessly bidding up interest rates.
Given the magnitude of the problems we face, expedited and
stabilizing action provides an orderly transition to the new
regulatory structure we propose. We now need legislative action
by the Congress to put the reform and financing plan into place
to finish the job.
In short, we have proposed a blueprint for reform. We now
need your help to build a solid structure for the savings and
loan industry to ensure a strong foundation for housing finance
in the future. The President has asked me to deliver to the
bipartisan leadership of this Committee our comprehensive plan.
We respectfully request that you introduce it today. In his
budget message to the joint session of Congress on February 9,
President Bush called on the Congress to deliver a reform package
to him in 45 days. Once Congress acts, we will be ready to move
to stem the hemorrhaging.
This is a tall order, but I pledge to you the full
cooperation of the Administration. Cooperative and expedited
action by the Congress and the Executive branch will help to
reassure the millions of American savers, who rely on deposit
insurance protection, that we indeed have a safe and sound
financial system that will continue to meet their saving and
borrowing needs in the future.
THE SAVINGS AND T^*" fPnnT.FM
Our plan attempts to right the wrongs of the past.
Consequently, an understanding of how the current problem arose
will not only place our plan in the proper context, but also
explain why we have come forward with the detailed package we
present to you today.
Causes of the Problem
Inflation. Interest Rates, and Regulation 0. In the middle
1960s, savings and loans began experiencing liquidity and
earnings problems caused by increased inflation and the resulting
high, volatile interest rates. Mainly to protect these
institutions from the effects of rising interest rates and
excessive competition for funds from commercial banks, Congress,
in 1966, placed commercial banks, mutual savings banks and
savings and loans under deposit interest rate regulation
(Regulation Q).

- 4 Consumer Demands for Market Rates. In the late 1970s, when
rising inflation and interest rates exceeded Regulation Q
ceilings, many savers became unwilling to limit themselves to the
returns allowed under these artificially low interest rate
ceilings. These savers withdrew their deposits from traditional
savings accounts — a process called disintermediation — and
invested them in newly-emerging, uninsured money market mutual
funds. As a result of market forces, both consumers and
depository institutions pressured Congress to remove the
Regulation Q ceilings, which it did in the Depository
Institutions Deregulation and Monetary Control Act of 1980.
Changes in Technology. Starting in the 1970s, the
development of electronic technologies made it possible for
funds to be withdrawn or shifted between institutions and across
geographic boundaries instantaneously. Devices such as
repurchase agreements for securities and certificates of deposit,
marketed aggressively through brokers and underwriters, made it
possible for institutions to draw depositors from a broad
geographic base. They also enable depositors to withdraw their
money from those institutions very quickly, thus permitting
funds to flow to the highest bidder.
Furthermore, technological innovations made possible the
securitization of mortgage loans. This development has allowed
thrifts and non-thrifts to originate mortgages and sell them in
the broader capital markets to investors such as insurance
companies and pension funds. This, in turn, has increased
competition and reduced the interest rate spreads and profit
margins at banks and savings and loans.
Spread Problem. The high, short-term cost of deposits and
lower embedded fixed rates on mortgages produced losses and
drained capital from the S&L industry during the late 1970s and
early 1980s. The industry's tangible capital fell from $28
billion in 1978 to $4 billion in 1982, a reduction of 85 percent.
Broadened Powers. In 1982, responding to the interest rate
problems of thrifts, Congress passed the Garn-St Germain
Depository Institutions Act. This law gave the Federal Home Loan
Bank Board authority to substantially broaden the powers of
Federally chartered thrift institutions. Subsequently, the Bank
Board relaxed controls on consumer and commercial real estate
lending.
Direct Investments. In response to the reduced spreads
available in mortgage lending, some states permitted statechartered savings and loans to diversify their asset portfolios.
That change pulled capital away from residential mortgage loans
and into significant amounts of direct investment in real estate
and equity securities not permitted to federally-chartered

- 7 o

Precise and trackable accounting for all public and
private funds employed in resolving the S&L problem;

- 8 The considerable administrative expertise of the two
corporations will be available to manage financial, insurance
and regulatory issues. While a single agency will be created
however, separate insurance funds will be maintained for
'
commercial banks and for savings and loans, m e separate
insurance funds will not fee commingled, ajid premiums from each
industry wjJJ,fe£iisM pjHy for. ifcs. pwn insurance fund.
^~~
The FDIC Board will be expanded from three to five members
Three members, including the Chairman, will be private citizens'
appointed by the President and confirmed by the Senate. The two
remaining members will be the Comptroller of the Currency and
the Chairman of the newly-renamed Federal Home Loan Bank System
J
(FHLBS).
The Chairman of the FHLBS will continue to be the chartering
authority for federal savings and loan associations and mutual
savings banks, will supervise the Federal Home Loan Mortgage
Corporation, and it will be the primary federal supervisor of
savings and loans (see Chart 1). The current board will be
replaced by a single chairman. The Chairman of the FHLBS will be
subject to the general direction of the Secretary of the Treasury
in the same manner as the Comptroller of the Currency. The new
FHLBS Chairman will also be the head of the system of 12 Federal
Home Loan Banks (FHLBanks), which currently make loans to member
institutions and supervise and examine them as well. The chief
supervisory employee of each FHLBank will report directly to the
chief supervisory officer in Washington.
By separating the insurer from the chartering agency, more
serious disciplinary standards designed to protect the integrity
of federally-insured deposits can be maintained. In addition, by
subjecting the actions of the FHLBS to oversight by the Treasury
Department, the interests of the taxpayers can be more fully and
consistently protected. This Treasury oversight has existed for
national banks since the Administration of President Abraham
Lincoln. These steps will create a system of checks and balances
for savings and loans that more closely parallels that for
commercial banks.
Some observers have already expressed reservations about
Treasury oversight of the primary thrift supervisor in a manner
that parallels our authority over national banks. Let me assure
the Committee that we do not intend to micro-manage the
revitalized Federal Home Loan Bank System. That concern led to
our designating a chairman who would serve and function as a
chief executive officer.
It is critical, however, that we exercise the proper degree
of oversight. The reason is clear: Treasury funds are being
used for the first time as part of the clean-up operation.

9
Treasury oversight is essential to ensure that these problems and
the strain they place on our financial system do not occur again.
Treasury oversight is essential to ensure a strong and safe
system for readily available home financing.
Enhanced Safety and Soundness Standards
Capital Requirements. We are experiencing the results today
of an industry that collectively has not been adequately
capitalized. We have learned a valuable lesson: Deposit
insurance simply will not work without sufficient private capital
at risk and up front.
The Administration plan will increase safety and soundness
standards for savings and loan institutions by requiring these
institutions to meet standards equivalent to commercial bank
capital and regulatory standards within a two-year period. This
is consistent with the on-going efforts of all the federal
financial regulators, including the current Bank Board, to
implement risk-based capital to ensure that sufficient private
capital is at risk ahead of the deposit insurance fund. Again,
private capital is the best assurance that the federal insurance
of deposits will not be exposed to undue risk and imprudent
investment behavior.
All savings and loans will be required to meet capital
requirements equivalent to those for national banks by June 1,
1991. Some 1,240 savings and loans with total assets of $319
billion already meet this capital requirement, while the
remaining 1,368 solvent institutions will be expected to raise
the necessary capital internally or externally or by merging with
stronger institutions.
The Chairman of the FHLBS will oversee and manage this
transition period. When S&L capital standards become equivalent
with those for banks, S&Ls could have a 50 percent break in the
amount of required capital because of the treatment of home
mortgage assets under the Basle capital agreement. Moreover,
S&Ls will be given 10 years to amortize the goodwill on their
balance sheets.
Some stockholders may suffer dilution of their holdings, but
appropriately we are achieving a safer and stronger system where
private capital stands ahead of the government's insurance of
deposits, giving taxpayers enhanced protection. At the same
time, we expect a lower cost of funds for the solvent portion of
the industry once unfair competition from insolvent institutions
is removed.

- 10
Incentives for New Capital. Incentives for attracting new
capital will further increase the amount of private capital
protecting depositors. Several barriers to the entry of
traditional financial services companies will be eliminated. For
example, bank holding companies will be permitted to acquire a
failed or failing savings and loan without the existing crossmarketing and tandem restrictions. After two years, bank holding
companies will be able to acquire anv savings and loan without
these restrictions.
Additional Supervisory Powers. The FDIC will be given
enhanced authority to set insurance standards for all savings and
loans, both federal and state-chartered. It will be able to
restrict risky activities that have been authorized by some
states in the past. The FDIC also would have a "fast whistle"
to halt unsafe and unsound practices, while still protecting
insured depositors. Furthermore, all insured depository
institutions within holding companies would guarantee the
insurance fund against loss in the event of the failure of any
insured depository institution owned by the same holding company.
Putting Deposit Insurance on a Sound Financial Basis for the
Future
There is a fundamental requirement that the federal deposit
insurance funds are put on a sound financial basis. This can be
accomplished by reestablishing the basic principle of industryfinanced deposit insurance funds standing between any future
industry problems and the taxpayer.
The cost of the S&L solution underscores the importance of
requiring all federal deposit funds to be adequately capitalized.
Consistent with this mandate is the creation of a sound savings
association insurance fund, not just after-the-fact financing for
insolvent S&Ls. It is equally important that we shore up the
commercial bank insurance fund. The FDIC insurance fund's
reserve-to-insured deposit ratio has fallen to an estimated alltime low of 0.83 percent from its historical average of 1.40
percent.
We propose increasing commercial bank premiums to bring the
FDIC fund back in line with its historical reserve-to-deposit
ratio to protect depositors and taxpayers. Specifically, we
propose a gradual rise in the deposit insurance premiums paid by
commercial banks from $.08 per $100 in deposits to $.15 per $100
in deposits by 1991. Premiums would be rebated when the bank
insurance fund is in excess of a 1.25 percent reserve-to-deposit
ratio.

-lilt is important to point out that this is the first
statutory increase in the FDIC's deposit insurance premium since
1935. During the intervening years, the amount of deposits
insured per depositor in any one institution has increased from
$2,500 in 1933 to the current level of $100,000.
Let me emphasize, however, that all of the increased
premium revenue paid by commercial banks will go to the FDIC
insurance fund; not one penny from commercial banks will go to
any §&L resolution QZ £& £&e new savings association insurance
fund.
Emergency special assessment authority will be granted to
the FDIC. The FDIC will be permitted to raise the overall
premium level when the fund is too low, as well as to lower
premiums when it is fully funded. Thus, risk-based capital and
experience cost-based premiums will ensure that the costs to the
funds are covered. The maximum cap on the premiums paid by
commercial banks or S&Ls would be 35 basis points.
The Administration's reform plan also proposes to strengthen
the National Credit Union Share Insurance Fund (NCUSIF) by
having it use accounting procedures comparable to those used by
the FDIC and FSLIC. The NCUSIF is currently structured such that
each insured credit union places and maintains one percent of its
shares on deposit in the fund and treats the contribution as an
asset on its balance sheet. This contrasts with the practices of
both the FSLIC and the FDIC in which insured institutions treat
their premium contributions as expenses. As long as credit
unions consider their contributions as assets, they will resist
the using of these assets to cover insurance losses.
Therefore, we recommend that credit unions be required to
expense the one percent of deposits they maintain at the NCUSIF
over an 8-year transition period. During this transition period,
no additional premiums would be collected. At the end of 8
years, the NCUSIF would avail itself of its existing statutory
authority to collect a 1/12 of one percent premium.
Enhanced Enforcement Authority
As part of the comprehensive reform package, we must ensure
that fraud and financial institution crimes are pursued and
punished as befitting their grave societal costs. The fraud and
abuse are widespread and well-known to the American public
through news accounts. Our proposal will add new enforcement
authorities, increase penalties for fraud, and increase funding
to provide for dramatically increased law enforcement staff and

- 12 prosecutions. The scope of federal regulators' enforcement
authority will be broadened to include all insiders, in addition
to the managers of an institution. It will also grant regulators
broader power to impose temporary cease-and-desist orders.
We have borrowed a page from the Administration's war on
drugs and drug money laundering in drafting our new enforcement
authority. Maximum civil penalties will be raised to $1,000,000
per day, and maximum criminal penalties to 20 years, with
mandatory minimum sentencing. Authority will also be provided
for regulatory agencies to pay rewards to informants. Civil
penalty authority will be given to the Justice Department for the
first time. These civil penalties will be cumulative to criminal
sanctions. Also, we propose to add civil and criminal seizure
and forfeiture authority similar to the forfeiture authority for
drug and drug money laundering.
Most importantly, approximately $50 million per year would
be authorized for three years for the Justice Department to fund
a new national program to search out financial institution fraud.
This program will include new investigators, auditors, analysts,
and prosecutors trained in specialized and sophisticated methods
of financial institution fraud. Indeed, the number of personnel
devoted to investigating and prosecuting bank and thrift fraud
will be approximately doubled.
A Revitalized Housing Finance System
Today, as in the past, the S&L industry plays an important
role in housing finance. The S&L industry's problems do not stem
fundamentally from their traditional business of mortgage
financing. Nonetheless, problems in the S&L industry are a
threat to the viability of our housing finance system.
The Administration's plan is designed explicitly to promote
housing finance by revitalizing the S&L industry and the FHLBS.
The regulatory reforms outlined earlier as well as oversight by
Treasury of the FHLBS help insure a financially viable S&L
industry to serve housing finance. We believe the best thing for
housing finance in this country is a strong and sound S&L
industry.
Moreover, the plan provides for explicit representation for
the housing industry on the boards of directors of the regional
Federal Home Loan Banks. The objective is to ensure that the
concerns of the housing industry play a direct role in the
policies and practices of these government sponsored
enterprises.

- 13 Finally, the plan provides funding not just to resolve
insolvent S&Ls, but also includes funding to establish a new S&L
insurance fund for the future. The majority of future S&L
insurance premiums are allocated to this insurance fund; none pay
for REFCORP interest. And Treasury funds are allocated to the
insurance fund as well, giving tangible proof of our commitment
to the future of the S&L industry as a provider of housing
finance.
Restoring the Industry to Financial Health
During 1988, the Bank Board resolved 205 institutions and
stabilized 17 others. But the factors I have outlined combined
to create such a problem that there still remain a total of about
350 S&Ls insolvent according to generally accepted accounting
principles, or GAAP, and an additional roughly 150 which, while
GAAP solvent, have negative tangible net worth. These
institutions held about $265 billion in assets and had negative
net worth on the order of $18 billion as of September 1988, the
latest available figures.
Let me describe in some detail the Administration plan for
restoring the S&L industry to financial health. It has three
components. The first $50 billion is to resolve currently
insolvent institutions and any other marginally solvent
institutions which may become insolvent over the next several
years. Secondly, the plan ensures adequate servicing of the $40
billion in past FSLIC obligations. And third, and perhaps most
important, the plan provides $33 billion in financial resources
necessary to put S&L deposit insurance on a sound financial basis
for the future.
At the heart of our plan is the creation of a Resolution
Trust Corporation (RTC), for which the FDIC will be the primary
manager directed to resolve all S&Ls which are now GAAP insolvent
or become so over the next three years (see chart 2). The
creation of this new corporation will serve several practical
business purposes: it will allow the isolation and containment
of all insolvent S&Ls during the three-year resolution process
and will facilitate a full and precise accounting of all the
funds that are used. The RTC will seek to complete the
resolution or other disposition of all insolvent institutions and
their assets over a period of five years. An Oversight Board
consisting of the Secretary of the Treasury, the Chairman of the
Federal Reserve Board of Governors, and the Attorney General will
monitor all RTC activities to ensure the most effective use of
both private and public financial resources.
To accomplish its task, the RTC will have available $50
billion in new funding, which is provided by the Administration
plan. The plan also provides funds to pay for the $40 billion

- 14 that already has been committed in past FSLIC resolutions.
Finally, the plan will provide additional funds for handling
insolvencies in the post-RTC period from 1992 to 1999, as well as
to help build an insurance fund for the healthy S&Ls — the
Savings Association Insurance Fund (SAIF) — which will be
operating during this period.
Let me discuss now some specifics of the financing of the
various component parts of our plan. Further details are
contained in the Appendix to my testimony which includes
materials provided to this Committee by the Office of Management
and Budget.
To provide the $50 billion to the RTC, we will create a new,
separate, privately-owned corporation, the Resolution Funding
Corporation (REFCORP), which will issue $50 billion in long-term
bonds to raise the needed funds. REFCORP will purchase zerocoupon, long-term Treasury securities whose maturity value will
be $50 billion — growing through compound interest — to assure
the repayment of the principal of the bonds issued by REFCORP.
Funds to purchase these zero-coupon bonds will come exclusively
from private sources (see Chart 2 ) :
o The FHLBanks will contribute about $2 billion of their
retained earnings — which are currently allocated to,
but not needed by, the existing Financing Corporation
(FICO) — plus approximately 20% of their annual
earnings, or $300 million, in 1989, 1990 and 1991;
o The S&Ls will contribute a portion of their insurance
premiums; and
o If necessary, proceeds from the sale of FSLIC
receivership assets will be used.
No Treasury funds or guarantees will be used to repay any
REFCORP principal.
Interest payments on the REFCORP bonds will come from a
combination of private and taxpayer sources:
o The FHLBanks, beginning in 1992, will contribute $300
million a year;
o The RTC will contribute a portion of the proceeds
generated from the sale of receivership assets, and
proceeds from warrants and equity participations taken
in resolutions; and
o
Treasury funds will make up any shortfall.

- 15 All Treasury funds used to service REFCORP interest will be
scored for budget purposes in the year expended.
Funds for the second component of our plan — servicing the
cost of the $40 billion in resolutions already completed by
FSLIC — also will come from a combination of S&L industry and
taxpayer sources:
o FICO will issue bonds under its remaining authority
and contribute the proceeds;
o The S&Ls will contribute a portion of their insurance
premiums;
o FSLIC will contribute the proceeds realized from the
sale of receivership assets taken in already completed
resolutions, as well as miscellaneous income; and
o Treasury funds will be used to make up any shortfall.
The final component of the plan — managing future S&L
insolvencies and building SAIF, the new S&L insurance fund,
during the post-RTC period — is funded again from a combination
of S&L industry and taxpayer sources:
o The S&Ls contribute a portion of their insurance
premiums; and
o Treasury will contribute funds as needed.
These sources together provide about $3 billion per year to
handle any insolvencies which occur in the 1992-99 period and in
addition contribute at least $1 billion per year to building the
new Savings Association Insurance Fund. Assuming that $24
billion is used for post-RTC resolutions, by 1999 the SAIF fund
will still contain just under $9 billion at a minimum to support
the healthy S&Ls. Overall the plan contains $33 billion in postRTC funds from 1992 to 1999 to manage future insolvencies and
contribute to building a healthy new S&L insurance fund. Found
in the appendix are a chart (Chart 3) and a listing of sources
and uses of funds.
Throughout the plan, all Treasury funds used are fully
scored for budget purposes and increase budget outlays as
expended. The level of expected outlays falls within the margin
provided for in President Reagan's FY 1990 budget and should not
interfere with President Bush's commitment to meet the GrammRudman deficit reduction goals in future years. Over the 19891999 period, we estimate the net increase in the deficit to be
roughly $40 billion.

- 16 The S&L industry will be a major beneficiary of restoring
its own financial health. From the outset, the Administration
has stated that the S&L industry must therefore contribute its
fair share — before the Federal government makes good on its
pledge to protect insured depositors. As you can see, the plan
requires a combination of private industry and public sources
throughout. We believe that the share demanded of the industry
is indeed fair, but not so great as to jeopardize the viability
of the healthy S&L industry which will emerge from the RTC
resolution process. And it will indeed be a healthy industry
that emerges — one with an attractive and viable charter, with a
clean insurance fund, and one prepared to provide its traditional
support for home financing.
Is the capacity of the Administration's plan sufficient to
resolve those S&Ls presently insolvent and those marginal
institutions which will become insolvent? The answer is surely
yes.
To address the immediate problem, the Bank Board has already
handled about 222 institutions in 1988. Funding for the
estimated cost — about $40 billion — is contained in our plan.
What remains to resolve in the near future is the roughly
350 institutions which are insolvent by GAAP measures and about
150 additional institutions which, while GAAP solvent, have
negative tangible net worth. These 500 institutions have about
$18 billion of negative net worth and about $265 billion of
assets. Importantly, the problems are concentrated in a
relatively few institutions — over 80% of the negative net worth
is held in the most troubled 100 institutions.
How much will it cost assuming all of this caseload of 500
institutions have to be resolved? That, of course, depends on a
number of factors — future interest rates, real estate prices
and the speed with which the FDIC can get to work on the job.
Under likely scenarios, we estimate the size of the immediate
problem at well under the $50 billion available to the RTC to
handle it. To get our estimate, we start with the $18 billion of
negative tangible net worth. To that cost we add some fraction
of the assets which will be lost in the process of liquidation or
merger. Our present estimate of the total cost is about $40
billion. Even under less likely scenarios which would make the
problem worse, it is within the $50 billion available to the RTC.
Our best estimate of the size of the current problem — $40
billion for the resolutions completed by the Bank Board last year
plus something under $50 billion for the current caseload, a
total of about $90 billion — is in line with estimates from the
FDIC, GAO, Federal Reserve, and the Bank Board.

- 17 What happens if in the future even more that 350 GAAP
insolvent and 150 GAAP solvent and tangible with negative
tangible net worth must be resolved, as a number of commentators
have suggested? Our plan already contains a substantial amount
of funds to support the S&L industry during the post-RTC period,
1992-99. A total of about $24 billion will be available during
this period to resolve any S&Ls which become insolvent. This
amount is in addition to about $9 billion which is allocated by
the plan to building a new insurance fund for the healthy S&Ls.
Should a presently implausible economic scenario occur which
markedly increases the cost of the RTC resolution task — either
by increasing the cost of resolving the roughly 500 institutions
with negative tangible net worth or by adding a large number of
presently solvent institutions to its caseload — some portion of
the additional $24 billion capacity could be used. If they are
not needed for resolutions, these funds will be available for use
in further building the new S&L insurance fund.
CONCLUSION
The Administration's activity of the past few weeks should
illustrate clearly our commitment to a long-lasting resolution of
the S&L crisis. We have presented a structurally sound plan. We
have delivered to you a balanced financing package that requires
contributions from the S&L industry and also lives within the
government's means. If there is one recurring theme that I hear
from my G-7 finance colleagues, it is this: They — like all
investors in our capital markets — are closely watching our
commitment to budget discipline and financial responsibility.
Our expedited action will enhance financial stability both now
and in the future.
In conclusion, the President's comprehensive solution to the
savings and loan crisis — if enacted by Congress in a timely
manner — will provide a sound, long-term answer to the savings
and loan problem. We already have made a head start. The time
to act is now.
The cooperative supervisory action already being implemented
by the FSLIC and the FDIC paves the way to begin case resolutions
immediately once the Congress acts. We stand ready and eager to
work with the Members of this Committee and others to enact this
plan into law as soon as possible. Working together, we can
recreate and rejuvenate the vital savings and loan industry,
which has served the nation's home owners so well in the past.
I will be happy to answer any questions the Members of the
# # # # #
Committee may have.

Priority of Sources of Funds
Commercial bank premiums:
1) Bank Insurance Fund (Old FDIC fund)
Savings and Loan premiums:
1) Interest on FICO bonds
2)
Principal for REFCORP bonds
3)
FSLIC Resolution Fund (Old FSLIC assets and
liabilities)*
4)
Savings Association Insurance Fund*
* 3 and 4 above switch to 4 and 3 in 1992
Old Receivership Proceeds:
1) Principal for REFCORP
2)
Interest on FICO bonds
3)
FSLIC Resolution Fund
New Receivership Proceeds:
1) Interest on REFCORP bonds
Warrants and Participations:
1) Interest on REFCORP bonds
Miscellaneous FSLIC Income:
1) FSLIC Resolution Fund
FHLBank Retained Earnings and $300 million in FHLBank
Profits:
1) Principal on FICO bonds
2)
Principal on REFCORP bonds
3)
Interest on REFCORP bonds
Treasury funds:
1) Interest on REFCORP bonds
2)
FSLIC Resolution Fund
3)
Savings Association Insurance Fund (Schedule of
estimated resolution costs plus $1 billion starting in
1991 until earlier of 1999 or reaching 1.25 ratio)
REFCORP Proceeds
1)

Resolution Trust Corporation (RTC)

Priority of Uses of Funds
FDIC —

Bank Insurance Fund:

1) Commercial bank premiums
FDIC — Savings Association Insurance Fund:
1) Savings and Loan premiums
2)
Treasury funds
3)
Offices and office supplies of FSLIC Resolution Fund
(upon dissolution)
FSLIC Resolution Fund:
1) Miscellaneous FSLIC income
2)
Proceeds of FICO bonds
3)
Old receivership proceeds
4)
S&L premiums
5)
Treasury funds
FICO Principal:
1) FHLBank Retained Earnings and $300 million in FHLBank
Profits
FICO Interest:
1) S&L premiums
2)
Old receivership proceeds
REFCORP Principal:
1) FHLBank Retained Earnings and $300 million in FHLBank
Profits
2)
S&L premiums
3)
Old receivership proceeds
REFCORP Interest:
1) New receivership proceeds
2)
Warrants and Participations
3)
FHLBank Retained Earnings and Profits
4)
Treasury funds
Resolution Trust Corporation (RTC):
1) REFCORP proceeds ($50 billion)
Treasury;
1) FSLIC Resolution Fund proceeds upon dissolution (net of
offices and office supplies)
2)
REFCORP proceeds upon dissolution

Chart 1
General Organizational Structure

OVERSIGHT BOARD:
SECRETARY OF THE TREASURY
FEDERAL RESERVE BOARD
ATTORNEY GENERAL
Resolution Trust Corporation

Management
Contract

FSLIC Resol.
Fund

FDIC

Savings Assn.
Ins. Fund

Bank Ins.
Fund

Treasury

FHLB8

OCC

Chartering
Authority

FICO/
REFCORP

FHLBank
System

Examination/
Supervision

Chart 2
Insurance and Financing Structure

OVERSIGHT BOARD:
SECRETARY OF THE TREASURY
FEDERAL RESERVE BOARD
ATTORNEY GENERAL
Resolution Trust
Corporation

Management

FDIC

Contract
$50 Billion

Resolution
Funding
Corporation
(REFCORP) **

$50 billion in bonds
$5-6 billion for principal
$113 billion for interest

Capital
Markets

* The RTC will resolve all GAAP-insolvent S&Ls over a threeyear period and will sunset after five years. NOTE;
Although the RTC will contract with the FDIC, it will be
subject to an Oversight Board composed of the Treasury
Secretary, the Federal Reserve Chairman, and the Attorney
General.
** The REFCORP will raise $50 billion in the capital markets,
transfer that sum to the RTC for resolution costs for GAAPinsolvent S&Ls, and repay the principal and interest costs
on the $50 billion.

Chart 3

Sources
Miscellaneous FSLIC Income
Proceeds of FICO Bonds
Old Receivership Proceeds
Portion of 8&L Premiums
Treasury Funds
FHLBank Retained Earnings
Old Receivership Proceeds
Portion of S&L Premiums

SOURCES AND USES OF FUNDS
Resolution Trust Corporation * and
Resolution Funding Corporation (REFCORP! **
Uses

Purpose

FSLIC Resolution Fund

Principal Costs of REFCORP
Resolution Trust
Corporation

Additional FHLBank Earnings
New Receivership Proceeds
Treasury Funds
Warrants and Participations
Portion of S&L Premiums
Treasury Funds

Increased Commercial
Bank Premiums

Interest Costs of REFCORP

Post-RTC Resolutions and
New Savings Assn.
Insurance Fund

New Bank
Insurance Fund

The Resolution Trust Corporation will resolve GAAP insolvent savings and loans.

2/15/89

Adrainir.t r.it ion Propos.il: C.ir.h Flow for r,ovornmr»nr
($ in hi I I ions)
FY 89 FY 90 FY 91 FY 92 FY 91 FY 94 89-94 89-99

Cash Inflows (-):
FSLIC/RTC collections
-3.8
from FICO
FSLIC/RTC collections
-10.0
from REFCORP
S&L Premiums and other
-3.3
FSLIC Collections
0.0
Additional Collections
-17.0
to FDIC
TOTAL CASH INFLOWS
Cash Outflows:
Old Cases and administrative
expenses — cash
8.3
RTC cases
10.0
Post-RTC Cases
Contribution to REFCORP
interest costs
0.5
TOTAL CASH OUTFLOWS
18.8
Net cash outflows 1.8
Debt transaction adjustment*;:
New FSLIC debt Issued
9.7
Redemption of FSLIC
debt
-0.4
NET COST TO GOVERNMENT
(Budget Outlays)
11.1

-3.3

-7.1

-50.0

-25.0

-15.0

-1.5

-3.2

-3.6

-3.5

-16.4

-31.2

-1.6
-18. 1

-1.7
-4.9

-1 .8
-5.4

-1.9
-5.5

-7.9
-81.4

-19.9
-108.2

5.6
15.0
2.0

5.4

5.7

3.8

2.4

3.6

2.0

35.1
50.0
10.0

61.6
50.0
24.0

1.4
32.9

1.6
24.7

0.9
8.7

0.8
10.1

1.1
7.0

6.3
101.7

22.0
157.6

2.3

6. 1

3.9

4.8

1.5

70.2

49.3

0.0

9.7

-0.3

-0. 1

0.0

-1 . 1

0.0

-1 .9

-19.2

-0.8
-30.6

6.5
25.0

1.9

r,. o

i.n

1.7

1 .«.

?n.i

in. 9

FUNDING SUMMARY
($ in billions)

2/20/89
FY 89

FY 90

FY 91

FY 92

FY 93

FY 94

89-94

89-99

27.7

31.2

22.5

7.8

8.3

5.8

103.2

126.2

5.5
17.0

5.4
2.4

4.7
3.6

3.8
2.0

43.2
60.0

52.2
74.0

3.5

-73.5

-88.3

-1.5
-0.3
-1.8

2.0
0.4
1.9

-50.0
-5.6
-0.4
-17.5

-50.0
-19.0
2.1
-21.4

0.8

1.1

6.3

22.0

Add'l FDIC Collections 0.0 -0.8 -1.6 -1.7 -1.8

1.9

-7.9

-19.9

TOTAL BUDGET OUTLAYS 11.1 1.9 6.0 3.8 3.7

1.5

28. 1

39.9

FSLIC/RTC
Disbursements

Old Cases &
Other Expenses
17.7
6.2
New Cases
10.0
25.0
Collections (-) -17.0 -29.8 -16.5 -3.2 -3.6

New FICO(REFCORP) Bonds -10.0 -25.0 -15.0
Old Premiums (Net)
-1.4
0.4
0.3
-1.5
Additional Premium 1/
-0.3
-0.3
Other Old Collections
-5.6
-5.2
-1.6
-1.4
FSLIC/RTC Net Outlays 10.7 1.4 6.0 4.6 4.7 2.3 29.7. 37.9
Treasury Payments for
Bond (REFCORP) Interest

0.5

1.4

1.6

0.9

1/ A (-) indicates increase in premiums, a (+) indicates a decrease.

fin ;• j 1009
02/20/89

NKW IICO (KKFCOKP) FINANCING
($ in bill ions)
FY 89

FY 90

FY 91

FY 92

FY 93

FY 94

89-94

89-99

0.8
0.0
0.8

1.1
1.7
2.8

0.8
1.7
2.5

0.0
0.0
0.0

2.7
3.3
6.0

0.0
0.0
0.5
0.5

0.0
0.5
1.4
1.9

0.0
1.8
1.6
3.4

0.3
2.6
0.9
3.8

0.3
2.7
0.8
3.8

0.3
2.4
1. 1
3.8

0.9
10.0
6.3
17.2

2.4
12.0
22.0
36.4

NEW FICO (REFCORP) 1/
PRINCIPAL covered by
zeros paid with
private funds:
FHLB Retained Earnings
S&L Insurance Premiums
TOTAL DEFEASANCE
INTEREST covered by
private & public funds:
FHLB future income
Receivership Proceeds
Treasury funds
TOTAL INTEREST

1/ Sells long-term bonds: $10B in FY 89, $25B in FY 90, $15B in FY 91.

I .U 2 J 1089
I in bllI inns)

7/11/89

ty no

rv 91

•HinUMMraMUMHimutHMiittiiiiiit::::::t>i::tiitt:

ft 97 ft 93 rr 94 B9 94 09 99
rrt-rtttiiMlHmiiMttiTf.-ii-.t^tt:;::;:::-::::-:,!!!!;,,,,,

rsnc « tic ACCOUNT
OlSKftSFNfNfS
Old Cases ft Other f•peneee
AdJain and alec *np
Mot»B Issued
Interest on Motes
Outstandlnf
•epey not** laauad
prior to ft 87
M a lot onto •omenta
ltquldatlono
lotal Old Caaoa
and Othor f ap
e m Cases
Assisted Waraara
llquldatlano
total Haw Caaaa
lOfJU. 0IS8UKSEMEH1S

O.S
9.7

O.J

O.S

0.)

0.3

0.7

1.6
9.7

7.8
9.7

1.4

1.5

1.1

0.9

0.8

0.7

6.4

9.7

0.0
5.2
1.0

0.0
4.4

0.7
S.8

0.0
4.7

0.7
S.4

0.0
7.9

0.5
74.0
1.0

O.S
78.8
1.0

17.F

6.2

5.5

5.4

4.7

3.8

43.7

57.7

3.0
5.0
10.0
27.7

12.5
1?.*
25.0
SI.2

8.5
8.5
17.0
22.5

1.7
1.7
7.4
7.8

1.8
1.8
S.6
8.3

1.0
1.0
7.0
5.8

30.0
30.0
60.0
103.7

44.0
30.0
74.0
176.7

-3.S
-75.0

-15.0

7.1
•50.0

-7.1
•50.0

-7.3

-2.7

•2.9

-3.1

•7.6

15.6

•31.6

0.9
U.I

1.0
C

1.0
n «

1.0
0.3

1.0
0.0

5.5
0.7

10.7
0.7

1.7
0.4

1.7
0.1

•1.8

-1.7

-1.6

3.3
6.0

3.S
-16.9

•1.4
0.0
-0.4
•79.8
1.4

•1.2

6.0

•1.0
0.0
-0.3
-3.7
4.6

-1.4
•0.1
•0.3
•S.6
4.7

-1.5
-0.1
•0.4
-3.5
7.3

•7.8
-0.4
7 1
71.5
79.7

-9.7
-1.1
-3.5
•88.3
1/.9

0 1

0.1

0.0

1.1

0.0

1.9

19.7

18.9

18.6

18.5

17.3

0.0

OS
0.0

0.5
0.0

0.5
1.0

0.5
7.1

0.5
J.7

0.5
1.7

0 5
6.8

6.0

4.6

4.7

7.J

79.7

17.9

14
on

1.6
1.6

0.9
1.7

0.8
i.n

A 1
/ V

77.0
IV V

•

OJUfCTlOMS | )
M C O proceeds fCEMI f •>
3.8
•aw ttfCOt* Proceeds <•)
•10.0
Inauranca Praetuaa
before daductlono 1*1
•2.1
Oaduct < • ) :
rico C C I M ) Intaraat
0.6
Sac. •aaarwa Credit
0.1
Oafease Maw Bond
Principal
Mat treatus Inceaw f->
•1.4
Proceeds free lac* 1 vara
and Corporate-held
Aeeets fold caaaa) (->
•1.4
Intoaa on Inveet bol f-l
•0.1
-0.4
Other Collect lore <->
-17.0
IOIAI COUfCflOMS
10.7
f$HC/ttC Mfl OUflATS
Bepeyaent of Notaa laauad
after fV 86
0.4
Balance of f S M C Mate*
Outetandlnt (end-yr)
10.2
fSUC/AIC Cesh/lnveetaent
end-yr balance* (9/30/B8-B1 .OB)
balance for caaaa:
0.4
0.0
balance for new fund:

0.0
-0.4
-16.5

9JHMA0T Of ACCOUMtS AFftCfEO
ISIIC/AK Met Outlays
treasury Contribution to
arfCOAP interest
Add'l IOIC Collections

10.7
0.5
0 0
r

• • m ••.«••«••••«•••••••••••••••« * » * * " " " -

IOIAI etOGCt CAIHAVS

H I

•

—

r rrr••••« =:

1 9

f LC Vu 1TJ9
2/20/89
Assumptions

FY 89

FY 90

FY 91

FY 92

FY 93
wtd
wtd
wtd
wtd

FY 94

FICO (CEBA) Rates
REFCORP Rates
Int Rate on LT Treasuries
Discount on zeros
Int Rate on FSLIC Notes

9.8%
9.1%
8.8%
8.8%
9.5%

8.6%
7.9%
7.6%
7.6%
7.8%

6.5%
6.2%
6.2%
6.1%

4.9%

avq (88-90) :
avq (89-91):
avq (89-91):
avq (89-91):
4.3%
4.0%

FSLIC Deposit Base
($ in trillions)
1989-99 Growth Rate

1.0
7.2%

1.1

1.2

1.3

1.4

FDIC Deposit Base
($ in trillions)
1989-99 Growth Rate

2.1
6.9%

2.3

2.4

2.6

2.8

2.9

Recovery on receivership assets (new cases):
40 cents on each dollar over the 4 years subsequent to liquidation

9.»>%
7.7%
7.4%
7.4%

f LC I'u 1TJ9
2/20/89
Assumptions

FY 89

FY 90

FY 91

FY 92

FY 9 3
wtd
wtd
wtd
wtd

FY 94

FICO (CEBA) Rates
REFCORP Rates
Int Rate on LT Treasuries
Discount on zeros
Int Rate on FSLIC Notes

9.8%
9.1%
8.8%
8.8%
9.5%

8.6%
7.9%
7.6%
7.6%
7.8%

6.5%
6.2%
6.2%
6. 1%

4.9%

avq (88-90):
avq (89-91):
avq (89-91):
avq (89-91):
4.3%
4.0%

FSLIC Deposit Base
($ in trillions)
1989-99 Growth Rate

1.0
7.2%

l-l

1.2

1.3

1.4

FDIC Deposit Base
($ in trillions)
1989-99 Growth Rate

2.1
6.9%

2.3

2.4

2.6

2.8

2.9

Recovery on receivership assets (new cases):
subsequent to liquidation
40 cents on each dollar over the 4 years

9.5%
7.7%
7.4%
7.4%

TREASURYNEWS

iportment of the Treasury • Washington, D.c. • Telephone 566-2
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
February 22, 1989
L U ^ * K$r*] ''2Q3/376-4350
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,263 million of
$23,936 million of tenders received from the public for the 2-year
notes, Series W-1991, auctioned today. The notes will be issued
February 28, 1989, and mature February 28, 1991.
The interest rate on the notes will be 9-3/8%. The range
of accepted competitive bids, and the corresponding prices at the
9-3/8% rate are as follows:
Yield
Price
99,.831
Low 9.47%*
99,
.777
High
9.50%
99.
.795
Average
9.49%
•Excepting 9 tenders totaling $1,375,000.
Tenders at the high yield were allotted 41%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
66,845
$
66,845
New York
20,666,955
7,911,975
Philadelphia
48,790
48,790
Cleveland
110,815
110,815
Richmond
109,165
92,085
Atlanta
74,065
72,475
Chicago
1,274,915
326,680
St. Louis
112,765
93,175
Minneapolis
42,895
42,895
Kansas City
158,980
158,390
Dallas
62,350
54,375
San Francisco
1,092,545
168,875
Treasury
115.275
115.275
Totals
$23,936,360
$9,262,650
The $9,2 63 million of accepted tenders includes $1,565
million of noncompetitive tenders and $7,698 million of competitive tenders from the public.
In addition to the $9,263 million of tenders accepted in
the auction process, $760 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $897 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
N'B-151

TREASURY.NEWS _
ptportment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
February 23, 1989
,. __ t
202/376-4350

null 8 .-sW "':Q
RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $7,812 million
of $21,739 million of tenders received from the public for the
5-year 2-month notes, Series J-1994, auctioned today. The notes
will be issued March 3, 1989, and mature May 15, 1994.
The interest rate on the notes will be 9-1/2%. The range
of accepted competitive bids, and the corresponding prices at the
9-1/2% rate are as follows:
Yield Price
Low 9.48%* 99.996
High
9.49%
99.955
Average
9.49%
99.955
•Excepting 4 tenders totaling $32,000.
Tenders at the high yield were allotted 71%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
AcceDted
$
35,587
35,587
Boston
$
New York
19,,215,276
7,144,256
Philadelphia
19,493
19,493
Cleveland
44,535
44,535
Richmond
109,285
70,435
Atlanta
40,287
35,127
Chicago
281,754
1,,207,314
St. Louis
46,282
30,277
Minneapolis
25,661
25,361
Kansas City
56,374
55,374
Dallas
21,829
17,829
San Francisco
913,753
48,753
Treasury
3,053
3,053
Totals
$21,r738,729
$7,811,834
The $7,812
million of accepted tenders includes $69 6
million of noncompetitive tenders and $7,116 million of competitive tenders from the public.
In addition to the $7,812 million of tenders accepted in
the auction process, $650 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
NB-152

A BILL

To reform, recapitalize, and consolidate the Federal deposit
insurance system, to enhance the regulatory and enforcement
powers of Federal financial institutions regulatory agencies, and
for other purposes.

Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,

Section 1.

Short Title and Table of Contents

(a) Short Title-—This Act may be cited as the "Financial
Institutions Reform, Recovery and Enforcement Act of 1989."

(b) Table of Contents.—

Sec. 1. Short Title and Table of Contents.

Title I—PURPOSE

- 2 -

Sec. 101.

Purpose.

TITLE II—FEDERAL DEPOSIT INSURANCE CORPORATION AUTHORITIES
AND RESPONSIBILITIES

Sec. 201. Financial Institutions.
Sec. 202.

Duties of the Federal Deposit Insurance Corporation.

Sec. 203.

FDIC Board Members.

Sec. 204.

Definitions.

Sec. 205.

Insured Savings Associations.

Sec. 206.

Application Process; Insurance Fees.

Sec. 207.

Insurability Factors.

Sec. 208.

Assessments.

Sec. 209.

FDIC Corporate Powers.

Sec. 210.

Administration of Corporation.

Sec. 211.

Insurance Funds; Corporation Powers as Receiver

Sec. 212.

FSLIC Resolution Fund.

Sec. 213.

Amendments to Section 12.

Sec. 214.

Amendments to Section 13.

Sec. 215.

Borrowing Authority.

Sec. 216.

Limitation on Borrowing.

Sec. 217

Reports.

Sec. 218.

Regulations Governing Insured Financial Institutions

Sec. 219.

Nondiscrimination.

TITLE III—SAVINGS ASSOCIATION SUPERVISION IMPROVEMENTS

- 3 -

Sec. 301.

Definitions.

Sec. 302.

Supervision of Savings Associations.

Sec. 303.

Applicability.

Sec. 304.

Conforming Name Changes.

Sec. 305.

Safety and Soundness.

Sec. 306.

Deposits.

Sec. 307.

Supervisory Revisions.

Sec. 308.

Receiverships.

Sec. 309.

Technical Amendment.

Sec. 310.

Technical Amendment.

Sec. 311.

Amendment to Section 5.

Sec. 312.

Technical Amendment.

Sec. 313.

Conversions.

Sec. 314.

Capital Standards.

Sec. 315.

Technical Amendments.

Sec. 316.

Repeal.

Sec. 317.

Recovery Regulations Repealed.

Sec. 318.

Cost of Examination and Reports.

Sec. 319.

Savings and Loan Holding Companies.

Sec. 320.

Transactions with Affiliates; Loans to Insiders.

Sec. 321.

Advertising.

TITLE IV—DISSOLUTION AND TRANSFER OF FUNCTIONS, PERSONNEL AND
PROPERTY OF THE FEDERAL SAVINGS AND LOAN INSURANCE
CORPORATION.

- 4 -

Sec. 401. Dissolution.
Sec. 402.

Continuation of Rules.

Sec. 403.

Personnel.

Sec. 404.

Division of Property and Personnel.

Sec. 405.

Repeals.

Sec. 406.

Report.

TITLE V—FINANCING FOR THRIFT RESOLUTIONS

Subtitle A - Resolution Trust Corporation

Sec. 501. Resolution Trust Corporation Established.

Subtitle B - Resolution Financing Corporation

Sec. 502. Resolution Financing Corporation Established.
Sec. 503.

Financing Corporation.

Sec. 504.

Mixed Ownership Government Corporation.

TITLE VI—THRIFT ACQUISITION ENHANCEMENT PROVISIONS

Sec. 601. Acquisition of Thrifts by Bank Holding Companies.
Sec. 602.

Investments by Savings and Loan Holding Companies
in Unaffiliated Thrift Institutions.

Sec. 603.

Technical Amendment to Bank Holding Company Act.

- 5 -

TITLE VII—FEDERAL HOME LOAN BANK SYSTEM REFORMS

Subtitle A - Federal Home Loan Bank Act Amendments

Sec. 701. Definitions.
Sec. 702.

Federal Home Loan Bank System Chairman.

Sec. 703.

Election of Bank Directors.

Sec. 704.

Federal Home Loan Bank Lending.

Sec. 705

Chief Supervisory Officer.

Sec. 706.

Thrift Advisory Council.

Sec. 707.

Federal Savings and Loan Insurance Corporation
Industry Advisory Committee.

Sec. 708.

Rate of Interest.

Sec. 709.

Liquidity Requirements.

Sec. 710.

Advances.

Sec. 711.

Conforming Federal Home Loan Bank Act Amendments.

Subtitle B - Conforming Amendments

Sec. 712. Federal Home Loan Mortgage Corporation
Act Amendment.
Sec. 713.

Repeal of Limitation of Obligation for Administrative
Expenses.

Sec. 714.

Amendment of Additional Powers of Chairman.

Sec. 715.

Amendment of'Title 5, United States Code.

Sec. 716.

Amendment of Title 31, United States Code.

- 6 -

Sec. 717.

Amendment of Balanced Budget and Emergency Defic
Control Act Provisions.

Sec. 718.

Amendment of Title 18, United States Code.

TITLE VIII—BANK CONSERVATION ACT AMENDMENTS

Sec. 801. Definitions.
Sec. 802.

Appointment of Conservator.

Sec. 803.

Examinations.

Sec. 804.

Termination of Conservatorship.

Sec. 805.

Conservator; Powers and Duties.

Sec. 806.

Liability Protection.

Sec.807.

Rules and Regulations..

Sec. 808.

Repeals.

Sec. 809.

Conforming Amendment.

TITLE IX—REGULATORY AUTHORITY AND CRIMINAL ENHANCEMENTS

Sec 901. Short Title.

Subtitle A — Regulation of Financial Institutions

Sec. 902. Amendments to the Federal Deposit Insurance Act.
Sec. 903.

Parallel Increases in Civil Penalty Provisions.

Sec. 904.

Penalty for Violation of "Change in Bank Control
Act".

- 7 -

Sec. 905.

Reports.

Subtitle B — Regulation by the Federal Home Loan Bank System

Sec. 906. Examination Authority.
Sec 907.

Reports of Condition and Penalties.

Sec. 908.

Savings and Loan Holding Companies.

Sec. 909.

Continuity of Authority for Ongoing Litigation.

Sec. 910.

Temporary Extension of Authority.

Subtitle C — Credit Unions

Sec. 911. Amendments to Section 206.
Sec. 912.

Amendments to Section 205.

Sec. 913.

Amendments to Section 202.

Subtitle D — Right to Financial Privacy Act

Sec. 914. Amendments to Right to Financial Privacy Act.

Subtitle E — Criminal Enhancements

Sec. 915. Increased Criminal Penalties and Civil Penalties for
Certain Financial Institution Offenses.
Sec. 916.

Miscellaneous Revisions to Title 18.

Sec. 917.

Civil and Criminal Forfeiture.

- 8 -

Sec. 918.

Grand Jury Amendments.

Sec. 919. Litigation Authority.
Sec 920. Department of Justice Appropriation.

TITLE X—STUDY OF FEDERAL DEPOSIT INSURANCE AND BANKING REGULATION

Sec 1001. Study.
Sec. 1002. Topics.
Sec. 1003. Final Report.

TITLE XI—MISCELLANEOUS PROVISIONS

Sec 1101. Amendments to Section 202 of the Federal Credit
Union Act.
Sec. 1102. Amendment to Section 203 of the Federal Credit
Union Act.
Sec. 1103. Amendment to Section 5240 of the Revised Statutes.
Sec. 1104. Separability of Provisions.

TITLE I - PURPOSE.

Sec 101. PURPOSE. - The purposes of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 are: to promote a safe
and stable system of affordable housing finance through regulatory

- 9 -

reform; to improve supervision by strengthening capital, accounting,
and other supervisory standards; to establish a relationship of
general oversight by the Treasury Department over the Federal Home
Loan Bank System similar to that of the Office of the Comptroller of
the Currency; to establish an independent insurance agency to provide
deposit insurance for savers; to put the federal deposit insurance
system on a sound financial basis for the future; to create a new
corporation to contain, manage and resolve failed thrift
institutions; to provide the necessary private and public financing
to resolve failed institutions in an expeditious manner; to provide
for improved supervision and enhanced enforcement powers; to increase
criminal and civil money penalties for crimes of fraud against
financial•institutions and depositors; and for other purposes.

TITLE II - FEDERAL DEPOSIT INSURANCE CORPORATION AUTHORITIES AND
RESPONSIBILITIES.

Sec 201. FINANCIAL INSTITUTIONS. - Except as otherwise
hereinafter provided, the terms "insured bank", "insured banks",
and "insured bank's" in the Federal Deposit Insurance Act, as
amended (12 U.S.C. 1811 et seq.), are hereby deleted and the
terms "insured financial institution", "insured financial
institutions", and "insured financial institution's",
respectively, are inserted in lieu thereof, provided however that
where the term "insured bank" is preceded by the word "member" or

- 10 -

by the word "nonmember" such substitution of the term shall not
be made; and the term "Federal Home Loan Bank Board" is deleted
and the term "Federal Home Loan Bank System" is inserted in lieu
thereof.

Sec. 202. DUTIES OF FEDERAL DEPOSIT INSURANCE CORPORATION. Section 1 of the Federal Deposit Insurance Act (12 U.S.C. 1811).
is hereby amended by adding "and savings associations" after
"banks".

Sec. 203. FDIC BOARD MEMBERS. - Section 2 of the Federal Deposit
Insurance Act (12 U.S.C. 1812) is hereby amended as follows:

(1) In the first sentence, by deleting "three" and inserting in
lieu thereof "five", by adding after the second comma the phrase
"one of whom shall be the Chairman of the Federal Home Loan Bank
System", and by deleting "two" and inserting in lieu thereof
"three";

(2) In the second sentence by deleting everything up to and
including the word "members" the second time it appears therein,
and inserting in lieu thereof the following:

"One of the appointive members shall be designated by
the President to serve from time to time as Chairman of
the Board of Directors of the Corporation, and one

- 11 -

shall be designated by the President to serve from time
to time as Vice Chairman of the Board, and not more
than two of the appointive members";

(3) The fifth sentence shall be amended to read as follows:

"In the event of a vacancy in the office of the
Comptroller of the Currency, or the Chairman of the
Federal Home Loan Bank System, and pending the
appointment of a successor, or during the absence or
disability of any such member, the Acting Comptroller
of the Currency, or the Acting Chairman of the Federal
Home Loan Bank System, shall be a member of the Board
of Directors in the place and stead of the Comptroller
of the Currency or the Chairman of the Federal Home
Loan Bank System, respectively.";

(4) In the sixth sentence, by deleting "Comptroller of the
Currency" and inserting in lieu thereof "Vice Chairman of
the Board";

(5) In the last sentence, by adding "or Federal Home Loan bank"
after "Federal Reserve bank", and by adding "or financial
institution holding company" before the semi-colon; and

(6) By adding the following new paragraph at the end thereof:

- 12 -

"The members of the Board of Directors on the date of
enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 shall continue to
serve in office until the fulfillment of their existing
terms; the Chairman of the Board of Directors shall
continue to serve until a successor has been appointed
and qualified."

Sec. 204. DEFINITIONS. - Section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813) is hereby amended as follows:

(1) Notwithstanding Section 201 of this Act, subsection (h)
shall not be amended to delete the term "insured bank"
and insert the term "insured financial institution".

(2) Subsection (j) is amended by adding "conserving assets
or" before "winding up", and by adding before the
period therein the following phrase, ", or of a savings
association";

(3) Subsection (1) is amended as follows:

(a) by adding the phrase "or savings association" after
the phrases "a bank", "the bank", "receiving bank", or
"such bank" each time such phrases appear in the
subsection; and by adding the phrase "or savings

- 13 -

association's" after the word "bank's" each time it
appears in the subsection; and

(b) by striking out the word "and" at the end of
subparagraph (5)(A) and by replacing the period at the
end of subparagraph (5)(B) with "; or"; and

"(C) any money denominated in any currency other
than that of the United States, and any
obligation otherwise equivalent to money but
which is not expressed in terms of the currency
of the United States."

(d) in paragraph (5), by adding ", Chairman of the
Federal Home Loan Bank System" after "Comptroller of
the Currency";

Subsection (m) is amended by adding at the end thereof
the following:

"(3) In the case of a savings association that
becomes an insured financial institution as a result o
the operation of section 4(a), the term "insured

- 14 -

deposit" shall include any liability of that financial
institution which constituted an "insured account"
within the meaning of section 401(c) of the National
Housing Act immediately prior to enactment of the
Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (hereinafter referred to as "FIRREA");
Provided, that in the case of any such liability that
would not otherwise be eligible for insurance provided
by the Corporation:

"(A) if the liability has one or more fixed
maturity dates, the liability shall cease to be
included within the term "insured deposit" upon the
earliest maturity date occurring after the expiration
of six months from the date of enactment of FIRREA;

"(B) if the liability has a minimum required
notice period, the required notice period shall be
deemed to be initiated on the date of enactment of
FIRREA and the liability shall cease to be included
within the term "insured deposit" upon expiration of
the required notice period or upon the expiration of
six months after the date of enactment of FIRREA,
whichever is later; or

"(C) if the liability has no fixed maturity date

- 15 -

or required notice period, the liability shall cease to
be included within the term "insured deposit" upon the
expiration of six months from the date of enactment of
FIRREA.".

(5) Subsection (q) is amended to read as follows:

"(q) The term "appropriate Federal banking agency"
shall mean

—

"(1) the Comptroller of the Currency in the case
of a national banking association, a District
bank, or a federal branch or agency of a foreign
bank;

"(2) the Board of Governors of the Federal
Reserve System

—

"(A) in the case of a State member insured
bank (except a District bank),

"(B) in the case of any branch or agency of a
foreign bank with respect to any provision of
the Federal Reserve Act which is made
applicable under the International Banking
Act of 1978: Provided, that for the purposes

- 16 -

of subsections (b) through (n) of section 8
of this Act, the term "insured financial
institution" includes an uninsured branch or
agency of a foreign bank or a commercial
lending company owned or controlled by a
foreign bank,

"(C) in the case of any foreign bank which
does not operate an insured branch,

"(D) in the case of any agency or commercial
lending company other than a Federal agency,
and

"(E) in the case of supervisory or regulatory
proceedings arising from the authority given
to the Board of Governors under section
7(c)(1) of the International Banking Act of
1978, including such proceedings under the
Financial Institutions Supervisory Act;

"(3) the Federal Deposit Insurance Corporation in
the case of a State nonmember insured bank
(except a District bank) or a foreign bank having
an insured branch; and

- 17 -

"(4) the Federal Home Loan Bank System in the
case of a savings association or of a savings and
loan holding company.

"Under the rule set forth in this subsection, more than
one agency may be an appropriate Federal banking agency
with respect to any given institution."

(6) By deleting the provisions of subsection (t) and
reserving such subsection.

(7) By adding new subsections at the end thereof to read as
follows:

"(u) The term "savings association" means any
institution that was supervised by the Federal Savings
and Loan Insurance Corportion immediately prior to the
enactment of the FIRREA, a Federal savings and loan
association or Federal savings bank, or a building and
loan, savings and loan, homestead association, or
cooperative bank organized and operating according to
the laws of the State (as defined in the text of
subsection (a) hereof) in which it is chartered or
organized, or a corporation that the Board of Directors
determines to be operating substantially in the same
manner as a savings and loan association;

- 18 -

"(v) The term "bank" means all banks as defined in
subsections (a) through (g) hereof;

"(w)(l) The term "financial institution" means a bank
or savings association.

"(2) The term "insured financial institution" means a
bank or savings association insured pursuant to the
Federal Deposit Insurance Act.

"(x)(l) The term "default" with respect to an insured
financial institution means an adjudication or other official determination of "a court of competent
jurisdiction, the appropriate Federal banking agency,
or other public authority pursuant to which a
conservator, receiver, or other legal custodian is
appointed for an insured financial institution or, in
the case of a foreign bank having an insured branch,
for such branch.

"(2) The term "in danger of default" with respect to
an insured financial institution means that the
appropriate Federal banking agency or State chartering
authority has advised the Corporation with respect to
such institution (or in the case of a foreign bank

- 19 -

having an insured branch, with respect to such insured
branch) that, in its opinion—

"(i ) (I) the financial institution or insured
branch is not likely to be able to meet the
demands of its depositors or pay its obligations
in the normal course of business, and

"(II) there is no reasonable prospect that the
financial institution or insured branch will be
able to meet such demands or pay such obligations
without Federal assistance; or

"(ii)(I) the financial institution or insured
branch has incurred or is likely to incur losses
that will- deplete all or substantially all of its
capital, and

"(II) there is no reasonable prospect for the
replenishment of the capital of the financial
institution or insured branch without Federal
assistance.

"(y)(l) The term "financial institution holding
company" means a bank holding company or a
savings-and-loan holding company.

- 20 -

(2)

The term "bank holding company" has the

meaning prescribed in section 2 of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841 et seq.).

(3) The term "savings and loan holding company"
has the meaning prescribed in section (10)(a)(1)(D) of
the Home Owners' Loan Act of 1933 (12 U . S . C ) .

c. 205. INSURED SAVINGS ASSOCIATIONS. - Section 4 of the
deral Deposit Insurance Act (12 U.S.C. 1814) is hereby amended
follows:

(1) Subsection (a) is amended by adding the following
new sentence at the end thereof:

"Every savings association, the deposits of which were
insured by the Federal Savings and Loan Insurance
Corporation on the date immediately preceding the date
of enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, shall be, without
application or approval, an insured financial
institution as of the date of enactment of that Act,
and shall be subject to the provisions of this Act."

(2) Subsection (b) is amended by adding the following
phrase prior to the first period therein:

- 21 -

"; provided, however, that any application or notice
for membership or to commence or resume business must
be promptly provided by the appropriate Federal banking
agency to the Corporation and the Corporation shall
have a reasonable period to provide comments with
respect thereto which must be considered by the
appropriate Federal banking agency in making.its
findings thereon and with respect to the statutory
factors in section 6 of this Act."

(3) By deleting the last two sentences of subsection
(b) and all of subsection (c) and inserting the
following new subsections in lieu thereof:

"(c) Except as provided in subsection 5(d), a State
financial institution resulting from the conversion of
an insured Federal financial institution shall continue
as an insured financial institution.

"(d) Except as provide in subsection 5(d), a State
financial institution resulting from the merger or
consolidation of insured financial institutions, or
from the merger or consolidation of a noninsured
financial institution with an insured financial
institution, shall continue as an insured financial

- 22 -

institution."

Sec. 206. APPLICATION PROCESS; INSURANCE FEES. - Section 5 of
the Federal Deposit Insurance Act (12 U.S.C. 1815) is hereby
amended as follows:

(1) by adding the following new paragraphs at the end of
subsection (a) thereof:

"Subject to the provisions of this Act, any Federal
savings association that is authorized by the Federal
Home Loan Bank System to engage in the business of
receiving deposits, other than trust funds as herein
defined, upon application by the association to the
Federal Home Loan Bank System, may become an insured
financial institution following submission of such
application to the Corporation together with a
certificate issued to the Corporation by the Federal
Home Loan Bank System, unless insurance is denied by
the Board of Directors;

provided, however, that with

respect to any interim Federal savings association
chartered by the Federal Home Loan Bank System, and
which will not open for business, such insurance shall
be automatically granted upon issuance of such
association's charter by the Federal Home Loan Bank
System. Such certificate shall state that the savings

- 23 -

association is authorized to transact business as a
savings association and that consideration has been
given to the factors enumerated in section 6 of this
Act.

Upon Corporation review of such certificate and

application, and any appropriate examination by the
Corporation, the Board of Directors shall give
consideration to factors (1), (2), (3), (4), and (5) of
section 6 of this Act in determining whether to deny
insurance.

If the Board of Directors, after giving due

deference to the determination of the Federal Home Loan
Bank System with respect to such factors, does not
concur with the determination thereof, the Board of
Directors shall promptly notify the Federal Home Loan
Bank System that insurance has been denied, giving
specific reasons in writing for the Corporation's
determination with reference to factors (1), (2), (3),
(4) and (5) of section 6 of this Act and no charter or
insurance shall be granted.

Determinations by the

Board of Directors to deny insurance under this
subsection may not be delegated."

(2) The first sentence of subsection (a) is amended, by
deleting the comma following "State nonmember bank" and
adding thereafter "and State savings association,"; and

(3) The second sentence of subsection (a) is amended, by

- 24 -

deleting the comma following "State nonmember bank" and
adding thereafter "or such State savings association,", and
by deleting the comma after "such bank" and adding
thereafter "or savings association,", and by adding before
the period at the end of the sentence "or savings
association".

(4) Subsection (b) is amended by redesignating paragraphs
(5), (6), and (7) as paragraphs (6), 4 7), and (8)
respectively; and by inserting a new paragraph (5) to read
as follows:

"(5) .The risk presented to the Deposit Insurance Fund,
the Bank Insurance Fund and the Savings Association
Insurance Fund."

(5) New subsection (d) and (e) are added at the end thereof
to read as follows:

"(d) INSURANCE FEES. —

"(1) UNINSURED INSTITUTIONS. —

"(A) Every noninsured financial institution that becomes
insured by the Corporation, and every noninsured branch that

- 25 -

becomes insured by the Corporation, shall pay the
Corporation any such fees as the Corporation may by
regulation prescribe:

Provided, that a financial

institution that becomes an insured financial institution as
a result of the operation of section 4(a) of this Act shall
not pay any fee.

"(B) The fee paid by the financial institution shall be
credited to the Bank Insurance Fund if the financial
institution becomes a Bank Insurance Fund member, and to the
Savings Association Insurance Fund if the financial
institution becomes a Savings Association Insurance Fund
member.

"(2) CONVERSIONS. —

"(A) No insured financial institution may participate in a
conversion transaction without the prior consent of the
Corporation.

Except as provided in paragraph (C), the

Corporation shall not provide its consent to any conversion
transaction occurring before the expiration of five years
from the date of enactment of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989.

"(B) A "conversion transaction" means —

- 26 -

"(i)

The change of status of an insured financial
institution, whether as a result of a charter
conversion or otherwise, from a Bank Insurance
Fund member to a Savings Association Insurance
Fund member or from a Savings Association
Insurance Fund member to a Bank Insurance Fund
member;

"(ii) The merger or consolidation of a Bank Insurance
Fund member with a Savings Association
Insurance Fund member;

"(iii) (I) The assumption, on the part of a Bank
Insurance Fund member of liability to pay any
deposits in a Savings Association Insurance
Fund member, or

"(II) The assumption on the part of a Savings
Association Insurance Fund member of liability
to pay any deposits in a Bank Insurance Fund
member; or

"(iv) (I) The transfer on the part of a Bank
Insurance Fund member of assets to any Savings
Association Insurance Fund member in
consideration of the assumption of liabilities

- 27 -

for any portion of the deposits in such Bank
Insurance Fund member, or

"(II) The transfer on the part of a Savings
Association Insurance Fund member of assets to
a any Bank Insurance Fund member in
consideration of the assumption of liabilities
for any portion of the deposits in such Savings
Association Insurance Fund member.

"(C) The Corporation may provide its consent at any time
to a conversion transaction if:

"(i) The conversion transaction affects an
insubstantial portion, as determined by the
Corporation, of the insured liabilities of each
financial institution participating in the
conversion transaction; or

"(ii) The Corporation and, during the existence of the
Resolution Trust Corporation, the Resolution
Trust Corporation Oversight Board determine that
the conversion transaction is in the best
interests of the Bank Insurance Fund and the
Savings Association Insurance Fund.

- 28 -

"(D)

Every financial institution participating in a

conversion transaction shall pay:

"(i) In the case of a conversion transaction in which
the resulting or acquiring financial institution
is a Bank Insurance Fund member, an exit fee to
be determined by the Secretary of the Treasury,
which fee shall be paid to the Resolution Trust
Corporation or to such agency as the Secretary
of the Treasury may specify; and

"(ii) An entrance fee to be determined by the
Corporation, provided:

"(I) That in the case of a conversion
transaction in which the resulting or acquiring
financial institution is a Bank Insurance Fund
member, the fee shall be in an amount necessary
to prevent dilution of the Bank Insurance Fund,
and shall be paid to the Bank Insurance Fund;
and

"(II) That in the case of a conversion
transaction in which the resulting or acquiring
financial institution is a Savings Association
Insurance Fund member, the fee shall be in an

- 29 -

amount necessary to prevent dilution of the
Savings Association Insurance Fund, and shall be
paid to the Savings Association Insurance Fund.

"(e) LIABILITY OF COMMONLY-CONTROLLED FINANCIAL INSTITUTIONS. —

"(1) REQUIRED. .— Notwithstanding any provision of
law, State or Federal, or the constitution of any State, or of
any contract or other instrument or security, on and after the
date of enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, whenever the Corporation incurs a
loss in connection with the default of an insured financial
institution, or in connection with providing assistance to an
insured financial institution in danger of default, any other
commonly-controlled insured financial institution shall be liable
to the Corporation following notice to the institution as
provided below and on request shall reimburse the Corporation for
any such loss.

No such liability shall arise under this

subsection if the Corporation fails to provide notice within two
years of the date the Corporation incurs such loss.

"(2) AMOUNT OF COMPENSATION; PROCEDURES. —

"(A) USE OF ESTIMATES. — When an insured
financial institution is in default or requires
assistance to prevent default, the Corporation

- 30 -

shall in good faith estimate its prospective
losses resulting from such default or
assistance, shall advise any commonly-controlled
financial institution of the amount of its
liability in connection with such losses, and if
there is more than one such commonly-controlled
financial institution, determine such commonlycontrolled financial institution's share of such
liability.

"(B) PROCEDURES; IMMEDIATE PAYMENT. — The
Corporation, after consultation with the
appropriate Federal banking agency, may specify
the procedures and schedule by which each such
commonly-controlled financial institution must
reimburse the Corporation for its liability
under this subsection on a case-by-case basis.
The Corporation may compel any or all commonlycontrolled financial institutions to make
immediate payment of any compensation required
under paragraph (1).

"(C) PRIORITY. — The liability estabished
pursuant to the provisions of this subsection
shall be:

- 31 -

"(i) superior to the following obligations and
liabilities of the financial institution:

"(I) any obligation subordinated to depositors
or other general creditors;

"(II) any obligation to shareholders arising as
a result of their status as shareholders
(including a bank holding company or savings and
loan holding company or any shareholder or
creditor of such company);

"(III) any obligation or liability owed to any
other commonly-controlled company or
commonly-controlled insured financial
institution; or

"(IV) any liability which is a contingent
liability on the date the liability of the
financial institutions to the Corporation is
determined; and

"(ii) subordinate in right or payment to the following
obligations and liabilities of the financial
institution:

- 32 -

"(I) deposit liabilities other than those to
commonly-controlled financial institutions;

"(II) secured obligations; and

"(III) other general liabilities, except to the
extent specified in (i) above; and

"(iii) pari passu with other liabilities and
obligations of the financial institution.

"(D) ADJUSTMENT OF ESTIMATED PAYMENT. —

"(i) OVERPAYMENT. — If the amount of
compensation estimated by and paid to the
Corporation by one or more such commonlycontrolled financial institutions is
greater than the actual loss incurred by
the Corporation, the Corporation shall
reimburse each such commonly-controlled
financial institution its pro-rata share
of any overpayment.

"(ii) UNDERPAYMENT. — If the amount of
compensation estimated by and paid to the

- 33 -

Corporation by one or more such commonlycontrolled financial institutions is less
than the actual loss incurred by the
Corporation, the Corporation shall
redetermine in its discretion the
liability of each such commonly-controlled
financial institution to the Corporation
and shall require each such commonlycontrolled institution to make payment of
any additional liability to the
Corporation.

"(3) REVIEW. —

"(A) ADMINISTRATIVE REVIEW. — The Corportion
shall by regulation establish an administrative
procedure for review of the amount of losses, the
liability of individual commonly-controlled
financial institutions, and the schedule of
payments to be made by such commonly-controlled
financial institutions.

The regulations shall

provide for a hearing on the part of any such
commonly-controlled financial institution.

"(B) JUDICIAL REVIEW. — Determination made by
the Corporation of the amount of losses, the

- 34 -

liability of commonly-controlled financial
institutions, or the procedures or scheduling of
the payments required, shall be reviewable by the
Court of Appeals for the District of Columbia
Circuit or the Court of Appeals for the circuit
where the financal institution in default or is
located, and shall be upheld unless found to be
arbitrary or capricious.

"(4) LIMITATION ON RIGHTS OF PRIVATE PARTIES. — No court
shall give effect to any rights or powers conferred on any
person, whether such rights or powers are conferred by State
constitution or statute or by Federal statute or by the articles
or by-laws of a financial institution, a financial institution
holding company or any subsidiary therof or by any debt or equity
security of any such financial institution, financial institution
holding company or subsidiary thereof or by any other contract or
other instrument or otherwise, and any provision of any such
statute or security or article or by-law or contract or
instrument shall be void, insofar as giving effect to any such
rights or powers would impair the ability of the financial
institution to perform its obligations under this subsection.

"(5) LIMITATION. — For a period of five years from the
date of enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, no Savings Association Insurance

- 35 -

Fund member shall have any liability to the Corporation under
this subsection arising out of assistance provided to or loss
incurred as a result of the default of a Bank Insurance Fund
member, and no Bank Insurance Fund member shall have such
liability with respect to assistance provided to or loss incurred
as a result of the default of a Savings Association Insurance
Fund member.

"(6) DEFINITIONS. — For the purpose of this section:

"(A) COMMONLY-CONTROLLED INSTITUTIONS. — Financial
institutions are "commonly-controlled" whenever:

"(i) one financial institution is controlled by or
under common control with any company that controls
or is under common control with another financial
institution, or

"(ii) one financial institution controls or is
controlled by another financial institution.

"(B) DEFINITIONS. — the terms "company" and "control" have
the meanings specified in the Bank Holding Company Act of
1956, as amended (12 U.S.C. 1841 et seq.)."

Sec. 207. INSURABILITY FACTORS. - Section 6 of the Federal

- 36 -

Deposit Insurance Act (12 U.S.C. 1816) is hereby amended to read
as follows:

"Except as otherwise provided, the factors to be considered
and enumerated in the certificate required under section 4 hereof
and to be considered by the Board of Directors under section 5
shall be the following:

"(1) The financial history and condition of the financial
institution;

"(2) The adequacy of its capital structure;

"(3) Its future earnings prospects;

"(4) The general character and fitness of its
management;

"(5) The risk presented to the Deposit Insurance Fund,
the Bank Insurance Fund and the Savings
Association Insurance Fund;

"(6) The convenience and needs of the community to be
served; and

"(7)

Whether or not its corporate powers are

- 37 -

consistent with the purposes of this Act."

Sec. 208. ASSESSMENTS. - Section 7 of the Federal Deposit
Insurance Act (12 U.S.C. 1817) is amended as follows:

(1) Paragraph (2) of subsection (a) thereof is amended as
follows:

(a) the words "or the Federal Home Loan Bank System
or any Federal Home Loan Bank" are added after "Comptroller of
the Currency" each time they appear;

(b) the word "either" is deleted and "any" is inserted
in lieu thereof;

(c) the words "State nonmember bank (except a District
bank)" are deleted and the words "financial institution" are
inserted in lieu thereof; and

(d) subparagraph (B) is deleted and in lieu thereof
the following shall be inserted:

"(B) The Board of Directors may from time to time
require any or all insured financial institutions to
file such additional reports as the Corporation, after
agreement with the Comptroller of the Currency, the

- 38 -

Board of Governors of the Federal Reserve System, and
the Federal Home Loan Bank System, as appropriate, may
deem advisable for insurance purposes.".

(2) Paragraph (3) of subsection (a) thereof is amended by:

(a) deleting everything prior to the words "four
reports" and inserting in lieu thereof the following:

"Each insured financial institution shall make to
the appropriate Federal banking agency";

(b) adding after the word "bank" each time it
appears in the second, fifth, and sixth sentences, the words
"or savings association"; and

(c) by adding after the words "member bank" in
the seventh sentence the words "and each insured savings
association"; and

(d) paragraphs (4) and (7) are amended by adding
after the words "bank", "bank's", or "banks" the words "or
savings association", "or savings association's", or, "or
savings associations", respectively, except that no words
shall be added after the words "insured bank" or "insured
financial institution" or "foreign banks".

- 39 -

(3)

By replacing "bank" with "financial institution" and

"bank's" with "financial institution's" respectively
everywhere those words appear in paragraphs (3) through (8)
of subsection (b), except that the phrases "foreign bank"
and "foreign bank's" shall not be amended; and by deleting
paragraphs (1) and (2) of subsection (b) and inserting in
lieu thereof the following:

"(1) ASSESSMENT RATES.—

"(A) ANNUAL ASSESSMENT RATES PRESCRIBED.—The
Corporation shall set assessment rates for insured
financial institutions annually. The Corporation shall
fix the annual assessment rate for Bank Insurance Fund
members independently from the annual assessment rate
for Savings Association Insurance Fund members.

"(B) ASSESSMENT RATE FOR BANK INSURANCE FUND
MEMBERS.—

"The annual assessment rate for Bank Insurance
Fund members shall be:

"(i) Until December 31, 1989, one-twelfth
of one per centum;

- 40 -

"(ii) From January 1, 1990, through
December 31, 1990, 12 one-hundredths of one
per centum; and

"(iii) On and after January 1, 1991, 15 onehundredths of one per centum.

"(C) ASSESSMENT RATES FOR SAVINGS ASSOCIATION
INSURANCE FUND MEMBERS.—

"The annual assessment rate for Savings
Association Insurance Fund members shall be:

"(i) Until December 31, 1990, 20.8
one-hundredths of one per centum;

"(ii) From January 1, 1991, through December
31, 1993, 23 one-hundredths of one per
centum; and

"(iii) From January 1, 1994, and thereafter,
18 one-hundredths of one per centum.

"(D) FACTORS TO BE CONSIDERED IN ADJUSTING RATE.—The
Corporation shall have authority and discretion to fix
the annual assessment rates for insured financial

- 41 -

institutions above the levels described in paragraphs
(B) and (C) provided the Corporation makes the findings
herein prescribed;

Provided, that except as otherwise

expressly provided herein the Corporation shall not fix
any such annual assessment rates that exceed the
maximum levels specified in paragraph (E); and Provided
further, That before increasing the annual assessment
rates, the Corporation determines that one or more of
the following conditions exist:

"(i) BANK INSURANCE FUND.—In the case of Bank
Insurance Fund members, the factors shall be the
following.:

"(I) That the Bank Insurance Fund has
experienced a net loss during any one of the
prior three years;

"(II) That the Bank Insurance Fund reserve
ratio or the Deposit Insurance Fund reserve
ratio is less than 1.20 per centum; or

"(III) That, in the opinion of the Board of
Directors, extraordinary circumstances exist
that raise a reasonable risk of serious
future losses to the Bank Insurance Fund or

- 42 -

to the Deposit Insurance Fund as a whole.

"(ii) SAVINGS ASSOCIATION INSURANCE FUND-—In
the case of Savings Association Insurance
members, the factors shall be the following:

"(I) That the Savings Association Insurance
Fund has experienced a net loss during any
one of the prior three years;

"(II) That the Savings Association Insurance
Fund reserve ratio or the Deposit Insurance
Fund -ratio is less than 1.20.per centum; or

"(III) That, in the opinion of the Board of
Directors, extraordinary circumstances exist
that raise a reasonable risk of serious
future losses to the Savings Association
Insurance Fund or to the Deposit Insurance
Fund as a whole.

"(iii) MAXIMUM ANNUAL INCREASE.—The maximum annual
increase in the annual assessment rate with respect
to each fund shall not exceed a 50 percent annual
increase over the annual assessment rate of the
prior year.

- 43 -

"(E)

Notwithstanding subparagraphs (B), (C) and (D) of this

paragraph (1), the Corporation may in its discretion set a
lower minimum annual assessment rate for the Bank Insurance
Fund or the Savings Association Insurance Fund if the
respective fund has a reserve ratio greater than 1.25 per
centum and it is likely that such reserve ratio will not
decrease over the following five year period; (ii) each
insured financial institution shall pay a minimum annual
assessment of $500, or such higher amount as may be
calculated by the Corporation to cover direct expenses
incurred by the Corporation related to such institutions, or
a lower amount if the conditions provided in (i) of this
subparagraph (E) exist; and (iii) the annual assessment rate
shall not exceed 35 one-hundredths of one per centum, except
as provided in (ii) of this subparagraph (E).

"(F) FINANCING CORPORATION AND FUNDING CORPORATION
ASSESSMENTS.

Notwithstanding any authority provided herein,

with respect to Savings Associaton Insurance Fund members,
amounts assessed by the Financing Corporation and the
Funding Corporation under section 21 and 21b, respectively,
of the Federal Home Loan Bank Act, as amended, shall be
substracted from the amounts authorized to be assessed by
the Corporation hereunder.

"(2) ASSESSMENT PROCEDURES. —

- 44 -

"(A)

SEMIANNUAL ASSESSMENTS.—Except as provided in

subsection (c)(2) of this section,

"(i) the semiannual assessment due from any Bank Insurance
Fund member for any semiannual period shall be equal to
one-half the annual categorical assessment rate applicable
to such Bank Insurance Fund member multiplied by such Bank
Insurance Fund member's average assessment base for the
immediately preceding semiannual.period; and

"(ii) the semiannual assessment due from any Savings
Association Insurance Fund member for any semiannual period
shall be equal to one-half the annual categorical assessment
rate applicable to such*Savings Association Insurance Fund
member multiplied by such Savings Association Insurance Fund
member's average assessment base for the immediately
preceding semiannual period.

"(B) For the purposes of this section the term "semiannual
period" means a period beginning on January 1 of any
calendar year and ending on June 30 of the same year, or a
period beginning on July 1 of any calendar year and ending
on December 31 of the same year."

(4) By amending subsection (d) to read as follows:

- 45 -

"(d)

ASSESSMENT CREDITS.—

"(1) IN GENERAL — As of December 31, 1990, and as of
December 31 of each calendar year thereafter, the
Corporation shall compute the aggregate amount to be
credited to insured financial institutions.

"(2) AMOUNT OF ASSESSMENT CREDIT.—

"(A) CREDIT BARRED.—Whenever the Board of Directors
determines that the Bank Insurance Fund reserve ratio is
equal to or less than 1.25 per centum, the Board of
Directors shall not credit any amount to Bank Insurance Fund
members.

"(B) CREDIT AUTHORIZED.—

"(i) AGGREGATE CREDIT.—Whenever the Board of Directors
determines that the Bank Insurance Fund reserve ratio
exceeds 1.25 per centum, or such higher level as the Board
of Directors in its discretion may determine, the Board of
Directors may in its discretion credit the smaller of the
following amounts to Bank Insurance Fund members:

"(I) The amount necessary to reduce the Bank
Insurance Fund reserve ratio to 1.25 per centum or such

- 46 -

higher level as the Board of Directors may determine; or

"(II) 60.00 per centum of the net assessment income
received from Bank Insurance Fund members the prior year.

"(ii) The Corporation shall deduct any outstanding
obligations owed to the Corporation by an individual insured
financial institution from any assessment credit to be
credited to such financial institution.

"(C) CREDIT BARRED.—Whenever the Board of Directors
determines that the Savings Association Insurance Fund
reserve ratio is equal to or less than 1.25 per centum, the
Board of Directors shall" not credit any amount to Savings
Association Insurance Fund members:

Provided that no credit

shall be made as long as the Financing Corporation is
authorized to assess on Savings Association Insurance Fund
members an assessment to cover Financing Corporation
interest obligations pursuant to Section 21 of the Federal
Home Loan Bank Act.

"(D) CREDIT AUTHORIZED.—

"(i) AGGREGATE CREDIT.—Whenever the Board of Directors
determines that the Savings Association Insurance Fund
reserve ratio exceeds 1.25 per centum or such higher level

- 47 -

as the Board of Directors in its discretion may determine,
the Board of Directors may in its discretion credit the
smaller of the following amounts to Savings Association
Insurance Fund members:

"(I) The amount necessary to reduce the Savings Association
Insurance Fund reserve ratio to 1.25 per centum, or such
higher level as the Board of Directors may determine; or

"(II) 60.00 per centum of the net assessment income
received from Savings Association Insurance Fund members the
prior year.

"(3) APPLICATION OF ASSESSMENT CREDIT.—Each year any such credit
shall be applied by the Corporation toward the payment of
the total assessment becoming due for the semiannual
assessment period beginning the next ensuing July 1 and any
excess credit shall be applied upon the assessments next
becoming due.

"(4) "NET ASSESSMENT INCOME" DEFINED.—The term "net assessment

- 48 -

income" as used herein means the total assessments which
become due during the calendar year less:

"(A) the operating costs and expenses of the Corporation for
the calendar year;

"(B) additions to reserve to provide for insurance losses
during the calendar year, except that any adjustments to
reserve which result in a reduction of such reserve shall be
added;

"(C) the insurance losses sustained in said calendar year
plus losses from any preceding years in excess of such
reserves; and

"(D) any lending costs for the calendar year, which costs
shall be equal to the amount by which the amount of interest
earned, if any, from each loan made by the Corporation under
section 13 of this Act after January 1, 1982, is less than
the amount which the Corporation would have earned in
interest for the calendar year if interest had been paid on
such loan during such calendar year at a rate equal to the
average current value of funds to the United States Treasury
for such calendar year.

"If the above deductions exceed in amount the total

- 49 -

assessments which become due during the calendar year,
amount of such excess shall be restored by deduction fr
total assessments becoming due in subsequent years."

(6) By replacing "bank" wherever it appears in subsections
(f), (g) and (i) with "financial institution."

(7) By amending subsection (j) as follows:

(a) The last sentence in paragraph (1) is amended by
inserting before the words "any bank holding company" the
numeral "(1)" and by inserting before the period the
following:

"; (2) any "savings and loan holding company" which has
control of any insured financial institution, and the
appropriate Federal banking agency in the case of
savings and loan holding companies shall be the Federal
Home Loan Bank System; and (3) any other company that
controls an insured financial institution that is not a
bank holding company or a savings and loan holding
company."

(b) In subparagraph (2)(A), the word "failure" is
deleted and "default" is inserted in lieu thereof; and the
word "bank" is deleted and the word "financial institution"

- 50 -

is inserted in lieu thereof."

(c) In subparagraph (2)(D), the words "unless it finds
that an emergency exists," are added after the comma
following the word "shall";

(d) In paragraph (7), the word "or" at the end of
subparagraph (D) and the period at the end of subparagraph
(E) are deleted and the word "; or" is added at the end of
subparagraph (E), and a new subparagraph (F) is added to
read as follows:

-"(F) The appropriate Federal banking agency determines
that the proposed transaction would result in an
adverse effect on the Bank Insurance Fund, the Savings
Association Insurance Fund, or the Deposit Insurance
Fund.";

(e) Deleting paragraph (17) and inserting in lieu thereof
the following:

"(17) This subsection shall not apply to a transaction
subject to section 3 of the Bank Holding Company Act of
1956 (12 U.S.C. 1842) or section 18 of this Act (12
U.S.C. 1828) or section 10 of the Home Owners' Loan Act
of 1933, as amended.";

- 51 -

(f) Inserting the following new subsection (1) to read as
follows:

"(1) For purposes of this section —

"(1) The "Deposit Insurance Fund reserve ratio" is the
ratio of the net worth of the Deposit Insurance Fund to
the value of the aggregate insured deposits held in all
insured financial institutions.

"(2) The "Bank Insurance Fund reserve ratio" is the
ratio of the net worth the Bank Insurance Fund of the
Deposit Insurance Fund -to the value of the aggregate
insured deposits held in all Bank Insurance Fund
members.

"(3) The "Savings Association Insurance Fund reserve
ratio" is the ratio of the value of the net worth of
the Savings Association Insurance Fund of the Deposit
Insurance Fund to the value of the aggregate insured
deposits held in all Savings Association Insurance Fund
members.

"(4) "Bank Insurance Fund member" means any insured
financial institution other than a Savings Association
Insurance Fund member.

- 52 -

"(5)

"Savings Association Insurance Fund member" means

any financial institution that was insured by the
Federal Savings and Loan Insurance Corporation
immediately prior to the enactment of FIRREA, and any
insured savings association other than a Federal
savings bank chartered pursuant to section 5(o) of the
Home Owners' Loan Act of 1933.

"(6) The "Deposit Insurance Fund" is comprised of the
Bank Insurance Fund and Savings Insurance Fund."

Sec. 209. FDIC CORPORATE POWERS. - Section 9 of the Federal
Deposit Insurance Act (12 U.S.C. 1819) is hereby amended:

(1) by striking out the words "bank" and "banks" wherever
they appear and inserting "financial institution" or "financial
institutions", respectively, in lieu thereof;

(2) by inserting "other than as received under the
provisions of section 11(e)(2) or 11(e)(3)" immediately before
the words "and which involves" in paragraph Fourth; and

(3) by adding at the end thereof the following new
paragraph:

"Eleventh.

To define any terms used in the Federal

- 53 -

Deposit Insurance Act, as amended, that are not
specifically defined in such Act, and to interpret the
definitions of any terms that are not so defined;
Provided, That no such definition shall be binding on
any other Federal banking agency as it may implement or
enforce the provisions of this Act."

Sec. 210. ADMINISTRATION OF CORPORATION. - Subsection 10(b)
of the Federal Deposit Insurance Act (12 U.S.C. 1820) is
hereby amended as follows:

(a) In the first sentence, by adding after "or other
institution," a comma and. the phrase "including a State
savings association".

(b) In the second sentence, by deleting "insured Federal
savings bank" and by inserting in lieu thereof "insured
savings association".

Sec. 211.

INSURANCE FUNDS; CORPORATION POWERS AS RECEIVER. -

Section 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821
is hereby amended as follows:

(1)

Subsection (a) is amended as follows:

- 54 -

(a)

Paragraph (1) is amended to read as follows:

"(1) On and after the effective date of the "Financial
Institutions Reform, Recovery and Enforcement Act of 1989"
the Corporation shall insure the deposits of all insured
financial institutions as provided in this Act.

Except as

provided in paragraph 2, the maximum amount of the insured
deposit of any depositor shall be $100,000."

(b) In subparagraph (2)(B), the words "time and savings" are
deleted.

"(4) There are hereby established two insurance funds both
to be operated and administered by the Corporation and to be
separately maintained and not commingled, which shall be
used by the Corporation for the purposes of carrying out the
insurance purposes of this chapter in the manner set forth
below.

"(A) As of the effective date of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, there is
hereby established a fund to be designated the Bank
Insurance Fund.

On that date, the Permanent Insurance Fund

shall be dissolved and all the assets, debts, obligations,

- 55 -

contracts, and other liabilities of the Permanent Insurance
Fund, matured or unmatured, accrued, absolute, contingent,
or otherwise shall hereby be transferred in their entirety
to the Bank Insurance Fund.

Money in the Bank Insurance

Fund shall be available to the Corporation for the uses and
purposes herein provided with respect to the Bank Insurance
Fund members.

All amounts assessed Bank Insurance Fund

members by the Corporation shall be deposited into the Bank
Insurance Fund.

"(B) (i) As of the effective date of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989,
there is hereby established a fund to be designated the
Savings Association Insurance Fund.

All amounts assessed

Savings Associations Insurance Fund members from the date of
enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, and not required for the Financing
Corporation or for the Resolution Funding Corporation
pursuant to section 21 and 21b, respectively, of the Federal
Home Loan Bank Act, or for the FSLIC Resolution Fund
pursuant to section 11A of this Act, shall be covered into
the Savings Association Insurance Fund; provided, however
that beginning in 1992, no amounts assessed Savings
Association Insurance Fund members shall be provided to the
FSLIC Resolution Fund.

- 56 -

"(ii)

Beginning in fiscal year 1991, in order to provide

funding to the Savings Association Insurance Fund, the
Secretary of the Treasury shall, subject to the availability
of appropriations, pay to the Fund the amounts per fiscal
year, less the assessment paid by the savings associations
to the Fund for such fiscal year, as set forth in the table
below; provided, however, that at such time as the Savings
Association Insurance Fund reserve ratio is equal to 1.25
per centum no further amounts shall be paid to the Fund by
the Secretary of the Treasury.

Fiscal Year

"(iii)

Beginning

Dollars in

October 1,

Billions

1991

$2.0

1992

3.4

1993

4.6

1994

3.0

1995

4.0

1996

4.0

1997

4.0

1998

4.0

1999

3.0

There are hereby authorized to be appropriated to

- 57 -

the Secretary of the Treasury, without fiscal year
limitation, such sums as may be necessary for payments to
individual funds as authorized by this Act.

"(iv) The Corporation is hereby authorized to borrow from
the Federal Home Loan Banks, with the concurrence of the
Chairman of the System, such funds as the Corporation deems
necessary for the use of the Savings Association Insurance
Fund, which borrowings shall be a direct liability of such
Fund and shall be subject to the limitations in paragraph
(b) of Section 15 of the Federal Deposit Insurance Act (12
U.S.C. 1825(b)).

"(v) Money in the Savings Association Insurance Fund shall
be available to the Corporation for the uses and purposes
herein provided with respect to Savings Association
Insurance Fund members.

All amounts assessed Savings

Association Insurance Fund members by the Corporation which
do not include those required for the Financing Corporation
or the Resolution Funding Corporation pursuant to the
Federal Home Loan Bank Act, or for the FSLIC Resolution Fund
pursuant to section 11A of this Act, shall be deposited into
the Savings Association Insurance Fund."

(2) Subsection (c) is amended to read as follows:

- 58 -

"(c)

CORPORATION AS RECEIVER OR CONSERVATOR.

"(1) Notwithstanding any other provision of law, State or
Federal, or the constitution of any State, the Corporation is
authorized to accept appointment and act as receiver or
conservator for financial institutions in default upon
appointment as set out in subsection (d) or (e) hereof.

"(2) As such receiver or conservator, the Corporation shall have
the following authorities and duties:

"(A) the Corporation is authorized:

"(i) to take over the assets of and operate the financial
institution with all the powers of the member or
shareholders, the directors, and the officers of the
financial institution and shall be authorized to conduct all
business, including taking deposits, and perform all
functions of the financial institution in its own name,

"(ii) to take such action as may be necessary to put the
financial institution in a sound and solvent condition,

"(iii) to merge the financial institution with another
insured financial institution,

- 59 -

"(iv)

to organize, with respect to savings associations, by

application to the Chairman of the Federal Home Loan Bank
System a new Federal Savings Association to take over such
assets and/or such liabilities as the Corporation may deem
appropriate, or with respect to any insured financial
institution, to organize a bridge bank under subsection (i)
hereof or a new national bank under subsection (h) hereof.

"(v) to transfer any assets or liabilities of the financial
institution i«n default (including assets and liabilities
associated with any trust business), such transfer to be
effective without any further approval, assignment or
consent with respect thereto, provided that when the
transferee is another financial institution, the transfer
must be approved by the appropriate Federal banking agency
for the acquiring institution,

"(vi) to place the financial institution in liquidation and
to proceed to realize upon the assets of the financial
institution, having due regard to the condition of credit in
the locality,

"(vii) to determine claims under the provisions set forth
under subsection (1),

"(viii) to exercise all powers and authorities specifically

- 60 -

granted by the provisions of this Act and such incidental
powers as shall be necessary to carry out the powers so
granted, and to take any actions authorized by this Act, or

"(ix) to exercise any combination of the powers enumerated
in clauses (2)(A)(i) through (2)(A)(viii),

"whichever shall appear to be in the best interests of the
financial institution in default, of its depositors, or the
Corporation;

"(B) the Corporation shall pay all valid credit obligations
of the financial institution in accordance with the
prescriptions and limitations set forth in this Act;

"(C) in cases of liquidation, or other closing or winding
up of the affairs of a closed financial institution, the
Corporation:

"(i) shall promptly publish a notice to the financial
institution's creditors to present their claims, with proof
thereof, to the receiver by a date specified in the notice
(at least 90 days after first publication).

The notice

shall be published again approximately 1 month and 2 months
respectively after first publication.
the specified date shall be disallowed.

Claims filed after
The receiver shall

- 61 -

mail a similar notice at the time of first publication to
any creditor shown on the financial institution's books at
the creditor's last address appearing thereon or upon
discovery of the name and address of a claimant not
appearing on the financial institution's books within 30
days of discovery;

"(ii) shall allow any claim seasonably received and proved
to its satisfaction.

The receiver may wholly or partly

disallow any creditor claim or claim of security,
preference, or priority not so proved, and shall notify the
claimant of the disallowance and the reason therefore.
Mailing notice of the disallowance to the claimant's last
address appearing on the financial institution's books or on
the proof of claim shall be sufficient notice.

Unless,

within 30 days after notice is mailed, the claimant files a
written objection to the disallowance, disallowance shall be
final.

Those claims to which an objection is properly and

timely filed shall be decided in accordance with the
provisions of subsection (1).

"(iii) may pay creditor claims which are allowed by the
receiver or approved by a final determination by the
receiver in accordance with subsection (1), from time to
time, in the receiver's discretion, to the extent funds are
available, in such manner and amounts as are authorized

- 62 -

under this Act;

"(D) the Corporation shall pay to itself for its own
account such portion of the amounts realized from any
liquidation as it shall be entitled to receive on account of
its subrogation to the claims of depositors, and it shall
pay to depositors and other creditors the net amounts
available for distribution to them;

"(E) the Corporation may, in its discretion, pay dividends
on proved claims at any time, and no liability shall attach
to the Corporation itself or as such receiver by reason of
any such payment for failure to pay dividends to a claimant
whose claim is not proved at the time of any such payment;

"(F) the Corporation may request a stay for a period of up
to 90 days after the appointment of the receiver as to any
legal action or proceeding to which the receiver or the
financial institution in default is or may become a party.
Upon petition, the court shall grant such stay as to all
parties;

"(G) the Corporation is authorized to disaffirm or
repudiate any contract or lease the performance of which the
Corporation in its discretion considers to be burdensome, or
in its discretion considers the disaffirmance or repudiation

- 63 -

of which will promote the orderly administration of the
financial institution's affairs.

So long as the Corporation

disaffirms or repudiates the contract within 90 days from
the date the Corporation is appointed conservator or
receiver or discovers the existence of the contract or lease
subject to disaffirmance or repudiation, neither the
Corporation nor the estate of the financial institution will
incur any liability with respect to such contract or lease,
except that lessors shall be entitled to the contractual
rent for the period from the appointment of the receiver to
the date the notice of disaffirmance or repudiation is
mailed or effective:

Provided, That nothing herein is

intended in any way to limit the authority of the
Corporation as receiver to disaffirm or repudiate such
contract or lease after the 90-day period set out above;

"(H) the Corporation may enforce any contract entered into
by the financial institution to the same extent as the
financial institution in default, notwithstanding any
provision of the contract to the contrary, which it deems in
its discretion to be necessary for the orderly execution of
its duties;

"(I) the Corporation shall keep a full accounting of each
receivership estate and conservatorship estate or other
disposition of institutions in default and make such

- 64 -

accounting available to the shareholders of the financial
institution, the Secretary of the Treasury, and the
Comptroller General;

"(J) in any case in which funds remain after all
depositors, creditors, other claimants, and administrative
expenses are paid, the Corporation shall distribute such
funds to the financial institution's shareholders or members
along with the accounting specified in paragraph (I); and

"(K) the Corporation may, any time five years after its
appointment as receiver of a Federal financial institution,
destroy any records of such institution which the
Corporation in its discretion deems to be unnecessary."

(3) Subsection (d) is amended to read as follows:

"(d) CORPORATION AS RECEIVER OR CONSERVATOR OF FEDERAL
FINANCIAL INSTITUTIONS.

"(1) Except as provided in Section 21a of the Federal Home
Loan Bank Act notwithstanding any other provision of law,
State or Federal, or the constitution of any State, whenever
a receiver or conservator is appointed for an insured
Federal or District.financial institution by the authority
having supervision of such financial institution for the

-* 65 -

purpose of liquidation or winding up its affairs, the
Corporation shall be appointed, and shall accept
appointment, as such receiver or conservator.

The

Corporation may, at the discretion of the supervisory
authority, be appointed conservator not for the purpose of
liquidation or winding up the financial institution's
affairs, and the Corporation may accept such appointment.

"(2) As such receiver or conservator, the Corporation shall
have all powers and duties set forth in this Act, and such
other powers and duties possessed by receivers and
conservators for Federal financial institutions under any
other provisions-of law, in addition to and not in
derogation of the powers conferred in this Act;

"(3) As such receiver or conservator, the Corporation shall
not be subject to the direction or supervision of any other
agency or Department in the exercise of its rights, powers,
and privileges as receiver or conservator, Provided that, in
cases in which the financial institution continues to
operate in conservatorship the institution shall remain
subject to the supervision of its primary regulator."

(4) Subsection (e) is amended to read as follows:

"(e)

CORPORATION AS RECEIVER OR CONSERVATOR OF STATE

- 66 -

FINANCIAL INSTITUTIONS.

"(1)(A) Whenever the authority having supervision of any
insured State financial institution (except a District
financial institution) appoints a receiver or conservator
for such State financial institution and tenders appointment
to the Corporation, the Corporation may accept appointment
as receiver or conservator.

"(B) The Corporation as such receiver or conservator shall
possess all the rights, powers, and privileges granted by
State law to a receiver or conservator of a State financial
institution of any kind, in addition to and not in derogation of the powers conferred upon the Corporation
under subsection (c).

"(C) As such receiver or conservator, the Corporation shall
not be subject to the direction or supervision of any other
agency or Department, State or Federal, in the exercise of
its rights, powers, and privileges.

"(2) Whenever the Chairman of the Federal Home Loan Bank
System appoints a conservator or receiver under the
provisions of section 5(d)(2)(C) of the Home Owners' Loan
Act of 1933, as amended (12 U.S.C. 1464(d)(2)(C), the
Corporation shall be appointed.

- 67 -

"(3)

The Corporation shall have power and jurisdiction to

appoint itself as sole conservator or receiver of an insured
State financial institution in the event the Corporation
determines—

"(A) that

"(i) a conservator, receiver, or other legal
custodian has been or is hereafter appointed for an
insured State financial institution other than by the
Federal Home Loan Bank System or by the Comptroller of
the Currency and that the appointment of such
conservator, receiver, or- custodian, or any.
combination thereof, has been outstanding for a period
of at least 15 consecutive days, and that one or more
of the depositors in such institution is unable to
obtain a withdrawal of this deposit, in whole or in
part; or

"(ii) an insured State financial institution has been
closed by or under the laws of any State; and

"(B) that one or more of the grounds specified in paragraph
(2)(A) of Section 5(d) of the Home Owners' Loan Act of 1933,
as amended (12 U.S.C. 1464(d)) existed with respect to such
financial institution at the time a conservator, receiver,

- 68 -

or other legal custodian was appointed, or at the time such
financial institution was closed, or exists thereafter
during the appointment of the conservator, receiver, or
other legal custodian or while the institution is closed.

"(4) In any case where the Corporation is appointed
conservator or receiver of an insured State financial
institution—

"(A) the provisions of this Act shall be applicable in the
same manner and to the same extent as if such institution
were a Federal financial institution with respect to which
the Corporation had been appointed conservator or receiver;
and

"(B) the Corporation shall have authority to liquidate such
financial institution in an orderly manner or to make such
other disposition of the matter as it deems to be in the
best interests of the institution, its savers, and the
Corporation.

"(5) The authority conferred by paragraphs (2) and (3)
shall be in addition to, and not a limitation upon,
appointment under paragraph (1)."

(5) Subsection (f) is amended to read as follows:

- 69 -

"(f)

PAYMENT OF INSURED DEPOSITS.—

"(1) In cases of the liquidation, or other closing or
winding up of the affairs of a closed insured financial
institution or insured branch of a foreign bank, payment of
the insured deposits in such financial institution or branch
shall be made by the Corporation as soon as possible,
subject to the provisions of subsection (g) of this section
either by cash or by making available to each depositor a
transferred deposit in a new financial institution in the
same community or in another insured financial institution
in an amount equal to the insured deposit of such depositor:
Provided, however, that all payments made pursuant to this
section on account of a closed bank or insured branch of a
foreign bank shall be made only from the Bank Insurance
Fund, and all payments made pursuant to this section on
account of a closed savings association shall be made only
from the Savings Association Insurance Fund.

"(2) The Corporation, in its discretion, may require proof
of claims to be filed and may approve or reject such claims.
In the case of a disputed claim, the Corporation shall have
the power to adjudicate such dispute according to rules and
regulations established for that purpose.

Final

determination made by the Corporation shall be reviewable by
the Court of appeals for the District of Columbia Circuit or

- 70 -

the Court of Appeals for the circuit where the financial
institution is located and shall be upheld unless found to
be arbitrary or capricious.

In the absence of rules and

regulations, the Corporation may require the final
determination of a court of competent jurisdiction before
paying such claim."

(6) Subsection (g) is amended to read as follows:

"(g) SUBROGATION.—

"Notwithstanding any other provision of law, State or
Federal, or the constitution of any State, the Corporation,
upon the payment to any depositor as provided in subsection
(f) of this section, or the assumption of any deposit
pursuant to Section 13, shall be subrogated to all rights of
the depositor against the financial institution or branch to
the extent of such payment.

Such subrogation shall include

the right on the part of the Corporation to receive the same
dividends from the proceeds of the assets of such financial
institution or branch and recoveries on account of
stockholders' liability as would have been payable to the
depositor on a claim for the insured deposit, but such
depositor shall retain such claim for any uninsured or
unassumed portion of the deposit:

Provided, That, with

respect to any bank which closes after May 25, 1938, the

- 71 -

Corporation shall waive, in favor only of any person against
whom stockholders' individual liability may be asserted, any
claim on account of such liability in excess of the
liability, if any, to the bank or its creditors, for the
amount unpaid upon his stock in such bank; but any such
waiver shall be effected in such manner and on such terms
and conditions as will not increase recoveries or dividends
on account of claims to which the Corporation is not
subrogated:

Provided further, That if the Corporation

determines not to invoke the authority conferred in
subsection (e)(3), the rights of depositors and other
creditors of any State financial institution shall be
determined in accordance with the applicable provisions of
State law."

(7) Subsection (h) is amended as follows:

(a) The term "closed bank" is deleted, and the term
"financial institution in default" is inserted in lieu
thereof wherever it appears;

(b) In paragraph (1), the words "closing of an insured
bank" are deleted and the words "default of an insured
financial institution" are inserted in lieu thereof;

- 72 -

constitution of any State," are added after
"Notwithstanding any other provision of law" in the last
sentence; and

(d) In paragraph (4), the words "closed insured bank" are
deleted, and the words "financial institution in default"
are inserted in lieu thereof.

(8) Subsection (i) is amended to read as follows:

"(i) BRIDGE BANKS.—

"(1) ORGANIZATION.—

"(A) PURPOSE.—When one or more insured financial
institutions are in default or in anticipation of its or
their becoming in default, the Corporation may, in its
discretion, organize a bridge bank or banks with respect
thereto and upon the granting of a charter to such bridge
bank, the bridge bank m a y —

"(i) assume such deposits of such insured financial
institution or institutions that is or are in default or in
danger of default as the Corporation may, in its discretion,
determine to be appropriate;

- 73 -

"(ii)

assume such other liabilities (including liabilities

associated with any trust business) of such insured
financial institution or institutions that is or are in
default or in danger of default as the Corporation may, in
its discretion, determine to be appropriate;

"(iii) purchase such assets (including assets associated
with any trust business) of such insured financial
institution or institutions that-is or are in default or in
danger of default as the Corporation may, in its discretion,
determine to be appropriate; and

"(iv) perform,any other temporary function which the
Corporation may, in its discretion, prescribe in accordance
with this Act.

"(B) ARTICLES OF ASSOCIATION.—The articles of association
and organization certificate of a bridge bank as approved by
the Corporation shall be executed by three representatives
designated by the Corporation.

"(C) NATIONAL BANK.—A bridge bank shall be organized as a
national bank.

"(D) INTERIM DIRECTORS.—A bridge bank shall have an
interim board of directors consisting of not fewer than five

- 74 -

nor more than ten members appointed by the Corporation.

"(2) CHARTERING.—

"(A) CONDITIONS.—A bridge bank shall be chartered by the
Comptroller of the Currency as a national bank only if the
Board of Directors determines that—

"(i) the amount which is reasonably necessary to operate
such bridge bank will not exceed the amount which is
reasonably necessary to save the cost of liquidating,
including paying the insured accounts of, one or more
insured financial institutions in default with respect.to
which the bridge bank is chartered;

"(ii) the continued operation of such insured financial
institution or financial institutions in default with
respect to which the bridge bank is chartered is essential
to provide adequate banking services in the community where
each such financial institution in default is located; or

"(iii) the continued operation of such insured financial
institution or institutions in default with respect to which
the bridge bank is chartered is in the best interest of the
depositors of such financial institution or institutions in
default or the public.

- 75 -

"(B) INSURED NATIONAL BANK.—A bridge bank shall be an
insured bank from the time it is chartered as a national
bank.

"(C) BRIDGE BANK TREATED AS BEING IN DEFAULT FOR CERTAIN
PURPOSES.—Notwithstanding any other provision of law, State
or Federal, or the constitution of any State, any bridge
bank shall be treated as a financial institution in default
at such times and for such purposes as the Corporation may,
in its discretion, determine.

"(D) MANAGEMENT.—A bridge bank, upon the granting of its
charter, shall be under the management of a board of
directors consisting of not fewer than five nor more than
ten members appointed by the Corporation.

"(E) BYLAWS.—The board of directors of a bridge bank shall
adopt such bylaws as may be approved by the Corporation.

"(3) TRANSFER OF ASSETS AND LIABILITIES.—

"(A) IN GENERAL.—Upon the granting of a charter to a
bridge bank pursuant to this subsection, the Corporation, as
receiver, or any other receiver appointed with respect to
any insured financial institution in default with respect to
which the bridge bank is chartered may, transfer any assets

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and liabilities of such financial institution in default to
the bridge bank in accordance with paragraph (1) of this
subsection.

Thereafter, the Corporation, as receiver, or

any other receiver appointed with respect to an insured
financial institution in default may transfer any assets and
liabilities of such insured financial institution in default
as the Corporation may, in its discretion, determine to be
appropriate in accordance with paragraph (1) of this
subsection.

For purposes of this paragraph of this

subsection, the trust business, including fiduciary
appointments, of any insured financial institution in
default, is included among its assets and liabilities.

The

transfer of any assets or liabilities associated with any
trust business of an insured financial institution in
default transferred to a bridge bank shall be effective
without any further approval, assignment or consent with
respect thereto, notwithstanding any other provision of law,
State or Federal, or the constitution of any State.

"(B) INTENT OF CONGRESS REGARDING CONTINUING OPERATIONS.—
It is the intent of the Congress that, in order to prevent
unnecessary hardship or losses to the customers of any
insured financial institution in default with respect to
which a bridge bank is chartered, especially creditworthy
farmers, small businesses, and households, the Corporation
should—

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"(i)

continue to honor commitments made by the financial

institution in default to creditworthy customers, and

"(ii) not interrupt or terminate adequately secured loans
which are transferred under subparagraph (A) and are being
repaid by the debtor in accordance with the terms of the
loan instrument.

"(4) POWERS OF BRIDGE BANKS.—Each bridge bank chartered
under this subsection shall have all corporate powers of,
and be subject to the same provisions of law as, a national
bank, except as otherwise provided in this subsection and
except that-

"(A) the Corporation may—

"(i) remove the interim directors and directors of a bridge
bank;

"(ii) fix the compensation of members of the interim board
of directors and the board of directors and senior
management, as determined by the Corporation in its
discretion, of a bridge bank; and

"(iii) waive any requirement established under section
5145, 5146, 5147, 5148, or 5149 of the Revised Statutes

- 78 -

(relating to directors of national banks) or section 31 of
the Banking Act of 1933 which would otherwise be applicable
with respect to directors of a bridge bank by operation of
paragraph (2)(B);

"(B) the Corporation may idemnify the representatives for
purposes of subparagraph (1)(B) and the interim directors,
directors, officers, employees and agents of a bridge bank
on such terms as the Corporation determines to be
appropriate;

"(C) no requirement under section 5138 of the Revised
Statutes or any other provision of law relating to the
capital of-a national bank shall apply with respect to a
bridge bank;

"(D) the Comptroller of the Currency may establish a
limitation on the extent to which any person may become
indebted to a bridge bank without regard to the amount of
the bridge bank's capital or surplus;

"(E)(i) the board of directors of a bridge bank shall elect
a chairperson who may also serve in the position of chief
executive officer:

Provided, That such person shall not

serve either as chairperson or as chief executive officer
without the prior approval of the Corporation;

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"(ii)

the board of directors of a bridge bank may appoint a

chief executive officer who is not also the chairperson:
Provided, That such person shall not serve as chief
executive officer without the prior approval of the
Corporation;

"(F) a bridge bank shall not be required to purchase stock
of any Federal Reserve bank;

"(G) the Comptroller of the Currency shall waive any
requirement for a fidelity bond with respect to a bridge
bank at the request of the Corporation;

"(H) any action to which a bridge bank becomes a party by
virtue of its acquisition of any assets or assumption of any
liabilities of a financial institution in default shall be
stayed from further proceedings for a period of up to 90
days at the request of the bridge bank;

"(I) no agreement which tends to diminish or defeat the
right, title or interest of a bridge bank in any asset of an
insured financial institution in default acquired by it
shall be valid against the bridge bank unless such
agreement:

"(i) shall be in writing,

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"(ii) shall have been executed by such insured financial
institution in default and the person or persons claiming an
adverse interest thereunder, including the obligor,
contemporaneously with the acquisition of the asset by such
insured financial institution in default,

"(iii) shall have been approved by the board of directors of
such insured financial institution in default or its loan
committee, which approval shall be reflected in the minutes
of said board or committee, and

"(iv) shall have been, continuously from the time of its
execution, an official record of such insured financial
institution in default; and

"(J) except with the prior approval of the Corporation, a
bridge bank may not, in any transaction or series of
transactions, issue capital stock or be a party to any
merger, consolidation, disposition of assets or liabilities,
sale or exchange of capital stock, or similar transaction,
or change its charter.

"(5) CAPITAL-—

"(A) NO CAPITAL REQUIRED.—The Corporation shall not be
required t o —

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"(i)

issue any capital stock on behalf of a bridge bank

chartered under this subsection; or

"(ii) purchase any capital stock of a bridge bank: Provided,
That notwithstanding any other provision of law, State or
Federal, or the constitution of any State, the Corporation
may purchase and retain capital stock of a bridge bank in
such amounts and on such terms as the Corporation, in its
discretion, determines to be appropriate.

"(B) OPERATING FUNDS IN LIEU OF CAPITAL.—Upon the
organization of a bridge bank, and thereafter, as the Board
of Directors may, in its discretion, determine to be
necessary or advisable, the Corporation may make available
to the bridge bank, upon such terms and conditions and in
such form and amounts as the Corporation may in its
discretion determine, funds for the operation of the bridge
bank.

"(C) AUTHORITY TO ISSUE CAPITAL STOCK.—Whenever the Board
of Directors determines it is advisable to do so, the
Corporation shall cause capital stock of a bridge bank to be
issued and offered for sale in such amounts and on such
terms and conditions as the Corporation may, in its
discretion, determine.

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"(6)

NO FEDERAL STATUS.—

"(A) AGENCY STATUS.—A bridge bank is not an agency,
establishment, or instrumentality of the United States.

"(B) EMPLOYEE STATUS.—Representatives for purposes of
subparagraph (1)(B), interim directors, directors, officers,
employees, or agents of a bridge bank are not, solely by
virtue of service in any such capacity, officers or
employees of the United States for purposes of Title 5,
United States Code, or any other provision of law.

Any

employee of the Corporation or of any Federal
instrumentality who serves at the.request of the- Corporation
as a representative for purposes of subparagraph (1)(B),
interim director, director, officer, employee or agent of a
bridge bank shall not

"(i) solely by virtue of service in any such capacity lose
any existing status as an officer or employee of the United
States for purposes of Title 5, United States Code, or any
other provision of law, or

"(ii) receive any salary or benefits for service in any such
capacity with respect to a bridge bank in addition to such
salary or benefits as are obtained through employment with
the Corporation or such Federal instrumentality.

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"(7)

ASSISTANCE AUTHORIZED.—The Corporation may, in its

discretion, provide assistance under section 13(c) to
facilitate any transaction contemplated in subparagraph
(10)(A)(i), (ii) or (iii) with respect to a bridge bank in
the same manner and to the same extent as such assistance
may be provided under such section with respect to an
insured financial institution in default, or to facilitate a
bridge bank's acquisition of any assets or the assumption of
any liabilities of an insured financial institution in
default.

"(8) ACQUISITION

"(A) IN GENERAL.—Any transaction with respect to the
merger or sale of a bridge bank requiring approval under
section 18(c), unless immediate action is necessary to
prevent the

probable failure of an insured financial

institution, shall be deemed to be an emergency requiring
expeditious action.

The responsible agency shall notify the

Attorney General thereof and if a report on competitive
factors is requested within ten days, such transaction may
not be consummated before the fifth calendar day after the
date of approval by the responsible agency with respect
thereto.

"(B) BY OUT-OF-STATE HOLDING COMPANY.—Notwithstanding any

- 84 -

other provision of law, State or Federal, or the
constitution of any State, any financial institution,
including an out-of-state financial institution, or any outof-state financial institution holding company may acquire
and retain the capital stock or assets of, or otherwise
acquire and retain a bridge bank:

Provided, That the bridge

bank at any time had assets aggregating $500,000,000 or
more, as determined by the Corporation on the basis of the
bridge bank's reports of condition or on the basis of the
last available reports of condition or thrift financial
reports of any insured financial institution in default,
which institution has been acquired, or whose assets have
been acquired, by the bridge bank; and Provided further,
That the acquiring entity may acquire the bridge bank only
in the same manner and to the same extent as such entity may
acquire an insured bank in default under section 13(f)(2).

"(9) CORPORATE EXISTENCE OF BRIDGE BANK.—Subject to
paragraphs (10) and (11) of this subsection, the corporate
existence of a bridge bank shall not exceed the period of
two years from the date it is granted a charter:

Provided,

That the Board of Directors may, in its discretion, extend
the corporate existence of the bridge bank for additional
three one-year periods.

"(10) TERMINATION OF BRIDGE BANK STATUS.—

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"(A)

IN GENERAL.—A bridge bank shall terminate its status

as such upon the earliest to occur of the following:

"(i) The merger or consolidation of the bridge bank with a
financial institution that is not a bridge bank: Provided,
That in connection with such a transaction, the bridge bank
may request conversion of its charter to that of a financial
institution that is not a bridge bank;

"(ii) The sale of all or substantially all of the capital
stock of the bridge bank to an entity other than the
Corporation and other than another bridge bank.

"(iii) The assumption of all or substantially all of the
deposits and other liabilities of the bridge bank by a
financial institution holding company or a financial
institution that is not a bridge bank, or the acquisition of
all or substantially all of the assets of the bridge bank by
a financial institution holding company, a financial
institution that is not a bridge bank, or other entity as
permitted under applicable law.

"(iv) The dissolution of the bridge bank by the Corporation
in accordance with paragraph (11) of this subsection prior
to the initial two-year period of corporate existence of the
bridge bank and any extension thereof in accordance with

- 86 -

paragraph (9) of this subsection.

"(v) The expiration of the initial two-year period of
corporate existence of the bridge bank and any extension
thereof in accordance with paragraph (9) of this subsection.

"(11) DISSOLUTION OF BRIDGE BANK.—

"(A) IN GENERAL.—Notwithstanding any other provision of
law, State or Federal, or the constitution of any State—

"(i) the Board of Directors may, in its discretion,
dissolve a bridge bank in accordance with this paragraph
(11) at any time during the corporate existence of a bridge
bank if the Board of Directors determines that the amount
which is reasonably necessary to dissolve the bridge bank
will not exceed the amount which is reasonably necessary to
either continue operation of the bridge bank or effect a
transaction with respect to the bridge bank as contemplated
in subparagraph (10)(A)(i), (ii) or (iii) of this
subsection;

"(ii) the Board of Directors may, in its discretion,
commence such dissolution proceedings in accordance with
this paragraph (11) with respect to a bridge bank as the
Board of Directors determines to be necessary following the

- 87 -

consummation of a transaction contemplated in subparagraph
(10)(A)(ii) or (iii); and

"(iii) the Board of Directors shall commence dissolution
proceedings in accordance with this paragraph (11) upon the
expiration of the period of corporate existence of a bridge
bank as provided in paragraph (9) of this subsection.

"(B) PROCEDURES.—The Comptroller of the Currency shall
appoint the Corporation receiver for a bridge bank upon
certification by the Board of Directors to the Comptroller
of the Currency of its determination to dissolve the bridge
bank.

The Corporation as such receiver shall wind up the

affairs of the bridge bank in conformity with the provisions
of law relating to the liquidation of closed national banks.
With respect to any such bridge bank, the Corporation as
such receiver shall have all the rights, powers and
privileges now possessed or hereafter granted by law to a
receiver of a national bank or a District bank and
notwithstanding any other provision of law in the exercise
of such rights, powers, and privileges the Corporation shall
not be subject to the direction or supervision of the
Secretary of the Treasury or the Comptroller of the
Currency.

"(12)(A) Each bridge bank established under this subsection

- 88 -

may operate branches in only one state.

"(B) The Corporation may, in the Corporation's discretion,
organize two or more bridge banks under this subsection to
assume any deposits of, assume any other liabilities of, and
purchase any assets of a single financial institution in
default."

(9) Subsection (j) is amended by deleting the term "closed bank"
and inserting "financial institution in default" in lieu
thereof.

(10) By adding new subsection (k), (1) and (m) at the end thereof
to read as follows:

"(k) VALUATION OF CLAIMS AGAINST FINANCIAL INSTITUTIONS IN
DEFAULT.—Notwithstanding any other law, State or Federal,
or the constitution of any State, and regardless of the
method which the Corporation determines to utilize with
respect to an insured financial institution in default or in
danger of default, including but not limited to transactions
authorized under subsection (i) and under section
13(c)(2)(A), the following provisions shall govern the
rights of the creditors (other than insured depositors) of
such financial institution:

- 89 -

"(1)

MAXIMUM LIABILITY.—The maximum liability of the

Corporation to any person having a claim against the estate
of an insured financial institution in default shall be
equal to the amount such claimant would have received from
the estate of the financial institution if the Corporation
had liquidated such estate.

In the case of an insured

financial institution which the Corporation elects to
operate, the point in time for determining what such
claimant will receive from the estate of the financial
institution had the Corporation liquidated such estate shall
be the date the receiver ceases operating the financial
institution, and begins to wind up the affairs of the
financial institution, and the Corporation shall not be
liable to any such claimant should the estate of the
financial institution be diminished from the time the
Corporation begins operating the financial institution to
the time the Corporation ceases operating the financial
institution and begins to wind up the affairs of the
financial institution, absent a finding of bad faith on the
part of the Corporation; and

"(2) ADDITIONAL PAYMENTS AUTHORIZED.—The Corporation may,
in its discretion, use its own resources to make additional
payments or credit additional amounts to or with respect to
or for the account of any claimant or category of claimants:
Provided, That the Corporation shall not be obligated, as a

- 90 -

result of having made any such payment or credited any such
amount to or with respect to or for the account of any
claimant or category of claimants, to make payments to any
other claimant or category or claimants; and Provided
further;

"(A) That if the financial institution in default is a Bank
Insurance Fund member, the Corporation may only make such
payments out of fund held in the.Bank Insurance Fund of the
Deposit Insurance Fund; and

"(B) That if the financial institution in default is an a
Savings Association Insurance Fund member, the Corporation
may only make such payments out of funds held in the Savings
Association Insurance Fund of the Deposit Insurance Fund.

"(3) The Corporation may make the payments or credit the
amounts specified in paragraph (2) directly to the claimants
or may make such payments or credit such amounts to an open
insured financial institution to induce the open insured
financial institution to accept liability for such claims.

"(1) RULE-MAKING AND CLAIMS DETERMINATION AUTHORIZED.—

"(1) The Corporation shall have power to make rules and
regulations for the conduct of conservatorships and of

- 91 -

receiverships and the Corporation may, by regulation or
order, provide for the exercise of functions by members or
stockholders, directors, or officers of a financial
institution during conservatorship or receivership.

The

Corporation shall also have the power to determine claims in
accordance with rules and regulations it shall prescribe and
subject to judicial review as herein provided.

"(2) The authority to determine claims shall only be
exercised after the Corporation has established rules or
regulations governing the processing of claims, the
accounting of estate funds, and the distributing of residual
funds to shareholders.

Final determinations made by the

Corporation with respect to claims asserted against the
estate of a financial institution shall be reviewable by the
Court of Appeals for the District of Columbia Circuit or the
Court of Appeals for the circuit where the financial
institution is located and shall be upheld unless found to
be arbitrary or capricious.

"(3) In the absence of rules and regulations established by
the Corporation for the resolution of claims against the
estate of the financial institution, any action or
proceeding against a financial institution for which the
Corporation has been appointed receiver, or against the
Corporation as receiver of such financial institution, shall

- 92 -

be brought in the district or territorial court of the
United States held within the district in which that
financial institution's principal place of business is
located, or, in the event any State, county, or municipal
court has jurisdiction over such an action or proceeding, in
such court in the county or city in which the financial
institution's principal place of business is located.

"(m) JUDICIAL REVIEW—Except as provided in this section,
no court may take any action, except at the request of the
Board of Directors by regulation or order, to restrain or
affect the exercise of powers or functions of the
.Corporation as a conservator or receiver."

SEC. 212. FSLIC RESOLUTION FUND. - There is hereby added after
Section 11 of the Federal Deposit Insurance Act a new section 11A
(12 U.S.C. 1821A) to read as follows:

"Sec. 11A. FSLIC RESOLUTION FUND- (a) ESTABLISHED. There is
hereby established a separate fund to be designated as the FSLIC
Resolution Fund which shall be managed by the Corporation and
separately maintained and not commingled.

On the date of the

dissolution of the Federal Savings and Loan Insurance Corporation
in accordance with section 401 of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, all reserves and
all other assets of any kind, and debts, obligations, contracts

- 93 -

and other liabilities of the Federal Savings and Loan Insurance
Corporation, matured or unmatured, accrued, absolute, contingent,
or otherwise shall hereby be transferred in their entirety to the
FSLIC Resolution Fund; provided however that such liabilities
transferred to the FSLIC Resolution Fund shall not include
liabilities specifically transferred pursuant to section 21a of
the Federal Home Loan Bank Act.

Such reserves assets, debts,

obligations, contracts, or other liabilities as are so
transferred shall be exclusive assets-and liablities of the FSLIC
Resolution Fund and not of the Corporation and shall not be
consolidated with the assets and liabilities of the Deposit
Insurance Fund or the Corporation for accounting or reporting or
any other purpose.

"(b) SOURCE OF FUNDS. The FSLIC Resolution Fund shall be funded
from the following sources in the listed priority to the extent
funds are needed: (i) miscellaneous income from assets of the
Federal Savings and Loan Insurance Corporation that were
transferred to the FSLIC Resolution Fund on the date of enactment
of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989; (ii) the proceeds of the resolution of insolvent
thrift institutions which became insolvent prior to December 31,
1988, to the extent such funds are not required by the Resolution
Funding Corporation pursuant to section 21b of the Federal Home
Loan Bank Act;

(iii) proceeds from borrowings by the Financing

Corporation pursuant to section 21 of the Federal Home Loan Bank

- 94 -

Act; (iv) all amounts assessed Savings Association Insurance Fund
members by the Corporation pursuant to section 7 from the date of
enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, and not required by the Financing
Corporation pursuant to section 21 of the Federal Home Loan Bank
Act, or for the Resolution Trust Corporation pursuant to section
21a of the Federal Home Loan Bank Act, which shall be covered
into the FSLIC Resolution Fund until December 31, 1991.

"(c) TREASURY BACKUP. In the event that all the above funds are
insufficient for the funding purposes of the FSLIC Resolution
Fund, the Secretary of the Treasury shall, subject to the
availability of appropriations, provide such,excess.funds
determined by the Federal Deposit Insurance Corporation and the
Secretary to be necessary for FLSIC Resolution Fund purposes.
There are hereby authorized to be appropriated to the Secretary
of the Treasury, without fiscal year limitation, such sums as may
be necessary to carry out the provisions of this paragraph.

"(d) LEGAL PROCEEDINGS. Notwithstanding any other provision of
law, any judgment resulting from civil action, suit, or
proceeding to which the Federal Savings and Loan Insurance
Corporation was a party prior to its dissolution hereunder, or
which is initiated against the Corporation or its assets
thereafter, shall be limited to the assets of the FSLIC
Resolution Fund.

- 95 -

"(e)

DISSOLUTION.

The FSLIC Resolution Fund shall be dissolved

upon satisfaction of all debts and liabilities and sale of all
assets acquired in case resolutions and otherwise.

Upon

dissolution any remaining funds shall be covered into the
Treasury, provided that any tangible assets, including offices
and office supplies, shall be transferred to the Corporation for
use by and to be held as asset of the Savings Association
Insurance Fund."

Sec. 213. AMENDMENTS TO SECTION 12. - Section 12 of the Federal
Deposit Insurance Act (12 U.S.C. 1822) is hereby amended as
follows:

(1) The words "closed bank" are deleted wherever they occur, and
the words "financial institution in default" are inserted in
lieu thereof;

(2) Subsection (a) is amended to read as follows:

"(a) BOND NOT REQUIRED; AGENTS; FEE.—Notwithstanding any
other provision of law, State or Federal, or the
constitution of any State, the Corporation as receiver of an
insured financial institution or branch of a foreign bank
shall not be required to furnish bond and shall have the
right to appoint an agent or agents to assist it in its
duties as such receiver, and all fees, compensation, and

- 96 -

expenses of liquidation and administration thereof shall be
fixed by the Corporation, and may be paid by it out of funds
coming into its possession as such receiver."

(3) In subsection (d), the words "as a stockholder or the closed
bank, or of any liability of such depositor" are deleted;
and the words "such bank" are deleted and "such financial
institution" are inserted in lieu thereof.

Sec. 214. AMENDMENTS TO SECTION 13. - Section 13 of the Federal
Deposit Insurance Act (12 U.S.C. 1823) is amended as follows:

(1) Subsection (a) is amended to read as follows:

"(a) INVESTMENT OF CORPORATION FUNDS.—

"(1) AUTHORITY.—Funds belonging to the Corporation and
held in either the Bank Insurance Fund or the Savings
Association Insurance Fund that are not otherwise employed
shall be invested in obligations of the United States or in
obligations guaranteed as to principal and interest by the
United States:

Provided, that funds held in the Bank

Insurance Fund and the Savings Association Insurance Fund
shall be invested separately and not commingled.

"(2) LIMITATION.—The Corporation shall not sell or

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purchase any such obligations for its own account and in its
own right and interest, at any one time aggregating in
excess of $100,000, without the approval of the Secretary of
the Treasury.

The Secretary of the Treasury may waive the

requirement of his approval with respect to any transaction
or classes of transactions subject to the provisions of this
subsection for such period of time and under such conditions
as he may determine."

Subsection (b) is amended as follows:

(a) by deleting the words "banking and checking" -wherever
they occur, and inserting the word "depository" in lieu
thereof*;

(b) by deleting the word "bank" wherever it occurs, and
inserting the words "financial institution" in lieu thereof,
except the the phrase "Federal Reserve bank" shall remain
unchanged.

Subsection (c) is amended as follows:

(a) The words "closing or "closed" are deleted wherever
they occur, and the words "default" or "in default" are
inserted in lieu thereof respectively;

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(b)

Notwithstanding Section 201 of this Act, the term

"closed insured bank" is deleted wherever it occurs and the
term "insured financial institution in default" is inserted
in lieu thereof;

(c) In subparagraph (2)(A), the words "insured institution"
are deleted wherever they occur and the words "another
insured financial institution" are inserted in subparagraph
(2)(A) in lieu thereof, and the words "such other insured
financial institution" are inserted in subparagraph
(2)(A)(ii) and (iii) in lieu thereof;

(d) In paragraph (2), a new subparagraph (2)(C) is added to
read as follows:

"(C) Any action to which the Corporation is or becomes
a party by virtue of its acquisition of any asset or
exercise of any other authority set forth in this
section shall be stayed for a period of ninety days at
the request of the Corporation.";

(e) In paragraph (3) the words "section 13(f) of this Act"
are deleted, and the words "subsections (f) and (g) hereof"
are inserted in lieu thereof;

(f)

In paragraph (4), the word "banking" is deleted and the

- 99 -

word "financial" is inserted in lieu thereof, and the
following new sentences are inserted immediately after the
period at the end of paragraph (A):

"In determining the cost of assistance, the Corporation
shall consider the immediate and long-term obligations
of the Corporation with respect to such assistance,
including contingent liabilities.

The Corporation

shall also consider the Federal tax revenues foregone
by the government, to the extent reasonably
ascertainable, as a result of the provisions of the
Technical and Miscellaneous Revenue Act of 1988
providing specific tax benefits to acquirers of
financial institutions in default or in danger of
default or to such institutions as a result of
assistance provided by the Corporation, or any similar
statutory provision."; and

(g) By redesignating existing paragraph (6) and (7) as
paragraphs (7) and (8); and by deleting existing paragraph
(8); and by inserting a new paragraph (6) to read as
follows:

"(6) Notwithstanding any other provision of law, State
or Federal, or the constitution of any State, the
transfer of any assets or liabilities associated with

- 100 -

any trust business of an insured financial institution
in default under subparagraph (2)(A) shall be effective
without any further approval, assignment, or consent
with respect thereto."

(4) Subsections (d) and (e) are amended to read as follows:

"(d) SALE OF ASSETS TO CORPORATION.—Conservators,
receivers, or liquidators of insured financial institutions
in default shall be entitled to offer the assets of such
financial institutions for sale to the Corporation or as
security for loans from the Corporation.

The proceeds of

every such sale or loan shall be utilized for the same
purposes and in the same manner as other funds realized from
the liquidation of the assets of such financial
institutions.

The Corporation, in its. discretion, may make

loans on the security of or may purchase and liquidate or
sell any part of the assets of an insured financial
institution which is now or may hereafter be in default.

"(e) AGREEMENTS AGAINST INTERESTS OF CORPORATION.—No
agreement which tends to diminish or defeat the right, title
or interest of the Corporation in any asset acquired by it
under this section or section 11, either as security for a
loan or by purchase or as receiver of any insured financial
institution, shall be valid against the Corporation unless

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such agreement (1) shall be in writing, (2) shall have been
executed by the financial institution and the person or
persons claiming an adverse interest thereunder, including
the obligor, contemporaneously with the acquisition of the
asset by .the financial institution, (3) shall have been
approved by the board of directors of the financial
institution or its loan'committee, which approval shall be
reflected in the minutes of said board or committee, and (4)
shall have been, continuously, from the time of its
execution, an official record of the financial institution."

(5) Subsection (f) is amended as follows:

(a) Notwithstanding section 201 of this Act, subsection (f)
shall not be amended to delete the term "insured bank" and
insert the term "insured financial institution";

(b) The words "closed" and "closing" are deleted wherever
they occur and the words "in default" or "default" are
inserted in lieu thereof respectively;

(d) The word "depository" is deleted wherever it occurs and
the word "financial" is inserted in lieu thereof;

- 102 -

(e) In subparagraph (3)(E) the word "relevant" is added
before the words "State supervisor"; and a new sentence is
added at the end thereof to read as follows:

"The "relevant State supervisor" means the State
supervisor having authority to supervise the
financial institution in danger of default."

(f) In subparagraph (6)(A) the words "the offeror which
made the initial lowest acceptable offer and" are inserted
after "the Corporation shall permit";

(g) Paragraph (7) is amended by adding a new subparagraph
(7)(C) to read as follows:

"(C) if in the opinion of the Corporation the
acquisition threatens the safety and soundness of
the acquiror or does not result in the future
viability of the resulting financial institution.";

(h) In paragraph (8), subparagraphs (A), (B), (C), (D), (F)
and (G) are deleted and subparagraph (E) is redesignated to
become paragraph (8); and

(i) Paragraph (9) is amended as follows: (i) in the

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paragraph heading the word "nonbank" is deleted and the word
"certain" is inserted in lieu thereof; (ii) in subparagraph
(9)(A), the words ", other than a subsidiary that is an
insured bank," are added after the word "subsidiary" and the
phrase "which is not an insured bank" is deleted; and (iii)
in subparagraph (9)(B) the words "or an affiliate of an
insured bank" are added after the words "intermediate
holding company;" in the sentence.

(6) In subsection (h), the terms "a closed insured bank",
"closing" and "insurance fund" are deleted, and the terms "an
insured financial institution in default," "default" and "Bank
Insurance Fund" are inserted in lieu thereof respectively.

(7) Subsection (i) is amended:

(a) by inserting the word "financial" before the word
"institution" wherever it occurs;

(b) in subparagraph (1)(C) by deleting the words "chartered
bank" and inserting "financing institution" in lieu thereof,
by adding the words "a savings association," after "State
member bank," and by adding "Chairman of the Federal Home
Loan Bank System," after "Federal Reserve System,"; and

(c)

in paragraph (5)(C) by deleting the words "greater than

- 104 -

zero and".

(8) Section 408(m) of the National Housing Act, as amended (12
U.S.C. 1730a(m)), is hereby transferred to and shall become part
of the Federal Deposit Insurance Act, as amended, at Section 13
and shall become subsection (k) thereof (12 U.S.C. 1823(k)), and
is further amended as follows:

(a) After transfer to the Federal Deposit Insurance Act,
the term "Corporation" shall mean the Federal Deposit
Insurance Corporation;

(b) , By deleting the words "insured institution", "an
insured institution" and "insured institutions" wherever
they appear and inserting in lieu thereof "Savings
Association Insurance Fund member", "a Savings Association
Fund member: and "Savings Association Insurance Fund
members" respectively;

(c) By deleting the words "depository institution" and
"depository institutons" wherever they occur and inserting
in lieu thereof "financial institution" and "financial
institutions" respectively;

(d) Notwithstanding Section 201 of this Act, subparagraph
(A)(i) of paragraph (1) shall not be amended to delete the

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term "insured bank" and insert the term "insured financial
institution".

(e) In subparagraph (l)(A)(i), the phrase "this section" is
deleted and the phrase "section 10 of the Home Owners' Loan
Act of 1933, as amended," is inserted in lieu thereof, and
the words "section 1729(f) of this title" are deleted, and
the words "subsection (c) are inserted in lieu thereof;

(f) In subparagraph (l)(A)(iii), the words "the party
thereto that is not an insured institution" are deleted, and
the words "every party thereto" are inserted in lieu
thereof;

(g) The language in subparagraph (l)(A)(iv) is deleted and
the following language is inserted in lieu thereof:

"In authorizing any transactions under this
subsection, the Corporation must obtain the prior
concurrence of (i) the Chairman of the Federal Home
Loan Bank System in connection with the override of
any provisions of the laws or constitution of any
State or any provision of Fedeal law other than
section 10(e)(3) of the Home Owners' Loan Act of
1933, as amended; and (ii) the Board of Governors
of the Federal Reserve System in connection with

- 106 -

the override of the provisions of the Federal
Reserve Act or the Bank Holding Company Act."

(h) Subparagraph (l)(B)(iii) is amended:

(i) by deleting in the first sentence everything after
the words "only by", and inserting in lieu thereof the
words "a vote of seventy-five per centum or more of the
voting members of the Board of Directors."; and

(ii) by deleting in the second sentence the words
"Federal Home Loan Bank Board" and inserting in lieu
thereof the words "the Corporation";

(i) Subparagraph (3)(A) is amended:

(i) by deleting the words "savings and loan holding
company" and inserting "holding company that controls a
Savings Association Insurance Fund member" in lieu
thereof; and

(ii) by inserting after the words "shall permit" the
words "the offer or which made the lowest acceptable
offer and";

(j) In subparagraph (3)(C), insert the word "financial"

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before the words "institution" and "institutions";

(k) Amend paragraph (4):

(i) by deleting the language in subparagraph (A) and
inserting in lieu thereof the following language:

"the term 'of the same type' means financial
institutons that are 'savings associations' as
defined in section 10(a) of the Home Owners' Loan
Act of 1933, as amended, or holding companies
thereof; and"

(ii)

in subparagraph (B), by deleting the words

term 'in-State deposit ory inst itution or in-Stat
depository ins titution holding company1' means" a
inserting in 1 ieu thereof the words "a financial
insti tution is 'within the same State' where the
financial inst itution is".

Sec. 215.

BORROWING AUTHORITY.

Section 14 of the Federal

Deposit Insurance Act (12 U.S.C. 1824) is hereby amended as
follows:

(1) by deleting "$3,000,000,000" and inserting in lieu

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thereof "$5,000,000,000, subject to the approval of the
Secretary of the Treasury"; and

(2) by adding at the end of the section the following:

"The Corporation may employ such funds for purposes of
the Bank Insurance Fund or the Savings Association
Insurance Fund and the borrowing shall become a
liability of each such fund to the extent funds are
employed therefore."

Sec. 216. LIMITATION ON BORROWINGS. - Section 15 of the Federal
Deposit Insurance Act (12 U.S.C. -1825) is hereby amended as.
follows:

(1) by redesignating the existing paragraph as subsection (a)
and by adding at the end thereof the following:

"and such State, territorial, county, municipal or local
taxation shall be the only type of State, territorial,
county, municipal, or local tax to which the Corporation for
itself or as receiver of an insured financial institution
shall be subjected.

Further, the failure of an insured

financial institution to pay or remit any State,
territorial, county, municipal, or other local tax shall not
subject the Corporation as receiver or conservator of that

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financial institution to any penalty, forfeiture, or
limitation with respect to the enforceability of any right,
title, or interest the Corporation as receiver or
conservator may have and such failure to pay the tax shall
only result in a claim for such tax against the estate of
the financial institution."; and

(2) by adding a new subparagraph(b) to read as follows:

"All notes, debentures, bonds, or other similar obligations
including estimated losses for guarantees or other
liabilities, of the Bank Insurance Fund or the Savings
Association Insurance Fund (other than obligations to the
Treasury) outstanding at any one time, may not exceed 50 per
centum of the net worth of the Bank Insurance Fund or the
Savings Association Insurance Fund, respectively, as
calculated based on the most recent audit by the General
Accounting Office, or $10,000,000,000 to each fund,
whichever is less.

Sec. 217. REPORTS. - Section 17 of the Federal Deposit Insurance
Act (12 U.S.C. 1827) is hereby amended:

(1) By striking out subsection (a) and inserting in lieu thereof
the following:

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"(a)

The Corporation shall annually submit a full report of

its operations, activities, budget, receipts and expenditures for
the preceding 12-month period.

Such report shall be submitted to

the President of the Senate and the Speaker of the House of
Representatives, who shall cause the same to be printed for the
information of Congress, and the President as soon as practicable
after the first day of January each year."

(2) By redesignating subsections (b), (c) and (d) as (c), (d)
and (e) respectively, and by adding a new subsection

(b) to read

as follows:

*(b) As soon as practicable, prior^to the beginning of each
fiscal quarter, the Corporation shall submit a report to the
Secretary of the Treasury and the Director of the Office of
Management and Budget with respect to the Corporation's financial
operating plans and forecasts (including estimates of actual and
future spending, and estimates of actual and future non-cash
obligations) taking into account the Corporation's financial
commitments, guarantees and other contingent liabilities.
Nothing herein implies in and of itself any obligation on the part
of the Corporation to obtain the consent or approval of the
Secretary or the Director of the plans and forecasts provided
pursuant hereto."

Sec 218. REGULATIONS GOVERNING INSURED FINANCIAL INSTITUTIONS.

- Ill -

- Section 18 of the Federal Deposit Insurance Act (12 U.S.C.
1828) is hereby amended as follows:

(1) Subsection (a) is amended by adding before the period in the
first sentence the following:

"; Provided further that such signs displayed by
financial institutions will further represent whether
the financial institution is a Bank Insurance Fund
member or a Savings Association Insurance Fund member."

(2) Subsection (c) is amended —

(a) in paragraph (2), by deleting subparagraph (C) and
inserting in lieu thereof the following:

"(C) the Corporation if the acquiring, assuming, or
resulting bank is to be a State nonmember insured
bank (except a District bank or a savings bank
supervised by the Federal Home Loan Bank System);
and

"(D) the Federal Home Loan Bank System if the
acquiring, assuming, or resulting institution is to
be a savings association.";

- 112 -

(b) by deleting subparagraph (12);

(c) in subparagraphs (3), (4), (6), (7) and (9), by
adding after the word "bank" or "banks" each time it
appears, the words "or savings association" or "or
savings associations", respectively.

(d) in subparagraph (3), the word "failure" is deleted,
and the word "default" is added in lieu thereof.

(3) Subsection (d) is amended by adding after "(except a
District bank)" each time they appear, the words "or savings
bank supervised by the Federal Home Loan Bank System.

(4) Subsection (i) is amended —

(a) in paragraph (1) by deleting the words
"nonmember bank (except a District bank)" and
replacing in lieu thereof the words "financial
institution (except a member bank or a District
bank)";

(b) in paragraph (2):

(i)

by adding before the period the following

- 113 -

"; (D) the Federal Home Loan Bank System if the
resulting institution is to be a State savings
association or a savings bank to be supervised by the
Federal Home Loan Bank System; and

(ii) in subsection (C), by adding after the words
"resulting bank" the words "or savings association",
and by adding after the words "(except a District
bank)" the words "a savings bank to be supervised by
the Federal Home Loan Bank System)."

(5) By inserting the following new subsections after
subsection (1) therein:

"(m) ACTIVITIES OF SAVINGS ASSOCIATIONS
SUBSIDIARIES.

—

"(1) PROCEDURES. — Whenever an insured savings
association establishes or acquires control of a
company or whenever an insured savings association
elects to conduct any new activity through a
company that the insured savings association
controls, the insured savings association:

"(A) shall notify the Corporation and the Federal

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Home Loan Bank System not less than 30 days prior
to the establishment, or acquisition, of any such
new company, and not less than 30 days prior to the
commencement of any such activity, and in either
case shall provide at that time such information as
each such agency may, by regulation, require;

"(B) except as provided in subsection 5(t)(l) of
the Home Owners' Loan Act, as amended, shall deduct
its entire investment in and loans and other
financial accommodations to the company from its
own capital for the purposes of determining capital
adequacy if the company is engaged in activities
not permissible for a national bank; and

"(C) shall conduct the activities of the company in
accordance with such rules, regulations and orders
as may be established by the Federal Home Loan Bank
System.

"(2) ENFORCEMENT POWERS. — With respect to any
company controlled by an insured savings
association:

"(A) the Corporation and the Federal Home Loan
Bank System shall each have, with respect to such

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company, the respective powers and authorities that
each may possess with respect to the insured
savings association pursuant to this section or to
section 8; and

"(B) the Federal Home Loan Bank System shall have
authority to determine, after notice and
opportunity for hearing, that the continuation by
the insured savings association of its ownership or
control of, or its relationship to, the company
constitutes a serious risk to the financial safety,
soundness or stability of the insured savings
association is inconsistent with sound banking
principles or with the purposes of this Act, and
upon making any such determination the agency shall
have authority to order the insured savings
association to divest itself of control of the
company; the Federal Home Loan Bank System shall
also have the authority to take any other
corrective measures with respect to the company,
including the authority to have the company
terminate the activities or operations posing such
risks, as the agency may deem appropriate.

"(3) ACTIVITIES INCOMPATIBLE WITH DEPOSIT
INSURANCE.

—

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"(A)

The Corporation shall have authority to

determine by regulation of general applicability to
all State-chartered Savings Association Insurance
Fund members that any specific activity after
determination by the.Board of Directors poses a
serious threat to the Savings Association Insurance
Fund:

Provided, that prior to adopting any such

regulation, the Corporation shall consult with the
Chairman of the Federal Home Loan Bank System and
shall provide appropriate State supervisors the
opportunity to review such regulation and comment
thereon, and the Corporation shall specifically
take such comments into consideration.

Upon

issuing such a regulation with respect to an
activity, the Corporation may order that no Savings
Association Insurance Fund member may engage in any
activity directly that is not permissible for a
federal savings and loan association under the Home
Owners' Loan Act.

In addition, no Savings

Association insurance Fund member shall be or
become liable for the liabilities or obligations
arising out of any such activity conducted
indirectly, except to the extent such liability or
obligation (i) is in writing, (ii) shall have been
executed by the member and person or entity to whom
the liability or obligation is owed either

- 117 -

contemporaneously with the creation of the
liability or obligation, or if the liability or
obligation was created prior to the effective date
of the FIRREA, within 120 days of the effective
date of the FIRREA, (iii) has been approved by the
Board of Directors or an official committee of the
member, and (iv) shall have been, continuously,
from the time of its creation, an official record
of the bank.

"(B) Nothing in this section shall limit the
authority of the Federal Home Loan Bank System to
issue regulations to promote safety and soundness
or to enforce compliance with other applicable
laws.

"(4) "COMPANY" DEFINED. — As used in this subsection
(m), the term "company" shall not include an
insured financial institution.

"(5) Nothing contained in subsection (m) shall derogate
from the rights and authorities of the Corporation
under other provisions of law."

Sec. 219. NONDISCRIMINATION. - Section 22 of the Federal Deposit
Insurance Act (12 U.S.C. 1830) is hereby amended to read as

- 118 -

follows:

"It is not the purpose of this chapter to discriminate
in any manner against State nonmember banks or State
savings associations and in favor of national or member
banks or Federal savings associations, respectively;
but the purpose is to provide all banks and savings
associations with the same opportunity to obtain and
enjoy the benefits of this chapter."

TITLE III - SAVINGS ASSOCIATION SUPERVISION IMPROVEMENTS.

Sec 301. DEFINITIONS. - Section 2 of the Home Owners' Loan Act
of 1933 (12 U.S.C. 1462) is hereby amended as follows:

(1) by amending subsection (a) to read as follows:

"(a) The term "Chairman" means the Chairman of the Federal
Home Loan Bank System.";

(2) by amending subsection (b) to read as follows:

"(b) The term "System" means the "Federal Home Loan Bank
System",

- 119 -

(3)

by amending subsection (c) to read as follows:

"(c) The term "savings association" means any institution
that was supervised by the Federal Savings and Loan Insurance
Corporation immediately prior to the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, a
Federal savings and loan association or Federal savings bank, a
building and loan, savings and loan or homestead association, a
cooperative bank or a state savings bank that is a member of the
Savings Association Insurance Fund, the deposits of which are
insured by the Federal Deposit Insurance Corporation.

(4) by amending subsection (d) to read as follows:

"(d) The term "federal savings association" means a Federal
savings and loan association or a Federal savings bank chartered
under section 5 of this title.",

(5) by adding new subsection (e) to read as follows:

"(e) The term "Federal banking agencies" means the Office
of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, and the Federal Deposit Insurance
Corporation." and

Sec. 302. SUPERVISION OF SAVINGS ASSOCIATIONS. - (a) The Home

- 120 -

Owners' Loan Act of 1933, as amended, is hereby further amended
by inserting a new Section 3 as follows:

"Section 3 SUPERVISION OF SAVINGS ASSOCIATIONS. (a) The
Chairman is authorized to provide for the examination, safe and
sound operation, and regulation of savings associations.

The

Chairman may issues rules and regulations, including regulations
defining the terms used in this chapter, to carry out the
responsibilities of the Chairman, or the System.

The authorities

conferred by this section are intended to encourage savings
associations to maintain their role of providing credit for
housing in a manner consistent with principles of safe and sound
operation.

"(b) The Chairman shall by regulation prescribe uniform
accounting and disclosure standards for all savings associations
to be used in determining their compliance with all applicable
rules and regulations.

These uniform accounting standards shall

incorporate generally accepted accounting principles to the same
degree that generally accepted accounting principles are used to
determine compliance with rules and regulations issued by the
Federal banking agencies, shall require full compliance therewith
no later than the schedule provided in 12 C.F.R. Section 563, and
shall be coordinated with the capital standards established by
the Chairman pursuant to section 5 (t)(l) of this Act, provided
that there will be no deviation from full compliance with the

- 121 -

uniform accounting standards after December 31, 1993.

"(c) The rules, regulations and policies of the Chairman
governing the safe and sound operation of savings associations,
including policies governing asset classification and appraisals,
shall be no less stringent than those of the Office of the
Comptroller of the Currency.

"(d) No savings association shall make loans beyond one
hundred miles from its principal office except (1) loans in the
area beyond such one hundred mile limit in which it was operating
prior to June 27, 1934, and (2) loans which are made pursuant to
regulations of the Federal Home Loan Bank System:

Provided, that

any loan made beyond fifty^miles from the savings association's
principal office (and outside the territory in which it was
operating on such date also shall be subject to such
regulations.".

(b) Section 409 of the National Housing Act (12 U.S.C.
1730b) relating to investment of certain funds in accounts of
savings associations is hereby transferred to and shall become a
part of the Home Owners' Loan Act of 1933 as new Section 3(e)
hereof and is further amended by replacing the words
"institutions insured by the Corporation," with "savings
associations, to the extent they are insured by the Federal

- 122 -

Deposit Insurance Corporation".

(c) Section 410 of the National Housing Act (12 U.S.C.
1730c) relating to participation by savings associations in
lotteries and related activities is hereby transferred to and
shall become part of the Home Owners' Loan Act of 1933, amended,
at Section 3(f), and is further amended by deleting the term
"insured institution" and "institution" each time they appear and
inserting in lieu thereof the term "savings association".

(d) Section 413 of the National Housing Act (12 U.S.C.
1730f) relating to disclosures with respect to certain federally
related mortgage loans is hereby transferred to and shall become
a part of the Home Owners' Loan Act of 1933 as new Section 3(g)
thereof and is further amended by replacing the words "insured
institution" and "institution," wherever they appear in that
section, with the words "savings associations".

(e) Section 414 of the National Housing Act (12 U.S.C.
1730g) relating to state usury override for certain loans is
hereby transferred to and shall become a part of the Home Owners'
Loan Act of 1933 as new Section 3(h) hereof and is further
amended by:

(1) replacing the terms "insured institution" and
"institution," wherever they appear in that section, with the

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term "savings association"; and

(2) deleting the words "(which, for the purpose of this
section, shall include a Federal association the deposits of
which are insured by the Federal Deposit Insurance Corporation)".

(f) Section 403 of the National Housing Act (12 U.S.C.
1726(b)) relating to the form and maturity of securities is
hereby transferred to and shall become a part of the the Home
Owners' Loan Act of 1933 as a new section Section 3(i) hereof to
provide as follows:

".(i) No savings association shall issue securities which
guarantee a definite maturity except with the specific approval
of the System, or issue any securities the form of which has not
been approved by the System.".

Sec 303. APPLICABILITY. - The Home Owners' Loan Act of 1933, as
amended, is further amended by adding new section 4 as follows:

"Section 4. Applicability. (a) The following sections of
this Act apply to all savings associations:

sections 3, 5(d),

5(f), 5(i), 5(o), 5(p), 5(q), 5(s), 5(t), 5(u), 5(v), 6, 7, 9,
10, 11, and 12.

"(b) The following sections of this Act apply to Federal

- 124 -

savings associations:

sections 5(b), 5(c), 5(e), 5(g), 5(h),

5(j), 5(1), 5(m), 5(n), 5(r), and 8.".

Sec. 304. CONFORMING NAME CHANGES. - Section 5 of the Home
Owners' Loan Act of 1933 (12 U.S.C. Section 1464) is hereby
amended, as follows":

(1) Except as otherwise provided in this section, all references
to "association," "Federal association," or "Federal savings and
loan association" shall be replaced with "Federal savings
associations," in the following subparts:

5(b), (c), (g),

(h),(i), (j), (1), (n), (p) and (r) (12 U.S.C. 1464(b), (c), (g),
(h), (i), (j)., (.1), (n), (p) and (r), respectively).

(2) All references to "association" shall be replaced with
"savings association," in the following subparts:

(5)(d), (f),

(k), (o), (q), and (s) (12 U.S.C. 1464(d), (f), (k), (o), (q),
and (s), respectively).

(3) The following miscellaneous changes and exceptions to the
foregoing portions of this section are as follows:

(A) References to "associations" in subsections
5(c)(1)(D), and (F) (12 U.S.C. 1464(c)(1)(D), (F)) shall remain
unchanged.

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(B)

References to "savings and loan association"

in subpart 5(c)(l)(R) (12 U.S.C. 1464(c)(1)(R)) shall be amended
by deleting "and loan."

(C) References to "association" in subparts
5(i)(3)(A)(iv)-(v) and 5(i)(3)(B)(ii)(12 U.S.C.
1464(i)(3)(A)(iv)-(v), (B)(ii)) shall be replaced with "savings
associations."

(D) The reference to "building and loan" in
subpart 5(m) (12 U.S.C. 1464(m)) shall be replaced with
"savings."

(E) The reference to "mutual savings and loan
association" in subpart 5(p)(l) (12 U.S.C. 1464(p)(l)) shall be
replaced with "mutual savings association."

(F) The reference to "domestic building and loan
assocaition" in subpart 5(r)(l) (12 U.S.C. 1464(r)(l) shall
remain unchanged.

Sec. 305 SAFETY AND SOUNDNESS. Section 5(a) of the Home Owners'
Loan Act of 1933 (12 U.S.C. 1464 (a)), is hereby amended by
inserting after the words "credit for housing" the words
"consistent with the safe and sound operation of Federal savings
associations".

- 126 -

Sec. 306.

DEPOSITS. - Section 5(c) of the Home Owners' Loan Act

of 1933, as amended (12 U.S.C. 1464(c)), is hereby amended by
revising paragraph (c)(1)(G) to read as follows:

"(G) Deposits. Investments in time deposits, savings
accounts certificates, or accounts of any financial institution,
the deposits of which are insured by the Federal Deposit
Insurance Corporation."

Sec 307. SUPERVISORY REVISIONS. - (a) Section 5(d) of the Home
Owners' Loan Act is amended by deleting paragraphs 2 through 5, 7
through 10, 12(a), 13 and 15.

(b) Section (5)(d)(l) of the Home Owners' Loan Act of 1933
shall be hereby redesignated as (5)(d)(1)(A).

(c) Section 407(m) of the National Housing Act (12 U.S.C.
1730(m)) is hereby transferred to and shall become a part of the
Home Owners' Loan Act of 1933, as amended, at section
(5)(d)(1)(B) and is further amended by substituting the term
"savings association" for the terms "institution" and "insured
institution", and the term "savings associations" for the terms
"institution" and "insured institutions", deleting the phrase "on
behalf of the Corporation" and substituting the term "System" for
"Corporation" everywhere else it appears and is further amended
by redesignating paragrahs (m)(l) through (m)(4) as clauses

- 127 -

(5)(d)(l)(B)(i) through (5)(d)(1)(B)(iv) respectively.

Sec. 308. RECEIVERSHIPS. - Section 5(d)(6) of the Home Owners'
Loan Act of 1933 (12 U.S.C. 1464(d)(6)) is redesignated as
Section 5(d)(2).and is hereby amended:

(1) by deleting the words "the Federal Savings and Loan
Insurance Corporation or" from subparagraph (B) thereof;

(2) Subsections (C), (D), and (E) of section 5(d)(2) as
redesignated of the Home Owners' Loan Act of 1933 are hereby
redesignated as (D), (E), and (F) and a new subsection (C) is
added to read as follows:

"(C) Notwithstanding any other provision of law, State or
Federal, or the constitution of any State, or of this section,
the System shall have power and jurisdiction to appoint the
Federal Deposit Insurance Corporation as sole conservator or
receiver of an insured State savings association, in the event
that the System determines that any of the following grounds for
the appointment of a conservator or receiver exist with respect
to such financial institution:

"(i) insolvency in that the assets of the financial
institution are less than its obligations to its creditors and
others,

- 128 -

"(ii)

substantial dissipation of assets or earnings due to

any violation or violations of law, rules, or regulations, or to
any unsafe or unsound practice or practices, or

"(iii) an unsafe or unsound condition to transact business.

"(B) In such cases the Federal Deposit Insurance
Corporation shall have powers and duties specified in subsection
(c) and in subsection (1) of section 11 of the Federal Deposit
Insurance Act.

"(C)(i) The authority conferred by this paragraph (2) shall
not be exercised without the written approval of the State
official having jurisdiction over the insured State financial
institution that the grounds specified for such exercise exist.

"(ii) If such approval has not been received within 30 days
of receipt of notice to the State that the System has determined
such grounds exist, and the System has responded in writing to
the State's written reasons, if any, for withholding approval,
then the System may proceed without State approval."

(3) by deleting the words "Federal Savings and Loan Insurance
Corporation" from redesignated subparagraph (E) thereof and
substituting the words "Federal Deposit Insurance Corporation";
and

- 129 -

(4)

by deleting the last sentence of redesignated subparagraph

(E) thereof.

Sec. 309. TECHNICAL AMENDMENT. - Section 5(d)(11) of the Home
Owners' Loan Act of 1933 is redesignated as Section 5(d)(3).

Sec. 310. TECHNICAL AMENDMENT. - Section 5(d)(12) of the Home
Owners' Loan Act of 1933 is redesignated as (5)(d)(4) and is
further amended by redesignating existing paragraphs (A) and (B)
as (B) and (C) respectively.

Sec. 311. AMENDMENT TO SECTION 5. - Section 5(d)(14) of the Home
Owners' Loan Act of 1933 is redesignated as Section 5(d)(5) and
is amended to read as follows:

"(3)(A) As used in this subsection, the term "savings
association" includes any former savings association that retains
deposits insured by the Federal Deposit Insurance Corporation
notwithstanding termination of its status as an institution
insured by such corporation and any Federal savings bank whose
deposits are insured by the Federal Deposit Insurance
Corporation, and any former Federal savings bank that retains
deposits insured by the Federal Deposit Insurance Corporation
notwithstanding termination of its status as an insured bank.

"(B) References in this subsection to savings account

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holders and to members of savings associations shall be deemed to
be references to holders of withdrawable accounts in savings
institutions over which the System has any statutory power of
examination or supervision as provided in this paragraph, and
references therein to boards of directors of savings associations
shall be deemed to be references to boards of directors or other
governing boards of such associations.

The System shall have

power by regulation to define, for the purposes of this
paragraph, terms used or referred to in the preceding sentence
and other terms used in this subsection.".

Sec. 312. TECHNICAL AMENDMENT. - Section 5(d)(16) of the Home
Owners' Loan Act of 1933 (12 U.S.C. 1464(d)(16) is redesignated
as section 5(d)(6) (12 U.S.C. 1464(d)(6)).

Sec. 313. CONVERSIONS. - Section 5(i) of the Home Owners' Loan
Act of 1933 (12 U.S.C. 1464(i)) is hereby amended by deleting
paragraph (2) and inserting in lieu thereof the following:

"(2)(A) No savings association may convert from the mutual
to the stock form, or from the stock form to the mutual form,
except in accordance with the rules and regulations of the
System.

"(B) Any aggrieved person may obtain review of a final
action of the Federal Home Loan Bank System which approves, with

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or without conditions, or disapproves a plan of conversion
pursuant to this subsection only by complying with the provisions
of subsection (d) of section 10 of this Act within the time limit
and in the manner therein prescribed, which provisions shall
apply in all respects as if such final action were an order the
review of which is therein provided for, except that such time
limit shall commence upon publication of notice of such final
action in the Federal Register or upon the giving of such general
notice of such final action as is required by or approved under
regulations of the System, whichever is later.

"(C) Any Federal savings association may change its
designation from a Federal savings and loan association to a
Federal savings bank, or the reverse.".

Sec. 314. CAPITAL STANDARDS. - Section 5 of the Home Owners'
Loan Act of 1933 as amended (12 U.S.C. 1464) is hereby further
amended by adding the following new subsection (t) at the end
thereof to read as follows:

"(t) (1) Not later than 90 days after enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, the
Chairman shall by regulation establish uniformly applicable
capital standards for savings associations.

Such standards shall

be not less stringent than the capital standards applicable to
national banks, provided that any deviation from such standards

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shall not result in materially lower capital standards than are
applicable to national banks;

Provided that the standard may

include, as a component of capital, goodwill (limited to goodwill
existing on the date of the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989) to be
amortized on a straight-line basis over a ten-year period or over
such shorter period as may be determined by the Chairman with the
concurrence of the Secretry of Treasury.

For purposes of

determining such capital adequacy, the savings association's
entire investment in, and loans to, any subsidiary engaged in
activities not permissible for a national bank shall be deducted
from the capital of the savings association.

In any event, any

investments in, and loan to, a subsidiary engaged solely in
mortgage banking activities shall not be deducted from the
capital of the associations.

The standards established under the

subsection shall include all relevant substantive definitions
established by the appropriate Federal banking agency for
national banks.

The Chairman shall prescribe a timetable for the

implementation of these capital standards that requires their
full implementation by no later than June 1, 1991.

"(2) Until June 1, 1991, the Chairman may restrict the asset
growth of any savings association not in compliance with capital
standards established pursuant to this subsection.

After June 1,

1991, the Chairman shall•prohibit the asset growth of any savings
association or class of savings associations not in compliance

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with capital standards established pursuant to this subsection.
The Chairman may restrict the asset growth of any savings
association that the Chairman determines is taking excessive
risks or is paying excessive rates for deposits."

"(3) For purposes of this subsection, the term "national bank"
shall have the same meaning as it has in section 3(d) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(d))."

Sec. 315. TECHNICAL AMENDMENT. — Section 8 of the Home Owners'
Loan Act of 1933 (12 U.S.C. 1466a), is hereby amended by
replacing all references to "association" with

"savings

association", except with respect to references to "Federal
savings and loan association", which shall be replaced with
"Federal savings association."

Sec. 316. REPEAL. - Section 9 of the Home Owners' Loan Act of
1933 as amended (12 U.S.C. 1467) is repealed.

Sec. 317. RECOVERY REGULATIONS REPEALED. (a) Section 10 of the
Home Owners' Loan Act of 1933 (12 U.S.C. 1467a) is hereby
repealed effective on the date of enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989,
provided that associations that had entered into a plan approved
by the Federal Home Loan Bank Board shall be grandfathered
hereunder as long as the association adheres to the plan and

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continues to submit to the Chairman of the Federal Home Loan Bank
System regular and complete reports on the association's progress
in meeting the association's goals under the plan.

(b) Section 416 of the National Housing Act (12 U.S.C.
1730i) is hereby repealed effective on the date of enactment of
the Financial Institutions Reform, Recovery and Enforcement Act
of 1989, provided that insured institutions which had entered
into a plan approved by the Federal Savings and Loan Corporation
shall be grandfathered hereunder as long as the insured
institution adheres to the plan and continues to submit to the
Chairman of the Federal Home Loan Bank System regular and
complete reports on the- insured institutions progress in meeting
the insured institutions goals under the plan.

For the purpose

of this section, the term 'insured institution' shall have the
same meaning as in 12 U.S.C. 1730a(a)(1)(A).

Sec. 318. COST OF EXAMINATION AND REPORTS. - A new Section 9 is
added to the Home Owners' Loan Act of 1933 as amended to read as
follows:

"Section 9. EXPENSES OF EXAMINATIONS OF SAVINGS
ASSOCIATIONS OR AFFILIATES.

(a)

The expense of examination of

savings associations provided for by section 5 of this chapter
shall be assessed by the Chairman upon savings associations in
proportion to their assets or resources.

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"(b)

The expense of examinations of an affiliate of a

savings association provided for by this Act may be assessed by
the Chairman upon the affiliates examined in proportion to assets
or resources held by the affiliates on the dates of such
examination.

"(c) If any affiliate shall refuse to pay such expense, or
other expense imposed pursuant to this section, or shall fail to
do so within sixty days after the date of such assessment, then
such expenses may be assessed against the affiliated savings
association and when so assessed, shall be paid by such
association; Provided however, That, if the affiliation is with
two or more savings associations, or affiliates, such expenses may
be assessed against, and collected from, any or all of such
savings associations in such proportions as the. Chairman
prescribe.

"(d) If any affiliate of a savings association shall refuse
to permit an examiner to make an examination of the affiliate or
shall refuse to give any information required in the course of
any examination, the savings association with which it is
affiliated shall be subject to a penalty of not more than $25,000
for each day that any such refusal shall continue.
Notwithstanding the foregoing, for violations made with reckless
disregard for the safety and soundness of the financial
institution, the Corporation may, in its discretion, assess a

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penalty of not more than $1,000,000 per day for each day during
which such violation contniues.

Such penalty may be assessed by

the Chairman, and collected for the use of the System and
deposited in the same manner as expenses of examinations.

"(e) The Funds derived from such assessments may be
deposited by the Chairman as provided in sections 1439 and 1439a,
as amended, of this title, or upon the approval of the Secretary
of the Treasury, in any Federal Reserve Bank or other Government
depository under the same provisions as apply in section 192 of
this title to the Comptroller of the Currency.

The funds derived

from such assessments shall not be construed to be Government or
public funds or appropriated monies.

"(f) The Chairman, is authorized and empowered to prescribe
regulations governing the computation and assessment of the
expenses of examinations herein provided for and the collection
of such assessments from the savings associations of affiliates
examined.

"(g) In addition to the expense of examination to be
assessed by the Chairman, as provided in this section, all
savings associations exercising fiduciary powers and all savings
associations or similar institutions in the District of Columbia
exercising fiduciary powers, shall be assessed by the Chairman
for the examination of their fiduciary activities a fee adequate

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to cover the expenses thereof, and which fee shall be treated,
paid, and deposited in the same manner as an assessment for
expenses of examination provided for in this section.

"(h) In addition to the expense of examinations to be
assessed by the Chairman in accordance with paragraphs (a) and
(b), savings associations or affiliates of savings associations
examined more frequently than twice in one calendar year shall be
assessed the expense of those additional examinations.

Funds

from such assessment shall be treated, paid, and deposited in the
same manner as an assessment for expenses of examination provided
for in this section.

"(i) All savings associations and affiliates shall provide
the System with access to any information or report with respect
to any examination made by any public regulatory authority and
furnish any additional information with respect thereto as the
System may require.".

Sec. 319. SAVINGS AND LOAN HOLDING COMPANIES. - Section 408 of
the National Housing Act (12 U.S.C. 1730a) is hereby transferred
to and shall become new section 10 of the Home Owners' Loan Act
of 1933, as amended, and is further amended as follows:

(1) by deleting the words "insured and institution", "insured
institutions", and "institution" wherever they occur and

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inserting in lieu thereof "savings association", "savings
associations" and "association", respectively;

(2) by deleting the word "Corporation" wherever it occurs and
inserting in lieu thereof "System";

(3) by deleting all references to subsection (m) and section
1729(f) of this title wherever they occur and inserting in lieu
thereof "setion 1823(c) of this title!.' and "section 1823(k) of
this title", respectively;

(4) by deleting subparagraph (a)(1)(A) and inserting in lieu
thereof the following:

"(A) "savings association" means a Federal savings and loan
association or Federal savings bank, a building and loan, savings
and loan or homestead association, a cooperative bank or a state
savings bank that is a member of the Savings Association
Insurance Fund, the deposits of which are insured by the Federal
Deposit Insurance Corporation, and shall include a savings bank
which is deemed by the System to be a savings association under
subsection (m)";

(5) by deleting subparagraph (a)(1)(B) and inserting in lieu
thereof the following:

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"(B)

"uninsured institution" means any financial

institution the deposits of which are not insured by the Federal
Deposit Insurance Corporation;";

(6) by striking out "and" at the end of subparagraph (a)(l)(K)
thereof; by striking out the period at the end of subparagraph
(a)(1)(L) thereof and inserting in lieu thereof a semicolon; and
by adding a new subparagraph (a)(l)(M) to read as follows:

"(M) "System" means the Federal Home Loan Bank System and";

(7) by deleting subsections (d), (g), (m), (p) and (t), by
redesignating subsections (h), (i), (j), (k), (1), (n), (o), (q),
(r) and (s) as paragraphs (g), (h), (i), (j),(k),- (1), (m), (n),
(o), (p) and (q), respectively, and by inserting the following
new subsection (d) to read as follows:

"(d) TRANSACTIONS WITH AFFILIATES. Transactions between
any subsidiary savings associations of a savings and loan holding
company and any affiliate (of such savings association
subsidiary) shall be subject to the limitations and prohibitions
specified in section 11 of this Act.";

(8) by deleting paragraph (e)(4) thereof and by redesignating
paragraph (e)(5) as new paragraph (e)(4);

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(9)

by amending subsection (2)(i) by striking out "(A), except

with the prior approval of the Board, to serve at the same time
as a director, officer, or employee of an insured institution or
another savings and loan holding company, not a subsidiary of
such holding company, or (B)", and inserting a comma in lieu
thereof;

(10) by deleting paragraph (4) of redesignated subsection (n)
and inserting in lieu thereof the following:

"(4) Failure to Achieve and Maintain QTL Status.

"(A) A savings association that fails to achieve or
maintain its status as a qualified thrift lender shall, •
within three years of the date on which the association
loses its status as a qualified thrift lender, convert its
charter to one or more bank charters, unless during the one
year period following the date it loses its status as a
qualified thrift lender, the association becomes a qualified
thrift lender and does not thereafter lose its status as a
qualified thrift lender.

"(B) Until such conversion is complete, such savings
association shall not:

"(i)

after three years from the date it loses it

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qualified thrift lender status, be eligible to obtain
advances from any Federal Home Loan Bank and shall
repay any outstanding advances promptly;

"(ii) expand its activities beyond those conducted on
the date the savings association loses its status as a
qualified thrift lender;

"(iii) open any additional branch offices; or

"(iv) after three years from the date it loses its
qualified thrift lender status, engage directly or
through a subsidiary in an activity unless such
activity is permissible for either a bank or a state
bank (other than a savings bank) located in the State
in which the association is located.

"(C) Any company that controls a savings association
identified in paragraph (A) shall, after three years
following the date on which the savings association loses
its status as a qualified thrift lender, be subject to all
of the provisions of the Bank Holding Company Act of 1956,
as amended, and other applicable statutes as if the company
were a bank holding company and the savings association were
a bank as those terms are defined in the Bank Holding
Company Act of 1956, as amended.

- 142 -

"(D)

Any bank chartered as a result of the

requirements of this section shall be obligated until
December 31, 1993, to pay the assessments assessed on
savings associations under the Federal Deposit Insurance
Act.

Such institution shall also be assessed the exit fee

provided in section 5(d)(2) of the Federal Deposit Insurance
Act.

"(E) as used in this subsection, "bank" shall mean a
national member bank or a State bank (other than a savings
bank), as defined in section 3 of the Federal Deposit
Insurance Act."

(11) By deleting paragraph (7) of redesignated subsection

(n)

Sec

320.

TRANSACTIONS WITH AFFILIATES; LOANS TO INSIDERS. -

The Home Owners' Loan Act of 1933 as amended is further amended
by adding at the end thereof the following new section 11:

"Section 11. TRANSACTIONS WITH AFFILIATES; LOANS AND
EXTENSIONS OF CREDIT TO EXECUTIVE OFFICERS, DIRECTORS AND
CONTROLLING PERSONS.

(a)

Except to the extent that the

System determines for reasons of safety and soundness that
additional restrictions should apply, the provisions of
section 23a and section 23B of the Federal Reserve Act shall

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be applicable to every savings association in the same
manner and to the same extent as if such savings association
were a member bank as defined in that Act and for this
purpose any company which would be an affiliate of a savings
association for the purposes of section 23A and section 23B
of the Federal Reserve Act if such savings association were
a member bank as defined in that Act shall be deemed to be
an affiliate of such savings association.

"(b) Except to the extent that the System determines for
reasons of safety and soundness that additional restrictions
should apply, the provisions of section 22(h) of the Federal
Reserve Act relating to limits on loans and extensions of
credit by a member bank to its executive officers or
directors or to any person who directly or indirectly owns,
controls, or has the power to vote more than 10 per centum
of any class of voting securities of such member bank shall
be applicable to every savings association in the same
manner and to the same extent as if such savings association
were a member bank as defined in that Act.

"(c) Violations of this section shall be enforced by the
System in accordance with section 8 of this Federal Deposit
Insurance Act.".

Sec 321. ADVERTISING. - The Home Owners' Loan Act of 1933, as

- 144 -

amended, is hereby amended by adding a new section 12 to read as
follows:

"Section 12. ADVERTISING. No savings association shall
carry on any sale, plan or practices, or any advertising, in
violation of regulations promulgated by the System.".

TITLE IV. DISSOLUTION AND TRANSFER OF FUNCTIONS, PERSONNEL
AND PROPERTY OF FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION

Sec 401. DISSOLUTION. - Sixty days after enactment of this
Act, except as otherwise provided in it, the Federal Savings
and Loan Insurance Corporation, shall cease to exist and shall
for all purposes be considered dissolved.

Except as otherwise

provided in this Act, after its enactment, all insurance and
receivership functions previously performed by the Federal
Savings and Loan Insurance Corporation shall be performed as
appropriate, by the Federal Deposit Insurance Corporation or
the Resolution Trust Corporation.

The Federal Deposit

Insurance Corporation shall also have the power to take any
action necessary on behalf of the Federal Savings and Loan
Insurance Corporation in connection with its dissolution in
accordance with this Act;

- 145 -

Sec. 402.

CONTINUATION OF RULES. - (a)

All rules,

regulations, and orders of the Federal Savings and Loan
Insurance Corporation, or the Federal Home Loan Bank Board as
operating head thereof, in effect on the date of enactment of
this Act and relating to (i) the provision, rates,
cancellation, or payment of insurance of accounts, (ii)
administration of the insurance fund, or (iii) conduct of
conservatorships or receiverships, including the handling of
claims against receiverships, shall remain effective and
enforceable by the Federal Deposit Insurance Corporation or
the Resolution Trust Corporation, as appropriate, unless
otherwise determined by the Federal Deposit Insurance
Corporation after consultation with the Chairman of the
Federal Home Loan Bank System.

(b) All other rules, regulations, and orders of the
Federal Savings and Loan Insurance Corporation shall remain
effective and enforceable by the Chairman of the Federal Home
Loan Bank System.

(c) Within 60 days after enactment of this Act, the
Chairman of the Federal Home Loan Bank System and the Chairman
of the Federal Deposit Insurance Corporation shall identify
the rules, regulations, and orders referred to in subsections
(a) and (b) of this section in accordance with the allocation
of authority between them under this Act and promptly publish

- 146 -

notice thereof in the Federal Register.

(d) The Federal Deposit Insurance Corporation shall have
the power to promulgate and enforce rules, regulations, or
orders to prevent actions or practices of savings associations
that pose a serious threat to the Savings Association
Insurance Fund or the Bank Insurance Fund.

Sec. 403. PERSONNEL. - (a) The Chairman of the Federal Home
Loan Bank System, jointly with the Chairman of the Federal
Deposit Insurance Corporation, shall identify those employees of
the Board and the Federal Savings and Loan Insurance Corporation
who, on the date of enactment of this Act, were engaged in
functions or activities (hereinafter, "functions") related
primarily to the functions which are transferred from the Board
and/or Federal Savings and Loan Insurance Corporation to the
Federal Deposit Insurance Corporation.

The employees so

identified shall be entitled to the following rights:

(1) Each employee identified in a transferred function
shall be transferred to the Federal Deposit Insurance Corporation
for employment and shall be guaranteed a position.

All Board and

Federal Savings and Loan Insurance Corporation employees electing
to transfer with their function shall be transferred to the
Federal Deposit Insurance Corporation no later than 60 days after
the date of enactment of this Act.

For purposes of determining

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assignment rights, any transfer from the Board and/or Federal
Savings and Loan Insurance Corporation to the Federal Deposit
Insurance Corporation shall be deemed to be a transfer of
function as defined by the regulations promulgated by the Office
of Personnel Management pursuant to 5 U.S.C. 3503 and
transferring employees shall be entitled to all rights and
benefits under the regulations promulgated by the Office of
Personnel Management pursuant to 5 U.S.C. 3502.

All Board and

Federal Savings and Loan Insurance Corporation employees who
agree to transfer with their functions shall be placed in a
competitive area of their own at Federal Deposit Insurance
Corporation separate and apart from the competitive areas in
existence at Federal Deposit Insurance Corporation for purposes
of placement under this section.

In placing transferring

employees under 5 CFR 351 procedures, Federal Deposit Insurance
Corporation may provide for the assignment of a transferred
employee in an excepted service position to a position in the
competitive service.

In addition Federal Deposit Insurance

Corporation may elect to bring into the competitive service any
or all excepted service positions transferred from the Board or
Federal Savings and Loan Insurance Corporation.

Transferring

employees who are in the excepted service and are placed by
Federal Deposit Insurance Corporation in a competitive service
position will have their appointments converted to career or
career conditional in accordance with 5 CFR 315.701.
Transferring employees shall receive notice of their assignment

- 148 -

rights pursuant to 5 CFR 351 and this section no later than 90
days after the effective date of their transfer to Federal
Deposit Insurance Corporation.

Transferring employees shall be

entitled to pay and grade retention in accordance with the
principles reflected in the regulations promulgated by the Office
of Personnel Management pursuant to 5 U.S.C. 5361-66.

(2) Any employee who declines to transfer with his or
her function to the Federal Deposit Insurance Corporation shall
be entitled to severance pay in accordance with the regulations
promulgated by the Office of Personnel Management pursuant to 5
U.S.C. 5595 and shall be entitled to placement assistance under
the Office of Personnel Management's Displaced Employee Program
as defined at 5 CFR 330, Subpart C.

Notwithstanding the

foregoing, severance pay shall in no event be less than 90 days
pay.

All such severance pay shall be paid by the Federal Home

Loan Bank System.

Each employee in an excepted service position

who declines to transfer shall be entitled to placement
assistance under the Office of Personnel Management's Interagency
Placement Assistance Program for a period of 120 days after
receipt of their termination notice.

(3) A transferred Board or Federal Savings and Loan
Insurance Corporation employee who declines an offer of
employment by the Federal Deposit Insurance Corporation which is
not considered a reasonable offer under regulations promulgated

- 149 -

by the Office of Personnel Management pursuant to 5 U.S.C.
8336(d)(1) shall be entitled to the benefits specified in
paragraph 2 of this subsection for employees declining to
transfer and any such employee who is otherwise eligible shall be
entitled to early optional retirement under 5 U.S.C. 8336(d)(2).
Within one year after the transfer of functions to the Federal
Deposit Insurance Corporation is completed, should Federal
Deposit Insurance Corporation determine that a reorganization of
the combined workforce is required, that reorganization shall be
deemed a "major reorganization" for purposes of affording
employees early optional retirement under 5 U.S.C. 8336(d)(2).

.(4) Any employee accepting employment with the Federal
Deposit Insurance Corporation as a result of this transfer may
retain any benefit of or continue membership in any employee
benefit program of the Federal Home Loan Bank Board, including
insurance, to which he or she belongs on the date of enactment of
this Act, provided the employee does not elect to give up the
benefit or membership in the program and further provided the
benefit or program is continued by the Federal Home Bank System.
The difference in the costs between the benefits which would have
been provided by the Federal Deposit Insurance Corporation and
those provided by this section shall be paid by the Federal Home
Loan Bank System.

Sec. 404. DIVISION OF PROPERTY AND PERSONNEL. - Within 60 days

- 150 -

after enactment of this Act, the Chairman of the Federal Home
Loan Bank System, jointly with the Chairman of the Federal
Deposit Insurance Corporation, shall divide between the Federal
Home Loan Bank System and the Federal Deposit Insurance
Corporation in accordance with the division of responsibilities
effected by this Act, all personnel and all property of the
Federal Savings and Loan Insurance Corporation previously
employed to perform its functions and those of the Federal Home
Loan Bank Board.

Any disagreement between them in so doing shall

be resolved by the Director of the Office of Management and
Budget.

Sec. 405. REPEALS, - Except a-s otherwise provided in this Act,
sections 401; 402, 403, 404, 405, 406, 407, 411, 415 and 416 of
the National Housing Act are hereby repealed.

Sec. 406. REPORT. - Immediately prior to its dissolution, the
Federal Savings and Loan Insurance Corporation shall provide by
written report to the Secretary of the Treasury, the Director of
the Office of Management and Budget and to the Congress, a final
accounting of its finances and operations, and shall thereafter
cease operations.

TITLE V - FINANCING FOR THRIFT RESOLUTIONS. -

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Subtitle A —

Resolution Trust Corporation

Sec. 501. RESOLUTION TRUST CORPORATION ESTABLISHED.

The Federal Home Loan Bank Act (12 U.S.C. 144 et seq.) is
hereby amended by inserting after section 21 the following new
section:

"Section. 21a. RESOLUTION TRUST CORPORATION ESTABLISHED.
ESTABLISHMENT.

(a) There is hereby established the

Resolution Trust Corporation (hereinafter in this section
also referred to as the Corporation) with the powers,
authorities and purposes herein provided.

The Oversight

Board and the Corporation shall not be an nagency" or
"executive agency" for purposes of title 5, United States
Code.

(b) PURPOSES. (1) The purpose of the Corporation shall be
to carry out a program, under the direction of the
Oversight Board, to manage and resolve all cases involving
institutions, the accounts of which were insured by the
Federal Savings and Loan Insurance Corporation, prior to
enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, for which a receiver or
liquidating conservator has been appointed or is appointed
within the three-year period following the date of the

- 152 -

enactment of that Act; to manage the assets of the Federal
Asset Disposition Association; and to peform such other
functions as authorized under this Act.

In its resolution

activities, the Resolution Trust Corporation is authorized
to take warrants, voting and nonvoting equity, or other
participation interests in resolved institutions or assets
or properties acquired in connection with resolution..

"(2) In carrying out its obligations, the Corporation
shall possess all of the rights and powers provided in Sections
11, 12 or 13 of the Federal Deposit Insurance Act, or otherwise
granted herein; provided that it shall not have the power to
obligate the Federal Deposit Insurance Corporation or-its funds
(except as otherwise specifically provided); and in connection
with providing assistance to or liquidating or otherwise
resolving an institution as provided above, it shall consider
and be subject to the limitations set forth in Section 13(c)(4)
of the Federal Deposit Insurance Act.

"(C) OVERSIGHT BOARD.

"(1) Membership. The Oversight Board of the
Resolution Trust Corporation, which shall serve as the
board of directors thereof, shall consist of three
members:

the Secretary of the Treasury, the Chairman

of the Federal Reserve Board, and the Attorney General

- 153 -

of the United States, or their respective designees.

"(2) Chairman. The Chairman of the Oversight Board
shall be the Secretary of the Treasury.

"(3) Terms of Office, Succession, Delegation,
Vacancies.

The term of each member of the Oversight

Board shall expire when the Resolution Trust
Corporation is terminated.

Vacancies on the Oversight

Board shall be filled in the same manner as the vacant
position was previously filled.

"(4) Compensation. Members of the Oversight Board
shall receive resonable allowances for necessary
expenses of travel, lodging, and subsistence incurred
in attending meetings and other activities of the
Oversight Board, as set forth in the bylaws issued by
the Oversight Board, except that such level shall not
exceed the maximum fixed by subchapter 1 of chapter 57
of title 5, United States Code, for officers and
employees of the United States.

"(5) Duties. The Oversight Board shall review and
have overall responsibility over the work, progress,
management and activities of the Resolution Trust
Corporation and may disapprove, in its discretion, any

- 154 -

and all regulations, policies, procedures, guidelines,
statements, contracts, and other actions of the
Resolution Trust Corporation and shall approve or
disapprove, in its discretion, any and all agreements
for the purchase of assets and assumption of
liabilities, any and all agreements for the
acquisition, consolidation or merger, or any other
transaction proposed by the Resolution Trust
Corporation by which any person or entity will acquire
an institution subject to the provisions of this title.

"(6) Quorum Required. A quorum shall consist of
two members of the Oversight Board and all decisions of
the Board shall require an affirmative Vote of at least
a majority of the members voting.

"(7) The Oversight Board is authorized to employ
such staff as it deems necessary and appropriate to
fulfill its obligations under this Act, which shall be
subject to the terms and conditions of employment
applicable to the Resolution Trust Corporation,
provided however that the Oversight Board as it
considers necessary shall utilize the personnel of the
agencies of the three members of the Oversight Board,
without additional compensation to carry out the
Oversight Board's staff functions.

- 155 -

"(8) Rules and Records.

The Oversight Board shall

adopt such rules as it may deem appropriate for the
transaction of its business and the accomplishment of
its duties hereunder, and shall keep permanent and
accurate records of its acts and proceedings.

"(d) CHIEF EXECUTIVE OFFICER. A chief executive officer
of the Resolution Trust Corporation shall be selected by the
Oversight Board and shall serve at the pleasure of the Board.

"(e) CORPORATE POWERS. The Resolution Trust Corporation shall
be a body corporate that shall have the power to

—

"(1) operate under the direction of the Oversight
Board;

"(2) adopt, alter, and use a corporate seal, which
shall be judicially noted;

"(3) issue capital certificates as provided in this
Act;

"(4) provide for one or more vice presidents, a
secretary, a treasurer and such other officers,
employees, and agents, as may be necessary, define
their duties, and require surety bonds or make other

- 156 -

provisions against losses occasioned by acts of such
persons;

"(5) subject to the approval of the Oversight Board,
hire, promote, compensate, and discharge officers and
employees of the Resolution Trust Corporation, without
regard to title 5, United States Code, provided that
compensation and benefits of such employees shall be
consistent with those of the^Federal Deposit Insurance
Corporation;

"(6) prescribe by the Oversight Board its bylaws that
shal]» be consistent with law and that shall provide
for the manner in which—

"(A) its officers employees, and agents are selected;

"(B) its property is acquired, held and transferred;

"(C) its general operations are to be conducted; and

"(D) the privileges granted by law are exercised and
enjoyed.

"(7) with the consent of any executive department or
agency, use the information, services, staff, and

- 157 -

facilities of such in carrying out this title;

"(8) enter into contracts and make advance, progress,
or other payments with respect to such contracts;

"(9) acquire, hold, lease, mortgage, or dispose of, at
public or private sale, real and personal property,
and otherwise exercise all the usual incidents of
ownership of property necessary and convenient to its
operations;

"(10) obtain insurance against loss;

"(11) modify or consent to the modification of any
contract or agreement to which it is a party or in
which it has an interest under this title;

"(12) deposit its securities and its current funds
under the terms and conditions applicable to the
Federal Deposit Insurance Corporation under Section
13(b) of the Federal Deposit Insurance Act and pay
fees therefor and receive interest thereon as may be
agreed; and

"(13) exercise such other powers as set forth in this
title, and such incidental powers as are necessary to

- 158 -

carry out its powers, duties and functions in
accordance with this title.

SPECIAL POWERS.

"(a) In General. The Resolution Trust Corporation is
authorized—

"(1) to enter into contracts with the Federal Deposit
Insurance Corporation and with such other persons or
entities, public and private, as it deems advisable
and necessary in order to manage the institutions for
which it is responsible and their assets; provided,
however, that the Federal Deposit Insurance
Corporation shall be the primary manager of the
Resolution Trust Corporation, in accordance with an
agreement between the Federal Deposit Insurance
Corporation and the Oversight Board, except in such
case where the Oversight Board shall specifically
contract with another person or entity on a case by
case basis; provided further that all contracts with
persons or entities other than the Federal Deposit
Insurance Corporation must be subject to a competitiv
bid process;

"(2) to set the policy on credit standards to be used

- 159 -

by the institution for which it is responsible;

"(3) to require a merger or consolidation of an
institution for which it is responsible;

"(4) to organize one or more Federal mutual savings
associations, which shall be chartered by the Federal
Home Loan Bank System and the deposits of which shall
be insured by the Federal Deposit Insurance
Corporation through the Savings Association Insurance
Fund ;

"(5) to review and analyze all insolvent institution
cases resolved by the Federal Savings and Loan
Insurance Corporation since January 1, 1988, through
the date of enactment of this Act, and to actively
review all means by which it can reduce costs under
existing Federal Savings and Loan Insurance
Corporation agreements, including through the exercise
of rights to restructure such agreements, subject only
to the monitoring of the Oversight Board.

The

Corporation shall report to the Oversight Board the
results and conclusions of its examination, and
thereafter the Corporation, as permitted by the terms
of any resolution agreement and upon the express
concurrence of the Oversight Board, shall restructure

- 160 -

such agreements where savings would be realized
therefrom, the costs of which restructuring shall be a
liability of the Corporation;

"(6) to exercise all resolution powers and activities
authorized to be exercised by the Federal Deposit
Insurance Corporation under the Federal Deposit
Insurance Act and the Federal Savings and Loan
Insurance Corporation under Title IV of the National
Housing Act including but not limited to the powers
and authorities with respect to receiverships or
conservatorships, to engage in assistance
transactions, to-collect indebtedness, to enforce
liabilities and obligations, and to exercise the
incidental powers and authorities provided the Federal
Deposit Insurance Corporation all of which may be
performed and exercised by the Corporation under this
section as may be necessary to fulfill its obligations
and duties under this Act; and

"(7) to take such other incidental powers as the
Resolution Trust Corporation determines as may be
necessary to carry out the purposes of this title.

INSTITUTIONS MANAGED BY THE CORPORATION.

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"(1) All insured savings associations organized by the
Corporation under this section shall be subject to such
limitations, restrictions, and conditions as determined by the
Corporation with respect to the following activities:

"(A) growth of assets;

"(B) lending activities;

"(C) asset acquisitions (except as necessary to serve its
existing customer base with residential mortgages or
consumer loans;

"(D) use of brokered deposits; and

"(E) payment of deposit rates.

"(2) All insured savings associations organized by the
Corporation under this section shall be subject to all laws,
rules, and regulations otherwise applicable to them as insured
savings associations.

"(3) Any insured savings association organized by the
Corporation under this section that holds deposits insured by
the Federal Deposit Insurance Corporation shall continue to be
subject to supervision by the Federal Home Loan Bank System and

- 162 -

Federal Deposit Insurance Corporation as otherwise provided by
law.

"(h) FADA. The Corporation shall convert the Financial Asset
Disposition Association to a corporation or other business
entity and sell such other corporate entity or business entity,
or wind down such Association or dissolve it no later than 180
days after the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989; provided that in
connection with any such sale, no contract rights to manage
savings association resolution shall be transferred.

(i) 'CAPITAL CERTIFICATES. The Resolution Trust Corporation
shall be authorized to issue capital certificates to the
Resolution Funding Corporation consistent with the provisions
of section 21b of this Act.

(1) Authorization to Issue.

"(1) In General. Notwithstanding any other provision
of law, the Resolution Trust Corporation is hereby authorized
to issue to the Resolution Funding Corporation nonvoting
capital certificates.

"(2) Requirement Relating to the Amount of
Certificates.

The amount of certificates issued by the

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Resolution Trust Corporation under paragraph (A) shall be equal
to the aggregate amount of funds provided by the Resolution
Funding Corporation to the Resolution Trust Corporation under
section 21b of the Federal Home Loan Bank Act.

"(3) Certificates May be Issued Only to the Resolution
Funding Corporation.

Capital certificates issued under

subparagraph (A) may be issued only to the Resolution Funding
Corporation in the manner and to the extent provided in section
21 of the Federal Home Loan Bank Act and this subsection.

"(4) No Dividends. The Resolution Trust Corporation
shall pay no dividends on any capital certificates issued under.
this paragraph.

"(j) EXEMPTION FROM TAXATION. The Resolution Trust
Corporation, the capital, reserves, and surplus thereof, and
the income derived therefrom, shall be exempt from Federal,
State, municipal, and local taxation except taxes on real
estate held by the Resolution Trust Corporation, according to
its value as other similar property held by other persons is
taxed.

"(k) TERMINATION.

"(1) Resolution Trust Corporation.

The Resolution Trust

- 164 -

Corporation shall terminate five years after the date of
enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989.

"(2) Case Resolutions. Simultaneously with the
termination of the Resolution Trust Corporation as
provided in subsection (1), all assets and liabilities of
the Corporation would be transferred to the FSLIC
Resolution Fund to be managed by the Federal Deposit
Insurance Corporation with the proceeds of the net assets
being provided to the Resolution Funding Corporation."

"(1) POWER TO REMOVE: JURISDICTION. — Notwithstanding any
other provision of law, any civil action, suit or proceeding to
which the Corporation is a party shall be deemed to arise under
the laws of the United States, and the United States District
Courts shall have original jurisdiction over such.

The

Resolution Trust Corporation may, without bond or security,
remove any such action, suit, or proceeding from a State court
to the United States District Court for the District of
Columbia, or if the action, suit or proceeding arises out of
the actions of the Corporation with respect to an institution
for which a receiver or liquidating conservator has been
appointed, the United States District Court for the district
where the institution is located.

- 165 -

"(m) GUARANTEES OF FSLIC.

(1)

Guarantees issued by the

Federal Savings and Loan Insurance Corporation after January 1,
1989, and before the date of enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, made
in connection with loans made to savings associations extended
by the Federal Reserve Banks and Federal Home Loan Banks (the
"Lenders") and guaranteed by the Federal Savings and Loan
Insurance Corporation during such period, shall by operation of
law and without further action by the Federal Home Loan Bank
System, the Federal Savings and Loan Insurance Corporation, or
any court, become and be converted into obligations,
entitlements, and instruments of the Corporation.

(2) Obligations under the guarantees to the Lenders, assumed
by the Corporation under (1) above, shall be paid by the
Corporation one year after the date of enactment of this title,
to the extent that the loans referred to in (1) above have not
previously been paid, using any funds or other assets available
to the Corporation; and, in any event, the Corporation shall
draw upon the resources available to it through borrowing by
Resolution Funding Corporation.

"(n) ISSUE REGULATIONS. The Corporation may issue such
regulations, policies, procedures, guidelines, or statements as
that Corporation considers necessary or appropriate to carry
out this title, all of which shall be promulgated and enforced

- 166 -

without regard to subchapter II of chapter 5 of title 5, United
States Code.

"(o) BORROWING. The Corporation is authorized to borrow from
the Treasury, and the Secretary of the Treasury authorized and
directed to loan to the Corporation on such terms as may be
fixed by the Secretary of the Treasury not exceeding in the
aggregate $5,000,000,000 outstanding at any one time.
Provided, That each such loan shall bear interest at a rate
determined by the Secretary of the Treasury, taking into
consideration the current average rate on outstanding
marketable obligations of the United States as of the last day
of the month preceding the making of such loan: For purposes of
this subsection, the Secretary of the Treasury is authorized to
use as a public-debt transaction the proceeds of the sale of
any securities hereafter issued under the Second Liberty Bond
Act, as now or hereafter in force, and the purposes for which
securities may issued under the Second Liberty Bond Act, as now
or hereafter in force, are hereby extended to include such
loans.

Subtitle B — Resolution Funding Corporation

Sec. 502. RESOLUTION FUNDING CORPORATION ESTABLISHED. - The
Federal Home Loan Bank Act (12 U.S.C. 1421 et seq. ) is hereby

- 167 -

amended by inserting after new section 21a the following new
section:

"Section 21b. RESOLUTION FUNDING CORPORATION ESTABLISHED, (a)
PURPOSE.

The purpose of the Resolution Funding Corporation is to

provide funds to the Resolution Trust Corporation in order for
that corporation to carry out its purposes under this Act.

"(b) ESTABLISHMENT. Notwithstanding any other provision of
law and not later than five days after the enactment of this
title, the Chairman of the Federal Home Loan Bank System shall be
authorized to and shall charter a corporation to be known as the
Resolution Funding Corporation (hereinafter referred to in this
Act as the 'Funding Corporation').

"(c) MANAGEMENT OF THE FUNDING CORPORATION.

"(1) Directorate. The Funding Corporation shall be
under the management of a directorate composed of three members
as follows:

"(A) The director of the Office of Finance of the
Federal Home Loan Banks (or the head of any successor office to
such office); and

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"(B)

Two members selected by the Oversight Board

from among the presidents of the Federal Home Loan Banks.

"(2) Terms. Of the two members appointed under (l)(b)
with respect to initial terms, one shall be appointed for a term
of two years and one shall be appointed for a term of three
years, and thereafter, each member appointed under paragraph
(l)(b) shall be appointed for a term of three years.

"(3) Vacancy. If any member leaves the office in which
such member was serving when appointed to the Directorate -

"(A) such member's service on the Directorate
shall terminate on the date such member leaves
such office; and

"(B) the successor to the office of such member
shall serve the remainder of such member's term.

"(4) Equal Representation of Banks. No president of
a Federal Home Loan Bank may be appointed to serve an additional
term on the Directorate until such time as the presidents of each
of the other Federal Home Loan Banks have served as many terms on
the Directorate as the president of such bank (before the
appointment of such president to such additional term).

- 169 -

"(5) Chairperson. The Oversight Board shall select the
chairperson of the Directorate from among the three members of
the Directorate.

"(6) Staff.

"(A) No paid employees. The Funding Corporation
shall have no paid employees.

"(B) Powers. The Directorate may, with the
approval of the Chairman of the Federal Home Loan Bank System,
authorize the officers, employees, or agents of the Federal Home
Loan Banks to act for and on behalf of the Funding Corporation in
such manner as may be necessary to carry out the functions of the
Funding Corporation.

"(7) Administrative Expenses, Insurance Costs and
Custodian Fees.

"(A) In general. All administrative expenses
issuance costs (as defined in subsection (k)(4)) and custodian
Fees (as defined in subsection (k)(5)) of the Funding Corporation
shall be paid by the Federal Home Loan Banks.

"(B) Pro rata distribution. The amount each
Federal Home Loan Bank shall pay shall be determined by the

- 170 -

Oversight Board by multiplying the total administrative expenses,
issuance costs and custodian fees for any period by the
percentage arrived at by dividing

—

"(i) the aggregate amount the Oversight Board
required such bank to invest in the Funding Corporation (as of
the time of such determination) under paragraphs (4) and (5) of
subsection (e) (as computed without regard to paragraphs (3) or
(6) of such subsection); by

"(ii) the aggregate amount the Oversight Board
required all Federal Home Loan Banks to invest (as of the time of
such determination) under such paragraphs.

"(C) Administrative expenses defined. For
purposes of this paragraph, the term 'administrative expenses'
does not include any interest on (and any redemption premium with
respect to) any obligation of the Funding Corporation.

"(8) Regulation by Oversight Board. The Directorate
of the Funding Corporation shall be subject to such regulations,
orders, and directions as the Oversight Board may prescribe.

"(9) No Compensation from Funding Corporation. Members
of the Directorate of the Funding Corporation shall receive no
pay, allowances, or benefits from the Funding Corporation by

- 171 -

reason of their service on the Directorate.

"(d) POWERS OF THE FUNDING CORPORATION. The Funding
Corporation shall have only the following powers, subject to the
other provisions of this section and such regulations, orders,
and directions as the Oversight Board may prescribe:

"(1) To issue nonvoting capital stock to the Federal
Home Loan Banks;

"(2) To purchase capital certificates issued by the
Resolution Trust Corporation under section 21a of this Act;

"(3) To issue debentures, bonds, or other obligations
and to borrow, to give security for any amount borrowed, and to
pay interest on (and any redemption premium with respect to) any
such obligation or amount;

"(4) To impose assessments in accordance with
subsection (e)(7);

"(5) To adopt, alter, and use a corporate seal;

"(6) To have succession until dissolved;

"(7) To enter into contracts;

- 172 -

"(8) To sue and be sued in its corporate capacity, and
to complain and defend in any action brought by or against the
Funding Corporation in any State or Federal court of competent
jurisdiction; and

"(9) To exercise such incidental powers not
inconsistent with the provisions of this section or section
21a(i) of the Federal Home Loan Bank Act as are necessary or
appropriate to carry out the provisions of this section.

"(e) Capitalization of the Funding Corporation.

"(1) In General. Purchase of Capital Stock by Federal
Home Loan Banks.

Each Federal Home Loan Bank shall invest in

nonvoting capital stock of the Funding Corporation at such times
and in such amounts as the Oversight Board may prescribe under
this subsection.

"(2) Par Value; Transferability. Each share of stock
issued by the Funding Corporation to a Federal Home Loan Bank
shall have a par value in an amount determined by the Oversight
Board and shall be transferable only among the Federal Home Loan
Banks in the manner and to the extent prescribed by the Oversight
Board at not less than par value.

"(3) Maximum Investment Amount Limitation for Each

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Federal Home Loan Bank.

The cumulative amount of funds invested

in nonvoting capital stock of the Funding Corporation by each
Federal Home Loan Bank shall not exceed the aggregate amount o f —

"(A) the sum of -

"(i) the reserves maintained by such bank on
December 31, 1988, pursuant to the requirement contained in the
first two sentences of section 16 of this Act (12 U.S.C. 1436);
and

"(ii) the undivided profits (as defined in
paragraph (8) hereof) of such bank on such date; minus

"(iii) the amounts used to invest in the
capital stock of the Financing Corporation pursuant to the
requirement contained in of section 21 of this Act (12 U.S.C.
1441); and

"(B) for the period December 31, 1988 through
December 31, 1991, or such later date as necessary to fund the
Funding Corporation Principal Fund pursuant to this Act, the sum
of -

"(i) the amounts added to reserves after
December 31, 1988, pursuant to the requirement contained in the

•- 174 -

first two sentences of section 16 of this Act (12 U.S.C. 1436);
and

"(ii) the undivided profits of such bank
accruing after December 31, 1988; minus

"(iii) the amounts required to be used to
invest in the capital stock of the Financing Corporation pursuant
to the requirement contained in section 21 of this Act (12 U.S.C.
1441) after December 31, 1988.

"(4) Pro Rata Distribution of First $1,000,000,000
Invested in the Funding Corporation by the Federal Home Loan
Banks.

With respect to the first $1,000,000,000 which the

Oversight Board may require the Federal Home Loan Banks to invest
in capital stock of the Funding Corporation under this
subsection, the amount which each Federal Home Loan Bank (or any
successor to such bank) shall invest shall be determined by the
Oversight Board by applying to the total amount of such
investment by all such banks the percentage appearing in the
following table for each such bank:

"Bank Percentage

Federal Home Loan Bank of Boston

1.8629

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Federal Home Loan Bank of New York

9,.1006

Federal Home Loan Bank of Pittsburgh

4,.2702

Federal Home Loan Bank of Atlanta

14..4007

Federal Home Loan Bank of Cincinnati

8,.2653

Federal Home Loan Bank of Indianapolis

5..2863

Federal Home Loan Bank of Chicago

9..6886

Federal Home Loan Bank of Des Moines

6..9301

Federal Home Loan Bank of Dallas

8..8181

Federal Home Loan Bank of Topeka

5..2706 •

Federal Home Loan Bank of San Francisco

19..9644

Federal Home Loan Bank of Seattle

6,.1422

"(5) Pro Rata Distribution of Amounts Required to be
Invested in Excess of $1,000,000,000.

With respect to any amount

in excess of $1,000,000,000 which the Oversight Board may require
the Federal Home Loan Banks to invest in capital stock of the
Funding Corporation under this subsection, the amount which each
Federal Home Loan Bank (or any successor to such bank) shall
invest shall be determined by the Oversight Board by multiplying
such excess amount by the percentage arrived at by dividing—

"(A) the sum of the total assets (as of the most
recent December 31) held by all insured savings associations
which are members of such bank; by

- 176 -

"(B) the sum of the total assets (as of such date)
held by all insured savings associations which are members of any
Federal Home Loan Bank.

"(6) Special Provisions Relating to Maximum Amount
Limitations.

"(A) In General. If the amount any Federal Home
Loan Bank is required to invest in capital stock of the Funding
Corporation pursuant to a determination by the Oversight Board
under paragraph (5) (or under subparagraph (B) of this paragraph)
exceeds the maximum investment amount applicable with respect to
such bank under paragraph (3) at the time of such determination
(hereinafter in this paragraph referred to'as the 'excess
amount') -

"(i) the Oversight Board shall require
each remaining Federal Home Loan Bank to invest (in addition to
the amount determined under paragraph -(5) for such remaining bank
and subject to the maximum investment amount applicable with
respect to such remaining bank under paragraph (3) at the time of
such determination) in such capital stock on behalf of the bank
in the amount determined under subparagraph (B);

"(ii) the Oversight Board shall require the
bank to subsequently purchase the excess amount of capital stock

- 177 -

from the remaining banks in the manner described in subparagraph
(C); and

"(iii) the requirements contained in
subparagraphs (D) and (E) relating to the use of net earnings
available for dividends shall apply to such bank until the bank
has purchased all of the excess amount of capital stock.

"(B) Allocation of Excess Amount Among Remaining
Home Loan Banks.

The amount each remaining Federal Home Loan

Bank shall be required to invest under subparagraph (A)(i) is the
amount determined by the Oversight Board by multiplying the
excess amount by the percentage arrived at by dividing-

"(i) the amount of capital stock of the Funding
Corporation held by such remaining bank at the time of such
determination; by

"(ii) the aggregate amount of such stock held
by all remaining banks at such time.

"(C) Purchase Procedure. The bank on whose behalf
an investment in capital stock is made under subparagraph (A)(i)
shall purchase, annually and at such issuance price, from each
remaining bank an amount of such stock determined by the
Oversight Board by multiplying the amount available for such

- 178 -

purchases (at the time of such determination) by the percentage
determined under subparagraph (B) with respect to such remaining
bank until the aggregate amount of such capital stock has been
purchased by the bank.

"(D) Limitation on Dividends. The amount of
dividends which may be paid for any year by a bank on whose
behalf an investment is made under subparagraph (A)(i) shall not
exceed an amount equal to 1/4 of the net earnings available for
dividends of the bank for the year.

"(E) Transfer to Account for the Purchase of Stock
Required.

Of the net earnings available for dividends foT any

year of a bank on whose behalf an investment is made under
subparagraph (A)(i), such amount as is necessary to make the
purchases of stock required under subparagraph (A)(ii) shall be
placed in a reserve account (established in such manner as the
Oversight Board shall prescribe by regulations) the balance in
which shall be available only for such purchases.

"(F) Net Earnings Available for Dividends Defined.
For purposes of this paragraph, the term 'net earnings available
for dividends' means the net earnings of a bank for any period as
computed after reducing the amount of earnings for such period by
the amount required to be carried (for such period) to reserves
maintained by such bank pursuant to the first two sentences of

- 179 -

section 16 of this Act (12 U.S.C. 1436).

"(7) Additional Sources. In the event that each Federal
Home Loan Bank has exhausted the investment amount applicable
with respect to such bank under paragraph (3) with respect to
investments under paragraphs (4), (5), and (6), then the amounts
necessary to provide additional funding for the Funding
Corporation Principal Fund shall be obtained as follows:

"(A) First, the Funding Corporation, with the approval
of the Board of Directors of the Federal Deposit Insurance
Corporation, shall assess each insured savings association an
assessment as if such assessment was assessed by the Federal
Deposit Insurance Corporation with respect to Savings Association
Insurance Fund members pursuant to section 7 of the Federal
Deposit Insurance Act, as amended; provided that the maximum
amount of the aggregate amount assessed shall be the amount of
additional funds necessary to fund the Funding Corporation
Principal Fund; provided that the amount assessed hereunder and
the amount assessed by the Financing Corporation under section 21
of this Act shall not exceed the amount authorized to be assessed
pursuant to section 7 noted above and that the Financing
Corporation shall have first priority to make such assessments;
all such amounts shall be subtracted from the amounts authorized
to be assessed by the Federal Deposit Insurance Corporation
pursuant to section 7 noted above.

- 180 -

"(B) To the extent funds available pursuant to
paragraph (A) are insufficient to capitalize the Funding
Corporation so as to provide funds for the Funding Corporation
Principal Fund, then the Federal Deposit Insurance Corporation
shall transfer to the Funding Corporation from the proceeds of
the FSLIC Resolution Fund the remaining amount of funds necessary
for such purpose.

"(8) Undivided Profits Defined. For purposes of
paragraph (3), the term 'undivided profits' means retained
earnings minus the sum of -

"(A) that portion required to be added to reserves
maintained pursuant to the first two sentences of section 16
of this Act (12 U.S.C. 1436); and

"(B) the dollar amounts held by the respective
Federal Home Loan Banks in special dividend stabilization
reserves on December 31, 1985, as determined by the table set
forth in section 21(d)(7) of this Act (12 U.S.C. 1441(d)(7)).

"(9) Aggregate Annual Federal Home Loan Banks
Contribution.

Notwithstanding any other provision in sections

21, 21a and 21b of this Act, the aggregate annual amount
contributed by the Federal Home Loan Banks (for the period from
the date of enactment of the Financial Institutions Reform,

- 181 -

Recovery and Enforcement Act of 1989, until such time as the
Funding Corporation has no more liabilities) for Funding
Corporation principal and interest payments and Financing
Corporation principal payments under section 21 of this Act shall
be $300,000,000; provided, however, that such aggregate annual
amount shall be such lesser number equal to all the amounts
needed for the purposes above if such total amounts shall be less
than $300,000,000.

"(f) Obligations of the Funding Corporation.

"(1) Issuance. The Funding Corporation, subject to the
direction of the Resolution Trust Corporation, may issue bonds,
notes, debentures, and similar obligations, in an aggregate
amount not to exceed $50,000,000,000.

"(2) Interest Payments. The Funding Corporation shall
pay the interest due on (and any redemption premium with respect
to) such obligations from funds obtained for such interest
payments from the following sources.

"(A) The Resolution Trust Corporation shall
pay to the Funding Corporation the net proceeds received by the
Resolution Trust Corporation from the liquidation of institutions
under its management pursuant to section 21a of this Act to the
extent they are determined by the Oversight Board to be in excess

- 182 -

of funds necessary for resolution costs in the near future and
any proceeds from warrants and participations of the Resolution
Trust Corporation; and

"(B) To the extent the funds available
pursuant to clause (A) are insufficient to cover the amount of
interest payments, then the Federal Home Loan Banks shall pay to
the Funding Corporation the aggregate annual amount of
$300,000,000 minus the amounts needed by the Financing
Corporation pursuant to section 21 of this Act and for the
purchase of Funding Corporation capital certificates, with each
bank's individual share to be determined pursuant the formulation
and limitations of paragraphs (3) through (6) of subsection (e);

"(C) The proceeds of all net assets of the
Resolution Trust Corporation, upon its dissolution, which shall
be transferred to the Funding Corporation; and

"(D) Notwithstanding any other provision of
this Act, to the extent that the Directorate determines after
consultation with and approval of the Secretary of the Treasury
that the Funding Corporation is unable to pay the interest on any
obligation issued under this subsection from the sources of funds
under (A), (B), and (C), the Secretary of the Treasury shall pay
to the Funding Corporation the additional amount due which shall
be used by the Funding Corporation to pay such interest.

In each

- 183 -

such instance where the Secretary of the Treasury is required to
make a payment under this paragraph to the Funding Corporation,
the amount of the payment shall become a liability of the Funding
Corporation to be repaid to the Secretary of the Treasury upon
dissolution of the Funding Corporation to the extent that the
Funding Corporation may have any remaining assets.

There is

authorized to be appropriated to the Secretary of the Treasury,
for fiscal year 1989 and each fiscal year thereafter, such sums
as may be necessary to carry out this paragraph.

"(3) Principal Payments. On maturity of an obligation
issued under this subsection, the obligation shall be repaid by
the Funding Corporation from the liquidation of noninterest
bearing instruments held in the Funding Corporation Principal
Fund established by subsection (g)(2).

The Funding Corporation

shall obtain funds for such Principal Fund from the funds
obtained pursuant to subsection (e) of this section, all of which
such funds shall be invested in noninterest bearing instruments
described in subsection (g)(1).

"(4) Proceeds To Be Invested in Capital Certificates of the
Resolution Trust Corporation.

Subject to such terms and

conditions as may be approved by the Oversight Board, the
proceeds of any obligation issued by the Funding Corporation
shall be used to -

- 184 -

"(A) purchase the capital certificates issued by the
Resolution Trust Corporation under section 21a of this Act; or

"(B) refund any previously issued obligation the net
proceeds of which were invested in the manner described in
subparagraph (A).

"(5) Investment of United States Funds in Obligations.
Obligations issued under this section by the Funding Corporation,
with the approval of the Oversight Board shall be lawful
investments, and may be accepted as security, for all fiduciary,
trust, and public funds the investment or deposit of which shall
be under the authority or control of the United States or any
officer of the United States.

"(6) Market for Obligations. All persons having the power
to invest in, sell, underwrite, purchase for their own accounts,
accept as security, or otherwise deal in obligations of the
Federal Home Loan Banks shall also have the power to do so with
respect to obligations of the Funding Corporation.

"(7) Tax Exempt Status.

"(A) In General. Except as provided in subparagraph
(B), obligations of the Funding Corporation shall be exempt from

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tax both as to principal and interest to the same extent as any
obligation of a Federal Home Loan Bank is exempt from tax under
section 13 of this Act (12 U.S.C. 1433).

"(B) Exception. The Funding Corporation, like the
Federal Home Loan Banks, shall be treated as an agency of the
United States for purposes of the first sentence of section
3124(b) of title 31, United States Code (relating to
determination of tax status of interest on obligations).

"(8) Obligations Are Exempt Securities. Notwithstanding
paragraph (10) below, obligations of the Funding Corporation
shall-be deemed to be exempt securities (within the meaning of
the laws administered by the Securities and Exchange Commission)
to the same extent as securities which are direct obligations of
the United States or are guaranteed as to principal or interest
by the United States.

"(9) Minority Participation in Public Offerings. The
Oversight Board and the Directorate shall ensure that minority
owned or controlled commercial banks, investment banking firms,
underwriters, and bond counsels throughout the United States have
an opportunity to participate to a significant degree in any
public offering of obligations issued under this section.

"(10) No Full Faith and Credit of the United States.

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Obligations of the Funding Corporation shall not be obligations
of, or guaranteed as to principal by, the Federal Home Loan Bank
System, the Federal Home Loan Banks, the United States, or the
Resolution Trust Corporation and the obligations shall so plainly
state.

The Secretary of the Treasury shall pay interest on such

obligations as required pursuant to subsection (f).

"(g) USE AND DISPOSITION OF ASSETS OF THE FUNDING
CORPORATION NOT INVESTED IN RESOLUTION TRUST CORPORATION.

"(1) In General. Subject to such regulations,
restrictions, and limitations as may be prescribed by the
Oversight Board, assets of the Funding Corporation, which are not
invested in capital certificates issued by the Resolution Trust
Corporation under .section 21a of this Act and which are not
needed for current interest payments, shall be invested in -

"(A) direct obligations of the United States?

"(B) obligations, participations, or other
instruments of, or issued by, the Federal National Mortgage
Association or the Government National Mortgage Association;

"(C) mortgages, obligations, or other securities
for sale by, or which have been disposed of by, the Federal Home
Loan Mortgage Corporation under section 305 or 306 of the Federa!

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Home Loan Mortgage Corporation Act [12 U.S.C. 1454 or 1455]; or

"(D) any other security in which it is lawful for
fiduciary and trust funds to be invested under the laws of any
State.

"(2) Segregated Accounts for Zero Coupon Instruments
Held to Assure Payment of Principal.

The Funding Corporation

shall invest funds from sources specificed in subsection (e) in,
and hold in a segregated account (the "Funding Corporation
Prnicipal Fund"), noninterest bearing instruments -

"(A) -which are securities described in paragraph
(1) ; and

"(B) the total of the face amounts (the amount of
principal payable at maturity) of which is approximately equal to
the aggregate amount of principal on the obligations of the
Funding Corporation.

"(h) MISCELLANEOUS PROVISIONS RELATING TO THE FUNDING
CORPORATION.

"(1) Treatment for certain purposes. Except as
provided in subsection (f)(7)(b), the Funding Corporation shall
be treated as a Federal Home Loan Bank for purposes of sections

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13 and 23 of this Act (12 U.S.C. 1433 and 1443).

"(2) Federal Reserve Banks as Depositaries and Fiscal
Agents.

The Federal Reserve banks are authorized to act as

depositaries for or fiscal agents or custodians of the Funding
Corporation.

"(3) Applicability of Certain Provisions Relating to
Government Corporations.

Notwithstanding the fact that no

Government funds may be invested in the Funding Corporation, the
Funding Corporation shall be treated, for purposes of sections
9105, 9107, and 9108 of title 31, United States Code, as a
mixed-ownership Government corporation which has capital of the
Government.

"(4) Power to Remove and Jurisdiction.
Notwithstanding any other provision of law, any civil action,
suit, or proceeding to which the Resolution Funding Corporation
is a party shall be deemed to arise under the laws of the United
States, and the United States District Court for the District of
Columbia shall have original jurisdiction over such.

The

Resolution Funding Corporation may, without bond or security,
remove any such action, suit, or proceeding from a State court to
the United States District Court for the District of Columbia.

"(i) TERMINATION OF THE FUNDING CORPORATION.

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"(1)

In General.

The Funding Corporation shall be

dissolved, as soon as practicable, after the date by which all
capital certificates purchased by the Funding Corporation in the
Resolution Trust Corporation have been retired.

"(2) Oversight Board Authority To Conclude the
Affairs of the Funding Corporation.

Effective on the date of the

dissolution of the Funding Corporation under paragraph (1), the
Oversight Board may exercise on behalf of the Funding
Corporation, any power of the Funding Corporation which the
Oversight Board determines to be necessary to settle and conclude
the affairs of the Funding Corporation.

"(j) REGULATIONS. The Oversight Board may prescribe such
regulations as may be necessary to carry out the provisions of
this section, including regulations defining terms used in this
section.

"(k) DEFINITIONS. For purposes of this section -

"(1) Insured Savings Association. The term 'insured
savings association' means a savings association as such term is
defined by section 3(u) of the Federal Deposit Insurance Act and
which is insured by the Federal Deposit Insurance Corporation.

"(2) Oversight Board. The term 'Oversight Board'

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means the Oversight Board of the Resolution Trust Corporation
under section 21a of the Federal Home Loan Bank Act, and after
the termination of said Corporation the term shall mean the
Secretary of the Treasury, the Chairman of the Federal Reserve
Board and the Attorney General.

"(3) Directorate. The term 'Directorate' means the
directorate established in the manner provided in subsection
(c)(1) to manage the Funding Corporation.".

"(4) Issuance Costs. The term "issuance costs"—

"(i) means .issuance fees and commissions
incurred by the Funding Corporation in connection with the
issuance or servicing of any obligation of the Funding
Corporation; and

"(ii) includes legal and accounting expenses,
trustee and fiscal paying agent charges, costs incurred in
connection with preparing and printing offering materials, and
advertising expenses, to the extent that any such cost or expense
is incurred by the Funding Corporation in connection with issuing
any obligation; and

"(5) Custodian Fees. The term "custodian fee"
means—

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"(i) any fee incurred by the Funding
Corporation in connection with the transfer of any security to,
or the maintenance of any security in, the segregated accounts
established under subsection (g); and

"(ii) any other expense incurred by the
Funding Corporation in connection with the establishment or
maintenance of such accounts.

Sec. 503.

FINANCING CORPORATION. " Section 21 of the Federal Home

Loan Bank Act (12 U.S.C. 1441) is hereby amended as follows:

(1) By deleting the term "insured institution" and "institution"
each time they appear and inserting "insured savings association"
and "savings association" in lieu thereof respectively; and by
deleting the term "Federal Home Loan Bank Board" and "Board" each
time they appear and inserting in lieu thereof "Chairman of the
Federal Home Loan Bank System" and "Chairman" in lieu thereof
respectively.

(2) In subsection (c), in paragraph (2) by adding "prior to the
date of the enactment of the Financial Institution Industry

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Reform, Recovery and Enforcement act of 1989 and thereafter the
FSLIC Resolution Fund" before the period therein; and in
paragraph (9) by striking out "or section 402(b) of the National
Housing Act [12 USCS § 1725(b)]".

(3) In subsection (e), in paragraph (3) by adding "prior to the
enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, and therafter purchase capital
certificates or capital stock issued by the FSLIC Resolution
Fund" before the semi-colon;

(4) In subsection (e), in paragraph (7) by deleting "the Federal
Savings and Loan Insurance Corporation" and inserting "the FSLIC
Resolution Fund" in lieu thereof.

(5) In subsection (f), by striking out everything thereunder and
inserting the following:

"(f) Sources of Funds for Interest Payments; Financing
Corporation Assessment Authority.

The Financing Corporation

shall obtain funds for interest payments on obligations issued
hereunder from the following sources:

"(1) The Financing Corporation assessments which were
assessed on insured institutions pursuant to subsection (f) of
this section prior to the enactment of the Financial Institutions

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Reform, Recovery and Enforcement Act of 1989;

"(2) The Financing Corporation, with the approval of the
Board of Directors of the Federal Deposit Insurance Corporation,
shall assess on each insured savings association an assessment as
if such assessment was assessed by the Federal Deposit Insurance
Corporation with respect to Savings Association Insurance Fund
members pursuant to section 7 of the Federal Deposit Insurance
Act:

Provided, That the amount assessed hereunder and the amount

assessed by the Funding Corporation under section 21b of this Act
shall not exceed the amount authorized to be assessed pursuant to
section 7 of the Federal Deposit Insurance Act, and that the
Financing Corporation shall have first priority to make such
assessments; and Provided, further, that all assessments made by
the Financing Corporation under this section and the Funding
Corporation under section 21b shall be subtracted from the
amounts authorized to be assessed by the Federal Deposit
Insurance Corporation pursuant to section 7 of the Federal
Deposit Insurance Act; and

"(3) To the extent the funds available pursuant to
paragraphs (1) and (2) are insufficient to cover the amount of
interest payments, then to the extent the funds are not required
by the Resolution Funding Corporation so as to provide funds for
the Funding Corporation Principal Fund under section 21b of this
Act, then the Federal Deposit Insurance Corporation shall

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transfer to the Financing Corporation from the proceeds of the
FSLIC Resolution Fund the remaining amount of funds necessary for
the Financing Corporation to make interest payments.

"(4) In subsection (g), by deleting the comma after "[12
USCS 1725(b)(1)(A)]" and inserting thereafter "prior to the
enactment of the Financial Institution Industry Reform, Recovery
and Enforcement Act of 1989 and thereafter in capital
certificates or capital stock issued by the FSLIC Resolution
Fund,".

(5) In subsection (1), by deleting subparagraph (1) and
inserting in lieu thereof a new subparagraph (1) to read as
follows:

"(1) Insured Savings Association means a savings
association as defined by section 3(u) of the Federal Deposit
Insurance Act (12 USCS § 1813(u)) that is insured by the Federal
Deposit Insurance Corporation."

Sec. 504. MIXED OWNERSHIP GOVERNMENT CORPORATION.

Section 9101(2) of title 31, United States Code, is amended
by adding at the end thereof the following new subparagraph:

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"(L)

The Resolution Funding Corporation".

TITLE VI - THRIFT ACQUISITION ENHANCEMENT PROVISIONS

Sec. 601. ACQUISITION OF THRIFTS BY BANK HOLDING COMPANIES.
Section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 184
is amended by adding at the end thereof the following new
subsection:

"(i) Acquisition of Savings Associations.

"(1) Beginning on the date two years following the.enactment
of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, the Board may approve an
application by a bank holding company under subsection
(c)(8) to acquire any savings association pursuant to the
requirements and limitations of this section.

In approving

applications by bank holding companies to acquire a savings
association, the Board shall not impose restrictions on
transactions between the savings association and its holding
company affiliates, except as required under the provisions
of section 23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 371c-l) or other applicable statute."

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Sec.

602.

INVESTMENTS BY SAVINGS AND LOAN HOLDING COMPANIES IN

UNAFFILIATED THRIFT INSTITUTIONS.

Section 408(e)(1)(A)(iii) of

the National Housing Act (12 U.S.C. 1730a(e)(1)(A)(iii)) is
amended to read as follows:

"(iii) to acquire, by purchase or otherwise, or to retain
more than 5 percent of the voting shares of an insured
institution not a subsidiary, or of a savings and loan
holding company not a subsidiary, or in the case of a
multiple savings and loan holding company, to so acquire or
retain more than 5 percent of the voting shares of any
company not a subsidiary which is engaged in any business
activity other than those specified in paragraph (2) of
subsection (c) of this section.".

Sec. 603.

TECHNICAL AMENDMENT TO THE BANK HOLDING COMPANY ACT.

Section (2)(j) of the Bank Holding Company Act of 1956 (12 U.S.C
1841(j)) is amended to read as follows:

"(j) INSURED INSTITUTION; SAVINGS ASSOCIATION.—For
purposes of this Act, the terms 'insured institution' and
'savings association' have the meaning given to the term
'savings association' in section 10(a)(1)(A) of the Home
Owners' Loan Act (12 U.S.C.

)."

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TITLE VII - FEDERAL HOME LOAN BANK ACT SYSTEM REFORMS

Subtitle A. Federal Home Loan Bank Act Amendments

Sec. 701 DEFINITIONS.

(a) Add new paragraph (10) to section 2 of the Federal Home
Loan Bank Act (12 U.S.C. 1422) to read as follows:

"(10) The term "savings association" has the same meaning as
in section 2(c) of the Home Owners Loan Act (12 U.S.C.
§1462(c) ) ."

(b) Add a new paragraph (11) to Section 2 of the Federal
Home. Loan Bank Act and (12 U.S.C. 1422) to read as follows:

"(11) The term "Chairman" means "Chairman of the Federal
Home Loan Bank System."

(c) All provisions of Federal law are hereby amended by
deleting the term "Federal Home Loan Bank Board" or "Board" where
such term refers to the Federal Home Loan Bank Board, and
inserting "Chairman of the Federal Home Loan Bank System" or
"Chairman" in lieu thereof, respectively.

Sec. 702. FEDERAL HOME LOAN BANK SYSTEM CHAIRMAN. Section 17 of

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the Federal Home Loan Bank Act (12 U.S.C. 1437) is hereby amended
to read as follows:

"(a) The Federal Home Loan Bank Board is hereby abolished
and all power and authority vested in it or its Chairman
immediately prior to enactment of the Financial Institution
Industry Reform, Recovery and Enforcement Act of 1989 are,
except as otherwise provided in that Act, vested in the
Chairman of the Federal Home Loan Bank System, which System
shall be a bureau in the Department of the Treasury.

The

Chairman shall supervise the Federal Home Loan Banks and
their members and shall promulgate and enforce such rules,
regulations, and orders, as are necessary from time to time
for carrying out the provisions of this Act and all other
laws it is his duty to implement.

The Chairman shall

perform his duties under the general directions of the
Secretary of the Treasury.

"(b) The Chairman, who shall be a citizen of the United
States, shall be appointed by the President, by and with the
advice and consent of the Senate, and shall hold office for
a term of five years unless sooner removed by the President,
upon reasons to be communicated by the President to the
Senate; provided, however, that the individual serving as
the Chairman of the Federal Home Loan Bank Board on the date
of enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 shall be the Chairman until the

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date on which his term as Chairman of the Federal Home Loan
Bank Board would have expired notwithstanding subsection
(a). The Chairman may continue to serve until a successor
has been appointed and qualified.

"(c) Subject to the approval of the Secretary of the
Treasury, the Chairman of the Federal Home Loan Bank System
may employ, direct and fix the compensation of such
employees, attorneys and agents as he deems necessary to
carry out his duties. In directing and fixing such
compensation, the Chairman shall seek to maintain
comparability with the compensation at the other Federal
bank regulatory agencies. The Chairman may designate who
shall.serve in his absence; may continue or establish
collective offices or administrative units of the Federal
Home Loan Banks and, after consultation with the Federal
Home Loan Banks, appoint the heads of such collective
offices or administrative units; and, notwithstanding any
other provisions of law, may delegate to any duly authorized
employee, representative, or agent (including the Office of
Finance or Office of Regulatory Affairs of the Federal Home
Loan Banks or any other joint office or administrative unit
of the Federal Home Loan Banks) any power vested in the
Chairman by law.

"(d) The Chairman shall have the power to suspend or remove
any director, officer, employee or agent of any Federal Home

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Loan Bank or administrative unit of such Banks (including
the Office of Finance and the Office of Regulatory Affiars
or any other joint office or administrative unit of the
Federal Home Loan Banks), the fact of such suspension or
removal to be communicated in writing forthwith to such
director, officer, employee, or agent and to such Bank or
joint office or administrative unit.

"(e) The salaries of the Chairman and other employees of
the bureau and all other expenses-thereof shall be paid from
assessments levied on the Federal Home Loan Banks pursuant
to section 18 of this Act, and the funds derived from such
assessments shall not be construed to be Government Funds or
appropriated monies, or subject'to Presidential
apportionment for the purposes of Chapter 15 of Title 31 or
any other authority.

Such compensation, other than t