Full text of Press Releases of the United States Department of the Treasury : Volume 290

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TREAS.
HJ
10
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v.290

U.S. DEPARTMENT OF THE TREASURY

PRESS RELEASES

APR 02 '89 18 = 26 AMERICAN HORTICURAL SOCIETY

P. 2

April 2, 1989
STATEMENT OF THE GROUP OF SEVEN
The Finance Ministers and Central Bank Governors of Canada,
France, the Federal Republic of Germany, Italy, Japan, the United
Kingdom and the United States met on April 2 in Washington for an
exchange of views on current global economic and financial issues.
The Managing Director of the IMF participated in the multilateral
survejillance discussions.
The Ministers and Governors reviewed their economic policies
and prospects based on the agreed arrangements for economic
policy coordination* Growth over the past year exceeded
expectations and the pattern has been supportive of global
adjustment. Inflation remained generally moderate in 1988 but
inflationary pressures have recently appeared in a number of
countries. External imbalances have been reduced in those
countries with the largest imbalances, although recently the pace
of adjustment has slowed, Exchange rates have generally been
stable.
The Ministers and Governors agreed that sustained noninflationary growth is essential to dealing with global economic
problems and remains the central objective of the coordination
process. The success of these efforts depends on continued
progress in controlling inflation and gradually reducing external
imbalances. While the Ministers and Governors welcome the
reduction in external imbalances achieved last year, they stressed
that further progress in this area is required.
Based on this assessment of the current situation, the
Ministers and Governors concluded that continued efforts are
required. In countries with fiscal and trade deficits, especially
the United States and also Canada and Italy, further reductions
in budget deficits are needed to complement monetary policies in
achieving better domestic and external balance and sustained noninflationary growth. The major surplus countries should pursue
economic and structural policies that will sustain adequate
growth of domestic demand without inflation and facilitate external
adjustment. All countries must pursue structural reforms which
will help to sustain non»inflationary growth. The exchange rate
stability over the past year has made a welcomed contribution to,
and been supported by, the progress achieved in sustaining the
global expansion and reducing external imbalances. The Ministers
and Governors agreed that a rise of the dollar which undermined
adjustment efforts, or an excessive decline, would be
counterproductive and reiterated their commitment to cooperate
closely on excfta-ije markets.

APR 02 '89 18=26 AMERICAN HORTICURAL SOCIETY

P.3

-2Ministers and Governors reiterated the importance they
attach to steady progress in the Uruguay Round towards greater
trade liberalization. They stressed the danger to the global
adjustment process of protectionism and committed themselves to
resisting these pressures wherever they arise. A more open
international trading system is essential to the sustained health
of the global economy.
{In reviewing the international debt situation, the Ministers
and Governors recognized the progress which had been made in
several countries, but noted with concern that serious problems
remain* Noting the encouragement in their Berlin communique for
further development of the debt strategy, they discussed recent
propdsals by several countries.
The Ministers and Governors agreed that the key principles
of the case-by-case, growth-oriented debt strategy remained
valid!. However, they believed that for countries undertaking
fundamental and convincing economic reforms in cooperation with
the IMF and World Bank, the debt strategy should be strengthened
by placing greater emphasis on voluntary debt and debt service
reduction in agreement with the commercial banks as a complement
to new lending. They believe this could make an important
contribution to efforts to resolve international debt problems by
significantly reducing new financing needs to more manageable
levels and reducing the stock of debt over time.
They encouraged the IMF and World Bank to continue in their
respective roles to work with debtor countries on economic reform
programs essential for lasting progress and to place greater
emphasis on measures to attract new investment — noting the role
of MIQA in this connection — and to foster repatriation of
flight capital.
They also encouraged the IMF and World Bank to take, in
accordance with their established principles, appropriate steps
to support efforts to reduce the debt burdens of countries which
are committed to substantial economic reforms. This support
should be accomplished by setting aside a portion of policy-based
loans to facilitate debt reduction transactions. In addition,
the two institutions should examine the establishment of limited
interest support for transactions involving significant debt or
debt service reduction. The concrete negotiations on debt and
debt service reduction are a matter for the debtor countries and
the commercial banks.

-3The Ministers and Governors affirmed the key role of
commercial banks in resolving debt problems. They further
concurred that diversified financial support from the banks is
needed to support sound economic reform programs through a broad
array of new lending and debt/debt service reduction mechanisms.
In order to encourage a broader range of voluntary debt and debt
service reduction transactions, the Ministers and Governors
encouraged the commercial banking community to consider
negotiating waivers of restrictive clauses in existing commercial
bank lending agreements for a given period. They also agreed to
review, consistent with maintaining the safety and soundness of
the financial system, regulatory, tax, and accounting practices
with a view to eliminating unnecessary obstacles to debt and/or
debt service reduction transactions.
The Ministers and Governors also encouraged the IMF to
continue to collaborate actively with the Paris Club.
The Ministers and Governors emphasized the importance of a
growing global economy. They concluded by calling on all parties
to work cooperatively and promptly to put into place the elements
discussed to strengthen the international debt strategy.

TREASURY NEWS

Department of the Treasury • Washington, D.C. • Telephone 566-204
TEXT AS PREPARED

-TO

APR •'

Remarks by

• s :*'

OEPARTKCM

Secretary of the Treasury
Nicholas F. Brady
at the Morning Session of
the Interim Committee
of the International Monetary Fund
Washington, D.C.
April 3, 1989

The World Economic Outlook and
the Question of an SDR Allocation

It's a pleasure for me to welcome you to Washington and to
take part in the deliberations of this group. We have important
issues to discuss today, and I believe that we have the
opportunity to make substantial progress on several of them.
Regarding global economic activity, we find ourselves in a
better situation than most of us expected a year ago. Industrial
country growth strengthened to over 4 percent in 1988, ushering
in the seventh consecutive year of expansion. This boosted world
trade growth to its best rate of the decade, and helped the
developing countries achieve real growth of nearly 4.5 percent.
Moreover, according to the Fund's assessment, the pattern of
growth among the industrial countries was generally favorable
last year. Aggregate domestic demand growth in our major trading
partners strengthened to a level well in excess of that in the
United States. This was certainly a welcome development, providing
direct support for the global adjustment process and for the
aspirations of the developing economies.
NB-203

- 2-

Adjustment of U.S. imbalances continued as we recorded a $34
billion decline in our merchandise trade deficit. Our current
account deficit declined less sharply, but still substantially.
Japan's large trade and current account surpluses are also being
reduced. Importantly, last year we also saw a reduction of the
external imbalances of the Asian Newly Industrializing Economies.
These trends are essential components of a balanced, world-wide
adjustment process. So too would be a substantial decline in the
large imbalances within Europe. But on this score, the basic
trend in Europe evident last year gives us some concern.
Recently, there have been some concerns about a resurgence
of inflation. Clearly, we don't want to squander the hard-won
gains we've made against inflation. Some of us — and here I
include the United States — need to be particularly vigilant on
this score. But I do not believe that the data suggest that a
serious acceleration of inflation in our countries is underway.
We should, therefore, maintain balance in promoting sustained noninflationary growth while reducing external imbalances.
One of the key tasks for the U.S. is to reduce our Federal
budget deficit. There has been progress, but much more clearly
remains to be done. I can personally assure you that President
Bush is committed to further deficit reductions, and is giving
this issue the highest priority. We are actively working with
Congress to develop a framework for further progress on this
front o

With the achievement of strong fiscal positions in major
surplus countries, they now have a greater measure of flexibility
to pursue appropriate growth and adjustment strategies. This
flexibility can and should be used to help our countries make
further progress in reducing external imbalances.
The industrial countries are, of course, well aware of the
implications of our performance and policy choices for the rest
of the world. Ensuring open and growing domestic markets is a
necessary condition for continued developing country growth, and
for progress in resolving debt problems. I will have more to say
on this latter point during today's afternoon session.
To summarize my views on the world economic outlook, the
performance of the global economy in 1988 illustrates that the
rewards of sound, coordinated, policies are broadly shared. If
each of us keeps sight of our collective objective of balanced
and sustained growth, we have every reason to expect continued
progress in the years ahead.
The Question of an SDR Allocation
Regarding an SDR allocation, we continue to have reservations
as to whether the requirements specified in the Articles of
Agreement have been met. The question of an SDR allocation,

- 3-

however, merits our continued close consideration. In particular,
we should study carefully the costs and benefits of various
proposals to allocate SDR.
Thank you very much.

TREASURY NEWS.._

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

TEXT AS PREPARED
APR
FOR RELEASE UPON DELIVERY
EXPECTED AT 2:30 PM
APRIL 3, 1989
Remarks by
Secretary of the Treasury
Nicholas F. Brady
at the Afternoon Session
of the Interim Committee
of the International Monetary Fund
Washington, D.C.
The International Debt Strategy

b 8 5~ "-'

The international debt strategy has been of particular
concern to this Committee for a number of years. The Interim
Committee has in fact provided guidance on this issue not only
to the IMF Executive Board, but to the international community
at large. It is time once again for this Committee to take a
leadership position on the debt problem and provide direction to
international efforts to strengthen the debt strategy.
We recently have offered a number of specific suggestions
for strengthening the strategy, building on ideas and suggestions
put forward by many of you. I am greatly encouraged by the
broad international support that has been expressed for the
concepts and approach which have been put forward. At the same
time, I recognize that many questions remain. It is time, in my
view, that we work together to turn these concepts into specifics
which provide a basis for lasting progress in dealing with the
debt problem.
We believe that the principles of the current strategy —
the vital importance of stronger growth, debtor reforms, external
financial support, and a case-by-case approach to individual
nations' problems — remain valid. It also is crucial for the
Fund and World Bank to continue to play central roles in the
strategy, by assisting developing countries in formulating sound
macroeconomic and structural policies, and by helping to catalyze
NB-204
financial support from other creditors.

2
Policy reforms to produce key macroeconomic and structural
changes are essential to the resolution of debt problems. In
addition, special efforts are needed as part of Fund and Bank
programs to promote confidence in economic programs and encourage
new direct investment flows and the repatriation of flight
capital, as alternatives to new debt. The Fund should also
develop improved techniques for monitoring flight capital to
prompt corrective action at an early stage. Both public and
private sources have estimated that assets held abroad by
nationals of a number of countries might equal or exceed their
external commercial bank debt. These funds, therefore, represent
an important potential source of private capital for debtor
countries which must be part of any overall approach to the debt
problem.
We look to the banking community to support actively
debtors' continuing reform efforts through voluntary debt and
debt service reduction as well as continued new lending. To
facilitate this process, legal constraints in existing bank loan
agreements need to be relaxed. In particular, the negotiation
of a general waiver of sharing or negative pledge clauses for
each performing debtor would be important. This could permit
negotiations on a broad range of voluntary debt or debt service
reduction transactions between debtors and banks which choose to
pursue these alternatives. Such waivers might have a life of
perhaps three years, to stimulate debt or debt service reduction
within a relatively short timeframe. We expect these waivers to
accelerate the pace of voluntary market transactions which reduce
debt or debt service, thus benefitting debtor nations and
reducing new financing needs to more manageable levels.
But for this process to move ahead, the IMF and the World
Bank must also play an active role. We have, therefore, proposed
that the Fund and the Bank adapt their policy-based lending
programs to support specifically voluntary debt reduction. For
debtor nations requesting a debt reduction program, a portion of
policy-based loans should be set-aside to support transactions
involving significant debt reduction. These funds could be made
available to collateralize discounted debt-for-bond exchanges,
or to replenish foreign exchange reserves following a cash buyback, once such transactions have been negotiated with commercial
banks.
In addition, we believe that both institutions should make
available limited interest support for transactions involving
significant debt or debt service reduction. Such support, which
could be structured so as to safeguard the financial positions
of thefor
Fund
and
the
Bank,
could
be made
available
on
a burdens
rolling
growth.
debtors
basis
catalyze
improve
debtors'
and
market
These
a creditors
limited
actions
activity
creditworthiness,
period
alike.
should,
which
of time.
could
therefore,
and
These
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provide
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to
both

3
It will be important during the period ahead to maintain a
close association between debtor country performance, IMF and
World Bank financing, and commercial bank activity. At the same
time, we should recognize that rigidities in the current system
and lack of early financial support in some cases have made it
more difficult for debtor nations to perform well under reform
programs. When a country is launching a major economic reform
effort, it needs to have visible, meaningful support from the
international community from the outset, not months later. We
believe, therefore, that the Fund's policies on financial
assurances should be reviewed with a view toward greater
flexibility in this area. We have suggested that initial
disbursements from the Fund and World Bank should occur once a
waiver agreement has been reached, but prior to completion of
full commercial bank financing packages.
Creditor governments, for their part, should continue to
reschedule official debts in the Paris Club and maintain export
credit cover for debtor nations adopting Fund and World Bank
programs. Countries should also review their respective
regulatory, accounting, and tax regimes with a view to reducing
impediments to debt and debt service reduction. These are issues
for the national authorities to act upon individually, rather
than the international institutions. Where possible, creditor
governments should provide bilateral funding in support of the
strengthened debt strategy. In this connection, we welcome the
additional financial support which has been pledged by Japan to
support these efforts.
In order to move ahead to strengthen the debt strategy, it
is vital that the Interim and Development Committees give
clear direction to the IMF and World Bank Executive Boards on
these matters. I would then urge both Boards to consider
promptly needed changes in Fund and Bank policies in order that
new mechanisms could be put in place.
Similarly, I would urge the banking community to begin now
to incorporate these ideas in their negotiations with individual
countries, in order to reduce the period of uncertainty. Action
on waivers is particularly important to creating the scope for
voluntary debt or debt service reduction. The balance among
debt reduction, debt service reduction, and new lending will, of
Thank you.
course, vary from country to country and from bank to bank.
I am confident that this approach to strengthening the debt
strategy can provide the basis for renewed progress on the debt
problem.

TREASURY NEWS
department of the Treasury • Washington,
D.C.Office
• Telephone
566-2041
CONTACT:
of Financing
202/

376-4350

FOR IMMEDIATE RELEASE
April 3, 1989

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $7,204 million of 13-week bills and for $7,213 million
of 26-week bills, both to be issued on April 6, 1989',
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing July 6, 1989
Discount Investment
Rate
Price
Rate 1/

26-week bills
maturing October 5, 1989
Discount Investment
Price
Rate
Rate 1/

8.80%
8.89%
8.87%

8.81%
8.85%
8.84%

9.12%
9.22%
9.20%

97.776
97.753
97.758

9.35%
9.39%
9.38%

95.546
95.526
95.531

Tenders at the high discount rate for the 13-week bills were allotted 32%.
Tenders at the high discount rate for the 26-week bills were allotted 58%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted

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

Accepted

45,720
19,487,130
30,690
52,850
69,405
46,155
1,582,450
57,355
11,840
75,265
28,900
1,312,875
502,900

$
45,720
5,523,850
30,690
52,850
54,405
46,155
521,650
48,955
11,840
75,265
28,900
260,875
502,900

:
:
:
:
:

$
32,395
21,604,780
25,525
44,200
49,915
42,075
1,827,915
43,455
11,710
66,000
32,770
1,303,320
583,480

$
32,395
5,969,880
25,525
44,200
49,915
42,075
161,915
34,955
11,700
66,000
32,770
158,320
583,480

$23,303,535

$7,204,055

: $25,667,540

$7,213,130

$19,521,850
1,448,840
$20,970,690

$3,422,370
1,448,840
$4,871,210

: $20,381,115
:
1,346,435
: $21,727,550

$1,926,705
1,346,435
$3,273,140

2,297,335

2,297,335

:

2,200,000

2,200,000

35,510

35,510

:

1,739,990

1,739,990

$23,303,535

$7,204,055

: $25,667,540

$7,213,130

$

An additional $4,590 thousand of 13-week bills and an additional $526,110
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.

NB-20 5

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-204
6510

Text As Prepared
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
APRIL 4, 1989
Remarks by
Secretary of the Treasury
Nicholas F. Brady
at the Morning Session
of the Development Committee
of the International Monetary Fund
and the World Bank
Washington, D.C.
I am pleased to participate once again in the Development Committee,
which plays an important role in providing guidance on growth and
structural reform issues, and on the World Bank's role in the
international debt strategy. I would like to touch on these key issues
this morning, while concentrating on further steps to strengthen the debt
strategy, particularly within the World Bank.
As the Ministers and Governors are aware, we believe that
considerable progress has been made in addressing debt problems during the
past several years. The principles which have guided us in the past -the importance of stronger growth, debtor reforms, external financial
support, and a case-by-case approach to individual debtors' problems -remain valid. However, it is clear that new directions for our strategy
are now needed.
These should include:
o On the part of debtor nations, a new emphasis on measures to
encourage investment and the return of flight capital;
o On the part of commercial banks, stronger emphasis on debt and
debt service reduction to complement new lending; and
o On the part of the key international financial institutions, a
change in their policies to provide greater encouragement to
debt and debt service reduction along with other non-debt
private financial flows.

NB-206

- 2We have proposed that the World Bank, along with the Fund, set aside
a portion of policy-based loans to support transactions involving
significant debt reduction which have been negotiated with commercial
banks. Such set-aside funds could be used to collateralize discounted
debt-for-bond exchanges, or to replenish foreign exchange reserves
following a cash buyback.
In addition, we believe that both institutions should make available
limited interest support for transactions involving significant debt or
debt service reduction. Such support could be structured to safeguard the
financial position of the Bank and could be made available on a rolling
basis for a limited period of time. We recognize that the interest
support proposal involves a number of technical issues for the Bank which
require careful consideration. However, we believe it is essential to
establish both support mechanisms in order to provide adequate impetus to
market activity beneficial to both debtors and creditors alike.
The balance of new lending, debt and debt
from country to country, and will need to be
between debtor nations and commercial banks.
constraints in existing commercial bank loan
important.

service reduction will vary
worked out in negotiations
A waiver of the legal
agreements would also be

To complement these changes in the Bank's financial policies, there
is a need to strengthen the effectiveness of its structural adjustment
lending programs. In particular, we believe the Bank should adopt
procedures which assure closer monitoring of performance under these
loans, including Board approval for release of individual tranche
disbursements.
In addition, the Bank should place increased emphasis in its
structural adjustment and sector loans on measures to promote foreign
direct investment. We are encouraged that MIGA will be moving ahead with
its first guarantees in the next few months. The IFC also has a
continuing role to play in attracting foreign investment. Moreover,
debtor governments should implement sound debt/equity swap programs -including, where feasible, opportunities for participation by their own
citizens as a stimulus to the return of flight capital.
Finally, I would note that environmental reform deserves stronger
attention. I would encourage the Bank to establish its own internal
environmental impact assessment procedures, and to develop procedures for
providing information about environmental aspects of individual loans to
non-governmental organizations and community groups. These organizations
can provide useful input to the Bank's appraisal of specific projects. I
also strongly support the position of my Canadian colleague, Finance
Minister Wilson, on increasing public access to environmental information
and ask that we have a full and detailed report on where we stand on all
of these issues at our September meeting.

- 3-

Before concluding, I want to refer to another important development
in the debt strategy. This is the recent agreement to increase the
resources of the Inter-American Development Bank through a major capital
replenishment. The IDB can play a role in supporting policy reform in
Latin America and the Caribbean through additional financial support for
both project and policy-based lending. We welcome the fact that the IDB
can now move ahead in this area.
In concluding, I would like to underscore the importance of prompt
action by the Bank as well as the Fund in putting into place the
mechanisms that can lay the basis for further progress in the debt
strategy.

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
APR
FOR IMMEDIATE RELEASE

b n ~ ;:

CEI^.T^-^

HIGHLIGHTS OF SPEECH BY
DEPUTY SECRETARY OF THE TREASURY
M. PETER MCPHERSON
BEFORE THE
COUNCIL OF INSTITUTIONAL INVESTORS
WASHINGTON, D.C.
APRIL 4, 1989
Deputy Secretary of the Treasury Peter McPherson today told the
Council of Institutional Investors "the Administration believes
that U.S. management should have a balanced decision making
horizon - short and long term - in order to preserve and advance
our competitive position in the world. Accordingly within the
context of the current ERISA law, the Administration seeks to
encourage a balanced time horizon investment approach by pension
funds. Pension plans, as large and growing shareholders with
long term liabilities, are in an ideal position to help assure
that American management takes a balanced time horizon approach
to running their companies."
Mr. McPherson and David Walker, Assistant Secretary of
Department of Labor recently held a press conference to
underline that pension funds are not required to automatically
tender when a tender offer exceeds the market price; rather the
pension fund is obligated to go through a process of considering
the options and then to act in the best economic interest of the
participants and beneficiaries. They were making the point that
there is no ERISA obligation to take a short term view.
McPherson said "that a balanced investment strategy is clearly
consistent with the pension plans' responsibility under ERISA,
subject of course to the pension management's ERISA
responsibilities to think through the investment strategy
options."
NB-207

-2"This process of thinking through the investment options would
often include a review of the long term plans of the
corporations in which the pension plans are investing or
considering investing. If a pension plan determines that
generally a balanced time horizon view of corporate performance
is likely to maximize the return for the participants and the
beneficiaries, then the pension plan manager should undertake
such a strategy."
"Corporate management often complains that it cannot influence
their own pension funds. It is true that management cannot
influence its pension funds for the benefit of the corporation."
"However, the board of a corporation, a committee of the board
or an officer of the corporation, among others, can be the
•named fiduciary1 of the corporation's pension plan, and such
'named fiduciaries' have the responsibility of managing the
pension fund."
"In brief, many 'named fiduciaries' are committees of the board,
•named fiduciaries' are responsible for determining an
investment approach, many •named fiduciaries' settle upon a
balance time horizon approach, and finally those decisions
appear generally appropriate under ERISA."

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
REMARKS BY
DEPUTY SECRETARY OF THE TREASURY
M. PETER MCPHERSON
BEFORE THE
COUNCIL OF INSTITUTIONAL INVESTORS
WASHINGTON, D.C.
APRIL 4, 1989
RELATIONSHIPS BETWEEN PENSION FUNDS
AND CORPORATE MANAGEMENT
The Administration has been giving a great deal of thought to how
to support and encourage U.S. managers to take a long term view
in their management decisions. To that end and to encourage
economic growth, we support capital gains going back into the tax
code. We also are supporting legislation to make the R and D tax
credit permanent.
This matter of decision making horizons is getting attention
because CEOs generally, in fact, feel they are often pressured to
take a short term view. This was pointed out in a study prepared
by Yankelovich, Cloney, Shulman, summarized in an article in
Business Month entitled "Their Deepest Concerns", January, 1988.
Moreover, there are specific reasons for concern. For example,
some feel that Americans are better today at inventing technology
than we are at the time consuming effort of commercializing
inventions. The frequently cited example, is the Japanese
progress in commercialization of high definial TV even though the
most basic technology was invented here.
I should note that not everyone agrees managers are pushed to
take a short term view. Some feel that stock markets do not
punish, in fact, may even reward the long term view. For
example, a study recently undertaken at the Pennsylvania State
University suggested that announcements of new expenditures on
research and development have frequently increased stock
market values. "Fortune" magazine in recent months had a cover
story arguing that managers are rewarded in the market by taking
the long view in making decisions.
Still, there probably are examples of soundly managed companies
with prudent long and short term business strategies in place but
with a low stock price because the companies have lost their
market luster or fashion. Such companies are ready targets for
takeover, despite the best efforts of management.

2
No doubt many companies do take a long term view when they make
decisions. But there is a wide-spread perception that it is
difficult for many U.S. companies to take that approach. Part of
the reason for this, in the opinion of many, is that there is not
a stable relationship between pension funds and corporate
management. It is argued that pension funds are not investors
but traders and that corporations tend to treat pension funds as
such. The focus of this speech is on this relationship between
pensions fund and management.
Role of Pension Funds
There has been a great deal of discussion about the role of
pension plans in the increased volume of trading on the stock
exchanges. Let me present a few facts about the role
of pension plans in the markets and the changes in that role over
the years. (In this speech "pension plans" or "pension funds"
mean both public and ERISA covered private pension funds unless
otherwise indicated.)
Pension plan assets have grown much more rapidly than financial
assets for the economy as a whole over the past four decades. In
1950 pension plans held only 3% of the total financial assets in
the economy. By 1970 they held 9% of all financial assets and by
1987 the pension plan share of total financial assets in the
economy had risen to 18%. Pension plans, held less than $100
billion in assets in 1950, but have assets of slightly over $2.0 .
trillion. Three quarters of these assets are held by private
pension plans and the other quarter by public pension plans.
This three-quarter to one-quarter split has been stable since
1950.
As pension assets have been increasing dramatically, pension
plans have also been shifting a greater proportion of their
investments into publicly traded corporate equities. Between
1950 and 1987 the share of pension assets invested in these
stocks increased from 8% to 35%. In 1987 private pension plans
held 18 percent of all public traded corporated equities, and
public pension plans owned 6 for a total of 24 percent.
Institutional investors owned about one half of the market, with
pension funds being the largest component.
Another important fact is that individual investors, who held as
much as 90 percent of publicly traded corporate equities in 1950,
now apparently hold a little less than 60 percent.
Institutional investors turnover rates are much higher than
individual investors. For example, recent data from the
Securities Industry Association (SIA) show that individual
investors accounted for about 18% of big board trading in 1988,
even though they own nearly 60% and; about 55% of trading was
accounted for by institutional investors who own about 50% of the
market. About 26% of the trading was formally by security firms

3
trading for their own account. There is some suggestion that a
large part of the security firms' trading may be on behalf of
institutional investors so that institutional turnover probably
was much higher than 55%.
Historically pension plans (at least private ones for which
Department of Labor has data) have had a higher turnover rate
than investors in the market as a whole. For example, in 1977,
when the annual turnover rate for the New York Stock Exchange as
a whole was 21%, the private pension turnover rate was 28%. In
1981 when the market turnover rate was 33%, pension plans had a
52% turnover rate. Thus, between 1977 and 1981 at least, it
seems clear that private pension plans were generally out ahead
of the market in turnover rates. Between 1981 and 1986 the
turnover rate on the New York Stock Exchange increased rapidly,
jumping from 33% in 1981 to 64% in 1986. Pension turnover at the
end of that period was about 60%. I suggested above that
institutional trading on the big board probably was a very large
percentage of the total. Also pension trading was almost
certainly higher than their ownership percentage, but it may be
that the turnover rate of the pension funds was lower than for
some other institutional investors. Further figures and studies
are needed.
In brief, pension funds have grown rapidly as a percentage of
ownership of the total market and they are much more active
traders than individuals.
I should also note that institutional investors, including
pension funds, own a large percentage of many companies; 30%,
60%, 70% of companies.
My figures come in large part from the Department of Labor who
has watched pensions closely. These figures can be debated and
are subject to various interpretations.
It should be pointed out that many pension funds are not, in
general, active traders and there may be a trend away from active
trading. Many pension funds are getting so large that it is not
easy to sell because they have to put the proceeds somewhere
else. Some argue that the continued growth of the pension funds
means that they are likely to become more stable investors in the
years ahead. Other factors which encourage a less active trading
approach are studies, including a study of the Department of
Labor, which suggests that pension funds with active trading
approaches frequently don't dp better and may not do as well as
the overall market. Moreover, the cost of active trading can be
substantial. This cost is brokerage fees and the additional fees
for active management as opposed to less expensive passive
management of funds. Very important also is the market impact
cost of trading that may be as much as 100 basis points or more.
For all of these reasons, there has been a growing amount of

4
passive investing by pension funds.
The increased equity ownership by institutional investors,
including pension funds, may be the most important development in
corporate management/ownership for decades. The last development
of such significance was when professional managers began in
large numbers to take over control from owner managers, detailed
first in 1932 in the Modern Corporation and Private Property by
Adolf Berle and Gardiner Means.
However, as stated above this recent shift in ownership, in the
opinion of many has not yet settled into a stable relationship
between pension funds and corporate management. And some feel
that a lack of stability in the relationship between pension
funds and corporate managers makes it more difficult for managers
to take a long term view in their decision making. To quote a
CEO who recently told me, "I don't know if pension investors will
stick with me long enough to see through the changes we need in
our company."
A Balanced View Under ERISA
Before discussing in detail the problems of the relationship
between pensions and management, let me say again the
Administration believes strongly that U.S. management should have
a balanced decision making horizon - short and long term - in
order to preserve and advance our competitive position in the
world.
ERISA is designed to give trustees and managers maximum
flexibility within the constraints of their fiduciary
obligations. The current structure appears to be generally
working well. Any changes to the fiduciary standards of ERISA
would have to be carefully considered and undertaken with great
care. The fiduciary obligations, in particular the prudence
standard and the requirement that fiduciaries act solely in the
interest of the plan, are central to the law. Modifications
would affect many areas governed by the statute, not just the
issue of a long term versus short term investment horizon.
Accordingly, I am uneasy about the idea of changing the statute.
Nevertheless, within the context of the current ERISA law, the
Administration seeks to encourage a balanced time horizon'
investment approach by pension funds. For example, recently the
Department of Labor and Treasury held a press conference to
underline that pension funds are not required to automatically
tender when a tender offer exceeds the market price; rather the
pension fund is obligated to go through a process of considering
the options and then to act in the best economic interest of the
participants and beneficiaries. Among other things, we were
making the point that there is surely no ERISA obligation to take

5
a short term view. Corporate lawyers have, I am told, tended to
advise their clients to take a short term view, e.g. sell when
the tender offer is above market, because some of them think that
it is the more conservative approach.
I refer again to the
announcement in our press conference and urge lawyers to be sure
that clients truly understand their obligations and options in
this area.
To further develop this thought, let me say that pension plans,
as large and growing shareholders with long term liabilities, are
in an ideal position to help assure that American management
takes a balanced time horizon approach to running their
companies. That investment strategy is clearly consistent with
the pension plans' responsibility under ERISA, subject of course
to the pension management's ERISA responsibilities to think
through the investment strategy options. This process of
thinking through the investment options would often include a
review of the long term plans of the corporations in which the
pension plans are investing or considering investing. Management
no doubt will find it in their interest to articulate such long
term plans for pension plan investors and other shareholders. If
a pension plan determines that generally a balanced time horizon
view of corporate performance is likely to maximize the return
for the participants and the beneficiaries, then the pension plan
manager should undertake such a strategy.
Corporate management often complains that it cannot influence
their own pension funds. It is true that management can not
influence its pension funds for the benefit of the corporation.
Moreover, the corporation cannot direct the "named fiduciary" to
buy or sell, vote on proxies, etc. However, the board of a
corporation, a committee of the board or an officer of the
corporation, among others, can be the "named fiduciary" of the
corporation's pension plan, and such "named fiduciaries" have the
responsibility for managing the pension fund. It is, in fact,
generally the case that such a party, very often a committee of
the board, is the "named fiduciary". The "named fiduciary"
generally will hire one or more investment managers to manage
portions of the money.
The "named fiduciary" typically hires investment managers based
in part on a proposed strategy, e.g. active strategy, long term
investing, etc, and periodically reviews what has happened and
agrees upon the strategy for the period thereafter. Presumably
these investment advisors are hired and strategies are agreed
upon in the context of the ERISA responsibilities of the "named
fiduciary". That ERISA responsibility is, of course, to consider
options and determine a strategy in the economic interest of the
participants and beneficiaries. In brief, many "named
fiduciaries" are committees of the board, "named fiduciaries" are
responsible for determining an investment approach, many "named
fiduciaries" settle upon a balance time horizon approach, and

6
finally those decisions appear generally appropriate under ERISA.
The Problem. A Caution
I will set forth today the position of management versus pension
funds. I will do so somewhat starkly to make a point but, in
fact, there is a range of views and approaches by both management
and labor. Moreover, the issues here are just part of a much
broader set of matters, e.g. LBOs and takeovers, management's
relationship with shareholders generally, etc.
Corporate Management View of the Relationship
Corporate management has a view on why the relationship between
management and pension funds is not stable. Corporate management
often complains as follows: pension funds and their investment
managers view their corporate investments simply as the purchase
of stocks, rather than seeing themselves as investing in a going
business. They assert that the focus on stocks rather than the
underlying business causes pension funds and their investment
managers to have too short a performance time horizon. As a
result they may buy and sell stocks too often and for superficial
reasons. They argue that too many investment managers and their
staff are super aggressive MBAs whose personal achievement time
horizon is too short. This is accented by many "named
fiduciaries" and pension funds demanding short term excellent
performance from investment managers. Management notes that even
if the pension fund takes a balance time horizon view, its
investment managers will feel pressure for quarter by quarter
performance since that is, in part, how they will sell
themselves to future clients. Some say pension funds and
investment managers use simplistic performance criteria for
judging the progress of enormous corporations. They are eager
for good results and easily disappointed by momentary setbacks in
business operations. The investment community as a group is too
influenced by performance fads and trendy industries. In short,
Wall Street is on a very different time horizon than Main Street.
Corporate America often says pension funds give lip service to
all the right corporate goals. They support more research and
development, long term relationship-building with employees and
customers, market share efforts, etc. But they still demand
quarterly earnings gains and high share prices while they wait
and that is sometimes not possible.
For corporate America the alleged lack of loyalty of pension
funds when managements are confronted by hostile raiders is the
test that is often failed. Pension funds, it is said, want a
better stock price — however and whenever it is available. They
have no long-term commitment to a company's progress.
Corporate management argues that you cannot run a business with
long-term objectives when you are constantly looking over your
shoulder for someone about to offer flighty stockholders a better

7
deal. You end up operating your business at the margin, heavily
leveraged and stretched to the breaking point, with no room for
error or flexibility. No organization can run at top speed every
day.
Corporate management notes that pension funds, especially public
pension funds, sometimes include social issues in their agenda
for corporate performance. Some managers argue that many of
these issues politicize what should be a sound business and
economic decision-making process. Suddenly, the corporation must
address goals that belong in the political arena, goals that in
fact may detract from the best economic performance for
shareholders including the pension funds.
Management argues that they already talk a great deal to pension
funds. Also it is hard to know who represents who since no one
pension fund owns very much of a particular company and a
"leader" does not necessarily represent alot of others. Many,
perhaps most, large publicly held companies feel that they have
to treat all shareholders about the same because of, among other
reasons, potential SEC problems, and some pension funds,
especiaily some public pension funds, are asking for special
treatment.
A very interesting perspective is provided by a very senior CEO
who believes that pension funds should take a balanced and longer
term view in their investments because of their long term
obligations and the stake which they have in corporate America's
success. But he says that pension funds probably are going to be
traders to some degree because of the large number of
corporations in which they invest. Moreover, management cannot
insist on a special long term commitment on the part of pension
funds and argue at the same time against giving the funds a
special role in corporation decisions. He thinks that large
public companies cannot deal in a special way like this with only
some of their shareholders. Accordingly, he believes that the
relationship between pensions and management cannot be expected
to change much, and probably should not, beyond perhaps a
concentrated effort by management to respond to the interest of
all shareholders and communicate with them. He says that where
the performance of the company and its management is inadequate,
it is reasonable to expect the shareholders to disinvest or try
to change the management. He seems to say that, to the extent
that there is a problem between pension funds and management, it
is partly because some managers are not responding to the
economic interests of all shareholders. This CEO and many other
CEOs feel that there is pressure to take a short term view but
they feel that stability in the pension fund - management
relationship is not the central problem. Rather they point to
conditions that encourage takeovers and LBOs, e.g. availability
of hugh amounts of takeover money, full deductibility of interest
in highly leverage situations, etc.

8

Pension Plan View of the Relationship
Pension plan managers reply to those management claims as
follows: While pension funds as a group may own a large
percentage of the stock of a corporation, each individual fund
rarely owns more than one or two percent. Moreover, an
individual fund may own one or two percent of the
outstanding share of many companies. This type of diversified
holding must be managed as an portfolio and not directly as the
ownership of a business.
Pension plans and their investment managers point out that "named
fiduciaries" charged with pension plan responsibility (and
usually part of management) look at performance quarter by
quarter, regardless what anyone tries to say, and that review
translates into quarter by quarter horizons.
Also, some pension funds say that the volatility of the stock
market, driven by the lure of hugh gains through takeovers,
mergers and LBOs pulls attention to the short term, and that only
so much restraint can be expected from anyone in these
conditions.
Some pension plans say they are not staffed or organized to
participate as owners of the companies in which they invest.
They certainly are not set up to serve on a number of boards of
directors and besides such involvement might limit their ability
to sell if they thought it appropriate. Moreover, how many
company objectives and strategies of companies could a pension
plan help develop? The plan's only option is to evaluate the
detailed programs of managers and directors after they are
established. Managers set the business agenda and pension funds
respond.
Pension funds point out that fairly often a pension fund has
different investment advisors with different strategies, e.g.
some with long term approaches and others with a short term view.
This "balanced" approach makes sense for the individual fund but,
of course, it is these short term investment managers that
corporate managers complain about. In any case many, perhaps
most, large pension funds are set up so that their investment
managers have broad authority to implement an agreed upon
strategy. (Some, in fact, suggest that this set of issues be
viewed as a triangle with management, pension funds and
investment managers each having a different perspective.)
Pension plans believe that corporate managements are rarely
confused about the type of performance that pension plans expect.
Protests to the contrary are sometimes a cover for
ineffective leadership. Pension plans want the kind of
performance any investor would want from a well-run business.

9
While they can live without progress every quarter, they do
expect periodic gains. Long term growth, particularly in large
corporations, has got to be achieved with some regularity.
Earnings disruptions that are explained and addressed promptly
may not be a problem. It is consistently poor or erratic
performance without serious remedial action and good explanations
that dismays all investors.
Pension plans have few options in dealing with corporate
managements that do not perform well. It is argued that the
proxy solicitation process for reforms or director changes is so
costly and dominated by management that it is not cost effective
compared to just selling your stock. When an acquirer comes
along, it is a gift to have someone who will take you out of the
stock at a very favorable price. Corporate management generally
consults and is sensitive to the concerns of major individual and
corporate shareholders. In that spirit, some pension groups have
tried recently to impact on major corporate decisions. Some of
corporate America has not been very interested and sometime
hostile to these ideas. Pension funds agree that the Wall Street
Walk is at times very disruptive but the corporate management
generally does not provide a option.
Resolving the Differences
There are many issues on either side of this debate, but those I
have mentioned sum up the essence of the problem. They
certainly give a flavor of the differences. We should be careful
not to overemphasize the differences that exist, but a certain
amount of tension between corporate America and institutional
investors is essential, if businesses are to be attentive to
maximizing their opportunities. At the same time, pension
owners/investors and managers should come to a better working
understanding for the economic benefit of everyone and the good
of the country.
It is interesting to look at the role of stockholders in Germany
and Japan. Banks and other corporations often own controlling
blocks of stocks. In those situations, stockholders frequently
have a major role in key corporate decisions. Often that role is
very informal. It can be argued that knowledgeable shareholders
in Japan and Germany who closely monitor corporations have an
earlier and less disruptive impact on corporations that start to
get into trouble. I am not arguing in favor of these interlocking
relationships, indeed these relationships in Japan are probably
part of our trade problem. In addition, our laws would and
should preclude some of such concentrated holdings in the U.S.,
but there may be some things to learn here. Some of the same
lessons could also be drawn from a somewhat comparable situation
in many U.S. corporations with large and sophisiticated noninstitutional shareholders.
I am not trying to suggest the amount or exact type of

10
relationship between pension funds and corporate management but
there may be options to the Wall Street Walk. For example, some
argue that the corporate governance process should work to
provide that option for truly important corporate issues. The
theory is that management cannot expect shareholders to be loyal
without some input. Certainly management must really deal with
pension funds, keeping in mind the amount of shares they vote.
Management usually deals with other major shareholder groups in
that spirit. As a part of the relationship with pension funds,
management will want to make a great effort to present their long
range plans and focus on the feedback. Management will, of
course, have more to sell if their companies are well run.
Management must sell its performance and plans to its
shareholders just like it sells its goods to its customers, and
there is a message if the shareholders don't buy the program.
The pressure of corporate governance reform from pension funds
is, in part, because some feel that at least some management does
not deal sufficiently with the pension funds concerns.
Management can expect that the pressure will remain and perhaps
increase on corporate governance to the extent that management
appears not to respond to the concerns of these major
shareholders.
That being said, a more basic question may be how the owners all of the shareholders - feel that management is responding to
their interests. Management of large public corporations was
effectively insulated from the shareholders over the past several
decades but that time is largely gone. Management is living in
that new reality and it can be tough.
As to pension funds, they need to have more long-term commitment
as investors. Pension funds have such a big stake that it no
longer makes sense for them to be only traders. That mind set
comes from a different period of history when pension funds were
small players. Today they have a major interest in corporate
America and in management taking a balance time horizon approach
to running companies. The role of investor may well require some
pension plans to change how they operate. Certainly, some
pension funds will need to spend more time trying to understand
corporate management and their long-term plans, e.g. attend more
analyst meetings, know and communicate more with the analysts for
the industry, communicate more with the companies and raise
business strategy questions, etc.
Both sides have useful things to say to each other, things that
are not always being heard now. Both sides have legitimate needs
and interests that should be respected.
I should note that there is in fact some of what is needed
already going on in both the pension community and in management

11
but further steps are needed.
As I stated above, I have contrasted somewhat starkly the views
of pension funds versus management. Many pension people feel
that the recent move toward passive investment will deal in part
with rapid turnovers and there clearly are many pension funds
that take a very responsible long term view. Moreover, Bruce
Atwater, CEO of General Mills and a leader on these issues in the
corporate community, and others feel that there is already a
great deal of communication between some pension funds and some
companies.
Also, corporate pension plans have generally been less worried
about these issues than public pension funds.
Moreover, we should keep in mind that the relationship of pension
funds and management is only part of a whole range of economic
forces and perhaps not a central factor.
This lack of stability in the relationship between pension funds
and management is basically a problem that needs to be worked out
between the private parties. It is not something the government
should try to dictate. It is true that we in the government
should continue to watch the matter and perhaps at the margins we
can help.
In conclusion, the pension funds with their long term liabilities
are in an excellent position to take a balanced view - short and
long term - of their investments. Also given the size and growth
of pension funds, corporate America probably will and should pay
more attention to pension funds' economic concerns. Stability in
the relationship between these parties is important for the
ability of managers to take a long term view and hence for the
competitive position of the U.S.

TREASURYNEWS
lepartment of the Treasury • Washington, D.C. • Telephone
CONTACT: Office of Financing
FOR RELEASE AT 4:00 P.M.
202/376-4350
April 4, 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 April 13, 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 $14,724 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, April 10, 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
January 12, 1989,
and to mature
July 13, 1989
(CUSIP No.
912794 SQ 8 ) , currently outstanding in the amount of $7,665 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
April 13, 1989,
and to mature October 12, 1989 (CUSIP No.
912794 TA 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 April 13, 1989.
In addition to the maturing
13-week and 26-week bills, there are $9,062
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 $ 1,543 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,903 million as
agents for foreign and international monetary authorities, and $6,433
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
NB-208
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'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. • Telephone 566-2041
-l-M 5ol0
-;R I)
FOR IMMEDIATE RELEASEES MU

April 5,

33
CONTACT: LARRY BATDORF

(202) 566-2041

T5W
TREASURY RELEASES SIXTH REPORT
ON U.S. CORPORATIONS IN PUERTO RICO

The Treasury Department today released its sixth Report on
The Operation and Effect of the Possessions Corporation System of
Taxation"! Possessions corporations are companies incorporated in
one of the fifty States or the District of Columbia that are
generally exempt under section 936 of the Internal Revenue Code
from Federal tax on their income from Puerto Rico, Guam, and
certain other U.S. possessions.
These corporations are also
generally exempt under industrial tax incentive programs from all
or a portion of the otherwise applicable income tax imposed by
Puerto Rico and the possessions.
The tax data in the report released today relate to returns
with fiscal years ending after June 30, 1983 and on or before
June 30, 1984. It is therefore the first Possessions Report that
presents evidence on the impact of the provisions of the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA).
Since over 99 percent of the income of all possessions
corporations is derived from Puerto Rico, the body of the report
deals
with
the
operation
and
effect
of
the
possessions
corporation system in Puerto Rico.
Among the principal findings of this report are:
The estimated tax savings to U.S. corporations from the
possessions corporation provisions were $1.6 billion
1983 (Table 4-5).

in

Possessions corporations in manufacturing industries in
Puerto Rico employed approximately 89,000 persons in
1983.
This represented 12 percent of total employment in
Puerto Rico and 62 percent of all employees in Puerto
Rico's manufacturing sector. (Tables 4-6 and 3-3.)

NB-209

-2Average tax savings per employee were $18,523, or 125
percent of average compensation. Tax saving per employee
ranged from 265 percent of compensation in pharmaceuticals to 31 percent of compensation in textiles (Table
4-6) .
TEFRA appears to have reduced the tax benefits received
by possessions corporations.
In a group of firms with
matched 1982 and 1983 tax returns that were required to
use the TEFRA rules, tax benefits declined from 137
percent of compensation in 1982 to 101 percent in 1983
(Table 5-4).
The pharmaceutical industry derived 46 percent of the
total tax savings and provided 15 percent of the
employment of possessions manufacturing corporations in
1983. (Table 4-7.)
Possessions corporations also held about $15 billion of
exempt financial assets in Puerto Rico at year-end 1986.
It is very difficult to identify any
significant
reduction in interest rates or increase in real investment resulting from the tax exemption for financial
assets (Tables 6-1, 6-2, 6-3 and 6-4).
An appendix to the Report summarizes the possessions corporation system of taxation' as it applies to American Samoa and
Guam and describes the tax exemption for U.S. corporations
operating in the Virgin Islands in accordance with section 934(b)
of the Internal Revenue Code.
Copies of the Report, GPO Stock No. 048-000-00406-7, are
available for purchase from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20401.
o

0

o

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE

QQ.^ 53]^

April 11, 1989

Edith E. Holiday
General Counsel
Department of the Treasury

Edith (Ede) E. Holiday was appointed General Counsel for the
Department of the Treasury on March 18, 1989. She was confirmed
by the United States Senate on March 17, 1989. Ms. Holiday had
served since October 19, 1988 as Assistant Secretary of the
Treasury for Public Affairs and Public Liaison as well as
Counselor to the Secretary.
Prior to joining the Department, Ms. Holiday was Chief Counsel
and National Financial and Operations Director for the
Bush/Quayle 88 Presidential Campaign. Previously she served as
Director of Operations for George Bush for President and Special
Counsel for the Fund for America's Future.
In 1984 and 1985, Ms. Holiday was Executive Director for the
President's Commission on Executive, Legislative and Judicial
Salaries. She practiced law with the firm of Dow Lohnes &
Albertson in 1983 and 1984 and with the firm of Reed Smith Shaw &
McClay from 1977 to 1983. Ms. Holiday also served as Legislative
Director for U.S. Senator Nicholas F. Brady in 1982.
Ms. Holiday graduated from the University of Florida
(B.S., 1974; J.D. 1977). Born in Middletown, Ohio, she resides
in Atlanta, Georgia and is married to Terrence B. Adamson. They
have a two month old daughter, Kathlyn. Ms. Holiday is the
daughter of Mr. and Mrs. Harry Holiday, Jr., formerly of
Middletown, Ohio, currently of Delray Beach, Florida and
Highlands, North Carolina.

NB-210

2041

TREASURYNEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
April 5, 1989

CONTACT!? Office of Financing
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 $3,238 million of 7-year notes maturing
April 15, 1989, and to raise about $3,750 million new cash. The
public holds $3,238 million of the maturing 7-year notes, including
$650 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, Federal Reserve Banks for
their own accounts hold $110 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-211

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
TO BE ISSUED APRIL 17, 1989
April 5, 1989

Amount Qtftrid;
To the public

$7,000 million

PaacrlPtlpn Qt Sicuritv*
Term and type of security
7-year note*
Series and CUSIP designation .... F-1996
(CUSIP No. 912827 XK 3)
Maturity date
April 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
October 15 and April 15
Minimum denomination available .. $1,000
Terms of Sales
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 Terms8
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
Kev Dates:
Receipt of tenders
Wednesday, April 12, 1989,
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury .. Monday, April 17, 1989
b) readily-collectible check .. Thursday, April 13, 1989

TREASURY NEWS

department of the Treasury • Washington, D.C. • Telephone 566-2041
ON 5510
APR hi
FOR IMMEDIATE RELEASE
APRIL 6, 1989

' > / ' **! n

CONTACT: ART SIDDON
(202)
566-2041

M. PETER MCPHERSON
DEPUTY SECRETARY
TO LEAVE TREASURY
Secretary of the Treasury Nicholas F. Brady announced that
M. Peter McPherson, Deputy Secretary of the Treasury, will leave
the Treasury Department on April 6. Mr. McPherson leaves
Treasury to join Bank of America, where he will become an
Executive Vice President and the Director of Debt Restructuring.
He will be responsible for all bank negotiations of restructured
developing country debt and for the management of the bank's debt
equity swaps. He will serve as the bank's primary spokesman on
developing country debt issues and will serve on the bank's
Senior Management Council.
In announcing his departure, Secretary Brady said, "Peter has
been an active leader at Treasury. He has personally been
involved in critical matters including the U.S.-Canada Free Trade
Agreement and GATT. Peter worked extensively on competitiveness
issues, especially the issues concerning decision making horizons
of managers and the role of pension funds. His experience and
wisdom will be missed. I wish Peter the best in the private
sector and am grateful for his work at Treasury."
Mr. McPherson, confirmed as Deputy Secretary of the Treasury in
August 1987, was involved in the full range of issues in the
Department. As Treasury's number two official, he has taken a
special interest in trade, tax, and international issues. He
was one of the three negotiators in the final weeks of the U.S.Canada Free Trade Agreement. He was a member of the Farm Credit
Assistance Board and a member of the Board of the Federal
Financing Bank.
Mr. McPherson served as Acting Secretary of the Treasury during
the transition period between Secretary Baker and Secretary
Brady.
NB-212

From 1981 to 1987, Mr. McPherson served as Administrator, Agency
for International Development and Chairman of the Board of the
Overseas Private Investment Corporation. As Administrator, he
was in charge of the U.S. response to the Great Famine in Africa
in 1984-85 when the U.S. delivered more than 2 million tons of
food to Africa over a 12 month period. He was General Counsel to
the 1980 Reagan-Bush Transition.
Before joining the Reagan Administration, Mr. McPherson was a
partner and head of the Washington office of an Ohio law firm,
Vorys, Sater, Seymour & Pease. He served as Special Assistant to
the President and Deputy Director of Presidential Personnel in
the Ford White House.

TREASURY NEWS

department of the Treasury • Washington, D.C. • Telephone 566-2041
..-':10

0£r,..-:

FOR RELEASE AT 3:00 PM
April 6, 1989

Contact: Peter Hollenbach
(202) 376-4302

TREASURY ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MARCH 1989
The Department of the Treasury announced activity figures for the
month of March 1989 of securities within the Separate Trading of
Registered Interest and Principal of Securities program,
(STRIPS). The principal outstanding for eligible securities was
$326,960,142,000 with $247,755,712,000 held in unstripped form
and $79,204,430,000 held in stripped form. The amount
reconstituted in March was $1,627,280,000. The attached table
gives a breakdown of STRIPS activity by individual loan
description.
The Treasury now reports reconstitution activity for the month
instead of the gross amount reconstituted to date. 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-213

TABLE VI—HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, MARCH 31, 1989
(In thousands)

26

Principal Amount Outstanding
Loan Description

Maturity Data
Total

Portion Held in
Unstripped Form 1

Portion Held in
Stripped Form'

Reconstituted
This Month

11-5/8% Note C-1994 ..

.11/15/94.

$6,658,554

$5,578,554

$1,080,000

$20,800

11-1/4% Note A-1995 ..

.2/15/95

6,933.861

6.202.821

731,040

24.000

11-1/4% Note B-1995 .

.5/15/95 .

7,127,086

5,434.926

1,692.160

40.000

10-1/2% Note C-1995 .

.8/15/95

7,955.901

7.005,101

950,800

.11/15/95.

7,318,550

6,782.550

536.000

6-7/8% Note A-1996

.2/15/96 .

8.410,929

8.105.329

305.600

-0—

7-3/8% Note C-1996 .

.5/15/96 .

20,085.643

19.989,643

96,000

100,800

7-1/4% Note D-1996

.11/15/96.

20.258.810

19.987.610

271,200

30.400

8-1/2% Note A-1997 . .

.5/15/97

9,921,237

9,776.037

145.200

8-5/8% Note B-1997

.8/15/97

9,362.836

9,362.836

8-7/8% Note C-1997 . .

.11/15/97.

9.808.329

9.792.329

8-1/8% Note A-1998 . .

.2/15/98 .

9.159.068

9.159,068

9-1/2% Note C M 995

.

5.600

16,000

9 % Note 8-1998

5/15/98

9,165.387

9,165,387

9-1/4% Note C-1998

8/15/98 .

11.342.646

11,342,646

8-7/8% Note 0-1998

.11/15/98.

9.902.875

9.902.875

8-7/8% Note A-1999 .

.2/15/99

9,719,678

9,719,678

11-5/8% Bond 2004.

.11/15/04.

8.301,806

2,764.206

5.537,600

1 2 % Bond 2005

.5/15/05

4,260.758

1,725.608

2,535,150

10-3/4% Bond 2005.

.8/15/05

9,269.713

6,506.913

2.762,800

9-3/8% Bond 2006

.2/15/06 .

4,755,916

4,755,916

-0—
48,000

127,600

— 0 —

11/15/14.

6,005,584

1,409,584

4,596.000

79,200

11-1/4% Bond 2015. . .

.2/15/15 .

12.667,799

2,894,199

9,773,600

164,480

11-3/4% Bond 2009-14

10-5/8% Bond 2015 .

.8/15/15 .

7,149.916

1,946.716

5.203.200

9-7/8% Bond 2015 ..

.11/15/15.

6.899.859

3.258.259

3.641,600

9-1/4% Bond 2016

.2/15/16

7,266.854

5,242.054

2,024,800

217,600

.5/15/16 .

18.823.551

13,123,551

5.700.000

244.000

7-1/2% bona 2U16

.11/15/16.

ld.oo4.448

9,361,168

9,503.280

8-3/4% Bond 2017

.5/15/17

18.194,169

8,238.169

9,956.000

8-7/8% Bond 2017

.8/15/17

14,016,858

9,154.458

4,862,400

9-1/8% Bond 2018. .

.5/15/18

8,708.639

5,811.039

2,897,600

104.800

11/15/18.

9,032.870

6,033.670

2,999,200

300.000

2/15/19

9,610.012

8.222.812

1,387,200

326,960.142

247,755,712

79,204.430

7-1/4% Bond 2016

.

9 % Bond 2018
8-7/8% Bond 2019
Total

.

120.000

-0—
1,627.280

1
Effective May 1, 1987, securities held in stripped form were eligible for reconstitution to their unstripped form. The amounts in this column represent the net affect of stripping and
reconstituting securities.

Note: O n the 4th workday of each month a recording of Table VI will be available after 3:00 pm. The telephone number is (202) 447-9873.
The balances in this table are subject to audit and subsequent adjustments.

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
ri': \Y. ROC CONTACT: Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
April 6, 1989

U " 0
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION

Tenders for $9,011 million of 52-week bills to be issued
April 13, 1989,
and to mature
April 12, 1990,
today. The details are as follows:

were accepted

RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Rate

Investment Rate
(Equivalent Coupon-Issue Yield)

Price

8.73%
8.75%
8.75%

9.48%
9.51%
9.51%

91.173
91.153
91.153

Low
High
Average -

Tenders at the high discount rate were allotted 97%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received

Accepted

$

32,390
22 ,079,130
24,475
55,565
54,895
29,595
1 ,565,715
37,770
16,065
65,140
31,270
1 ,013,950
272,565
$25,,278,525

$ 32,390
7,917,030
24,475
55,565
54,895
29,595
155,825
37,740
16,065
63,110
21,270
330,900
272,465
$9,011,325

$21,,518,125
1,,030,400
$22,,548,525

$5,250,925
1,030,400
$6,281,325

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
NB-214

2,,500,000
230,000
$25,r278,525

2,500,000
230,000
$9,011,325

TREASURY NEWS
spartment of the Treasury • Washington, D.c. • Telephone 566-2041
5310
CONTACT:

FOR IMMEDIATE RELEASE
April 7, 1989

Larry Batdorf
(202) 566-2041

i-ir,

UNITED STATES AND GUAM SIGN
TAX IMPLEMENTATION AGREEMENT
The Treasury Depa rtment announced today that the United
States and Guam have signed a tax implementation agreement to
exchange tax informat
matters. The agreeme ion and provide mutual assistance in tax
existing tax agreemen nt, when effective, will replace and expand
agreement was signed ts between the United States and Guam. The
Director of the Guam by the Governor of Guam, Joseph F. Ada, the
G. Blaz, and by Actin Department of Revenue and Taxation, Joaquin
Policy) John G. Wilki
F. Bias, who is also g Assistant Secretary for the Treasury (Tax
brought the agreement ns. The Lieutenant Governor of Guam, Frank
Chairman of the Guam Tax Reform Commission,
s to Washington for signature by Mr. Wilkins
The agreement is effective January 1, 1991, or such earlier
date as the two governments agree. Sections 1271 and 1277 of the
Tax Reform Act of 1986 required the United States and Guam to put
into effect a tax implementation agreement before certain
provisions of the Tax Reform Act that concern Guam will take
effect.
The agreement with Guam is similar to the tax implementation
agreements signed by the United States with the Virgin Islands in
1987 and with American Samoa in 1988. The United States is
continuing to negotiate a tax implementation agreement with the
Commonwealth of the Northern Mariana Islands. In the case of
each of these possessions, certain provisions of the Tax Reform
Act of 1986 are not effective until a tax implementation
oOo
agreement is in effect.

NB-215

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: 18

Author(s):
Title:

Treasury Press Conference

Date:

1989-04-10

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

THE SECRETARY OF THE TREASURY
WASHINGTON

April 4, 1989

Dear
Thank you for your leadership in moving with dispatch
on the Administration's Financial Institutions Reform, Recovery,
and Enforcement Act of 1989. Your announced schedule for markup of the President's legislation and your continuing efforts to
move the legislation for his early signature are truly in the
public interest. Your dedication to prompt action will translate
into substantial savings for the U.S. taxpayer.
In my view it is critical that the fundamental
structure of the Administration's plan — reform, financing and
enforcement —
generally remain intact. On the financing issue,
we have provided adequate funding through an equitable and
balanced system of self-help contributions from the savings and
loan industry and Treasury funding.
There is an important reason to adhere to our
financing proposal: the intent and integrity of the GrammRudman-Hollings process. Proposals to concentrate the financial
burden solely in this year's budget would mean that we far exceed
the Gramm-Rudman-Hollings deficit reduction target. Any effort
to sidestep this process could be viewed as gimmickry, could
create an unfortunate precedent, and could render essential
budget discipline a sham. Our plan scores all Treasury payments
in the year expended and lives within the President's budget
deficit reduction program.
My meetings over the weekend with our major foreign
trading and financial partners only reinforce in my mind the
importance of the Gramm-Rudman-Hollings discipline to our
international economic standing. Our international friends are
concerned about our ability to bring down the budget deficit ar.i
will be watching carefully to see that we keep our commitments.
If we fail to honor Gramm-Rudman-Hollings, the effect on
financial markets could raise government borrowing rates; if
these rates increase by as little as two basis points, the
resulting increased interest cost would dwarf any potential ccst
savings derived from direct Treasury financing of the savings ».r
loan plan.

2 -

Finally, if we open up Gramm-Rudman-Hollings, one sure
consequence for the S&L package will be something none of us -can
afford — delay — and delay translates into a higher total cost
associated with resolving the S&L problem.
As for reform, we believe that deposit insurance
protection for the public works best when sufficient private
capital is up front and at risk, ahead of the deposit insurer and
the taxpayer. Regulatory standards for thrifts must be brought
up to the level of banks. We have for too long allowed thrifts
to grow without the discipline of prudent capital levels and
meaningful accounting standards. The result has been the current
thrift crisis. That is why we have set June 1991 as an
appropriate time to have risk-based capital standards in place
for S&Ls that are no less stringent than capital standards for
national banks. As you know, the risk-based capital formula
encourages the holding of mortgages and mortgage-backed
securities.
One of the reasons we face the problems we have today
is that savings and loans have had either regulatory or
statutory capital forbearance since the early 1980s. In this
context, a 1991 date is reasonable and necessary to restore
public confidence in the savings and loan industry. I urge you
to resist entreaties to postpone the effective date of the
capital requirements; it didn't work in the past.
To be clear, 1991 is not a date after which noncomplying S&Ls must face liquidation. Instead, after that date a
financial institution must have a suitable business plan to bu:l:
capital before it can grow. The definition of capital must be
meaningful. We should not allow phantom capital, as would occur
if we allowed deferred loan losses to count as capital, allowed
the double accounting of subsidiary capital, or counted
subordinated debt as tier 1 capital. The GAAP capital standard
must replace so-called regulatory accounting principles (RAP).
We would, however, be pleased to work with Congress on
appropriate language to ensure equitable treatment of goodwill
resulting from a supervisory acquisition, assuming that the ctr.er
elements of the Administration's capital rule are maintained
intact.
The general regulatory and supervisory reform
components of the President's legislation are equally important.
One other potential improvement in the regulatory provisions
concerns easing restrictions immediately on bank holding ccrpa.-.
acquisition of savings and loan associations. This would help
bring more private capital into the industry. We would be
pleased to work with the Congress in this area, as well, we
believe the delay that would come from a protracted debate a::.:
competitive
services offered by different finar.rii.
institutions products
would be and
counterproductive.

- 3 -

We feel strongly that sanctions for wrong doing and
improper practices in financial institutions be strengthened to
maintain the credibility of the other reforms we all agree are'
necessary. As President Bush observed, and the General
Accounting Office confirmed, unconscionable risk-taking, fraud,
and outright criminality have been important factors in the
erosion of the strength of the financial institution industry.
The public has asked that we make every effort to recover assets
diverted from these institutions and put those guilty of criminal
activity behind bars.
Finally, I must again stress the critical need for
immediate action by the Congress. Delay is our enemy. There
will be other opportunities to address other issues not contained
in this legislation.
Our goal as stated by the President, and which I know
you share, is "to resolve this threat to the American financial
system permanently, and to do so without delay." Let us.move
forward together quickly toward that goal.
Sincerely,

Nicholas F. Brady

TREASURY JMEWS

apartment of the Treasury • Washington, D.C. • Telephone 566-2041
, CONTACT: Office of Financing
•-•
" 202/376-4350
FOR IMMEDIATE RELEASE
April 10, 1989
RESULTS OF TREASURY'S MEEKLY BILL*AUCTIONS
Tenders for $7,207 million of 13-week bills and for $7,224 million
of 26-week bills, both to be issued on
April 13, 1989, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing July 13, 1989
Discount Investment
Price
Rate
Rate 1/
8.70%
8.72%
8.71%

9.02%
9.04%
9.03%

97.801
97.796
97.798

26-week bills
maturing October 12, 1989
Discount Investment
Rate
Rate 1/
Price
8.77%
8.78%
8.78%

9.30%
9.32%
9.32%

95.566
95.561
95.561

Tenders at the high discount rate for the 13-week bills were allotted 63%
Tenders at the high discount rate for the 26-week bills were allotted 99%

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

Accepted

$
49.460
23,753,585
28,280
54,080
63.980
44,565
1,325,115
55,010
12,840
52,985
45,075
813,050
611,070
$26 ,909 ,095

$

49,190
963,755
28,280
54,080
63,980
44.565
155,265
35,010
12,840
52,985
35,075
101.050
611,070
$7 ,207 145

$
39,500
20,946,820
18,880
46,395
50,125
40,520
1,317,795
39,300
12,275
66,010
33,755
784.950
500,395
$23,896,720

$ 39,500
6.050,290
18,870
46,325
50,125
40,520
113.195
31,300
12,275
66,010
23,755
231.450
500,395
$7,224,010

$23 172 645
1 503 855
$24 676 500

$3 470 695
1 503 855
$4 974 550

$19,330,860
1,200,925
$20,531,785

$2,658,150
1.200,925
$3,859,075

2 032 830

2 032 830

1,900,000

1,900,000

199 765
$26,909,095

199 765

1,464,935
$23,896,720

1,464,935
$7,224,010

Izpe
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

$7,207,145

An additional $86,035 thousand of 13-week bills and an additional $616,465
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
NB-216

TREASURY,NEWS .
Department
of theAT
Treasury
D.c.
• Telephone
566-2041
FOR RELEASE
4:00 P.M. • Washington,
CONTACT:
Office
of Financing
April 11, 1989

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 April 20, 1989. This offering
will result in a paydown for the Treasury of about $22,800 million,
as the maturing bills total $37,200 million (including the 248-day
cash management bills issued August 15, 1988, in the amount of $7,021
million and the 17-day cash management bills issued April 3, 1989,
in the amount of $15,506 million). Tenders will be received at Federal Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500, prior to 1:00 p.m., Eastern Daylight
Saving time, Monday, April 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
January 19, 1989, and to mature July 20, 1989 (CUSIP No. 912794
SR 6), currently outstanding in the amount of $7,614 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be
dated April 20, 1989, and to mature October 19, 1989 (CUSIP No.
912794 TB 0).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing April 20, 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 o»f tenders for such accounts exceeds the aggregate amount of maturing bills held by them. Federal Reserve Banks
currently hold $4,647 million as agents for foreign and international
monetary authorities, and $4,314 million for their own account.
These amounts represent the combined holdings of such accounts for
the four issues of maturing bills. Tenders for bills to be maintained on the book-entry records of the Department of the Treasury
NB-217
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
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
10/87
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.

TREASURY NEWS
tepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April .12, 1$89

COM 53

.'irfr |l

CONTACT:

LARRY BATDORF
(202) 566-2041

8 S5 '^ J9

TREASURY RELEASES REPORT ON THE TAXATION
OF AMERICANS^ WORKING ABROAD
The Treasury Department has released a report on Taxation of
Americans Working Overseas - The Operation of the Foreign Earned
Income Exclusion in 1983.
U.S. citizens and residents employed in a foreign country for
11 out of 12 months and U.S. citizens who are bona fide residents
of a foreign country for the full tax year may claim an exemption
from Federal income tax of up to $70,000 per year of foreign
earnings plus housing costs in excess of a base amount. The tax
data in this report relate primarily to 1983 income.
At that
time, the maximum annual exclusion of foreign earned income was
$80,000 plus reasonable housing costs in excess of $6,604.
Among the principal findings of this report are:
— Approximately 154,000 returns claimed the foreign earned
income exclusion in 19-83. They reported $7.0 billion of foreign
earned income, of which $6.0 billion was excluded from the tax
base.
— Fewer than one in five returns claimed relief for excess
housing costs. For those that did, the relief was substantial;
it averaged 30 percent of the average basic exclusion.
— The estimated tax savings from the foreign earned income
exclusion in 1983 was $1.0 billion.
— Saudi Arabia was the most frequently reported tax home,
accounting for 16 percent of the returns and 22 percent of the
excluded income.
Other principal tax homes were Germany, the
United Kingdom, Canada, and Japan.
The principal fields of occupation* ;' reported were
construction, engineering, petroleum or mining (21 percent of the
individuals); education and religion (20 percent) and business
management (15 percent).
Copies of the report, GPO Stock No. 048-000-00407-5 are
available for purchase from the Superintendent of Documents, U.S.
Government Printing Office, Washington, D.C. 20401.
o 0 o

NB-218

TREASURY NEWS
FOR IMMEDIATE
Department
of theRELEASE
Treasury • Washington, D.C.
• Telephone
Office
of Financing
April 12, 1989

IJ c
h z>6
310CONTACT:

202/376-4350

RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $7,020 million of
$18,630 million of tenders received from the public for the 7-year
notes, Series F-1996, auctioned today. The notes will be issued
April 17, 1989, and mature April 15, 1996.
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% interest rate are as follows:
Yield
Price
Low
9.38%*
99. 975
High
9.40%
99. 874
Average
9.39%
99. 924
•Excepting 1 tender of $4,000.
Tenders at the high yield were allotted 38%
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accected
Boston
$
32,782
32,782
$
New York
16,515,361
6 ,334,941
Philadelphia
15,657
15,657
Cleveland
27,446
27,446
Richmond
23,021
17,996
Atlanta
36,871
36,871
Chicago
1,196,315
312,769
St. Louis
41,985
22,745
Minneapolis
16,665
16,658
Kansas City
29,579
29,579
Dallas
13,481
11,480
San Francisco
677,414
157,009
Treasury
3,855
3,840
Totals
$18,630,432
$7 ,019,773
The $7,020
million of accepted tenders includes $650
million of noncompetitive tenders and $6,370
million of competitive tenders from the public.
In addition to the $7,020 million of tenders accepted in
the auction process, $600 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $110 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-219

-2041

TREASURY NEWS _
department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE

April 12, 1989

U.S. Treasury to Sell Silver
The Department of the Treasury today announced that it has
asked the Department of Defense, Defense Logistics Agency (DLA)
to arrange public sales of Treasury-held silver beginning in May.
This arrangement is pursuant to PL 100-440, dated September 22,
1988, and will result in the sale of 2 1/2 million fine troy
ounces of silver each year for the next three fiscal years.
Two sales of approximately 1.25 million troy ounces each will
be held in fiscal year 1989. Quarterly sales are planned for
fiscal years 1990 and 1991.
The Secretary of the Treasury reserves the right to cancel
any scheduled sale upon a determination that such a sale will
severely disrupt the domestic market for silver or for any other
reason deemed to protect the best interests of the government.
The silver to be offered is of various finenesses and is
currently in storage at Mint facilities in San Francisco and West
Point. Offered for sale from the San Francisco holdings is .999,
.900, and .400 fine silver in bars weighing between 500 and 600
gross ounces. The West Point silver to be offered for sale is
.999 fine silver in bars weighing approximately 1000 gross
ounces. The balance of the assay in both offerings is copper.
The sales will be by competitive bids, per fineness
categories, with all successful bidders paying the price bid for
each ounce of silver. Bids will be accepted for a minimum
purchase quantity as outlined in the Invitation for Bid. The
government reserves the right to reject any or all bids. A bid
deposit of 5 percent of the amount bid will be required.
Delivery will be made f.o.b. purchaser's conveyance at the
San Francisco or the West Point Mint.
(more)
NB-220

Formal Invitations For Bid will be issued to provide complete tern
s and conditions of the sales. Firms or persons on DLA's
precious metal mailing lists will be sent a copy of the
Invitation For Bid within approximately 20 days. The first sale
will be scheduled to take place approximately 20 days following
issuance of the Invitation For Bid.
Requests for the Invitation For Bid and other inquiries
should be directed to:
Defense Logistics Agency
Directorate of Stockpile Management
Stockpile Contracts Division
Disposal Branch - DLA-NCM
18th and F Streets, N.W.
Washington, D.C. 20405
Telephone: (202) 535-7225

TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
5310
For Release Upon Delivery
Expected at 9:30 a.m.
April 13, 1989

'> :'S

M

i

-• 7:-'.:>.,

STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the Administration's
views regarding the impact on sma 11 businesse s of the nondiscrimination rules of section 8 9 of the Internal Revenue Code.
The Administration recognizes the difficultie s posed by section
89 for small businesses. Because we are awar e of these
difficulties, the Administration supports con tinued efforts to
simplify the application of secti on 89. " We b elieve, however,
that the Treasury Department and Internal Rev enue Service cannot,
by regulation, go any further in simplifying section 89 without
enactment
legislation.
Tr easury IDepar
looks
forward
In the offirst
part of myThe
testimony,
will tment
describe
briefly
to
assisting
Congress
in
fashioni
ng
a
legisla
tive
solution.
the background of section 89, the policy rationale for its
enactment and certain positions taken in the proposed
regulations. Then I will discuss the principal problems with the
application of the statute to small businesses. Finally, I will
conclude by summarizing the Administration's position on
modification of section 89.
Background and Policies
The enactment of section 89 had two basic effects. First,
a uniform set of nondiscrimination rules was made applicable to
the wide variety of employee benefit plans previously subject to
different rules, such as group-term life insurance plans and
self-insured medical plans. Second, nondiscrimination rules were
made applicable to employer-provided health insurance, which was
previously not.subject to such rules. It is this latter effect
of section 89 that is the most far reaching in its impact.
NB-221

-2The Internal Revenue Code generally provides that the value
of employer-provided health coverage is excluded from income.
The primary purpose of this exclusion is to encourage employers
to provide health coverage to their employees. The President's
1990 budget reports that the revenue loss tax expenditure for
employer-provided health coverage in 1990 will be $29.6 billion.
Section 89 conditions this tax benefit by providing that
employer-provided health coverage may be excluded from the income
of highly compensated employees only if coverage is also provided
on a nondiscriminatory basis to nonhighly compensated employees.
In the event employer-provided health coverage is found to be
discriminatory under section 89, the value of coverage is
included in the income of highly compensated employees as wages.
The rationale for the conditions imposed by section 89 was
that the tax expenditure for the exclusion from highly
compensated employees' incomes is justified only to the extent
employers provide nonhighly compensated employees health coverage
generally comparable in value to the coverage received by highly
compensated employees. The legislative history of the Tax Reform
Act of 1986 indicates that Congress was concerned that the rules
formerly applicable to certain employee benefits, particularly
health insurance, did not require sufficient coverage of
nonhighly compensated employees as a condition to the exclusion;
the tax benefit afforded to highly compensated employees
receiving employer-provided health coverage could not be
justified without broader coverage being mandated.
Under section 89 an employer may choose to test its health
plan to determine if the plan "satisfies the nondiscrimination
rules under one of two methods. Under the first method, a plan
satisfies the rules if it satisfies two eligibility tests and one
benefits test. The first eligibility test is that at least 50
percent of the plan participants must be nonhighly compensated.
Satisfaction of the test ensures that the plan is not designed to
benefit primarily highly compensated employees. The second
eligibility test is that at least 90 percent of the nonhighly
compensated employees must be eligible for a benefit at least
equal to 50 percent of the greatest benefit available to a highly
compensated employee. Satisfaction of this test ensures that
minimum health coverage is available to most employees. The
benefits test is satisfied if the average employer-provided
benefit received by nonhighly compensated employees is at least
75 percent of the average employer-provided benefit received by
highly compensated employees. This test is designed to ensure
that nonhighly compensated employees actually benefit under the
plan. In addition to meeting these tests, a plan may not contain
any provision relating to eligibility to participate which (by
its terms or otherwise) discriminates in favor of highly
compensated employees.

-3Under the second method, a plan satisfies the nondiscrimination rules if it benefits 80 percent of the employer's nonhighly
compensated employees. This method is available, however, only
if the plan in question meets the general requirement that it not
contain any discriminatory provision relating to eligibility to
participate.
The definition of highly compensated employees under section
89 is the same as that used for other employee benefits. The
Internal Revenue Code generally defines a highly compensated
employee as any employee who, during the current year or the
prior year, is one of the following: (i) a 5 percent owner; (ii)
an officer receiving compensation in excess of $45,000; (iii) an
employee receiving compensation in excess of $75,000; and (iv) an
employee receiving compensation in excess of $50,000, who is
among those 20 percent of employees receiving the greatest
compensation from the employer. The Code provides that the
relevant dollar amounts will be indexed for inflation.
When testing its health plans, an employer generally may
exclude those employees who have not completed six months of
service, those who are not yet age 21, those who normally work
less than 17-1/2 hours per week, those who normally work not more
than six months per year and nonresident aliens receiving no
United States source income.
In recently promulgated regulations, the Treasury Department
and Internal Revenue Service have attempted to be as flexible as
legally possible to assist employers in bringing their plans into
compliance with section 89. The proposed regulations
implementing section 89 that were published on March 7, 1989
provide several transitional provisions that will enable
employers to comply more easily with section 89 in 1989. First,
the proposed regulations provide that employers who reasonably
and in good faith comply with section 89 and its legislative
history in 1989 will be treated as having satisfied section 89.
In addition, employers may generally ignore facts in existence
prior to July 1, 1989 when testing their plans for compliance in
1989. Employers who choose to take advantage of this relief
merely annualize the benefits provided after July 1 to determine
whether their plans are discriminatory. Lastly, the proposed
regulations provide that employers who elect not to test whether
their plans satisfy the 75 percent benefits test in 1989 may
include in the income of certain of their highly compensated
employees all of the employer-provided health coverage. This
election relieves employers of most of the data collection and
testing burdens. The highly compensated employees who must
include in income all of the employer-provided health coverage
are the 20 percent of such employees who receive the greatest
compensation from the employer, but not less than ten employees
nor more than 2,000 employees. This transitional provision is
extended to 1990, except that the number of highly compensated
employees who must include all of the employer-provided health
coverage in income is greater.

-4Impact on Small Businesses
In formulating section 89, Congress was to some extent
attentive to the particular situation of small businesses. Thus,
for example, the 80 percent coverage test described above was
originally intended, in part, to facilitate section 89 testing
for small employers. The expectation underlying this test was
that certain employers, especially small employers, might have
very simple benefit structures under which substantially all
employees are covered under one plan or a few very simple plans.
It was thought that because of the availability of this test,
many small businesses would not have difficulty in performing the
nondiscrimination test; for such employers, a single, simpler
test could be used, and the application of the three-part test
would be unnecessary.
Nonetheless, it is clear that section 89 raises significant
compliance problems for many small businesses as well as other
employers. The principal difficulty arises when the employer is
required to value the benefits actually provided under the plan.
In some cases, valuation will not be necessary, as for instance,
if an employer provides a single plan that satisfies the 80
percent test, or provides several plans that may be deemed
comparable without benefit valuation and that together pass the
80 percent test. Valuation, however, may be required, for
example, if more than one plan or option is provided.
To the extent valuation of benefits is required, those small
businesses that provide health coverage to most of their
employees may have particular difficulty in applying the
nondiscrimination tests. In order to determine whether its
health plans satisfy the three-part nondiscrimination test of
section 89, an employer is required to test its plans on one day
of the year, taking into account the facts in existence on such
day. This test requires an employer to value the employerprovided health coverage actually received by each of its
employees. In order to do this, an employer must identify those
of its employees receiving employer-provided health coverage on
the testing day and must ascertain the value of such coverage
using any reasonable method, including the cost of coverage. If
any highly compensated employee elects to receive health coverage
on a day other than the testing day that has a value different
from the value of the health coverage provided on the testing
day, then the employer must take into account the values of the
health coverage provided to the highly compensated employee in
determining the value of the employer-provided coverage provided
to such employee during the year.
In addition to the general problems of testing and valuation,
we understand that one of the most significant problems that some
small businesses encounter in applying these tests relates to the
pricing of the health coverage offered by insurance companies.
Many small businesses are required to pay insurance companies
individual annually rated premiums rather than level-rate group

-5premiums. As a result, such a business is precluded as a
practical matter from using the cost of health coverage as its
value, because the cost of a highly compensated employee's
coverage may be much greater than the cost of the coverage
provided to a nonhighly compensated employee even though the same
benefit schedule covers both employees. In addition, small
businesses whose insurers refuse to provide health coverage to
part-time employees may be unable to satisfy the
nondiscrimination tests of section 89 if such businesses have a
significant number of part-time employees. Finally, because
small employers have a limited employee population, changes in
the composition of the work force may have a significant impact
on testing results.
Conclusion
The Administration fully understands the problems employers
are experiencing in complying with section 89. It is clear that
many of these problems were not fully understood when section 89
was drafted and that parts of the statute were ill-considered.
At the same time, we fully recognize the competing policy
objectives as well as revenue considerations. Accordingly, we
want to give full latitude to the tax writing committees to
consider
these issues,
and we intend
to work
with be
them
to fashion
I would
pleased
to
This concludes
my prepared
remarks.
appropriate
revenue
neutral
legislation.
respond to your questions.

Removal Notice
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Citation Information
Document Type: Transcript

Number of Pages Removed: 17

Author(s):
Title:

"Meet the Press" Guest: Nicholas Brady

Date:

1989-04-16

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
Text as Prepared
USR>
Er&argoed For Release Upon Delivery
Expected at 10:00 a.n., D.S.T.
»r/? /.;
Statement by
The Honorable Nicholas F. Brady
Secretary of the Treasury
Before the
Subcommittee on Foreign Operations
Committee on Appropriations
U.S. House of Representatives
April 17, 1989
Mr.

-,- ,4,:
~*c

Chairman and Members of the Committee:

I welcome this opportunity to discuss with you the
Administration's fiscal year 1990 budgetary proposals for the
Multilateral Development Banks (MDBs) and the IMF's Enhanced
Structural Adjustment Facility (ESAF).
I want to begin by commending the Committee and its staff
for your excellent work last year in passing a separate, standalone foreign assistance appropriations bill. As you know only
too well, Mr. Chairman, that was a signal achievement.
The
Administration attached considerable importance to that
legislation, and we recognize and very much appreciate the
constructive role played by you and members of the Committee.
We
also value highly the frank and informative bipartisan dialogue
that was evident throughout the process leading up to enactment
of the legislation.
For fiscal year 1990, the Administration is requesting
$1,637 million in budget authority and $2,377 million under
program limitations for subscriptions to the MDBs. It is worth
emphasizing, Mr. Chairman, that exclusive of U.S. funding
shortfalls from previous years, which comprise $313 million of
this appropriation request, Administration requests for the MDBs
have not increased since FY 1985. Thus, one might say that the
MDBs have had their own nominal freeze in place for the past four
years, and we are proposing to continue that this year.
For FY 1990 we are also seeking $150 million in budget
authority to fund U.S. participation in the International
Monetary Fund's Enhanced Structural Adjustment Facility (ESAF).
The specific requests for each MDB "window" and the ESAF are
presented in the annex at the end of my testimony.
Mr. Chairman, you have been an extremely strong advocate of
the MDBs. You recognize, as I do, that these institutions are
important vehicles for promoting U.S. economic, political,
security, and humanitarian interests. Currently, the

N'B-:22

2
international debt problem and the environment are of particular
concern to all of us. Therefore, I regret that in your informal
mark-up of the Administration's FY 1990 foreign assistance budget
request, you suggested cuts of $303 million from the MDBs and $75
million from the ESAF. In particular, you eliminated funding for^
the World Bank and the Inter-American Development Bank because of''
dissatisfaction with the debt strategy. In light of efforts that
are now under way to strengthen the strategy, I hope you will
reconsider the level of funding for the MDBs and the ESAF.
renP9?M-? T9 «TRK?*GTHEH THE DEBT STRATEGY
As you know, the Administration has reexamined the
international debt situation and the strategy for addressing debt
problems. On March 10, I outlined a number of proposals to
strengthen the strategy at a meeting of the Bretton Woods
Committee. The new ideas build on the principles of the existing
strategy, which have been reaffirmed by the international
community as a valid basis for addressing debt problems. These
principles call for restoration of growth through debtor economic
reforms, the provision of external financial support by
creditors, and the treatment of each country's needs and problems
on an individual basis.
In concluding our review, however, we recognized that
despite progress achieved in many areas through the previous
strategy, serious impediments to a successful resolution of debt
problems remain. In many debtor nations, growth has not been
sufficient, nor has economic policy reform been adequate.
Capital flight continues to drain resources from debtor country
economies, and neither investment nor domestic savings have shown
much improvement in a number of cases. Furthermore, while some
progress has been made in reducing countries' debt through market
mechanisms, the pace of debt reduction has been constrained. To
be fair, Mr. Chairman, these are difficulties you have pointed
out many times yourself.
Let me outline for you our proposals to address these
problems. The approach ve have suggested is intended to mobilize
more effective external financial support for debtor countries'
economic reform efforts. While recognizing the continued
importance of new commercial bank lending, we feel that more
emphasis should be placed on voluntary debt and debt service
reduction, new investment, and flight capital repatriation.
In this new approach, we continue to rely upon the
International Monetary Fund (IMF) and the World Bank to play
central roles in addressing debt problems. The policy reforms
fostered by these institutions to produce key macroeconomic and
structural changes and sustained economic performance remain
primary to any resolution of debt problems. In fact, we believe
that IMF and World Bank capacity for promoting reform and

3
mobilizing financial resources can be more effectively harnessed
to strengthen the international debt strategy. This can be
achieved through additional emphasis on policies to promote
foreign direct investment and flight capital repatriation, as
well as redirection of some Fund and Bank resources to support
debt and debt service reduction. I will elaborate on this below.
To facilitate the debt reduction process, constraints on
diversified forms of financial support from the banking community
need to be relaxed. In particular, the negotiation of a general
waiver of the sharing and negative pledge clauses for each
performing debtor would permit debt reduction negotiations
between debtors and banks to go forward. Such waivers might have
a three-year life in order to stimulate debt reduction within a
relatively short time period. We expect these waivers to
accelerate the pace of debt reduction, thus benefiting debtor
nations and reducing new financing needs to more manageable
levels. A variety of debt and debt service reduction
transactions could be pursued, including debt/bond exchanges,
cash buybacks, and non-collateralized interest reduction
instruments. At the same time, effective debt/equity programs
should be in operation in the debtor nations in order to permit
continued conversions of external obligations into investment
instruments.
We look to the banking community to continue to provide new
lending as well, although the magnitudes required should be
reduced by the debt and debt service reduction operation. New
financing could include concerted lending, club loans, or trade
credits — all of which could involve a differentiation of new
loans from old debt. Further, new investment and flight capital
repatriation should play a role in meeting financing needs.
THE ROLE OF THE MDBS IN THE DEBT STRATEGY
Let me elaborate on how the Multilateral Development Banks
relate to this enhanced debt strategy. As I mentioned, the World
Bank will have to play a central role. This is true both with
respect to its promotion of policy reforms and its mobilization
of financial resources for the debtors.
Helping countries establish economic policies conducive to
stronger growth will remain paramount. Sound policies must be
established in the various sectors of debtor economies by, for
example, liberalizing trade, reforming parastatals, developing
financial markets, and relying on the private sector to help
increase employment and efficiency. The World Bank has built
impressive expertise in these areas and has made significant
contributions to reforms in many countries.
In addition to providing advice and funding for vital
structural reforms, however, the World Bank should place special

4
emphasis on measures to promote overall confidence in economic
programs, improve the investment climate, and encourage
repatriation of flight capital. By establishing sound economic
policies, countries can make great strides in restoring investor
confidence. Further, by liberalizing their financial sectors,
debtor countries can expand the scope for investment by
foreigners as well as their own nationals holding assets abroad.
We have proposed, moreover, that the World Bank extend its
policy-based lending operations to provide support for voluntary
debt reduction. In particular, we have suggested that the World
Bank set aside a portion of participating nations' policy-based
loans specifically to support debt reduction transactions —
thereby redirecting resources available from the World Bank's
current capital. These funds could be used to collateralize
debt-for-bond exchanges with a significant discount on
outstanding debt, or to replenish foreign exchange reserves
following a cash buyback.
We believe that the Bank should also make available limited
interest support for transactions involving significant debt or
debt service reduction. Such support, which could be structured
so as to safeguard the financial position of the Bank, could be
made available on a rolling basis for a limited period of time.
Through these efforts, the Bank should help catalyze market
activity which would ease debt service burdens, improve debtors'
creditworthiness, and provide an impetus to growth.
Beyond ongoing and enhanced efforts to promote economic
reforms and to facilitate an easing of debt burdens, the World
Bank will continue its project-lending activities, which remain
a key mechanism for stimulating growth. Such lending will still
comprise about 75 percent of total lending. These loans cover a
wide range of sectoral and development projects in borrowing
countries, rehabilitating or restructuring existing enterprises
and expanding productive capacity. They have financed country
projects in agriculture and rural development, transportation,
education, industry, energy, health and nutrition, water supply
and sewerage, urban development, and telecommunications. This
type of capital transfer complements, on a micro-level, the
Bank's efforts to help countries implement broader-based
structural reforms.
Support for the Debt Strategy
This is, I believe, a particularly opportune time for
legislative action to support the activities of the Bank. In
early April, I conferred with Finance Ministers and Central Bank
Governors from around the world in meetings of the World Bank and
IMF. I was greatly heartened by the broad support expressed for
our proposals by the various groups — the Group of Seven, the
Group of Ten, and the Interim and Development Committees of the

5
IMF and World Bank. The IMF Interim Committee, for example,
which represents the views of both debtor and creditor
governments, welcomed the U.S. proposals to strengthen the debt
strategy and "requested the Executive Board to consider as a
matter of urgency the issues and actions involved." In
particular, the Committee agreed that "the Fund should provide
resources in appropriate amounts to members to facilitate debt
reduction by setting aside a portion of members' purchases under
Fund supported arrangements."
It is critical now that we build upon the momentum
established by these meetings and take the steps necessary to
implement the strengthened debt strategy. This involves ensuring
that the international institutions which have been asked to take
leading roles have adequate resources to do the job.
I hope that the United States will take the lead in this
process, Mr. Chairman, by fully funding the World Bank and the
other development institutions. The regional development banks
will also play an important role in the strengthened debt
strategy. The operations of the African, Asian, and InterAmerican Development Banks complement and support the policy
reforms promoted by the World Bank and the IMF. As the World
Bank seeks to expand the array of sectoral and structural
adjustments targeted by its lending, the regionally focused
institutions can help reinforce the incentives for debtor
countries to implement policies that will lead to sustainable
growth and recovery.
In particular, we expect the Inter-American Development
Bank, now that agreement has been reached on a capital increase,
will undertake lending programs that encourage its borrowers to
adopt policies that will contribute to their economic recovery.
ENVIRONMENT
Debt, however, is not the only major issue that needs U.S.
leadership and the assistance of the MDBs. Global warming and
other environmental matters are now of major international
concern. The adverse effects of climate change and ozone
depletion will not stop at national boundaries. These issues are
global in nature and we must clearly develop new and cooperative
ways to deal with them more effectively.
You, Mr. Chairman, and members of this committee have shown
a great deal of leadership in galvanizing the MDBs to action on
these matters, working closely with the Executive Branch.
Congress, in fact, has given the Executive Branch a substantial
mandate to promote a heightened environmental awareness in the
MDBs and to assure that progress on this front is achieved in the
developing countries. Important headway on various levels has
been made over the past year and we are fully committed to doing

6
more in this important area. All of us are looking to these
institutions to play a critical role in helping to keep this
planet and our environment habitable.
Largely through U.S. efforts, the Development Committee
Communique of April 4 noted that members stressed the increasing
importance attached to environmental issues and to the timely
dissemination of environmental information on Bank-supported
operations. In addition, the Committee agreed to discuss at
their next meeting the Bank's efforts to support the environment,
including the integration of environmental concerns in Bank
operations and measures to increase public awareness of World
Bank environmental activities.
In order to continue to influence this effort, we must be
prepared not only to insist on a critical examination of these
issues, but also be willing to provide the needed financial
support. To help convince you that such support is warranted, I
would like to review some of the reforms now under way to
strengthen the MDBs effectiveness in addressing environmental
concerns.
Recent Reforms
The Inter-American Development Bank (IDB), as part of the
recently negotiated replenishment agreement, is to establish an
environmental line unit to assist in evaluating environmental
aspects of projects early in the project cycle. It was the
United States government that called publicly for the
establishment of this unit, first at the Bank's Annual Meeting
in Caracas in 1988, and again at this year's Annual Meeting in
Amsterdam. The IDB has also held five environmental seminars
for members of its technical staff and estimates that 80 percent
of its operational staff has now completed the training.
The African Development Bank (AFDB) established its own
environmental line unit in 1988. This unit is headed by a
recently recruited African expert who is assisted by three
experts seconded from industrial countries, including one from
the United States seconded under the provisions of an AID
technical assistance program. The African Development Bank is
also working with the Sierra Club, the Natural Resources Defense
Council, and the American Farmland Trust to set up a conference
to increase cooperation between environmental agencies and nongovernmental organizations (NGOs) in four of its borrowing
countries. This initiative, which we encouraged at the AFDB's
Annual Meeting in Abidjan last year, is not proceeding as rapidly
as we had hoped. However, we look forward to the conference
taking place in the second half of this year.
The World Bank renewed and strengthened its pledge to
environmental reform in the Executive Directors Report on the

7
General Capital Increase that was negotiated in 1988. Language
in the report, that was agreed among both developed and
developing countries, called specifically for "better management
of natural resources and for integration of environmental work
into country development strategies, policies and programs; the
evaluation of environmental costs of projects, and mitigation or
elimination of adverse effects." Our job now is to see that
this pledge is fulfilled. This year, the Bank almost doubled
last year's administrative budget for environmental work,
increasing it to $9.4 million in FY 1989 compared with $4.8
million in FY 1988. We are working to assure that a further
increase dedicated to environmental work will be set aside for
next year, particularly in the regional units which monitor the
project appraisal process.
The Asian Development Bank (ADB) established an
environmental' line unit in 1987. The Bank is continuing to work
on refining the participation of the unit in the project cycle.
The role of this unit is set out in the Bank's initial paper on
"Preliminary Environmental Screening of Loans and Technical
Assistance Projects." In addition, the Bank has published other
papers covering secondary screening procedures and provisions for
participation of environmental specialists in loan and technical
assistance appraisals. It is also focusing greater attention on
environmental protection measures in loan agreements and in
documents that give guidance to missions and to post-evaluation
and review operations.
I have provided only a very brief summary of some of the
progress we have made in the MDBs on environmental issues over
the past year. More information is included in the Annual Report
that we submitted to Congress earlier this year.
Tropical Forests
No environmental issue has engaged more public concern than
the destruction of tropical rain forests. The U.S. Government
is determined that the MDBs will adopt policies and procedures
for protective measures in the appraisal of projects that may
adversely affect these forests and other fragile eco-systems.
We have taken several steps to increase international
understanding of the importance of this issue and to build
greater support for measures to protect all such eco-systems
that may be threatened by development projects and programs.
In April of last year, Treasury released its own standards
for U.S. evaluation of MDB projects affecting tropical moist
forests. These standards, developed with support from more than
50 environmental groups in this country, were immediately made
available to the management and staff of the World Bank and to
the regional development banks. They were also tabled at an Ad
Hoc meeting of environmental experts held under the auspices of

8
the Organization for Economic Cooperation and Development (OECD)
in Paris last May. We have made arrangements to see that they
will be discussed again at a follow-on meeting of the OECD's
Development Assistance Committee that will be held in Paris in
June.
Other Initiatives
We have also released U.S. standards for evaluating MDB
projects adversely affecting wetlands and Sub-Saharan savannas
and we are now working with the Natural Resources Defense Council
and other environmental organizations to complete standards for
protecting important marine areas such as coral reefs and
seagrasses.
In addition, Treasury has set up an informal working group
with Greenpeace to help us develop more effective measures to
encourage integrated pest management. Another group is being
organized to help us address energy efficiency and conservation
issues. I am hopeful that we will have more progress to report
in both of these important areas by the time of our next report.
Assessment of Environmental Impact
It is imperative that appropriate environmental impact
assessment procedures be established within the MDBs and in
borrowing countries. There is also a critical need for the MDBs
to provide environmental information on projects to the public
in advance of Board action. I stressed the importance of
environmental issues at the Annual Meeting of the World Bank in
Berlin last September. In March of this year, I wrote a letter
to President Conable emphasizing the importance we attach to
providing access to information and the need for the Bank to act
more quickly in this area. Two weeks ago, we made a statement to
the World Bank's Development Committee highlighting once more the
importance of prompt action. I have urged my colleagues in
other developed countries to support these efforts, and we will
press hard in the months ahead to get international agreement on
appropriate procedures.
We will be most effective if we can mobilize international
support for environmental impact assessment procedures and access
to information, and work with our colleagues from other
countries, both developed and developing, in establishing
procedures that are acceptable to all member countries. We need
to focus our efforts on bringing about the changes that we think
are important within the MDBs and in the countries that borrow
from them.
We have reservations regarding legislation to extend
National Environmental Policy Act (NEPA) procedures to U.S.
votes in the banks. Extension of NEPA would move the focus of

9
our efforts away from reform of MDB procedures, which is the
right focus, to internal U.S. Government procedures.
We are
also concerned that extension of NEPA could be viewed as a
unilateral U.S. approach that would generate opposition to our
proposals and hold back our efforts to promote reform. On the
other hand, I would strongly support an initiative that seeks to
develop appropriate procedures within the MDBs. Such procedures
might well be based on other procedures already established in
member countries or accepted by international organizations.
OTHER U.S. INTERESTS IN THE MDBs
I believe there is more than ample reason for the United
States to support the MDBs based on the international debt and
environmental considerations which I have just reviewed.
However, since U.S. interests in these organizations cover many
areas, as this Committee is well aware, let me quickly review
other dimensions of U.S. interests in fostering a strong
foundation for the multilateral development banks.
First, they support our geo-political and strategic
interests. The MDBs lend to countries that are strategically
important to the United States, such as Turkey, the Philippines,
and Mexico. MDB involvement leads to further cooperation on a
number of fronts, including controlling international migration,
and promoting democracy and human rights.•
Second, the MDBs advance the broad U.S. economic objective
of promoting the growth of a free, open, and stable economic and
financial system. They do this by encouraging and supporting
developing country movement toward more open trade and capital
flows, including greater reliance on the private sector and freemarket pricing policies.
Third, the MDBs support U.S. objectives to improve the
quality of life for impoverished people throughout the developing
world. They provide, particularly through their soft loan
windows, special funding for social programs and generally
promote overall economic growth and productivity in developing
countries.
Finally, stronger, more stable, growing developing country
economies directly help the U.S. economy: they contribute to an
expansion of employment in the United States through increased
exports. Let me elaborate on this point to underscore just how
important this is for the U.S. economy.
Agriculture
The agriculture sector illustrates this vividly. Six out
of every ten people in developing countries depend on agriculture
and related pursuits for their livelihood. Hence, the most

10
direct way to increase incomes in these countries is to assist
agriculture. Indeed, the MDBs are a prime source of project
finance and technical advice in this key sector. Overall, more
MDB lending goes into the agriculture sector than any other —
roughly 25 percent annually.
In poorer countries, up to 60 percent of increased income
is spent on food and upgrading the quality of the diet, and this
virtually always translates into more animal protein in the
diet. Production of more animal protein, in turn, requires more
feed grains and soybean meal — products that U.S. farmers
produce more efficiently than anywhere else in the world. In
fact, the output from one in four U.S. cropland acres enters
export markets, creating nearly one million farm and off-farm
jobs. Roughly 40, percent of U.S. agriculture exports is sold in
developing countries. Hence, living standards in the Third
World, where diets have ample room to grow, will probably play a
greater role than any other factor in determining whether U.S.
agriculture will stagnate or flourish.
South Korea's recent economic performance illustrates the
potential for increased U.S. exports. Since 1982, per capita
consumption of livestock products increased from 18 to 25
kilograms per year, a 39 percent increase which is very high
compared to the relatively flat consumption patterns in the
United States and Europe. The quantity of U.S. feed grains and
soybean exports to Korea doubled in the period from 1980 to
1987. It is important to note in this connection that the MDBs
played a key role in Korea's economic success: MDB loans to
Korea have totaled over $8.7 billion.
Information Technology
A sector that is becoming increasingly pivotal to growth in
all countries is information technology. Within a matter of
decades, government and commerce in the industrialized world have
become dependent on rapidly changing computer hardware and
software, and the new forms of telecommunications — satellite
transmission and optic-fiber cables — that link computers,
telephone, and television. But information technology can also
be invaluable in agricultural research, health services, and
other traditional development activities. Proper utilization of
these technologies can help economies run much more efficiently.
Microelectronics, for instance, can help countries make better
use of electric power, thus limiting capital costs; and
computerization of financial and economic data increase their
accuracy and utility for growth and development several fold.
The MDBs can play a critical role in helping developing
countries gain access to information technology. Indeed, we
believe that this is an area in which there is considerable
scope for greater MDB activity, particularly the World Bank.

11
Not only is strengthening the information technology
capability of developing countries in their self-interest, it is
in our self-interest as well. A growing, more productive
economy is a growing market for U.S. exports. But more directly,
the U.S. is a world leader in this sector. As the developing
countries grow and increase their purchases of information
technology hardware and software, U.S. producers should be well
poised to secure much of this business. In recent years U.S.
exports of computers and business equipment to developing
countries have jumped dramatically. Korea went from importing
$161 million in 1984 to $489 million in 1988, a 300 percent
increase; and Mexico increased from $338 million to $602 million,
almost a 180 percent increase during a period when their ability
to import has been sharply curtailed.
U.S. Business Contracts
In this context, it is useful to note that business
contracts resulting from MDB projects are a direct and tangible
benefit stemming from U.S. participation in the MDBs. These
contracts are composed of three related elements. First, there
is the procurement stemming directly from MDB-provided finance.
U.S. businesses secured roughly $1.9 million in contracts from
the MDBs last year. This compares with U.S. budget expenditures
for the MDBs averaging about $1.3 million annually. Secondly,
since the MDBs only provide a portion of the finance needed for
a project, there are other procurement possibilities generated
by non-MDB finance for a project.
Finally, the business contacts established through U.S.
business participation in bidding on MDB projects leads to
follow-on business. For instance, Morrison-Knudsen, a U.S.
engineering and construction firm, and ECI International, a U.S.
firm specializing in the supply of educational and vocational
training equipment, have sent letters to Congress noting that
contacts established on an MDB project are helpful in pursuing
non-MDB opportunities. In sum, MDB projects are an important
nexus for the development of U.S. exports.
To assist U.S. business in competing for MDB contracts, the
Omnibus Trade Act required the appointment of commercial officers
to serve with each of the U.S. Executive Directors at the MDBs.
The Treasury Department is consulting with the representatives
of the International Trade Administration and the Foreign and
Commercial Service about these appointments. It is expected that
the positions at the Asian and African Banks will be filled in
the near future.
In addition, Treasury is working with the MDBs
to improve the quality and timeliness of information about
contract awards on MDB projects.

12
Burden-sharing
Fortunately, the burden of financing the operations of these
institutions is shared by all member countries. Consequently,
U.S. interests in developing countries can be pursued through
these institutions without the United States bearing the full
burden. This is particularly important during periods of severe
budgetary constraint.
We currently maintain a 34.5 percent share in the capital
of the Inter-American Development Bank. Our shares in the other
IFIs are much lower. In recent years the contributions of other
donor countries — including some developing countries — to
these institutions have increased relative to the United States
as their respective economies have grown and prospered. This is
particularly important for MDB concessional lending operations
where all contributions are fully paid in.
For their market-related lending operations, the MDBs
leverage the callable capital guarantees of member countries to
borrow funds on private capital markets. Hence, the majority of
MDB loans are financed with relatively small cash outlays from
MDB members, and are cost-effective when compared with U.S.
bilateral economic assistance.
In FY 1988 the United States provided $3.1 billion in
foreign economic assistance (Development Assistance and the
Economic Support Fund) to 75 countries, exclusive of Israel,
Spain, and a few other higher income countries. These countries
received U.S. assistance to engender close cooperation and
enhance our national interest through increased political,
economic, and military stability in the Third World. These same
countries received additional commitments of $18 billion from the
MDBs — but at a cost to the United States of only $1.2 billion
in budget authority. Hence, for about one-third the budget cost
of all our bilateral aid programs, U.S. payments to the MDBs
leverage lending programs that are almost six times as large as
our bilateral programs.
In addition, the MDBs provide considerable finance and
technical assistance to countries such as Argentina, Brazil, and
Mexico that are of considerable geo-political importance to the
United States — but which receive virtually no U.S. economic
assistance. The MDBs made commitments of over $5 billion to
these countries in FY 1988.
ENHANCED STRUCTTIRAL ADJUSTMENT FACILITY (ESAF!
In addition to our requests for funding of the MDBs, the
Administration is seeking authorization and appropriation in FY
1990 for a modest $150 million contribution to the Interest

13
Subsidy Account of the Enhanced Structural Adjustment Facility
(ESAF) of the International Monetary Fund (IMF).
In recent years, the international community has adopted a
comprehensive approach to help the poorest countries,
particularly those in Sub-Saharan Africa, to implement the
structural economic reforms which are essential for the increased
growth and development necessary to alleviate poverty and
improve basic human needs. This approach draws upon the
collective efforts of the IMF, World Bank, and official
creditors.
The ESAF represents the centerpiece of the Fund's efforts
to address the plight of the poorest countries. It was
established in 1987 to enable the IMF to provide financial
assistance on concessional terms to the poorest countries
experiencing protracted balance of payments problems and prepared
to undertake multi-year economic reforms. It builds upon the
IMF's Structural Adjustment Facility (SAF), which was established
in 1986 in response to U.S. proposals to assist the low-income
countries adopt growth-oriented reforms. The ESAF is expected
to provide new resources totaling $8 billion to low-income
countries engaged in economic and structural adjustment. These
resources will supplement the roughly $2.5 billion remaining to
be disbursed under the SAF.
The ESAF is catalyzing significant additional resources for
the low income countries through its association with the Policy
Framework Paper (PFP) process, a unique and historic step forward
in strengthening collaboration between the Fund and World Bank.
Under this process, the two institutions work in a mutually
constructive manner in helping resolve the special problems in
the poorest of the developing countries. Member countries
eligible to use the SAF and ESAF develop a medium-term PFP — a
joint document of the Fund and Bank — outlining their structural
and macroeconomic reform efforts and containing an assessment of
their financing needs, including possible IMF and World Bank
financing. The Fund and Bank are now conducting joint staff
missions to prepare the PFPs.
The World Bank agreed to earmark $3 to 3-1/2 billion of the
Eighth Replenishment of the International Development Association
(IDA) for adjustment programs related to PFPs. Substantial donor
support is also being catalyzed through co-financing, in
particular for Sub-Saharan Africa under the Bank's Special
Program of Assistance. Furthermore, at the Toronto Summit, the
Heads of State or Government agreed to ease the debt servicing
burdens of the poorest countries undertaking internationally
supported adjustment programs. The mechanisms to address these
debt service burdens have been developed by the Paris Club, the
institution responsible for rescheduling debt owed to official
creditors, and are working smoothly.

14
The United States is the only major industrial country that
has not yet contributed to the ESAF. The IMF is the central
monetary pillar of U.S. international economic policy and a key
policy instrument to advance our economic and security interests.
A modest contribution to the ESAF would go far to maintain our
credibility in the IMF and provide the United States with a voice
on issues of central importance to our national interests and the
well-being of the world economy. It would help many of the lowincome countries to adopt necessary growth-oriented reforms.
Many of these countries, including Pakistan, Bolivia, Zaire, and
other key nations in Sub-Saharan Africa are of significant
strategic importance to the United States.
Countries contributing to the ESAF are expected to provide
loans of about $8 billion. The United States is one of the very
few major member countries not providing loans. We have
consistently indicated that we could not provide loans due to
budget constraints, and we are not now proposing any U.S. loans
to the ESAF. The necessary size of such loans would, in my view,
be prohibitive.
We should, however, contribute modestly to an account which
will help subsidize ESAF loans to developing countries. The
proposal before you is to make a $150 million contribution to an
Interest Subsidy Account of the ESAF which would make its loans
concessional. It is critical that loans from the ESAF be
provided on realistic terms to these low-income countries.
Budget authorization and appropriation of the full U.S.
contribution is being sought in FY 1990 to provide the IMF with
adequate assurance that resources will be available to finance
the interest subsidy. However, actual disbursements from the
U.S. contribution would occur over the period through U.S. FY
2001, roughly the final date for interest payments on ESAF
loans. Consequently, actual budget outlays each year will be
small and would not exceed $3 million in FY 1990, with the bulk
of the outlays occurring in the latter part of the 12-year
period.
Such a contribution would be particularly cost-effective.
The U.S. contribution represents only one and one-half percent of
the total resources being provided to the facility, in comparison
with our IMF quota share of some 20 percent. Moreover, the
amount of resources the ESAF can bring to bear in the poorest
countries often far exceeds the amounts that can be mobilized
through our bilateral assistance.
For these reasons, Mr. Chairman, I urge you to support
enactment of legislation providing for a contribution by the
United States of $150 million to the Interest Subsidy Account of
the IMF's Enhanced Structural Adjustment Facility.

15
INTERNATIONAL FINANCE CORPORATION (IFC)
As you are aware, U.S. support for the IFC has come under
question as a result of major shortfalls in our planned purchases
of shares. In 1985, we agreed to a capital increase of $650
million for the IFC, but have been able to pay for only 34
percent of our allotted 175,162 shares (at $1,000 each). We are
at a critical juncture, wherein we must pay our capital arrears
to allow the IFC to pursue a number of private sector development
activities. Otherwise, we risk a serious weakening of the
institution's financial well-being and a loss of U.S. leadership
in the institution.
The IFC is the arm of the World Bank that makes equity
investments in and loans to private sector enterprises in the
developing world. It operates without government guarantee —
thus reducing the role of governments in developing economies.
More significantly, equity investment by the IFC, as well as
loans, allows enterprises to grow without increasing their
indebtedness. It has been an important catalyst of investment
funds, most recently attracting $7.50 from other sources of
capital for every $1 it lends and invests.
The IFC also plays an important role in advising governments
about how to improve the environment for investment in their
countries. It has contributed toward the development of capital
markets through advice and investments. This work allows
countries to generate financing from institutional and individual
investors, both foreign and domestic, without the intermediation
of commercial banks.
I would like to describe for you some of the most important
initiatives under way at the IFC — programs that require U.S.
financial support for the institution to be carried out in full
over time.
Sub-Saharan Africa
As part of an overall plan to increase IFC's involvement in
Sub-Saharan Africa, the IFC has undertaken or participated in
three related programs: the African Project Development
Facility, the African Management Services Company, and the
Africa Enterprise Fund.
The African Project Development Facility was established
two years ago by the IFC with the African Development Bank and
the UNDP. Teams based in Abidjan and Nairobi provide advice to
companies planning investments and help them raise finance.
Their work is complemented by the African Management Services
Company (AMSC), which trains the personnel necessary to manage
companies. The IFC invested in the AMSC in 1988, as a logical
extension of its work in Sub-Saharan Africa. The AMSC provides

16
management training for new ventures, existing private companies,
and parastatals undergoing privatization. The AMSC also provides
back-up in areas such as marketing, product development, and
improved productivity.
The IFC has rounded out its role in Sub-Saharan Africa with
the establishment of the Africa Enterprise Fund (AEF) to promote
IFC investment in small — and medium-sized enterprises. A large
number of IFC professionals have been sent into the field with
authority to take decisions autonomously on much smallerinvestments than those IFC normally makes. Despite their small
size — ranging from $100,000 to $750,000 — these investments
are subjected to the same standards of analysis applied to larger
investments. This extremely labor-intensive program meets the
financing needs of small African entrepreneurs who would never
be able to attract IFC investments without this type of outreach.
As the profits on this activity are much lower than those from
larger investments, the IFC's ability to continue the program
will be limited if U.S. funding shortfalls are not paid.
Private Sector Development
Among other efforts to support development of the private
sector, the IFC pursues three main activities in capital markets
development: advising in the establishment and/or strengthening
of capital markets; investing or lending to domestic capital
market institutions in need of support; and improving the access
of companies and financial institutions to the global financial
markets.
We expect these efforts to pay substantial dividends over
the coming years. The most important effect will be lowering the
need for borrowing to finance investment. Other positive effects
will be liberalization of financial systems, opening of companies
to public control, and reduction of the role of governments in
capital investment.
The IFC's Corporate Finance unit has pursued corporate
restructurings through a three-phase approach. It conducts an
intense review of a company's finances and operations, followed
by the use of various techniques to achieve the optimum use of
the firm's internal resources. Companies may engage in debt buybacks, debt-equity conversions, or debt swaps and/or exchanges.
Finally, the IFC, the company, and its creditors negotiate an
agreement on the restructuring, which usually involves an
investment by the IFC. These negotiations are settled on a caseby-case basis, using a market-oriented approach.
Since 1985, the IFC has participated in about 50 corporate
restructurings, one half of which have been in Latin America and
the Caribbean. This type of fee-generating service is being
increasingly provided by the IFC in its role as an "investment

17
bank for development." While this service is self-financing, it
does not generate the kind of profits that the IFC needs to
finance its growing investments.
INTER-AMERICAN DEVELOPMENT BANK (IDB1
As you are aware, Mr. Chairman, member countries of the
Inter-American Development Bank (IDB) have agreed to increase
the Bank's capital and replenish the resources of the
concessional window, the Fund for Special Operations (FSO).
Final agreement was reached during the Bank's annual meeting in
March. It calls for a $26.5 billion capital increase and a $200
million replenishment of the FSO. The annual U.S. share of the
subscriptions to paid-in capital and contributions to the FSO
would be $77.9 million.
The agreement is a good and fair one that reflects the
needs and desires of both the donor and borrowing member
countries. The result will be a strengthened IDB that can more
effectively support the growth and development of Latin America
and the Caribbean. Under the agreement and with the
organizational and procedural reforms that are already under way
in the Bank, the IDB will:
lend $22.5 billion over the 1990 - 1993 period;
• continue to seek ways to ensure that half of its
lending program benefits lower income groups;
provide up to $5.6 billion of fast-disbursing,
policy-based sector lending;
strengthen the country programming process to ensure
that all its lending will support policy reform and
self-sustaining growth;
• adopt a loan approval mechanism that allows greater
weight to be given to the views of donor countries;
and
reorganize operating departments to implement sector
lending and country programming, and to improve the
overall efficiency of Bank operations. This will
include enhancing its environmental analysis by
establishing an environmental line unit.
With the replenishment now agreed and the organizational
and procedural reforms being implemented, the Bank will also be
able to make its contribution to helping resolve Latin America's
debt problems. That contribution will be to encourage its
borrowers to adopt policies that improve economic performance,

18
stimulate new foreign investment, increase domestic savings, and
encourage the repatriation of flight capital. Private sector
initiatives and the development of market-based economies should
be emphasized. It will be critical, therefore, that the United
States meet its funding obligations to the IDB in order that this
process can be fully implemented.
CONCLUSION
In conclusion, Mr. Chairman, I want to emphasize the
Administration's commitment to, and full support for, the MDBs
and U.S. participation in the IMF Enhanced Structural Adjustment
Facility. These institutions are vital to our efforts to
strengthen the international debt strategy. It is critical that
we provide full funding for U.S. participation in order to
maintain U.S. leadership on debt issues, and to ensure that the
strengthened strategy is implemented.
These institutions also serve the United States in a
variety of other ways. We rely on the MDBs to promote policies
which protect the delicate global environment that we all share.
We depend on their role to promote our security and humanitarian
interests.
Furthermore, the fate of MDB activities is important to the
U.S. economy, since success in promoting sustainable growth will
increase effective demand among developing countries for U.S.
exports and reduce the strains on the international financial
system. I also believe that successful operation of overall MDB
programs will make one additional contribution: the promotion
of peace and democracy among nations. I cannot overemphasize
the importance I attach to this.
I recognize fully that, even in the best of circumstances,
supporting foreign assistance is never popular. Now, at a time
of severe budget constraint, it will be even more difficult. It
is imperative that we support these institutions in their
important tasks.

1
ANNEX
Fiscal Year 1990 Budget Reouest
We are requesting $1.6 billion for the MDBs and $150
million for the IMF's Enhanced Structural Adjustment Facility
(ESAF) in FY 1990. These funding requests reflect both the need
for budgetary restraint and the financial requirements for
effective development programs. Our MDB request is comprised of
MDB funding requirements currently due for payment, $1.3 billion,
and $314 million of the $414 million in U.S. funding shortfalls
to the MDBs. The stringency of the budget constraint on
international affairs funding prevents the Administration from
requesting the entirety of U.S. funding shortfalls on earlier
scheduled MDB payments. These requests are composed exclusively
of funding commitments negotiated by the Administration in close
consultation with this Committee.
International Bank for Reconstruction and Development (IBRD)
For the IBRD (also known as the World Bank) in fiscal year
1989, the Administration is requesting: 1) $20.1 million in
budget authority to complete the first installment to the 1988
GCI; and 2) $70.1 million in budget authority and $2,241.8
million under program limitations for subscription for the second
installment.
The Bank's principal role today is making long-term credit
available for productive projects, which will lead to economic
and social development in its less developed members. These
loans carry market interest rates.
In addition to project
finance, the IBRD provides policy advice and technical assistance
and financing in support of structural reform, and serves as a
financial catalyst and institution builder.
International Development Association (IDA)
For fiscal year 1990, the Administration is requesting:
1) $6.7 million to complete the second installment, and 2) $958.3
for the third and final installment for the $2,875 million U.S.
share of IDA-8. IDA, an affiliate of the World Bank, is the
single largest source of multilateral development assistance for
lending on concessional repayment terms to the world's poorest
countries. Over 96 percent of IDA lending goes to countries with
an annual per capita income of $400 or less.
International Finance Corporation (IFC)
For fiscal year 1990, the Administration is requesting:
1) $79.9 million to fund the U.S. shortfalls in its subscription
to the $650 million IFC capital increase; and 2) $35.0 million
for the fifth and final installment. The IFC provides risk

2
capital as well as long-term loans; plays an important role as a
catalyst in attracting private capital; and provides technical
assistance to developing countries that want to encourage
domestic and foreign private investment.
Inter-American Development Bank (IDB)
For fiscal year 1990, the Administration is requesting
$31.6 million in budget authority to complete the U.S. commitment
to the sixth IDB capital increase.
Fund for Special Operations (FSO)
For fiscal year 1990, the Administration is requesting
$63.7 million in budget authority to complete the U.S. commitment
to the sixth increase in FSO resources. These funds are required
for the 1989 FSO lending program.
Inter-American Investment Corporation (IIC)
For fiscal year 1990, the Administration is requesting
$25.5 million in U.S. funding shortfalls to the IIC. These
funds, for the third and fourth of four installments to the IIC,
would complete the U.S. commitment to this institution.
The IIC is linked to the IDB, and is designed to support private
sector activities in Latin America through equity and loan
investments that focus primarily on small- and medium-scale
enterprises.
Asian Development Bank (ADB)
The ADB is currently making lending commitments on the basis
of capital stock that is fully subscribed by Bank member
countries, including the United States. Hence, there is no need
to request funding for the ADB in fiscal year 1990. The Bank
makes loans at market rates to developing member countries in
regions of key importance to U.S. strategic and economic
interests.
Asian Development Fund (ADF)
For fiscal year 1990, the Administration is requesting:
1) $84.6 million in U.S. funding shortfalls to the first and
second installments to the fourth replenishment of ADF resources;
and 2) $146.1 million for the third, regularly scheduled
installment. The stringent budget constraint on funding for
international affairs prevents us from requesting the remaining
funding shortfall of $100 million to the ADF until FY 1991.
However, because of exchange rate changes and lower-than-expected
lending levels, it is expected that the total $230.7 million
requested will be sufficient to complete its project lending
programs in calendar year 1989.

3
The ADF is a source of concessional finance to the poorest
member countries of the ADB. Pakistan, Bangladesh, Sri Lanka,
and Nepal are the major borrowers from the Fund.
African Development Bank (AFDB)
For fiscal year 1990, the Administration is requesting:
1) $1.6 million in budget authority to subscribe to paid-in
capital to complete the second of five installments to increase
the Bank's capital base; and 2) $9.0 million in budget authority
and $134.8 million under program limitations for the third U.S.
installment. The Bank makes loans on market terms for the
economic and social development of fifty African member
countries, individually and through regional cooperation. The
AFDB is an important part of the U.S. commitment to work with the
countries of Africa for the achievement of their long-term
development obj ectives.
African Development Fund (AFDF)
For fiscal year 1990, the Administration is seeking $105
million in budget authority for the second of three installments
of the U.S. contribution to the fifth replenishment of AFDF
resources. The Fund complements AFDB operations by providing
concessional financing for high priority development projects in
the poorest African countries. The United States has a strong
humanitarian interest in aiding the poorest countries of the
world's least developed continent through its support for the
AFDF.
IMF Enhanced Structural Adjustment Facility (ESAF)
For fiscal year 1990, the Administration is requesting $150
million in budget authority for a one-time U.S. contribution to
the Interest Subsidy Account of the ESAF. The ESAF provides
financial assistance on concessional terms to the poorest
countries experiencing protracted balance of payments problems.

TREASURY NEWS

isportment of the Treasury • Washington, D.C. • Telephone 566-2
For Release Upon Delivery i'3R.~i\ . JM 5310
Expected at 1:00 p.m., DST
STATEMENT OF A~ 10 ;J m OQ
,r ,J
MR. DAVID M. NUMMY
"
ACTING ASSISTANT SECRETARY OF THE TREASURY FOR MANAGEMENT
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
APRIL 17, 1989

° S ?'>

Mr. Chairman, thank you for the opportunity to appear today to
provide the Treasury Department's perspective of accounting and
internal control system issues within the U.S. Customs Service.
With me today are Mr. Samuel T. Mok, the Department's
Comptroller, and Mr. Michael T. Smokovich, Assistant Commissioner
for Federal Finance at the Financial Management Service. The
Department's philosophy in general is to delegate operational
authority commensurate with responsibility to its bureaus. The
Department monitors performance and provides support and
assistance where appropriate. In the case of Customs, we are
actively involved in assisting Customs in its efforts. Resolving
the problems we are discussing here today is receiving a high
priority from the Department.
Background
The Customs Service has been experiencing continuing problems
with the ability of its financial management systems to produce
complete, accurate, and timely data. In our 1986, 1987, and 1983
Federal Managers' Financial Integrity Act (FMFIA) Reports to the
President and Congress, the Department was able to provide
assurance that all of Treasury's systems of accounting and
internal control conform to the standards prescribed by the
Comptroller General except those of the U.S. Customs Service. At
the present time, Customs' systems contain problems in the areas
of:
o general data integrity,
o the ability to produce accurate and reconcilable external
and internal reports,
o reconciliation between general ledger and subsidiary
accounts, and
o discrepancies between reported collections and deposits.
Departmental Response
The Department has taken several steps to help Customs' remedy
the problems identified as a result of the FMFIA review process.
In October 1987, the Assistant Secretary (Management) furnished
(over)
NB-223

-

- 2 Customs with an action plan to correct known problems and
identify any additional deficiencies. In response, Customs
developed its own comprehensive plan to correct systems
weaknesses. Customs' plan included the procurement of contractor
support for a complete review of its financial systems, which was
approved by the Department in January 1988. The contractor's
final report was issued in October 1988, and confirmed many
existing problems in addition to identifying several new issues.
Concurrent with the contractor's systems review, a Departmental
team was formed to perform a study of Customs' financial
management structure and practices. The study team's report was
completed in September 1988, and contained a variety of
recommendations for improving the financial management
organization and practices of the Customs Service. Customs' has
generally implemented those recommendations which could be
accomplished in the near term, and is still in the process of
addressing the more complex issues requiring a more protracted
time period to complete. The subcommittee has previously been
furnished copies of the contractor's review and the Department's
study.
Ongoing Efforts
Customs has recently formed an internal task force to direct and
coordinate the correction of all known financial systems
deficiencies. The task force reports to Customs' Deputy
Commissioner. On a continuous basis my office reviews Customs'
plans, identifies issues that merit attention, and encourages
prompt corrective actions in order to provide the necessary
guidance and support to resolve the financial system problems.
As part of that evaluation, we conduct periodic progress reviews
with Customs' senior financial management officials. Finally,
the Deputy Commissioner and I meet monthly to discuss the
Assessment
progress being made.
We are encouraged by the direct involvement of Customs' Deputy
Commissioner in the FMFIA corrective action process, as this
indicates a commitment by Customs' top management to resolve
Customs' financial management problems. We believe Customs is
now taking a reasonable approach toward correcting its accounting
and internal control problems, and are optimistic that current
initiatives will yield true results.
I will now be happy to respond to any questions you might have.

NATIONAL ADVISORY COUNCIL
ON
INTERNATIONAL MONETARY AND
FINANCIAL POLICIES
SPECIAL REPORT
TO THE PRESIDENT
AND TO THE CONGRESS
ON A PROPOSED U.S. CONTRIBUTION
TO THE
ENHANCED STRUCTURAL ADJUSTMENT FACILITY
OF THE INTERNATIONAL MONETARY FUND

April 1989

NATIONAL ADVISORY COUNCIL
ON
INTERNATIONAL MONETARY AND
FINANCIAL POLICIES
SPECIAL REPORT
TO THE PRESIDENT
AND TO THE CONGRESS
ON A PROPOSED U.S. CONTRIBUTION
TO THE
ENHANCED STRUCTURAL ADJUSTMENT FACILITY
OF THE INTERNATIONAL MONETARY FUND

April 1989

I.

Introduction

The National Advisory Council recommends to the President and
to the Congress the enactment of legislation providing for a
contribution by the United States of $150 million to the Enhanced
Structural Adjustment Facility (ESAF) of the International
Monetary Fund (IMF). The ESAF was established in 1987 to enable
the IMF to provide financial assistance on concessional terms to
the poorest developing countries experiencing protracted balance
of payments problems and prepared to undertake multi-year economic
reform programs. It is an integral part of concerted
international efforts to help the poorest countries, particularly
those in Sub-Saharan Africa, to implement the structural economic
reforms which are essential for the increased growth and
development necessary to alleviate pervasive poverty and improve
basic human needs.
The U.S. contribution would take the form of a payment to the
interest subsidy account of the ESAF for use in reducing the
interest charges on ESAF loans to the concessional levels more
appropriate to the financial situation and capabilities of the
poorest countries. Such a contribution is essential to assure
that the United States has an effective voice in ESAF activities
and that the more than SDR 8 billion in resources available from
the facility will be used in a manner supportive of U.S. economic
and national security interests.
This report describes the economic situation in the
ESAF-eligible countries and the need for the ESAF; reviews the
role of the IMF in the poorest countries; provides a detailed
description of the ESAF provisions; and describes the legislation
proposed to give effect to the U.S. contribution.
II. The Economic Situation in the Poorest Developing Countries
During the current decade, the economic performance of the
ESAF-eligible countries (excluding China and India) has lagged
substantially behind that of the developing countries as a whole.
(See Table 1.)
The ESAF-eligible countries (generally those having per
capita income of $410 or less in 1980) have confronted many of the
same difficulties as the middle-income debtors. For example, they
were affected by the global recession in the early 1980s, rising
interest rates and difficulties in sustaining domestic policy
reforms. These problems were all the more acute because, like the
middle-income debtors, many of these countries had overborrowed
during the 1970s and used these resources to finance consumption
at the expense of investment.

The plight of the ESAF-eligible countries was aggravated,
however, by even sharper terms of trade losses than the developing
countries as a whole, reflecting the heavy dependence of these
countries on raw material exports and the sharp fall in global
commodity prices. For example, between 1980 and 1988, terms of
trade declined on average by 1.6 percent per annum in the
ESAF-eligible countries (3.0 percent per annum in Sub-Saharan
Africa) whereas they were nearly unchanged on this basis for all
developing nations. As a result, the economic situation in these
countries remains highly precarious and these nations have been
unable to effectively address widespread poverty and the basic
human needs of their populations.
The ESAF-eligible countries suffered declines in per capita
income of roughly 0.5 percent per year during 1981-1983, and their
overall per capita income growth over the entire period 1980-88
averaged only half a percent a year. This poor performance
represented a significant setback, especially in view of the
already weak and fragile economic situation of these countries at
the beginning of the decade.
The weak economic performance of these countries was mirrored
as well in their external accounts. These countries experienced
substantial import compression throughout most of this decade,
with nominal imports falling more than 10 percent between 1980 and
1983. Nominal imports did not reach 1980 levels again until 1987
and even by 1988, imports were substantially below 1980 levels in
real terms. As a result of this poor performance, investment was
squeezed, impeding the low-income countries from developing their
infrastructures and developing productive capabilities that would
strengthen growth.
The external financial situation of these countries remains
fragile and their financial outlook is precarious. External
reserve levels, after falling in the mid-1980s, have been rebuilt
somewhat but still represent less than 2 months' worth of imports.
External debt levels are relatively heavy, in excess of 400
percent of exports, roughly three times the level for the entire
group of developing countries. While much of this debt is owed to
official creditors, the debt service ratio for this group remains
relatively high, 28.4 percent in 1988 versus an average for all
developing countries of less than 20 percent.
Within the group of low-income countries, the performance of
the Sub-Saharan African countries was even weaker than that of the
low-income countries as a whole. Economic growth for the
Sub-Saharan African countries (excluding Nigeria) averaged only
2.3 percent per year over the period 1980-88, equivalent to
negative per capita growth of roughly 0.5 percent per year. The
consequences of this economic retrogression are all the more
dramatic when account is taken of the extremely low economic base
from which Sub-Saharan Africa started at the beginning of the
decade. In effect, most Sub-Saharan African countries lost
ground, both relatively and absolutely, throughout the 1980s.

Furthermore, though the total external debt of the
Sub-Saharan African countries is relatively modest — less than
$100 billion if Nigeria is excluded — in comparison with the
major middle-income debtors, it is extremely large in relation to
the size of their economies. For example, the debt to export
ratio for the group of Sub-Saharan African countries, exclusive of
Nigeria, is over 300 percent, roughly twice the relative burden
for all developing countries. Furthermore, the current debt
service ratio for the Sub-Saharan African countries represents
roughly a 50-percent increase over the level which prevailed
earlier in the decade. As a result, Sub-Saharan Africa's debt
looms large and many of these countries have experienced debt
servicing problems in the 1980s.
Ill. The Role of the IMF in the Low-Income Countries
The IMF has played a leading role in the past years in
supporting the adjustment efforts and addressing the balance of
payments difficulties of the low-income countries. Since the
mid-1970s, the IMF has extended some SDR 13 billion under formal
IMF programs and other facilities, including trust arrangements.
The bulk of these financial resources (SDR 11 billion) were
provided in association with formal IMF arrangements, principally,
standby programs. Consistent with the Fund's mandate as a
monetary institution, these resources were generally extended with
3 to 7 year maturities on highly conditional terms carrying
market-oriented interest rates. The adjustment programs supported
by this financing emphasized fiscal and credit measures, aimed at
reining in aggregate demand to a level consistent with the
availability of resources, as well as reforms to achieve more
appropriate relative prices, including greater market-orientation
of exchange rates, so as to reallocate resources toward investment
and exports.
The IMF long ago recognized that the situation in the poorest
countries required special attention. However, the IMF's
principle of uniform treatment constrained the Fund's ability to
adapt its traditional approach to address the needs of the
poorest. Therefore, the Fund has relied on its legal authority to
act as a trustee to provide special assistance and concessional
financing. Under Article V, Section 2(b), of the IMF's Articles
of Agreement, the Fund is empowered, if requested, to "perform
financial and technical services, including the administration of
resources contributed by members, that are consistent with the
purposes of the Fund." The operations involved in the performance
of such financial services cannot be on the account of the Fund,
nor can these services impose any obligation on a member without
its consent. This provision affords the requisite scope and
flexibility to the Fund to extend financial and technical
assistance to its member countries. This authority has proven
particularly useful in enabling the creation of mechanisms to
reduce the cost of financing and alter the conditionality for
low-income countries under the Fund's traditional arrangements.

- 4 -

o

In 1976, the IMF created the Trust Fund to provide
concessional balance of payments assistance (SDR 2.9
billion) to eligible developing countries as a supplement
to assistance available from regular IMF facilities. The
Trust Fund's resources were derived from the profits from
the sale by public auction of a portion of the Fund's
gold, supplemented by transfers by some of the
beneficiaries of direct distributions of gold sale profits
and income from investment of assets. Eligibility was
defined in terms of per capita income (under SDR 300 from
mid-1976 through mid-78, and under $520 from mid-1978 to
mid-80). In addition, eligible countries were required to
demonstrate a balance of payments need and make reasonable
efforts to improve their balance of payments position.
The Trust Fund was terminated as of April 30, 1981.
o The Fund established a Supplementary Financing Facility
Subsidy Account in December 1980 to reduce the cost for
low-income countries of using the Supplementary Financing
Facility (SFF). The SFF, financed by borrowings from
member governments, made resources available to countries
requiring financing in excess of amounts available under
upper credit tranche programs. The subsidy account was
financed primarily from repayments of and interest on a
portion of the Trust Fund loans (up to SDR 750 million).
o In 1986, the IMF created the Structural Adjustment
Facility (SAF) to promote comprehensive growth-oriented
reforms in the poorest countries facing protracted balance
of payments problems, using the $2.7 billion in reflows to
the Trust Fund. This facility was established in response
to U.S. proposals, presented at the 1985 IMF/World Bank
Annual Meetings in Seoul, Korea. (The SAF is discussed at
length below.)
As discussed in the previous section, many of the low-income
countries at times faced an adverse external environment in the
late 1970s and 1980s and encountered difficulties in sustaining
domestic policy reforms. Against this background, the IMF's
efforts to meet the adjustment and financing needs of the
low-income countries through formal IMF arrangements at market
related interest rates and with relatively short maturities,
particularly for countries in Sub-Saharan Africa, contributed to
many instances of prolonged use of the Fund's limited resources
and growing arrears on its obligations. For example, of the 39
members with four or more IMF programs over the last 10 years,
22 were low-income countries. Also, of the Fund's SDR 2.4 billion
of arrears with maturities of 6 months or longer at the end of
1988, roughly 80 percent are accounted for by low-income members.
Prolonged use of IMF resources and arrears are threatening to
undermine the IMF's ability to fulfill its responsibilities to
deal with the problems of the major debtor developing countries as
well as the financial integrity of the Fund.

- 5 -

Widespread recognition has emerged that the large IMF role in
the low-income countries, emphasizing traditional adjustment
programs which rely on shorter-term financing at market-related
rates of interest, might not be either appropriate or desirable.
In view of these difficulties, an effective response to the
balance of payments financing and economic problems of the poorest
countries requires a comprehensive strategy involving:
o Longer term reforms to remove macroeconomic and structural
impediments to growth.
o Concessional financing, consistent with the ability of the
poorest countries to sustain growth and meet repayment
obligations; and
o Intensified collaboration between the IMF, World Bank and
international donor community to mobilize resources in
support of adjustment efforts.
Many of the economic and balance of payments problems of the
poorest countries reflect deep-seated impediments to an efficient
allocation of resources, appropriate production incentives, and
the mobilization of domestic savings. These problems must be
tackled by the adoption of comprehensive macroeconomic and
structural reforms in order to establish a foundation for
sustained growth. Structural measures should increase the market
orientation of an economy and thus improve the efficiency of
resource allocation. Such measures include:
o A greater focus on market-determined prices, by allowing
exchange rates to reflect supply and demand for foreign
exchange, removing subsidies, and liberalizing pricing
regimes;
o Tax reform to increase incentives to work, save, and
invest, and financial market reforms to provide for more
efficient allocation of savings;
o Privatization of governmental entities;
o Improving efficiency through greater competition and
deregulation; and
o The liberalization of trade and foreign direct investment
practices to open the economy and provide access to
foreign goods, technology, and capital.
As part of this strategy, it was also recognized that the
poorest countries would require more financing than could be
provided by the SAF and traditional Fund arrangements and on
concessional terms consistent with the ability of these countries
to meet repayment obligations.

- 6 -

Against this background, IMF Managing Director Michel
Camdessus proposed at the 1987 Venice Summit a substantial
enhancement of the resources available under the SAF. The Summit
countries welcomed the Manager Director's proposal and in late
1987, the IMF established the Enhanced Structural Adjustment
Facility (ESAF), with the objective of obtaining additional
loanable resources of some SDR 6 billion derived from national
contributions.
The ESAF represents the centerpiece of the Fund's efforts to
address the plight of the poorest countries. However, the
structural economic problems and protracted balance of payments
difficulties facing the poorest countries will also require a
coordinated effort with the World Bank, with its financial
resources and expertise in structural and sectorial areas, and
bilateral donors.
As such, the ESAF was also envisaged as playing a catalytic
role as part of an expanded international effort to help the
poorest countries. To this end, the ESAF builds on the
intensified IMF and World Bank collaboration that had been
developed under the SAF through the establishment of the Policy
Framework Paper (PFP) process.
The PFP process represents a unique and historic step forward
in promoting intensified collaboration between the World Bank and
IMF in the low-income countries. Through the PFP process, Fund
and Bank staff are conducting joint missions and working more
closely together to ensure that the low-income countries receive
consistent policy advice. Under this process, member countries
eligible to use the SAF and ESAF develop a medium-term PFP, in
cooperation with the IMF and World Bank, outlining a 3-year
adjustment program including structural measures and delineating
in broad terms the expected path of macroeconomic policies. The
PFP also contains an assessment of the social impact of the
proposed policy measures as well as of the country's financing
needs and possible sources of financing, including those from the
IMF and World Bank.
The PFP process is having the desired catalytic effect in
support of growth-oriented reforms. In addition to the amounts
committed by the Fund, the World Bank, for its part, agreed to
earmark $3 to 3 1/2 billion of the $12.4 billion of the Eighth
Replenishment of the International Development Association (IDA)
for adjustment programs related to PFPs. Furthermore, the Bank
has extended over the 1986-88 period, $3.9 billion in adjustment
lending to the 30 countries with PFPs. Substantial donor support
is also being catalyzed through co-financing, in particular for
Sub-Saharan Africa under the Special Program of Assistance. Donor
co-financing for IBRD Fiscal Years 1988-90 in Sub-Saharan Africa
is projected to total $12.5 billion under IDA and IBRD operations.
Furthermore, at the 1988 Toronto Summit, the Heads of State
or Government agreed to ease the debt servicing burdens of the
poorest countries undertaking internationally supported adjustment
programs. Subsequently, the Paris Club of official creditors
established a framework of comparability, under which concessional

- 7 debt will be rescheduled at concessional interest rates over 25
years, including 14 years' grace. On non-concessional debt,
creditors may choose from several options to reduce the debt
service burden: (1) write-off one-third of debt service due,
with the remainder rescheduled over 14 years with 8 years' grace;
(2) interest rates to be reduced by 3.5 percentage points, or by
half if the original rate is less than 7 percent, with repayment
taking place over 14 years with 8 years' grace; and (3)
rescheduling at market-based rates over 25 years with 14 years'
grace.
IV. Description of the ESAF
The ESAF was established on December 29, 1987, as a separate
IMF administered trust, whose objectives and basic procedures
parallel those of the SAF. The ESAF is expected to provide
resources totaling SDR 6 billion to low-income countries engaged
in economic and structural adjustment. These resources will
supplement the SDR 2.2 billion that remain to be disbursed under
the SAF. The principal features of the ESAF are described below.
Eligibility
The low-income countries eligible for SAF/ESAF programs are
the 62 members that qualify for loans from the International
Development Association. The two largest eligible countries,
however, China and India, have indicated that they do not intend
to avail themselves of the resources of the facility, thus
enlarging the amounts of financing available to other eligible
countries. The majority of the eligible countries are in
Sub-Saharan Africa. (Eligible members are listed in Table 2.)
Financing
The ESAF is expected to provide new resources totaling SDR 6
billion ($8.1 billion at end-December, 1988, exchange rates) to
the low-income countries, in addition to the SDR 2.2 billion of
financing remaining to be disbursed under the SAF. Thus, SDR 8.2
billion ($11.1 billion) of concessional resources are available to
assist the poorest.
The resources for the ESAF are being provided by a group
composed of almost all major industrial countries as well as some
developing countries. In general, these countries are providing
loans to a special IMF trust, supplemented by contributions to an
interest subsidy account to enable the trust to extend financing
at the desired concessional interest rate of 0.5 percent per
annum. In some cases, however, the contributors are extending the
loans directly at concessional rates and in a few others,
countries are providing their contributions as grants to the
interest subsidy account. As of December 31, 1988, loans to the
trust totalled around SDR 5.3 billion, and contributions to the
interest subsidy account were SDR 2.2 billion. (See Table 3.)
Some industrial countries have indicated they would be prepared to
provide additional loans if further resource commitments could be
found.

- 8 -

National contributors are bearing the risks associated with
their loans to the ESAF. The IMF has taken important steps,
however, to protect ESAF creditors by improving the security and
liquidity of their contributions to the ESAF. As part of the
ESAF, the IMF established a reserve account in an amount of some
SDR 4-1/2 billion, to be funded primarily from principal and
interest payments on SAF loans supplemented, inter alia, by income
from investing SAF resources.
Access/Maturities
Access under the ESAF will be determined for individual
countries on a case-by-case basis with respect to their balance of
payments needs and the strength of their adjustment efforts.
Total access on average is intended to be around 150 percent of
quota over the 3-year period of the ESAF programs, and maximum
access is 250 percent of quota. This ceiling may be extended in
exceptional circumstance up to a maximum of 350 percent of quota.
In contrast, under the SAF, an eligible member could draw up to
63.5 percent of its quota over a 3-year period.
SAF disbursements are extended at an interest rate of 0.5
percent and this is the desired concessional interest rate for
ESAF loans. Repayments of both SAF and ESAF loans are to take
place in ten equal seminannual installments beginning 5-1/2 years
and ending 10 years from the date of disbursement. In contrast,
under IMF stand-by programs using ordinary resources, repayments
are made in eight quarterly installments beginning 3 years and
ending 5 years from the date of disbursement; these loans
currently carry an interest rate of over 7 percent.
It was originally envisaged that commitments under the ESAF
were to be made until November 30, 1989; final disbursements were
to occur before June 30, 1992; and final loan repayments were to
take place in the year 2002. This timetable is being extended by
the Fund, by one year at a minimum, such that commitments will be
made at least through 1990.
Monitoring Arrangements
Under the ESAF:
o Quarterly quantitative benchmarks are established for the
key financial variables normally covered by the annual
arrangements;
o A limited number of seminannual performance criteria will
be used, including some structural reforms, domestic bank
credit and fiscal targets and where appropriate, a balance
of payments test and external borrowing criteria;
o Mid-year reviews will generally be conducted on the basis
of the benchmarks and performance criteria; and

- 9 -

o

Prior actions will be required in a number of cases.

These monitoring arrangements provide considerably more
flexibility than traditional performance criteria under regular
IMF programs. For example, traditional IMF programs usually
contain quarterly performance criteria oriented toward shorter
term goals such as maintaining tight control over budgetary and
credit indicators in order to reduce excess demand to a level
consistent with resource availability as well as establish more
appropriate exchange rates. In contrast with the ESAF, these
monitoring arrangements do not focus as heavily on structural
performance objectives and address the longer term obstacles to
growth.
Operations to Date
As of the end of 1988, 30 SAF and ESAF arrangements were in
place. (See Table 4.)
o There were 23 SAF arrangements with total commitments of
SDR 1.1 billion and disbursements of SDR 0.6 billion.
o Six ESAF arrangements had been arranged with commitments
totaling SDR 0.8 billion. Four of these six had been
approved in November and December of 1988 alone. It is
expected that a large number of ESAF arrangements will be
approved in 1989, particularly as the November 1989,
commitment date approaches.
o Of the 29 arrangements, 23 were with Sub-Saharan African
countries.
V. A U.S. Contribution to the ESAF
The Administration is seeking authorization and appropriation
in FY 1990 for a modest $150 million contribution to the Interest
Subsidy Account of the ESAF. Such a contribution would strongly
support achievement of U.S. foreign economic policy and security
interests.
The ESAF is a central and critical element of international
efforts to address the serious economic problems confronting the
poorest countries. Among the poorest countries are a number of
nations of significant strategic importance to the United States,
including Pakistan, Bolivia, Zaire, and other key Sub-Saharan
African nations. Moreover, the ESAF can play a pivotal role in
addressing the significant problems of prolonged use of IMF
resources, Fund arrears, and in strengthening collaboration
between the Fund, World Bank and international donor community by
building on the PFP process.

- 10 -

The United States is the only major industrial country that
has not yet contributed to the ESAF. The Fund is the central
monetary pillar of U.S. international economic policy and a key
policy instrument to advance our economic and security interests.
A modest contribution to the ESAF would go far to maintain our
credibility in the IMF and provide the United States with a voice
on issues of central importance to our national interests and the
well-being of the world economy.
The proposed U.S. contribution would take the form of a
payment to the Interest Subsidy Account of the ESAF for the
purpose of helping to reduce the interest rate on ESAF loans to
the desired concessional interest rate of 1/2 of 1 percent.
Budget authorization and appropriation for the full U.S.
contribution of $150 million are being sought in FY 1990 to
provide the IMF with adequate assurance that resources will be
available to finance the interest subsidy. However, actual
disbursements from the U.S. contribution would occur over the
period through U.S. fiscal year 2001, roughly the final date for
interest payments on ESAF loans. Consequently, actual budget
outlays each year will be small and would not exceed $3 million in
FY 1990, with the bulk of the outlays occurring in the latter part
of the 12-year period. (See Table 5.)
Even with an Interest Subsidy Account contribution, the
United States would be one of the very few major countries not
making loans to the ESAF trust — the major part of the ESAF. The
United States has steadfastly indicated it could not makes loans
to the ESAF due to budgetary constraints.
A contribution to the Interest Subsidy Account would be
extremely cost-effective. The U.S. contribution represents only
some 1.6 percent of the total resources being provided to the
facility, in comparison with our IMF quota share of some 20
percent. Moreover, the amount of resources the ESAF can bring to
bear in the poorest countries is far in excess of the amounts that
can be mobilized through our bilateral assistance. For example,
in contrast with the SDR 8.2 ($11.1) billion of concessional
resources available for lending under the ESAF, U.S.
authorizations in FY 1988 for economic support, food and
development assistance totaled only $0.9 billion for Sub-Saharan
Africa and around $1.4 billion for the ESAF-eligible countries.
For these reasons, the National Advisory Council recommends
to the President and the Congress the enactment of legislation
providing for a contribution by the United States of $150 million
to the Interest Subsidy Account of the IMF's Enhanced Structural
Adjustment Facility.

Table 1
ECONOMIC INDICATORS
(in percentage terms)
Real Growth
1983 1984 1985 1986 1987 1988
Small, Low Income
Countries
Sub-Saharan Africa
(exclusive of Nigeria)

1.6

3.3

3.7

4.4

3.6

4.9

-0.6

1.2

3.0

3.6

2.3

3.7

1.5

0.8

2.2

Real Growth Per Capita
1983 1984 1985 1986 1987 1988
Small, Low Income
Countries
Sub-Saharan Africa
(exclusive of Nigeria)

-1.1

0.8

1.4

-3.6 -1.5 0.3 0.6 -0.6 0.7
Debt/Exports
1983 1984 1985 1986 1987 1988

All Developing
Countries

133 133 150 169 159 146

Small, Low Income
Countries

338 344 404 422 456 437

Sub-Saharan Africa
(exclusive of Nigeria)

230 228 274 303 331 325
Debt/GDP
1983 1984 1985 1986 1987 1988

All Developing
Countries

33

34

37

38

39

37

Small, Low Income
Countries

45

45

52

52

60

61

Sub-Saharan Africa
(exclusive of Nigeria)

52

55

62

63

70

68

N.B. The group of small, low-income countries is essentially
equivalent to the group of ESAF countries.

TABLE 2

Low-Income Developing Members Eligible for Assistance Under the
Enhanced Structural Adjustment Facility

Member

Quota
(In SDR millions)

Afghanistan
Bangladesh
Benin
Bhutan
Bolivia

86.5
287.5
31.3

Burkina Faso
Burma
Burundi
Cape Verde
Cent. African Rep.

31.6
137.0
42.7

Chad
China, F.R. of
Comoros
Djibouti
Dominica
Equatorial Guinea
Ethiopia
Gambia, The
Ghana
Grenada
Guinea
Guinea-Bissau
Guyana
Haiti
India
Kampuchea, Democratic
Kenya
Kiribati
Lao, P.D.R.
Lesotho

2.5
90.7

4.5
30.4
30.6
2,390.9

4.5
8.0
4.0
18.4
70.6
17.1
204.5

6.0
51.9

7.5
49.2
44.1
2,207.7
25.0
142.0

Quota
(in SDR millions)

Member

33.9
61.0
37.3
33.7
546.3

Mauritania
Mozambique
Nepal
Niger
Pakistan
Rwanda
St. Kitts and Nevis
St. Lucia
St. Vincent
Sao Tome and Principe
Senegal
Sierra Leone
Solomon Islands
Somalia
Sri Lanka

4.5
7.5
4.0
4.0
85.1
57.9

5.0
44.2
223.1
169.7
107.0
38.4

Sudan
* Tanzania
Togo
Tonga
Uganda

3.3
99.6

Vanuatu
Viet Nam
Western Samoa
Yemen Arab Re public
Yemen P.D.R.

9.0
176.8

6.0
43.3
77.2
291.0
270.3

Zaire
Zambia

2.5
29.3
15.1

Tot al
Liberia
Madagascar
Malawi
Maldives
Mali

-

43.8

71.3
66.4
37.2

2.0
50.8

8,790.4

TABLE 3

Contributions to the ESAF
(as of 12/31/8 8; millions of SDRs)

Grants or
Grant Equivalents*

Loans

309

2,200

(326)

800

130

700

Italy

(172)

370

Canada

(140)

300

Switzerland

(101)

200

440

--

(449)

744

Japan
France
Germany

U.K.
19 other countries**

2,167

*

5,314

For the figures in parentheses, the grant equivalent has been
estimated by Treasury staff.

** The commitments of these countries have not yet been made public

Table 4
SAF and ESAF Arrangements
(as of December 31, 1988; millions of SDRs)
Member

Date of
Arrangement

Date of
Expiration

Amount
Agreed

Undrawn
Balance

Structural Adjustment Facility Arrangements
Bangladesh
February 6, 1987
Burundi
August 8, 1986
Central African Rep.
June 1, 1987
Chad
October 30, 1987
Dominica
November 26, 1986
Equatorial Guinea
December 13, 1988
Guinea
July 29, 1987
Guinea Bissau
October 14, 1987
Haiti
December 17, 1986
Kenya
February 1, 1988
Lesotho
June 29, 1988
Madagascar
August 31, 1987
Mali
August 5, 1988
Mauritania
September 22, 1986
Mozambique
June 8, 1987
Nepal
October 14, 1987
Sierra Leone
November 14, 1986
Somalia
June 29, 1987
Sri Lanka
March 9, 1988
Tanzania
October 30, 1987
Togo
March 16, 1988
Uganda
June 15, 1987
Zaire
May 15, 1987
Total
Enhanced Structural Adjustment Facility Arrangements
Bolivia
Gambia
Ghana
Malawi
Niger
Senegal
Total

July 27,
November
November
July 15,
December
November

1988
23, 1988
9, 1988
1988
12, 1988
21, 1988

February 5, 1990
August 7, 1989
May 31, 1990
October 29, 1990
November 25, 1989
December 12, 1991
July 28, 1990
October 13, 1990
December 16, 1989
January 31, 1991
June 28, 1991
August 30, 1990
August 4, 1991
September 21, 1989
June 7, 1990
October 13, 1990
November 13, 1989
June 28, 1990
March 8, 1991
October 29, 1990
March 15, 1991
June 14, 1990
May 14, 1990

July 26,
November
November
July 14,
December
November

1991
22, 1991
8, 1991
1991
11, 1991
20, 1991

182.56
27.11
19.30
19.43
2.54
11.68
36.77
4.76
28.00
90.17
9.59
42.16
32.26
21.53
38.74
23.69
36.77
28.07
141.67
67.95
24.38
63.25
184.79
1,137.15

8.00
25.19
3.26
19.18
61.77
6.57
28.88
22.10
4.58
8.24
5.04
25.19
19.23
97.05
14.45
16.70
13.45
126.59
528.42

136.05
20.52
368.10
55.80
50.55
144.67
775.69

113.38
17.10
281.80
46.50
42.13
114.89
615.79

5.76
4.10
13.31

Table 5
IMF Enhanced Structural Adjustment Facility
Subsidy Account
FY 1990 Request
($ thousands)
Fiscal Year Budget Authority Outlays
1990 150,000 3,000
1991 0 5,000
1992 0 8,000
1993 0 11,000
1994 0 ,13,000
Subtotal 150,000 40,000
1995-2001 0 110,000
Total $150,000 $150,000

TREASURYMEWS
Deportment of the Treasury • Washington, ox. • Telephone 386-2041
CONTACT: Office of Financing
202/376-4350
^LU

FOR IMMEDIATE RELEASE
April

17, 1989

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,203 million of 13-week bills and for $7,201 million
of 26-week bills, both to be issued on
April 20, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing
July 20. 1989
Discount Investment
Rate
Rate 1/
Price

Low
8.55%!/
8.86%
High
8.59%
8.90%
8.57%
Average
8.88%
a/ Excepting 1 tender of $10,000.

97.839
97.829
97.834

26-week bills
maturing October 19, 1989
Discount Investment
Rate
Rate 1/
Price
8.56%
8.61%
8.59%

9.07%
9.13%
9.11%

95.672
95.647
95.657

Tenders at the high discount rate for the 13-week bills were allotted 48%
Tenders at the high discount rate for the 26-week bills were allotted 14%

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
y

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
$
41,970
20,330,520
30,825
43,735
57,610
36,135
1,268,640
47,525
8,395
47,740
35,870
947,850
400,375

$
41,970
6,110,520
30,825
43,735
47,610
36,135
136,240
27,525
8,395
47,740
28,270
243,835
400,375

$

28,035
19,620,080
28,215
30,580
47,105
33,230
1,121,555
35,840
10,550
48,320
28,430
1,123,485
481,690

28,035
),107,080
28,215
30,580
47,105
33,230
157,055
27,840
10,550
48,320
23,430
177,485
481,690

$23,297,190

$7,203,175

$22,637,115

$7,200,615

$19,604,580
1,267,510
$20,872,090

$3,510,565
1,267,510
$4,778,075

$17,666,955
1,094,460
$18,761,415

$2,230,455
1,094,460
$3,324,915

2,313,700

2,313,700

2,000,000

2,000,000

111,400

111,400

1,875,700

1,875,700

$23,297,190

$7,203,175

$22,637,115

$7,200,615

Equivalent coupon-issue yield.

NB-224

Accepted

TREASURY NEWS
Department off the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 11:00 A.M.
April 18, 1989

STATEMENT OF THE HONORABLE
DAVID W. MULLINS, JR.
ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Committee:
I welcome the opportunity to participate in your examination
of Federal credit reform and borrowing by off-budget agencies. I
also want to take this opportunity to seek your support of the
Administration's credit reform proposal, H.R. 1127.
Over the years the Treasury has been involved in a number of
policy initiatives designed to control the growth and cost of
Federal and federally-assisted credit. The Federal Government is
the largest financial intermediary in the United States. At the
end of 1988, the Government held $222 billion of outstanding
direct loans (including $124 billion financed by the Federal
Financing Bank) and had another $550 billion in outstanding
guaranteed loans (including $451 billion of FHA and VA mortgages
and $48 billion of guaranteed student loans). Governmentsponsored enterprises, such as the Federal National Mortgage
Association and the Federal Home Loan Banks, had an additional
$666 billion of outstanding loans at the end of the year. Thus,
directly or indirectly, the Government had influenced the
allocation of $1.4 trillion of outstanding credit to farmers,
homeowners, small businesses, exporters, utilities,
shipbuilders, and State, local and foreign governments.
While much public attention is focused on direct Treasury
borrowing to finance budget deficits, much less attention has
been focused on federally-assisted borrowing in the form of offbudget guaranteed loans and borrowing by off-budget Governmentsponsored enterprises. Yet, of the estimated $193 billion of
net Federal and federally-assisted borrowing in FY 1990, 46
percent is for financing the budget deficit, 17 percent for
financing off-budget Federal loan guarantee programs, and 37
percent for financing off-budget GSEs. Taken together, it is
clear that off-budget credit assistance from the Federal
Government
will be the largest component of total borrowing under
NB-225
Federal auspices in FY 1990.

2
Guaranteed borrowing
Under present budget scorekeeping, loan guarantees appear to
be essentially costless at the time the guarantee is issued,
regardless of how much subsidy may be implicit in the program.
Additionally, some Federal guarantees underwrite debt financed in
competition with direct Federal borrowing, and the impact of such
borrowing is like Treasury borrowing to finance direct loans and
has a similar adverse impact on private credit markets and
interest rates.
A major reason for the growth in loan guarantees is the
intense scrutiny given in the budget process to the deficit in
the up-coming budget year. Loan guarantees have a negligible
impact on the budget deficit in the year in which the guarantee
is issued. That is, unlike direct loans which result in
immediate budget outlays in the full amount of the disbursement,
loan guarantees are reflected in the unified budget outlay totals
only over time, to the extent of program administrative expenses,
the cost of future defaults, and in some cases, direct cash
interest subsidies. Thus, guarantees provide significant
benefits to borrowers with substantially less near-term budget
impact than providing the same level of benefits in the form of
direct loans. Consequently, there has been a marked shift from
direct to guarantee loan programs by those wanting to expand
Government programs with minimal near-term budget effect. In
addition, there has been a pronounced shift from Government
guaranteed debt financed by local lending institutions to debt
financed directly in the securities market. These trends have
contributed to the significant growth in guarantee programs which
has occurred over the last decade.
While the problem of the budget treatment and control of
guaranteed loans has remained unsolved, considerable progress
has been made with respect to the efficient financing of Federal
credit programs.
Federal Financing Bank
At the request of the Treasury, the FFB was established by
Congress in 1973 to deal with severe debt management problems
resulting from years of off-budget financing which had flooded
the Government securities market with a variety of Governmentbacked securities. These securities were financed outside the
Treasury by various Federal agencies in the form of direct agency
issues, sales of loan assets with Federal guarantees, and
guarantees of obligations of private borrowers. Although the
securities were backed by the Government, they sold at
relatively high interest rates and fees. These securities also
competed with Treasury securities, undermined Treasury debt
management policies, created serious marketing problems, and
placed Treasury in a position of acquiescing to agency financings

3
on terms which Treasury believed did not reflect the full value
of the Government backing.
The FFB was a response to a need for control and rationalization of the financing of Federal programs, primarily credit
assistance programs. This need arose from three basic trends:
(1) the rapid growth of Federal credit assistance programs,
(2) the shift from direct loans (on-budget) to guaranteed loans
(off-budget), and (3) the shift from guaranteed loans financed by
local lending institutions to guaranteed obligations financed
directly in the securities markets.
The proliferation of the Government-backed securities in
the market before the establishment of the FFB was very costly to
the Government, and thus the taxpayer, in part because of higher
transaction costs and in part because the less competitive market
for the securities resulted in higher borrowing costs. For
example, prior to the establishment of the FFB, obligations fully
guaranteed by the Department of Defense under the foreign
military sales program were financed in the securities markets at
interest rates up to 2 percentage points over prevailing market
yields on Treasury securities of comparable maturity. Since
there is no economic difference between a guaranteed loan and a
direct loan by FFB or another Federal agency, there is no reason
to incur higher costs to the Government for financing guarantee
programs in the private markets.
It is now widely recognized that the FFB has been successful
in rationalizing Federal borrowing activity. Twenty-seven
Federal agency programs of issues, sales, or guarantees of
securities, totaling $146 billion of obligations outstanding at
the end of FY 1988, have been financed by the FFB. (See
attachment.) The consolidation of market financing by the FFB
has resulted in estimated savings in program financing costs of
well in excess of $1/2 billion per year, most of which are
savings to the Government rather than to guaranteed borrowers.
While the FFB's primary function is debt management, the FFB
has also served to facilitate the control of Federal credit
programs. By consolidating the borrowing of the various
agencies, the FFB has made the problem of unrestrained growth in
Federal credit more visible and has underscored the need for more
effective control. In addition, the FFB has served to bring to
the attention of Congress the true nature and aggregate impact of
these programs and has led to many Congressional hearings and
studies concerning the control of Federal credit programs.
Budget status
Until 1985, the outlays of the FFB were off-budget,
including its purchases of guaranteed loan assets from Federal
agencies and its direct loans to private borrowers guaranteed by

4
Federal agencies. Because of its off-budget status, the FFB was
sometimes wrongly criticized for being in itself a means for
Federal agencies to avoid budget control of their credit
programs. The FFB, however, was created strictly for the purpose
of reducing the costs of Federal and federally-assisted borrowing
from the public, and to assure that such borrowings are financed
in a manner least disruptive of private financial markets and
institutions. The FFB itself did not affect either the budget
status or the authorized program levels of the agencies using the
FFB. The actual allocation of budget and credit resources to
various agencies and programs is determined through the budget
process. Any efforts to control credit programs should be
focused on the programs themselves, rather than on the FFB.
The off-budget status of the FFB was one of the issues
considered in 1981 and 1982 by the Reagan Administration, when
the Federal Credit Policy Working Group under the auspices of the
Cabinet Council on Economic Affairs (now known as the Economic
Policy Council) conducted an extensive review of the FFB in the
broader context of overall Administration budget and credit
program policies. That review led to the adoption of two
important principles. First, the budget should include all of
the Government's cash outlays to the public, including outlays to
the public by the FFB, and second, all agencies should, over
time, be required to finance fully guaranteed securities of a
type that is ordinarily financed in investment securities markets
through the FFB rather than in the securities market.
In accordance with the second principle, OMB Circular No.
A-70, "Policies and Guidelines for Federal Credit Programs," reissued in August 1984, included a requirement that fully
guaranteed obligations of a type that is ordinarily financed in
investment securities markets be financed by the FFB. At
Treasury's request, this requirement was also included in the
legislation submitted by the Reagan Administration to Congress in
July 1985 to implement the first principle. If the legislation
were enacted to place the FFB on-budget without the requirement,
it was expected that Federal agencies would simply bypass the FFB
by financing their fully guaranteed obligations directly in the
securities market in order to avoid budgetary control of their
credit programs. The legislation which emerged from Congress,
Gramm-Rudman-Hollings, did not include the requirement for FFB
financing of fully guaranteed securities of a type that is
ordinarily financed in investment securities markets.
In keeping with Federal credit program policy, the Reagan
Administration's credit reform legislation, submitted to Congress
in 1987, 1988 and again in January 1989, included a requirement
that fully guaranteed obligations of a type that is ordinarily
financed in investment securities markets be financed by the FFB.
The Bush Administration has endorsed the credit reform
legislation, which has been recently introduced as H.R. 1127 and

5
S. 584. H.R. 1127 was introduced by Mr. Gradison and referred to
your Committee, as well as the House Banking, Government
Operations, and Rules Committees. The credit reform legislation
will improve the accounting for Federal credit transactions in
the budget/appropriations process by requiring credit agencies to
obtain appropriations to cover the estimated subsidy costs in
direct and guaranteed loans. This approach will provide a basis
for direct comparisons in the budget process of the economic
costs of credit subsidies with the costs of subsidies provided in
the form of cash grants.
Effects of GRH
Gramm-Rudman-Hollings, which was enacted in December 1985,
required all transactions of the FFB on behalf of a Federal
agency to be treated as a means of financing for the agency. As
a result, FFB disbursements that were formerly off-budget are now
scored as budget outlays of the agency originating the
transaction. Thus, without the requirement that Federal agencies
finance their fully guaranteed obligations through the FFB, the
GRH change in budget scoring has led to intense pressure to
return to the off-budget financing of guaranteed obligations in
the private market. Since 1985, legislation has been enacted
which prohibited FFB financing of new loans under four guarantee
programs and instead, authorized private market financing with
full faith and credit guarantees.
In addition, the GRH budget scoring change led to the sale
with recourse of loans in the FFB portfolio in order to reduce
near-term budget deficits, at the expense of higher deficits in
future years. This incentive, combined with Congressional desire
to provide further subsidies to certain borrowers, prompted
Congress to create prepayment programs under which rural electric
cooperatives and foreign governments are authorized to prepay
their FFB loans at less than their contractually defined
prepayment prices and to refinance privately with Government
guarantees. This procedure produces a subsidy that is
determined, not on the basis of an analysis of need for subsidy,
but by the happenstance of changing interest rate relationships.
Moreover, this subsidy (the loss in FFB loan value at prepayment)
is not appropriated by Congress to the program agency, but
rather, is hidden in the cost of financing the public debt. To
date, these borrowers have prepaid $9 billion resulting in
associated taxpayer losses of $2 billion.
More recently, in October 1988 the President vetoed a
legislative proposal to permit SBA section 503 certified
development companies to prepay their guaranteed borrowings from
the FFB at substantially reduced premiums and to finance the
prepayments with market borrowings fully guaranteed by the
Government.

6
As a result of the shift to market financing of new loans
under programs previously financed by the FFB and the disposal
of loans in the FFB portfolio, FFB financing of Federal credit
programs has declined from a peak of $140 billion in 1986 to $124
billion at the end of 1988, and is projected to decline further
to $86 billion at the end of 1994.
GSEs
The GRH legislation has also prompted a renewed interest,
after a 15-year hiatus, in the creation of off-budget
Government-sponsored enterprises. Prior to GRH, the last GSE to
be created was the Student Loan Marketing Association. SLMA was
created in 1972 as a part of the effort described earlier to
shift the financing of guaranteed loans from the bank loan market
to the securities market. Beginning in 1987, four new GSEs have
been created:
o The College Construction Loan Insurance Association,
created to guarantee bonds issued for college
construction to fill the void which would be left by
the proposed termination of on-budget direct loan
programs conducted by the Department of Education.
o The Financing Corporation, created to recapitalize the
Federal Savings and Loan Insurance Corporation.
o The Farm Credit System Financial Assistance
Corporation (FAC), created to provide a financing
mechanism for the Farm Credit System.
o The Federal Agricultural Mortgage Corporation
(Farmer Mac), created to shift the financing of farm
loans from the bank loan market to the securities
market.
The charter of a fifth new GSE, the Farm Credit System
Capital Corporation, was revoked by the legislation that created
FAC and Farmer Mac.
Legislation was proposed to create a sixth new GSE, the
Corporation for Small Business Investment. This legislation,
which was strongly opposed by the Administration, was not adopted
by the 100th Congress. COSBI would have shifted off-budget
certain activities now financed on-budget by the Small Business
Administration.
A seventh new entity, the Farm Credit System Insurance
Corporation, was established to insure the timely payment of
principal and interest on Farm Credit System obligations. This
entity was initially considered to be a GSE, but upon further

7
examination, has been classified in the Budget as a Federal
agency.
The four new GSEs which have been created differ from the
older, traditional GSEs. The traditional GSEs serve as financial
intermediaries to facilitate the flow of credit to private
borrowers in three major areas: (1) agriculture, (2) housing,
and (3) higher education. The older GSEs typically have raised
funds in the capital markets in their own names or by issuing
pass-through securities, and then either have lent directly to
their borrower clientele or have served as financial
intermediaries by providing liquidity to local lending
institutions. Unlike the traditional GSEs, the four new
enterprises were either established primarily to assist a Federal
agency or an existing GSE, or will assist the public by insurance
rather than by financial intermediation.
Mr. Chairman, you have specifically requested our assessment
of four issues posed by borrowing activities of GSEs generally:
1. Does GSE credit activity pose risks to the Federal
Treasury?
Yes, both directly and indirectly. Several GSEs have
authority to borrow from the Treasury in amounts that
range up to $4 billion. These authorities would
presumably be used if the institutions became
financially impaired or otherwise became unable to
honor their private market obligations. Some
obligations issued by GSEs are guaranteed by the
Government, and the Treasury is required by law to pay
a significant portion of the interest on the
obligations of one GSE. Moreover, participants in the
Federal agency securities market have long held the
view that Congress would not permit GSEs to fail.
Recent Congressional actions with respect to the Farm
Credit System have reinforced this view.
In connection with potential taxpayer exposure to risks
undertaken by the GSEs, the Committee might want to ask
a Federal entity, such as the Congressional Budget
Office, to study the relationship between risks and GSE
capital and to consider whether capital standards
should be established for the GSEs. Currently, the
GSEs' ties to the Government permit them to operate
with high ratios of liabilities to capital, compared
with private enterprises, particularly when liabilities
for mortgage-backed securities are taken into
consideration. Such a study could address whether
financial-institution type capital standards would be
appropriate for the GSEs, since the GSEs perform
intermediation functions that are similar to those of

8
financial institutions, and what existing or new entity
within the Federal Government should set the capital
standards. It could also address whether uniform
capital standards for all GSEs would be appropriate or
whether the operations are sufficiently unique to
require differentiated standards.
Can GSE borrowing raise the cost of Federal borrowing.
and if so. under what conditions?
The total volume of credit available in financial
markets at any time is limited by a number of
constraints, including the flow of savings and
investment, and the constraints of monetary policy and
the level of interest rates. While Treasury borrowing
is subject to oversight and control, i.e., Treasury
borrows to finance outlays authorized by Congress, and
the aggregate amount of outstanding Treasury debt is
limited by law, the borrowing activities of many GSEs
are not so constrained. The limited supply of credit
available in the economy means that increased demands
from incremental borrowings of GSEs may add to
pressures on interest rates and may tend to raise
interest costs for all borrowers, including the Federal
Government. These problems may be especially acute
during periods of increased economic activity when
private demands for credit rise.
What information is available to the Congress and the
Administration on the extent of actual and contingent
Federal liability created bv GSE borrowing?
Although not presented and summarized succinctly, there
is much useful information in the Budget on the Federal
liabilities associated with GSE borrowing. For
example, the Federal Government has a contingent
liability for principal and interest on approximately
$5 billion of Student Loan Marketing Association
obligations guaranteed by the Department of Education.
The Government has an actual liability for a
significant portion of the interest on obligations
issued by the Farm Credit System Financial Assistance
Corporation, and a contingent liability for the
remaining interest and all of the principal. Beginning
in FY 1993, the Government will have a contingent
liability for principal and interest on Farm Credit
System obligations insured by the Farm Credit System
Insurance Corporation. The Budget also indicates the
Government will share with the private sector ultimate
financial risk with respect to the Federal Agricultural
Mortgage Corporation, the Federal National Mortgage

9
Association, and the College Construction Loan
Insurance Association.
Under what circumstances are credit activities more
appropriately conducted for budget and management
purposes as on-budget borrowing bv Federal agencies,
rather than through GSEs?
The question of appropriate Federal credit program
management structures is distinct from the question of
the appropriate budget scoring for Federal credit
activities.
Federal credit assistance programs are created
primarily to address two objectives: (1) provide
subsidies to particular borrowers, and (2) correct
capital market imperfections and increase the amount of
credit available for specific purposes. From a
management perspective, it is with respect to the first
objective that the need for direct Federal intervention
and control is the greatest. Thus the subsidy
objective has generally been addressed by programs of
direct Federal loans and Federal loan guarantees, and
GSEs have traditionally been created to improve the
private market mechanism.
There are a number of considerations involved in
determining the appropriate budget scoring for Federal
credit activities. These considerations are addressed
by OMB in preparing the President's budget and by CBO
in preparing the Congressional budget.
Chairman, you have also requested our response to two
specific to REFCORP:
As proposed, is REFCORP structured more like an offbudget agency, or like a GSE?
REFCORP is structured to be a Government-sponsored
enterprise, rather than a Government-owned enterprise,
and therefore it is excluded from the budget. Under
our bill, REFCORP is a limited purpose GSE chartered by
the Chairman of the Federal Home Loan Bank System.
REFCORP bonds are not Treasury obligations and are not
guaranteed by the Treasury. Private capital is used to
fully repay principal on all debt issued. Moreover,
industry funds are also used to pay interest costs,
with Treasury guaranteeing the payment of any
shortfall. Every dollar of Treasury funds expended is
scored on budget in the year expended.

10
2.

What are the benefits and costs to the government of
providing that REFCORP issue its own debt to the
public, rather than relv exclusively on Treasury
borrowing?
The REFCORP is a special purpose financing vehicle. It
has a distinct, limited life to resolve a specific
problem. If enacted as proposed, Congress will limit
the amount that REFCORP can borrow and provide it with
no line of credit to the Treasury. We believe this
type of vehicle is appropriate because it is the best
way to ensure that the S&L industry pays a substantial
portion of the cost to resolve its own problems. Under
our plan, FHLBank earnings and S&L assessments
completely cover the repayment of the principal on all
debt issued, as well as a portion of the interest.
This industry "self-help" feature would be jeopardized
with Treasury financing, since industry funds would not
be collected specifically to repay Treasury debt or
meet Treasury interest payments.
In addition, the REFCORP financing mechanism requires
separate and distinct accounting for all costs
associated with the Administration's plan. In contrast
with direct Treasury funding out of general revenues,
this mechanism more easily accommodates an oversight
function - such as the RTC - with direct accountability
for its decisions.
Finally, Treasury financing of the plan would result in
large increases in the Federal deficit in 1990 and
1991, making it virtually impossible to meet the
legislated Gramm-Rudman-Hollings deficit targets.
Alternative financing plans set dangerous precedents
with serious implications for the financial markets.
We firmly believe that any potential cost savings from
direct Treasury borrowing would be more than offset by
the costs of delay, the loss of significant, up front
industry contributions, and the possible costs of a
market reaction to a loss of Gramm-Rudman-Hollings
discipline.
This concludes my prepared statement. I will be glad to
answer any questions you may have.
Attachment
o 0 o

FEDERAL FINANCING BANK HOLDINGS
(in millions)
Y '88 Net Change
September 30. 1988
16/l/fi7-9/36/flft

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
Government-Guaranteed
Lending:
sub-total*
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DHUD-Community Development
DHUD-New Communities
DHUD-Public Housing Notes +
General Services Administration •+
DOI-Guam Power Authority
on
DOI-Virgin Islands
NASA-Space Communications Co. +
Navy Snip Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 5ll
DOT-WMATA
sub-total*
grand total*
•figures may not total due to rounding
-•-does not include capitalized interest

10,957.6
118.1
17,131.0
5,592.2

$ -1,505.8
6.8
745.0
1,238.8

33,799.0

484.7

58,496.0
79.5
96.4
-04,139.2
15.4

-6,513.0
-4.4
-5.9
-0.7
-102.0
-4.2

62,826.5

-6,630.2

16,011.7
4,910.0
50.0
318.1
-02,037.0
387.5
32.1
26.6
898.8
1,758.9
19,205.3
632.7
870.9
2,162.4
46.2
177.0

-3,152.3
-30.0
50.0
-6.2
-30.6
-37.3
-8.0
-1.1
-0.6
90.2
-29.4
-1,991.6
-107.9
-28.9
338.7
-9.2
-0-

49,525.1

-4,954.1

$ 146,150.5

$ -11,099.6

$

TREASURY NEWS
apartment off t h e Treasury.ir.Rf• W .ROOM
a s h i n5310
g t o n , D.C. • T e l e p h o n e 566-2041
FOR RELEASE AT 4:00 P.M. ArR Zl
April 18, 1989

CONTACT: 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 April 27, 1989.
This offering
will result in a paydown for the Treasury of about $ 175 million, as
the maturing bills are outstanding in the amount of $14,579 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, April 24, 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
January 26, 1989,
and to mature
July 27, 1989
(CUSIP No.
912794 SS 4 ) , currently outstanding in the amount of $7,426 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
October 27, 1988,
and to mature
October 26, 1989 (CUSIP No.
912794 SM 7), currently outstanding in the amount of $9,575 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing April 27, 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, 631 million as agents for foreign
and international monetary authorities, and $3,265 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-226

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
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
10/87

TREASURY NEWS _

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

TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
APRIL 19, 1989
Prepared Statement of
Assistant Secretary of the U.S. Treasury for Policy Development
The Honorable Charles H. Dallara
before the
Subcommittee on International Economics and Trade Policy
Foreign Affairs Committee
U.S. House of Representatives
Mr. Chairman and Members of the Subcommittee:
As you know, the Administration has recently concluded a
thorough review of the international debt strategy. As a result
of this review, we have put forward several proposals for
strengthening the debt strategy. These were outlined in a
speech by Secretary of the Treasury Brady before the Bretton
Woods Committee on March 10 of this year. In the short span of
five weeks since this speech was made, the United States'
proposals have received broad international support, and we
have moved into the phase of developing details and implementing
the strengthened strategy.
I welcome this opportunity, Mr. Chairman, to describe why
the Bush Administration proposed changes in the previous
strategy, and to provide your Subcommittee a perspective on the
international debt situation and the Administration's efforts
to help renew growth in debtor countries.
Review of the Previous Strategy
Much has been accomplished in recent years through the
debt strategy we have had in place since 1985. A number of the
major debtors have implemented vital macroeconomic and structural
reforms. Steps have been taken in some countries to privatize
national industries, open up their economies to greater foreign
trade and investment, and expand exports. Such efforts produced
results: for example, export earnings have risen steadily
since 1986 and by 12 percent in 1988 alone; current account
deficits have been sharply reduced since 1982; and six major
NB-227
debtors achieved more than 4 percent positive growth in 1988.

2
These signs of progress notwithstanding, our review of the
debt situation led us to conclude that several serious problems
remained. Debtor reforms in several countries had not been
applied consistently; low investment and capital flight continued
to weaken future economic prospects; new loans from commercial
banks were not always forthcoming in a timely fashion; and many
debtor nations had not achieved adequate growth on a sustained
basis. We recognized that these issues must be addressed if
progress were to be made on international debt.
In developing our new proposals, it became clear that the
key principles of the previous strategy remained valid: the
need for stronger growth, debtor policy reforms, adequate
external financial support, and a case-by-case approach to the
unique circumstances facing individual countries. The U.S.
initiative to strengthen the international debt strategy reflects
our continuing commitment to these fundamental tenets.
Proposals to Strengthen the Debt Strategy
The approach proposed by Secretary Brady to strengthen the
debt strategy is intended to mobilize more effective external
financial support for debtor countries' efforts to reform their
economies and achieve lasting growth. Our ideas build on
suggestions of many throughout the world, including members of
Congress. The strengthened strategy revolves around two central
themes: the need to give greater emphasis to debt and debt
service reduction, and the need for debtor countries to
implement sound economic policies designed to encourage
investment and flight capital repatriation.
These themes underlie the Administration's proposals,
which will require active participation by all parties in the
form of:
o Sustained implementation of sound macroeconomic and
structural policies in debtor countries, with increased
attention to policies that will foster new investment
and flight capital repatriation.
o Continued central roles for the IMF and World Bank,
emphasizing support for ongoing macroeconomic and
structural reform programs — including the areas
stressed above — and for debt and debt service
reduction efforts.
o Timely and diversified financial support from
commercial banks, with greater attention to debt and
debt service reduction to complement new lending.
Let me elaborate on the steps needed in each of these
areas.

3
Debtor Economic Reforms
Our suggestions highlight the need for consistent
implementation of broadly-based economic reforms in debtor
countries. There is no substitute for sound economic policies.
No amount of debt or debt service reduction will lead to
sustained economic growth without proper policies. Inappropriate
policies and inconsistent implementation have often been at the
heart of economic and financial problems in these countries.
Each country must take the initiative to undertake such reforms,
fitted to its individual needs and circumstances.
Macroeconomic reforms — in particular sound fiscal,
monetary, and exchange rate policies — remain critical.
However, they are not sufficient. Supply-side policies designed
to free up rigidities, allow the marketplace to work, and boost
production are essential to combining adjustment with growth.
Thus, countries should pursue policies which liberalize trade,
reform labor markets, develop financial markets, and privatize
government enterprises. This will allow the private sector to
help increase employment and efficiency. Policies should be
designed with new emphasis on boosting the confidence of both
foreign and domestic investors, thereby encouraging new
investment and fostering flight capital repatriation.
Flight capital can offer countries an important source of
foreign exchange for meeting their financing needs and their
growth objectives. In this connection, debtor countries should
review, among other things, their overall investment and tax
regimes to remove disincentives to investment. This includes
reducing or eliminating limitations on remittances of profits
and dividends, which can discourage both foreign and domestic
investors who have capital abroad. It also may need to involve
lowering overall tax rates, broadening the tax base, and reducing
capital gains and dividend taxes.
Role of the IMF and World Bank
As Secretary Brady has made clear, we believe that the
International Monetary Fund (IMF) and the World Bank will need
to continue to play central roles in the strengthened debt
strategy, although their roles will be modified to reflect the
new areas of emphasis. The policy reforms fostered by these
institutions to produce key macroeconomic and structural changes
and sustained economic growth remain critical to the resolution
of debt problems. We believe that the IMF and World Bank's
ability to promote reform and mobilize financial resources can,
however, be more effectively harnessed to strengthen the
international debt strategy. In our view, this can be achieved
through:
o additional emphasis on policies to promote foreign
direct investment and flight capital repatriation, and

4
o

by making available some Fund and Bank resources to
support directly debt and debt service reduction.

The World Bank and IMF have built impressive expertise in
helping countries design and implement critical macroeconomic
and structural reforms to facilitate economic recovery. These
institutions have already made significant contributions to
reforms in many countries, but there is clearly more to be
done. Large fiscal deficits, high inflation, low levels of
investment, and structural rigidities which hinder the efficient
functioning of the marketplace continue to plague many debtor
countries. The Fund and the Bank must continue to help debtors
attack these and other problems. In addition, the World Bank
should give particular emphasis to direct investment policies,
while the Fund should concentrate on the flight capital problem.
We have further proposed that the IMF and World Bank provide
direct financial support for voluntary debt and debt service
reduction. Programs to support debt reduction should be
available to countries with medium-term commercial bank debt
which have a balance of payments need and are prepared to
negotiate strong economic reform programs with the IMF and
World Bank. Such support by the international financial
institutions would be available only when countries have been
able to negotiate with their commercial banks transactions
involving significant debt or debt service reduction. In such
circumstances, the IMF and World Bank should make available two
types of financial support for debt and debt service reduction.
First, we have suggested that the IMF and World Bank
modify their policy-based lending operations to help finance
specific debt reduction transactions. This could be achieved
by setting aside a portion of participating nations' policybased loans to collateralize discounted debt-for-bond exchanges,
or to replenish foreign exchange reserves following a cash
buyback, once such transactions have been negotiated with
commercial banks.
In addition, we believe that the Fund and the Bank should
make available limited interest support for transactions
involving significant debt or debt service reduction. Such
support, which should be structured so as to safeguard the
financial positions of the Fund and the Bank, could be made
available on a rolling basis for a limited period of time, such
as one year.
It will be important to preserve close association between
debtor country performance, IMF and World Bank financing, and
commercial bank activity. At the same time, rigidities in the
current system have in some cases made it more difficult for
debtor nations to perform well under reform programs. When a
country is launching a major economic reform effort, it needs
to have visible, meaningful support from the international

5
community from the outset. We believe, therefore, that the
Fund and the Bank should review their policies in this area to
introduce greater flexibility in the timing of financial
disbursements. Initial disbursements from the Fund and the
World Bank might, therefore, be made before final agreement is
reached with commercial banks on specific debt and debt service
reduction transactions.
Support from Commercial Banks
Active participation by the banking community in this
effort will be a critical element of the strengthened debt
strategy. As I have already indicated, a major feature of our
proposal is debt and debt service reduction, to complement new
money. A major advantage of this approach is that it will allow
banks to choose what form their support will take from a
diversified set of choices, including debt reduction, debt
service reduction, or various forms of new lending mechanisms.
Certain steps need to be taken, however, to enable such
diverse financial support for debtor countries to come forward
in a timely and efficient manner. In particular, attention
needs to be focused on existing loan agreements between debtors
and commercial bank creditors, which contain elements impeding
debt and debt service reduction. Such contractual constraints
can be waived through .negotiations between each debtor and its
creditors in order to allow debt and debt service reduction
transactions to proceed. These waivers might have a three-year
life in order to stimulate reduction of debt burdens within a
relatively short time period.
We expect waivers to accelerate the pace of debt reduction,
thus benefiting debtor nations and reducing new financing needs
to more manageable levels. Once waivers are agreed upon,
debtors and creditors should be able to negotiate a range of
specific transactions, which might include debt/bond exchanges,
cash buybacks, and interest reduction instruments. At the same
time, effective debt/equity programs should be in operation in
the debtor nations in order to permit continued conversions of
external obligations into investment instruments.
It will be important that the banking community also
continue to provide new lending, although the magnitudes required
should be reduced by the debt and debt service reduction
operations. New financing could include concerted lending,
club loans, trade credits, or project finance.
Creditor governments, for their part, should continue to
reschedule official debts in the Paris Club and maintain export
credit cover for debtor nations adopting Fund and World Bank
programs. Regulatory, accounting, and tax regimes should also
be reviewed, with a view to reducing any impediments to debt and
debt service reduction. Where possible, creditor governments
should also provide bilateral funding in support of the

6
strengthened debt strategy. Japan has already risen to this
challenge by announcing a commitment to provide additional
financing of $4.5 billion. We welcome this announcement, which
underscores Japan's strong support for the strengthened debt
strategy.
Questions Raised about the Strengthened Debt Strategy
A number of questions have arisen concerning the
strengthened debt strategy, and I would like to address a few
of these.
Many have asked whether our initiative is "enough" to bring
real progress in easing debt burdens. I believe that the
answer to that question is yes. We see great potential in the
combination of debt and debt service reduction, new lending,
foreign direct investment and flight capital repatriation to
provide adequate support for individual country efforts. The
real issue is not whether there is a specified amount of debt
reduction in a certain period of time but whether the combination
of debt reduction, debt service reduction, and new money provided
will be sufficient to reinforce domestic economic reform and
foster sustained economic growth. Viewed in that light, the
amount of debt reduction needed will vary from case to case,
depending in part on the debtors priorities and circumstances.
It is important to understand that, while there is urgency
to getting the process of debt reduction under way, the process
is likely to be an incremental one, with possibly modest activity
at the outset leading to greater debt reduction over time as
market innovations appear and the catalytic process unfolds.
In fact, we believe that it is important that the initial steps
in this process be realistic and practical, in order to permit
it to move ahead promptly. Exaggerated or grandiose demands
for debt relief could actually slow the process. By opening up
the market to debt and debt service reduction transactions,
however, and building on the experience gained, we believe the
international community can achieve significant results for
debtor countries.
In discussing the strengthened strategy, some have also
asked which countries would be eligible. Developing countries
from all parts of the world stand to benefit from this
initiative. In developing these proposals, we have consciously
extended our focus from the major fifteen debtors to a broader
group of countries experiencing difficulties in servicing their
commercial bank obligations. By negotiating a comprehensive
reform program with the IMF/World Bank, any country with mediumterm commercial bank debt can become a candidate for IMF and
World Bank support of its debt and debt service reduction
efforts.
Many of the potential candidates are of particular strategic
and political interest to the United States. Several potential

7
early candidates for such support have already emerged. Both
Mexico and the Philippines have now completed negotiations with
the IMF management on comprehensive economic reform programs
which should provide a solid foundation for their negotiations
with the commercial banks. Venezuela is also well along in this
process as well and has already drawn money from the IMF to
support its initial reform efforts. Morocco is also in the
process of negotiations with the international financial
institutions and commercial banks and stands ready to benefit
from a strengthened strategy.
Specific questions have arisen about how the "good
performers" would be treated under this initiative. We recognize
that some countries that would be eligible for a debt reduction
program have already made considerable progress. Chile's
intensive reform efforts, for example, have helped create a
more efficient and competitive economy and, among other things,
produced probably the most open investment regime in Latin
America. Chile has benefited from real growth exceeding 5
percent for the past three years and a very low level of
inflation. Colombia has also made significant progress, while
avoiding formal debt rescheduling. Under an IMF enhanced
surveillance program, it has virtually eliminated its fiscal
deficit, while increasing its international competitiveness
The reward has been GDP growth averaging over 5% in the 1986-88
period. Other debtors, such as Uruguay, have also made major
strides.
Some of these countries may wish to continue to rely upon
the support of the Fund and the Bank without taking advantage
of the new proposals. If so, they should be encouraged in
their efforts, where sound policies remain in place. Others of
these countries may wish to consider taking advantage of the
potential benefits of the proposals we have made. They also
should be supported.
We feel that a strengthened international debt strategy
will help debtor countries address more successfully the myriad
of problems they have been facing, some of which are compounded
by unwieldy external obligations. We realize that the economic
measures involved in this approach will not be any easier now
than they have been; the benefits, however, will be more visible,
thus providing greater encouragement for these difficult reform
efforts.
International Support
Earlier this month, many of the parties involved in
addressing international debt problems converged on Washington
for the Spring Meetings of the IMF and World Bank. During that
time, we presented in a number of fora our ideas for
strengthening the debt strategy. These ideas received much
attention and strong support from the Group of Seven and Group

8
of Ten industrial nations and both the Interim and Development
Committees of the IMF and World Bank.
For example, the Interim Committee, which represents the
views of both debtor and creditor governments, welcomed the U.S.
proposals to strengthen the debt strategy and "requested the
[IMF] Executive Board to consider as a matter of urgency the
issues and actions involved." In particular, the Committee
agreed that "the Fund should' provide resources in appropriate
amounts to members to facilitate debt reduction" and that "the
question of provision of resources for limited interest support
transactions involving significant debt or debt service reduction
should be examined."
Next Steps
It is critical now that we build upon the momentum
established by these meetings and take the steps necessary to
flesh out the strengthened debt strategy. Debtor countries
are anxious to proceed with debt reduction, and we would like to
move forward as quickly as possible. We believe that it is
important that this occur without delay as part of ongoing
negotiations between debtors and creditors.
We anticipate that the Executive Boards of the IMF and World
Bank will meet in the next few weeks on the key issues before
these institutions, and we hope they will reach decisions at an
early stage about how to put the necessary mechanisms into
place. In the meantime, commercial banks and debtor countries
can move ahead in developing specific debt reduction and debt
service reduction transactions. They should also be preparing
the way for such transactions to go forward by negotiating
waivers that remove the contractual constraints on debt and
debt service reduction.
We believe that a dynamic process has been set in motion
whereby each country can work with its creditors to reach
agreement on a diverse range of financial support. We look to
the process itself to generate new and innovative debt and debt
service reduction techniques, differentiated new money
mechanisms, and other diversified forms of financial support.
In addition, to the basic process of debt reduction, these
activities can include debt swaps that directly benefit the
public interest. Just last week, for example, three
conservation organizations signed an agreement to retire $9
million of Ecuador's commercial bank debt in exchange for local
currency bonds which will fund environmental and conservation
projects. We heartily support such private sector initiatives.
In closing, I want to emphasize that the Administration's
intent in strengthening the international debt strategy is to
promote an approach to debt problems that will help revive
growth and renew hope in developing countries. To achieve
progress, the strengthened strategy will depend on continued

9
cooperative efforts of commercial banks, debtor and creditor
governments, and the international financial institutions.
Secretary Brady and the Bush Administration are fully committed
to making this process work, and we look forward to strong
Congressional support for these efforts.
Thank you.

I

TREASURY NEWS
eportment off the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 19, 1989

CONTACT:

Larry Batdorf
(202) 566-2041

AGES PLEADS GUILTY TO
SOUTH AFRICA EMBARGO VIOLATIONS
The United States Treasury Department today announced that
on April 5, 1989, in the United States District Court for the
Eastern District of New York, co-defendants Air Ground Equipment Sales, Inc. (AGES) and Robert G. Fessler, Chairman and
Chief Executive Officer of AGES, pleaded guilty to criminal
charges of illegal imports of merchandise purchased from South
African Airways, a South African parastatal organization.
The corporation has entered pleas of guilty to violation
of the parastatal import ban of the Comprehensive AntiApartheid Act (CAAA) and to smuggling, and has agreed to pay a
$1 million fine, the maximum criminal penalty authorized under
the law. The four jet engines, engine stands, and accompanying
materials, which have a combined domestic value of $7.5 million,
will be forfeited under U.S. Customs Service regulations.
Fessler pleaded guilty to one felony count of violating
the parastatal import ban of the CAAA, which carries a maximum
criminal penalty of up to $50,000 and/or ten years imprisonment. Sentencing is scheduled for June 9, 1989, in the U.S.
District Court for the Eastern District of New York in
Brooklyn.
AGES is headquartered in West Babylon, New York, and
maintains offices throughout the United States and around the
world. It engages in the buying, selling, and leasing of
aircraft parts. The four engines in question, were purchased
by AGES from South Africa in 1987 through an international
broker.
The defendants falsified shipping and Customs documents in
order to transship the engines and related materials to the
United States through Israel. Using the falsified documents,
AGES cleared the goods through U.S. Customs in August 1987.
On November 5, 1987, the U.S. Customs Service seized the
engines at AGES' headquarters pursuant to a search warrant.
NB-228
The Government of Israel and South African Airways cooperated
in the investigation.

- 2-

Salvatore R. Martoche, Assistant Secretary of the Treasury
for Enforcement, said, "The guilty pleas by AGES represent a
major victory in the Treasury Department's on-going efforts
to enforce vigorously the CAAA prohibitions on imports from
South African parastatal organizations."
Martoche also said, "This case should send a strong
message that violations of the South African sanctions program
will not be tolerated. The outcome is the result of a joint
effort and close cooperation among the U.S. Customs Service and
the Office of Foreign Assets Control, both agencies of the
Treasury Department. These two Treasury agencies will continue
to work closely with the Department of Justice to pursue a
vigorous enforcement program against violations of the South
African sanctions."

TREASURY NEWS
Department off the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
April 19, 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 $10,879 million of 2-year notes maturing
April 30, 1989, and to pay down about $1,625 million. The public
holds $10,879 million of the maturing 2-year notes, including
$1,357 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, Federal Reserve Banks, for
their own accounts, hold $777 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-229

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED MAY 1, 1989
April 19, 1989
Amount Offered:
To the public

$9,250 million

Description of Security;
Term and type of security
2-year notes
Series and CUSIP designation .... Y-1991
(CUSIP No. 912827 XL 1)
Maturity date
April 30, 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
October 31 and April 30
Minimum denomination available .. $5,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment 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
Kev
Dates:
Wednesday,
designated
institutions
Acceptable April 26, 1989,
Receipt
of tenders
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
Monday, May 1, 1989
available to the Treasury
Thursday, April 27, 1989
b) readily-collectible check

TREASURY NEWS
Department off the Treasury • Washington, D.C. • Telephone 566-2041
Text As Prepared
Embargoed For Release Upon Delivery
Expected at 10:00 a.m., D.S.T.

r". ;-.GG*M 5310

STATEMENT OF THE HONORABLE NICHOLAS F. BRADY ;'Ri;
SECRETARY OF THE TREASURY
^.-'ARTf-jHOUSE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE
AND GENERAL GOVERNMENT
APRIL 20, 1989
MR. CHAIRMAN, MEMBERS OF THE COMMITTEE:
I am pleased to be here today to discuss with you the
operating budget request for the Department of Treasury for
Fiscal Year 1990.
Over the past few weeks, I have testified before the Senate
and the House Budget Committees and Appropriations Committees as
one of the Administration's economic spokesmen. We talked about
President Bush's key budget proposals, including funding to win
the war against drugs, to emphasize education and environmental
issues, and plans to assist the homeless. We also talked about
the Administration's plan to resolve the savings and loan crisis,
important revenue related measures, and the need to improve our
competitive position in the world economy.
My remarks, today, focus not on the economic and tax policy
underlying the President's budget, but on that portion of the
overall budget that pertains to the operations of the Department
of the Treasury. As you are aware, the President's Fiscal Year
1990 Budget proposes freezing, at Fiscal Year 1989 levels, the
aggregate spending of domestic programs not directly associated
with one of his five broad initiatives. The Administration
strongly encourages full funding of the Department's $0.5 billion
request to continue the War on Drugs, including the increases
proposed by President Eush to increase cargo inspections for drug
smuggling and expand efforts to fight money laundering.
NB-230

Although most of our programs are included in the aggregate
domestic discretionary spending category, the President has
emphasized that the freeze is flexible, allowing some programs to
increase while others are reduced. Discussions concerning
increases or decreases to specific programs within the freeze
category are ongoing between Congressional leaders and
Administration officials.
The Department of the Treasury carries out a wide variety of
functions that are critical to the functioning of our Nation's
government. These activities include:
o Administering the Nation's tax system and collecting
the revenues due under our tax laws;
o Managing the government's finances, by financing the
debt, paying obligations, and maintaining the fiscal
accounts;
o Collecting customs duties at our Nation's borders;
interdicting illegal and dangerous drugs; and providing
for the protection of the President and the Vice
President; and
o Assisting the President in directing the
Administration's domestic and international economic
policies, monetary and financial affairs, and tax
policies.
For Fiscal Year 1990, the Department is requesting a total
of $8.0 billion and 155,748 full time equivalent positions for
the purpose of carrying out these critical responsibilities.
This request represents an increase of $311 million and 1,990
full time equivalent positions compared to Fiscal Year 1989.

3
I would like to highlight a number of objectives of our
Fiscal Year 1990 budget request:
I. Our key priority is to maintain an effective tax
administration system by transforming many manual, paperintensive operations into a modern, automated system capable of
delivering first quality service while processing returns and
collecting revenues.
The Department's budget for the Internal Revenue Service,
the largest Treasury bureau, takes account of the continued
growth in tax administration workload and the pressing need for
modernized systems. For the IRS, this entails pursuing the
redesign of our current tax processing system—a system first
introduced in the early 1960's, but today, aged and deficient in
terms of available technology. This budget request will not only
help guarantee the efficient collection of tax revenues through
the turn of the century, but also will provide for the continuing
improvement in service levels that the taxpaying public expects
and deserves, reducing response times from weeks and days, in
some cases, to a matter of minutes.
II. Our second objective is to maintain the ability of the
Internal Revenue Service to promote tax compliance and collect
revenue, while supporting improvements in these areas.
Improving service levels through modernization of tax
collection systems will provide a necessary boost to our ability
to promote tax compliance. However, the request for the IRS also
contains the funds necessary to improve important, ongoing
revenue enforcement activities. We propose to accomplish this
objective by increasing resources for several high yielding
revenue efforts, including the collection of unpaid taxes,
compliance efforts among U.S. citizens living abroad, and
investigations into possible underpayment of employment taxes.

4
Finally, we plan to augment the IRS' ability to perform
examinations of %ax returns where there are simple discrepancies
that have a revenue impact.
The Bipartisan Budget Agreement for FY 1990 was approved
last week by the President and the Congressional leaders of both
parties. Incorporated into that agreement are $0.5 billion in
additional revenues to be derived from expanded IRS tax
enforcement efforts. To meet this target, additional resources
will be required for IRS enforcement programs above the FY 1989
enacted levels. After the new resource requirements are
determined, they will be provided to the Congress as part of the
continuing negotiations on the FY 1990 budget.
III. A third objective is to support the President in his efforts
to end the scourge of drugs by promoting the Department's role in
drug law enforcement.
The role of the U.S. Customs Service in inspecting the
people and goods crossing our Nation's borders places the
Department of the Treasury at the forefront of President Bush's
efforts to stem the tide of illegal drug trafficking. In Fiscal
Year 1990, the Customs Service will continue to participate in
drug enforcement task forces in major cities across the Nation
and to increase drug interdiction efforts along our borders. The
Department is requesting the additional resources to expand
contraband examinations and improve automated systems that
support investigative and intelligence operations. We also seek
continued development and refinement of automated systems such as
the Customs' Automated Commercial System to enhance productivity
and improve the effectiveness of operations.
IV, Our next major objective is to fulfill our other law
enforcement and protection responsibilities, including the
continued enforcement of the Nation's trade laws.

5

The Department's budget requests funds for continuing law
enforcement and support operations provided by the Federal Law
Enforcement Training Center, the Customs Service, the Bureau of *
Alcohol, Tobacco and Firearms, and the Secret Service.
Considering Treasury's pivotal involvement in Federal law
enforcement and our critical need to both hire and retain the
most highly skilled law enforcement personnel, the Department
supports the work of the National Advisory Commission on Law
Enforcement. We need a fair compensation system, applicable to
all Federal law enforcement personnel, to confront recruitment
and retention problems, and to address the compensation issue as
it relates to other Federal, state, and local law enforcement
agencies.
We also remain committed to the concept of consolidated
training in order to take advantage of scale economies and
address the shared needs of our Nation's diverse law enforcement
personnel. The request for the Federal Law Enforcement Training
Center will support a facility that fully meets the basic and
advanced law enforcement training needs of the participating
agencies.
In addition to the drug interdiction efforts already
mentioned, the Department proposes to provide funding for the
Customs Service that will allow the collection of $19 billion in
revenue through the enforcement of the Nation's trade laws. The
Department's proposed funding will support the rapid inspection
and clearance of 9.8 million formal merchandise entries and 370
"million passengers.
We seek funds for the Bureau of Alcohol, Tobacco and
Firearms to continue conducting programs to reduce the criminal
use of firearms and explosives. In addition, funding the

6
operations of the Bureau will provide for the collection of an
estimated $10.3 billion in excise taxes on alcohol and tobacco.
The proposed budget for the Secret Service takes into
account the need for improved security at the Vice President's
residence, vital upgrades to information and communications
systems, and improved administration of responsibilities that
include the protection of the President and the Vice President,
and the investigation of currency counterfeiting, check forgery,
and other types of fraud.
V. The Department's fifth objective is to continue to
effectively-manage the Nation's finances and service America's
debt.
The request for the fiscal service bureaus—the Financial
Management Service and the Bureau of Public Debt—furthers our
efforts to improve governmentwide cash management, debt
collection, financial information systems, customer service to
holders of government securities, and the cost effectiveness of
the Savings Bonds program.
As the lead agency for many of these issues, the Financial
Management Service has presided over a substantial
accomplishment—the generation of measurable savings of over $2 0
billion during the 1980's through more effective processing of
the Federal government's $2.3 trillion annual cash flow. Over
the last few years, the Financial Management Service has been
called on to increase its leadership role in the financial
management of the Federal government. The Service's proposed
budget for Fiscal Year 1990 reflects this active role as well as
the need to sustain the systems modernization necessary for
ensuring financial management services in the future.

7
The Department's proposed budget for the Bureau of Public
Debt will provide funding to fully reimburse the Federal Reserve
Banks for services performed as fiscal agents on behalf of the
Bureau. Additionally, funding is provided to handle workload
associated with the new Education Savings Bonds program and to
develop a new savings bonds processing system to maintain the
records of the 5.4 billion savings bonds that the public now
owns. We also expect that through continued enhancement of
automated systems, we will improve our ability to render better
accounting and servicing of the Public Debt.
VII. Another major objective is to provide continued support for
policy formulation and management oversight of all Departmental
operations.
The budget request for Treasury's Departmental Offices will
support the Department in its efforts to assist the President in
the formulation of tax and economic policy—both national and
international. It will also fund continued management oversight
of the Department's diverse operations, including the
establishment of an assertive and independent statutory Inspector
General.
VI. Our final objective is to supply the resources necessary to
provide for the Nation's coinage and currency demands.
The Bureau of Engraving and Printing does not require
appropriated funds for currency production. The requested
funding for the U.S. Mint will allow for the production of
sufficient coinage to meet the Nation's business needs. The
budget will also fund efficiency improvements that will enhance
our capabilities to manufacture domestic coinage.

8
In summary, the $8.0 billion budget request for the
Department of the Treasury represents:
o a faithful commitment to carrying out President Bush's'
charge to restrain the growth of government, while
providing vital Federal services;
o a vital investment in the ability of the Department to
manage its tax collection, financial management, and
debt accounting roles;
o a necessary license to support the President's war on
drugs through increased interdiction and other law
enforcement duties; and
o a mandate to carry out many of the most essential
functions of the Federal government.
Mr. Chairman, that concludes my opening remarks. I will be
happy to answer any questions that you or the other Subcommittee
members may have.

TREASURY NEWS

Department off the Treasury er.P.GOM
Washington,
D.C. • Telephone 566-2041
5310

FOR IMMEDIATE RELEASE
APRIL 19, 1989

CONTACT:

ART SIDDON
566-5252

STATEMENT BY
SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
The Senate deserves a great deal of credit for acting
swiftly to pass President Bush's savings and loan reform plan.
In fending off amendments to the financing mechanism, the Senate
has upheld the integrity of the Gramm-Rudman-Hollings process.
We also applaud the Senate's efforts to maintain strong capital
requirements.
We particularly appreciate the bipartisan
leadership and cooperation shown in this effort.

NB-231

TREASURY.NEWS

epartment off the Treasury e Washington, D.C. e Telephone 566-2041
UDfU'vi, RQQh 5510

FOR IMMEDIATE RELEASE

B

RZ1

April 20, 1989

- "",0

Monthly Release of U.S. Reserve Assets
DEPARTM

The Treasury Department today released U.S. reserve assets data
for the month of March 1989.
As indicated in this table, U.S. reserve assets amounted to
$49,854 million at the end of March, up from $49,373 million in
February.

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

End
of
Month

Total
Reserve
Assets

Gold
Stock 1/

Special
Drawing
Rights 2/3/

Foreign
Currencies

49,373
49,854

11,,061
11 ,061

9,653
9,443

19, 306
20,-298

1/

Reserve
Posi tion
in IMF 2/

1989
Feb.
Mar.

9,-353
9,
-052

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-232

TREASURY NEWS
epartment off the Treasury e Washington, D.C. e Telephone 566-2041

FOR IMMEDIATE RELEASE
April 24, 1989

CONTACT: Peter Hollenbach
(202) 376-4302

TREASURY APPROVES A 10-YEAR MATURITY EXTENSION FOR SAVINGS BONDS

The Department of the Treasury announced today that Series EE
savings bonds with issue dates of May 1, 1981, through October 1,
1981, will be granted a 10-year maturity extension. Without this
extension, the bonds would have reached their initial maturity
period between May 1 and October 1, 1989. As a result of
Treasury's action, Series EE bonds issued between May 1 and
October 1, 1981, have been granted extended maturities ranging
from May 1 to October 1, 1999. During this 10-year extension,
outstanding bonds in this group will continue earning marketbased interest rates.
Treasury's action continues a longstanding tradition of
encouraging individuals to purchase and hold U.S. Savings Bonds.
Savings bonds are an important and cost-effective source of
Treasury financing and they provide a safe form of savings for
all Americans. Since their interest fluctuates with market
rates, savings bonds also provide competitive interest earnings.
Currently more than 30 million Americans hold savings bonds
valued at more than $112 billion.

NB-233

TREASURY.NEWS
CONTACT:
of Financing
Department off the Treasury e Washington,
D.C. eOffice
Telephone
566-2041
202/376-4350

5310

FOR IMMEDIATE RELEASE
April 2 4 , 1989

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
•t:fr •

1

,5

Tenders for $7,210 million of 13-week bills and for $7,203 million
of 26-week bills, both to be issued on April 27, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing
July 27, 1989
Discount Investment
Price
Rate
Rate 1/
8.63%
8.68%
8.66%

8.94%
9.00%
8.98%

26-week bills
maturing October 26
Discount Investment
Rate
Rate 1/

97.819
97.806
97.811

8.69%
8.73%
8.72%

9.21%
9.26%
9.25%

1989
Price
95.607
95.587
95.592

Tenders at the high discount rate for the 13-week bills were allotted 37%.
Tenders at the high discount rate for the 26-week bills were allotted 45%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

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

Accepted

35,035
18,474,615
33,945
37,050
82,550
30,345
1,105,600
24,565
7,555
34,120
31,975
599,515
598,610

35.035
$
5 ,953,615
33,945
37,050
73,100
30,345
192,590
24,565
7,555
34,120
23,825
165,385
598,610

$

24,730
18 ,586,185
20,230
33,795
43,930
29,155
1 ,022,045
24.975
7,160
44,970
29,245
667,510
500,460

24,730
$
5 942,285
20,230
33,795
43,930
29,155
305,795
22,975
7,160
44.970
19,245
208,460
500,460

$21,095,480

$7 ,209,740

$21 ,034,390

$7 203,190

$17,774,785
1,280,615
$19,055,400

$3 889,045
1 280,615
$5 169,660

$17 165,275
1 ,013,835
$18 179,110

$3 334,075
1 013,835
$4 .347,910

1,726,260

1 726,260

1 600,000

1 ,600,000

313,820

313,820

1,255,280

1 ,255,280

$21,095,480

$7 209,740

: $21,034,390

$7 ,203,190

$

:

:

An additional $31,080 thousand of 13-week bills and an additional $163,120
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
NB-2 34

TREASURY NEWS
apartment off the Treasury e Washington, D.C. • Telephone 566-2041
jQH 5310
FOR IMMEDIATE RELEASE
April 24, 1989

CONTACT:
"

LARRY BATDORF
(202) 566-2041

TREASURY SEEKS PUBLIC COMMENT ON PROVIDERS OF TRAVEL
SERVICES AND FAMILY REMITTANCE FORWARDING TO CUBA
The Treasury Department today announced the publication
in the Federal Register on April 21, 1989, of a notice
requesting public comment on the fitness and qualification
of providers of travel service, carrier service, and family
remittance forwarding to Cuba, in connection with a new
licensing requirement. The notice lists 44 applicants that
have filed license applications and have been granted
provisional authorization to provide services pending review
of their completed applications. Only those names on this
list are authorized to provide these types of services to
Cuba.
On November 23, 1988, amendments to the Cuban Assets
Control Regulations, 31 C.F.R. Part 515, were published to
require that persons engaged in certain service transactions
related to Cuba secure specific licenses from the Treasury
Department's Office of Foreign Assets Control. Licenses
will be issued only upon the applicant's written affirmation
and subsequent demonstration that it does not participate in
discriminatory practices of the Cuban government against
certain residents and citizens of the United States.
Comments in response to the Federal Register notice
should be submitted in writing to the Office of Foreign
Assets Control, U.S. Treasury Department, 13 31 G Street,
N.W., Room 400, Washington, D.C. 20220. To the extent
permitted by law, the identity of anyone submitting
information, as well as any identifying information
provided, will be held in confidence. The comment period
closes on June 20, 1989.
NB-235

TREASURYNEWS 1&

epartment off the Treasury e Washington,
D.C.
• Telephone
CONTACT:
Office
of Financing566-2
FOR RELEASE AT 4:00 P.M.
April 25, 1989
"?ft 2
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
$14,000 million, to be issued May 4, 1989.
This offering
will result in a paydown for the Treasury of about $ 850 million, as
the maturing bills are outstanding in the amount of $ 14,839 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, May 1, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
August 4, 1988,
and to mature
August 3, 1989
(CUSIP No.
912794 SJ 4), currently outstanding in the amount of $16,621 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
May 4, 1989,
and to mature November 2, 1989 (CUSIP No.
912794 TC 8 ).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing May 4, 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 $ 1,974 million as agents for foreign
and international monetary authorities, and $3,767 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).
MR-?7£

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
ipartment off the Treasury e Washington, D.C. e Telephone 566-2041
FOR IMMEDIATE RELEASE
April 26, 1989

CONTACT: Office of Financing
-r?-i^ 202/376-4350
i J0—0

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,260 million
of $22,884 million of tenders received from the public for the
2-year notes, Series Y-1991, auctioned today. The notes will be
issued May 1, 1989, and mature April 30, 1991.
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% rate are as follows:
Yield
Price
99..911
Low
9.,30%
9.,35%
99..822
High
9.,34%
99..839
Average
Tenders at the high yield were allotted 55%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location Received Accepted
Boston $ 71,870 $ 71,370
New York
19,534,190
7,354,540
Philadelphia
47,935
47,935
Cleveland
102,910
102,910
Richmond
123,560
108,605
Atlanta
76,825
75,010
Chicago
1,425,620
551,630
St. Louis
160,195
110,945
Minneapolis
51,470
51,470
Kansas City
163,935
162,150
Dallas
47,120
44,855
San Francisco
935,495
435,595
Treasury
143,320
143,320
Totals
$22,884,445
$9,260,335
The $9,260 million of accepted tenders includes $1,6 45
million of noncompetitive tenders and $7,615 million of competitive tenders from the public.
In addition to the $9,260 million of tenders accepted in
the auction process, $1,180 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $777 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-2 37

(

TREASURY NEWS

1

Department off the Treasury e Washington, D.C. • Telephone 566-2041
For Release Upon Delivery
Expected at 9:30 a.m. E.S.T.
April 27, 1989
STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:

JET:.!.

I am here today at your request to present the Treasury
Department's views on the role of qualified pension plans, in
particular defined benefit pension plans, in leveraged buyouts
(LBOs). The Department believes that it would be premature to
change the current law regarding pension plans, particularly with
respect to reversions of excess pension plan assets, in response
to the LBO phenomenon.
BACKGROUND
The Internal Revenue Code provide
s rules designed to encourage employers to establish and mainta in qualifie d retirement
plans. Under these rules, an employer's contributio n to a trust
established under a retirement plan is de ductible to the employer
and is not included in the income of the employee. In addition,
income earned by the trust assets is not currently t axable to the
trust, the employer or the employees. In the case o f a defined
benefit pension plan, under which an empl oyee earns credit toward
a specific pension benefit, the employer is required to fund the
plan under one of various actuarial fundi ng methods in such a
manner as to ensure that there are suffic ient assets to satisfy
If a defined under
benefit
pension liabilities
thepension
plan. plan is terminated, plan
assets in the trust must first be applied to satisfy plan liabilities. Upon satisfaction of such liabilities, plan assets
remaining in the trust, so-called excess assets, may be distributed to the employer.
Any such excess assets recovered by the
employer are includible in the employer's income for Federal income tax purposes and are subject to a nondeductible 15% excise
tax.
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.

NB-238

-2In determining the amount of contributions that may be made to a
plan, an actuary makes certain assumptions regarding interest
rates, the rate of return on plan investments, salary increases
until participants' projected retirements, the rate of employee
turnover, the rate of employee mortality, and other factors, any
or all of which assumptions may prove to be inaccurate.
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.
In sum, when a plan is terminated, excess assets may exist
because (1) the actual experience of the plan may be different
from the assumptions made by the actuary, (2) the accrued
benefits, both fixed and contingent, are less than those
projected to be earned upon participants' retirements, and (3)
the funding method adopted by the employer generally would have
required LBO
prefunding
of projected
benefits.
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 interests in the target corporation for
cash and/or debt of the acquisition corporation.
The equity supplied by the investor group typically represents 15 percent of an LBO's total capitalization. Around 30
percent 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 often
comes from an investment bank, with the junk bonds purchased by
investment partnerships, insurance companies, bank subsidiaries,
pension funds, 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
DISCUSSION
and specialized limited partnerships.
Several concerns have been raised regarding the role of
pension plans, particularly pension plans with excess assets, in
LBO transactions. These concerns include whether the existence
of a pension plan with excess assets makes a company more
attractive as a target of an LBO, whether pension plans are more
likely to be terminated following a successful LBO, and the use
of plans to defend against hostile takeovers (leveraged or
otherwise).

-3Attractiveness of Overfunded Plans to Purchasers. The
presence of an overfunded pension plan may make a company more
attractive as a target of an LBO. Although the purchase price
may reflect the value of the excess assets in the pension plan,
the excess assets may be viewed as a ready source of cash that
may facilitate the LBO financing. For example, the excess assets
may provide a source of funds with which to retire some portion
of the short-term bridge loans incurred in the transaction, or as
a source of funds with which to service the debt incurred. At
the same time, the Treasury Department has no empirical data suggesting that the mere presence of excess assets in a pension plan
significantly contributes to the likelihood that a company will
be the target of an LBO. Moreover, we would note in this regard
that recently enacted legislation imposed an excise tax on asset
reversions and additional limits on deductible contributions to
pension plans that will have the effect of limiting the amount of
excess assets that may accumulate in a pension plan. Thus, if
the availability of substantial excess assets does facilitate
LBOs, the new limitations may reduce this effect in the future.
Increased Likelihood of Asset Reversions. Concern has
been raised whether after a successful LBO it is more likely that
overfunded pension plans will be terminated. The basis for this
concern is that because of the highly leveraged nature of the
transaction, there is an incentive to recover the excess assets
from the pension plan to facilitate servicing or retiring the
debt. Although the Treasury Department has not compiled any data
on this issue, the PBGC has compiled some data, which they will
address in their testimony before the subcommittee.
If plan terminations are more frequent in the context of
LBOs, much of this activity may well be a result of the highly
leveraged structure of the transaction. The excess assets might
be used to pay interest on the overall debt incurred in the
transaction, or to retire some of the bridge loans.
Alternatively, the pension plan, whether or not it has excess assets, might be terminated to reduce future expenses. In some
cases, because the purchase price would normally reflect the
presence of excess assets, the existence of the excess assets may
actually result in additional debt incurred in the LBO to finance
the acquisition of the excess assets. In this case, the plan
might be terminated to retire the additional debt that was incurred effectively to "acquire" the plan.
In some cases, however, the pension plan might be terminated, or replaced with another type of plan, for reasons not directly related to the leveraged nature of the transaction. Thus,
for example, elimination of a pension plan may reflect a different philosophy of the new management toward employee benefit
plans; new management might, for example, replace the defined
benefit plan with a defined contribution plan to which contributions are contingent on profits. Similarly, if a significant
portion of the underlying business of the target company is sold

-4off after the LBO, many of the participants in the pension plan
may no longer remain with the company, and the role of the
pension plan in the company's overall compensation structure may
have changed significantly.
Although there may be some higher likelihood of asset
reversions in the context of LBOs, we do not believe that it is
appropriate at this time to restrict LBOs or to restrict the
ability to recover excess assets as a means of reducing the
number of reversions. First, the available data does not suggest
that asset reversions happen only or predominately in the context
of LBOs, or that LBOs arise only where there are excess pension
assets. Second, the number and dollar volume of reversions
generally has been falling steadily, and reversions are now occurring at only a fraction of the rate at which they were occurring at their peak in 1985. Accordingly, based on the evidence
presently available, we do not believe that current pension
policies encourage LBOs or that reversions occur only because of
LBOs. Rather, we believe that changing the reversion rules would
have little or no significant effect on the course of LBOs in the
future, and that restricting LBOs would have little or no
significant effect on the number of reversions in the future.
In our view, the tax treatment of excess asset reversions
should neither be a significant impediment to LBOs nor a
significant incentive toward LBOs and, although the issue is one
that Congress and the relevant agencies should continue to
monitor, we believe that it would be premature to take additional
steps restricting an employers's ability to recover excess assets
in response to the LBO phenomenon. The current law treatment of
asset reversions attempts to strike a balance among the various
goals of pension policy, i.e., to protect employees' retirement
income security, to encourage the sound funding of plans, to
encourage employers to establish and maintain pension plans for
their employees, and to discourage the premature termination of
these plans. The ability of employers to terminate their pension
plans and recover excess assets, whether in the context of LBOs
or other corporate transactions, is part of that balance. In
addition, many of the current law rules affecting reversions—the
new funding limitations, the excise tax on reversions, the excise
tax on nondeductible contributions—were only recently enacted.
Finally, the number of reversions has declined significantly,
perhaps in response to some of the recent changes.
Defensive Use of Pension Plans. In the context of LBOs,
and takeovers generally, it has become common to consider using
employee benefit plans to defend against hostile takeovers. Such
defensive tactics are of two basic types. One approach involves
modifying existing defined benefit plans to eliminate any
features of the plans that might be attractive to a hostile
purchaser. A second approach involves establishing Employee
Stock Ownership Plans (ESOPs) as a means of placing a significant
portion of voting stock in the hands of employees who might be

-5less likely to tender their shares to a hostile bidder. Since
this ESOP approach does not involve defined benefit pension
plans, we will not address it in this testimony.
The defined benefit plan defensive approach most often
involves amending a pension plan to adopt so-called "pension
parachutes."
Pension parachutes may take several forms. For
example, the plan may be amended to provide that, in the event of
a hostile takeover, additional pension benefits (or retiree
medical benefits) are to be provided to plan participants,
perhaps to the extent of any excess assets or simply at some
fixed level above current benefits. Other potential defensive
amendments of this type include provisions that would bar plan
amendments without participant approval or bar plan termination
altogether following a hostile takeover. As long as such
amendments comply with the relevant requirements of ERISA and the
Internal Revenue Code, we do not see any tax policy objection to
the voluntary provision of additional retirement benefits and
rights to employees.
This concludes my prepared remarks. I would be pleased
to respond to your questions.

,I

DEPARTMENT OF THE TREASURY

Report to the Congress
on
International Economic and Exchange Rate Policy

April 1989

DEPARTMENT OF THE TREASURY

Report to the Congress
on
International Economic and Exchange Rate Policy

April 1989

TABLE OF CONTENTS

Page
Part I

Introduction

1

Part II World Economic Performance and Outlook

2

Part III Foreign Exchange Market Developments

9

Part IV Asian Newly Industrialized Economies

12

Part V Conclusion

20

APPENDIX Tables

23

PART I:

INTRODUCTION

Section 3005 of the Omnibus Trade and Competitiveness Act
of 1988 (Pub. L. 100-418) requires the Secretary of the Treasury
to submit to the Committee on Banking, Housing and Urban Affairs
of the Senate and the Committee on Banking, Finance and Urban
Affairs of the House of Representatives a report each October 15
on international economic policy, including exchange rate
policy.
The initial report was submitted in October 1988 and
provided an analysis of exchange market developments, including
the underlying economic factors and the impact on the U.S.
economy; an assessment of which countries were "manipulating"
exchange rates within the meaning of the legislation; and
recommendations for changes in U.S. economic policy to attain a
more appropriate and sustainable current account balance.
Section 3005 also requires the Secretary to provide a
written update of developments 6 months after the initial
report. This report provides such an update. Part II reviews
recent developments in the world economy, including developments
in the U.S. balance of payments and efforts by the major
industrial countries to coordinate economic policies. Part III
analyzes the situation in the foreign currency markets,
including the impact of changes in the exchange rate for the
dollar on the U.S. economy. Part IV provides a status report on
negotiations with Korea and Taiwan, economies which were
considered in the October report to be "manipulating" their
exchange rates, within the meaning of the trade legislation.
The final part provides conclusions on the principal issues
discussed in the report.

-2-

PART II:

WORLD ECONOMIC PERFORMANCE AND OUTLOOK

Global Economic Developments
o Overview
The economic expansion in the industrial countries that has
been underway for six consecutive years strengthened
substantially in 1988, contributing to a very strong increase in
world trade growth and helping the Less Developed Countries
(LDCs) record their highest growth rate of the decade. In
addition, the pattern of growth both within and among the seven
largest industrial economies last year provided essential
support for global current account adjustment. The U.S. current
account deficit was reduced considerably in 1988 while the
surpluses of Japan, the European Community and the four Asian
Newly Industrialized Economies (NIEs) also declined. Consumer
price inflation in the industrial countries picked up slightly
again in 1988, albeit to a rate that was only slightly above the
20-year low reached in 1986. (See Table 1.)
The basically favorable macroeconomic trends that were
evident in 1988 have generally persisted thus far this year,
promoting confidence that industrial country growth will
continue, albeit at a more moderate pace, at least into 1990.
Partly as a result, the LDC economies and world trade should
return to their more moderate 1987 growth rates.
However, the international pattern of growth will probably
be somewhat less favorable for current account adjustment than
was the case last year. Thus, while the external adjustment
process is expected to continue in real terms in key countries,
further large reductions in major current account imbalances are
not anticipated this year.
The available evidence suggests that, while inflationary
pressures bear close watching in some countries, the average
industrial country inflation rate will pick up only modestly
this year, to just below 4 percent. There is little evidence
that a serious general acceleration of inflation is developing.
o Expansion Continuing at a Sustainable Pace
Real GNP rose 4.2 percent (annual average) in the seven
largest economies in 1988. Expectations earlier in the year
that the stock market break of October 1987 would have serious
negative repercussions on industrial country macroeconomic
performance were not borne out by events. Indeed, consumer and
business sentiment improved substantially and generally remains
good.

-3-

In addition to being stronger than initially anticipated,
industrial country growth in 1988 was also better balanced
internationally and therefore more supportive of global current
account adjustment. In the United States, domestic demand
growth was more moderate (3.0 percent) than in the earlier years
of the current expansion, thus helping reduce the growth rate of
nominal imports and making domestic productive capacity
available to meet substantially higher foreign demand for U.S.
products. The sharp improvement in U.S. net export performance
last year accounted for nearly 1 percentage point of last year's
3.9 percent total GNP growth rate.
The Japanese economy, conversely, was led by a sharp
increase in domestic demand while the external side exerted a
strong net contractionary effect. Despite tax cuts in Germany,
domestic demand growth was only slightly above GNP growth, and
external developments had an essentially neutral impact. In the
remaining major industrial countries, the difference between
domestic demand and GNP growth was somewhat larger than was the
case for Germany, particularly in the United Kingdom.
Growth prospects for the industrial countries remain
favorable for 1989. GNP growth is projected to return to a more
moderate and sustainable 3 to 3-1/2 percent range as private
consumption growth moderates slightly and fixed investment slows
from last year's exceptional pace. Japan will again be the G-7
growth leader for both GNP and domestic demand. In Europe, the
growth slowdown is expected to be particularly evident in
Germany and the United Kingdom.
The basic composition of industrial country growth outside
of the United States this year (i.e., domestic demand growth in
excess of GNP growth) is expected to be qualitatively similar to
1988. However, the projected slowdown of consumption and
investment implies a more measured pace of domestic demand
growth, which will narrow the amount by which it exceeds GNP
growth.
o External Adjustment at More Measured Pace
One of the most favorable aspects of global economic
developments in 1988 was the sharp increase in world trade
growth, which both resulted from and contributed to the stronger
and more balanced overall growth performance. The latest IMF
estimates indicate that world trade volume increased by
9.3 percent in 1988 after a healthy 6.1 percent gain in 1987.
This strong advance largely reflected developments in the
industrial countries, which account for nearly 75 percent of
total world trade.

-4-

These trade developments were reflected in significant
shifts in the current account positions of major countries and
country groups. The U.S. current account deficit declined about
$20 billion, while Japan's surplus declined $7.5 billion and the
combined surplus of the four Asian NIEs by about $4-1/2 billion,
despite sharp growth in Korea's surplus. Europe's aggregate
current account surplus was reduced by roughly $20 billion,
though this was accounted for almost entirely by a very sharp
increase in the deficit of the United Kingdom; Germany's current
account surplus rose nearly $4 billion to a large record high of
around $48-1/2 billion.
External adjustment in the major countries can also be
gauged by considering current account imbalances as a percent of
GNP, which eliminates valuation problems associated with
exchange rate changes and takes into account the differing sizes
of national economies. By this measure, the U.S. current
account deficit declined from its 1987 peak of 3.4 percent of
nominal GNP to 2.8 percent 1-ast year; Japan's surplus dropped
from 3.6 to 2.8 percent (vs. its 1986 peak of 4.3 percent).
Germany's surplus remained unchanged at 4.0 percent of GNP,
though this was down somewhat from its 1986 peak of 4.4 percent.
Two emerging trends suggest, however, that while global
current account adjustment is expected to continue this year,
the pace of adjustment may slow somewhat. First, the projected
narrowing in the difference between domestic demand and GNP
growth in the major surplus countries will tend, ceteris
paribus, to reduce the macroeconomic impetus for large
additional shifts. Second, while U.S. export growth
strengthened substantially in 1988, so too did export growth
rates in most of the other major industrial economies, including
the major surplus countries.
o Inflation Remains Modest and Contained
Consumer price inflation in the major industrial countries
averaged about 3.1 percent in 1988, only slightly higher than
the 2.8 percent recorded in 1987. Rates in Japan and Germany
were exceptionally low, even by historical standards, averaging
around 1 percent. France continued its impressive progress,
holding its inflation rate below 3 percent. Rates in the United
States and Canada both averaged near 4 percent, and around 5
percent in Italy and the United Kingdom.
Inflation rates in the major industrial countries have
increased somewhat during the past 6 months, generating concern
in some quarters about a potential serious deterioration on the
price front. Average inflation in the industrial countries is
expected to rise only modestly this year, however, probably
remaining below 4 percent. While the situation bears close
attention in some countries, some factors suggest that there is
not now a serious risk of a general acceleration of inflation.

-5-

First, slower GNP and domestic demand growth this year will
ease some of the demand-side pressure that may have been
emerging last year. Second, and related to this, monetary
authorities in the key countries have been pursuing policies of
restraint. Third, despite some recent increases, unit labor
cost developments have been quite moderate. Fourth, the
OECD-wide surge in investment last year should help ease
production bottlenecks that may be emerging in particular
sectors.
U.S. Trade and Current Account Developments
o Developments in 1988
The U.S. trade deficit peaked in real terms in late 1986,
and a year later in value terms. It then declined markedly in
1988.
The improvement in the U.S. trade deficit (nominal terms) in
1988 was broadly-based in geographical and product terms, and
involved substantial increases in exports and slower import
growth. For 1988 as a whole, the trade deficit declined by
roughly $34 billion, from $160 to $127 billion, as exports grew
strongly (28 percent in value terms), while imports grew less
than one-third as fast. In volume terms, exports were up 23
percent, while imports increased 7 percent.
The trade deficit in 1988 decreased with every major
geographic area, with the strongest declines vis-a-vis Western
Europe, Latin America, and Japan. The improvement also covered
a wide range of products. Only consumer goods, among major
product groupings, failed to show a reduced defict in 1988.
Strong export growth was broadly-based in terms of both
product categories and geographic regions. Past exchange rate
changes played a major role in enhancing U.S. competitiveness in
1988. Our export competitiveness was complemented by strong
domestic demand growth in industrial countries — especially
Japan — and a revival of exports to Latin America, particularly
to Mexico.
The more subdued rate of import growth for the United States
in 1988 reflected in part the lagged effects of past exchange
rate changes and lower average oil prices. Auto and consumer
goods imports increased only slightly in 1988; a surge in these
two categories had been a major contributor to the widening of
the trade deficit during 1983-87. Capital goods was the one
product category registering strong import growth in 1988,
reflecting strong capital equipment spending by U.S. firms.
The pace of improvement in the trade balance, however,
slowed in the last half of 1988. After remaining essentially
flat at fourth quarter 1987 levels through the first three

-6-

quarters of 1988, import growth picked up in the fourth quarter
of 1988, largely in finished manufactures. Export growth,
though still robust, moderated somewhat in the latter part of
1988. Exports in the first half of 1988 were up over 32 percent
in value terms from the first half of 1987, while second half
exports were up 24 percent from the same period in 1987.
The U.S. current account deficit also declined in 1988,
though less dramatically than the trade deficit, falling by
roughly $20 billion, from $154 to $135 billion. This outcome
reflected the net effect of the trade balance improvement
discussed above, and a switch from surplus to deficit on trade
in services. The adverse shift on the services account reflects
the fact that the traditional U.S. surplus on investment income
has been eroded, along with the U.S. international investment
position, as borrowing from abroad has been needed to finance
continued U.S. external deficits. (See Table 2.)
With respect to capital flows, the recorded net inflow in
1988 declined by about $17 billion, roughly equal to the
decrease in the current account deficit. This was accompanied
by a substantial shift from official to private net inflows.
Official net inflows declined in 1988, while overall private
inflows were unchanged. Within private capital, direct
investment and securities transactions registered an increased
net inflow, while banking inflows declined. By category, the
largest changes in non-official flows were: increased foreign
purchases of U.S. Treasury securities, more than offsetting a
decline in purchases of other U.S. securities; a substantial
decline in U.S. direct investment outflows; and a significant
increase in net lending abroad by U.S. banks. (See Table 3.)
o Prospects for 1989
In view of recent developments, including higher oil prices
and other factors, improvements in the U.S. trade deficit for
1989 which had earlier been expected may be partly offset. The
outlook for trade and current account adjustment through the end
of this year will be influenced by a number of major factors, in
addition to oil prices. These factors include the prospects for
sustained growth abroad, especially in Europe; exchange rate
developments; progress with Korea and Taiwan on market opening
and exchange rate adjustment; and sustained growth in major LDC
export markets.
At home, success in reducing the budget deficit will be a
critical counterpart to progress in these other areas. The
recent bipartisan agreement on a budget framework for Fiscal
Year 1990 between the President and the joint leadership of the
Congress represents an important step in meeting the deficit
reduction targets of the Gramm-Rudman-Hollings law.

-7-

Economic Policy Coordination
The major industrial countries are continuing their efforts
to coordinate economic policies to achieve shared objectives.
The coordination process has now become an accepted feature of
the international economic landscape with regular meetings of
finance officials from the Group of Seven countries (United
States, Japan, Germany, France, United Kingdom, Canada, and
Italy). A sign of the growing maturity and acceptance of the
G-7 process, for example, was demonstrated by the meeting in
February where no communique was issued and without the market
instability that would have followed such a development in the
past.
The recent meetings of the G-7 in February and again on
April 2 have focused on efforts to maintain the substantial
progress achieved in 1988 in dealing with global economic
problems. Last year represented a notable success for the
coordination process, as documented in the October report.
Economic growth exceeded expectations and inflation remained in
check. External imbalances were reduced substantially and
exchange markets were generally stable.
However, sustained noninflationary growth — which remains
the central objective of the coordination process — will
require continued efforts. The success of these efforts depends
on continued progress in controlling inflation and gradually
reducing external imbalances. While reductions in external
imbalances were achieved last year, further progress in this
area is required.
o Countries with large fiscal and trade deficits,
especially the United States, but also Canada and Italy,
need to make further reductions in budget deficits to
complement monetary policies. Implementation of the
recent bipartisan budget framework agreement between the
President and the joint Congressional leadership will be
crucial to achieving further reductions in the U.S.
budget deficit.
o The major surplus countries should pursue economic and
structural policies that will sustain domestic demand
growth without inflation and facilitate external
adjustment; and
o All countries need to pursue structural reforms.
The coordination process has resulted in more effective
arrangements to deal with exchange market pressures. As
discussed in the next part of the report, exchange markets have
been more stable over the past year, thus contributing to and
benefitting from the progress in sustaining the global expansion

-8-

and reducing external imbalances. The G-7 agreed at their April
meeting that a rise of the dollar which undermined adjustment
efforts, or an excessive decline, would be counterproductive and
reiterated their commitment to cooperate closely on exchange
markets.

-9-

PART III:

FOREIGN EXCHANGE MARKET DEVELOPMENTS

Overview
During the last 6 months, exchange markets have been
generally stable. The dollar appreciated by about 5 percent
against the Japanese yen and 4 percent against the German mark,
but on a trade-weighted basis in nominal terms is little changed
against major currencies. (See Table 4.)
Trends in exchange markets over this period can be
subdivided into three distinct periods: 1) from October through
mid-December when the dollar experienced selling pressure; 2)
from mid-December through March when the dollar strengthened;
and 3) since the beginning of April when the dollar eased from
its end-March highs, but continues to be in good demand.
Trading conditions throughout the period were influenced
primarily by developments and market expectations regarding U.S.
economic growth, inflation, monetary policy, and interest rates.
In market intervention, the U.S. monetary authorities made
net purchases of about $0.7 billion from October through
January. They purchased about $2.6 billion ($2.0 billion
against yen and $0.6 billion against marks) to support the
dollar against selling pressure during October-December, and
sold about $1.9 billion against German marks in January as the
dollar rose.
October through Mid-December
The dollar started declining in early October following
evidence of slowing U.S. economic activity, which the market
regarded as reducing the likelihood of monetary tightening. By
mid-October, selling pressure on the dollar had emerged in
response to diminishing prospects for higher dollar yields and
market perceptions that U.S. monetary authorities might tolerate
a gradual easing of the dollar ahead of the election,
particularly because of concerns that adjustment of world trade
imbalances was slowing. Furthermore, private analysts suggested
that it would take a further dollar decline to narrow the U.S.
external deficit. After the election, market attention shifted
to concerns about the U.S. budget deficit, stimulating further
dollar selling. Concerted intervention purchases of dollars by
G-7 monetary authorities during the period made the market
cautious about selling the dollar aggressively.
Mid-December through March
In December market sentiment changed, with participants
taking the view that the G-7 monetary authorities would
concentrate more on adopting anti-inflationary policies.
Economic indicators showed that U.S. economic activity, though

-10-

moderating, remained robust. Dollar demand quickened on the
market's belief that the Federal Reserve would tighten its
monetary stance further. At mid-month, the Federal funds rate
rose from under 8-1/2 percent to near 9 percent. However, in
view of coordinated interest rate hikes in Europe, interest
differentials favoring dollar placements against European
currencies initially narrowed. There was no appreciable change
in interest differentials against the yen.
Toward mid-January, the market turned increasingly bullish
on the dollar. There was growing optimism regarding the United
States' willingness to tackle its fiscal deficit. Also, "safe
haven" demand related to tensions in the Mediterranean was
appreciable. Meanwhile, comments from various G-7 officials
were interpreted as indicating a tolerance for further dollar
appreciation. Reports of concerted intervention sales of
dollars during January and early February braked the dollar's
upward momentum.
Subsequently, additional data interpreted as suggesting
that inflationary momentum may have increased in the United
States encouraged further expectations of monetary tightening by
the Federal Reserve. Chairman Greenspan said that the Federal
Reserve would err on the side of monetary restraint. The
Federal Reserve progressively tightened the Fed funds to levels
over 9 percent and, in late February, raised its discount rate
by 1/2 percentage point to 7 percent. Meanwhile, Germany and
Japan signalled that they would avoid further tightening of
their monetary stances. Interest differentials against the
German mark and the Japanese yen then began to widen
significantly and, by late March, were approximately 1/2
percentage point higher than in late February.
Since End-March
After reaching its highs for 1989 in late March, the dollar
eased back in early April. Following the G-7's statement of
April 2 and subsequent reports of intervention sales of dollars
against yen as well as marks, the market perceived that the G-7
monetary authorities would regard further dollar appreciation as
counterproductive to global adjustment of external imbalances.
Also, prospects for a further widening of interest differentials
in favor of the dollar were viewed by market participants as
mixed, given that U.S. economic indicators were seen as pointing
tentatively to moderating U.S. economic activity.
Effects of Exchange Rate Changes on External Positions
Despite recent movements, the dollar remains roughly at
1980 levels in real terms. On average, the appreciation of the
dollar in the early and mid-eighties against our major trading
partners has been reversed.

-11-

Exchange rate changes since October have, on balance, been
minor, and exchange rate changes in any case tend to influence
the real economy with considerable lags. Thus, exchange rate
developments over the past months probably have not been a
significant factor affecting the U.S. economic situation and
prospects. The influence of such minor exchange rate changes is
extremely small, in comparison with the potential overall impact
of other factors influencing the trade and current account
position.
The October report noted several factors not captured by
conventional models which could contribute to sustained
reduction of the trade deficit over the long term. Strengthened
competitiveness is much broader based than exchange rate
calculations show. Intense competitive pressures during the
period of dollar strength forced U.S. producers to make
fundamental changes resulting in increased efficiency, reduced
costs, and improved quality.
Also, direct investment in the United States should
contribute to the adjustment process over time, especially in
the automotive sector, with Japanese firms in particular
expanding U.S.-based output (for export as well as import
replacement), product lines and value added. However, the
favorable indirect effects of past exchange rate changes on the
trade balance resulting from direct investment activity are of a
long-term nature. The modest exchange rate movements over the
past 6 months have probably not affected these developments.
Finally, most trade models are based on assumptions of no
policy changes. The essence of the G-7 coordination process is
that policies are regularly reviewed, with an eye to possible
changes in light of developments in the underlying fundamentals.
The G-7 are committed to implementing the policies necessary to
build on the progress that has been achieved.

-12-

PART IV: ASIAN NEWLY INDUSTRIALIZED ECONOMIES (NIEs)
Overview
The U.S. merchandise trade deficit with the Asian NIEs —
Korea, Taiwan, Hong Kong, and Singapore — was $29.2 billion in
1988, 16 percent below 1987. This development reflected decreases
in the bilateral deficits with Hong Kong (down 21 percent to $4.6
billion) and Taiwan (down 26 percent to $13 billion). As a share
of the total U.S. trade deficit, the trade deficit with the NIEs
increased slightly from 22 percent to 23 percent.
However, as noted in the last report, if the imbalance with
Taiwan is adjusted to account for $2.5 billion (customs value) in
gold Taiwan imported from the United States in the early part of
1988 for the purposes of diversifying official international
reserves and reducing the imbalance, then the trade deficit with
Taiwan fell by only 11 percent to $15.5 billion.
Under Section 3004 of the 1988 Trade Act, the Secretary of
the Treasury is required to "consider whether countries manipulate
the rate of exchange between their currency and the U.S. dollar
for purposes of preventing effective balance of payments
adjustments or gaining unfair competitive advantage in
international trade." It was concluded in the October 1988 report
that Taiwan and Korea engaged in such "manipulation," within the
meaning of the legislation. Pursuant to Section 3004, the
Treasury was required to initiate bilateral negotiations with
Taiwan and Korea for the purpose of ensuring that these two
economies regularly and promptly adjust the rate of exchange
between their currencies and the U.S. dollar to permit effective
balance of payments adjustment and to eliminate the unfair
advantage.
Below is a summary of economic and exchange rate developments
in Korea and Taiwan and the negotiations which have taken place
with them since October. (See Table 5 on U.S. trade with Asian
NIEs and currency changes.)
Korea
o Recent Exchange Rate Developments
The October report to the Congress and subsequent
initiation of exchange rate negotiations with the Korean
authorities stimulated a period of more intense appreciation of
the won in late 1988.
o In the fourth quarter of 1988, the Korean authorities
allowed nominal appreciation of the won to total 5.1
percent, compared with 2.5 percent and 1.3 percent in
the second and third quarters.

-13-

o

Most of this fourth quarter movement occurred in October
and November, with the pace of appreciation slowing
substantially in December.

Cumulative won appreciation in 1988 totalled 15.8 percent.
This exceeded the movement against the dollar in 1988 of the
currencies of Korea's key trade competitors, Japan and Taiwan.
Thus, in 1988, the Korean won began for the first time to lose
on a broad basis some of the advantage that it had gained for
Korea earlier in the decade, and particularly since 1985.
Despite the won's strengthening in 1988, cumulative won
appreciation still lagged behind that of the yen and New Taiwan
(NT) dollar in key periods. For example, in the interval from
the Plaza Agreement in September 1985 to end-1988, the won
appreciated 34 percent against the U.S. dollar, compared with 49
percent for the NT dollar and 83 percent for the yen. Thus, the
won maintained an important, albeit diminished, competitive
edge.
In 1989, the authorities have generally maintained the slow
pace of appreciation that they resumed in early December 1988.
Won appreciation in the first quarter of 1989 totalled only 1.8
percent. However, late March and early April saw a brief period
of somewhat more rapid movement of the won as the Treasury
Department intensified its negotiations with Korea and the
deadline approached for this report. Thus, as of mid-April, the
won had appreciated 2-1/2 percent in 1989.
o 1988 Bilateral U.S. Trade Deficit with Korea
According to U.S. customs data, the United States bilateral
trade deficit with Korea increased 1 percent in 1988 to $9.0
billion, reflecting a 39 percent increase in U.S. exports to
Korea and a 19 percent increase in U.S. imports from Korea.
This is significantly slower growth than in 1987 when our
bilateral trade deficit increased 39 percent (from $6.4 billion
to $8.9 billion), based on a 27 percent rise in exports to Korea
and a 33 percent rise in imports from Korea.
In the second and third quarters of 1988, the U.S.
bilateral deficit with Korea was actually somewhat lower than in
the same quarters in 1987. These declines were due primarily to
a drop in the rate of growth of U.S. imports from Korea. This,
in turn, was largely the result of the temporary impact of labor
disturbances in Korea on production and exports. Growth in the
bilateral deficit resumed in the fourth quarter of 1988,
registering an increase of 5 percent over the fourth quarter of
1987.

-14-

o

Korean Global Balance of Payments Developments in 1988

Korea's 1988 global trade surplus increased 51 percent to
$11.6 billion on a balance of payments basis. Overall, exports
grew 15 percent in volume terms, down from 24 percent in 1987.
The growth of import volume, however, decreased even more
sharply to 10 percent from 22 percent in 1987.
Toys are the only category of Korean exports that declined
in value terms in 1988 (by 7 percent). Textiles and footwear —
other labor-intensive products about whose competitiveness the
government expresses concern — managed increases of 22 percent
and 25 percent, respectively, despite won appreciation and
higher wages. Exports of higher value-added products performed
even more strongly: electronics were up 33 percent, iron and
steel 35 percent, machinery 51 percent, automobiles 20 percent
(despite second quarter labor disturbances), and ships 55
percent.
Korea's 1988 current account surplus increased 44 percent
to $14.3 billion, compared with the government's $7 billion
target. Thus, for the third consecutive year, the actual
current account surplus was more than double the government's
initial target for the year. Increases in net services and
transfers — reflecting declining external interest payments,
Olympics-related tourism revenues, and transfers from Korean
residents abroad — contributed to the swelling of the current
account surplus.
As indicated in Part II above, the magnitude of external
imbalances is best judged by presenting the amount as a
percentage of GNP. In this context, it is noteworthy that
Korea's trade surplus increased from 6.5 percent of GNP in 1987
to 7.4 percent in 1988, while the current account surplus
increased from 8.3 percent of GNP in 1987 to 9.1 percent in
1988. In contrast, Japan's 1988 trade surplus was equal to 3.3
percent of its GNP and its current account surplus, 2.8 percent,
both having declined from 1987 to 1988.
With the rapid expansion of its current account surplus in
1988, Korea was able to continue reducing its external debt and
building its foreign reserves, further strengthening its
international position. Gross external debt fell to $31.2
billion (20 percent of GNP) in 1988, compared with $35.6 billion
(30 percent of GNP) in 1987 and $46.8 billion (55 percent of
GNP) in 1985. In addition, Korea increased its foreign reserves
by nearly $9 billion to $12.3 billion in 1988; although equal to
about 3 months' imports, this level is not excessive.

-15-

o

Domestic Economic Performance

Korea's economy continued to boom in 1988. Real GNP growth
exceeded 12 percent for the third consecutive year, bringing
cumulative real GNP growth to 41 percent since end-1985.
Domestic demand is strengthening — due to large nominal wage
increases, lower tariffs, and cuts in excise taxes — but
increased real net exports still accounted for nearly 50 percent
of real GNP growth.
Unemployment averaged only 2.5 percent in 1988, the lowest
annual average in the last three decades. Wages have increased
by about 33 percent in the past 2 years. Cumulative
productivity gains among production workers totalling about 30
percent, in the past 2 years have largely offset the higher
wages.
Monetary and price developments are increasingly showing
the negative side effects of Korea's external imbalance.
Despite tight credit controls and the government's direct
efforts to sterilize the liquidity resulting directly from
Korea's massive external surpluses, money supply expanded by
about 19 percent in 1988. This, together with the large nominal
wage increases and emerging capacity constraints, was largely
responsible for the jump in inflation from 3 percent in 1987 to
7.2 percent in 1988.
o Trade Developments in 1989
Preliminary Korean customs data for the first quarter of
1989 show a substantial decline in Korea's global trade surplus
relative to the same period in 1988. These data indicate that
the global trade surplus totalled only $95 million in the first
quarter of 1989, compared with $1.4 billion in the first quarter
of 1988. Moreover, the won value of Korean exports declined by
4 percent in January and by 8 percent in February relative to
the same periods in 1988, although in U.S. dollar terms, Korean
exports increased by 11 percent and 6 percent, respectively,
given the increase in the dollar value of the won in 1988.
For January-February 1989 (the latest period for which U.S.
customs data are available), the U.S. bilateral trade deficit
with Korea declined 28 percent, compared with the same period in
1988. U.S. exports to Korea increased 29 percent, while imports
from Korea declined by 1 percent.
It is likely that Korea's first quarter trade performance
reflects a compounding of seasonal factors (the first quarter is
traditionally the weakest quarter in the trade account) and
other unique influences:
o Korean exporters accelerated shipments in the fourth
quarter of 1988 in anticipation of continued
strengthening of the won.

-16-

o

Korean importers, for their part, delayed clearing goods
through customs in anticipation of the January 1, 1989,
tariff cuts.
o Together, these factors helped swell the 1988 fourth
quarter trade surplus and produce an abnormally low
surplus in the first quarter of 1989.
o The increased level of labor disturbances so far this
year is also temporarily suppressing Korea's export
performance.
These seasonal or temporary factors notwithstanding, the
preliminary data for early 1989 probably also reflect the
beginning of a reduction in the underlying imbalance — perhaps
a significant reduction. Previous appreciation of the won,
coupled with inflation and some trade liberalization, may have
begun to contribute to a welcome structural reduction in Korea's
external surpluses.
o Evaluation of Recent Developments
The won's appreciation against the U.S. dollar in 1988 was
significant and reflected Korea's recognition of the need for
the exchange rate to play a role in the adjustment process. The
accelerated appreciation of late 1988, after negotiations were
initiated, and more recently in the last few weeks, was a
welcome response to our concerns. Nevertheless, cumulative won
appreciation remains insufficient, judged against the magnitude
of Korea's external surpluses in the past 3 years and the much
greater appreciation of the currencies of Korea's competitors in
the same period.
Korea's exchange rate policy this year appears to be based
on the assumption that the trade data for the first quarter of
1989 foreshadow a drastic reduction in Korea's surpluses for the
year as a whole. The indications that structural reduction in
these surpluses may have begun are both welcome and hopeful.
Nevertheless, the data are too preliminary and limited to
indicate clearly such a trend, and in our judgment, do not
justify the sharp deceleration in the pace of appreciation in
most of the period since early December 1988. While some
moderation in the pace of appreciation relative to the fourth
quarter of 1988 appears understandable in the circumstances,
continued appreciation of the won during the period ahead is
nonetheless required to reinforce recent trade developments and
ensure that the preliminary, first-quarter reduction in Korea's
external surplus is, indeed, the first stage in a structural and
lasting correction of the imbalance. If final trade data for
the period ahead also show significant reductions in Korea's
external surplus, the need for further won appreciation would be
diminished.

-17-

The Treasury Department's negotiations with the Korean
authorities since the October report appear to have produced
some results. Cumulative exchange rate appreciation, however,
remains insufficient and assurances of further appreciation that
could be considered sufficient in the circumstances are lacking.
In addition, Korea has not provided indications that it intends
to move to a market-based system of exchange rate determination
over the medium-term. Nor is Korea willing to engage in broader
discussions on financial market liberalization. Thus, our
judgment is that, within the meaning of Section 3004 of the
Omnibus Trade and Competitiveness Act, Korea continues to
"manipulate" its currency.
Our negotiations in the coming months will be aimed at
obtaining assurances that exchange rate policy during the period
ahead will reinforce the direction of recent trade developments.
We will also seek to encourage the Korean authorities to
dismantle the comprehensive capital and exchange controls that
prevent market forces from asserting themselves in exchange rate
determination.
Taiwan
Taiwan's external imbalances have undergone further
positive adjustment since the last report. This is due, in
large part, to the effects of currency appreciation, further
reductions in trade barriers, and rising inflation and wages.
If all of these elements, particularly further appreciation,
continue this year, we would anticipate an additional reduction
in Taiwan's current account surplus and its bilateral trade
surplus with the United States in 1989.
Taiwan's global current account surplus also decreased by
43 percent in 1988 to $10.2 billion. As a proportion of GNP,
this translates into a sizeable decline from 18.4 percent in
1987 to 8.3 percent in 1988. At the same time, Taiwan's overall
trade surplus, excluding official gold imports from the United
States, fell 26 percent in 1988 to $13.8 billion ($10.9 billion,
including U.S. gold).
In the first 3 months of this year, compared with the same
period last year, Taiwan's overall trade surplus was lower by 23
percent, excluding U.S. gold, but up 9 percent including U.S.
gold. Moreover, domestic demand has replaced exports as the
main source of growth for the economy. Real GNP growth was 7.3
percent in 1988, down from 11 percent in 1987.
Large U.S. exports of gold to Taiwan through August 1988
accounted for more than half of the reduction in the U.S.
bilateral deficit with Taiwan. These exports have ceased and
need to be replaced with an even greater value of other
sustainable exports if the adjustment process is to be furthered

-18-

in 1989. In the last 6 months for which U.S. data are available
(September 1988-February 1989), the average monthly trade
deficit with Taiwan (excluding U.S. gold exports) has fallen 21
percent from the same period a year ago. Nonetheless,
annualizing these data results in a trade deficit larger than
last year's, or $13.9 billion. Clearly, this is still an
unsustainable imbalance.
The New Taiwan (NT) dollar has strengthened by 49 percent
against the U.S. dollar since the Plaza Agreement in September
1985, compared to 83 percent for the yen, 53 percent for the
German mark, and 34 percent for the Korean won. However, in
1988 the NT dollar depreciated through October. Since the
October report, the exchange rate has appreciated by 6-1/2
percent, mainly in 1989. Such currency appreciation is a
positive development. Nonetheless, given the still large trade
imbalance and the lack of currency appreciation throughout most
of 1988, it appears that a continuation of the recent
appreciation is required to advance the adjustment process.
During our recent negotiations with Taiwan (under the
auspices of the American Institute in Taiwan and Coordination
Council for North American Affairs) regarding its exchange rate
policy, Taiwan agreed to take a number of important measures,
including liberalizing its foreign exchange system and reducing
capital controls. This liberalization could represent a
potentially important step toward the establishment of a more
market-based system of exchange rate determination.
It remains, however, too early to assess fully the effects
of these measures. The effectiveness of the liberalization will
depend importantly on how it is implemented and, specifically,
on satisfactory resolution of uncertainties concerning: the
extent of central bank intervention in the market; the continued
free flow of trading information; the removal of remaining
controls on capital inflows; and the potential for
discrimination between Taiwanese and foreign banks. If these
potential difficulties are promptly and fully addressed, the
liberalization could be a major advance. If not, the new system
could regrettably involve little real progress toward exchange
rate liberalization.
o Description of New Exchange Rate System
Taiwan began to implement the new exchange rate system on
April 3. Formerly, the NT dollar's value against the U.S.
dollar was determined by the "middle rate" of interbank
transaction rates on the previous business day, with a limit on
fluctuation. The most important aspect of the new system is
that all NT dollar-U.S. dollar transactions of $30,000 and above
will now be freely determined. The exchange rate for small
retail transactions under $30,000 will be determined by rotating

-19-

groups of nine foreign exchange banks (including foreign banks)
based on the prevailing free market rates. Banks can then
decide the exchange rate for small transactions based on this
"reference rate." If the transacted rates fluctuate in excess
of a certain level, then a new "reference rate" is determined
with a wider band.
Given that the central bank could still intervene in the
foreign exchange market through proxy state-owned banks, a
significant reduction of central bank direct and indirect
intervention will be essential to allow adequate scope for
market forces. However, as announced and initially implemented,
the new system does not permit openly ascertaining the level of
official intervention. The Central Bank is using five local
banks for intervention and information regarding transaction
amounts and transaction banks will no longer necessarily be made
available as it was in the past. Although the need for some
discretion by the Central Bank is understandable, given the
relatively small size of Taiwan's foreign exchange market, it
need not have come at the expense of a normal degree of
transparency for the system.
There are other operational problems with the new system.
First, limits have been retained on banks "short" foreign
exchange positions. Moreover, additional new limits were
imposed on "long" foreign exchange positions. Initially these
limits discriminated against foreign banks. Moreover, although
foreign banks are to participate- in the committee that
determines the "reference" exchange rate, this has not yet
appeared to be the case. We have indications that Taiwan
intends to correct these problems, and will monitor the
situation.
We are encouraged by the new foreign exchange system, which
could potentially limit intervention. But, as noted above, its
significance depends on its implementation. While we also
welcome the appreciation of the NT dollar since the beginning of
our negotiations, this appreciation, if not continued, will be
insufficient against the backdrop of the lack of appreciation
throughout most of 1988, which impeded the adjustment process.
Therefore, further appreciation, of a sufficient magnitude, will
be necessary this year.
Therefore, at this time, we are not yet able to alter our
basic judgment that Taiwan, within the meaning of the
legislation, "manipulates" its exchange rate. with full
implementation of the new system, however, and further adequate
exchange rate appreciation, it would be possible to review our
position on this matter. Our negotiations in the period ahead
will be aimed at prompt resolution of the problems that could
limit the effectiveness of the new system as well as obtaining
further sufficient appreciation of the NT dollar. It is
important that Taiwan's currency more accurately reflect market
forces and its external surpluses.

-20-

PART V:

CONCLUSION

This report has provided an update of developments since
October 1988, when the first report on international economic
and exchange rate policies was submitted to the Congress.
Global economic performance has remained favorable in the
intervening period. The economic expansion is continuing in the
major countries, with the seventh year of consecutive growth
following an extremely robust performance in 1988. Furthermore,
in 1988, the lagged effects of exchange rate changes in 1986 and
1987 and the composition of demand in the major countries were
conducive to significant reductions in external imbalances.
The pace of external adjustment has slowed, however. In
view of recent developments, including higher oil prices and
other factors, improvements in the U.S. trade deficit for 1989
which had earlier been expected may be partly offset. While
inflationary pressures bear close watching, there is little
concern that a general acceleration of inflation is developing.
The economic policy coordination process has contributed
importantly to the improved performance of the global economy in
the current expansion. Sustained noninflationary growth remains
the central objective of the coordination process and will
require continued efforts in reducing fiscal deficits,
controlling inflation and gradually reducing external
imbalances. In the United States, the recent bipartisan budget
framework agreement between the President and the joint
leadership of the Congress represents an important step forward
in these efforts.
During the past 6 months, exchange markets have been
generally stable. The dollar has appreciated slightly against
some major currencies, but has been broadly stable on a trade
weighted basis. These exchange market developments have, at
most, had only a marginal impact on U.S. trade performance and
would not be sufficient to change the outlook. The relative
stability of exchange rates has made a welcome contribution to,
and been supported by, the progress in sustaining global
expansion and reducing external imbalances. The G-7 major
industrial countries have agreed that a rise of the dollar which
undermined adjustment efforts, or an excessive decline, would be
counterproductive, and they have reiterated their commitment to
cooperate closely on exchange markets.
In the October report, it was determined that Taiwan and
Korea, within the meaning of the Section 3004 of the Omnibus
Trade and Competitiveness Act of 1988, were "manipulating" their
exchange rates against the U.S. dollar to prevent effective

-21-

balance of payments adjustment or gain unfair competitive
advantage in international trade. In accordance with that
section, the Treasury initiated bilateral negotiations with
Korea and Taiwan for the purpose of ensuring that they regularly
and promptly adjust the rate of exchange between their
currencies and the U.S. dollar to permit effective balance of
payments adjustment and eliminate the unfair trade advantage.
The appreciation of the Korean won since 1988 has been
significant, and coupled with inflation and some trade
liberalization, may have begun to contribute to a welcome
structural reduction in Korea's external surpluses. Cumulative
appreciation of the won, however, remains insufficient in view
of Korea's overall economic performance and the large gap that
exists between the appreciation of the won and that of the
currencies of its major competitors. Korean authorities have
slowed the won's rate of appreciation so far this year on the
belief that first quarter trade data for 1989, showing a
substantial decline in Korea's global trade surplus, portend a
drastic reduction for the year as a whole.
In our judgment, these trade data are too limited and
preliminary to indicate a clear irreversible trend towards a
structural reduction in Korea's surpluses. Although, the
Treasury Department's bilateral negotiations with Korea have
produced some results, assurances of further adequate exchange
rate appreciation are lacking. Moreover, Korea shows virtually
no willingness to move to a market-based system of exchange rate
determination over the medium-term nor to engage in broader
discussions on financial market liberalization. Thus, within
the meaning of the legislation, Korea continues to "manipulate"
the won. Continued bilateral negotiations with Korea in the
period ahead will be aimed at assuring adequate exchange rate
cooperation in the near-term. Also, Korean authorities will be
encouraged over the medium term to dismantle the comprehensive
capital and exchange controls that prevent market forces from
asserting themselves in exchange rate determination.
Taiwan's bilateral trade surplus with the United States and
global current account surplus have declined. The NT dollar
depreciated in 1988 through October, but has since appreciated
somewhat. While this appreciation is welcome, further
appreciation of a sufficient magnitude is required to advance
the adjustment process, given the continued large trade
surpluses and the lack of appreciation throughout most of 1988.
Taiwan's new foreign exchange system is an encouraging
development, which could potentially limit intervention. The
significance of the new system will, however, depend on its full
implementation, and uncertainties exist as to the prospects for
continued heavy central bank intervention to limit appreciation.
Therefore, the basic judgment cannot yet be altered that Taiwan,
within the meaning of the legislation, "manipulates" its

-22-

exchange rate. With full implementation of the new system and
further sufficient exchange rate appreciation, we may well be in
a position to review this judgment. Negotiations in the period
ahead will aim at prompt resolution of the problems that could
limit the effectiveness of the new system as well as obtaining
further sufficient appreciation of the NT dollar.

- 23 -

APPENDIX
TABLES

Economic Performance of Key
Industrial Countries
Summary of U.S. Current Account
Summary of U.S. Capital Account Flows
Measurements of Dollar Movements Versus
G-7 Currencies
U.S. Trade with Asian NIEs and Currency
Changes

- 24 -

Table 1
Economic Performance of
Key Industrial Countries 1/
GNP Growth

2/

Domestic Demand Growth 2/

1987

1988

1987

1988

U.S.
Japan
Germany
France
U.K.
Italy
Canada

3.4
4.5
1.8
2.3
4.3
3.1
4.0

3.9
5.7
3.4
3.4
4.4
3.7
4.2

3.0
5.2
3.1
3.4
4.3
4.6
4.7

3.0
7.7
3.7
3.7
6.2
4.1
5.1

G-7 3/

3.4

4.2

3.7

4.4

Inflat ion 4/

Current Acco

1987

1988

1987

1988

U.S.
Japan
Germany
France
U.K.
Italy
Canada

3.6
0.1
0.2
3.3
4.1
4.7
4.4

4.1
0.7
1.2
2.7
4.9
5.0
4.0

-3.4
3.6
4.0
-0.5
-0.6
-0.1
-1.9

-2.8
2.8
4.0
-0.4
-3.1
-0.5
-1.5

G-7 3/

2.8

3.1

1/ All data are latest IMF figures, except for U.S.
2/ Real growth rates, annual average.
3/ Average of individual country rates weighted by GNP in dollar
terms; annual averages.
4/ Consumer prices; annual averages.
5/ Calculated as percent of GNP; negative indicates deficit.

Table 2
SUMMARY OF U.S. CURRENT ACCOUNT
(MILLIONS OF DOLLARS, 3.A.)
Annual

Quartara
87:4 68:1

67:1

67:2

87:3

Total Export•

5(791

59664

64902

Agricultural

(466 7118 8267

7626 8910 9547

NonAgrlcultural

50306 52746 56615

Total Import*

86:2

8813

88:4

79443

81674

83648

1988

1966 1987
223969

249570

319905

10213 9598

27357

29516

38266

60387 66230 69896

71461 74050

196612

220054

261637

96662 99416 104567

109205 110327 109595

110844 115664

368516

409650

446430

Patrolaum

6760 10075 12759

11286 9960 10257

9838 9236

34391

42883

39291

Non-Petrolaim

87902 89341 91807

97917 100367 99337

101006 106429

334125

366967

407139

TRADE BALANCE

39871

-41191

-29170

-144547

-160280

-126525

Partial Bal (Exol.
Ag Expa a Pat impa

37597 -36596 -35192 -37529 -34138 -29441 -29545 -32379

-137513 -146914 -125503

-222
52144548 1825

678

12042

1336

-865

21027 19759 4777

Invaat. Income

-1234
5076 46941692

1067

12539

1128

-1986

23143 20374 2602

Othar Sarvicaa

1012
138-146

133

-389

-497

206

1101

Total Tranafara

-3215
-2967 -4444
-3125

-2980

-4373

-3147

-2777

Remit* & Panaion

-872
-867-932 -884

-855

-828

-906

-819

Govt Granta

-2100 -3512
-2343
-2241

-2125

-3545

-2239

-1958

-11736 -10011 -10052

NET INVISIBLES

2247 104-1300
-3437

-2302

7669

-1811

-3662

5716 6314 -B806

CURRENT ACCOUNT

-3J624
-40853
•32607 -31912

-41967

-33522

36998

-33814

Nat Sarvicaa

Source:

-39553

-39665

Survey of Current Business

68014

75140

-35187

-30152

-32016

-2116 -615 2175
-15309 -13445 -13563
-3571 -3434 -3531

-138829 -153966 -135331

Table 3
SUMMARY OF U.S. CAPITAL AC
(MILLIONS OF DOLLARS,

FLOWS
-A.)

Quarter*

Annual

87:4 86:1

88:2 88:3 88:4 1986 1987 1986

87:1

87:2

87:3

1956

3419

32

3741

1503

39

-7380

2272

313

9146

-3566

67

-170

252

1012

-614

-801

1990

3266

-1999

1161

3641

Foreign Official Aaaata
Induetrial
OPEC
Other

13977
16561
-2801
217

10332
17533
-2661
-4520

611
-926
-1723
3260

20047
16063
-2750
6734

24670
20814
-1375
5231

5946
6839
-1783
890

-2534
-3314
. -466
1246

10930
5557
715
4658

35507
29379
-9327
15455

44967
49231
-9955
5691

39012
29896
-2909
12025

Banka, net:
CI a lata
Liabilltiee

15770
21870
-6100

-4461
-22422
17961

29634
-16519
46153

6304
-23460
29764

-125
17108
-17233

17647
13274
31121

1394
-27832
29226

2268
-33495
35763

19808
-59975
79783

47247
-40531
67778

21364
-57493
78877

Securitiea, net
Foreign Securitiea
U.S. Treaaury Securitiea
Other U.S. Securitiea

13908
-1639
-2826
18373

13479
-88
-2431
15998

9012
-972
-2835
12819

-6236
-1757
496
-4977

4799
-4467
6887
2379

16763
1529
5457
9797

9806
-1554
3412
7948

7985
-2962
4130
6637

70481
-4297
3809
70969

30161
-4456
-7596
42213

39373
-7474
19686
26961

U.S. Direct Inveat. abroad
Relnveated Earninga
Equity 6 Intar-co. Debt

10691
-8663
-2028

-6220
-4932
-1288

-7870
-6300
-1570

-19676
-15776
-3900

-6509
-3636
-2873

511
-1525
2036

-5196
-5519
323

-9241
-6749
-492

-27811
-19708
-6103

-44457
-35671
-6766

-20435
-19429
-1006

Tor. Direct Inveat. in U.S.
Reinvaatad Earninga
Equity 6 Intar-co. Debt

7979
1645
6334

7229
736
6493

15026
2061
12945

11742
-1925
13667

7347
3345
4002

13061
1093
11968

8395
1882
6513

13420
652
12568

34091
-2294
36385

41976
2537
39439

42223
7172
35051

Other U.S.-Corp., net
Claims
Liabilities

1205
-491
1696

4173
2603
1570

-331
-215
-116

248
1246
-1000

1700
-315
2015

-6948
-7061
113

2399
749
1650

n .a.
n.a.
n.a.

-7126
-4220
-2906

5295
3145
2150

-2849
-6627
3778

NET CAPITAL FLOWS

44171

27781

46366

17180

32571

46438

8674

30900

123264

135498

118763

Statiatical Diac.

-6547

13071

-4399

16342

4428

12624

23733

1013

15565

18467

16550

TOTAL •

37624

40852

41967

33522

36999

33814

32607

31913

136629

153965

135333

US Raaarva Aaaata
(Incr(-)Decr(*))
Other Govt Aaaata

Source:

Survey of Current Business

- 27 -

Table 4
Measurements of Dollar Movements
Versus G-7 Currencies Since Key Dates
Percent dollar appreciation ( + ) -or depreciation

(-)

as of April 12, 1988

Value of the
dollar in
terms of:

Since
Floating
Began
3/20/73
to date

Japanese yen
German mark
Sterling
French franc
Canadian dollar
Italian lira

-49.6
-33.2
+ 45.8
+ 40.8
+ 19.2
+144.3

Source:

London midday rates.

S ince
Dollar
Peak
2/26/85
to date

S ince
Previous
Report
10/14/88
to date

-49.2
-45.7
-38.3
-40.0
-15.3
-36.3

+ 4.0%
+ 3.5%
+ 3.3%
+ 2.4%
-1.5%
+ 1.8%

- 28 -

Table 5
U.S. TRADE WITH ASIAN NIES AND CURRENCY CHANGES

U.S. Trade Deficit with Asian NIEs [1]
(U.S. $ Billions)
1980[2] 1987[2] 1988[2] %Change[3]
Honq Kong
Korea
Singapore
Taiwan

-2.1
0.2
1.1
-2.8

-5.8
-9.4
-2.1
-17.5

-4.6
-9.5
-2.2
-13.0

121%
n.a.
n.a.
369%

TOTAL NIEs

-3.6

-34.8

-29.2

722%

Total U.S.

-25.5

- 160.3

- 126.5

397%

% Total
U.S.

[11
[2]
[3]

from

22%

23%

Totals may not equal sum of components due to rounding.
U.S. balance of payments adjusted data.
From 1980 to 1988.

Cumulative Change aqainst US$ as of April 11, L989
J
[1]
7/22/80 9/20/85 end-87 10/14/88[2] Rate on 4/11

HK$
Won
S i ng a pore$

NTS
¥
DNI

14%

-37.88%
-11.87%
8.04%
32.72%
66.02%
-7.89%

0.41% -0.30%
34.01%
8.70%
12.49%
1.92%
49.39%
5.26%
82.51% -6.84%
53.07% --15.32%

0.40%
6.41%
3.28%
6.55%
-4.72%
-4.30%

HK$ 7.78
W 667.5
S$ 1.96
NTS 27.12
¥ 132.68
DM 1.8 9

(1) This table is calculated in terms of the movement of the
foreign currency against the U.S. dollar, as this is the
way the Asian NIEs measure their foreign currency movements.
Thus, foreign currency appreciation is represented by a (+)
and deoreciation by a (-).
[2J Date of last foreign exchange report to Congress.

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

April 27, 1989
Statement by
Secretary of the Treasury
Nicholas F. Brady
The House Banking Committee vote today will restore the
strong capital requirement in President Bush's Savings and Loan
Reform Plan. Requiring S&Ls to put their own capital at risk
ahead of the taxpayers' money is the only way to prevent in the
future the unsound business practices that contributed to the
current crisis. We commend the Committee for its actions and
urge the Congress to move forward quickly to bring a bill to the
President's desk.

NB-239

TREASURY NEWS
Deportment of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Offj.ce of Financing
202/376-4350
31

FOR RELEASE AT 12:00 NOON
April 28, 1989
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
May 11, 1989,
and to mature May 10, 1990
(CUSIP No. 912794 UD 4 ) . This issue will provide about $225
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,786
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Daylight Saving time, Thursday, May 4, 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 May 11, 1989.
In addition to the
maturing 52-week bills, there are $14,833 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $1,935 million as agents for foreign
and international monetary authorities, and $6,733 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 $310
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-240

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.

REASURYNEWS
204
irtment of the Treasury • Washington, D.C. • Telephone
JDR/,RY,H.C-H 5310

u'^
OEPAHTH'cHi

FOR IMMEDIATE RELEASE
April 28, 1989

Contact: Larry Batdorf
566-2041
TREASURY ANNOUNCEMENT
OF IRS NOTICE 89-58

On April 28, 1989 the Internal Revenue Service issued
Notice 89-58 to provide taxpayers guidance on the allocation of
bank loan losses for purposes of calculating the foreign tax
credit. Notice 89-58 provides generally that all losses incurred
by a bank with respect to loans made in the ordinary course of
business will be spread among the various categories of interest
income by reference to the bank's aggregate portfolio of loans.
Loan losses will be spread among the categories of interest
income without regard to the source of income to which the loan
generating the loss would have given rise.
The Treasury Department today announced that if upon later
review any significant modifications were to be made to the
decisions reflected in Notice 89-58, in order to allocate loan
losses more closely to the source of income produced by the loan
generating the loss, such modifications would in no event have
effect on losses realized on or before December 31, 1990.

NB-241

rREASURY NEWS'©
lortment of the Treasury • Washington, D.C. • Telephone 566-20

For Immediate Release
Remarks by
The Secretary of the Treasury
Nicholas F. Brady
U.S. Chamber of Commerce
Washington Hilton Hotel
Washington, D.C.
Monday, May 1, 1989
It is a pleasure to be here today for the U.S. Chamber of
Commerce Annual Meeting. I'd like to begin with an announcement.
This morning the Treasury Department informed the House and
Senate leadership that we have ordered a delay — to October 1 —
in the beginning date for testing plans for compliance with
Section 89 regulations.
I have also asked the Congress to work with the
Administration to find ways to revise Section 89 to make its
requirements less burdensome to businesses.
Section 89, as most of you know, is the requirement of the
1986 tax reform act that health benefit plans be generally
available to all employees in order for them to be considered a
tax-excludible employee benefit. The fundamental logic behind
the provision is unassailable. A system that differentiates
between people in the matter of health benefits subsidized by the
taxpayers cannot be sustained.
The authors of this law intended that it assure an
equitable system of health benefits for all workers. But in
attempting to issue the Section 89 regulations, the Treasury
Department has found it imposes unreasonable compliance burdens
on business. The cost of compliance with Section 89, as it
presently stands, is excessive. The law needs to be changed,
and we stand ready to encourage, support and work with Congress
to revise and improve it.
Now I would like to turn to a discussion of some of the most
difficult problems facing our country and the approach President
NB-242

2
Bush is taking to solve them. The goal of the Bush
Administration's economic policy is to continue inflation-free
economic growth. The approach President Bush has taken to meet
this goal is: Tackle the tough problems. Find bipartisan
solutions.
Last week marked the conclusion of President Bush's first
100 days in office. While the first 100 days are only a very
early landmark in a four-year Administration, I believe the
President has already demonstrated the kind of leadership that
will be the hallmark of his Presidency and will ultimately mark
him as a great President.
He is an action-oriented chief executive, deeply involved in
the issues. He has the ability to seek out differing points of
view, to listen, to consult, and utlimately to forge consensus.
This enables him to accomplish things that conventional wisdom
said could not be done, such as the agreement on aid to the
Contras which he successfully negotiated with Congress. And it
was this same open and responsive approach that enabled the
Congress and the President to achieve consensus on a budget
agreement just two weeks ago —the first time a President and
Congress have ever reached such an agreement so early — prior to
all deadlines, and in a calm, rather than a crisis environment.
Some of our most effective Presidents, of both political
parties, have possessed this same combination of leadership
skills. President Lincoln forged an effective war-fighting team
out of an Administration prone to division and conflict among
itself. President Franklin Roosevelt was known for his
willingness to listen to new economic ideas — sometimes to the
dismay of his more traditional advisors. And it was in
Roosevelt's first one hundred days that he forged bipartisan
consensus with Congress, on the 1933 emergency legislation that
marked the beginning of our climb out of the depression.
Thanks to President Reagan's wise stewardship, we do not
face today national crises on a par with those that confronted
Lincoln and Roosevelt. But I believe the traits President Bush
shares with these men make him the President to lead our efforts
to solve the problems of our time.
When he took office, President Bush asked each of us in the
Cabinet to face the issues squarely, propose fair and fitting
solutions and work with Congress to implement them. That is
exactly what we have done. At Treasury we have begun by clearing
out the underbrush and some of the underbrush is sequoias.
Certainly one of the largest problems we faced at Treasury
was the crisis in the savings and loan industry. President Bush
has acted swiftly and forcefully to resolve the crisis. Just
eighteen days after his Inauguration, the President came forward

3
with a comprehensive plan, and the Congress has acted swiftly on
it. The Senate has already passed the legislation, and the House
Banking Committee is currently in mark up.
The cost of solving the S&L problem is truly staggering —
$40 billion already spent and another $50 billion needed to
resolve the remaining insolvent S&Ls. Our plan relies on a
combination of industry and taxpayer funds. We propose that the
industry provide as much financial support as is possible and
still emerge a healthy competitive industry.
The plan is not a bailout for ailing S&Ls — its purpose is
to protect depositors' savings. In addition, it is a reform
plan that is designed to ensure that the industry can never again
sink into this kind of crisis.
The foundation of our reform plan is the requirement that
S&Ls meet the same capital standards as national banks. That is,
the owners of S&Ls must put their own capital at risk ahead of
the taxpayers' money. It must be real, not phantom, capital.
This is not an unreasonable request, and we must demand no less.
If the minimum capital standard that the President proposes —
three percent tangible capital — is adopted, two thousand
Savings and Loans could meet it immediately.
Those two thousand
represent four out of every five of the solvent S&Ls in this
country.
The principle behind our insistence on this point is simple:
It is just plain human nature that an individual, any individual,
is going to exercise more caution and careful judgement when he
is putting his own money at risk. We should truly be ashamed if
we put in place a solution to the S&L crisis that does not remove
the conditions which would let it occur again.
The House Banking Committee has recognized this. It has
courageously ignored the pressure of industry self-interest and
required a minimum three percent tangible capital standard. This
is the crucial element of the reform package. We taxpayers owe a
great vote of thanks to the Committee — and particularly to
Chairman Gonzalez and Congressman Wylie — for their resolve and
commitment to solving this problem for once and for all.
The second major problem we have confronted at the Treasury
is Third World debt. This one is simply too large for a "made in
America" solution. The overall debt of developing countries is
more than $1.2 trillion; the total commercial bank debt of the 15
largest debtors amounts to $275 billion. Only about 30 percent
of the bank debt is held by U.S. banks. The rest of the bank
creditors are located abroad. Thus, effective action will
require a cooperative international effort.
Fortunately, we have seen in recent weeks broad support for

4
a new approach to strengthening the international debt strategy.
This new approach represents the best ideas gathered from around
the world. I put them forward on behalf of President Bush in a
speech early in March and they were endorsed by the world's
financial leaders at meetings here in Washington early last
month. We are now in the process of implementing the new
approach.
Our new ideas are aimed at easing the debt burden of
developing countries. This will support their efforts to make
their economies more responsive to market forces, thus generating
higher growth, and a better standard of living for their people.
A dynamic process is underway — debtor countries are
already actively engaged with the commercial banks in devising a
variety of ways to secure financial support in the form of debt
and debt service reduction, as well as creative forms of new bank
lending. New energy and ideas are being unleashed; but we are
also seeing how tough this process is going to be. Both sides
need to be more forthcoming and realistic in their expectations
about what can be achieved in the initial round of this process.
The third major problem that we have tackled is the federal
budget deficit. Just two weeks ago, President Bush reached
agreement with the bipartisan leadership of Congress on a budget
that will meet the Gramm-Rudman deficit reduction target for
fiscal 1990 without raising taxes.
The budget agreement has been greeted as somewhat less than
bold and heroic, and it may be. But it should not be dismissed
lightly. It is the first time a President and a Congress have
ever reached such an agreement before the first budget resolution
required by the Budget Act. It does leave many details yet to be
negotiated, but the negotiators have shown the determination and
the good will needed to work out these details.
Most importantly, the agreement represents a promise by both
sides to put aside their differences in the interest of fiscal
sanity. The American people do not expect that we will have no
differences. But they do expect us to be able to deal with our
differences in the best interest of our country. This agreement
shows the people — and the financial markets — that we can do
so.
It is my experience that fiscal responsibility can lead to
financial stability. When the Gramm-Rudman law was adopted in
1985, interest rates dropped three full percentage points in six
months. If we show that we can meet the deficit reduction
requirements of that law today, interest rates will come down.
The objective of our economic policies must be to continue
strong, inflation-free economic growth. It is harder to meet

5
these objectives if our federal budget is out of control, so we
simply must meet the Gramm-Rudman target, not only next year, but
in subsequent years as well.
Now, many of you will have heard that the budget agreement
calls for $5.3 billion in new revenue next year. This provision
does not violate the President's pledge of no new taxes. The
way to raise that revenue without raising taxes, is to cut the
tax rate on capital gains.
However, the amount of revenue the capital gains cut will
produce really is not the best argument for it. The other
reasons for encouraging capital investment are much more
compelling. The real objective of President Bush's proposal is
not revenue, but economic growth. Jobs and opportunity are the
most important results of a preferential tax rate for capital
gains. A new factory built, a new medical cure, better quality
products at lower prices — that's what the capital gains tax is
all about.
The underlying issue here, in fact, goes to the more
fundamental problem of how we will preserve and improve our
standard of living. How we will increase the rate of national
saving and investment. How we will encourage Americans to take
the long-term view in their economic thinking. How we will
improve our international competitiveness.
The President stands firmly behind his capital gains
proposal and I do too. The differential on capital gains will
cut the cost of capital in the U.S. and bring us more in line
with our international competitors, almost all of whom grant
preferential tax treatment to capital gains. It is the
responsible way to raise the bulk of the $5.3 billion we need to
meet the Gramm-Rudman target for next year. But more than that,
it is the right thing to do for the long-term health of our
economy.
In sum, the Bush Administration is already deep in the midst
of producing solutions to tough problems: The savings and loan
crisis, Third World debt, the budget. And as you look around
the Administration, the war on drugs, peace in Central America,
education and the environment. President Bush has tackled them
all and sought the help of Congress on each one. We need your
help too. The Chamber is always one of the leading voices in
Washington for responsible government. Thank you for that, and
for the opportunity to be with you today.

TREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-20
CONTACT: Office of Financing
L\'C\. -ROOM 5310

202/376-4350

FOR IMMEDIATE RELEASE
May 1, 19.89

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $7,009 million of 13-week bills and for $7,005 million
of 26-week bills, both to be issued on May 4, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

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

Low
8.61%a/
8.92%
High
8.65%
8.97%
Average
8.64%
8.96%
a/ Excepting 1 tender of $200,000.

97.824
97.813
97.816

26-week bills
maturing November 2, 1989
Discount Investment
Price
Rate
Rate 1/
8.57%
8.65%
8.64%

9.08%
9.17%
9.16%

95.667
95.627
95.632

Tenders at the high discount rate for the 13-week bills were allotted 59%.
Tenders at the high discount rate for the 26-week bills were allotted 14%.

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

$
37,710
20,933,670
31,775
43,865
72,545
40,010
1,126,875
49,355
7,610
41,095
23,165
937,770
528,065

$
37,710
5,826,910
31,775
43,865
57,545
40,010
79,325
29,355
7,610
41,095
23,165
262,370
528,065

$
26,995
20,471,430
23,185
30,870
40,565
27,640
838,435
27,595
8,675
52,085
22,215
820,090
520,735

$
26,995
5,915,870
23,185
30,870
40,565
27,640
96,935
21,875
8,675
52,085
22,215
217,090
520,735

$23,873,510

$7,008,800

$22,910,515

$7,004,735

$20,629,945
1,249,995
$21,879,940

$3,765,235
1,249,995
$5,015,230

$18,145,510
1,067,950
$19,213,460

$2,239,730
1,067,950
$3,307,680

1,961,625

1,961,625

1,850,000

1,850,000

31,945

31,945

1,847,055

1,847,055

$23,873,510

$7,008,800

$22,910,515

$7,004,735

An additional $5,555 thousand of 13-week bills and an additional $359,345
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.

"REASURY NEWS
CONTACT:
Office of Financing
artment of the Treasury • Washington, D.C.
• Telephone
566-20
FOR RELEASE AT 4:00 P.M.
May 2, 1989

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
$13,600 million, to be issued May 11, 1989.
This offering
will result in a paydown for the Treasury of about $1,225 million, as
the maturing bills are outstanding in the amount of $14,833 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, May 8, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
February 9, 1989,
and to mature
August 10, 1989
(CUSIP No.
912794 ST 2), currently outstanding in the amount of $7,605 million,
the additional and original bills to be freely Interchangeable.
182-day bills for approximately $6,800 million, to be dated
May 11, 1989,
and to mature November 9, 1989 (CUSIP No.
912794 TD 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 May 11, 1989.
In addition to the maturing
13-week and 26-week bills, there are $8,786
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 $1,454 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,764 million as
agents for foreign and international monetary authorities, and $6,793
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 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'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, o.e. • Telephone 56*2041
U r.y
10
For Release upon Delivery
Expected at 11:00 a.m.
May 2, 1989

STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to be here today to present the
Administration 's views regarding H.R. 1864, which was introduced
by Chairman Ro stenkowski and others on April 13, 1989, to amend
section 89 of the Internal Revenue Code. The Administration
recognizes the enormous administrative burdens imposed on many
employers by s ection 89. It is clear now that many of these
problems were not fully understood when section 89 was enacted
and that these problems cannot be properly addressed by
regulations. Consequently, we agree with the Chairman that a
H.R. revis
1864 ion
is of
intended
to many of the concerns
complete
sectionto89respond
is necessary.
taxpayers have expressed. The Administration applauds the
efforts of the Chairman and the other sponsors of the bill to
resolve the problems posed by section 89 and believes the bill
sets the stage for legislative debate. We look forward to
working with Congress during the course of the effort to develop
a prompt legislative solution.
In the first part of my testimony, I will briefly describe .
the background of section 89, the policy rationale for its
enactment and certain aspects of the proposed regulations. Then,
I will summarize briefly the significant provisions of the bill.
Finally, I will provide the Administration's preliminary views on
certain provisions of the bill.
NB-245

-2BACKGROUND AND POLICIES
The Internal Revenue Code generally provides that the value
of employer-provided health coverage is excluded from income.
Section 89, however, conditions the availability of this tax
benefit by providing that employer-provided health coverage may
be excluded from the income of highly compensated employees only
if coverage is also provided on a nondiscriminatory basis to
nonhighly compensated employees. In the event employer-provided
health coverage is found to be discriminatory under section 89,
the value of coverage is included in the income of highly
compensated employees as wages. The specific features of section
89 and the regulations thereunder are summarized in the
description of the bill prepared by the staff of the Joint
Committee on Taxation (JCT pamphlet), and I will not repeat them
here.
The rationale for the conditions imposed by section 89 was
that the tax expenditure for the exclusion from highly
compensated employees' incomes is justified only to the extent
employers provide nonhighly compensated employees health coverage
generally comparable in value to the coverage received by highly
compensated employees. The legislative history of the Tax Reform
Act of 1986 indicates that Congress was concerned that the rules
formerly applicable to certain employee benefits, particularly
health insurance, did not require sufficient coverage of
nonhighly compensated employees as a condition to the exclusion;
it was thought that the tax benefit afforded to highly
compensated employees receiving employer-provided health coverage
could not be justified without nondiscriminatory coverage being
mandated.
In promulgating proposed regulations under section 89, the
Treasury Department and Internal Revenue Service attempted to be
as flexible as legally possible to assist employers in bringing
their plans into compliance with section 89. Thus, the proposed
regulations provide several transitional provisions intended to
allow employers to comply more easily with section 89 in 1989.
First, the proposed regulations provide that employers who
reasonably and in good faith comply with section 89 and its
legislative history in 1989 will be treated as having satisfied
section 89. The proposed regulations further provide that
employers who elect not to test whether their plans satisfy the
75 percent benefits test in 1989 may include in the income of
certain of their highly compensated employees all of the
employer-provided health coverage. The highly compensated
employees who must include in income all of the employer-provided
health coverage are the 20 percent of-such employees who receive
the greatest compensation from the employer, but not less than
ten employees nor more than 2,000 employees. This transitional
provision is extended to 1990, except that the number of highly
compensated employees who must include all of the employerprovided health coverage in income is greater. Finally, under
the proposed regulations, an employer generally may choose

-3July 1, 1989, as the beginning of its testing year, and thereby
ignore'facts in existence prior to that date when testing its
plans for compliance in 1989. Under this provision, an employer
must annualize the benefits provided after July 1 to determine
whether its plans are discriminatory.
Because we have become convinced that section 89 must be
significantly restructured, the Department of the Treasury will
do all it can to provide appropriate regulatory relief to
minimize, within the confines of existing law, needless taxpayer
compliance efforts under the current statute. In line with this
policy, and in order to facilitate the legislative process, the
proposed regulations will be modified to extend the beginning
date for testing plans for compliance with the nondiscrimination
rules in 1989 from July 1 to October 1. We hope that this step
will provide Congress with sufficient opportunity to act before
employers are required to expend substantial further resources to
comply with the current statute.
SUMMARY OF H.R. 1864
H.R. 1864 responds to the perceived problems with section 89
in four ways. First, the complicated nondiscrimination tests of
section 89 would be replaced by a two-part eligibility test and a
benefits test. Second, certain modifications would be made to
the categories of employees that must be considered for purposes
of these tests, and the definition of highly compensated
employees is changed. Third, the bill provides that the
nondiscrimination rules applicable to group-term life insurance
plans prior to the enactment of section 89 are to be applied to
such plans, rather than the bill's new health nondiscrimination
rules. Finally, while the bill would retain the so-called
qualification requirements set forth in section 89(k), the
sanction for failure to satisfy such requirements would be
changed to an excise tax on the employer.
A. Nondiscrimination Tests
The first part of the eligibility test requires an employer
to provide to at least 90 percent of its nonhighly compensated
employees health coverage that is primarily core health coverage,
at a cost to an employee of no more than $10 per week for
employee coverage and no more than $25 per week for family
coverage. The second part of the eligibility test requires that
no health plan of an employer discriminate with respect to
eligibility (by its terms or in operation) in favor of higjily
compensated employees. The JCT pamphlet states that the second
part of the test is intended to preclude executive-only plans.
The description further states that if at le'ast 50 percent of the
employees eligible to participate in the plan are nonhighly
compensated employees, the plan is not an executive-only plan.
A health plan that satisfies both parts of the eligibility
test is a "qualified core health plan." If the employer's health

-4plans are not considered, in the aggregate, to be a qualified
core health plan, each highly compensated employee must include
in income all of his or her employer-provided benefit.
If an employer's health plans pass the eligibility test, a .
portion of the value of the employer-provided health coverage
must be included in the income of a highly compensated employee
if such coverage does not satisfy the benefits test. The
benefits test limits the amount of the tax-favored health
benefits a highly compensated employee may receive to 133 percent
of the value of the employer-provided coverage taken into account
to satisfy the eligibility test.
B. Employees Taken Into Account and Definition of Highly
Compensated
Under current law, the definition of a highly compensated
employee is the same as that used for other employee benefits.
The Internal Revenue Code generally defines a highly compensated
employee as any employee who, during the current year or the
prior year, is one of the following: (i) a 5 percent owner; (ii)
an officer receiving compensation in excess of $45,000; (iii) an
employee receiving compensation in excess of $75,000; and (iv) an
employee receiving compensation in excess of $50,000, who is
among those 20 percent of employees receiving the greatest
compensation from the employer. The Code provides that the
relevant dollar amounts will be indexed for inflation. In
addition, an employer must have at least one officer who is
considered a highly compensated employee, regardless of that
officer's compensation. The bill modifies the definition of a
highly compensated employee by providing that officers with
compensation in excess of $45,000 are the only officers who must
be considered highly compensated employees.
Under current law, an employer, when testing its health
plans, generally may exclude those employees who have not
completed six months of service, those who are not yet age 21,
those who normally work less than 17 1/2 hours per week, those
who normally work not more than six months per year and
nonresident aliens receiving no United States source income.
The bill preserves the rules regarding minimum age and
service conditions and nonresident aliens, but changes the
definition of part-time employees and provides special rules for
leased employees and employees covered by collective bargaining
agreements. Part-time employees are those who normally work less
than 25 hours per week. A leased employee generally may be
considered an excludable employee if the leasing organization
certifies to the employer that core health coverage is available
to the leased employee at a cost that is no higher than $10 per
week ($25 per week for family coverage). Finally, although the
bill is somewhat unclear on this point, it appears that employees
who are covered by a collective bargaining agreement may be
disregarded in testing the health benefits available to an

-5employer's other employees. Similarly, other employees may be
disregarded when testing the health benefits provided to
employees covered by collective bargaining agreements.
C. Plans Covered
Under present law', group-term life insurance plans are
subject to the section 89 rules, as well as health plans. In
addition, an employer can elect to test certain other employee
benefit plans, such as dependent care assistance programs, under
the nondiscrimination rules of section 89. By contrast, the bill
subjects only health plans to its new nondiscrimination rules and
provides that the nondiscrimination rules in effect prior to the
Tax Reform Act of 1986 will apply to group-term life insurance.
D. Sanction for Failure to Meet Qualification Rules
The bill replaces the current law sanction for failure to
meet the so-called qualification requirements with an excise tax
on the employer. It is unclear what amount is subject to the
tax. The bill provides that the excise tax is to be equal to 34
percent of the amounts paid or incurred under the plan, similar
to the present law requirement regarding the amount to be
includable in an employee's income for such failure. The JCT
pamphlet states the excise tax is to be equal to the cost to the
employer relating to the coverage that failed a qualification
requirement.
COMMENTS ON H.R. 1864
The Administration believes that the bill represents a
positive step toward simplification of the rules applicable to
employer-provided health and other benefits and, in particular,
endorses its movement toward a design-based method for testing
plans for nondiscrimination. We are especially pleased that H.R.
1864 would eliminate much of the data collection and recordkeeping requirements of current law.
The Administration has not fully completed its review of the
bill, and further time is necessary to explore fully the bill's
practical impact. It is necessary to determine precisely how the
tests will operate in the context of the wide variety of
circumstances faced by employers, and, in particular, to assess
the relationship between the tests and employees required to be
considered. We are, however, prepared to make several
preliminary comments at this time as to the areas that we believe
need further consideration or clarification.
A. Nondiscrimination Tests
1. Eligibility Test
The foundation of the bill's eligibility test is the
required availability of a health plan providing "primarily core

-6health benefits" at a cost to employees of no more than $10 per
week ($25 per week for family coverage). The dollar amounts are
indexed in accordance with the social security average wage
index. It should be noted that, historically, health costs have
been increasing more rapidly than wages. Although the bill does
not define the term "core benefits," the JCT pamphlet states that
major medical and hospitalization benefits are core health
benefits and that dental and vision benefits and any health
benefit provided under a salary reduction arrangement are not
core health benefits.
The Administration believes employers should be permitted
flexibility in choosing the types of health coverage they offer
to their employees. The bill's provision for "primarily core
health benefits" achieves this goal. Nevertheless, we agree with
the JCT pamphlet that dental and vision benefits should not be
considered core health benefits and urge Congress to provide in
the statute itself that such benefits are not core health
benefits.
The purpose of the dollar limitations on the amount an
employer may require an employee to pay for qualified core health
coverage is to ensure that affordable core health coverage is
available to employees. The advantage of dollar limitations is
to enable an employer, on an objective basis, to determine if it
is offering health coverage to employees on a nondiscriminatory
basis. At the same time, it is also important to assure that any
dollar limitation does not reduce the availability of employerprovided health benefits.
To ensure health coverage remains affordable, the bill
provides that the dollar limitations are indexed in accordance
with the social security average wage index. The Administration
supports the effort to make affordable health coverage available
to employees and understands affordability is the rationale
underlying the designation of a wage inflation index rather than
a health care costs inflation index.
However, the impact of this method of indexing on employers'
costs and on the overall cost of health coverage is not known.
For example, it is uncertain whether the wage index would have
the effect of increasing employers' costs, increasing co-payments
and deductibles, or decreasing the quality of health coverage
offered to employees. As a result, the Administration is not
prepared at this time to state that this index is the best method
of indexing the dollar limitations or that other affordability
tests should not be considered. We will work with Congress to
determine the proper approach as soon as practicable.
The second part of the eligibility test provides that the
plan may not contain any provision relating to eligibility to
participate that discriminates in favor of highly compensated
employees. As noted above, the JCT pamphlet indicates that this
test will not be met unless at least 50 percent of the group of

-7employees eligible to participate in the plan are nonhighly
compensated employees. This rule should be modified to provide
that a plan would be treated as satisfying the second part of the
test if the percentage of highly compensated employees eligible
to participate is no greater than the percentage of the nonhighly
compensated employees eligible to participate in the plan.
Absent such a change, an employer with a workforce comprised of a
relatively large proportion of highly compensated employees might
not be able to satisfy this part of the test.
2. Benefits Test
Under the benefits test, the value of the health benefits
actually provided to a highly compensated employee that is more
than 133 percent of the value of the benefits available to
nonhighly compensated employees under a qualified core health
plan is included in income. This test is simpler than the
benefits test in section 89 because an employer is not required
to keep records of the health coverage received by nonhighly
compensated employees.
Nonetheless, the problem of health benefit valuation
remains. The bill provides that value shall be determined under
tables prescribed by the Secretary of the Treasury. The JCT
pamphlet provides that until regulations are developed an
employer may use any reasonable valuation method, including the
cost of the premium as determined under the continuation coverage
requirements applicable to group health plans.
Section 89 also directs the Secretary of the Treasury to
prescribe health valuation tables. Employers argued that until
valuation tables were developed, section 89 could not be
implemented. Amendments to section 89 made by the Technical and
Miscellaneous Revenue Act of 1988 (TAMRA) and the recently
promulgated proposed regulations provide that any reasonable cost
valuation method may be used to value benefits and that the cost
of health coverage for purposes of the group continuation
coverage requirements of section 4980B is deemed a reasonable
cost valuation method. TAMRA and the proposed regulations
provide that COBRA cost is a reasonable valuation method because
the Treasury Department, despite considerable efforts, could not
timely develop accurate, reliable valuation tables.
The Treasury Department believes it is in no better position
today to develop valuation tables than it was when section 89 was
enacted. Consequently, we urge Congress to provide in the
statute that the value of health coverage is its cost or any
other reasonable valuation method that the Secretary of Treasury
may provide in regulations. This would provide certainty to
employers and allow the Treasury Department to study further
whether it is feasible to develop tables. To assist the Treasury
Department in developing these tables, we request Congress
provide appropriate authority and direction to other federal
agencies that collect data regarding health care to share such

-8data with the Treasury Department for use in the developing
valuation tables for health benefits.
3. Salary Reduction Contributions
The bill provides that salary reduction contributions are
treated as employee contributions for purposes of determining
whether the employee-paid portion of the premium exceeds $10 per
week ($25 per week for family coverage). For purposes of
determining whether health benefits provided to highly
compensated employees exceed 133 percent of the qualified core
health benefit provided to nonhighly compensated employees,
salary reduction contributions are treated as employee
contributions in the case of nonhighly compensated employees and
employer contributions in the case of highly compensated
employees. The JCT pamphlet states that salary reduction
contributions are treated in this manner because they are truly a
cost to the employee, and in a real sense are more costly for
nonhighly compensated employees.
Although the Administration recognizes the policy reasons
underlying the bill's treatment of salary reduction
contributions, it believes the treatment of salary reduction
contributions for purposes of the nondiscrimination rules needs
further study. In particular, the treatment of such
contributions for purposes of the benefits test should be
examined to determine if there is an equitable way to treat such
contributions made by highly compensated employees as employee
contributions if, in fact, nonhighly compensated employees are
receiving the same health benefits as highly compensated
employees.
B. Small Business Considerations
The special circumstances faced by small businesses should
be addressed in any legislation enacted to modify section 89.
Businesses with less than ten employees often cannot purchase
health insurance at group rates. Moreover, many small businesses
have insurance contracts that do not provide for coverage for
employees working less than 30 hours per week.
Congress should consider alternative ways in which small
businesses that cannot purchase health insurance at favorable
group rates may comply with the nondiscrimination rules. We
believe the bill does not provide a satisfactory alternative for
these businesses. For example, the $10 cap on the amount an
employer may require an employee to pay for health coverage under
a qualified core health plan may cause such businesses problems
if any employee has health problems or if the employer's
workforce is comprised of employees of significantly different
ages.
The Administration suggests, therefore, that Congress
consider permitting small businesses to satisfy the

-9nondiscrimination rules under alternative tests. A small
business for this purpose would generally be defined as a
business with ten or fewer employees. However, an employer with
a larger number of employees could, under rules developed by the
Secretary of the Treasury, be granted similar relief to the
extent it was found that the employer faced similar circumstances
in purchasing insurance.
We offer for your consideration this alternative. The
dollar limitations on the employee-paid portion of the premium
would not apply if: (i) a small business has only one health
plan; (ii) the small business makes core health coverage
available to 90% of its nonhighly compensated employees; and
(iii) a majority of the nonexcludable, nonhighly compensated
employees eligible to participate in the plan actually do so.
Many small businesses have insurance contracts that do not
provide for coverage of employees who normally work less than 30
hours per week. The Administration believes it is advisable not
to require employers with such contracts to make available health
coverage to employees working less than 30 hours per week until
the expiration of the current contract term.
Still other alternatives may be developed. The
Administration urges Congress to consider all viable proposals
that would enable such businesses to comply with whatever form
the nondiscrimination rules may take in future legislation.
C. Applicability of Qualification Requirements
Congress should consider applying the qualification
requirements only to health plans. This approach is sensible if
the nondiscrimination rules are applicable only to health plans.
Even if Congress rejects this approach, the Administration
recommends that the qualification requirements not apply to
no-additional-cost fringe benefits, employee discounts and
employer-provided eating facilities. These fringe benefits are
adequately addressed in section 132 and the regulations
thereunder. Moreover, it is questionable, for example, whether
employers should be required to maintain an employee discount
program for an indefinite period of time or that an eating
facility should be maintained for the exclusive benefit of
employees.
D. Sanctions for Failure to Meet Qualification Requirements
H.R. 1864 replaces the current sanction for failure to
comply with the qualification requirements of section 89 from an
inclusion in employees' incomes of the values of the benefits
provided under the plan to an excise tax on the employer equal to
34 percent of the amount paid or incurred under the plan. We
whole-heartedly agree that the sanction for failure to comply

-10with these requirements should be imposed on the employer who
caused the failure, not on employees.
Nevertheless, we perceive two problems with the proposed
excise tax. First, it should not be applied to amounts paid or
incurred under the plan. Such a provision would require an
employer to know all of the health benefits provided under the
plan to its employees during each year and the value of each
benefit. The Administration recommends that the base to which
the excise tax would apply be adopted in accordance with the
description in the JCT pamphlet, i.e., the cost to the employer
of providing the health coverage.
Second, we believe that a 34 percent excise tax may be too
high. Consideration should be given to a two-tiered excise tax
similar to the two-tiered excise tax imposed on certain
transactions involving private foundations. Thus, a lower rate
excise tax would be applied for each year in which the failure
exists. If an employer did not correct the failure within a
reasonable time after the failure is discovered, a higher excise
tax would apply.
In addition, an employer may inadvertently fail to comply
with one of the qualification requirements. For example, the
employer may fail to provide a small number of its employees with
the required notice of material plan terms. For this reason, any
legislation that may be enacted should provide rules for de
minimus failures or should give the Secretary of the Treasury
authority to provide for such rules in regulations.
CONCLUSION
The Administration agrees that prompt Congressional action
is needed to alleviate the problems employers are experiencing in
complying with section 89. We believe the bill represents a
major step forward in achieving these goals, but we are
continuing to analyze the approaches taken in the bill to
determine whether they represent the best solutions to the
various issues posed. We are convinced that in order for any
legislative response to be effective the statute must be made
comprehensible and simple to administer. We are confident that
through the legislative process our mutual goals can be achieved
and the outstanding issues resolved.
This concludes my prepared remarks. I would be pleased to
respond to your questions.

TREASURY NEWS ^
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 10:45 A.M., D.S.T.
May 2, 1989
STATEMENT OF THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
SENATE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE
AND GENERAL

GOVERNMENT

MAY 2, 1989

MR. CHAIRMAN, MEMBERS OF THE COMMITTEE:

I am pleased to be here today to discuss with you the
operating budget request for the Department of Treasury

for

Fiscal Year 1990.

Over the past few weeks, I have testified before the Senate
and the House Budget Committees and Appropriations Committees as
one of the Administration's economic spokesmen.

We talked about

President Bush's key budget proposals, including funding to win
the war against drugs, to emphasize education and environmental
issues, and plans to assist the homeless.

We also talked about

the Administration's plan to resolve the savings and loan crisis,
important revenue related measures, and the need to improve our
competitive position in the world economy.

My remarks, today, focus not on the economic and tax policy
underlying the President's budget, but on that portion of the
overall budget that pertains to the operations of the Department
of the Treasury.

As you are aware, the President's Fiscal Year

1990 Budget proposes freezing, at Fiscal Year 1989 levels, the
aggregate spending of domestic programs not directly
with one of his five broad initiatives.

associated

The Administration

strongly encourages full funding of the Department's $0.5 billion
request to continue the War on Drugs, including the

increases

proposed by President Bush to increase cargo inspections for drug
smuggling and expand efforts to fight money
IJB-2 4 6

laundering.

2
Although most of our programs are included in the aggregate
domestic discretionary spending category, the President has
emphasized that the freeze is flexible, allowing some programs to
increase while others are reduced. Discussions concerning
increases or decreases to specific programs within the freeze
category are ongoing between Congressional leaders and
Administration officials.
The Department of the Treasury carries out a wide variety of
functions that are critical to the functioning of our Nation's
government. These activities include:
o Administering the Nation's tax system and collecting
the revenues due under our tax laws;
o Managing the government's finances, by financing the
debt, paying obligations, and maintaining the fiscal
accounts;
o Collecting customs duties at our Nation's borders;
interdicting illegal and dangerous drugs; and providing
for the protection of the President and the Vice
President; and
o Assisting the President in directing the
Administration's domestic and international economic
policies, monetary and financial affairs, and tax
policies.
For Fiscal Year 1990, the Department is requesting a total
of $8.0 billion and 155,748 full time equivalent positions for
the purpose of carrying out these critical responsibilities.
This request represents an increase of $311 million and 1,990
full time equivalent positions compared to Fiscal Year 1989.

3
I would like to highlight a number of objectives of our
Fiscal Year 1990 budget request:
I. Our key priority is to maintain an effective tax
administration system by transforming many manual, paperintensive operations into a modern, automated system capable of
delivering first quality service while processing returns and
collecting revenues.
The Department's budget for the Internal Revenue Service,
the largest Treasury bureau, takes account of the continued
growth in tax administration workload and the pressing need for
modernized systems. For the IRS, this entails pursuing the
redesign of our current tax processing system—a system first
introduced in the early 1960's, but today, aged and deficient in
terms of available technology. This budget request will not only
help guarantee the efficient collection of tax revenues through
the turn of the century, but also will provide for the continuing
improvement in service levels that the taxpaying public expects
and deserves, reducing response times from weeks and days, in
some cases, to a matter of minutes.
II. Our second objective is to maintain the ability of the
Internal Revenue Service to promote tax compliance and collect
revenue, while supporting improvements in these areas.
Improving service levels through modernization of tax
collection systems will provide a necessary boost to our ability
to promote tax compliance. However, the request for the IRS also
contains the funds necessary to improve important, ongoing
revenue enforcement activities. We propose to accomplish this
objective by increasing resources for several high yielding
revenue efforts, including the collection of unpaid taxes,
compliance efforts among U.S. citizens living abroad, and
investigations into possible underpayment of employment taxes.

4
Finally, we plan to augment the IRS1 ability to pertorm
examinations of tax returns where there are simple discrepancies
that have a revenue impact.
The Bipartisan Budget Agreement for FY 1990 was approved
last week by the President and the Congressional leaders of both
parties. Incorporated into that agreement are $0.5 billion in
additional revenues to be derived from expanded IRS tax
enforcement efforts. To meet this target, additional resources
will be required for IRS enforcement programs above the FY 1989
enacted levels. After the new resource requirements are
determined, they will be provided to the Congress as part of the
continuing negotiations on the FY 1990 budget.
III. A third objective is to support the President in his efforts
to end the scourge of drugs by promoting the Department's role in
drug law enforcement.
The role of the U.S. Customs Service in inspecting the
people and goods crossing our Nation's borders places the
Department of the Treasury at the forefront of President Bush's
efforts to stem the tide of illegal drug trafficking. In Fiscal
Year 1990, the Customs Service will continue to participate in
drug enforcement task forces in major cities across the Nation
and to increase drug interdiction efforts along our borders. The
Department is requesting the additional resources to expand
contraband examinations and improve automated systems that
support investigative and intelligence operations. We also seek
continued development and refinement of automated systems such as
the Customs' Automated Commercial System to enhance productivity
and improve the effectiveness of operations.
IV. Our next major objective is to fulfill our other law
enforcement and protection responsibilities, including the
continued enforcement of the Nation's trade laws.

5
The Department's budget requests funds for continuing law
enforcement and support operations provided by the Federal Law
Enforcement Training Center, the Customs Service, the Bureau of
Alcohol, Tobacco and Firearms, and the Secret Service.
Considering Treasury's pivotal involvement in Federal law
enforcement and our critical need to both hire and retain the
most highly skilled law enforcement personnel, the Department
supports the work of the National Advisory Commission on Law
Enforcement. We need a fair compensation system, applicable to
all Federal law enforcement personnel, to confront recruitment
and retention problems, and to address the compensation issue as
it relates to other Federal, state, and local law enforcement
agencies.
We also remain committed to the concept of consolidated
training in order to take advantage of scale economies and
address the shared needs of our Nation's diverse law enforcement
personnel. The request for the Federal Law Enforcement Training
Center will support a facility that fully meets the basic and
advanced law enforcement training needs of the participating
agencies.
In addition to the drug interdiction efforts already
mentioned, the Department proposes to provide funding for the
Customs Service that will allow the collection of $19 billion in
revenue through the enforcement of the Nation's trade laws. The
Department's proposed funding will support the rapid inspection
and clearance of 9.8 million formal merchandise entries and 370
million passengers.
We seek funds for the Bureau of Alcohol, Tobacco and
Firearms to continue conducting programs to reduce the criminal
use of firearms and explosives. In addition, funding the

6
operations of the Bureau will provide for the collection of an
estimated $10.3 billion in excise taxes on alcohol and tobacco.
The proposed budget for the Secret Service takes into
account the need for improved security at the Vice President's
residence, vital upgrades to information and communications
systems, and improved administration of responsibilities that
include the protection of the President and the Vice President,
and the investigation of currency counterfeiting, check forgery,
and other types of fraud.
V. The Department's fifth objective is to continue to
effectively manage the Nation's finances and service America's
debt.
The request for the fiscal service bureaus—the Financial
Management Service and the Bureau of Public Debt—furthers our
efforts to improve governmentwide cash management, debt
collection, financial information systems, customer service to
holders of government securities, and the cost effectiveness of
the Savings Bonds program.
As the lead agency for many of these issues, the Financial
Management Service has presided over a substantial
accomplishment—the generation of measurable savings of over $20
billion during the 1980's through more effective processing of
the Federal government's $2.3 trillion annual cash flow.. Over
the last few years, the Financial Management Service has been
called on to increase its leadership role in the financial
management of the Federal government. The Service's proposed
budget for Fiscal Year 1990 reflects this active role as well as
the need to sustain the systems modernization necessary for
ensuring financial management services in the future.

o
CVJ
CD
CD

federal financing bank

LL
LL

M 3310
May 2, 1989

FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
October 1988.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $145.5 billion on
October 31, 1988, posting a decrease of $621.2 million from
the level on September 30, 1988. This net change was the
result of decreases in holdings of agency debt of
$370.3 million, in agency assets of $0.3 million, and in
agency-guaranteed debt of $250.6 million. FFB made 32
disbursements during October.
Attached to this release are tables presenting FFB
October loan activity and FFB holdings as of October 31, 1988

NB-247

•<*•

CM
CD
CD
ID

CO

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

00
CD

Page 2 of 4

FEDERAL FINANCING BANK
OCTOBER 1988 ACTlVl'iY

BORROWER

AMOUNT
OF ADVANCE

DATE

FINAL
MATURITY

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

1/05/89
1/10/89
l/U/89

7.664%
7.667%
7.706%

araNHf ftEBT
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note #473
+Note #474
Note #475

10/7
10/12
10/14

$

1,000,000.00
15,055,000.00
2,000,000.00

TENNESSEE, v&TfFY VrTf^FTTY
Advance #950
Advance #951
Advance #952
Advance #953
Advance #954
Advance #955
Advance #956
Advance #957
Advance #958

10/3
10/10
10/14
10/18
10/21
10/26
10/28
10/31
10/31

65,000,000.00
70,000,000.00
32,000,000.00
17,000,000.00
24,000,000.00
25,000,000.00
15,000,000.00
100,000,000.00
93,000,000.00

10/10/88
10/18/88
10/21/88
10/26/88
10/26/88
11/01/88
11/01/88
11/07/88
11/09/88

7.607%
7.626%
7.706%
7.689%
7.822%
7.813%
7.748%
7.733%
7.733%

10/25
10/25
10/28

2,345,687.38
6,602,642.43
4,054,325.12

9/01/10
2/25/11
U/30/93

9.034%
9.036%
8.523%

670,000.00
9,762,650.73

10/02/89
10/03/94

8.258%
8.704%

8.428% arm.
8.893% ann.

10/01/89

8.255%

8.425% ann.

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Greece 16
Greece 17
Morocco 13

DEPARTMENT OF HOUSING AND URBAN rs^ptMy^r
Ccmgunitv Development
Lincoln, NE
*San Juan, PR

10/1
10/3

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Space Caanunications Co. 10/1 568,962,553.21

•maturity extension
+rollover

Page 3 of 4

FEDERAL FINANCING BANK
OCTOBER 1988 ACTIVITY.

*"<i«JdER

_QAT£_

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

8,704,000.00
422,000.00
186,000.00
15,804,000.00
225,000.00
6,295,000.00
8,809,000.00
1,511,000.00
306,000.00
2,595,000.00
3,316,000.00
140,000.00
2,019,000.00

1/03/17
1/03/17
10/03/90
12/31/90
1/02/18
12/31/90
1/03/17
1/03/17
10/15/90
1/02/90
1/02/90
1/03/17
12/31/90

9.064%
9.064%
8.557%
8.575%
9.064%
8.569%
8.892%
8.892%
8.473%
8.259%
8.259%
8.996%
8.409%

8.964%
8.964%
8.467%
8.485%
8.964%
8.479%
8.795%
8.795%
8.835%
8.175%
8.175%
8.897%
8.322%

1/31/89

7.767%

BTTRAT. FTBfrngFICATION ADMINISTRATION
•Wabash valley Power #104 10/3
•Wabash Valley Power #206
•Wabash Valley Power #206
Oglethorpe Power #320
New Hampshire Electric #270
*United Power #67
•Wabash Valley Power #104
•Wabash valley Power #206
United Power #212
•Wolverine Power #182
•Wolverine Power #183
•Wabash Valley Power #206
•Colorado Ute-£Lectric #203

10/3
10/3
10/6
10/6
io/6
10/11
10/11
10/13
10/13
10/13
10/27
10/31

TfTW^w v^TTPy ATTTfyTTTY'
Seven Stfl*-°? Eimv Corporation
Note A-89-01 10/31

•maturity extension

697,573,672.85

qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr

FEDERAL FINANCING BANK HOLDINGS
(in millions)
Proqram
October 31. 1988
Agency Debt:
Export-Import Bank
$ 10.957.6
NCUA-Central Liquidity Facility
120.9
Tennessee Valley Authority
16.758.0
U.S. Postal Service
5,592.2
sub-total* 33,428.7
Agency Assets:
Farmers Home Administration
58,496.0
DHHS-Health Maintenance Org.
79.5
DHHS-Medical Facilities
96.4
Overseas Private Investment Corp.
-oRural Electrification Admin.-CBo
4,139.2
Small Business Administration
15.1
sub-total* 62,826.2
Government-Guaranteed Lending:
DOD-Foreign Military Sales
15,658.9
DEd.-Student Loan Marketing Assn.
. 4,910.0
DOE-Geothermal Loan Guarantees
50.0
DHUD-Community Dev. Block Grant
316.2
DHUD-New Communities
-0DHUD-Public Housing Notes +
2,037.0
General Services Administration +
387.5
DOI-Guam Power Authority
32.1
DOI-Virgin Islands
26.6
NASA-Space Communications Co. +
995.2
DON-Ship Lease Financing
1,758.9
Rural Electrification Administration
19,221.7
SBA-Small Business Investment Cos.
614.2
SBA-State/Local Development Cos.
866.7
TVA-Seven States Energy Corp.
2,176.3
DOT-Section 511
46.2
DOT-WMATA
177.0
sub-total* 49,274.4
grand total* $ 145,529.3
* figures may not total due to rounding
+does not include capitalized interest

September 30. 1988 ¥jftl5lll-?0>/3T7g8$

10,957.6
118.1
17,131.0
5,592.2

$

-02.7
-373.0
-0-

33,799.0

-370.3

58,496.0
79.5
96.4
-04,139.2
15.4

-0-0-0-0-0-0.3

62,826.5

-0.3

16,011.7
4,910.0
50.0
318.1
-02,037.0
387.5
32.1
26.6
898.8
1,758.9
19,205.3
632.7
870.9
2,162.4
46.2
177.0

-352.8
-0-0-1.9
-0-0-0-0-096.4
-016.3
-18.5
-4.2
13.9
-0-0-

49,525.1
$ 146,150?5

-250.6
$ -621.2

TREASURY NEWS W

Department of the Treasury • Washington, D.C. • Telephone 536-2
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
May 3, 1989
;.; _ I 0
CONTACT:

Office of Financing
202/376-4350

TREASURY MAY QUARTERLY FINANCING
The Treasury will raise about $11,400 million of new cash
and refund $17,343 million of securities maturing May 15, 1989,
by issuing $9,750 million of 3-year notes, $9,500 million of
10-year notes, and $9,500 million of 29-3/4-year 8-7/8% bonds.
The $17,343 million of maturing securities are those held by the
public, including $2,209 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 $1,826 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 29-3/4-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-248

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
MAY 1989 QUARTERLY FINANCING
May 3, 1989
Amount Offered to the Public

$9,750 million

Description of Security:
Term and type of security
Series and CUSIP designation

3-year notes
Series S-1992
(CUSIP No. 912827 XM 9)
CUSIP Nos. for STRIPS Components . Not applicable

Issue date May 15, 1989
Maturity date
Interest rate
Investment yield
Premium or discount
Interest payment dates

May 15, 1992
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

Noncompetitive tenders
Accrued interest
payable by investor

Payment Terms:
Payment by non-institutional
investors
,
Payment through Treasury Tax
and Loan (TT&L) Note Accounts
Deposit guarantee by
designated institutions
Key Dates:
Receipt of tenders
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury
b) readily-collectible check

$9,500 million

10-year notes
Series B-1999
(CUSIP No. 912827 XN 7)
Listed in Attachment A
of offering circular
May 15, 1989
May 15, 1999
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

29-3/4-year bonds (reopening)
Bonds of 2019
(CUSIP No. 912810 EC 8)
Listed in Attachment A
of offering circular
May 15, 1989
February 15, 2019
8-7/8X

$1,000
To be determined after auction

To be determined at auction
To be determined after auction
August 15 and February 15 (first
payment on August 15, 1989)
$1,000
$1,600,000

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

Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.1 OX
Accepted in full at the average price up to $1,000,000

Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10X
Accepted in full at the aver
age price up to $1,000,000

None

None

$21.81975 per $1,000
(from February 15, 1989,
to May 15, 1989)

FulI payment to be
submitted with tender

Full payment to be
submitted with tender

Full payment, including
accrued interest, to be
submitted with tender

Acceptable for TT&L Note
Option Depositaries

Acceptable for TT&L Note
Option Depositaries

Acceptable for TT&L Note
Option Depositaries

Acceptable

Acceptable

Acceptable

Tuesday, May 9, 1989,
prior to 1:00 p.m., EDST

Wednesday, May 10, 1989,
prior to 1:00 p.m., EDST

Thursday, May 11, 1989,
prior to 1:00 p.m., EDST

Monday, May 15, 1989
Thursday, May 11, 1989

Monday, May 15, 1989
Thursday, May 11, 1989

Monday, May 15, 1989
Thursday, May 11, 1989

Minimum denomination available $5,000
Amount required for STRIPS
Not applicable
Terms of Sale:
Method of sale
Competitive tenders

$9,500 million

TREASURY NEWS
Department of the Treasury • Washington, o.c. • Telephone
'••h' 5310
FOR IMMEDIATE RELEASE

May 3, 19 89
isY

;•

DEPARTKLSi

Statement by
The Secretary of the Treasury
Nicholas F. Brady

The House Banking Committee's 49-2 vote on legislation to
reform the savings and loan industry is a significant step
toward achieving a resolution of this crucial issue.
The House Banking Committee is to be commended for its action
to provide strong capital standards for the savings and loan
industry, including the phase-in of a three percent minimum
tangible capital requirement. Sufficient private capital is
essential to protect the American taxpayer. We also applaud
the Committee action to approve the Administration's
financing mechanism.
We do have serious concerns, however, about the nature and
direction of amendments which reconfigure the Resolution
Trust Corporation.
The Committee has made substantial
modifications which alter the original design and intent of
the Administration proposal to manage insolvent savings and
loan institutions at the lowest possible cost to the
taxpayer.
We are particularly concerned about provisions
that would divert resources needed for savings and loan
resolutions to housing subsidies.
With the Senate action completed two weeks ago, we urge the
House of Representatives to act quickly so this legislation
may be on the President's desk as soon a possible.

NB-249

2041

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
lL"i O C - J . 0

Hay ;.-

s ••'•'

!Ji,AR

FOR RELEASE AT 3; 00 PM '*<-,<[
May 4, 1989

Contact: Peter Hollenbach
(202) 376-4302

TREASURY ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR APRIL 1989
The Department of the Treasury announced activity figures for the
month of April 1989, of securities within the Separate Trading of
Registered Interest and Principal of Securities program, (STRIPS).
Dollar Amounts in Thousands
$326,960,162
Principal Outstanding
(Eligible Securities)
Held in Unstripped Form

$239,787,572

Held in Stripped Form

$87,172,590

Reconstituted in April

$1,797,760

The attached table gives a breakdown of STRIPS activity by
individual loan description.
The Treasury now reports reconstitution activity for the month
instead of the gross amount reconstituted to date. 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-250

26

TABLE VI—HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, APRIL 30, 1989
(In thousands)
Principal Amount Outstanding
Loan Description

Maturity Data
Total

Portion Held in
Unstripped Form'

Portion HefcJ in
Stripped Form'

Reconstituted
This Month

11-5/8% NoteC-1994 ..

.11/15/94

S6.658.554

$5,572,154

11-1/4% Note A-1995 ..

2/15/95

6.933.861

6,149.381

784.480

11-1/4% Note B-1995 .

5/15/95

7,127,086

5.375.886

1.751,200

3,200

.8/15/95

7,955,901

7.005.901

950.000

2.400

907,200

10-1/2% Note C-1996 ..

$1.086.400
$2,560

9-1/2% Note 0-1995

11/15/95

7,318.550

6.411.350

8-7/8% Note A-1996 .

2/15/96

8.410.949

8.100,549

310,400

7-3/8% Note C-1996 .

5/15/96

20.085.643

19.828.043

257.600

9.600

7-1/4% Note 0-1998

11/15/96

20,258.810 j

19.825.210

433.600

38.400

8-1/2% Note A-1997 .

5/15/97

9.776.037

145.200

8-5/8% Note B-1997 ..

8/15/97

8-7/8% Note C-1997 . .

.11/15/97

9.921,237 |
I
9.362.836 |
9.808.329 |

8-1/8% Note A-1998 .

.2/15/98

9.159.068 i

9.158.428

9 % Note B-1998

.5/15/98

9,165.387 |

9.165,387

9-1/4% Note C-1998 .

8/15/98

11.342.646 j

11.341.046

8-7/8% Note 0-1998 .

.11/15/98

9.902.875 •

9.902.875

9.362.836
9.792.329

16.000
640

1.600

8-7/8% Note A-1999

.

2/15/99

9.719,678 j

9.719.678

11-5/8% Bond 2004

.

11/15/04

8.301.806 j

2,751.406

5.550.400 I

1 2 % Bond 2005

5/15/05

4.260.758 :

1.725,608

2.535.150

10-3/4% Bond 2005. ..

8/15/05

9,269,713 |

6.407,713

2.862.000

9-3/8% Bond 2006.

2/15/06

4.755.916 |

4.755.916

6.005,584 !

1.363.984

.2/15/15

12.667.799 j

2.925.559

9.742.240

8/15/15

7.149,916 I

1.946.716

5.203.200

9-7/8% Bond 2 0 1 5 . . .

.11/15/15

6.899.359 {

3.005.459

3.894.400

9-1/4% Bond 2 0 1 6 . . .

.2/15/16

7,266.854

5.166.054

2.100.800

24.000

7-1/4% Bond 2 0 1 8 . . .

5/15/16

18.823,551

11,962.751

6.860.800

412.800

11-3/4% Bond 2009-14
11-1/4% Bond 2015...
10-5/8% Bond 2015

11/15/14

11.200

4.641.600
215,200

147.200

7-1/2% Bond 2016 ...

.11/15/16

18.864.448

8.500.048

10,364.400

137,600

8-3/4% Bond 2 0 1 7 . . .

.5/15/17

18.194.169

7.715.289

10.478.880

362.400

8-7/8% Bond 2 0 1 7 . .

.8/15/17

14,016.858

8.784.858

5.232.000

227.200

9-1/8% Bond 2 0 1 8 . . .

.5/15/18

8.708.639

4,753,439

3.955.200

-0-

9.032.870

3.989,670

5.043.200

20.000

9,610.012

7.546.012

2.064.000

184.000

326,960,162

239.787.572

87.172,590

1.797.760

9 % Bond 2018
8-7/8% Bond 2 0 1 9 . . .

Total

11/15/18
.2/15/19

1
Effective M a y 1, 1987, securities held in stnpped form were eligible for reconstitution to their unstripped form. The amounts in this column represent the net affect of stripping and
reconstituting securities.

Note: O n the 4th workday of each month a recording of Table VI will be available after 3:00 pm. The telephone number is (202) 447-9873.
The balances in this table are subiect to audit and subsequent adjustments.

TREASURY NEWS
Dtpartment of the Treasury • Washington, D.C. • Telephone 566-2041
EMBARGOED FOR RELEASE UNTIL DELIVERY
Expected at y:00 a.m., D.S.T.
May 5, 1989

Statement by the Honorable Nicholas F. Brady
Secretary of the Treasury
before the
Committee on Banking, Housing and Urban Affairs
United States Senate
May 5, 1989

Mr. Chairman and members of the Committee:
ilcome this opportunity to review the Administration's
I we.
internati'onal economic and exchange rate policy and to discuss
the issues raised in the latest Treasury Department report on
this subject.
In particular, I would like to focus today on two aspects
of U.S. international economic policy. First, our efforts to
coordinate economic policies with other major i ndustrial
countries to achieve a growing world economy wi th low
inflation, reduced trade imbalances, and greate r exchange
market stability. And, second, our bilateral n egotiations
with Korea and Taiwan to achieve economic and e xchange rate
policies in these newly industrializing economi es that are
compatible with their growing role in the globa 1 economy and
their increased responsibility for maintaining an open world
trading system.
Economic Policy Coordination
The economic policy coordination process is now an
accepted feature of the international economic landscape. The
Group of Seven (G-7) — the United States, Japan, Germany,
United Kingdom, France, Canada, and Italy — meet regularly to
review economic policies and performance. Measures to achieve
shared objectives have been agreed and implemented. Close and
continuous cooperation in exchange markets has contributed to
more orderly currency arrangements.
NB-251

-2-

Last year represented a notable success for the
coordination process. Economic growth in the G-7 exceeded
expectations and provided a strong impetus to world trade.
Moreover, that growth was better balanced and supportive of a
reduction in global trade imbalances, particularly a $34
billion decline in the U.S. trade deficit. While inflation
picked up a bit in some countries, it remained modest and
there was no evidence that generalized inflationary pressures
were emerging. Finally, exchange markets were generally
stable.
The strong performance in 1988 provides a sound basis for
continued progress this year. Prospects are for solid growth
in the major industrial countries in 1989, in the 3 to 3 1/2
percent range. The more moderate pace of private consumption.
and investment and the new productive capacity resulting from
last year's investment will help to keep inflation pressures
in check. Moreover, the basic pattern of growth has improved
in the last 2 years. Domestic demand exceeds output in major
surplus countries, whereas in the United States domestic
demand is running below total output. This should contribute
to a further reduction of global trade imbalances, although at
a slower pace than during 1988.
The G-7 recognize that continued economic growth — which
remains the central objective of economic policy coordination
— requires that inflation be resisted where it is emerging
and that external imbalances be reduced further. In countries
with large fiscal and external deficits, especially the United
States, further reductions in budget deficits are crucial. A
reduction in the U.S. budget deficit through curbs on
government spending would free resources for exports and
investment. It would also help improve domestic savings and
reduce the need for foreign savings. And, as importantly, it
would demonstrate U.S. determination to tackle its own
economic problems. Our efforts to get other countries to make
the hard domestic choices that are necessary will succeed only
if the United States demonstrates leadership and does its part
by reducing the Federal budget deficit.
The recent bipartisan budget agreement is an important
step forward. But our trading partners are skeptical. They
want to see the proof, in terms of further reductions in the
deficit. We — the Administration and Congress — must act
promptly to implement fully the budget agreement and meet the
Gramm-Rudman deficit reduction target for fiscal 1990. We
also need to go further so that the deficit reduction targets
for fiscal 1991 and beyond are met.
The reduction of trade imbalances requires effective
action by both deficit and surplus countries. The surplus
countries must also do their part by improving domestic demand
growth, restructuring their economies to reduce dependence on
exports, and removing barriers which prevent full foreign
access to their markets.

-3-

Japan has undertaken a major effort to increase demand
and is-experiencing the fastest growth among the major
industrial countries. Despite this growth and the effects of
a significant past appreciation of its currency, Japan's trade
surplus declined only modestly last year and is expected to be
little changed in 1989. Clearly, further progress is needed
to implement effective structural reforms that will open the
economy to foreign goods and services and direct domestic
production to the home market.
In Germany, progress has been less satisfactory. Despite
some improvement in overall growth last year, the current
account surplus rose to record levels and is expected to rise
further this year as growth in domestic demand slows. More
needs to be accomplished to encourage domestic growth and to
remove impediments to investment and job creation.
Asian Newly Industrializing Economies
Responsibility for preserving a strong, stable world
economy extends beyond the G-7. The newly industrial
economies of Asia have benefitted greatly from an open,
growing international trading system. They must also do their
part to reduce global imbalances by allowing the value of
their currencies to reflect the strength of their economies
and bringing down barriers to trade and investment.
In the October 1988 report, the Treasury Department
concluded that Korea and Taiwan were "manipulating" their
exchange rates to gain a competitive advantage within the
meaning of the 1988 trade act. As required by the act,
negotiations with Korea and Taiwan have been initiated on
their exchange rate policies.
These negotiations have resulted in some welcome
progress. The currencies of both Korea and Taiwan have
appreciated further, recent evidence suggests that a
structural decline in their external surpluses may have begun
and they are taking steps to open their markets and
internationalize their financial systems. Nonetheless, we
believe there is a need for more progress.
Last year, Korea's currency, the won, appreciated by
nearly 16 percent, including about 4 percent in the 6 weeks
following the release of the Treasury report in-October.
However, the adequacy of the won's appreciation in 1988 must
be judged in light of much slower appreciation of the won in
1987 and the fact that in 1988 Korea's global current account
surplus grew by 44 percent to $14.3 billion or 9.1 percent of
GNP. Bilaterally, the U.S. trade deficit with Korea remained
unsustainably large in 1988, at $9.5 billion, even though the
deterioration slowed considerably due to stronger growth of
our exports to Korea and decline in the rate of growth of our
imports.

-4-

Preliminary data for the first quarter indicate a
significant decline in Korea's trade and current account
surpluses, including the imbalance with the United States.
Unfortunately, the Korean authorities' response to these
welcome developments has been to reduce sharply the pace of
the won's appreciation this year. Since the beginning of the
year the won has strengthened by only 2.7 percent against the
dollar. Much of this occurred since late March, following
another round of negotiations and the beginning of the
preparation of our April report. We believe that the Korean
current account data are too limited and preliminary to
confirm that a trend toward a structural, lasting decline in
Korea's external surpluses is underway. Thus, further
appreciation is necessary to sustain and reinforce these
recent welcome trade developments.
Towards this end, our negotiations with Korea in the
coming months will be aimed at obtaining assurances of
continued appropriate appreciation. Moreover, we will seek to
engage the Korean authorities in a broad dialogue on their
capital markets, including exchange controls and the banking
and securities markets. Such discussions would be aimed at
improving the efficiency and openness of these markets. In
addition, we will seek to obtain an understanding that
comprehensive capital and exchange controls used to manipulate
the exchange rate would be dismantled over the medium term and
that market forces instead would be allowed to determine the
rate.
A reduction in Taiwan's external surplus also appears to
be occurring. Last year, Taiwan's global current account
surplus fell by 43 percent to $10.2 billion. Taiwan's trade
surplus with the United States, which accounts for 95 percent
of its global trade surplus, fell 26 percent to $12.7 billion,
although more than half of this reduction reflected purchases
of U.S. gold which have been discontinued. Preliminary data
for the first quarter of 1989, however, point to further
reductions in Taiwan's trade surplus with the United States.
In large measure these declines have resulted from the NT
dollar's past appreciation. Moreover, since the October
report, the currency has appreciated further, by roughly
12 percent, including about 5 percent since the release of the
April report. We believe this will reinforce the positive
trends in Taiwan's external surpluses.
Given the appreciation since the October report —
particularly following last week's release of our latest
report — and in light of recent trade data, there may be no
need for further appreciation at this time. We will, however,
continue to monitor Taiwan's trade and exchange rate
developments closely to ensure that momentum toward external
adjustment is sustained.

-5-

We will also monitor carefully implementation of Taiwan's
new exchange rate system, without which the recent
appreciation would not have occurred. This system, which the
Taiwanese authorities proposed during our negotiations, has
the potential for achieving a market-based exchange rate.
However, implementation of the system is at an early stage and
a number of operational problems remain which could severely
limit the effectiveness of the liberalization.
Conclusion
In conclusion, Mr. Chairman, substantial progress has
been achieved in recent years in promoting sustained
noninflationary growth, reducing external imbalances and
fostering greater stability of exchange rates. The major
countries have a special responsibility to play in continuing
this progress. Others, however, have a clear and
complementary role to play. Our bilateral negotiations with
Korea and Taiwan have achieved important progress that could
set the stage for lasting, significant reduction in their
external imbalances. In the period ahead, we will aim at
ensuring that these economies play their appropriate role in
promoting effective balance of payments adjustment and
avoiding a competitive advantage in international trade.

TREASURY NEWS .
Office of Financing
ipartment of the Treasury • Washington,Contact:
D.C. • Telephone
566-2041
202/ 376-4350
~10
FOR IMMEDIATE RELEASE
May 4, 1989
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION

Tenders for $9,013 million of 52-week bills to be issued
May 11, 1989,
and to mature
May 10, 1990,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount Investment Rate
Rate
(Equivalent Coupon-Issue Yield)
Low
8. 42%
9. 12%
High
8. 44%
9. 15%
Average 8. 44%
9. 15%
Tenders at the high discount rate were allotted 44%.

Location

TENDERS RECEIVED AND ACCEPTED
(In Thousands )
Accepted
Received

Boston
New York
Philadelphiai
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

NB-252

$
28,510
30,583,665
19,610
39,550
33,275
30,790
1,018,135
27,700
19,535
50,890
32,785
848,470
283,870
$33,016,785

$
28,510
8,321,285
19,610
39,550
33,275
29,230
38,135
21,700
19,535
49,890
22,785
105,900
283,870
$9,013,275

$29,422,010
864,775
$30,286,785
2,600,000

$5,418,500
864,775
$6,283,275
2,600,000

130,000
$33,016,785

130,000
$9,013,275

Price
91,.486
91,.466
91,.466

TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 2:00 P.M.
THURSDAY, MAY 4, 1989

STATEMENT OF
ROBERT R. GLAUBER
NOMINEE FOR UNDER SECRETARY (FINANCE)
UNITED STATES DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman, Senator Packwood, distinguished members of the
Finance Committee, I have the honor of being nominated by the
President for the position of Under Secretary for Finance of the
U.S. Treasury. It is an honor as well to appear before this
Committee. I appreciate your making the time in your busy
schedules to hold this hearing.
The responsibilities of my position include the Offices of
Domestic Finance, Economic Policy, and Fiscal Management. Domestic
Finance has primary responsibility for developing policies to deal
with the capital and securities markets, financial institutions,
and financial aspects of corporations. Economic Policy acts as
economic advisor to the Secretary of the Treasury, participates in
producing the Administration's economic forecast, and provides
primary staff support on economic issues. These issues include the
savings rate, retirement policy, and (together with the Office of
Tax Policy) the impact of tax policy on corporate decisions.
Fiscal Management acts as the government's financial manager,
handling federal collections and payments and overseeing its
central accounting and reporting systems.
I believe my. experience as a teacher and researcher on finance
issues at the Harvard Business School, as a consultant to financial
institutions and business corporations, and as Executive Director
of the Presidential Task Force empaneled to study the 1987 stock
market break provides useful preparation for the duties for which
I have been nominated.
I would like to take just a few minutes to outline some of the
major policy issues with which I would deal if confirmed, apart
from the current thrift crisis.

NB-253

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International Competitiveness
It is perhaps stating the obvious to point out that the rapid
internationalization of competition is one of the strongest forces
confronting U.S. corporations, financial institutions and financial
markets. If these institutions are to maintain and extend their
competitive position and economic leadership, we must frame
policies which take explicit account of these goals and give due
consideration to the international arena in which these
institutions must compete. As you know, the Secretary in a number
of statements has directed attention to these concerns and intends
to play an active role.
A. Leveraged Buyouts
At the beginning of this legislative session, this Committee
held hearings on leveraged buyouts (LBOs), an issue which has
important implications for the competitiveness of U.S.
corporations. Contrary to forecasts that the 1986 tax rate
reductions would sharply reduce the LBO business, the amount of
such transactions has been rising. is this trend a healthy one for
U.S. corporations? in my view, judgement should be based primarily
on whether or not LBOs contribute to the competitive position of
U.S. corporations.
The arguments are many and are arrayed on both sides. On the
positive side: management works harder when it owns a significant
piece of the equity, high debt levels can act as an effective
discipline on management, and private firms are not subject to the
short-term performance demands of the stock market.
At the same time there are aspects of LBOs which are a basis
for concern. First, more transactions are being done for companies
in cyclical industries—chemicals, paper, etc. When the economy
finally slows down, what will happen to these firms, not just their
bondholders and stockholders, but also their workers and the
communities in which the firms operate? Second, under pressure to
service debt, heavily leveraged companies may cut back on R&D and
capital expenditures—in short, they may become more short-term
oriented when private than they were as public firms. Third the
level of LBO debt held by insured banks is growing, leading some to
question whether sufficient due diligence has been performed.
Finally, many of the brightest people coming out of college and
business schools are spending more time recapitalizing old firms
rather than rebuilding them or creating new ones.
The evidence on LBOs is ambiguous and incomplete. While
aggregate debt levels are not beyond historical bounds, levels in
certain industries and specific transactions can be cause for
concern. Moreover, the recent LBO trend has gone on against a
background of healthy economic expansion; how well will these

3
highly leveraged firms perform in a period of economic decline,
where past history cannot be the guide?
My view is that any legislative initiatives at this stage
should be limited, reflecting the inconclusive nature of the
evidence. Some steps proposed by the Administration, though, would
be useful to implement now—capital gains tax reductions, to
encourage long-term investment decisions, and clarification of the
ERISA laws, to indicate that pension fund trustees are not
obligated to take a bid higher than current market price from fear
of litigation.
A more sweeping and potentially more effective proposal would
be to make dividends tax deductible, so that companies do not have
tax incentives to replace equity with debt. The tax codes of
virtually all other major industrial countries exempt dividends in
whole or in part. But given the current size of the federal budget
deficit, such a revenue reduction would be difficult to achieve.
The elimination of the tax deduction for some or all interest
payments is an equally sweeping legislative initiative but, in my
view, is overreaching. It would adversely affect the competitive
position of U.S. corporations, by raising their cost of capital and
by favoring foreign companies, which can use tax-deductible debt,
in acquisition battles. Moreover, any attempt to eliminate the
deduction for "bad" debt—for example, debt involved in "hostile"
takeovers or raised by "excessively" leveraged firms—has and would
produce definitional and administrative nightmares.
B. Financial Institutions
Several recent legislation initiatives have important
implications for the competitive position of U.S. financial
institutions. The secular decline in the profitability of these
firms during the 1980's—commercial banks as well as thrifts—can
be traced in some considerable measure to the competition from
insolvent S&Ls which have been permitted to remain in operation.
Continuing to compete in the marketplace, these institutions have
pushed up deposit costs and reduced profit margins for commercial
banks as well as other thrifts. The S&L legislation, which was
recently and expeditiously cleared by the Senate, will resolve
these institutions and reduce the pressure.
In the broader international arena, the position of U.S. banks
has declined over the last two decades. In 1970, 7 of the world's
10 largest commercial banks, as measured by total assets, were U.S.
firms. That declined to 3 of 10 in 1980 and none today. Several
forces are at work, including the change in exchange rates,
especially that of the yen-dollar, and the more concentrated
structure of banking abroad compared to the U.S. But the
restricted range of activities permitted to U.S. banks also has

4
played a role. The broadening of permitted commercial bank
activities would enhance the competitive position of U.S. banks by
stabilizing and increasing their profitability. And it would allow
U.S. banks to meet their foreign competitors on a more level
playing field, since a number of foreign banks operating in the
U.S. are today permitted to engage in activities prohibited by
Glass-Steagall to their U.S. competitors. Moreover, the experience
some U.S. banks have developed abroad in these activities could be
used to good effect at home.
As the financial services industry continues to evolve, it may
well become clear that the distinction between commercial banks and
thrifts has less economic meaning than one between smaller,
"community" institutions and larger, "wholesale" institutions.
That is, there may be more in common among most thrifts and the
great majority of banks, all directed toward serving community,
retail financial needs than between these banks and their
multinational counterparts whose major focus is on the wholesale
banking needs of corporations and similar institutions. If this
does become the pattern of evolution, I believe it will have
important implications for, and simplify the development of,
legislation dealing with such issues as permitted banking
activities
and Markets
deposit insurance.
C.
Securities
Finally, how the markets for securities and related financial
instruments develop has important competitive implications.
The
October 1987 market break revealed important weakness in both the
institutional structure and regulation of these markets.
Competition among the marketplaces for stocks, options, and
financial futures is essential to continued capital market
innovation in the face of increased pressure of global competition.
But to operate efficiently and safely, these separate marketplaces
must be part of a system which reflects, both in institutional
structure and regulation, the economic functioning of one market.
There have been over the last year some positive developments
in this area. Both the circuit breaker mechanisms developed
jointly by the Chicago Mercantile Exchange (CME) and the New York
Stock Exchange and the cross-margining discussions between the CME
and the Chicago Board Options Exchange—initiatives of those
private organizations themselves—enhance the integrity of the one
market system. At the same time, little has been done to
coordinate and integrate the clearing and settlement systems of
these marketplaces. The October 1987 break demonstrated the
brittleness of these systems and the damage to the broader
financial system which could result from a rupture. An important
agenda item must be work on clearance and settlement systems, to
assure that the U.S. marketplaces relate effectively to one another
and are integrated into the evolving global clearance and

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settlement system. This issue will be high on the agenda of the
Working Group on Financial Markets.
I would be happy to answer any questions the Committee might
have on these or other issues.

TREASURY NEWS
ipartment of the Treasury • Washington, D.C. • Telephone 566-2041
Remarks by
The Secretary of the Treasury
•
Nicholas F. Brady
At The Treasury Historical Association's
"Bicentennial Lecture Series"
The Cash Room
May 3, 1989

Thank you, "Joe" (Henry Fowler). Good evening guests,
members and friends of the Treasury Historical Association. All
of us share an appreciation of this building and the
distinguished history of this Department. It is, as many of you
know, the third oldest continuously occupied federal building in
Washington.
A little more than a month ago, we began a public tour
program here in the building. So from now on, the general
public will have an opportunity to gain an appreciation for this
historic building.
One of the highlights of the public tour will be a
magnificent frame produced by the Bureau of Engraving and
Printing in 1893. It was recently restored and unveiled earlier
today as part of our Bicentennial Celebration. It now hangs in
the West Lobby around the corner from this room. I encourage you
to walk down there and take a look at it during the reception
that will follow Paul Volcker's remarks.
The display was produced to honor the 400th anniversary of
the Discovery of America. It was firs€ exhibited at the
Columbian Exposition, but it later was shipped all over the
country to other fairs and shows.
My role this evening is to open officially the celebration
of Treasury's Bicentennial Year. Two hundred years ago, the
world's oldest Constitutional government got its start. Just
this past Sunday, President George Bush travelled to New York to
celebrate the 2 00th anniversary of George Washington's
Inauguration as the first President of the United States.
Treasury's official beginning came in September of 1789,
when it became the second Executive Branch agency. Our founding

2
fathers recognized that one of the first duties of any government
is to provide a sound financial system for its citizens. The
standard of leadership set by the first Secretary of the
Treasury, Alexander Hamilton, still stands as the model for his
successors.
Within months of its founding, the Treasury Department was
by far the largest federal agency, both in numbers of staff and
in its scope. Today's organization, with eleven bureaus, seems
quite vast.
But in the early years many of the agencies that today
provide services to the American people in other cabinet
departments were situated at Treasury. Among them are the Coast
Guard, the Postal Service, the Public Health Service, the Bureau
of the Budget (now OMB), and the predecessor agencies of the
Departments of Interior, Commerce and Labor.
We are beginning our Bicentennial celebration with a lecture
series that will explore some of the themes of our history. The
first lecture is taking place this evening in this room that
itself is rich in history and symbolism.
Ulysses S. Grant, our 18th President, recognized this room's
potential even before it was completed. He decided to have his
inaugural ball, or reception as it was in this case, on March 4,
1869 in this room.
Traditionally, the evening festivities were in honor of the
outgoing president and his successor. That year, the event was
called a reception to avoid having to invite the unpopular expresident, Andrew Johnson.
Two thousand invitations were sold, slightly less than the
8 0,000 invitations sold for President Bush's inauguration. Each
ticket admitted one gentleman and two ladies.
Unfortunately, the event wasn't particularly well-planned.
The lack of any kind of coat check system caused, as one headline
read, "A WILD HUNT FOR OVERCOATS." Many of the guests had to
wait until 4:00 a.m. to retrieve their wraps and some clever
people entered the cloak room on the fourth floor through a
transom above the door of an adjacent room.
Now, before I turn the microphone back to "Joe", I want to
thank the Treasury Historical Association's board for the
ambitious program they are planning for this year. They began
with the Bicentennial Calendar that details the Department's
achievements day-by-day. In addition to tonight's lecture, they
have scheduled four more — on international trade, economic
growth, historic preservation, and the history of American tax
policy.

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Next fall, *Joe" Fowler will join several other former
Secretaries in a discussion of their roles and accomplishments.
And finally, in September, we're planning a gala birthday party.
Thank you all for coming this evening. It's a pleasure to
see the distinguished former Chairman of the Federal Reserve
Board, Paul VolckSr, here at Treasury. Now, I'd like to ask
"Joe" Fowler to introduce our distinguished speaker.

JOIWQ,.

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-1989