The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
TREASURY NEWS
Apartment of the Treasury • Washington, D.c. t Telephone 566-2041
CONTACT:
EMBARGOED FOR RELEASE AT 1:00 PM
April 1, 1991
Barbara Clay
202-566-5252
TREASURY NAMES IR A Q 'S AGENTS
The Treasury Department today identified 52 businesses and 37
individuals worldwide as front companies and agents of Iraq. The
action is part of an ongoing investigation by Treasury of Iraq’s
worldwide arms and financial complex.
In announcing the action, Treasury Deputy Secretary Robson said,
’’Exposing these companies and individuals strikes a blow at
Iraq's subterranean network in the world of arms trading and
clandestine financial operations."
As a result of today's action by the Treasury's Office of Foreign
Assets Control (OFAC), the companies and individuals are now
considered "Specially Designated Nationals", or agents of the
Government of Iraq, bringing them under the existing embargo and
asset freeze put in place by President Bush against Iraq. All
transactions with them under U.S. jurisdiction are prohibited
unless licensed by the Treasury Department.
In addition, Treasury today named 160 Iraqi-owned or controlled
merchant ships. These ships are now subject to embargo
provisions that prohibit their use by U.S. businesses and
individuals.
Doing business with an Iraqi specially designated national is
equivalent to doing business with the Government of Iraq, which
carries criminal penalties of up to $1 million per violation for
both corporations and individuals, as well as prison sentences of
up to 12 years for individuals. Civil penalties of up to
$250,000 may be imposed administratively.
OFAC has established a special Iraqi assets telephone hotline
through which anyone with information on companies or individuals
holding Iraqi assets or acting on behalf of Iraq may report that
information to OFAC.' All calls will be kept confidential. The
number is 202-566-6045.
NB-1204
oOo
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
April 1, 1991,
Contact:
Barbara Clay
202-566-5252
OPENING STATEMENT
JOHN E. ROBSON
DEPUTY SECRETARY OF THE TREASURY
APRIL 1, 1991
Today the Treasury Department is revealing the names of 89
businesses and individuals determined to be agents and front
companies in Iraq's arms procurement and financial network.
While this action may lack the spectacular drama of
Operation Desert Storm, it represents an important companion
effort by the United States to bring stability to the region. It
will disrupt the ability of Saddam Hussein or a successor to
employ this network to rebuild Iraq's military capacity or to
divert funds that rightfully belong to the Iraqi people for other
nefarious purposes or personal gain.
The events that culminated in Iraq's invasion of Kuwait last
August 2nd began long before.
For over the last decade, Saddam strengthened the sinews of
his war machine through a sophisticated network of front
companies and agents. Through it he got weapons, spare parts,
machine tools, and raw materials necessary to sustain his
militarized state. And through it he may have hidden away illgotten fruits of embezzlements from the Iraqi people. We want
the network exposed. And we want it neutralized.
By declaring these front companies and agents to be
Specially Designated Nationals of Iraq, we are putting the world
on notice that when you deal with them, you're dealing with
Saddam. And exposure of the network may also assist the allied
nations in discovering hidden wealth that could be used to pay
part of Iraq's war reparations.
I should point out, however, that despite considerable
speculation, neither we nor anyone else knows the specific dollar
amount of hidden assets. As the investigation of this network's
operations goes forward we hope to learn more. But at this point
it is inappropriate for us to speculate about the amount of
assets that may have been diverted.
Treasury's action today places these companies and
individuals under the trade embargo and asset freeze that
President Bush imposed following the invasion of Kuwait. This
NB- (12 0 5
means that they are cut off from their financial assets and
business relations within our jurisdiction and that their ability
to serve Saddam is disrupted.
Months of hard investigative work under the leadership of
Treasury's Office of Foreign Assets Control went into producing
this information. But the job is not finished. And I want to
emphasize that the fact that a name or a company isn't on this
list does not imply the U.S. Government's seal of approval. We
have many more cases under investigation.
Throughout the embargo we've worked closely with our allies.
We are asking them to join us in this effort by taking similar
steps to expose and neutralize Saddam's known agents and front
companies in their jurisdictions. Worldwide cooperation will
help eliminate this network.
Thank you.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April If 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $7,638 million of 13-week bills to be issued
on April 4, 1991 and mature on July 5, 1991 were
accepted today (CUSIP: 912794WR1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.78%
5.80%
5.80%
Investment
Rate
5.96%
5.98%
5.98%
Price
98.523
98.518
98.518
Tenders at the high discount rate were allotted 53%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
$20,858,635
1.679,215
$22,537,850
$3,184,790
1,679.215
o
o
Federal Reserve
Foreign Official
Institutions
TOTALS
in
Type
Competitive
Noncompetitive
Subtotal, Public
CO
Accepted
36,440
6,285,390
23,175
42,055
51,760
39,140
116,300
22,030
7,320
41,020
31,800
104,000
837.225
$7,637,655
1o
Received
36,440
21,508,575
23,175
42,665
55,230
39,610
1,761,260
56,730
7,320
41,020
31,800
870,450
837,225
$25,311,500
</>
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
2,486,935
2,486,935
286,715
$25,311,500
286,715
$7,637,655
An additional $138, 685 thousand of bills will be
issued to foreign official institutions for new cash.
N B -1 206
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 1, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $7,612 million of 26-week bills to be issued
on April 4, 1991 and mature on October 3, 1991 were
accepted today (CUSIP: 912794XH2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Discount
Rate
Low
High
Average
Investment
Rate
6.04%
6.06%
6.06%
Price
97.083
97.073
97.073
Tenders at the high discount rate were allotted 70%.
The investment rate is the equivalent coupon-issue yield
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,975
20,482,810
13,805
31,895
38,390
29,465
1,479,765
36,570
5,370
47,415
17,835
566,500
747.970
$23,525,765
Accented
27,975
6,523,385
13,805
31,895
37,190
29,165
51,465
20,070
5,370
46,970
17,835
59,000
747.970
$7,612,095
Type
Competitive
Noncompetitive
Subtotal, Public
$19,782,815
1.280.365
$21,063,180
$3,869,145
1.280.365
$5,149,510
2,050,000
2,050,000
412.585
$23,525,765
412.585
$7,612,095
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $191, 215 thousand of bills will ;
issued to foreign official institutions for new cash.
NB-1207
12139
RTR-
Hog 10
O^GOG
a 0514BC-TEXT-TREASURY/IRAQ-MULTITAKES
THE REUTER TRANSCRIPT REPORT
TREASURY DEPUTY SECRETARY JOHN ROBSON NEWS CONFERENCE
Date: April 1, 1991
Topic: The release of a list of front companies and agents
of the Iraqi government
Location: Treasury Department, 15th St. and Penn. Ave. NW
Time: 1 p.m.
*****
The editor of the report is Steve Ginsburg. Tim Ahmann, Eric
Beech, Eugenio Ramos, Peter Ramjug and Paul Schomer also are
available to help you. If you have questions, please call 202898-8345. For service problems inside the District of Columbia,
call 202-898-8355; outside D.C., call 1-800-537-9755.
*****
*****
This transcript is provided by News Transcripts, Inc. If
questions of content arise, call 682-9050
*****
JOHN E. ROBSON (Deputy Secretary of the Treasury):
Good afternoon. Today the Treasury Department is revealing the
names of 89 businesses and individuals determined to be agents
and front companies in Iraq's arms procurement and financial
network.
While this action may lack the spectacular drama of
Operation Desert Storm, it represents an important companion
effort by the United States to bring stability to the region. It
will disrupt the ability of Saddam Hussein or his successor to
employ this network to rebuild Iraq's military capacity, or to
divert funds that rightfully belong to the Iraqi people for
other nefarious purposes or personal gain.
The events that culminated in Iraq's invasion of
Kuwait last August 2nd began long before.
For over the last decade, Saddam strengthened the
sinews of his war machine through a sophisticated network of
front companies and agents. Through it he got weapons, spare
parts, machine tools, and raw materials necessary to sustain his
militarized state. And through it he may have hidden away illgotten fruits of embezzlements from the Iraqi people. We want
the network exposed and we want it neutralized.
By declaring the front companies and agents to be
Specially Designated Nationals of Iraq, we are putting the world
on notice that when you deal with them, you are dealing with
Saddam. And exposure of the network may also assist the allied
nations in discovering hidden wealth that could be used to pay
part of Iraq's war reparations.
I
should point out, however, that despite considerable
speculation, neither we nor anyone else knows the specific
dollar amount of hidden assets. As the investigation of this
network's operation goes forward, we hope to learn more. But at
this point, it is inappropriate for us to speculate about the
amount of assets that may have been diverted.
¡12139
Treasury's action today places these companies and
(individuals under the trade embargo and asset freeze that
(president Bush imposed following the invasion of Kuwait. This
[means that they are cut off from their financial assets and
[business relations within our jurisdiction, and that their
[ability to serve Saddam is disrupted.
Months of hard, investigative work under the
leadership of Treasury's Office of Foreign Assets Control vent
into producing this information. But the job is not finished.
And I want to emphasize that the fact that a name or a company
isn't on this list does not imply the U.S. government's seal of
approval. We have many more cases that are under investigation.
Finally, throughout the embargo we've worked closely
with our allies. And we are asking them to join us in this
effort by taking similar steps to expose and neutralize Saddam's
known agents and front companies in their jurisdictions.
Worldwide cooperation will help eliminate this network.
Thank you. Rick Newcomb and I will be pleased to
answer your questions.
Q:
Why did you wait so long?
ROBSON: The process of examining— first, I don't
think we waited too long; and second, that this is a complicated
set of facts that bore careful investigation. We have been in
that investigation. That investigation continues, and we want
to be sure as we go forward with it that when we make these
disclosures, they're based on the best evidence we can get.
Q: The two American firms listed— Bay Industries and
Matrix (phonetic)— can you tell us with some specificity what
they did or were engaged in, and what their assets are?
Control):
R. RICHARD NEWCOMB (Director, Office of Foreign Assets
I think you're referring to—
Q:
Microphone, please.
NEWCOMB: — you're referring to two companies where we
took individual blocking actions; these are companies we
determined to be under, controlled by Iraq in the United States.
We base it on information which we gathered over the period of
time we were looking into this. That's not information that
we've here to date made public, nor are we opening our
investigative files on those.
Q: When did you take the blocking action against
those two companies?
NEWCOMB: We took the blocking action on the Soen
(phonetic) Ohio company, Matrix Churchill in September. We took
the blocking action on the company in southern California last
week.
Q: Mr. Robson, I'm trying to understand exactly what
you hope to gain by releasing this list. Do you hope that no
12139
one doing business— anyone doing business doesn't do business
with these firms, or knows that if they do do business with any
of these firms or individuals, that they're then subject to
these series of penalties?
ROBSON: Well, it's a combination of things. Certainly
one of our primary goals is to illuminate the people who are
players in this network and were instrumentalities or agents of
Iraq. That hopefully in one case will make people very wary of
doing business; in other cases it will bring in— trigger the
operation of sanction laws in this country and others that
preclude them doing business; and, third, it will perhaps stem
or spark other investigations that will lead to the uncovering
of further members of the network and/or assets.
Q: Can you give us some kind of idea for the
involvement of some of these companies— what type of involvement
you're talking about? For instance, Iraqi Airways— are you
talking about just their normal transportation functions? What
are you talking about?
ROBSON: Well, the qualifications for becoming listed
here are that you are an agent or instrumentality of the
government of Iraq.
Q: So they could be on that list simply because
they're the government-owned airline.
ROBSON: It does not mean that you have in every case
performed activities that are unlawful.
Q: Does it mean it's illegal to fly Iraqi Air for an
American citizen? What do you do if someone—
ROBSON:
It has been illegal since the embargo was
imposed.
Q: Are there any companies in here that were
particularly involved in arms trading more so than any other?
And could you perhaps describe a typical transaction? Is there
anything particularly clandestine about it, or did they just
purMon Apr 1, 1991 14:41
12141
I RTR-hase something and ship it to Iraq?
ROBSON:
Rick, do you want to answer that.
NEWCOMB: Perhaps half of these companies, give or
!take a small percentage, are involved in arms purchases or
equipment that can be used to build arms or whole machines that
are involved, precision instruments, possible dual-use items and
so forth.
Q: Does that include this sewing machine company
I that's on the list?
ROBSON: The companies on there are— insofar as
individually identifying what each of them has done is not a
I matter that we will be getting into.
Q: What kind of cooperation are you getting
internationally?
ROBSON:
Good.
Q: Can you be more specific. Can you state that
other governments will freeze any assets of these companies,
such as the government of (inaudible)?
ROBSON: Well, bear in mind that most of the allies
who were part of the coalition have followed the U.N. sanctions
with some kind of internal sanctions of their own. This would
expose those companies or people to those sanctions, and would
certainly make it easier for their law enforcement agencies to
examine the question of whether they have violated the
I sanctions.
Q: Do you anticipate any of those companies' assets
being frozen in the UK, for instance?
ROBSON:
I don't want to speak for the United Kingdom
on that.
Q: Have any of the other foreign companies had their
assets frozen— any on the list at this point?
ROBSON:
Q:
Have any of the other foreign companies—
Have any of the foreign companies on the list.
NEWCOMB: Without going into specifics about any
companies on the list, I can say that other governments have
taken actions within their jurisdiction to prohibit them from
conducting transactions.
Q: Can you quantify in any way what this designation
of these additional business and individuals does to Saddam
Hussein economically?
12141
ROBSON: I think that would be very difficult to do. I
I think what we have tried to do is, as I said earlier, illuminate
I the presence of this group of companies and individuals, make it
I very clear that they are agents and instrumentalities of Iraq,
I and by virtue of that hopefully put a quarantine sign on them
I that will discourage others from doing business and lead to law
I enforcement activity where it's appropriate.
Q: You mention that the California firm— I think the
| (inaudible) Michigan firm— was last fall; I would say it's
I probably safe to asstpte, from what you said, that the Iraqi
I Airlines, it's been illegal to fly them probably since the
sanctions first began last summer. What on this list is really
I new?
ROBSON:
In respect of not having been publicly
identified?
Q:
Well, yes, what exactly is new here?
ROBSON:
Well, a good deal of it is.
Rick?
NEWCOMB: I think this is an important first step in a
series of steps, as Mr. Robson has pointed out in his remarks,
that the Treasury Department will take to identify the full
breadth and extent of this network worldwide.
Q: Can you describe the number of agents you had
working on this, what they were doing? Were you informationI sharing with other countries, et cetera?
I
NEWCOMB: Yes, we have information shared with other
countries; we've worked with a number of informants; people have
come forward with information for us. The government of Kuwait
■ has been of great assistance in this to us. We have a variety
of sources. We've utilized the entire federal law enforcement
community to aid us in our effort, and we'll continue to do so.
Q: Bay Industries is on the list, of course— it's one
of the two companies. Now, Mr. Wylie is supposed to control
that, yet he is not one of the individuals listed. Can you
explain that, please?
NEWCOMB: Mr. Wylie's assets were blocked, as were Bay
Industries. But we felt that the blocking action, the
individual notification that we gave to him, and the financial
institutions that we suspected had his accounts were sufficient
notice. The company itself is indeed on the list, however.
*****
*****
The Reuter Transcript Report
John Robson/News conference
April 1, 1991
MORE
Mon Apr 1, 1991 14:42
12168
RTR-
aO525BC-TEXT-TREASURY/IRAQ-1STADD
THE REUTER TRANSCRIPT REPORT
TREASURY DEPUTY SECRETARY JOHN ROBSON NEWS CONFERENCE
Date: April 1, 1991
(First Add)
*****
x x x
list, however.
Q: A follow-up.
his status (inaudible)?
NEWCOMB:
Can you identify his whereabouts or
As far as we know, he's still in California.
Q: I notice that on your list there are no companies
or people in any of the financial centers, let's say— the Virgin
Islands, the Cayman Islands, Lichtenstein, Switzerland, the
Antilles, places like that.
(Inaudible).
ROBSON: As I said earlier, our investigation is a
continuing one, and we expect it to be going on for some while.
Q: Are you getting cooperation from the countries he
referred to or from our agents (inaudible)?
ROBSON: I'll just echo what Mr. Newcomb said, which
is just that we are getting good cooperation from countries
around the world.
Q:
(Inaudible).
ROBSON: I don't want to identify any particular
countries with which we are cooperating. We're cooperating with
as many as we can.
Q: One follow-up, then. Are there any countries
which are not cooperating with you which you would like to get
more cooperation out of?
ROBSON:
I'm not aware of any.
Q: Sir, March 15th was the deadline for U.S.
companies to state their claims to you of damages. Can you give
a rough ballpark estimate at this time about what the damages
incurred by U.S. companies is?
ROBSON:
We don't have them finalized yet.
Q: Has nobody at State Department or some place asked
you (inaudible) U.N. cease-fire resolution, some ballpark
figure?
NEWCOMB:
Yes, we have worked closely with the State
I 12168
I Department in the issue of the U.N. resolution; we've worked as
I far as the figures that we have; we're going thrpugh the figures
I to attempt to verify their validity. I believe any attempt at
this point to speculate on the amount that might be involved
I wouldn't accurately reflect exactly what's at stake and what the
I issues are. I will, however, say that as far as blocked Iraqi
[ assets we've recorded somewhere in the neighborhood of one
I billion dollars blocked domestically.
I
Q: But, sir, are you saying that you've given— you've
I given a ballpark figure to State, but you don't want to make it
I public? Is that correct?
NEWCOMB: Oftentimes these figures can be double
counted because of the nature of people that are making the
claims, and we need to go through a verification process to
verify their validity. This was an exercise that we went
through in the Iran process in the 1979-1980 Iran hostage
crisis. It's a similar process.
Q: I must admit to some curiosity about why you won't
reveal what some of these companies may or may not have done.
What reasons would there be for not saying that this company was
involved in some sort of arms procurement, or, is there a
logistical reason, an investigatory reason, a legal reason why—
I
ROBSON: Well, there are investigatory reasons that
the particular activities of one or another of the companies or
individuals on the list are not being divulged.
Q: You have a lot of Jordanians on this list. How
much cooperation— could you characterize the cooperation of the
Jordanian government, and do you expect assets within Jordan and
under Jordanian nationals' control to be frozen in that country?
NEWCOMB: We have met on many occasions with the
Jordanian people, or with the Jordanian ambassador to the United
States. We are receiving cooperation from them; however, you are
correct——there are some Jordanian companies on this list. We're
continuing to look in that area.
company."
owned?
Q: Can you define just what you mean by a "front
Does it have to be Iraqi owned, Iraqi government
ROBSON: No, it has to be either an Iraqi owned or
controlled entity, or one that has demonstrated a pattern of
dealing as agent for the Iraqi government.
Q: And is this, these activities all since August
2nd, or are you talking about things these companies might have
done before the invasion?
ROBSON:
Q:
Both sides of the August 2nd date.
So if a company— I mean there is nothing illegal,
12168
there are no sanctions involved with— before August 2nd, why
would you include a company cn your list?
ROBSON: There are two reasons. One is there may be—
(there may in some cases be violation of export control laws with
¡respect to certain kinds of technology, and second, even in
¡those cases where the particular transaction may not have been a
[violation of the particular country's export control laws, they
[were nonetheless part of the Iraqi network that has led to the
[arms buildup and we believe that as agents, and
[instrumentalities of the government, they ought to be
identified.
Q: So in fact there are probably some companies on
¡this list who've really done nothing wrong under the law, is
that correct?
ROBSON:
Who have done nothing that is illegal; that's
possible.
Q: In your investigation, were you able to ascertain
if any of the money from any of these companies was being
skimmed off by Saddam Hussein, by members of his family? Did
you get to that level at all?
ROBSON: I think we've spoken about as much ont he
money skimming and hidden asset issue as we're going to at this
point.
Q: Isn't it illegal for a company or an individual to
act as an agent of the government and not declare itself
(inaudible)?
ROBSON: Well, it depends what you're up to, and in
this case these particular entities were acting as agents or
instrumentalities of the government of Iraq, and we believe that
it is in the interest of the world to make that fact known. So—
Q: Given the size of this network— you said you've
got (inaudible) businesses and individuals, but there's— you're
continuing your investigation. How much more is out there,
either fractionally, proportionally or rhetorically?
ROBSON: Well, I think that's going to be revealed as
this investigation goes forward, but we have at the moment a
number of other leads that we are following.
Q: But what percentage of the network have you
identified, designated?
ROBSON: Well, it's sort of like an iceberg. You
don't know how big it is till you've tracked it to its end. We
think we're off to a good start, but there are many more cases
that are under investigation.
Q:
How big is the iceberg so far in terms of—
12168
(Laughter) — in terms of the arms, illegal arms trading that you
have found so far, are we talking about a few million dollars, a
few hundred million dollars, perhaps a billion dollars? How
much of the arms trade— how large is it that you've found so
far?
ROBSON: Well, as I say the iceberg we found is 89
indMon Apr 1, 1991 15:01
12169
RTR-viduals and entities high, and we are still investigating
the rest of it. In terms of the dollar aspects of it, I think
I've indicated that we're simply not going to speculate on that
at the moment.
Q: Well, even with an iceberg, you know, that twothirds of it is below water—
Q:
(Inaudible) in addition, you know, in addition
(inaudible) identifying these companies, what additional
enforcement steps are you taking today that you have not
previously (inaudible)? (Inaudible) that you have not done
differently?
ROBSON: Well, for one thing these entities and
individuals are now identified around the world as subject to
the sanctions. Second, there are now clear opportunities for
further investigation to determine whether there was sanction
busting, and third, the investigations of them and companies
that were their colleagues are now going forward.
Q: Are any of these companies having their assets
today frozen for the first time (inaudible) identification
process? And how many of them are?
ROBSON: Mr. Newcomb says none here in the United
States, although there may be ones that are taking place abroad.
Q: Would you be able to give us a list of when
enforcement action actually has been taken on a case-by-case
basis? In other words, one company, last September, there was
an enforcement action; another one last week. Would you be able
to provide a list to us of when you actually took enforcement
action?
ROBSON: When we have taken— when we have taken
enforcement actions?
Q: When you already have taken— when Treasury's
actually taken an action such as closing down a particularly
entity, could you give us a list of the dates of when you've
done that and what kind of action you may have taken against
these identified individuals or organizations.
ROBSON: We generally make those public as they
happen, and would continue to do that. Yes, ma'am?
Q: Why is Hachette not on the list, some French
company that supposedly publishes some American magazines, and
there was some talk that they were kind of (inaudible)?
ROBSON: First, let me say that, as I said in my
remarks, the fact that a company isn't on the list is not
necessarily a determination as to its status as an
instrumentality or agent of Iraq. Second, just let me say that
my understanding of the Hachette situation is that there's an
12169
allegation that they have a minority ownership in them, as Iraqeither -sponsored or -controlled. And I'll leave it at that.
***** .
*****
The Reuter Transcript Report
John Robson/News conference (first add)
April 1, 1991
MORE
Mon Apr 1, 1991 15:01
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: 3
Author(s):
Title:
Treasury Secretary John Robson News Conference
Date:
1991-04-01
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
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: 11
Author(s):
Title:
Date:
ABC News, "This Week With David Brinkley" Guests: Nicholas Brady (Secretary of the
Treasury), Michael Eisner (Chairman and CEO, the Walt Disney Company), Robert Hormats
(Vice Chairman, Goldman Sachs International)
1991-03-24
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Department off the Treasury • Washington, D.C. • Telephone ses*204i
FOR RELEASE AT 4:00 P.M.
April 2, 1991
" '1
CONTACT:
° u ° u
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 approxi
mately $14,400 million, to be issued April 11, 1991.
This
offering will result in a paydown for the Treasury of about $5,250
million, as the maturing bills are outstanding in the amount of
$19,651 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Monday, April 8, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. 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 10, 1991, and to mature July 11, 1991
(CUSIP No. 912794 WY 6), currently outstanding in the amount
of $10,498 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $7,200
million, to be
dated April 11, 1991,
and to mature October 10, 1991
(CUSIP
No. 912794 XJ 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 April 11, 1991.
In addition to the
maturing 13-week and 26-week bills, there are $9,807 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 aggre
gate amount of maturing bills held by them. For purposes of deter
mining such additional amounts, foreign and international monetary
authorities are considered to hold $735
million of the original
13-week and 26-week issues. Federal Reserve Banks currently hold
$ 895
million as agents for foreign and international monetary
authorities, and $7,078 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).
NB.-1 208
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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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.
1/91
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. Com
petitive 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 m Treasury bills maturing on that date. Cash adjustments
be fflade for differences between the par value of the
maturing bills accepted in exchange and the issue price of the
new bills.
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.
8/89
TREASURY NEWS
bepartmunt of the Treasury • Washington, D.c. • Telephone §66-2041
FOR RELEASE AT 4:00 P.M.
April 3, 1991
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION $8,500 MILLION OF 7-YEAR NOTES
The Department of the Treasury will auction $8,500 million
of 7-year notes to refund $5,162 million of 7-year notes maturing
April 15, 1991, and to raise about $3,350 million of new cash.
The public holds $5,162 million of the maturing 7-year notes,
including $116 million currently held by Federal Reserve Banks
as agents for foreign and international monetary authorities.
The $8,500 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount. Tenders for such accounts will be accepted at
the average price of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
for their own accounts hold $216 million of the maturing securi
ties 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-12Q9
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
TO BE ISSUED APRIL 15, 1991
April 3, 1991
Amount Offered:
To the public .................. $8,500 million
Description of Security:
Term and type of security ...... 7-year notes
Series and CUSIP designation .... F-1998
(CUSIP No. 912827 A4 4)
Maturity date .................. April 15, 1998
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, 00 0
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 aver
age 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
Deposit guarantee by
designated institutions ........ Acceptable
Key Dates:
Receipt of tenders .............
a ) noncompetitive ............
b ) competitive ...............
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury ..
b) readily-collectible check ..
Wednesday, April 10, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Monday, April 15, 1991
Thursday, April 11, 1991
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 4, 1991
,
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $10,811 million of 52-week bills to be issued
on April 11, 1991 and mature on April 9, 1992 were
accepted today (CUSIP: 912794YH1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 87%
5. 88%
5. 88%
Investment
Rate
6.25%
6.26%
6.26%
Price
94.065
94.055
94.055
Tenders at the high discount rate were allotted 80
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
28,085
29,432,605
18,600
31,495
53,115
22,745
1,733,320
23,395
7,220
36,330
8,425
878,440
404.940
$32,678,715
Accepted
28,085
9,545,830
18,600
31,495
47,905
21,145
472,010
16,995
7,220
36,330
8,395
172,440
404.940
$10,811,390
Type
Competitive
Noncompetitive
Subtotal, Public
$28,781,775
886.940
$29,668,715
$6,914,450
886.940
$7,801,390
2,850,000
2,850,000
160.000
$32,678,715
160.000
$10,811,390
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $185,000 thousand of bills will be
issued to foreign official institutions for new cash.
PUBLIC DEBT NEWS
Department of the Treasury
•
Bureau o i\h e Public Debt • W ashington, D C 20239
FOR RELEASE AT 3 : 0 0 PM
April 4, 1991
Contact: Peter Holienbach
(202) 376-4302
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MARCH 1991
Treasury’s Bureau of the Public Debt announced activity figures for the month of March 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$495,965,790
Held in Unstripped Form
$372,581,055
Held in Stripped Form
$123,384,735
Reconstituted in March
$4,447,260
The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures are
included in Table VI of the 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
P A -51
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
A p r il 7, 1991
ADDRESS BY DR. DAVID C. MULFORD, GOVERNOR FOR THE UNITED STATES,
AT THE THIRTY-SECOND PLENARY SESSION
I w ant to ta k e t h i s o p p o rtu n ity to th a n k th e Government o f Ja p a n
and th e p e o p le o f Nagoya f o r th e warm welcome we have r e c e iv e d .
I a ls o
w ant to c o n g r a tu la te G overnor Hashimoto on h i s e l e c t i o n as Chairman o f
th e
Board
of
G overnors
of
th e
Bank,
and
P r e s id e n t
Ig le s ia s
and
th e
management o f th e Bank f o r th e e x c e lle n t p r e p a r a tio n s th e y have made f o r
t h i s T h irty -s e c o n d Annual M eeting o f th e In te r-A m e ric a n Development Bank.
T h is i s the f i r s t i n t e r n a t i o n a l f i n a n c i a l m e etin g s in c e th e end o f
th e
P e r s ia n
m a rk e ts
G ulf w ar.
T hroughout
p e rfo rm ed e x c e p tio n a lly
s i t u a t i o n i s mixed.
a lo n g t h i s p a th .
o u r r e c e s s io n .
th e
w e ll.
p e rio d
of
P r e s e n tly ,
th e
th e
w ar,
fin a n c ia l
g lo b a l economic
Some c o u n tr ie s a re doing w e ll and o u g h t to c o n tin u e
In th e U .S, we e x p e c t we w i l l s h o r t l y be coming o u t o f
We have a b e t t e r p a t t e r n o f e x te r n a l b a la n c e s among th e
m ajor i n d u s t r i a l c o u n tr ie s , b u t th e re a re c h a lle n g e s we w i l l need to fa c e
in th e coming m onths.
These in c lu d e many complex economic and f i n a n c i a l
problem s in th e M iddle E a st fo llo w in g th e G ulf Warj th e r e s t r u c t u r i n g o f
th e E a s te r n European econom ies and r e l a t e d a d ju stm e n t problem s in Europe;
and,
o f c o u rs e ,
NB-1211
th e c h a lle n g e s we h e re fa c e in th e a lre a d y e s ta b lis h e d
2
d e m o crac ie s
and
m arket;-based
C a rib b e a n .
V7e w i l l
need
econom ies
th e
of
re s o u rc e s
L a tin
and
A m erica
th e
e x p e r tis e
and
th e
of
th e
m u l t i l a t e r a l i n s t i t u t i o n s to overcome th e s e c h a lle n g e s .
At p a s t m eetin g s o f th e IDB, we have spoken o f new o p p o r tu n itie s
w hich were ex p ec te d to u n fo ld f o r
th e h e m isp h e re .
Today,
ra th e r
th an
lo o k in g fo rw a rd to e v e n ts to come, we f in d o u rs e lv e s in th e m id st o f a
p e r io d o f m ajor change.
The p ro c e ss o f b u ild in g more v i b r a n t econom ies
In th e hem isphere i s now underw ay.
L ead ers in th e r e g io n a re p u ttin g in
p la c e economic p o l i c i e s which d e m o n strate t h e i r d e te r m in a tio n to in c re a s e
grow th,
improve
L ik e w ise ,
th e
perform an ce
and l i f t
IDB now h as
a
r o le
th e
to
p r o s p e r ity
p la y
th a t
of
is
th e ir
c e n tra l
p e o p le .
to
th e
tr a n s f o r m a tio n o f th e h em isp h ere. I t a ls o has th e re s o u rc e s to c a r r y o u t
i t s m is s io n .
F o rw ard -lo o k in g
C a rib b e a n
h o ld
th e
s te p s
p ro s p e c t
Im p ressed by th e e f f o r t s
new
E n te r p r is e
fo r
th e
by new le a d e r s
fo r
a
b rig h t
o f th e s e le a d e r s ,
A m ericas
in
L a tin America and th e
f u tu r e
fo r
th e
re g io n .
P r e s id e n t Bush lau n ch e d th e
In itia tiv e
la s t
June
as
a means
of
p ro m o tin g p r o s p e r i t y f o r th e h em isp h ere.
The P r e s id e n t p ro p o sed s p e c i f i c
a re a s
o f g re a te s t
im p o rtan ce
to
a c tio n s
in a l l
L a tin A m erica and th e
th e m ajor p o lic y
C arib b ea n .
He
is s u e d a c h a lle n g e to a l l o f us and com m itted th e U .S. to see k more open
tr a d in g
arran g em en ts
th ro u g h o u t th e r e g io n ,
among
our
c o u n tr ie s ,
to
in c r e a s e
in v e stm e n t
to reduce o f f i c i a l d e b t b u rd en s and to s tim u la te
3
n a t i o n a l e n v iro n m e n ta l program s.
The P r e s id e n t knows t h a t he h as touched
s e n s i t i v e chords o f hope in L a tin America and th e C arib b ean and t h a t th e
E n te r p r is e I n i t i a t i v e co u ld be th e most p ro d u c tiv e h e m isp h e ric i n i t i a t i v e
e v er.
S u c c e s s fu l e f f o r t s
in a l l
th e s e m ajor p o lic y a re a s by n a tio n a l
governm ents and by th e IDB can la y th e b a s is f o r l a s t i n g
grow th and a
b e t t e r l i f e f o r a l l our p e o p le s .
The IDB:
C h a rtin g
a Course
fo r
P r o s p e r ity
in L a tin America and the
C arib b ean
At
th e
tim e
of
its
la s t
re p le n is h m e n t,
th e
In te r-A m e ric a n
D evelopm ent Bank so u g h t to assume a more c e n t r a l r o l e in th e re g io n .
I
would u n d e rs c o re on a p e rs o n a l n o te t h a t many is s u e s w hich were r a is e d in
th e re p le n is h m e n t p ro c e s s were s u c c e s s f u lly re s o lv e d th ro u g h n e g o tia tio n
and accom m odation on a l l s id e s .
A new v i s i o n was s e t f o r t h f o r th e Bank,
g iv in g i t th e mandate to move beyond i t s t r a d i t i o n a l r o le to become a key
p la y e r in th e m ajor economic and f i n a n c i a l is s u e s f a c in g our hem isphere
as t h i s c e n tu ry comes to a c lo s e .
The IDB sh o u ld be re c o g n iz e d and c o n g r a tu la te d f o r moving forw ard
to d e fin e and b e g in im plem enting i t s m is s io n .
In th e th r e e y e a rs o f h is
P re s id e n c y , E nrique I g l e s i a s has made one g ia n t s te p in each y e a r . F i r s t
he c o n clu d ed th e l a r g e s t re p le n ish m e n t in th e h i s t o r y o f th e Bank.
Then
he im plem ented a m ajor reform o f th e s t r u c t u r e and o r g a n iz a tio n o f th e
Bank.
Now he
is
a rtic u la tin g
th e
b ro a d e r m issio n
s e t t i n g in p la c e a program to r e a l i z e t h i s m is sio n .
to
d a te r e s u l t s
from th e f a c t t h a t E n riq u e I g l e s i a s
o f th e
Bank and
Much o f h i s su c c e ss
i s a p o l i t i c a l as
w e ll as a f i n a n c i a l le a d e r .
a ll
p a rtie s
who have a s ta k e
borrow ing members;
and NGOs;
He has prom oted
in
th e
g r e a te r i n t e r a c t i o n betw een
in s titu tio n :
bo rro w in g and n o n
th e p u b lic s e c to r and p r i v a t e
s e c to r ;
governm ents
and management, s t a f f and th e Board o f D ir e c to r s .
By a sk in g th e 1DB to assume th e le a d in im p o rta n t e lem en ts o f th e
E n te r p r is e
fo r
th e
A m ericas
In itia tiv e ,
P r e s id e n t
U .S. s u p p o rt and c o n fid e n c e in th e ID E 's new s t a t u r e .
Bush h as
e x p re sse d
The In te r-A m e ric a n
Development Bank w i l l be an im p o rta n t f o r c e f o r a c ti o n in is s u e s o f v i t a l
im p o rtan ce to L a tin America and th e C arib b ea n -- p a r t i c u l a r l y , though n o t
e x c lu s iv e ly
on th o s e
is s u e s
h ig h lig h te d
in
th e EAI.
w e ll- p la c e d to h e lp im plem ent our s h a re d v i s i o n .
The Bank i s
now
Our ta s k as G overnors,
E x e c u tiv e D ir e c to r s , and p r o f e s s io n a l Bank s t a f f i s to h e lp g e t th e jo b
done.
A t t r a c t i n g In v e stm e n t to L a tin America and th e C aribbean
A number o f c o u n tr ie s in L a tin A m erica and th e C arib b ean have made
s u b s ta n tia l
re fo rm s.
p ro g re s s
in
im plem enting
These a re fun d am en tal s te p s
econom ies.
macroeconomic
and,
s tru c tu ra l
to w ard s tr o n g e r and more v ib r a n t
However, w ith o u t th e needed c a p i t a l to fin a n c e grow th, L a tin
A m erican and C arib b ean c o u n tr ie s w i l l n o t e x p e rie n c e th e f u l l b e n e f i t s o f
b ro a d economic p o lic y re fo rm s.
The need to a t t r a c t c a p i t a l in o rd e r to b u ild upon refo rm s a lre a d y
underway
is
at
th e
h e art
of
e v e ry
R eso u rces in to d a y 's w o rld a re lim it e d .
c o u n tr y 's
developm ent
c h a lle n g e .
We a l l know t h i s , y e t o u r p o lic y
a c ti o n s
banks
o f te n f a i l
a re
no
to re c o g n iz e t h i s
lo n g e r
econom ic grow th.
e x te n d in g
lo a n s
th a t
For exam ple,
p ro v id e
b ro a d
com m ercial
s u p p o rt
fo r
B ut, more d e b t i s n o t th e answ er anyway; we a l l le a r n e d
t h a t le s s o n in th e 1980s.
c o n s tra in ts
re a lity .
Nor can c r e d i t o r governm ents a v o id p r e s e n t
on t h e i r a b i l i t y
to
p ro v id e
economic a s s i s t a n c e .
E a s te rn
Europe and th e M iddle E a s t have added h e a v ily to demands f o r c r e d i t o r
governm ent re s o u rc e s .
C re a tin g a c lim a te a t t r a c t i v e
b e in g g iv e n a new p r i o r i t y
gro w th .
L a tin
American
to p r i v a t e
in v e stm e n t i s
th e r e f o r e
as a so u rc e o f c a p i t a l f o r developm ent and
and
C arib b ean
c o u n tr ie s
must
compete
more
a g g r e s s iv e ly to draw th e i n t e r e s t o f in v e s t o r s and to re c o v e r th e sa v in g s
o f t h e i r own p e o p le .
T his i s where th e IDB must s te p fo rw ard to s u p p o rt
th e re fo rm s in L a tin America and th e C arib b ean -- f i r s t to l i b e r a l i z e and
open n a t i o n a l economies and th e n to h e lp c o u n tr ie s become c o m p e titiv e in
th e g lo b a l c a p i t a l sw e e p stak e s.
The
IDB i s
a lre a d y
moving
fo rw ard
on a new in v e stm e n t
le n d in g program to advance a d d i t i o n a l refo rm s needed to h e lp
open and improve t h e i r in v e stm e n t re g im e s.
s e c to r
c o u n tr ie s
Loans u n d e r t h i s program w i l l
make a c r i t i c a l d if f e r e n c e in th e c o m p e titio n f o r c a p i t a l .
We u rg e th e
Bank and e l i g i b l e c o u n tr ie s to p ro c e ed a g g r e s s iv e ly now to im plem ent t h i s
new g ro u n d -b re a k in g program and to b r in g th e f i r s t lo a n s to th e Board as
q u ic k ly as p o s s ib le .
6
The U n ited S ta te s w i l l p ro v id e
im p o rta n t s u p p o rt and in c e n tiv e s
£ 01* c o u n tr ie s w hich move in t h i s d i r e c t i o n th ro u g h th e E n te r p r is e f o r th e
A m ericas I n i t i a t i v e .
We a lre a d y have a u th o r i t y
to
red u ce c o n c e s s io n a l
fo o d a s s i s t a n c e d e b t (PL-480) and a re re a d y to b e g in n e g o tia tio n s as soon
as c o u n tr ie s q u a lif y .
th e a s s o c ia te d
th e
E nvironm ental Framework A greem ents w hich w i l l
mechanisms
s u p p o rt
lo c a l
We a re n e a r ly re a d y to e n te r in to n e g o tia tio n o f
fo r
c h a n n e llin g
lo c a l
e n v iro n m en tal program s.
c u rre n c y
We a r e
in te re s t
a ls o
e s ta b lis h
paym ents
to
s e e k in g a d d itio n a l
a u t h o r i t y from our C ongress to red u ce U .S. AID, Eximbank and CCC d e b t and
to f a c i l i t a t e
d a b t- f o r - n a t u r e swaps.
n e c e s s a ry a u th o r iz in g l e g i s l a t i o n
We hope to o b ta in p assag e o f th e
in t h i s
s e s s io n o f C ongress and would
welcome y o u r s u p p o rt.
As p a r t
a u th o rity
p ro v id e
fo r
o f d is c u s s io n s
c o n tr ib u tio n s
fu rth e r
re g im e s.
d ire c t
w ith o u r C ongress,
to
s u p p o rt
we a re
a new M u l t i l a t e r a l
fo r
th e
a ls o
s e e k in g
In v e stm en t
Fund to
lib e ra liz a tio n
of
in v e stm e n t
T h is Fund would t a r g e t re s o u rc e s to s u p p o rt s p e c i f i c a s p e c ts o f
in v e stm e n t
refo rm
and to
h e lp
e a se
some o f
th e
b u rd en o£ in v e stm e n t
lib e ra liz a tio n .
The
In v e stm en t
fa c ilitie s :
th e
Fund
T e c h n ic a l
w ill
c h an n e l
A s s is ta n c e
re s o u rc e s
F a c ility ;
F a c ility ;
and the E n te r p r is e Development F a c i l i t y .
a v a ila b le
re s o u rc e s w i l l fund g r a n t a s s is ta n c e
c o s ts
of
in v e stm e n t
re fo rm .
These
th e
to
re s o u rc e s
th ro u g h
th re e
Human R eso u rces
A la r g e p o r ti o n o f
m itig a te
can
th e
s o c ia l
h e lp
sp eed
im p le m e n ta tio n o f needed refo rm s and m oderate s o c i a l d i s l o c a t i o n s .
W ith
7
such s u p p o rt, governm ents can p u rsu e refo rm s a g g r e s s iv e ly d u rin g a window
of
o p p o rtu n ity
w h ile
m inim izin g
th e
p o te n tia l
fo r
s o c ia l
u n re st
and
p o l i t i c a l p r e s s u r e s in em erging d e m o crac ie s.
In a d d itio n , th e In v e stm en t
Fund
to
w ill
fin a n c ia l
c h an n e l
m a rk e t-p ric e d
in s titu tio n s
to
re s o u rc e s
s tim u la te
c re a tio n
and
or
th ro u g h
NGOs
e x p an sio n
of
and
sm all
b u s in e s s e s .
We a re p ro p o sin g t h a t th e In v e stm en t Fund be c r e a te d w ith a o n e
tim e c a p i t a l i z a t i o n o f $1.5 b i l l i o n to be p a id o v er a 5 y e a r p e rio d .
The
U n ite d S ta te s i s p re p a re d to p ro v id e one t h i r d o f th e c o n tr ib u tio n s .
We
have in v i t e d Ja p a n to sh a re th e le a d e r s h ip o f t h i s e f f o r t w ith th e U n ited
S ta te s .
J a p a n 's in c r e a s in g in v o lv em en t in L a tin A m erica h as been one o f
th e more h o p e fu l developm ents f o r th e re g io n in r e c e n t y e a r s .
th a t
We p ropose
th e b a la n c e bB funded by o th e r n o n -b o rro w in g members o f th e IDB,
many o f whom have s tro n g t r a d i t i o n a l t i e s
w ith
th e r e g io n .
Under our
p ro p o s a l, v o tin g r i g h t s would be p r o p o r tio n a l to th e c o n tr ib u tio n s th a t
a re made.
Why
d id
th e
U.S.
p ropo se
a
new
in v e stm e n t
fu n d ,
when
o th e r
program s and o rg a n iz a tio n s a lre a d y e x is t ?
The
answ er
is
th a t
th e s e
a re
e x tr a o r d in a r y
tim e s .
E x is tin g
i n s t i t u t i o n s a re n o t equipped to resp o n d q u ic k ly and f l e x i b l y to meet th e
c h a lle n g e o f sim u lta n e o u s and f a s t- p a c e d refo rm on a v a r i e t y o f f r o n t s .
High
q u a lity
te c h n ic a l
a s s is ta n c e
m ust
be
in
p la c e
p rio r
to
m ajor
d e c is io n s on p r i v a t i z a t i o n and on in v e stm e n t p o lic y refo rm in such a re a s
8
a s th e r e g u la to r y e n v iro n m e n t, th e ta x sy stem , and th e f i n a n c i a l s e c t o r ,
R eso u rces f o r r e t r a i n i n g and human re s o u rc e developm ent m ust e q u a lly be
a s s u re d to w orkers f e a r f u l o f change.
th a t
th e y
can p a r t i c i p a t e
in
th e
And s m a lle r b u s in e s s e s m ust see
new o p p o r tu n i tie s
c r e a te d
by
fre e r
m a rk e ts .
A d d itio n a l
p o lic y -b a s e d
le n d in g
by
th e
MDBs
may
o v erb u rd en
c o u n tr ie s a lre a d y u n d er f i s c a l c o n s t r a i n t s and e x te r n a l in d e b te d n e s s .
F u rth e rm o re , th e p r i v a t e s e c to r arms o f th e IFC and IIC g e n e r a lly can n o t
fu n d o th e rw is e
p ro fita b le
p r o je c ts
th a t
have h ig h
in itia l
developm ent
c o s ts .
T here i s no q u e s tio n t h a t th e IDB and th e IIC w i l l c o n tin u e to be
im p o rta n t to
th e o v e r a l l a d ju stm e n t e f f o r t s
C arib b ea n c o u n tr ie s .
They w i l l make c r u c i a l
in v e stm e n t in many c o u n tr ie s .
p ro v id e
th e
c o u n tr ie s
tim e ly
th a t
a re
o f th e L a tin A m erican and
However,
c o n c e n tr a tio n
p o is e d
to
of
make
c o n tr ib u tio n s
im m ediate
and f u l l
su p p o rt
p r iv a te
th e s e i n s t i t u t i o n s a lo n e can n o t
fin a n c ia l
a
m ajo r
fo r
th e
re s o u rc e s
commitment
o v e rh a u lin g and opening t h e i r in v e stm en t re g im e s.
u rg e y o u r
to
to
needed
by
ra d ic a lly
For th e s e re a s o n s , we
M u ltila te ra l
In v e stm en t
Fund.
B u ild in g Economic C on fid en ce:
The Need to Reduce Debt Burdens
1 have a lr e a d y m entioned th e U .S,
in te n tio n
to red u ce b i l a t e r a l
o f f i c i a l d e b t under th e E n te r p r is e f o r th e A m ericas I n i t i a t i v e .
R educing
9
debt is
e s s e n tia l
f o r some c o u n tr ie s
as an i n t e g r a l p a r t
o f economic
re fo rm .
The i n t e r n a t i o n a l community has b een p u rs u in g a s t r a t e g y to h e lp
c o u n tr ie s
to reduce t h e i r d e b t to com m ercial b a n k s.
We a re p le a s e d to
n o te t h a t th e Board o f D ire c to rs has approved a new p o lic y to e n a b le th e
IDB to j o i n
th e IMF and World Bank in p ro v id in g s u p p o rt f o r com m ercial
bank d e b t and d e b t s e r v ic e r e d u c tio n .
ou r h em isphere have
debt s tra te g y .
ta k en ad v an tag e
In two y e a r s , many c o u n tr ie s in
of
th e
s tre n g th e n e d
in te rn a tio n a l
Some a re b e n e f i t t i n g a lre a d y from th e renewed c o n fid e n c e
o f in v e s t o r s and n a tio n a ls who a re b r in g in g t h e i r c a p i t a l home.
I w ant to r e i t e r a t e
t h a t th e U n ite d S ta te s s ta n d s read y to b e g in
re d u c in g PL-480 d e b t and to expand t h i s a c t i v i t y as we se c u re a d d itio n a l
a u t h o r i t y from our C ongress.
P r e s id e n t Bush tr a n s m itte d l e g i s l a t i o n to
o u r C ongress in F ebruary t h a t would p ro v id e th e n e c e s s a ry a u th o r i t y
com plete th e E n te r p r is e I n i t i a t i v e .
demands
of
th e
G ulf
C ris is ,
fu ll
to
I would rem ind you t h a t d e s p ite th e
im p le m e n ta tio n
of
th e
E n te r p r is e
I n i t i a t i v e rem ains among P r e s id e n t B u sh 's h ig h e s t p r i o r i t i e s .
We a re a ls o com m itted to renew al o f th e f a s t tr a c k a u th o r ity f o r
n e g o t i a t i o n o f f r e e tr a d e ag reem en ts.
w i l l be com pleted by June 1 s t.
T his p ro c e s s i s now underway and
A pproval o f t h i s a u th o r ity by C ongress
w i l l p e rm it th e U n ite d S ta te s A d m in is tra tio n to move fo rw ard q u ic k ly on
FTA n e g o tia tio n s w ith Mexico and w ith o th e r q u a lif y in g L a tin A m erican and
C arib b ea n n a t i o n s ,
- IO
The D iv e rse R ole o f th e IDB
In a d d itio n to i t s p ro m in en t new r o le in ad v an cin g p o lic y refo rm
and econom ic grow th, th e IDB h as a ls o i n i t i a t e d new program s in th e a re a s
o f e n v iro n m e n ta l p r o te c tio n ,
th e r o le o f women in dev elo p m en t,
p o v e rty
a l l e v i a t i o n and s o c i a l s e c to r d evelopm ent.
The management has b ro u g h t fo rw ard a new p r i v a t e s e c t o r s t r a t e g y
p a p e r w hich th e Committee o f th e Board o f G overnors d is c u s s e d y e s te rd a y
(A p ril
6 th ),
th a t w ill
en ab le
th e
IDB to
p ro v id e
g re a te r
p r i v a t e s e c t o r developm ent in b o rro w in g member c o u n t r i e s .
w i l l complement a c t i v i t i e s
new
in v e stm e n t
s e c to r
a lr e a d y underway in th e Bank,
lo a n
program ,
and
w ill
make
s u p p o rt
to
T h is program
in c lu d in g th e
an
im p o rta n t
c o n t r i b u t i o n to b u ild in g v ia b le econom ies th ro u g h o u t th e re g io n .
S u p p o rt
from th e M u l t i l a t e r a l In v e stm en t Fund w i l l c o n tr ib u te im p o r ta n tly to th e
s u c c e s s o f th e p r i v a t e s e c to r developm ent s t r a t e g y .
We p a r t i c u l a r l y
w ish
to
a ch ie v e m en ts on th e en v iro n m en t.
d e v e lo p in g new p ro c e d u re s
c o n g r a tu la te
Bank
management
fo r
its
Im p o rta n t p ro g re s s h as b een made in :
to a s s e s s
th e
im pact o f p r o j e c t lo a n s
f o r th e en v iro n m en t; and
--
u p d a tin g th e B an k 's ap p ro ach to f o r e s t is s u e s th ro u g h pro m o tio n o f
new 'p r o j e c t s
to p r o t e c t
tro p ic a l
fo re s ts
a g a i n s t e n v iro n m e n ta lly unsound p r o j e c t s .
and m easures
to
g uard
The
is s u e s ,
Bank has
devoted
a g re a t
b u t more work i s n eed ed .
e n v iro n m e n ta l
im pact
deal
E f f e c tiv e
asse ssm e n t
p ro c e d u re
m easures a re needed to manage a c t i v i t i e s
m ajor im pact on f o r e s t s .
of
e ffo rt
to
e n v iro n m e n ta l
im p le m e n ta tio n o f th e new
is
c ritic a l.
A d d itio n a l
in r e l a t e d s e c to r s t h a t have a
F in a lly , we b e lie v e
t h a t th e Bank m ust a ls o
a s s ig n h ig h e r p r i o r i t y to dem and-side en erg y e f f i c i e n c y and to pro m o tio n
o f renew able energy o p tio n s ,
Both p r o j e c t lo a n s and p o lic y - b a s e d le n d in g
in th e energy s e c to r would be u s e f u l .
G re a te r a t t e n t i o n to in te g r a te d
l e a s t - c o s t in v e stm e n t p la n s in th e en erg y s e c to r and enhancem ent o f th e
B an k 's c a p a b i l i t y to e x p lo it a l t e r n a t i v e en erg y in v e stm e n t o p p o r tu n itie s
would a ls o h e lp a d d re ss our c o n c e rn s .
C o n c lu sio n :
S tro n g ,
v ib ra n t
L a tin
A m erican
and
C arib b ean
econom ies
w ill
b e n e f i t n o t on ly ou r hem isphere b u t th e w o rld as a w hole.
The U n ite d S ta tB s has made a new commitment th ro u g h th e E n te r p r is e
fo r
th e
A m ericas
In itia tiv e
to
advance
p r o s p e r ity th ro u g h o u t th e h em isp h ere.
IDB to j o i n us in in v e s tin g
s u s ta in e d
grow th ,an d
enhanced
We ask n o n -r e g io n a l members o f th e
in th e r e g i o n 's
f u tu r e by p ro v id in g t h e i r
s u p p o rt f o r th e M u l t i l a t e r a l In v e stm en t Fund.
We 'a ls o
lo o k
to
borrow ing
c o u n tr ie s
to
ris e
to
p r e s e n te d by th e E n te r p r is e f o r th e A m ericas I n i t i a t i v e .
th e
c h a lle n g e
Each c o u n try
m ust s u s ta in , and e x te n d i t s refo rm e f f o r t s in o rd e r to r e a l i z e th e g o a ls
o f economic grow th and improved w e ll-b e in g f o r i t s c i t i z e n s .
12
As we d e d ic a te o u rs e lv e s to t h i s im p o rta n t en d eav o r, we a l l r e l y
upon th e In te r-A m e ric a n Development Bank, w hich b r in g s us to g e th e r to d a y ,
not
o n ly
le a d e r s h ip
to
in
re sp o n d
th e
to
our
im p o rta n t
A m erica and th e C a rib b e a n .
e ffo rts
ta s k o f
but
to
c o n tin u e
tra n s fo rm in g
th e
a s s e rtin g
f u tu r e
its
o f L a tin
Ä i PUBLIC DEBT NEWS
JM
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-376-4350
FOR IMMEDIATE RELEASE
April 8, 1991
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $7,230 million of 13-week bills to be issued
on April 11, 1991 and mature on July 11, 1991 were
accepted today (CUSIP: 912794WY6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.58%
5.61%
5.60%
Investment
Rate_____Price
5.75%
98.590
5.79%
98.582
5.78%
98.584
Tenders at the high discount rate were allotted 35%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
42,665
23,174,560
51,400
61,075
56,405
39,305
1,669,955
60,230
6,720
47,775
27,780
812,320
1.022.995
$27,073,185
Accented
42,665
5,699,295
51,400
61,075
55,105
38,255
78,705
20,230
6,720
47,775
27,780
78,320
1.022.970
$7,230,295
Type
Competitive
N oncompet it ive
Subtotal, Public
$22,533,105
1.930.150
$24,463,255
$2,690,215
1.930.150
$4,620,365
2,377,830
2,377,830
232.100
$27,073,185
232.100
$7,230,295
Federal Reserve
Foreign Official
Institutions
TOTALS
NB- 1212
I fl PUBLIC DEBT NEWS
mi
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 8, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $7,212 million of 26-week bills to be issued
on April 11, 1991 and mature on October 10, 1991 were
accepted today (CUSIP: 912794XJ8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.67%
5.69%
5.68%
Investment
Rate
5.93%
5.96%
5.95%
Price
97.134
97.123
97.128
Tenders at the high discount rate were allotted 35%.
The investment rate is the equivalent coupon—issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
34,125
21,134,610
15,185
38,335
50,200
30,085
1,488,180
39,775
6,285
47,720
21,410
609,820
734.935
$24,250,665
Accepted
34,125
5,872,110
15,185
38,335
50,200
30,085
249,055
21,525
6,285
46,720
21,410
91,570
734.935
$7,211,540
Type
Competitive
Noncompetitive
Subtotal, Public
$20,723,745
1.361.52Ó
$22,085,265
$3,684,620
1.361.520
$5,046,140
1,900,000
1,900,000
265.400
$24,250,665
265.400
$7,211,540
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -1213
Department of the Treasury • Washington, o.c. • Telephone 566-2041
4pr i i di 0 0 i | | |
FOR R E L E A S E
E x p e c te d
a t
UPON
DELIVERY
1 0 : 0 0
a .m .
D .S .T .
pr
f P
L
ru
r --h t I RtASURY
PREPARED STATEMENT OF R. RICHARD NEWCOMB
DIRECTOR, OFFICE OF FOREIGN ASSETS CONTROL
DEPARTMENT OF THE TREASURY
before the
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
April 9, 1991
Economic Sanctions Against Iraq and Kuwait
Chairman Gonzalez and members of the committee:
My name is R. Richard Newcomb and I am the Director of the
Office of Foreign Assets Control at the United States Department
of the Treasury. I am here today to appear before the committee
to discuss the Treasury Department's role in formulating,
administering, and enforcing the sanctions against Iraq and
Kuwait.
19
The Office of Foreign Assets Control ("FAC") has primary
responsibility within the Executive branch for implementing the
financial and trade sanctions against Iraq and measures to
protect the assets of the legitimate Government of Kuwait. In
addition to these programs, FAC also administers economic
sanctions programs against Libya, Iran, South Africa, Cuba,
Vietnam, Cambodia, and North Korea and administers certain
residual World War II asset controls affecting the Baltic
Republics. The Office was also responsible for administering the
recently-concluded economic sanctions programs against the
Sandinista regime in Nicaragua and the Noriega regime in Panama.
This morning I will address the topics and concerns in which
you have expressed an interest, which relate principally to the
blocking of Iraqi and Kuwaiti assets in the United States. I
will also comment on your offer to suggest measures which would
increase FAC's effectiveness in formulating, administering, and
enforcing administrative sanctions.
N B -1214
2
Identification and Blocking of Iraqi and Kuwaiti Assets
Following the Iraqi invasion of Kuwait on August 2, the
President, acting under authority of the International Emergency
Economic Powers Act ("IEEPA"), declared a national emergency and
issued Executive Orders No. 12722 and No. 12723 ("the August 2
Executive Orders"), which froze all Iraqi and Kuwaiti governmentowned assets within the jurisdiction of the United States or
under the control of U.S. persons and imposed an immediate and
comprehensive trade embargo against Iraq.
On August 6, the United Nations Security Council, to bring
the invasion and occupation of Kuwait to an end and to restore
the sovereignty, independence, and territorial integrity of
Kuwait, decided that all U.N. member states should impose
sweeping economic sanctions against Iraq and occupied Kuwait. On
August 9, the President issued Executive Orders No. 12724 and No.
12725, this time acting under authority of IEEPA and the United
Nations Participation Act, broadening the U.S. sanctions with
respect to both Iraq and Kuwait to include a complete prohibition
on trade and trade-related activities with any person located
within the territories of Iraq or Kuwait, in addition to
continuing the freeze of Iraqi and Kuwaiti government-owned
assets imposed seven days earlier. The Executive orders of
August 2 and 9 were developed by Treasury with the assistance of
the Departments of State and Justice, the White House staff and
National Security Council. The sanctions programs presented by
the orders are similar, in whole or in part, to sanctions
programs previously implemented with respect to other countries,
most notably Libya in 1986.
The August 9 Executive order with respect to Iraq:
— prohibits exports and imports of goods, technology, and
services between the United States and Iraq, and any activity
that promotes or is intended to promote such exportation and
importation;
— prohibits any dealing by a U.S. person in connection with
property of Iraqi origin exported from Iraq after August 6, 1990;
—
prohibits transactions related to travel;
— prohibits transactions related to transportation to or
from Iraq, or the use of vessels or aircraft registered in Iraq
by U.S. persons;
— prohibits the performance by any U.S. person of any
contract in support of projects in Iraq;
3
— prohibits the commitment or transfer of funds or other
financial or economic resources by any U.S. person to the
Government of Iraq, or any other person in Iraq; and
— blocks all property of the Government of Iraq located in
the United States or in the possession or control of U.S.
persons, including their foreign branches on or after August 2,
1990.
The August 9 Executive order with respect to Kuwait imposed
essentially the same regimen of economic sanctions on Kuwait,
then under occupation and control by Iraq. Since the liberation
of Kuwait, the prohibitions on most trade and financial
transactions with Kuwait have been removed through the issuance
of a general license authorizing such transactions. Similarly,
except for seven Kuwaiti banks, the U.S. property of the
Government of Kuwait has been effectively unblocked by general
license. The seven banks, while remaining blocked, are licensed
to utilize their assets to settle pre-August 2 obligations.
The objectives of the Executive orders were to deprive Iraq
of any economic or financial benefits that might result from its
illegal invasion and occupation of Kuwait and to preserve and
protect the assets of the Government of Kuwait for the benefit of
their rightful owner. Iraqi assets blocked in the United States
and in all U.N. member states may be used as a source of funds to
pay claimants and creditors of Iraq if such a course of action is
determined appropriate and enabling legislation is enacted.
The August 2 Executive orders immediately froze, by
operation of law, all property and interests in property, of the
Governments of Iraq and Kuwait that were in, or thereafter came
within, the jurisdiction of the United States or under control of
U.S. persons. Any unauthorized transfers of property or
interests in property subject to the blocking orders occurring
after the effective date are deemed to be null and void. This
means that a U.S. financial institution, for example, which
transfers blocked funds after the effective date without
authorization from FAC can be penalized for violating the
sanctions.
On the morning of August 2, immediately after the President
signed the blocking orders, FAC began contacting major U.S. money
center banks and requested that the Federal Reserve Bank of New
York ("the FRBNY") notify Federal Reserve member banks of the
blocking. We also began a series of what have since become
regular consultations with the FRBNY, and various U.S. Government
agencies, including the Departments of State, Commerce, and
Defense, the Customs Service, the FBI, the NSC, and members of
the intelligence and law enforcement communities. Since the
morning of August 2, we have travelled abroad several times for
coordination meetings with our allies. We have also met with
hundreds of U.S. and foreign businesses, official agencies, and
individuals affected by the sanctions, in addition to responding
to several thousand telephone inquiries and pieces of
correspondence. Additionally, we have an ongoing program in
place with foreign governments and their embassies which enables
us to act in concert with all governments worldwide to ensure the
uniform application of all U.N. resolutions.
On August 3, we issued a press release announcing the first
of a series of general licenses designed to address many of the
most immediate and pressing problems relating to the freeze.
Most of these licenses addressed the need to safeguard and
preserve the value of the frozen assets and investments without
causing unnecessary and irreparable harm to the interests of
innocent third parties, including those of many U.S. businesses
and individuals and of the legitimate Government of Kuwait.
The need to quickly address these complicated and fact
intensive problems proved especially critical with respect to the
Kuwaiti assets since the freeze was intended primarily as a
protective measure, and complete immobilization of the Kuwait
governmental assets in the United States for a prolonged period
would have diminished their value and disrupted a number of
markets.
These initial licenses addressed problems such as: what to
do about Iraqi and Kuwaiti oil already en route to the United
States on the effective date; how to complete or unwind variously
affected financial or securities transactions entered into prior
to the effective date; what types of transactions or investments
by blocked companies or investment portfolios owned or controlled
by the Government of Kuwait to allow to continue unimpeded; and
what to do about payments due under letters of credit involving
U.S. banks for goods or services exported to Iraq or Kuwait prior
to the effective date. These general licenses, as well as the
specific licenses we have issued on a case-by-case basis, have
been carefully crafted to ensure that transactions permitted
thereunder are consistent with the objectives of the sanctions
and do not confer any realizable benefit on the Government of
Iraq. These licenses have been fully incorporated into a
comprehensive body of implementing regulations published on
November 30, 1990, for Kuwait and on January 18, 1991, for Iraq.
Very early in the program we began meeting regularly with
Kuwaiti Embassy officials to begin the process of identifying and
clarifying the status of Kuwaiti-owned entities around the world,
licensing limited operation of Kuwait entities within U.S.
jurisdiction under the effective control of legitimate
governmental authorities, and generally coordinating the efforts
of our respective governments concerning the sanctions. We
received excellent cooperation from the Kuwaiti authorities.
This proved to be an understandably painstaking and tedious
5
process inasmuch as the legal, financial, and commercial
information required to make these determinations must be precise
and accurate. Moreover, this information must be obtained from
various locations worldwide and some of the records were
destroyed or were under the control of Iraqi authorities.
In the first few weeks, our efforts regarding Kuwait focused
heavily on identifying and clarifying the status of Kuwaiti-owned
banks and financial institutions and communicating this informa
tion through the Federal Reserve System. By October 4, we were
able to issue a general notice clarifying the status of 94 major
banking and non-banking entities or corporate groups operating in
the United States.
Obviously, no such assistance was forthcoming from the
Government of Iraq. In identifying and blocking Iraqi assets,
both in the U.S. and worldwide, FAC has relied upon the coopera
tion of allied governments, other Federal agencies, the business
community, and the investigative efforts of its own staff.
The Nature of the Property Blocked
The Kuwaiti and Iraqi government-owned assets frozen by the
August 2 Executive orders were substantial. The frozen Kuwaiti
investments totalled in the billions of dollars and consisted
primarily of bank deposits, debt and equity securities (involving
both direct investment and portfolio holdings), and real estate.
Most of these assets were owned or controlled by licensed Kuwaiti
governmental entities such as the Kuwait Investment Office and
the Kuwait Investment Authority. The blocked Iraqi assets in
Government of Iraq designated accounts will total more than a
billion dollars. They are primarily bank deposits and blocked
oil payments. On February 11, 1991, we initiated a formal census
or inventory of these blocked assets as well as U.S. financial
claims against Iraq by publishing in the Federal Register
regulations requiring the filing of reports by all U.S. holders
of Iraqi property and U.S. claimants against Iraq as to the full
extent of such assets and claims. The inventory of blocked Iraqi
assets has not yet been completed; thus a total value is not yet
available.
In addition to the publication of the list of Specially
Designated Nationals, which I will describe momentarily, six
individual blocking actions have been taken to identify property
not clearly known to the public as property of the Government of
Iraq.
Iraai-Owned or -Controlled Companies
6
Through information obtained by FAC from readily available
public sources, as well as from the domestic and international
intelligence communities, we have undertaken a major initiative
to identify front companies and agents used to acquire
uechnology, equipment, and other resources for Iraq. This is
called the Specially Designated Nationals or "SDN” program. As
in the case of current sanctions against Cambodia, Cuba, Libya,
North Korea, and Vietnam, FAC has the authority to "specially
designate"— i.e., to identify publicly and to block— any person,
whether an individual or a business, directly or indirectly owned
or controlled by the Government of Iraq, or who acts or purports
to act for or on its behalf.
The term "specially designated national" is not used in the
Iraqi Sanctions Regulations (31 C.F.R. Part 575, 56 Fed. Rea.
2112 (January 18, 1991) ("ISR"). Such designation relies rather
on the definition of the Government of Iraq provided by Section
575.306 of the ISR:
The term "Government of Iraq" includes:
(a) The state and the Government of Iraq, as well
as any political subdivision, agency, or
instrumentality thereof, including the Central Bank of
Iraq;
(b) Any partnership, association, corporation, or
other organization substantially owned or controlled by
the foregoing;
(c) Any person to the extent that such person is,
or has been, or to the extent that there is reasonable
cause to believe that such is, or has been since the
effective date [August 2, 1990], acting or purporting
to act directly or indirectly on behalf of any of the
foregoing; and
(d) Any other person or organization determined by
the Director of the Office of Foreign Assets Control to
be included in this section.
In practice, a Specially Designated National of the
Government of Iraq ("Iraqi SDN") is an Iraqi government body,
representative, agent, intermediary, or front (whether overt or
covert) that is located outside Iraq and functions as an
extension of the Government of Iraq. It may be a firm created by
the Iraqi government, or it may be a third-country company that
otherwise becomes owned or controlled by the Iraqi government, or
that operates for or on behalf of the Government of Iraq.
7
The effect of being listed as an Iraqi SDN is four-fold:
(1) the SDN is exposed internationally as an Iraqi government
front; (2) U.S. persons will be prohibited from any trade or
transactions with the SDN; (3) the SDN's property, including
financial assets, within U.S. jurisdiction (which includes U.S.
banks' corporate branches overseas) will be blocked; and (4)
other governments will be urged to take similar steps or other
appropriate actions against the SDNs subject to their juris
diction. As a matter of U.S. law, persons holding the property
of any Iraqi SDN or other property in which there is a Government
of Iraq interest must report that information to FAC.
A U.S. company or individual could be designated as an Iraqi
SDN and, as such, would have its assets blocked by FAC and, in
effect, would be put out of business. Note that, because of the
definition of "Government of Iraq" in the ISR, a U.S. firm that
had not been designated an SDN, but in which the Government of
Iraq holds a controlling interest, is already subject to
blocking. For example, in September 1990 FAC served a blocking
notice covering all bank accounts and tangible property of the
Matrix-Churchill Corporation of Solon, Ohio. Public sources of
information demonstrated that the company was owned by Iraqicontrolled companies in England. Last month, the property and
accounts of a Santa Monica, California, based company as well as
that of its owner and his wife, were blocked. All were
identified as participants in Saddam Hussein's arms network.
On April 1, Treasury formally identified these and other
businesses and individuals worldwide as front companies and
agents of Iraq. The full list of these companies and
individuals, which are now considered SDNs, accompanies my
testimony as an attachment. The Iraqi SDN list is not a static
document, but will be continuously augmented as additional front
companies and agents are identified.
For U.S. persons, dealing with an Iraqi SDN is equivalent to
doing business with the Government of Iraq— an activity that is
prohibited by Executive Orders No. 12722 and No. 12724, and the
ISR. Such violations are subject to severe penalties. Pursuant
to the Iraq Sanctions Act (Pub.L. 101-513, Sec. 586E), civil
penalties of up to $250,000 may be imposed administratively.
Criminal fines of up to $1,000,000 per violation may be imposed
on both individuals and corporate entities, and prison sentences
of up to 12 years are authorized for individuals, including
officers, directors, and agents of a corporation, who are
knowingly involved in a corporate criminal violation.
Problems in Blocking Assets
I have already alluded to the frenzy of activity into which
the staff of FAC was plunged beginning on the morning of
8
August 2, and which continued in the weeks and months to follow.
The incredible demands placed on the Office by the Iraqi
emergency occupied every member of my staff and resulted,
unfortunately but necessarily, in a temporary suspension of much
of our important work in the various other sanctions programs
currently in effect. The American people have every reason to be
proud, as I am, of this loyal and dedicated cadre of individuals
who worked literally around-the-clock, putting aside their
personal lives to perform countless hours of uncompensated
service, under very difficult conditions, to put the new
sanctions program in effect and make them work as intended. The
workload demands of the Iraqi and Kuwaiti programs more than
equalled that of all other sanctions programs combined, but
international crises are seldom predictable, nor is the workload
they create. Ultimately, we were fortunate to be able to get
personnel detailed to us from other agencies and got the job
done.
Monitoring of Government-Controlled Banks
Under the Executive orders, as well as the Kuwaiti Assets
Control Regulations and the Iraqi Sanctions Regulations, the
definitions of Government of Kuwait and Government of Iraq
include the central bank of each country. For this reason all
assets of the Central Bank of Kuwait and the Central Bank of Iraq
that were in the control of a U.S. person were blocked from
August 2, 1990. Secondly, any transaction between these entities
and any U.S. person required the authorization of FAC. Where
transactions affecting the assets of the Central Bank of Kuwait
or the Central Bank of Iraq occurred pursuant to FAC authoriza
tion, reports were required to ensure that the transactions were
carried out in a manner consistent with the authorization. The
Government of Kuwait complied fully with the requirements to
report regularly on the assets of the Central Bank of Kuwait
which were subject to U.S. jurisdiction.
It is a pleasure to appear before this committee again.
will be pleased to respond to any questions.
#####
Attachment
I
13384
Federal Register / Vol. 56, No. 64 / W ednesday, April 3, 1991 / Rules and Regulations
Office of Foreign Assets Control
31 CFR Part 575
Iraqi Sanctions Regulations
Office of Foreign Assets
Control, Department of the Treasury.
action : Final rule: List of specially
designated nationals of the Government
of Iraq; List of vessels registered, owned
or controlled by the Government of Iraq.
a gen cy :
The Iraqi Sanctions
Regulations (the “Regulations”) are
being amended to add a new appendix
A and a new appendix 8 to the end
thereof. Appendix A contains the list of
Individuals and Organizations
Determined to be Within the Term
“Government of Iraq” (Specially
Designated Nationals of Iraq). The list at
Appendix A contains the names of
companies and individuals which the
Director of the Office of Foreign Assets
Control has determined are acting or
purporting to act directly or indirectly
on behalf of the Government of Iraq.
Appendix 6 contains the names of
merchant vessels registered, owned. orcontrolled by the Government of Iraq.
These lists may be expanded or
amended at any time.
EFFECTIVE DATE: April 3.1991.
a d d r e s s e s : Copies of these lists are
available upon request at the following
location: Office of Foreign Assets
Control, U.S. Department of the
Treasury. Annex, 1500 Pennsylvania
Avenue NW., Washington. DC 20220.
summary :
Federal Register / Vol. 56, No. -64 / W ednesday. April 3, 1991 / Rules and Regulations____ 13585
FOR FURTHER INFORMATION CONTACT.
Richard J. Hollas. Chief. Enforcement
Section, Office of Foreign Assets
Control. Tel: (202) 566-5021.
s u p p l e m e n t a r y iNFORMATiON:The Iraqi
Sanctions Regulations. 31 CFR part 575
(56 FR 2112. Jan. 18.1991. the
“Regulations”) were issued by the
Treasury* Department to implement
Executive Orders No. 12722 and 12724 of
August 2 and August 9,1990, in which
the President declared a national
emergency with respect to Iraq, invoking
the authority, in te r alia , of the
International Emergency Economic
Powers Act (50 US;C. 1701 e t seg.) and
the United Nations Participation Act (22
U.S.C. 287c). and ordered specific
measures against the Government of
Iraq.
Section 575.396 of the Regulations
defines the term “Government of Iraq“
to include:
(a) The state and the Government of
Iraq, as well as any political
subdivision, agency, or instrumentality
thereof, including the Central Bank of
Iraq:
(b) Any partnership, association,
corporation, or other organization
substantially -owned or controlled by the
foregoing:
(cj Any person to the extent .that such
person is. or has been, or to the extent
that -there is reasonable cause to believe
that such person is. or has been, since
the effective date, acting or purporting to
act directly or indirectly on behalf of
any of the foregoing: and
(d) Any other person or organization
determined by the Director of the Office
of Foreign Assets Control to be included
v/ithin this section.
Determinations that persons fall
within this definition are effective upon
the date of determination by the
Director. Office of Foreign Assets
Control (“FAC"). Public notice is
effective upon the date of publication or
upon actual notice, whichever is sooner.
This rule adds appendix A to part 575
to provide public notice of a list of persons, known as “specially designated
nationals“ of the Government oflraq.
The list consists of companies and
individuals whom the Director of the
Office of Foreign Assets Control has
determined to be owned or controlled
by or to be acting or purporting to act
directly or indirectly on behalf of the
Government of Iraq, and thus fall within
the definition of the “Government-of
Iraq” contained in § 575506 of the
Regulations. The persons included in
appendix A are subject to all
prohibitions applicable to other
components of the Government oflraq.
All unlicensed transactions with such
persons, or in property in which ihcy
have an interest, are prohibited.
The list of specially designated
nationals is a partial one. since FAC
may not be aware of all the persons
located outside Iraq that might be
owned or controlled by the Government
of Iraq or acting as agents or front
organizations for Iraq, and which thus
qualify as specially designated nationals
of the Government o f Iraq. Therefor *\
persons engaging in transactions may
not rely on the fact that any particular
person is not on the specially designated
nationals list as evidence that it ¡6 not
owned or controlled by. or acting or
purporting to act directly or indirectly
on behalf of. the Government of Iraq.
The Treasury Department regards it as
incumbent upon all U.S. persons to take
reasonable steps to ascertain for
themselves whether persons they enter
into transactions with are owned or
controlled by the Government of Iraq or
are acting or purporting to act on its
behalf, or on behalf of other countries
subject to blocking (at present.
Cambodia. Cuba, Libya, North Korea,
and Vietnam).
This rule also adds-appendix B to part
575 to provide public notice of a list of
merchant vessels which the Director of
the Office of Foreign Assets Control has
determined to be registered, owned, or *
controlled by the Government of Iraq or
by persons acting or purporting to act
directly or indirectly on behalf of the
Government of Iraq, pursuant to
§ 575.306 of the Regulations. The
merchant vessels included in appendix
B constitute blocked property in which
the Government of Iraq has an interest
and are subject to all the prohibitions
applicable to the Government of Iraq.
No U.S. person may engage in any
unlicensed transaction involving these
vessels.
The list of Government of Iraqflagged. owned, or controlled vessels is
a partial one, since FAC may not be
aware of all merchant ships registered,
owned, or controlled by the Government
of Iraq or by persons located outside
Iraq that may be acting as agents or
front organizations for Iraq who fall
within the definition of‘“ Government of
Iraq." Therefore, persons engaging in
transactions may not rely on the iact
that any particular vessel is not on the
list as evidence that it is not owned or
controlled by the Government of Iraq.
The Treasury Department regards it as
incumbent upon all U.S. persons to take
reasonable steps to ascertain for
themselves whether such vessels are
registered, owned, or controlled by Iraq
or by other countries subject to blocking
or transportation-related restrictions (at
present. Cambodia, Cuba. Libya. North
Korea, and Vietnam).
Section 586E of the Iraq Sanctions Act
of 1990. contained in the Foreign
Operations Authorization and
Appropriations Act of 1990. dated
November 5.1990.104 Sial 1979.
provides for civil penalties not to exceed
S250JXK)for violations of the Regulations
and fines of up to'Sl.000.000 and
imprisonment for up 4o 12 years for
willful violations of the Regulations. In
addition, section 5(b) of the United
Nations Participation Act of 1945 (22
U.S.C. 2B7c(b)} provides for the
forfeiture of any property involved in a
violation of the Regulations.
list of Subjects in 31 CFR Part 575
Banks. Banking, Exports. Imports,
Iraq, Kuwait. Loans. Penalties, Reporting
and recordkeeping requirements.
1. The authority citation for part 575
continues to read as follow-s:
Authority: 50 U.S.C 1701 et eeq.: 50 U.S.C
1601 et seq:: 22 U.S.C 287c. Public Law 101513.104 Stat. 2047-55 (Nov. 5.1990); 3 U.S.C.
301: E .0 .12722.55 FR 31B03 (Aug. 3.1990);
E.0.12724. 55 Fit 33089 (Aug. 13.1990).
2. Appendices A and B to part 575 are
added 1o read as follows:
Appendix A—Individuals and
Organizations Determined To Be
Specially Designated Nationals of the
Government of Iraq
Please sole that addresses of companies
and persons may change. The addresses
listed below are the last ones knows lo the
Office of Foreign Assets Control. Where an
address is not listed or someone wishes to
check for latest address information, the
Office of Foreign Assets Control will assist
with any updated information in its
possession.
Companies
1. Admincheck Limited. 1 Old Burlington
Street. London. England. United Kingdom
2. Advanced Electronics Development Ltd. 3
Mandeville Place. London. England. United
Kingdom
3. Al-Arabi Trading Company Limited. Lane
11. Hai Babil. Baghdad District 929. Iraq
4 . Al-Rafidain Shipping Compeny. Bombay.
India
5. The Arab Petroleum Engineering Company
Ltd.. Amman, jordan
6. Arab Projects Company S.A. Ltd., P.O. Box
1318. Amman, 'jordan
P.O. Box 7939. Beirut. Lebanon
P.O. Box 1972. Riyadh. Saudi Arabia
7. Arab Tran* Trade Co. S A L . 36. Kaft
Abdou Street Rouchdy. Alexandria 481
638. Egypt
8. Archi Centre I.C.E. Limited. 3 Mandeville
Place. London. England. United Kingdom
6. Axchiconsult Limited. 126 Buckingham
Place. London 5. England. United Kingdom
OTO
56, No. 64 / W ednesday, April 3, 1991 / Rules and Regulations
10. Associated Engineers. England, United
Kingdom
Tfflj A.T.E. International Ltd., f/k/a RWR
International Commodities. 3 Mandeville
Place. London. England. United Kingdom
12. Atlas Air Conditioning Company Limited,
55 Roebuck House. Palace Street. London.
England. United Kingdom
13. Atlas Equipment Company Limited. 55
Roebuck House. Palace Street, London,
England. United Kingdom
14. A.W.A. Engineering Limited. 3 Mandeville
Place, London. England. United Kingdom
15. Banco Brasileiro-lraquiano S.A., Praca Pio
X. 54-100 Andar, CEP 20091. Rio de Janeiro,
Brazil (Head office and city branch)
16. Bay Industries. Inc., 10100 Santa Monica
Boulevard. Santa Monica, California,
United States
1". Dominion International, England. United
Kingdom
18- Endshire Export Marketing. England,
United Kingdom
19. Euromac. Ltd.. 4 Bishops Avenue.
Northwood. Middlesex. England, United
Kingdom
20. Euromac European Manufacturer Center
SRL Via Ampere 5.20052 Monza, Italy
21. Euromac Transporti International SRL,
Via Ampere 5. 20052 Monza. Italy
22. Falcon Systems. England. United Kingdom
23. Geodesigns. England. United Kingdom
24. Investacast Precision Castings. Ltd., 112
City Road. London, England. United
Kingdom
25.1. P.C. International Limited. England,
United Kingdom
26.1. P.C. Marketing Limited. England, United
Kingdom
27. Iraqi Airways. Saddam International
Airport. Baghdad. Iraq
Opemring 6,1010 Wien, Vienna. Austria
General Service Agent. Bangladeshi-owned
Travel Agency. Dhaka, Bangladesh
Rio de janeiro.'Brazil
Jianguomenwai Diplomatic Housing
Compound. Building 7-1, 5th Floor.
Apartment 4, Beijing. People's Republic of
China
Prague Airport. Prague. Czechoslovakia
Nekazanka 3. Prague 1. Czechoslovakia
Copenhagen. Denmark
Main Eisenhuttenplatz 26. Frankfurt 6,
Cermany
Rome. Italy
Tokyo, japan
Casablanca. Morocco
The Netherlands
«•7. Ulica Crojecka. Central Warsaw, Poland
Tunis. Tunisia
Ankara. Turkey
Moscow, U.S.S.R.
Abu Dhabi. United Arab Emirates
4 Lower Regent Street. London SWlY 4P.
United Kingdom
5825 \V. Sunset Blvd. —218. Los Angeles,
California 90028. United States
25040 Southfield Road. Southfield, Michigan
48075. United States
Building 68. J.F.K. International Airport.
Jamaica. New York 11430, United States
1211 Avenue of the Americas. New York,
New York 10036. United States
Sanaa. Yemen
Belgrade, Yugoslavia
26. Iraqi Allied Services Limited, England.
United Kingdom
29. Iraqi Freight Services Limited. England.
United Kingdom
30. Iraqi Reinsurance Company. 31-35
Fenchurch Street. London EC3M 3D, United
Kingdom
31. Iraqi State Enterprise for Foodstuffs
Trading. P.O. Box 1308. Colombo 3. Sri
Lanka
P.O. Box 2839. Calcutta 700.001. India
32. Iraqi State Enterprise for Maritime
Transport. Bremen. Germany
Amman. Jordan
33. Iraqi Trade Center. Dubai. United Arab
Emirates
34. Keencloud Limited. 11 Catherine Place,
Westminister, London, England. United
Kingdom
35. Matrix Churchill Corporation. 5903 Harper
Road. Cleveland, Ohio 44139. United States
36. Meed International Limited, 3 Mandeville
Place. London. England. United Kingdom
37. Pandora Shipping Co.. S.A., Honduras
38. Petra Navigation & International Trading
Co. Ltd.. White Star Building., P.O. Box
8362, Amman. Jordan
Armoush Bldg., P.O. Box 485, Aqaba, Jordan
18 Huda Sharaw'i Street Cairo, Egypt
Hai Al Wahda Mahalat 906,90S Zulak 50.
House 14. Baghdad. Iraq
39. PMK/QUDOS (Liverpool Polytechnic),
England, United Kingdom
40. Rafidain Bank. New Banks’ Street P.O.
Box 11360. Massarif, Baghdad, Iraq (227
branches in Iraq)
P.O. Box 607, Manama, Bahrain (2 branches
in Bahrain)
114 Tahreer Str. Eldukki, P.O. Box 239. Ororan
Giza, Cairo. Egypt
P.O. Box 1194, Cinema al-Hussein Street,
Amman. Jordan
P.O. Box 685. Aqaba. Jordan
P.O. Box 815401, Jabal Amman, Jordan
Mafraq. Jordan
2nd Floor Sadat Tower, P.O. Box 1891. Beirut,
Lebanon (2 branches in Lebanon)
Sheikh Khalifa Street. P.O. Box 2727. Abu
Dhabi. United Arab Emirates
Rafidain Bank Building. 7-10 Leadenhsll
Street. London EC3V lNL. United Kingdom
T O. Eox 10023. Sanaa, Yemen Arab Republic
41. Rajbrook Limited. England. United
Kingdom
42. Reynolds and Wilson. England, United
Kingdom
43. S.M.I. Sewing Machines Italy S PA.. Italy
44. Sollatek, England. United Kindgom
45. Technology and Development Croup Ltd.,
Centric House 390/391, Strand. London,
England. United Kingdom
46. T.E.G. Limited. 3 Mandeville Place,
London. England. United Kingdom
47. T.M.G. Engineering Limited. Castle Row.
Horticultural Place. Chiswick. London.
England. United Kingdom
48. T N K Fabrics Limited. England. United
Kingdom
49. Trading &Maritime Investments. San
Lorenzo. Honduras
50. U.L International. England, United
Kingdom
51. UN1MAS Shipping. 138 El Geish Road.
P.O. Box 44. Alexandria. Egypt
52. Whale Shipping Ltd., c/o Government of
Iraq. State Organization of Ports. Maqal.
Basrah. Iraq
Individuals
1. Abbas. Abdul Hussein. Italy
2. Abbas. Kassim, Italy
3. Abraham, Trevor, England, United
Kingdom
4. Ahmad, Rasern. P.O. Box 1318. Amman.
Jordan
5. Ahmad. Wallid Issa, Iraq
6. Al-Amiri, Adnan Talib Hassim, 43 Palace
Mansions, Hammersmith. London. England,
United Kingdom
7. Al-Azawi. Dafir, Iraq
8. Al-Dajani, Leila N.S.. P.O. Box 1318,
Amman, Jordan
9. Al-Dajani. Nadim S.. P.O. Box 1318,
Amman. Jordan
10. Al-Dajani, Sa’ad. P.O. Box 1318, Amman.
Jordan
11. Al-Habobi. Dr. Safa Haji J.. Flat 4D
Thomey Court, Palace Gate. Kensington.
England, United Kingdom
12. Ali. Abdul Mutalib. Germany
13. Allen. Peter Francis. ’’Greys*’, 36
Stoughton Lane. Stoughton. Leicestershire.
England. United Kingdom
14. AJ-Ogaily, Akram H.. F;6t 2. St. Ronons
Court. 63 Putney Hill, London. England.
United Kingdom
15. Amaro, Joaquim Ferreira. Praca Pio X, 5410* Andar. CEP 20091. Rio de Janeiro.
Brazil
16. Armoush. Ahmad. White Star Bldg., P.O.
Box 8362. .Amman, Jordan
17. Armoush. Ali. White Star Bldg., P.O. Box
6562. Amman. Jordan
18. Aziz, Fouad Hamza. Pracia Pio X. 54-10*
Andar, CEP 20091, Rio de Janeiro. Brazil
19. Daghir. Ali Ashour, 2 Western Road.
Western Greer.. Thames Ditton. Surrey,
England. United Kingdom
20. Fattah. Jum's Abdul. P.O. Box 1318,
Amman. Jordan
21. Hand. Michael Brian. England, United
Kingdom
22. Henderson. Paul. 4 Copt Oak Close, Tile
Mill. Coventry. Warwickshire. England.
United Kingdom
23. Jon, Hana Paul. 19 Tudor House, Windsor
Way. Brock Green. London. England,
United Kingdom
24. Jume’an. George. P.O. Box 1318. Amman,
Jordan
25. Kadhum. Dr. Fadel Jawad. c/o Alvaney
Court. 250 Finchley Road. London. England.
United Kingdom
26. Khoshaba. Robert Kambar, 15 Harefield
Road. Maidenhead, Berkshire. England.
United Kingdom
27. Mohamed. Abdul Kader Ibrahim,
Jianguomenwai Diplomatic Housing
Compound. Building 7-1. 5th Fioor.
Apartment 4. Beijing. People's Republic of
China
28. Omran. Karim Dhaidas. Iraq
29. Raouf, Knalid Mohammed. Praca Pio X.
54-10’ Andar. CEP 20091. Rio de Janeiro,
Brazil
30. Ricks, Roy, 87 Si. Mary's Frice. Benfiect.
Federal Register / Vol. 56, No. W / Wednesday, April 3, 1991 / Rules end Regulations
E is e x . E n g la n d . U n ite d K in g d o m
2V Schm itt. R o g c n o E d u a rd o . P raca P io X.
54-10* A n d a r . C E P 20091. R io de Janeiro.
B razil
22 S:m. C ilb e rto F.. P raca P io X . 54-10*
Ar.dar. C E P 20091. R io de Janeiro. B ra zil
32 S o jz e . F ra n c isc o A n to n io . P raca P io X.
T-4-10* A r.dar. C E P 20091. R io de Janeiro.
B razil
V e s se l n a m e
|
Speckman. Jeanine. England. United
Kingdom
34.
35. T all. A k th a m . P.O . B o x 1316. A m m a n .
Jordan
36. T a ve ira . A . A r n a ld o G.. P ra c a P io X. 5 4 10* A n d a r . C E P 20091. R io de Janeiro. B ra z il
37. Z a h ra n . Y c u s u i. P.O. B o x 1218. A m m a n ,
Jordan
S n ip ty p e
DW T
j
Cat! sign
t. Ain 2 a !a h .__________
„
..................... 1 T k r .. . .
2 A! A n s a r ................... .................
i Tug
3G .330
N /A i YIAV
2
4
£
6
7.
60
1 2 .8 8 2
7 .1 5 5
1 .2 2 3
4 .6 4 »
1 .2 1 »
4 .7 4 0
2 .4 4 4
1 ,5 0 2
320
320
304
544
375
N /A
N /A
3 .5 4 »
375
368
9 .9 2 8
- 390
Al F a n ........................ ...... ............. .......
i R e s ..........
Al K a r a m a h . ..
_________ 1 T k r ____
Al K n a li s a ..............
.............................
At M a n s u r
. .......
.
Y c h t..................
At M eftvd — .................................... .............
Svc
P Al M ncul
............... ................................... S v c
9 Al N a :a f____
... ................ S v c ___________
1C Al N a s r ............................................................. ! S v i
’ I . A I N a s r __ _______________ _________ ¡ T k r
12 Al O m a r a h ____
._ .................................. T u g ....
13 Al R a i m a .....
T
.. . .
_ u»g ..........................
14. Ai R a s n e e d „ .
____
S v c ..........
15. Al R a m a .................. ................. .....
T x r ...
IE . Al S n u m o o k h .................. ................................
1?. Al W a ie e f l.............
......... ......
R e s _____
ifc. Al 2 a b ............
i S Al Z a w r a a ____
____
C p a ..............
2 0 . A l-A lyaa................
2 1 . A i-A rm n............
.....
2 2 A l-B aa m .. .
Tkr'
2 3 A l-B akr.............................
R es ,
2 <. A i-B aya a
..............
B rg ___
25. A l-E nttsar
.....
T u g T.tr.
26. A l-H a th e r..
T u g ..... .........
27. A U K arrkh__
_____
2 6 . AUKhaiij A l-A ra ö i._ .
S v e ...............
2S. A l-N o h a o d n ........
30. A tO a d is iy a ............
...........
Y c h t.. 1
3 1 . A l-R e s s a ta ..
T ug
....... S v c ___
32. A l-Sahil AJ-Arah.
3 3 A l-T h irm a r. .....
Tkr
3< A t- W a n n a h ...... ............................
T u g .......
35 A lab in ............. ....... ..
B rg ___
3 6 A le a r e e s i........................
C g a ......
3 ' A ita rs i* ................ ......
C o o __
3£ A tla ra h td i..... ...............................
Tkr
39 A lfidaa
................
Rrn
4 0 A ik h a n s a a ,.........................
C go
41. A lkinfli........... ..........
Cgo.
42. A lm u s ta n s m y a h ................I
...........
Tkr
43. A lm u ta n a b b i........................... ..........
T kr
4 4 . A ln a ta f ........................................
S v c _____
4 5. A ia a d is iy a h ....... .....................................
T k r ...........
4 6. A is u m o o d ____
. ____
S v c _____
4 7 . A tttaaw in A i a r s p ; ..............
C g o .................
a s A iw a h sa
Bro
4 3. A tw a s ia ..... .............. .....................................C c p ___
5C. A lv a rm u k ..........
.......................................; T«r
51 A icuba i:........... M .............................................
^ ........................ ....
£•2. A m urryan
............. ..........................
£3 A m are ................................................
S v c .............
54. A r b e e i......................
£5. B a b a G u rp m
Tkr _
____
56. B a b y lo n .............................
C g o ------------------57 B a d r 7 ............................................................... S v c .
56.
£S
6C
6 1.
62.
£2.
6a
€5
66.
67.
B a g h d a d .............................................
Svc
B a q n a a d ........... ..............................
C o o ..........- ___
B a l o e e s ...........
R h /p n
B a s r a .................. . .................................
Svc
B a s r a h . __
______ _____ C a n ____________
B u m r g a n ........................................ _.............¡ T k r .
D am a scu s
.........
.............. 1 T u g ,
D a m e n G o n n e tie m 5 7 1 6 ............................j S « c ..........................
D a m e n G o n n c h e m 5 7 1 7 ...............
...i S « c .........................
D a m e n G o n n c h e m 5 7 1 6 _____________ ! S v c _____________
375
368
368
4 .7 4 0
375
100
368
6 .3 9 6
524
149
1 .6 6 2
3 .5 5 0
8 .3 4 2
1 4 9.441
1 .6 6 2
3 .5 2 5
8 .3 4 2
1 5 5 .2 1 0
1 3 0 .2 4 1
4 .7 4 0
1 5 5 .2 1 0
6 .9 7 7
1 3 .6 3 4
1 .6 6 2
8 .3 4 3
1 4 9.371
4 .6 4 0
1 5 5 .2 1 0
508
320
3 6 .3 9 7
1 3 .6 5 6
647
i YIAN
j KN'KM
1 HNKD
I HfJMR
YIMD
YIAS
! YIN?
I DDRrt
I HNNR
! YiAW
YIAI
! Y IB E
I YlB A
N/A
Y .= F
YIBH
HNZW
N/A
YiAM
H N ST
Y I3 R
MNHB
N /A
YIH R
YIKH
YIKA
YINU
HN KS
Y IR F
NHSA
YITH
YIWH
I HND3
MNIO
HN FB
HNFR
HNe D
HNKN
HNKI
HNMS
HNMB
YIN F
MNOS
YISD
HSA1
! HNAO
MNWS
j HNYK
i y ;z r
I HNAM
YIBD
YIBB
hnsr
HN3B
N /A
2 .9 0 0 Y1AD
1 3 .6 5 6 HNBD
3 .9 8 5 MNBL
Y1AB
2 .9 0 6
1 3 .6 5 6 HNBS
3 6 .4 0 0 I HNSR
149 I YIDS
N /A
N/A
N /A
N/A
N /A ! N/A
1358
APPENDIX B—Merchant Vessels
Registered, Owned. Or Controlled by the
Government of Iraq or by Persons
Acting Directly or Indirectly on Behalf of
the Government of Iraq
• All ships listed or Iraqi-flagged
unless otherwise indicated.
• **N/A" is listed where information is
not available.
Owner
tragi Oil Tankers Company. Basrah, Iraq
Government of the Republic of Iraq. Manages by the Stale Organization
o< Iraqi Pons. Basrah, Iraq.
State Org. ol Iraqi Pons.
Iraqi Oil Tankers Company
Iraqi Oil Tankers Company.
Iraqi State Enterprise lor Water Transport
State Org. oi Iraqi Pons.
State Org of iraoi Pons.
State Org of Iraq: Pons.
State Org. of Iraqi Pons.
Iraqi Oil Tanker Company
State Org of Iraqi Pons.
State Org. oi Iraqi Pons.
State Org. of Iraqi Pons.
State Org. of Iraqi Pons.
State Org of Iraqi Pons.
State Org. of Iraqi Pons.
State Org. of Iraoi Pons.
Iraqi State Enterprise tor W aier Transport. Bagnoad.
State Org. of Iraqi Pons.
State Org. of Iraqi Pons.
Iraqi Oil Tankers Company.
State Org. of Iraqi Pons.
Iraqi State Enterprise tor Water Transpon. Formerly the Hiboob.
State Org. of Iraqi Pons.
State Org. of Iraoi Ports.
State Org. of Iraoi Pons.
State Org. of Iraqi Ports.
State Org. of Iraqi Pons.
Iraqi State Enterprise tor Water Transport
State Org. of Iraqi Pons.
Iraqi State Enterpnse tor Sea Fisheries. Basrah, Iraq.
State Org. of Iraqi Ports.
State Org. of Iraqi Pons.
Iraqi State Enterpnse tor Water Transport. Formoriy the Sanabul.
Iraqi State Enterpnse tor Water Transport,
iraoi State Enterpnse lor Water Transport
Iraqi Oil Tankers Company.
Iraqi State Enterpnse tor Water Transport Formerly tne Silowat
Iraqi State Enterpnse for Water Transport
Iraqi State Enterpnse tor Water Transpon.
Iraqi Oil Tankers Company.
Iraoi Oil Tankers Company.
Stale Org. of Iraqi Pons.
Iraqi Oil Tankers Company.
State Org of Iraqi Pons.
Iraqi State Enterpnse tor Water Transport
Iraoi State Enterprise tor Water Transport
irao> Stale Enterpnse lor Water Transpon.
trad' Oil Tankers Company.
State Org of iraq> Pons.
Iraqi Oil Tanners Company.
State Org. of Iraqi Pons.
State Org. of irao< Ports.
Iraqi Oil Tankers Company.
Iraqi State Enterpnse tor Water Transpon.
Government of the Republic of kao. Ministry of Oil. State Company lor
Oil Protects. Baghdad. Iraq. (Hag: Saudi Arabia).
State Org of Iraqi Pons.
Iraoi State Enterpnse tor Water Transpon.
State Organization of Iraqi Government
State Org. of Iraqi Pons.
Iraqi State Enterprise tor Water Transport
Iraqi 0<i Tankers Company.
State Org of Iraqi Pons.
State Org. ol kaoi Pons.
State Org. of Iraqi Pons.
State Org. of Iraqi Pons.
13533
Federal Register / Vol. 56, No. 64 / Wednesday, April 3, 1991 / Rules and Regulations
S h ip ty p e
V asse i nam e
66 D e y a la ...........
j
i
- — 1 T u g __ ..____
P sin n
- j T ug
Diving 1 «ii“.ch 1 ...
T u g ----D cw Hfw a................................. ...... ...... ,—
... 1 ___ ... ....
.
--------- 1 TkT.......................
D um p B a 'g e I ___ ___ _
_
_ ...i S v c ___________
7 4 D u m a R e ro e II...........
.........................J S v c ______ ______
S v c .............
7 6. F e e B e a t N o. 7G5 _
HP
Svc
_
7 7 F ire B o a t N o 7 0 6
7 6 C o r e l......................................... ■
F s h ___
7 0 Cure!
T ug
S v c ......................
6 0 . <t»*»
............... ......
.
.
....
81 H a m d e n ............................. _________ ,..... — T ug
T .m
Svc
...............
8 3 . H iila h . _______
M o m e e n .................................. .
............
Tkr
8 5 . H fttin___ _____ ..
M6 thn K h a ld n n n
...................
Svc
A7 Mm M end 6
_
AS F n h e jr e n .......................................... ..........
T u g _____
_
89. Jab h a
....
„
_
Tug
90, J e m b u r ............................................................... Tkr
Tug _
_
91. J a m h o h s .—
. F a t a l ................................................................
9 3 . K a rb a la ________________
.
___ S v c _
__
9 4 . K hahd Ibm Al W a ite d
........... ................. S v c
95. K hanaom
_________
__
T kr ..
9 6 . K h affta B int Al Ze«vra.
H R D /R n ..............
9 7 . K Fkuk..........
Tkr
9 8 . M a n d a li...... ..........
C ir
0 9 . M a y s e lo a n ................
100 M easen
Tu¿
1 0 1 . M ather)
......
...........
T ïf
1 0 2 . M oon Lady
o ri/n n
69
70
71
7?
73.
64
02
1 0 3 N a g m o r ------
C ah
104.
105.
106.
107.
106.
109.
110.
111.
112.
113.
114.
115.
116.
117
116.
119.
120.
121.
122.
123.
124.
125
C.
12?.
N a in a w it.......................... .......................
Tug
N o r ...................................
R vr
N o 1 ......... .....................
SV c
N o 2 ........... ...
S v c ............
N u f f a r b i................
C ah
O h o d 5 .......
O h o d 6 ...........
O h o d 7 ......................
Svc
T ug
O r o o b a ................................ ■
O to h M e m N o 9
Svc
P a le s t in e ....................
Pilot 3 9 3 .....................
Pilot 3 9 4 ........................................................
P nlm e 1
............. . . . . _______ Ptrt
P td
P okes 2
..............
P td
P o h e e 3 .......................
R a s h w c 1 8 ...........
, ,,
Tug
R a d h w a 1 9 ......................
Tug
R a d rtffs 2 0 _______ _____ _
........
R o o ia n ..........
F an
R u m a iia ...............
................. ..
Tkr
S a :‘ S e e d ...........
Svc
S s m s T S ...............
F w __
S e n a m ......... .......................
! &vc
S doot ......... ................«.....
; s«** ,
1 2 9 . S e a b a n k .......................... ............. 1 I 1 F a h /C o e
12
S e a n s N is s a n ..............
S h a h o o t___ .
S h e r aJ S a a r e h
S h o ro o k .........................
S H U -A ia h
N/A
350
£28
1.330
1.330
1.330
N /A
N /A
1.163
350
2.422
367
89
6.709
506
155.210
12.670
N/A
366
244
35.338
366
1,170
N /A
2.235
35.338
3.965
35.338
e.977
368
310
246
3.965
_ .
.1
! S ute O’-g o< Feat sons.
j b
:z
J 6JA
N /A
N /A
HNFL
HNFT
YIGZ
YIHM
N /A
YIAR
YIMN
HNKT
HNIN
N /A
YIMH
YU A
HNJM
YU R
HNKL
N /A
YISM
HNKO
HNKN
HNKK
YIOS
YIM Y
YIM N
YIM O
HN N Z
N /A
Y1NW
YISR
N /A
N /A
N /A
N /A
N /A
N /A
YlOB
N /A
YIFN
N /A
N /A
N /A
N /A
N /A
N /A
N /A
N /A
N /A
HNRM
N/A
soe ! YISM
26.732
! F an
1Sur
Y '3C
jerv
140
129
6.953
»66
1,163
404
403
N /A
387
.........
N/A
Stale Org of Iraqi Ports.
State Org. of Iraqi Pons.
State Org. of Iraqi Ports.
State Org of Iraqi Ports.
State Org. o< Iraq' Ports.
Iraqi Poru ffiay GiDraiier).
Whale Shipping Ltd., c /o State Org. of
Iraqi Ports (lias Gsbratter).
Y.'hale Shipping Ltd.. C/0 State Org. of
of
IraQi Pons (flag: Gioranar).
W hale Shipping Ltd., c /o State Org.
State Org. of Iraqi Pons.
State Org. of Iraqi Pons.
RaSpain Fisheries Co. Ltd., Basrah, Iraq.
Suite O rg of Iraqi Pons.
State O rg of Iraqi Pons.
State Org. of trod Pons.
State Org. o< Iraqi Pons.
State Org. of Iraqi Ports.
State O rg of Iraqi Ports.
Iraqi Oil Tankers Company.
State Org of Iraqi Pons.
Iraqi State Company 1or Oil Projocis (Mag Saudi Arabia).
State O rg of Iraqi Pons.
State 0 > g of Iraqi Ports.
Iraqi Oil Tankers Company.
State Org. of IraQi P o n t.
Rafidatn rishen e t Co. Lid.
State O rg o< Iraqi Ports.
State O rg ot Iraqi Pons.
Iraqi Oil Tankers Company.
Iraqi State Cm arpnae tor W ater Transport
Iraqi Oil Tankers Company.
State O rg of Faqi Pons. Formerly m e Afkadaryah.
State O rg of Iraqi Ports.
State O rg of Iraqi Pons.
State O rg o f Iraqi Ports.
Pandora Sfsppmg Co., S A . Honduras. Managed by Petrs Navigation 6
International Trading Co. Ltd.. Amman, Jordan, Formerly m e Iraqiowned AL-ZAHRAA. (Hag Honduras).
Government of m e Hepubke -of Iraq. Ministry of Agncuttura & Agrarian
Reform, State Fisheries Company. Baghdad, Iraq.
State Org. of Iraqi Pons.
State Org. of Iraqi Ports.
State O rg of Iraqi P o n s.
State Org. of Iraqi P o n s
Iraqi State Fq henes Co.
Iraqi State Company lor Oil Protects
Saudi Arabia).
Iraqi State Company lor Oil Protects (fteg Saudi Arst»a).
Iraqi State Company lor Oil Protects (flag: Saudi Arabia).
State Org. of Iraqi Pons.
S u te Org. of Iraoi P o rts
State O-g. of Iraqi Pons.
Stste Org. of Iraqi Pons.
State Org. of Fepi P o n s
State Org. of Faoi Pons.
S u te Org. of Faoi Pons.
S u te Org. of Iraqi Pons.
Iraoi Stale Company tor Ok Protects.
Iraqi S u te Company lor Ok Protects,
iraoi S u ie Company tor Ok Protects
Iraqi S u te Henanes -Company.
Iraoi Ok Tankers Gomoeny.
S u te O rg of *ao> Ports.
YIBJ
HNDJ
N /A
YIBK
YIDN
310
744
30
30
140
N /A
N /A
366
N /A
4.6 4 9
N /A
N /A
N /A
N /A
N /A
N /A
N /A
N /A
129
-36330
742
Tug
Fui
I Can
1 R -r
1 T eg
137. S in a i......................
I Rvc
136. S in te r.......................
1S~139. SfcY S e a .............................................................. 1 C o o
140. S o F m rhrvk
141. S u ia tm e n ry a n ....... .................................
350
356
N /A
130. S a c m u sic II........... ................... ....................
131.
132.
133.
134.
135.
Owner
Cell s^n
DW T
I
12K
N /A
8334
HRN2
HQHFU
9HYH2
YISN
HNLK
HNSR
YISH
N /A
YISI
N /A
YlAY
HNRZ
404
UOJE
N/A
Y LAG
I S u te O p . of iraoi Pons,
irsoi S u te P u na n et Company.
Traomg & Msrmrna investment s Honduras M anapad by Arab Trans
Traoe Co. S.A.-E., A,lass none Egypt, form erly the Faqi-pffned ALBAHAR AL AftABi (Hag Honduras).
Saamusic Shopmg -oo. Ltd., c /o Thenem ant SNps M anagement Inc.,
Athens, Greece V esssi Sacred by Government of Faq. 18 a g Matts).
S u te Org. of Feqi P o n s
Rsftdam Fwhanas Co.. Ltd.
Faqi S u te Frsnene* Company.
S u te O rg of Faqi P o n s
State Org. of Fats P o n s
S u te Org. of F a q P o n s
S u te O rg of F a q Pons.
State Org of Faq P o ns
Panoors Sfaporng Co. SJL. Honduras Managad by Petrs Navigation &
Interna Done* Trading Co. Ltd., Amman, Jordan, f ormarly m e Fsq*qvn ad ALRAZt. {flag: Honduras).
Faoi S u ta Fiahenes Company.
S u te Org. of F a q P o n s
Federal Register / Vol. 56. No. 64 / Wednesday. April 3. 1991 / Rules and Regulations
Snip typa
Vassal n a n a
M 2 Surwey
^43
|
No 1 ..................... .......... I R e s________ ___
(a:if>Ch N o 2 - - ................................' R es.......................
^45
,
1ItTr„ . . t .................... .....................................
T i f V M f ................................................... «...
^47 T#nk Ibn Z iy t d ___ ______ -nT„ r -------l t n m r r —
T h ^ ^ q l f .......................... vallar- ........- ................................
la p y r
.. ................. ... . ....................................
1 V . W ort Boat No. 6 .......................................
1* 1 W(vfe*hip 3 .................................... ..............
^52 Y t nt>u 3 1 . ___ t__ ______ ____ _____________
153 Y O ^ ! >n r i-.............................................................................
^54 2 |t^ Al OlWS.__ ___________ _____ I .v rr - r- ...........
155 Zam zam .. ..................... .., , , .................................„ ...........
156. Zanoobia. ..........................
.........................
157. Z u b iiO y __________ __________________ ____ 1 5 8 . 1 Atnar _
...........
_ ... _. ___
159. 1 Hum an..
__ ....
_.
___
160. 7 Nissan__________________________
T k r .....................................
S v c ___ - .........
T k r __ _______
T u g .«..
...........
T u g __ _
Brg........................
£ v ; .......................
S v c _________________
Cgo ...................................
T k r ___________ _____
Cgo ____ _________
Fan
___________
T k r___
____
Tkr...
___
T k r ____________
Dated: March 13.1991.
R. Richard Newcomb,
Director. Office o f Foreign Assets Control.
Approved: March 15.1991.
John P. Simpson.
Acting Assistant Secretary. (Enforcement).
{FR Doc. 91-7795 Filed 4-1-91: 8:45 am]
BILLING CODE «S10-2S-U
DV.T
|
N /A
N /A
N /A
3.627
4.649
116.139
220
366
N /A
N /A
N /A
366
9.247
544
3.549
N /A
1.502
1.502
1.502
Cali sign
N /A
N /A
N /A
HNTD
YITR
HN T2
YIAC
YIUR
N /A
N /A
N /A
YIYN
HN ZO
YIAZ
HNZN
YIBO
HNAR
HNHN
HNHN
Owner
State Org of Iraqi Pons.
State Org ot iraoi Pons
State Org. ot lrao< Pons.
traqi Oil Tankers Company.
State Org ot Iraqi Pons.
Iraqi Oil Tankers Company.
State Org. of Iraqi Ports.
State Org. of Iraqi Pons.
State Org. of Iraqi Pons.
State Org. of Iraqi Pons.
Iraqi State Company lor Oil Projects (flag: Saudi Arabia).
State Org. of Iraqi Pons.
Iraqi Slate Enterpnse tor Water Transport.
State Org. of Iraqi Pons.
Iraqi Stata Enterpnse tor W ater Transport.
State Org. of Iraqi Pons.
Iraqi Oil Tankers Company.
Iraqi Oil Tankers Company.
Iraqi Oil Tankers Company.
TREASURY NEWS
lepartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
April 9, 1991
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 approxi
mately $14,400 million, to be issued April 18, 1991. This offer
ing will result in a paydown for the Treasury of about $19,150
million, as the maturing bills total $33,555 million (including
the 15-day cash management bills issued April 3, 1991, in the
amount of $13,505 million). Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500, Monday, April 15, 1991, prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. 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 17, 1991, and to mature July 18, 1991 (CUSIP No. 912794
WZ 3), currently outstanding in the amount of $10,063 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be
dated April 18, 1991, and to mature October 17, 1991 (CUSIP
No. 912794 XK 5).
The bills will be issued on a discount basis under competi
tive 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 18, 1991. Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rates of accepted competitive
tenders. Additional amounts of the bills may be issued to Federal
Reserve Banks, as agents for foreign and international monetary
authorities, to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing bills
held by them. Federal Reserve Banks currently hold $2,685 million
as agents for foreign and international monetary authorities, and
$4,719 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 bookentry records of the Department of the Treasury should be sub
mitted on Form PD 5176-1 (for 13-week series) or Form PD 5176-2
(for 26-week series).
NB- 1215
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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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.
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. Com
petitive 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
f°r taccepted 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.
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.
8/89
EMBARGOED UNTIL GIVEN
EXPECTED AT 11:00 A.M.
WEDNESDAY, APRIL 10, 1991
TESTIMONY OF
THE HONORABLE JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE
Chairman Torres, Congressman McCandless, and members of the
Subcommittee, thank you for the opportunity to address the
implications for the consumer of H.R. 1505, the Financial
Institutions Safety and Consumer Choice Act of 1991, which is the
Administration's comprehensive proposal to modernize our outdated
banking laws. We believe that our proposal holds the promise of
multiple benefits to the consumer, including:
—
First, a safer, better capitalized, better regulated
banking system, which would leave taxpaying consumers
less exposed to losses through the deposit insurance
system;
—
Second, a broader choice of financial products for
consumers when they go to the bank, accompanied by
strengthened disclosure requirements;
—
Third, greater convenience, and lower interest rates
and transaction costs ; and
Fourth, enhanced availability of credit and other
financial products to local communities.
In short, we believe that H.R. 1505 represents a profoundly
pro-consumer approach to banking reform — and that's why we
named it the Financial Institutions Safety and Consumer Choice
Act.
NB-1216
Time to Fix the System
Before addressing the particulars of the bill, I would like
to explain why we have placed such a comprehensive reform
proposal before the Congress.
Mr. Chairman, the problems that the banking system faces
today are fundamental, and not superficial. These problems
demand a comprehensive solution, and will defeat a narrow,
piecemeal approach.
The evidence of fundamental problems is overwhelming. The
Bank Insurance Fund, after increasing steadily for over 50 years,
has now dropped to its lowest level in history as a percentage of
insured deposits. In the thirty-eight year period between 1942
and 1980, we had a total of 198 bank failures, or about 5 per
year. And yet in 1989 alone, we had 206 failures. In 1990,
another 161 banks failed, and 131 of them were small banks with
under $100 million in assets. The system is not working well for
our banking institutions, large or small.
Why are all these failures occurring? One reason is that,
over the years, banks have become less competitive as traditional
banking business has migrated to new products in other parts ^of
the financial services industry —— products that are off limits
for banks due to outdated laws. This trend has left the banks to
do too much risky lending to LBOs, Third World countries and
other less attractive borrowers. Another reason is that, while
we now allow interstate banking throughout almost the entire
nation, we impose enormous unnecessary costs on banks by
preventing them from branching across state lines. A third
reason is that our overextended deposit insurance safety net has
eliminated most of the incentive for sophisticated, large
depositors to monitor the activities of banks and check excessive
risk taking.
In part due to our failure to modernize, our international
competitive position has declined to the point where we have no
banks among the top 25 in the world. And as the economy has
slowed, some regions have experienced "credit crunches”. Weak
banks have not been able to lend even to good customers, which
has exacerbated the recession and hampered a speedy recovery.
Fundamental Reforms
We believe that comprehensive reform is needed to accomplish
three fundamental objectives. First, we must make deposit
insurance safe for taxpayers and depositors. That means stronger
supervision, better capitalized banks, and the return of deposit
insurance to its original purpose of protecting average
depositors in this country. It also means a well capitalized
Bank Insurance Fund.
Second, it is time to modernize archaic laws to let banks
catch up with their customers and deliver products more
efficiently to consumers across the country — which translates
into greater convenience, lower interest rates and transaction
fees for consumers, and more bank capital.
Third, we need to restore the preeminent international
position of our banking industry. Our economy is twice the size
of our nearest competitors, and a world class economy demands a
world class banking system.
We believe that our legislation will help accomplish each of
these objectives.
The full scope of the Administration's proposal has been
covered in prior testimony before the full Committee and before
the Subcommittee on Financial Institutions.
As you requested in
your letter of invitation, I will focus today on aspects of the
legislation that bear most directly on consumers. But before
doing so I would like to stress that comprehensive reform — and
not piecemeal reform — is what is needed. If we only tinker
with the problem — for example, by simply recapitalizing the
Bank Insurance Fund — then we will not have addressed the
underlying causes that have brought the Fund to its present
state. The chances are good that if we take that course, we will
be back again, sooner rather than later, recapitalizing the Fund
again, the next time perhaps with the taxpayer's money. That is
a prospect that no one could relish. To put it another way, with
over $2 trillion in insured deposits, there is no fund large
enough to protect the taxpayer if we allow the banking system to
remain weak, inefficient and unable to compete.
Mr. Chairman, the most important thing our legislation can
do for the consumer is to enhance the safety and soundness of our
banking institutions, making deposit insurance safe for
depositors and taxpayers alike. To do that, we need to improve
the supervision of our depository institutions; to limit the
extension of deposit insurance to those who are in need of
protection? and to modernize the archaic laws that keep our banks
from competing efficiently in today's world.
Prompt Corrective Action
Like Mr. Gonzalez' bill — H.R. 6 — the Administration's
proposal recognizes that our regulatory system must be better
designed to catch problems early, before they mushroom into
costly failures. Our legislation's proposed system of Prompt
Corrective Action will do just that. The combination of rules
and flexibility will help foster two desirable results:
regulators will be able to take action more swiftly as capital
declines, and there will be more pressure to take such swift
action because of the presumptions built into the statute. More
3
important, banks will be more likely to maintain strong levels of
capital if they face the certainty of decisive regulatory action
as their capital declines.
Not everyone will like this system, because it will be
argued that statutory presumptions will reduce regulatory
"flexibility." But that is in part its purpose. Open-ended
flexibility can be the enemy of decisive corrective action.
Critics will also claim that capital is not a good leading
indicator of problems, and that prompt corrective action relies
exclusively on capital. Both allegations are false. Numerous
studies have shown that capital is an excellent leading indicator
of problems in banks, and a simple one to measure. But i t i s not
a perfect early warning system, and our legislation specifically
recognizes its limits. Even a well—capitalized bank will trigger
prompt corrective actions under the new system if it is in an
unsafe and unsound condition due to loan concentrations or other
supervisory problems. Prompt corrective action does not rely
exclusively on capital.
Reduction of Overextended Deposit Insurance
In common with H.R. 6 and Mr. Wylie's H.R. 15, the
legislation recognizes the importance of rolling back the
creeping expansion of deposit insurance coverage to large,
sophisticated depositors. We have proposed eliminating insurance
coverage for brokered deposits and have carefully tried to
eliminate so-called "pass through" coverage for depositors that
are least in need of protection. Defined benefit pension plans
with professional management, employer liability, and guarantees
from the Pension Benefit Guaranty Corporation are not in need of
deposit insurance protection as well. At the same time, however,
the legislation would preserve pass-through protection for selfdirected defined contribution plans, where individuals choose
their own investments and bear the risk of any loss.
Likewise, the use of multiple insured accounts has gotten
out of hand. It is time to impose limits, and ours is $100,000
per depositor per bank for most accounts, with a separate
$100,000 in coverage for retirement savings. While this limit is
important, it is obviously not radical. A couple can still get
up to $400,000 in insurance coverage in each bank, which is
hardly a small sum. Only about 3% of American households have
over $100,000 in any one institution. Since households typically
have several members, it is a reasonable conclusion that our
proposal would affect substantially less than 3% of households.
And insurance for business accounts would not change.
4
Those who suggest that such clearly reasonable limits would
destroy the banking system or deprive the elderly of safe places
to invest are just plain wrong — and worse, are irresponsibly
and needlessly stirring up depositor fears.
Finally, the FDIC's current "too big to fail" policy must be
changed. The legislation would therefore essentially eliminate
the FDIC's discretion to protect uninsured depositors in bank
failures. But it would also preserve the government's ability to
protect the financial system when necessary, even if that
requires the rare protection of uninsured depositors.
We believe that this balance struck between direct taxpayer
exposure and the stability of the financial system is the correct
one. Nevertheless, some argue that we have not gone far enough - that the government should never protect uninsured depositors.
In our view, it would be foolhardy for the government to give up
its ability to protect uninsured depositors when the entire
financial system is at stake.
No other government has embraced
that restriction, and we shouldn't be the first to run the
experiment.
Others argue that we should simply expand the safety net to
coyer all deposits in all banks in order to create "fairness" for
uninsured depositors. That would be equally foolhardy — what
about fairness to the taxpayer? Why should the taxpayer have to
pick up the tab to protect an uninsured depositor who knows his
or her deposits are uninsured?
The best way to address this problem is to stop banks from
failing so frequently, which is exactly what this legislation
would do.
Restored Competitiveness
Ancthsr important aspect of enhancing safety and soundness
is restoring the competitiveness of our banking system. Our
banking laws served us well for many years, but they are now
archaic. They impose substantial and unnecessary costs, and
prevent banks from competing in the modern economy. The system
needs an overhaul, which the proposed legislation would
accomplish.
Nationwide banking and branching. Interstate branching is a
perfect example. Now that 48 of the 50 states allow some form of
interstate banking, it is fair to say that the philosophical
debate over interstate banking is over. Yet interstate branching
is still virtually prohibited, imposing unnecessary costs on
banks.
Like H.R. 15, introduced by Mr. Wylie — as well as
Mr. Schumer's H.R. 624 and Mr. Neal's H.R. 1480 —
our
5
legislation would move to end these artificial barriers. It
would do so in a way that recognizes the legitimate interests of
state governments. A state would still be able to restrict
intrastate branching of all state and national banks operating
within its borders. It would also have the ability to establish
activities restrictions for all of its own state banks and all
in-state branches of banks chartered in another state. The
Community Reinvestment Act would continue to apply, and states
could continue to apply state consumer protection laws to
branches of all out-of-state banks. Finally, states could tax
branches of all banks, state or national, to avoid any adverse
revenue impact resulting from changes in the law.
Nationwide interstate banking and branching would provide
tremendous benefits to consumers. Experience shows that greater
ease of entry would mean greater competition, which in turn would
lead to increased availability of credit and other financial
products, and to lower prices. The many consumers who live in
multistate areas — such as those in the Washington, D.C.
metropolitan area — would have easier everyday access to
branches of their banks. And more regionally diverse banking
organizations would be less vulnerable to regional economic woes,
and therefore less likely to fail.
Critics argue that these interstate activities provisions
would reduce the need for small banks, draw funds out of local
communities and deprive rural areas of much needed sources of
credit. There is no credible evidence to support these
hypothetical fears. Today, we have interstate banking in 48
states. Yet there is no evidence that out-of-state institutions
are overrunning the community banks. In fact, the evidence is to
the contrary. Studies show that community banks not only survive
entry by out-of-state rivals, they also tend to outperform them.
In states like New York, larger banks have actually
decreased the number of their branches in recent years in the
face of stiff competition from community banks. In California as
well, community banks continue to thrive and to compete quite
effectively with larger rivals, both in-state and out-of-state.
Smaller banks that serve local communities appear to have a
competitive advantage that their larger and more diversified
rivals cannot match — they know their customers and their
communities. We fully expect that to continue to be the case.
I stated earlier that the Community Reinvestment Act would
continue to apply when banking organizations expand across state
lines. I would like to address directly two instances in which
the application of CRA would change under our proposal. First,
we have provided for expedited 45-day review of applications for
mergers and acquisitions by Zone 1 banks —— banks that have
substantially more than the minimum capital levels. The concern
may be raised that the 45-day period may be inadequate for CRA
concerns to be fully addressed. In response, I would point out
that our proposal would explicitly require the regulators to deny
the application if it is determined that the transaction is
inconsistent with the convenience and needs of the community.
And we would expect that the regulators would develop procedures
to accommodate CRA concerns within the 45-day review period.
Second, Zone 1 banks with Satisfactory or Outstanding CRA
ratings will be able to branch within a state — after opening
their first branch in that state —— by subsequent notice and
without going through an application process. Here, the concern
may arise that full CRA review will be frustrated. We have
addressed that concern by limiting the provision to banks that
are very highly capitalized and that have good records under CRA.
The provision is meant as an additional "carrot" to encourage
banks to hold high levels of capital. This is a fundamental goal
our legislation, and one that would greatly benefit consumers
and taxpayers who will be better served by a stronger, better
capitalize banking system.
Financial Services Holding Companies. Like Mr. Barnard's
”” H.R. 192 —— our legislation would also permit banking
organizations to engage in a broader range of financial
activities. In some ways, the proposed changes reflect the
reality of the way that banking organizations already do
business. Banks are already in many aspects of the securities
and insurance businesses through a patchwork system created by
changes to state laws, exceptions in federal laws, and legitimate
regulatory interpretations. But this hodgepodge system is costly
and burdensome, with numerous restrictions that keep our
financial companies from competing fairly and effectively.
Under our proposal, bank holding companies would become
financial services holding companies. These financial services
holding companies could engage in all of the currently authorized
services activities, and those who maintained highly
capitalized banks could engage in a broad range of new financial
activities through affiliates — securities activities, insurance
activities, and any new activities that are determined to be "of
a financial nature" over time.
But important safeguards would be in place to protect banks
from risks associated with new activities and to prevent unfair
competition. Any new activities would be carried out in
separately capitalized affiliates whose capital could not be
double counted as capital of the bank. Only companies with wellcapitalized banks could take advantage of these new activities,
and only if their banks were not in an unsafe or unsound
condition and were not engaging in unsafe or unsound practices.
If the bank's capital level should decline or if it otherwise
falls into an unsafe or unsound condition, the holding company
would have to fix the problem or face the prospect of strong
7
remedial action. This could include divestiture of either the
new financial activities or the bank itself, or, if that did not
occur, holding company capital requirements, dividend
restrictions, and much closer supervision.
In addition, a number of strict firewalls would exist
between the bank and its new affiliates. A strengthened version
of Section 23A of the Federal Reserve Act expands the type of
transactions subject to its provisions. In addition, banks would
have to give prior notice to the regulator of any loan exceeding
5 percent of capital. At the same time, under revised Section
23B of the Federal Reserve Act, bank loans to customers of
affiliates would also have to be conducted on an arms length
basis.
Strict disclosure rules would apply to sales of non-deposit
products not only by banks, but by affiliates of banks.
Customers would have to sign plainly worded forms acknowledging
that such products were not covered by federal deposit insurance.
We have also included a provision barring the sale of securities
of bank affiliates on the bank's premises where deposits are
accepted. In addition, regulators would have the explicit
authority to limit the disclosure by banks to their affiliates of
nonpublic customer information. And most important, they would
have broad regulatory authority to impose limits on transactions
between banks and affiliates to prevent conflicts of interest,
unfair competition, and unsafe and unsound banking practices.
Once again, the consumer would be a direct beneficiary of
these reforms. Consumers would choose from a much broader array
of financial products at the bank, with strengthened disclosure
requirements. And the increased competition provided by banks
would lead to lower transaction costs and lower interest rates.
Finally, broader financial activities would lead to better
capitalized, more competitive, and safer and sounder banks.
Diversified Holding Companies. The bill would also allow
diversified holding companies to own financial services holding
companies. These diversified holding companies would have no
limits on the types of activities in which they could engage.
They would provide a critical new source of capital for banks,
since 80 percent of the capital in this country is in commercial
companies. But these companies must be prepared to put up this
capital if they want to own banks — again, their ownership of
banks would be contingent on maintaining high bank capital
levels, and they would be subject to similar prompt corrective
action penalties if bank capital should ever drop and the holding
company was unwilling to restore capital.
All of the firewalls that apply to bank transactions within
the financial services holding company would apply to bank
transactions with affiliates in the diversified holding company 8
-wit h one crucial difference. No bank, and no bank affiliate
within a financial services holding company, could provide loans
of any kind to the diversified holding company or its
subsidiaries. The bank simply could not become a commercial
company*s "piggy bank" for private sources of credit. We believe
that this prohibition along with the other safeguards described
above will be more than adequate to protect against abusive
lending practices.
Conclusion
Mr. Chairman, I would like to close by reemphasizing the
four broad benefits provided to consumers by our legislation.
First, a safer, better capitalized, better regulated
banking system, which would leave taxpaying consumers
less exposed to losses through the deposit insurance
system;
—
Second, a broader choice of financial products for
consumers when they go to the bank, accompanied by
strengthened disclosure requirements;
Third, greater convenience, and lower interest rates
and transaction costs; and
Fourth, enhanced availability of credit and other
financial products to local communities.
The time has come to address the urgent problems facing the
banking industry. We strongly urge Congress to adopt the
"Financial Institutions Safety and Consumer Choice Act of 1991."
###
9
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-376-4350
FOR IMMEDIATE RELEASE
April 10, 1991
RESULTS OF TREASURY'S AUCTION OF 7-YEAR NOTES
Tenders for $8,534 million of 7-year notes, Series F-1998,
to be issued on April 15, 1991 and mature on April 15, 1998
were accepted today (CUSIP: 912827A44).
The interest rate on the notes will be 7 7/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
7.92%
7.94%
7.93%
Price
99.762
99.656
99.709
$20,000 was accepted at lower yields.
Tenders at the high yield were allotted 96%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
10,931
15,893,839
5,862
10,871
45,138
13,299
996,327
6,702
2,958
13,517
4,185
223,267
3.019
$17,229,915
Accented
10,921
8,124,119
5,862
10,871
44,258
13,259
266,887
6,702
2,957
13,514
4,185
27,717
3.019
$8,534,271
The $8,534 million of accepted tenders includes $291
million of noncompetitive tenders and $8,243 million of
competitive tenders from the public.
In addition, $25 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $216 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1217
As Prepared for Delivery
Embargoed until 11:30am EST (4:30pm London)
April 15, 1991
Ry
‘ CONTACT:
CHERYL CR I S P E N
202/566-2041
REMARKS BY THE HONORABLE
NICHOLAS F. BRADY
U.S. SECRETARY OF THE TREASURY
AT
THE SPECIAL SESSION ON THE FUTURE OF EUROPE
London, England
Thank you, it is indeed an honor to address such a
distinguished group.
The sweeping developments in Europe over the past few years
provide the backdrop for our discussions here today. The
political and economic reforms underway throughout Eastern
Europe, the reunification of Germany, and the accelerated pace of
integration in the European Community, have brought with them
distinct challenges as well as great opportunities for Europe and
tne world community,
■ __ °ur beii“i is that wa can overcone these challenges and take
advantage of the opportunities if we build on a few guiding
principles,
*
*
Q
H
the rise of democracy reflects the power and enduring
ppeal o*. freedom, self-determination, economic openness, and
free enterprise.
,,
Second, we live in a highly integrated global system in
< COw°n
.p0Wer is 6hared among us. Increasingly, national
policies have international implications, and international
^ P a c t our policies at home. We should question
wnether the old distinctions between internal and external
policies have become outdated and counterproductive.
^ facade of prosperity based on economic growth has brought
e^panding responsibilities for us all. A world of
wenwy-four.hour global communications, instantaneous funds
transfer and interdependent economies is necessarily a world of
increased responsibility sharing.
NB-1218
2
The unique success of the international response to Iraqi
aggression demonstrates how a common cause widely agreed to can
advance our shared interests. We need to extend this spirit to
the economic challenges before us.
As we face the challenges ahead we recognize the need for
funds for Eastern Europe, German reunification, Latin America,
and for the rebuilding of the Middle East. To do all^these
things we need a positive, operational framework. This framework
can only be based on sustained, low inflationary growth.
First and foremost, each of us needs to pursue fiscal and
monetary policies that support low-inflationary growth and strike
an appropriate balance between domestic objectives and
international obligations.
In reaching that balance, we should act on the risks as they
are today, not as they were in times past. Today, there are
Indications of slowing growth in a number of countries. Although
there are signs the U.S. economy is emerging from its slowdown,
the pace of expansion in numerous West
European economies is
decelerating. In these circumstances, we must continue to be
vigilant against inflation but recognize that the greatest need
we face today is for strong, low-inflationary growth in the
industrial world, The policy coordination process remains a most
effective tool to meet this challenge.
In addition, we must accept the challenge of strengthening
the global trading system and make a success of the Uruguay
Round. It is too important for all of us not to receive the
political support it deserves.
Of course, the final measure of our success will not be
embracing these objectives in the abstract, but implementing them
in practice. Solid economic growth in the major European
economies is a necessary precondition for solid growth elsewhere
in the world. The EBRD will have an integral part to play in
this process. As Europe increasingly speaks with one voice, we
look forward to continuing and strengthening our partnership.
However, the transition within Europe contains a special problem
from our perspective. We should not be asked to accept the
lowest common denominator that emerges from EC debate as the
basis for international negotiation. And we cannot be asked to
negotiate the same issue twice — once with the EC as a whole and
then again with the individual member states.
The challenges are large.
greater. We must succeed.
Thank you.
But the potential rewards are
D epartm ent of th e Treasury • Washington, D.C. • Telephone 566-2041
Apr 16 3I 0 0 i 7 5 0
OtPT. OF I Hfc. TREASURY
for
i m m e d i a t e
APRIL
1 5 ,
CONTACT:
r e l e a s e
Bob
L e v i n e
(202)
1991
5 6 6 -2 0 4 1
UNITED STATES AND THE REPUBLIC OF THE MARSHALL ISLANDS
SIGN AGREEMENT TO EXCHANGE TAX INFORMATION
The Treasury Department announced today that the United States
and the Republic of the Marshall Islands have signed an agreement
to exchange tax information (the "Agreement”) that satisfies the
criteria set forth in the Compact of Free Association Act of 1985
(the "Act"). > Pub. L. No. 99-239, § 404 (1986). The Agreement was
signed in Majuro, Republic of the Marshall Islands, on March 14,
1991 by Minister of Foreign Affairs Tom D. Kijiner, on behalf of
the Republic of the Marshall Islands, and Ambassador William Bodde,
Jr., on behalf of the United States.
The Agreement entered into
force upon signature.
Under the Act, the Republic of the Marshall Islands qualifies
as a jurisdiction eligible for the benefits of Internal Revenue
Code Section 93 6.
As a result, electing U.S. corporations that
conduct certain business and investment activities in the Marshall
Islands will be allowed a credit against the U.S. income tax that
would otherwise be imposed on such activities.
The Agreement is
intended to meet the Act's requirement that these income tax
benefits are available only so long as the Marshall Islands has in
effect a tax information exchange agreement with the United States.
A limited number of copies of the Agreement are available from
the Treasury Public Affairs Office, Treasury Department, Room 2315,
Washington, D.C. 20220.
oOo
NB-1219
D E P T OF T U P T o t r
Tenders for $7,213 million of 13~we%9$^£ljB to be issued
on April 18, 1991 and mature on July 18, 1991 were
accepted today (CUSIP: 912794WZ3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 55%
5. 57%
5. 57%
Investment
Rate
5.72%
5.74%
5.74%
Price
98.597
98.592
98.592
$935,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 100
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
45,665
21,110,490
28,235
52,675
56,465
37,340
1,395,800
57,135
9,220
36,605
21,515
703,195
796.600
$24,350,940
Accepted
45,665
5,918,740
28,235
52,675
56,465
34,340
93,800
17,135
9,220
36,605
21,515
102,195
796.600
$7,213,190
Type
Competitive
Noncompetitive
Subtotal, Public
$19,368,255
1.864.465
$21,232,720
$2,230,505
1.864.465
$4,094,970
2,569,020
2,569,020
549.200
$24,350,940
549.200
$7,213,190
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -1220
UBLIC DEBT NEWS
Washington, DC 20239
Department of the Treasury •!.
FOR IMMEDIATE RELEASE, ,f>fi}
„ _ CONTACT: Office of Financing
April 15, 1991
APR i b Si U 0 I 7 0
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
DEPT. OF THE TREASURY
Tenders for $7,202 million of 26-week bills to be issued
on April 18, 1991 and mature on October 17, 1991 were
accepted today (CUSIP: 912794XK5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 66%
5. 68%
5. 67%
Investment
Rate
5.92%
5.95%
5.93%
Price
97.139
97.128
97.134
Tenders at the high discount rate were allotted 14
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,905
21,417,825
17,500
33,155
35,275
34,905
1,291,005
35,370
6,880
48,335
16,400
805,405
647.635
$24,417,595
Accented
27,905
5,981,820
17,500
33,155
35,250
34,045
80,005
15,370
6,880
44,035
16,400
261,905
647.635
$7,201,905
Type
Competitive
Noncompetitive
Subtotal, Public
$20,171,090
1.260.305
$21,431,395
$2,955,400
1.260.305
$4,215,705
2,150,000
2,150,000
836.200
$24,417,595
836.200
$7,201,905
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1221
[TREASURY NEWS
Department of the Treasury • Washington, d £c L(Mi
566-2041
L Ur
EMBARGOED UNTIL GIVEN
EXPECTED AT 9:30 A.M.
TESTIMONY OF
THE HONORABLE ROBERT R. GLAUBER
UNDER SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
April 16, 1991
Chairman Riegle, Senator Garn, members of the Committee:
I
appreciate this opportunity to present the
Administration's views on Title III of S. 207, the "Futures
Trading Practices Act of 1991."
As you know, early last month the Senate Agriculture
Committee was poised to mark-up a bill to reauthorize the
Commodity Futures Trading Commission (CFTC).
For nearly a year
the Administration has taken the position that such legislation
should not be enacted without addressing the crucial, systemwide
intermarket issues that were identified in the wake of the market
decline in 1987 —
particularly the lack of harmonized federal
oversight of margins in the "one market" of stocks, stock
options, and stock index futures.
Unfortunately, opponents of
these far-reaching changes had managed to block its consideration
in the last Congress, and the stalemate appeared likely to
continue in the Agriculture Committee mark-up.
At this point the Administration decided that we could no
NB- 1 2 2 2
2
longer afford stalemate, especially given the crucial need for
harmonized federal oversight of margins to avoid financial market
disruptions.
Accordingly, we agreed to a compromise that would
resolve the margin issue and at least make some progress on other
intermarket issues involving competition between markets.
We believed that such a compromise was the wisest course of
action under the circumstances, and the spirit of this compromise
was adopted by the Agriculture Committee in Title III of S.207.
While the actual language reported by the Committee raised a
number of important but unintended technical issues, during the
last several weeks we have worked hard to resolve these issues.
I would like to thank the staffs of the Securities and Exchange
Commission, the CFTC, and the Federal Reserve for their technical
help, especially since they did not always agree with the
substance of the provisions.
We expect a revised version of
Title III addressing these technical issues to be offered as a
managers' amendment to S.207 when it is taken up on the floor of
the Senate.
It is Secretary Brady's view that this new Title III
addresses many of the competing interests in the debate over CFTC
jurisdiction without compromising fundamental public benefits
embodied in previous proposals.
Most importantly, with the new
ability to harmonize margins on the basis of systemic risk, an
end to the stalemate will substantially reduce ongoing risk to
3
our financial markets.
In addition, improvements to the
jurisdictional issue involving hybrid instruments are at least a
modest step forward.
In that spirit, the Administration
generally supports new Title III.
To understand this compromise, let me provide you with some
additional background information.
As you will recall, the
Administration in 1990 submitted a proposal that in some respects
went considerably farther than the current proposal.
Among other
things, the 1990 bill would have unified regulation of stock and
stock derivative products? authorized harmonized federal
oversight of margins on such products to take into account
systemic risk? and permitted hybrid instruments to trade on both
stock and futures exchanges.
The 1990 proposal, like the
proposed version of Title III, included key recommendations
developed by the 1987 Presidential Task Force on Market
Mechanisms chaired by Secretary Brady.
Members of this Committee and members of the Senate
Agriculture Committee subsequently developed a substitute version
that deleted our proposal for unified regulation of equityrelated markets but preserved other important elements of the
bill in modified form (the so-called "Leahy-Lugar compromise”).
We appreciate the considerable efforts that were made to reach
this compromise last fall.
As you know, however, it was not
passed in the closing days of the last Congress, and the
4
Agriculture Committee was not prepared to report it out of
Committee last month.
Under the new Title III that was passed by the Agriculture
Committee (and as expected to be amended), the Federal Reserve
would be given authority to prescribe margin levels for stock
index futures, which it could delegate to the CFTC.
The CFTC
would be authorized to exempt certain products in the public
interest, and it would be directed to exempt certain swaps and
deposit hybrids if not contrary to the public interest.
Unlike
our original 1990 proposal and the Leahy-Lugar compromise,
however, jurisdiction over hybrid commodities would depend on a
preponderance-of-value test, rather than allowing hybrid
securities to trade anywhere as we had originally proposed.
Importance of this Bill
While new Title III does not go as far as our original
proposal, particularly in the area of hybrid instruments, it is
timely, constructive, and deserves to be enacted.
have passed since the October 1987 market break.
Four years
While several
important steps have been taken to prepare for major market
disruptions —
including intermarket circuit breakers, large
trader reporting, and improved clearance and settlement
procedures between markets —
critical legislation has yet to be
enacted, particularly in the crucial area of intermarket margins.
Meanwhile, we have experienced repeated episodes of violent drops
in the stock market in the absence of any significant news
events.
These major market disruptions have severely damaged the
confidence of individual investors.
We continue to believe the single most important step
Congress can take to address the likelihood and consequences of
major market disruptions is to unify regulation of the "one
market" of stocks, stock options, and stock index futures.
Short
of jurisdictional reform, however, we believe the provision in
new Title III assigning broad authority for setting margin levels
for stock index futures to the Federal Reserve Board represents a
critical step toward promoting intermarket stability.
We
strongly support this margin provision as amended.
Regulatory fragmentation over hybrid commodity instruments
also is creating a serious impediment to innovation, as amply
demonstrated in the Seventh Circuit's decision concerning Index
Participations in Chicago Mercantile Exchange v. Securities and
Exchange Commission. 883 F.2d 537 (1989).
The 50 percent test
under new Title III, together with new authority to exempt
futures contracts and mandatory exemptions for certain swaps and
deposit products, represent modest improvements and clarification
over the current situation.
Although the new provisions on
hybrids do not authorize the broader competition in financial
instruments that the Administration initially proposed, we
generally support them in the context of new Title III.
6
Let me now explain our views in more detail on the two basic
issues embodied in new Title III —
margins and exclusivity.
Margins
To enhance the safety and soundness of the financial system,
the bill gives the Federal Reserve authority to request any
contract market to set the margin for any stock index futures
contract (or option thereon) at such levels as the Board in its
judgment determines are appropriate to preserve the financial
integrity of the contract market or to prevent systemic risk.
If
the contract market fails to do so, the Board can direct the
contract market to adopt such margin levels.
This would preserve
the ability of the futures exchanges to manage margin
requirements on a day-to-day basis, and the statute would not
require minimum margin levels, which would be left to regulatory
discretion.
The result would be that, for the first time since stock
index futures began trading in 1982, the federal government would
have oversight authority over margins on all stock and stock
derivative products —
and not just for the narrow "prudential"
concerns of participants in a single market, but also for the
broader concern of systemic risk.
This systemic risk standard is
absolutely crucial to the protection of the integrity of the
nation's financial system.
Moreover, the Federal Reserve would
have the authority to harmonize margins across markets because it
7
already has ultimate margin authority over stocks and stock
options.
We have repeatedly emphasized the problems that are inherent
in the current scheme of margin regulation.
Currently the
futures exchanges and their clearinghouses set margins on stock
index futures themselves.
The result is a tremendous disparity
in margin levels on stock and stock index futures, even though
they are part of one market where margin levels on one type of
instrument can have a direct impact on the trading and price of
other types of instruments.
The result has been that futures
margins, which have no federal oversight, have often dipped to
dangerously low levels.
Those who try to dismiss the need for harmonized margins by
claiming that they are unrelated to volatility are simply missing
the point.
We have never said that average volatility has
increased.
Our concern is major market disruptions and how to
slow them down when the tidal wave starts to form —
not
volatility.
There is a broad consensus about the need for federal
oversight of margins on stock index futures to limit systemic
risk.
Indeed, no credible argument has been advanced against
federal oversight —
we must have such oversight where the
actions of private market participants in a narrow segment of the
8
market create risks for the financial system as a whole.
dangerous practice that is not in the public interest.
It is a
We need
to address this unjustified anomaly, and new Title III does so
effectively.
Exclusivity
New Title III also contains five provisions relating to the
exclusivity clause in the Commodity Exchange Act —
mandatory
exemptive authority for institutional swaps, a 50 percent value
test to determine jurisdiction over hybrid commodity instruments,
general exemptive authority over futures contracts entered into
by institutional participants, mandatory exemptive authority for
certain deposits, and the exclusion of exchange-traded index
participations that the SEC had approved or for which approval
was pending on or before December 31, 1990.
We are well aware of the concerns others have expressed
about these provisions.
We would underscore, however, that a
reasonable compromise that could break the legislative stalemate
serves the overall interests of the public and the financial
markets.
Moreover, instruments that trade today off of futures
exchanges would not be affected by the new Title III, and some
new hybrid products that might be subject to the exclusivity
provision today would not be subject to it under the new
legislative language.
In short, as described below, each of
these five provisions represents at least a modest improvement
9
over current law.
Swaps.
The treatment of swaps under new Title III would
improve the current state of the law, which consists of a CFTC
policy statement under which traditional swaps are not subject to
regulation under the Commodity Exchange Act.
Under the proposed amendment, the CFTC would be required to
exempt all swaps that meet certain conditions:
the CFTC determines that the exemption is consistent
with the public interest;
-
each party to the swap is an "institutional
participant" as defined in the proposed amendment;
the creditworthiness of the parties is a material
consideration in entering into or determining the terms
of the swap; and
the swap is not standardized and "fungible" and it not
traded in an exchange setting.
Unlike the policy statement under existing law, the proposed
swap provision in new Title III does not preclude, among other
things, the netting of payments among parties to swap agreements,
which may help to decrease systemic risk.
Moreover, eligible
swap agreements would be exempted effective as of October 23,
1974, the date of enactment of the Commodity Futures Trading
Commission Act, to ensure that the exemption is available for all
10
eligible swaps, regardless of when they were entered into.
We
believe the required exercise of exemptive authority for swaps
will remove a great deal of uncertainty that has surrounded the
swaps market.
Indeed, we understand that the International Swap
Dealers Association and the Securities Industry Association
consider this provision in new Title III to be an improvement
over current law.
Hybrid Commodity Instruments.
Current CFTC statutory
interpretation and regulations, as upheld by the courts, provide
the CFTC with broad discretion to assert exclusive jurisdiction
over hybrid commodity instruments.
This could be upheld even
where an instrument resembles a security much more than a futures
contract.
The 50 percent test of new Title III would exclude
from CFTC jurisdiction certain instruments that would otherwise
be covered under this broad CFTC authority, such as certain bonds
whose return is tied to the price of oil.
Moreover, the new test
would allow financial instruments to be structured to take
advantage of the broader rules.
Exemptive Authority.
For the first time, the CFTC would
have exemptive authority with respect to futures contracts
entered into by institutional participants.
While this exemptive
authority is not as broad as the CFTC's authority with respect to
commodity options, it is a step in the right direction.
As the
Agriculture Committee report noted, this new exemptive authority
11
can and should be used to provide greater regulatory flexibility
with respect to transactions in existing markets, as well as for
new transactions or markets.
market.
An example is the Brent crude oil
The CFTC's statutory interpretation, which concludes
that the market is not covered by the Commodity Exchange Act, has
been questioned by some, including a dissenting commissioner of
the CFTC.
In the absence of exemptive authority, the CFTC's
interpretation may not remove all doubt concerning the legal
status of Brent market transactions, which at least one court has
held to be futures contracts.
Exempting transactions in the
Brent markets would alleviate this uncertainty and free U.S.
participants from the competitive disadvantage of off-exchange
trading restrictions under the Commodity Exchange Act.
Deposits.
The bill also improves current law by mandating
the exemption of deposits with futures or options attributes that
do not meet the 50 percent test if the deposit or account is
subject to comprehensive banking regulation and the exemption
would not be contrary to the public interest.
This is similar to
the provision that was included in the Leahy-Lugar compromise
that was agreed to by a number of Senators in the latter part of
the last Congressional session.
This provision is an improvement
over current law, because it clarifies that the CFTC has clear
authority to exempt certain deposits from the Act, and indeed, is
required to exercise that authority if the new statutory
standards are satisfied.
Moreover, it must be emphasized that
12
this provision gives no new jurisdiction to the CFTC over deposit
instruments, and certainly does not extend to bank products that
have no futures or options attributes.
Index Participations.
Regarding index participations, at
least five of the eight IPs products that have been approved by
the SEC or pending approval will be allowed to trade on
securities exchanges.
The other three could trade if a licensing
agreement between the Chicago Mercantile Exchange and Standard &
Poor's Corporation is amended.
While all of these improvements to the exclusivity clause
fall short of the Administration's original proposal, the margin
provision represents a substantial improvement over current law.
At the same time, the exclusivity provisions represent at least a
modest improvement over existing law.
The Bond-Wirth Proposal
Let me turn now to the language proposed by Senators Bond
and Wirth as an alternative to the exclusivity provisions of new
Title III (the margin language would not be affected).
This
alternative includes broader general exemptive authority for the
CFTC? broader exclusions from CFTC jurisdiction for swaps and
deposit products; a broader exclusion provision for Index
Participations? and the ability of some hybrid instruments to
trade either on futures or securities exchanges if approved by
13
the appropriate agency.
This language is obviously closer in
nature to provisions the Administration included in its original
proposal in 1990.
However, the controversy surrounding this type
of proposal has failed to result in legislation, delaying passage
of crucial safety and soundness measures such as federal
oversight of margins on stock index futures based on systemic
risk.
As a result, we believe it is wise at this time to support
the compromise embodied in new Title III, which addresses the key
margin issue and makes modest improvements in the areas addressed
more sweepingly by the Bond-Wirth proposal.
Conclusion
As you well recall, Mr. Chairman, on Black Monday four years
ago, we had a crisis on our hands.
Despite the progress that has
been made to improve market stability, the many studies that have
been conducted, and the thorough debate that has taken place,
there is much unfinished business —
business that is crucial.
We cannot continue to keep our financial markets at risk, which
they are without federal oversight of stock index margins.
We believe Congress now has an opportunity to make a
significant contribution to the stability and competitiveness of
• financial markets.
This is the time to move forward, to
take the next constructive step, which new Title III represents.
Let's not make the best legislation the enemy of good
legislation.
If we wait for a perfect bill, we may be waiting a
- 14 long time.
Meanwhile, our regulatory system will not be
adequately prepared in the event of another market break.
Mr. Chairman, that concludes my testimony.
I would be
pleased to answer any questions the Committee may have.
FEASURY NEWS
artmtnt of tho Treasury • Washington, D.e. • Tslophons 56*204
As Prepared for Delivery
Immediate Release
April 16# 1991
STATEMENT BY THE HONORABLE NICHOLAS 7. BRADY
SECRETARY 07 THE TREASURY
GOVERNOR 07 THE UNITED STATES 5
BE70RE THE
INAUGURAL MEETING 07 THE
EUROPEAN BANK 70R RECONSTRUCTION AND DEVELOPMENT
Mr. President# fellow Governors# delegates# and distinguished
guests.
It is a privilege to take part today in this inaugural
meeting of the European Bank for Reconstruction and Development#
whose purpose is to help transform the nations of Central and
Eastern Europe into growing democratic market economies.
The challenge to these nations is great.
Entire political and
economic systems must be transformed.
The United States stands
t0Bh*iP 4 in thi>
Our participation in the creation
?an)c is * reflection of the importance which we attach to
this task.
central and Eastern Europe over the past two years. The political
ana economic objectives have been clear. Politically# citisens of
central and Eastern Europe choose freedom.
Economically# they
that promotes economic growth and rewards private
strive to replace state-run economies with the
aspirations
*raa market.
Our task is to support these
J1®® a central role to play in turning these aspirations
F*aa market and democratic principles are enshrined
initiArtlelBB' its structure is a combination of a merchant bank
iSr a development bank, which gives it the flexibility to build the
?ict5 r with
support of government, it also will have
thl S i l ity4 i.° v 0rk diractlF
foreign investors, in addition#
®®n,e wil1 hav® the capacity to promote regional projects in
market areas such as the environment# telecommunications and
transport.
NB- 1 2 2 3 ( * )
2
The founding members' emphasis on free market forces is enshrined
in its Articles of Agreement, which reserve the bulk of the Bank's
activities for direct support of the private sector and for
privatization activities. This private sector emphasis, which is
also a legal requirement, was a critical element of U.S. support
for the Bank.
r
The next step is to turn the Articles of Agreement into an
operational program for the Bank, a process that is already
underway.
of course^ the Bank will need to keep in mind the
ongoing activities or dtfter multilateral and bilateral donors to
the region,
in order to avoid duplication and conflicting
operations.
Building on its unique structure, however, the EBRO
has a special role to play.
We believe etrongly that the EBRD's focus should be private sector
development and the financing of infrastructure which directly
supports private sector activity. In particular, the Bank should
emphasize the privatization of existing state enterprises, the
provision of venture capital, the creation of new, private,
financial institutions and the development of capital markets.
The EBRD has been given a special mandate
involvement in this area is vital and will
environmental impact assessment process
participation.
In view of the critical
recovery in the region, this process is a
and sustainable development.
in the environment. Zts
be assisted through the
and meaningful public
need for environmental
pre-requisite for sound
We, the shareholders, have a responsibility to provide the Bank,
through our Directors, with clear policy guidance. The Directors
-*» as personal representatives of the Governors — must play a key
role in developing the focus of the EBRD. The Board of Directors,
therefore, should be fully involved and Informed. The Board should
conduct its role of guiding policy and approving operations with
the knowledge that management is to carry out day-to-day
operations.
we do not view the activity of the Board as an
advisory one, but, Instead, as a critical element of the Bank's
operations.
In conclusion, X would like to state the United States' strong
support for this institution and its goals. As an International
institution with a membership that spans many continents, the Bank
can play a pivotal role in assisting the countries of East and
Central Europe through the transition process.
3
I would like to congratulate Jacques At tali and hie staff for the
progress they have made in the organization of the Bank. We stand
ready to work with you, Mr. President, on the important task that
lies ahead.
I would also like to thank Her Majesty’s Government for the
extraordinary support it has shown this new organization.
Finally, X would like to reiterate the United States' strong
commitment to the nations of Central and Eastern Europe as they
seek an historic transformation of their economic and political
life. They have earned our admiration and merit our support.
Thank you.
1*1
FOR RELEASE AT 4:00 P.M.
April 16, 1991
CONTACT^ p i O f l f 1q £ AHft&ncing
' u“' 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 approxi
mately $15,200 million, to be issued April 25, 1991.
This offer
ing will result in a paydown for the Treasury of about $15,575
million, as the maturing bills total $30,774 million (including
the 161-day cash management bills issued November 15, 1990, in the
amount of $12,032 million).
Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500, Monday, April 22, 1991, prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$7,600 million, representing an additional amount of bills dated
January 24, 1991, and to mature July 25, 1991 (CUSIP No. 912794
XA 7), currently outstanding in the amount of $10,369 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately
$7,600 million, representing an additional amount of bills dated
October 26, 1990, and to mature October 24, 1991 (CUSIP No. 912794
WV 2), currently outstanding in the amount of $10,132 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competi
tive 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 25, 1991.
Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rates of accepted competitive
tenders.
Additional amounts of the bills may be issued to Federal
Reserve Banks, as agents for foreign and international monetary
authorities, to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing bills
held by them.
Federal Reserve Banks currently hold $2,132 million
as agents for foreign and international monetary authorities, and
$5,597 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 bookentry records of the Department of the Treasury should be sub
mitted on Form PD 5176-1 (for 13-week series) or Form PD 5176-2
(for 26-week series).
NB-1223
I
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 sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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.
1/91
f
TREASURY*S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
f
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Com
petitive 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.
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.
8/89
FOR RELEASE AT 4:00 P.M.
April 17, 1991
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $21,000 MILLION
The Treasury will auction $12,000 million of 2-year notes
and $9,000 million of 5-year notes to refund $10,573 million of
securities maturing April 30, 1991, and to raise about $10,425
million new cash. The $10,573 million of maturing securities are
those held by the public, including $951 million currently held
by Federal Reserve Banks as agents for foreign and international
monetary authorities.
The $21,000 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 aver
age prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $777 million of the maturing secu
rities that may be refunded by issuing additional amounts of the
new securities at the average prices of accepted competitive
tenders.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offer
ing circulars.
oOo
Attachment
NB-1224
OF
r- qj
{/> p
ci
HIGHLIGHTS
2 -YEAR AND
OF
TREASURY
OFFERINGS
TO
I £
THE
£
I yH1 C^l
co1
1
PUBLIC
5-YEAR NOTES TO BE ISSUED APRIL 30,
1991
April 17, 1991
Amount: Offered to the Public ... $12,000 million
$9,000 million
Description of S e c u r i t y :
Term and type of security ...... 2-year notes
Series and CUSIP designation ... Series Z-1993
(CUSIP No. 912827 A5 1)
Maturity date ................
April 30, 1993
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
5-year notes
Series N-1996
(CUSIP No. 912827 A6 9)
April 30, 1996
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
October 31 and April 30
$ 1,000
Terms of S a l e :
Method of sale ....
Competitive tenders
Noncompetitive tenders
.
Accrued interest payable
by investor ............
Payment T e r m s :
Payment by non-institutional
investors ........................
Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the aver
age price up to $1,000,000
Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the aver
age price up to $1,000,000
None
None
Full payment to be
submitted with tender
Full payment to be
submitted with tender
Deposit guarantee by
designated institutions ........ Acceptable
Kev D a t e s :
Receipt of tenders .............
a) noncompetitive ...............
b) competitive ..................
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury ...
b) readily-collectible check ...
Acceptable
Wednesday, April 24, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Thursday, April 25, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Tuesday, April 30, 1991
Friday, April 26, 1991
Tuesday, April 30, 1991
Friday, April 26, 1991
IîbI
u
I+-1
19
s9
En
of
Mo
1 —
IpfZ Z 31 (TO
«bartment of the Treasury • Washington, D.c • T e le p h o n e 5 6 6 -2 0 4 1
3EPT.0F THE TREASURY
For Immediate Release
April 19,
Monthly Release of U.S.
1991
Reserve Assets
The Treasury Department today released U.S.
for the month of March 1991.
reserve assets data
As indicated in this table, U.S. reserve assets amounted to
$78,002 million at the end of March 1991, down from $82,797 million in
1 February 1991 .
U.S. Reserve Assets
(in millions of dollars)
■End
[of
■Month
Special
Drawing
Rights 2/3/
Reserve
Position
in IMF 2/
Total
Reserve
Assets
Gold
Stock
■February
82,797
11,058
10,958
51,225
9,556
¡ Mar ch
78,002
11,058
10,368
47,666
8,910
1/
Foreign
Currencies
4/
■1991
¡1/ Valued at $42.2222 per fine troy ounce.
¡2/ Beginning July 1974, the IMF adopted a technique for valuing the SDR
b a s e d on a weighted average of exchange rates for the currencies of
s e l e c t e d member countries.
The U.S. S D R h o l d i n g s and r e s e r v e
posi t i o n in the IMF also are valued on this basis beginning July
1 974.
¡3/ Includes allocations of SDRs by the IMF plus transactions
li/ Valued at current market exchange rates.
fB-1225
in SDRs.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 22, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $7,615 million of 13-week bills to be issued
on April 25, 1991 and mature on July 25, 1991 were
accepted today (CUSIP: 912794XA7).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 67%
5. 70%
5. 69%
Investment
Rate
5.85%
5.88%
5.87%
Price
98.567
98.559
98.562
$100,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 29
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
32,310
24,503,885
28,350
36,485
49,580
21,060
1,128,740
17,205
7,755
31,970
20,510
517,345
916.460
$27,311,655
Accepted
32,310
6,192,370
28,350
36,485
49,580
20,350
164,990
17,205
7,755
31,970
20,510
96,345
916.460
$7,614,680
Type
Competitive
Noncompetitive
Subtotal, Public
$22,845,635
1.686.460
$24,532,095
$3,148,660
1.686.460
$4,835,120
2,546,860
2,546,860
232.700
$27,311,655
232.700
$7,614,680
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -1 2 2 6
jiM
Uli PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 22, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $7,619 million of 26-week bills to be issued
on April 25, 1991 and mature on October 24, 1991 were
accepted today (CUSIP: 912794WV2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.79%
5.79%
5.79%
Investment
Rate
6.06%
6.06%
6.06%
Price
97.073
97.073
97.073
$1,500,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 98%.
The investment rate is the equivalent coupon—issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
24,080
22,536,705
12,555
25,385
40,930
19,540
1,678,525
15,345
3,510
30,540
15,870
529,705
616.800
$25,549,490
Accepted
24,080
6,736,045
12,555
25,385
40,930
18,540
28,525
15,345
3,510
27,540
15,870
53,525
616.800
$7,618,650
Type
Competitive
Noncompetitive
Subtotal, Public
$20,766,915
1.098.475
$21,865,390
$2,836,075
1.098.475
$3,934,550
3,050,000
3,050,000
634.100
$25,549,490
634.100
$7,618,650
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -1227
STATEMENT OF THE HONORABLE
DAVID C. MULFORD
UNDER SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
TRADE, OCEANS AND ENVIRONMENT
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
APRIL 23, 1991
Introduction
Mr. Chairman and Members of the Committee, it is a great pleasure
to testify before you today on the critical role of the
international financial institutions (IFIs) as instruments to
achieve U.S. economic policy objectives in the world economy,
and international and bilateral efforts underway to support
economic reform. More specifically, I will be presenting the
Administrations request for Congressional approval for U.S.
participation in an increase of resources for the International
Monetary Fund (IMF), a Special Capital Increase (SCI) for the
Asian Development Bank (ADB), and the sixth replenishment of
resources of the African Development Fund (AfDF).
I will also give you an update on the international debt strategy
and' the contribution of the IFIs to the strategy, discuss
President Bush*s Enterprise for the Americas Initiative (EAI), and
review the role of the IFIs in protecting the global environment.
The International Monetary Fund flMF^
The resource needs of the IMF are reviewed periodically to ensure
that the Fund has adequate resources to fulfill its global
responsibilities. Negotiations on the current increase began in
1987 and were scheduled to be concluded in 1988. The United
States delayed conclusion of the negotiations by some two years,
however, until there was a clear and compelling case for the
increase and we were certain that an increased contribution would
be wisely spent. Last year, the IMF concluded negotiations on a
50 percent increase in its resources from $130 to $195 billion.
The U.S. share of the increase is some $12 billion at current
exchange rates, for which we will be seeking Congressional
authorization and appropriations. This is.the first quota
increase since 1983.
NB-1228
2
Passage of this legislation is essential. The increase in IMF
resources is vital if the Fund is to provide assistance throughout
the world and to secure U.S. objectives in the new world order of
multilateral cooperation. Following the onset of the Gulf crisis,
the Fund adapted its procedures to help countries throughout the
world address the economic costs of the crisis, including higher
oil imports.
In Eastern Europe, the IMF is backing sweeping reforms aimed at
restructuring economic life away from central planning and
establishing the foundation for the transition to market
economies. Especially in Poland, Hungary, and Czechoslovakia, IMF
policy advice and financial support is opening up free markets and
unlocking substantial additional resource flows. The Fund is also
supporting debt and debt service reduction, particularly in Latin
America, under the U.S.-led international debt strategy. In
addition it is promoting comprehensive reforms for increased
growth and the alleviation of poverty on concessional terms in
Africa. Through its essential support for the international
monetary system, the IMF is promoting a stronger world economy in
which U.S. jobs and exports can thrive.
Overall Fund lending is expected to more than double in 1991 to
$16 billion in disbursements and remain high in subsequent years.
In addition to bolstering Fund liquidity to meet these near-term
financing demands, the quota increase will provide for adequate
Fund resources over the medium term.
The quota increase will also help the Fund to keep pace with the
growth in the world economy. Over time, the size of the Fund's
quotas has fallen significantly to roughly 4 percent of world
imports. IMF quotas were at the 10 percent level during the
1960s. If the Fund is to be effective in its mission, it must be
perceived as being of a meaningful size relative to the problems
at hand in the world economy. This is necessary for countries to
adopt appropriate adjustment measures and for the Fund to catalyze
resources from other lenders.
Furthermore, the United States, as the leading and largest member
of the IMF, has a special responsibility to do its part in the
organization. Failure of the United States to support the quota
legislation would seriously erode the effectiveness and
credibility of the IMF.
In this context, the United States, with some 19 percent of the
IMF's voting power, has effective veto over key IMF decisions,
such as quota increases and amendments to the IMF's Articles, both
of which require an 85 percent majority. This veto power has
often proven essential to ensure that the Fund operated in a
manner consistent with overall U.S. interests.
3
The IMF is also extremely cost-effective in supporting U.S.
interests. First, the transfer of dollars to the IMF is like
putting money into a checking account which is interest-bearing
and can be drawn automatically. In recognition of this unique
monetary character of the IMF, the U.S. quota involves no net
budgetary outlays. Under the recent budget summit agreement, a
specific provision was made to account for the unique budgetary
treatment of the quota increase. While use by the IMF of the U.S.
quota will increase Treasury*s borrowing requirements, the
interest earned on the U.S. position in the Fund offsets this
cost. Furthermore, the IMF leverages our scarce resources, which
is particularly important at this time of budget restraint. For
every dollar we put in, others put in four.
During the quota negotiations, a number of steps were taken to
ensure that U.S. resources would be used far more effectively by
the IMF. Thus, at U.S. insistence, as an integral part of the
quota negotiations, the United States gained agreement on a
strengthened strategy to tackle the large and growing problems of
arrears in payments to the Fund. In recent years, arrears to the
Fund have grown to some $5 billion.
The strengthened arrears strategy is designed to protect the
Fund*s financial position. This strategy is well balanced,
combining incentives for countries to clear their overdue
obligations with disincentives to deter new arrears cases.
Mr. Chairman and Members of the Committee, the IMF is serving
vital U.S. interests throughout the world. It is an extremely
cost-effective organization. To ensure continued strong U.S.
leadership in this critical global organization, I urge you to
support the proposed increase in the U.S. quota share in the IMF.
The Multilateral Development Banks (MDBs)
U.S. participation in the World Bank Group and the regional MDB
groupings is based on the same premise as our participation in the
IMF — to promote a sound world economy and increased prosperity
for all countries. In an interdependent world this means
furthering an international economic framework that is open and
market-oriented to promote the efficiencies in production that
trade fosters. These gains from trade make for a world-wide
improvement in living standards.
MDB lending supports this general objective by mobilizing private
sector and government resources to finance the basic
infrastructure and service projects that improve productivity and
living standards in developing countries. Loans from the World
Bank and the regional MDBS have financed rural electricity, basic
health care, agricultural extension, education, water and
sewerage, environmental and resource management,
4
telecommunications, private sector investment, and public sector
reform projects.
Project viability, however, is determined not only by the rate of
return on a specific project, but also is dependent upon the
policy environment in which a particular project exists.
Therefore, the MDBs also engage in adjustment lending to support
sectoral and macroeconomic reforms to improve the domestic policy
and institutional environment with the goal of moving a national
economy toward self-sustaining economic growth. World Bank
adjustment lending, in particular, provides an essential
structural counterpart to the macroeconomic stabilizations
provided by the IMF.
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.
In addition,the business contracts resulting from MDB projects are
a direct and tangible benefit of 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 $2.0 billion in
contracts from the MDBs last year. This compares with U.S. budget
expenditures for the MDBs averaging about $1.6 billion 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 lead to follow-on business. In sum, MDB
projects are an important nexus for the development of U.S.
exports and jobs in the export sector, the value of which far
exceeds our financial support for these institutions.
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.
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.
Periodically we need to increase the capital base of the marketrelated "hard-loan windows" and replenish the resources of the
concessional "soft-loan windows" of these institutions. This year
we will be seeking Congressional approval for U.S. participation
in a Special Capital Increase (SCI) of the Asian Development Bank
5
(ADB) and in the sixth replenishment of resources for the African
Development Fund (AFDF). There have also been discussions between
the management and executive directors of the International
Finance Corporation (IFC) regarding justifications for an IFC
capital increase.
When the ADB was established in 1966, the United States and Japan,
as the two pre-eminent economic powers in the region, each
subscribed to the same number of shares in the Bank's capital
stock. The presumption was that equal ownership would be
reflected in equal influence in the policies and operations of the
Bank.
Although the situation has changed since then — most notably with
Japan's rapid growth and the expansion of its influence in Asia —
the United States' involvement and stake in the economic and
political development of the Asian countries have remained strong.
Also, the Asian Development Bank has evolved as a significant
factor in the economic development of the poorer countries in the
region. During this time we have adhered to the principle that
the United States should keep its relative share in the ownership
of the Bank's capital in order to maintain our influence in the
ADB.
In 1988 Japan sought a Special Capital increase to make up for the
decrease in its percentage ownership that had resulted from the
entry of China in the Bank and a previous SCI for several European
countries. The United States, in accordance with our long-time
objective of maintaining parity with Japan, also joined, as did
Sweden.
The SCI was approved by the ADB's Board of Governors in 1988. An
agreement was reached, however, that the participating countries'
contributions would not have to be made until later ——during our
fiscal years 1992 and 1993. The Administration is asking for
$425 million to be authorized to be appropriated for purchasing
U.S. shares in the SCI. The Administration will seek an
appropriation of $51 million for paid-in shares, and program
^-■i-*iai^a^ions in the amount of $374 million for callable shares.
In meeting our obligation under the SCI we will maintain the basis
for our influence in the ADB and thus avoid ceding a measure of
our influence in Asia in general, the world's most rapidly growing
economic region. This is why we have agreed to participate in the
SCI and seek the funds to meet our obligations under it.
In late February, the U.S. met all of its major policy objectives
for the sixth replenishment of the African Development Fund
(AfDF), and as a result, agreed to support a $3.4 billion increase
in the resources of this institution over a three year period. As
m the fifth replenishment, the U.S. would contribute 11.8 percent
of the total, which is $405 million, or $135 million annually.
6
Full implementation of the agreement will result in a fundamental
improvement in the quality of this institution's operations and
will signal a new commitment by the donor community and management
to make the AfDF a more effective and productive development
institution.
The bulk of the Fund's resources will now be allocated to
countries that are providing the economic environment conducive to
development and growth. Countries not pursuing sound economic
policies will be restricted to a defined program focussing on a
limited number of projects that can be implemented successfully
even in the face of adverse economic circumstances and policies.
To improve loan quality, donors agreed on new Board procedures
allowing executive directors with economic or technical concerns
on a loan to return it to the Loan Committee so that these
concerns may be addressed. We also reached agreement to
strengthen the Fund's environmental staff, and increase emphasis
on protection of forests and promotion of energy efficiency and
conservation.
The IFC serves U.S. policy goals in promoting the emergence of a
competitive private sector in developing countries. Nevertheless,
the IFC could be more effective in both promoting needed
developing country policy changes, and in encouraging the rest of
the World Bank group to give higher priority to the private
sector. The United States is, therefore, reviewing the proposal
of IFC management to increase IFC's capital in the broader context
of the need for the entire World Bank group to give significantly
greater priority to private sector developments in the 1990s. The
World Bank's private sector activities should be strengthened and
enhanced, and there should be better coordination between the
World Bank and the IFC on key policy issues regarding private
sector development and privatization. We are encouraging both the
IFC and World Bank to increase their support for privatization of
government entities. We also want the IFC to be more selective in
the countries and sectors in which it operates.
The International Debt Strategy
The international community has called on the IMF and World Bank
to assume pivotal roles in addressing external debt problems of
developing countries.
The international debt strategy, which has been shaped in large
part through U.S. leadership, has proven effective. Under the
debt strategy, we have seen real progress in reducing the debt
burdens of countries with strong economic reform programs. Eight
countries with substantial commercial bank debt — including two
of the largest debtor countries, Mexico and Venezuela — have
reached agreements with their commercial banks on packages that
include debt and/or debt service reduction. These countries
account for almost half of the total commercial bank debt of the
I ■
■
major debtor countries.
example:
7
■
■ ■
The benefits are substantial.
For
*
The Mexican agreement reduced annual interest payments by 33
percent ($1.5 billion); commercial bank debt was reduced by
38 percent? and the burden of $42 billion in principal
payments was removed.
*
The Costa Rican agreement reduced that country's commercial
bank debt by 62 percent and cut annual debt service payments
by 74 percent.
Chile, Venezuela, Morocco, the Philippines and Uruguay have also
reached agreements involving significant reductions in debt
burdens. Nigeria has recently reached an agreement in principle
with its banks on a debt reduction package. Several other
countries are continuing discussions with their banks including
Argentina, Bolivia, Brazil, Ecuador and Poland.
These debt reduction agreements enable debtor countries and
commercial banks to address their disparate needs. Furthermore,
these agreements are producing results for debtor economies by
helping restore investor confidence and stimulate new investment
flows.
The support of the IMF and World Bank is vital to achieving these
agreements. The economic reform programs countries undertake with
these institutions enable countries to gain credibility with their
creditors and to proceed with negotiations. The IMF has committed
$2.8 billion and the World Bank $2.7 billion to support specific
debt and debt service reduction instruments in countries that have
reached agreements with their commercial banks under the
strengthened debt strategy. As proposed in the President's
Enterprise for the Americas Initiative, the Inter-American
Development Bank is joining the IMF and World Bank in providing
support for these commercial bank packages.
The ongoing support from these institutions will help debtor
countries achieve real gains through economic reform and
commercial bank debt reduction.
The Paris Club of creditor governments has reached an historic
agreement to reduce Polish official bilateral debt by 50 percent
in real terms. The restructuring will occur in two stages,
including reduction of interest payments by 80 percent for the
first three years. This agreement reflects the culmination of
vigorous U.S. efforts to achieve multilateral agreement on
substantial debt and debt service reduction for Poland. In
addition, President Bush has announced that the United States is
prepared to increase U.S. debt relief for Poland beyond the Paris
Club consensus. A portion of the additional relief will help
Poland fund a new foundation for the environment.
8
This agreement provides a strong signal of creditor support for
Polish economic and democratic reforms. Together with the
conclusion of a new IMF program, it should help provide a sound
basis for sustained economic growth in Poland. Both measures
should also provide strong encouragement for new investment and
capital flows to Poland.
Enterprise for the Americas Initiative
In a further effort to strengthen the economies of our neighbors
in Latin America and the Caribbean and to improve trade
opportunities in the hemisphere, President Bush announced last
June the new Enterprise for the Americas Initiative (EAI).
This region is of vital interest to the United States. Ten years
of slow growth and debt overhang have plagued the economies of
Latin America and the Caribbean and thwarted opportunities for the
hemisphere as a whole.
The Enterprise for the Americas Initiative aims to address these
problems through action in three areas — trade, investment, and
debt. It thereby joins in a single endeavor the three economic
issues of greatest importance to the region. It also seizes, in
terms of timing and concept, on important developments already
underway in the region — including the spread of democracy and a
clear commitment on the part of many leaders in the region to
pursue reforms that will improve their economic prospects and make
them more competitive in attracting capital.
We are making real progress in implementing the vision laid out in
the Initiative. To increase trade and move toward the goal of a
hemispheric free trade system, we are pursuing a Free Trade
Agreement (FTA) with Mexico and Canada. The goal of this
agreement is to foster sustained economic growth for all three
countries, which together compose a market of over 360 million
people and $6 trillion in output. This FTA should expand and lock
in recent trade and investment liberalization achieved by the
Salinas Administration. As you know, the President has sent a
formal request to Congress seeking extension of fast track
authority, which will enable us to negotiate effectively such an
FTA agreement.
The debt reduction proposed under the Initiative will be an
important incentive for countries to carry out investment reforms.
We gained authority from Congress to undertake reduction of
concessional PL-480 debt for countries pursuing strong economic
reform programs, including liberalization of their investment
regimes. We will be discussing such debt reduction with
individual countries as they become eligible.
The Initiative will also provide significant benefits for the
environment within the hemisphere pursuant to EAI Environmental
9
Framework Agreements negotiated with each eligible country.
Interest payments made in local currency on the reduced PL-480
and, eventually, AID debts will remain in the country to support a
broad range of environmental projects. We expect local non
governmental organizations with expertise in the environment and
conservation to play a strong role in determining the use of these
environmental funds.
The President transmitted to the Congress on February 26,
legislation seeking authority from Congress to implement fully the
investment and debt elements of the Initiative. The
Administration is also requesting funding for implementation of
debt reductions and the creation of a multilateral investment fund
to support policy reform.
We are also seeking authorization of $500 million over five years
for a U.S. contribution to the Multilateral Investment Fund (MIF)
which the President proposed be established in the Inter-America
Development Bank (IDB). This Fund would target resources to
support specific aspects of investment reform and to help ease
some of the burden of investment liberalization.
The Investment Fund will channel resources through three
facilities: the Technical Assistance Facility; the Human
Resources Facility? and the Enterprise Development Facility. A
large portion of available resources will fund grant assistance
for development of human resources and business infrastructure,
thus making countries more attractive to potential investors and
help to mitigate the social costs of investment reform. These
resources can help speed implementation of needed reforms and
moderate social dislocations. With such support, governments can
pursue reforms aggressively during a window of opportunity while
minimizing the potential for social unrest and political pressures
in emerging democracies. In addition, the Investment Fund will
channel market-priced resources to and through non-governmental
organizations (NGOs) and financial institutions to stimulate
creation or expansion of small businesses.
We are proposing that the Investment Fund be created with a one
time capitalization of $1.5 billion to be paid over a 5-year
period, with the U.S. providing one-third of the contributions.
We have invited Japan to share the leadership of this effort with
the United States. Indeed, I am pleased to inform you that at the
annual meeting of the IDB in Nagoya, Japan, earlier this month,
the Government of Japan announced its support for the Multilateral
Investment Fund and encouraged other countries to follow the U.S.
and Japanese lead. We propose that the balance be funded by other
non-borrowing members of the IDB, many of whom have strong
traditional ties with the region.
The need to attract capital in order to build upon reforms already
underway is at the heart of every country’s development challenge.
10
While other programs and organizations already exist which attempt
to address these needs, the proposed new Investment Fund will
direct capital to areas which until now have not received adequate
attention.
Existing institutions are not equipped to respond quickly and
flexibly to meet the challenge of simultaneous and fast-paced
reform on a variety of fronts. High quality technical assistance
must be in place prior to major decisions on privatization and on
investment policy reform is such areas as the regulatory
environment, the tax system, and the financial sector. Technical
assistance must also be available to help countries improve vital
business infrastructure such as telecommunications, without which
no amount of policy reform will enable a country to attract
additional private investment. Resources for retraining and human
resource development must equally be assured to workers fearful of
change. And smaller businesses must see that they can participate
in the new opportunities created by freer markets.
This type of assistance requires costly, one-time grant financing
which is not supplied on a large scale by existing multilateral
development banks (MDBs)• The MDBs cannot generate sufficient
income surpluses through their operations to finance the level of
technical assistance required. We and the other members of these
institutions, plus bond rating agencies, insist that MDB operating
expenses be fully covered in MDB loans. This rules out
subsidizing loans to finance the technical assistance and detailed
diagnostic studies envisioned? hence the need to establish a MIF
to provide these resources.
We have been discussing this proposal in detail with the IDB and
other donor governments. There is no question that the IDB and
the IIC will continue to be important to the overall adjustment
efforts of the Latin American and Caribbean countries. They will
make crucial contributions to private investment in many
countries. Implementing sweeping changes in investment climates
requires broad policy control which we can only obtain through a
multilateral approach in an institution that the region respects,
namely, the IDB. To accomplish the goals of opening their
investment regimes and attracting capital, countries rely on a
range of programs, including IIC private sector equity and loans
and the traditional sector and project financing of the IDB.
However, while these programs provide critical support, they
cannot substitute for the financial resources and additional
expertise that the MIF can bring to bear. For these reasons, we
urge your immediate and full support for the Multilateral
Investment Fund.
Environmental Considerations
The environment has been an extremely important element in our
overall approach to economic issues in recent years. Economic
11
progress will
environmental
be integrated
international
be sustainable only in the context of sound
practices. Hence, environmental considerations must
more effectively into the on-going operations of the
financial institutions.
This concern led us to negotiate an environmental framework for
the IDA-9 Replenishment Agreement in 1990. It is the reason we
took such a strong stance on these issues in negotiating
replenishment of the African Development Fund and the
establishment of the European Bank for Reconstruction and
Development. It underlies the great weight we have given to three
key issues: environmental impact assessment, protection of
tropical forests, and promotion of energy efficiency and
conservation measures.
We believe the World Bank and the IDB will be ready to implement
new environmental impact assessment procedures in line with
legislation passed in the last Congress. The World Bank is
reassessing its forest policy and taking a new look at energy
efficiency and conservation alternatives. It has created a
special unit for energy efficiency and conservation for its
operations in Eastern Europe and is restructuring its Energy
Sector Management Assistance Program.
These reforms represent a significant commitment to strengthen
environmental capability in the MDBs. However, additional effort
is still needed to assure effective implementation. This year we
will look for new opportunities to influence energy policy and
promote more energy efficiency and conservation projects. We are
seeking more rapid progress on environmental impact assessment in
the Asian and African Development Banks. We will consider further
improvements and refinements, if they are needed, in the
procedures already being adopted by the World Bank and the InterAmerican Development Bank. We will continue our efforts to secure
greater protection for tropical forests, including reform of the
Tropical Forestry Action Plan.
We also want to encourage innovative programs that can be a
catalyst for more rapid environmental progress within developing
countries. That is why we have encouraged debt-for-nature swaps
and put so much emphasis on the environmental element of the
Enterprise for the Americas Initiative, and will devote a portion
of Poland*s debt relief to help fund a Polish environmental
foundation. In addition, we have offered to provide up to $150
million in parallel financing to the World Bank's Global
Environmental Facility over its three life. Our objective in the
facility is to foster greater interest in pilot projects that can
become part of regular lending programs in future years. We also
want to encourage a more open process that involves the scientific
and NGO communities.
12
The United States is also at the forefront in encouraging the IMF
to enhance its environmental focus. Widespread recognition has
emerged that IMF macroeconomic policy advice and prescriptions can
have at times an important, though indirect, impact on
environmental protection. In particular, the IMF has decided to
establish a group of economists that will serve as a liaison with
other organizations on environmental research and advise the Fund
on addressing environmental concerns. Also, most IMF country
documents now discuss environmental concerns. The IMF has also
strengthened its collaboration with the World Bank in taking
account of structural measures for environmental protection in its
work.
Conclusion
The United States relies heavily on the international financial
institutions (IFIs) to promote a sound, environmentally safe,
world economy and stable international monetary system. The
successful operation of IFI activities makes one additional
contribution: the promotion of peace and democracy among nations.
These are important matters, as I am sure you will agree, Mr.
Chairman. It is critical that the Executive and Legislative
Branches of our government continue to coordinate their activities
closely on these issues.
TREASURY NEWS
spartment of the Treasury • Washington, o.c. • Telephone
FOR RELEASE AT 4:00 P.M.
April 23, 1991
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 $ 16,000 million, to be issued May 2, 1991.
This offering will result in a paydown for the Treasury of about
$4,000 million, as the maturing bills are outstanding in the
amount of $20,011 million. Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500, Monday, April 29, 1991,
prior to 12:00 noon for noncompetitive tenders and prior to
1:00 p.m., Eastern Daylight Saving time, for competitive tenders.
The two series offered are as follows:
91-day bills (to maturity date) for approximately
$8,000
million, representing an additional amount of bills
dated August 2, 1990,
and to mature August 1, 1991
(CUSIP No. 912794 WS 9), currently outstanding in the amount
of $20,754 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $8,000
million, to be
dated
May 2, 1991,
and to mature October 31, 1991
(CUSIP
No. 912794 XL 3).
The bills will be issued on a discount basis under competi
tive 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 2, 1991.
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 competi
tive 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 $ 1,140 million as agents for foreign and international
monetary authorities, and $ 4,702 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- 1229
2041
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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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.
1/91
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. Com
petitive 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.
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.
8/89
TEXT AS PREPARED
NOT FOR RELEASE UNTIL DELIVERY
Expected at 10:00 a.m.
Wednesday, April 24, 1991
TESTIMONY OF BARRY S. NEWMAN
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL MONETARY AFFAIRS
BEFORE THE
SUBCOMMITTEE ON ECONOMIC STABILIZATION
OF THE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
APRIL 24, 1991
Thank you, Mr. Chairman.
I
am pleased to have this opportunity to present the
Treasury Departments views on U.S. policy on trade in financial
services and on the Fair Trade in Financial Services Act of 1991.
TRADITIONAL POLICY OF NATIONAL TREATMENT
At the outset, I would like to emphasize that the Treasury
Department strongly believes that everyone benefits from open
financial markets which are easily accessed by domestic and
foreign participants. The benefits which accrue from competition
in the financial services sector include increased liquidity,
greater access to financing, lower cost of funds, and in general,
a smoother functioning of financial markets. The strength, size
and depth of U.S. financial markets certainly attest to such
benefits.
The prevailing policy of the United States is to provide
national treatment to foreign participants in the establishment
and operation of financial institutions within the United States.
For example, the International Banking Act of 1978 generally
provides treatment for foreign banks that is no less favorable
than that accorded U.S. banks in similar circumstances.
The results of this national treatment policy are clearly
evidenced by the significant presence of foreign financial firms
in the United States. As of June, 1990, 284 foreign banks had
721 offices, with assets totalling $734 billion, approximately 20
NB-1230
2
percent of total U.S. commercial bank assets. Foreign banks
provide 17 percent of total lending in the U.S. and nearly 30
percent of total business loans. In some areas the role of
foreign banks is much larger. For example, foreign banks provide
60 percent of the business loans in New York and about 50 percent
in California.
Foreign banks, as illustrated by these numbers, have
obviously benefitted from our open market policy. So has the
entire U.S. economy. The Administration's legislative proposal
for modernizing the U.S. financial system maintains the
traditional policy of national treatment for foreign firms and
will permit them to take advantage of the new opportunities on
the same terms and conditions as U.S. financial service
providers.
The United States has also persistently pressed for open
financial markets and national treatment abroad in both bilateral
and multilateral fora. For example, the Treasury Department has
been engaged in bilateral talks with Japan since 1984 to open
Japanese financial markets and improve foreign firms' access.
These discussions have resulted in greater opportunities for U.S.
and other countries' financial firms in the government securities
markets, on the Tokyo Stock Exchange, and in various activities
such as trust banking and foreign exchange trading.
Treasury has held similar talks with Korea and Taiwan where
we have achieved some limited progress in opening those markets.
Negotiations with the Canadians four years ago resulted in a
U.S.-Canadian Free Trade Agreement which contained significant
liberalization measures for financial services. We hope to be
able to extend liberalization in a similar arrangement to Mexico,
with which we have also been engaged in financial market talks.
Discussions with the European Community have also been useful in
clarifying the status of U.S. firms as the EC moves towards a
single unified financial market in 1993.
In the OECD, Treasury has pressed for the principle of
national treatment in various OECD agreements and has encouraged
individual OECD member countries to adopt policies of open
markets and national treatment.
In the Uruguay Round, the Treasury has been the U.S.
Government agency responsible for negotiating a financial
services agreement which would contain legally binding
obligations calling for both market access and national treatment
for financial institutions. We hope the Uruguay Round will
improve financial services worldwide and lead to liberalization
in a wide range of countries, particularly in the newly
industrializing economies of Asia and Latin America.
3
1990 NATIONAL TREATMENT STUDY
While progress has been made over the years, the 1990
National Treatment Study demonstrated that U.S. firms continue to
f^ce difficulties in gaining access to many foreign markets.
Significant progress was noted m Canada and m most European
countries. However, the findings for other foreign financial
markets were less satisfactory with regard to the ability of U.S.
firms to participate fully and effectively.
Progress in Japan was found to be disappointingly slow and
incomplete. For example, foreign banks' competitive
opportunities have been effectively reduced by regulated interest
rates, restrictive operating regulations, strong ties among
related Japanese firms (keiretsu), excessive compartmentalization
financial markets and lack of transparency. Foreign
securities firms cite difficulty in introducing new products and
in underwriting and distributing domestic bond and eguity issues.
In other Asian countries, such as Korea and Taiwan, progress
was considered inadequate, with serious barriers to U.S.
financial firms still existing. In Korea, U.S. and other foreign
banks face discriminatory restrictions on their ability to
establish and branch, and to obtain local currency funding.
Until this year, foreign securities firms had not been permitted
to establish branches.
. In Taiwan, foreign banks face restrictions regarding their
ability to fund themselves competitively in local currency. They
also face restrictions on branching and are prohibited from
establishing subsidiaries. In securities activities, with the
exception of two recently approved foreign branches, foreign
financial firms are only permitted limited ownership in
securities operations.
Significant denials of national treatment were also noted in
Latin America. Until recently, Mexico has been closed to foreign
financial firms although current reform measures will permit
foreign ownership of up to 30 percent of the banks being
privatized. In Brazil, the establishment of new foreign bank
branches, subsidiaries or securities firms are banned by the 1988
Constitution. Severe restraints also exist on the establishment
of foreign bank branches and subsidiaries in Venezuela.
MOVEMENT TOWARD RECIPROCAL NATIONAL TREATMENT OVERSEAS
While the U.S. generally adheres to a policy of national
treatment, many countries have moved toward a reciprocal national
treatment policy whereby foreign firms are accorded national
treatment only if the home country market of the foreign firm
offers national treatment. In 1984, only 11 OECD members had
reciprocity powers. By January 1993, at least 18 out of the 24
4
OECD members will have such powers available, including such
major financial centers as Japan, the U.K. and Germany.
This trend is perhaps best illustrated by the European
Community's legislation to establish an integrated market in
banking and securities by the end of 1992. An early draft of the
Second Banking Directive included a potential mirror image
reciprocity provision. Such a provision would have limited the
activities of U.S. firms in the EC to those activities which EC
firms could undertake in the U.S. As a result, U.S. firms would
have been treated less favorably than their competitors in the
EC. Following discussions with the United States, this Directive
was revised to provide for reciprocal national treatment.
FAIR TRADE IN FINANCIAL SERVICES ACT
The movement towards reciprocity or reciprocal national
treatment in many other industrial countries and the slow
progress in achieving national treatment and equality of
competitive opportunity have raised the issue of whether the
United States needs additional policy tools to attain U.S.
objectives. Some have called for a change in our fundamental
policy of national treatment, such as that contained in the Fair
Trade in Financial Services Act.
The bill provides authority for the Secretary of the
Treasury to publish in the Federal Register a determination that
a particular country denies national treatment to U.S. financial
firms. After publication of such a determination, U.S. financial
regulators may deny applications for financial activities, after
appropriate consultation with the Secretary. The bill also
requires the Secretary of the Treasury to initiate negotiations
with countries where there are significant denials of national
treatment for U.S. firms.
The Treasury Department initially opposed proposals to adopt
a reciprocal national treatment policy because of concern that
even limited reciprocity would involve the risk that sanctions
would be imposed and that retaliation would follow. Such action
could have a potentially serious impact on global financial
markets.
Treasury worked with the sponsors of the bill last year to
modify those parts which we found most objectionable. Our
primary objective was to obtain greater discretion and
flexibility in the bill. As a result of these efforts, the
provisions on financial services in the short-term extension of
the Defense Production Act, S.468, were modified to respond to
Treasury's concern. As a result, the Treasury has withdrawn its
opposition to that.bill.
TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
APRIL 24, 1991
STATEMENT BY
THE HONORABLE DAVID C . MULFORD
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE
It is a great pleasure to testify before you today on the
subject of the Enterprise for the Americas Initiative. The
Initiative has received broad support from Latin American and
Caribbean leaders. It holds out the hope of a future of strong
economic partnerships and sustained growth throughout the
hemisphere. As we move forward to implement the Initiative, the
Administration depends on the support of Congress to make the
vision of the Initiative a reality.
Announced by President Bush last June, the Enterprise for
the Americas Initiative (EAI) is designed to deepen and expand
for our mutual benefit the wide array of trade and investment
ties which link the United States with its neighbors in Latin
America and the Caribbean. This is a region with which we share
a common cultural heritage, and whose many new leaders have shown
a strong commitment to democratic values and market-based economic
reforms.
The President tailored his Initiative to the concerns of
Latin American and Caribbean countries by proposing action in
three areas of vital importance to them — trade, investment, and
debt. The Initiative rests on these three pillars, each of which
represents a major priority for action.
Advancing Free Trade
As we work to expand trade through the Initiative, our long
term goal is to establish a hemispheric free trade area. In
announcing the Initiative, President Bush stated that the United
States stands ready to enter into free trade agreements (FTAs)
with Latin American and Caribbean countries, in particular with
groups of countries that have associated for the purpose of trade
liberalization. The first step in this process is the FTA we
propose to negotiate with Mexico and Canada. We are also
NB-1231
2
negotiating framework agreements with individual countries and
groups of countries in the region to address technical issues and
begin to reduce barriers to trade.
Ambassador Katz, in his testimony, will explore with you in
greater detail our efforts in this area and, in particular, the
importance of gaining fast-track negotiating authority.^ For my
part, I want to emphasize the importance of the trade pillar to
the success of the Enterprise for the Americas Initiative and,
more fundamentally, to the future of relations between the United
States and its neighbors.
The trade pillar of the Initiative cannot be considered in
isolation. Rather, it should be viewed in terms of its
contribution to the overall objective of the Initiative — to
create a partnership with Latin America that will lay the
foundations for long-term growth. By itself, a free trade
agreement would not necessarily succeed in bringing substantial
economic benefits. But free trade is a cornerstone of a broader
economic system based on market principles. It is that broader
system that the Enterprise for the Americas Initiative seeks to
foster jointly through its trade, investment, and debt pillars.
For the relatively small Latin American economies to open
themselves to imports means to accept a set of relative prices
determined by market forces and based on economic fundamentals.
The discipline of market prices limits the latitude to use
government intervention to distort resource allocation for the
benefit of the few and the detriment of the overall economy. For
example, opening borders to imports makes it increasingly
difficult to subsidize loss-making government enterprises,
protect industries through restricting new competition, and set
prices by decree. Clearly, a commitment to free trade reflects a
more fundamental commitment to a market-based economy.
For years we have been urging the countries of Latin America
to eliminate barriers to trade and investment — barriers that
impede their own economic growth. Now, under the Initiative, we
are offering them a tough but fair deal — they commit themselves
to effective market-oriented policies, and we undertake to
negotiate reciprocal free trade relationships based on a balance
of benefits and obligations.
The deal is tough because successful free trade agreements
will require greater reform in Latin American countries than in
the United States. The reason is simple: our barriers to trade
and investment are far lower than theirs. For instance, our
average tariff is less than half that of any country in Latin
America; our investment climate is far more open; our trade in
services is virtually free of restrictions; and we have a modern,
effective system of intellectual property protection.
3
But why should Latin American countries accept agreements
which will require them to shoulder the greater burden of policy
reform? Ten, five, or even two years ago, the magnitude of the
reforms required would have given them pause. Today, however,
there is an emerging consensus in Latin America that the reforms
implied by free trade agreements — broader macroeconomic and
structural reforms as well as elimination of barriers to trade
and investment — are prerequisites for renewed economic growth.
Those countries that have already embarked on reform are
interested in seeking reciprocal elimination of trade barriers
from their trading partners. In this sense, the timing of the
EAI is crucial. It has met with such an enthusiastic response in
Latin America because it harnesses an underlying momentum. But,
while these countries are taking bold steps for their future, the
temptation to slip back is ever-present. Our willingness to
negotiate reciprocal free trade agreements would encourage
ongoing reform and liberalization in the region. It offers a way
to codify, make more permanent, and increase public support for
these reforms.
Why is this a fair deal for the United States? What would
we gain from free trade with Latin American countries under the
EAI? First, in terms of U.S. trade policy interests, we benefit
from elimination of barriers to our exports of goods and services.
Because Latin America has higher barriers to trade and investment
than we do, we stand to gain more in a direct way than the Latin
American countries in a direct way from elimination of those
barriers.
Second, we will gain from having more prosperous neighbors,
and therefore more valuable trading partners, as reforms give
rise to faster growth. The U.S. currently supplies about forty
percent of Latin American and Caribbean imports — as established
trading partners, we are well positioned to benefit from increased
capacity to trade on the part of Latin America and the Caribbean.
Third, open, dynamic economies will be stronger partners in the
world trading system. Their success will encourage other
countries to adopt similar policies in international fora, like
the GATT. Finally, we have an interest in the prosperity of
Latin America that goes beyond immediate economic benefits — an
interest that rests on a shared heritage, ties of family and
culture, and geographical proximity.
Our vision of a hemispheric free trade area is a realistic
one. The first step towards this goal, discussing a free trade
agreement with Mexico, has been made possible by the remarkable
reforms that have transformed Mexico*s economy in the last few
years. These reforms are being mirrored in other countries in
the hemisphere. Fast track authority is essential for us to
seize this moment, to build upon and cement this momentum towards
more open economies and faster growth throughout the hemisphere.
4
Without fast track we will miss this unique opportunity to form a
new partnership in the Western Hemisphere.
Increasing Capital Flows to the Region
The investment pillar of the Initiative zeroes in on the
importance of increasing capital flows to Latin America and the
Caribbean.
A number of countries in the region have made substantial
progress in implementing macroeconomic and structural reforms.
These are fundamental steps toward stronger and more vibrant
economies. Without the needed capital to finance growth,
however, they will not experience the full benefits of market—
oriented economic reform.
The need to attract capital in order to build upon reforms
already underway is at the heart of every country's development
challenge. Resources in today's world are limited. Commercial
banks are no longer extending loans that provide broad support
for economic growth. The lessons of the 1980s taught us that
more debt is not the answer, yet countries now face the challenge
of meeting their financing needs in the absence of significant
commercial bank lending. Creditor governments also face
constraints on their ability to provide economic assistance,
while events in Eastern Europe and the Middle East have added
heavily to demands for such assistance.
Private investment is therefore receiving new priority as a
source of capital for development and growth. Latin American and
Caribbean countries must compete more aggressively to draw the
interest of investors and to recover the savings of their own
people. To help countries undertake this challenge, we proposed
that the Inter-American Development Bank (IDB) establish a new
investment sector lending program. This program will provide
guidance and financial support for specific measures to open
investment regimes.
The IDB is already moving forward with this program.
Negotiations of investment sector loans have begun with four
countries, and we understand that the first loans are expected to
be ready for consideration by the IDB Board of Directors in June.
Two additional countries are planning to begin discussions with
the IDB in the near future. A number of other countries have
also expressed interest in pursuing IDB investment sector loans.
Loans extended under this program will make a critical
difference in the competition for capital. Additional, more
directly targeted support is also needed, however. For this
reason, President Bush has proposed creation of a new Multilateral
Investment Fund, administered by the IDB. .This Fund would direct
I
resources to support specific investment reform actions and would
help ease some of the burden of undertaking these measures.
While existing institutions, including the IDB and the
Inter-American Investment Corporation, continue to play a
critical role in the overall adjustment and development efforts
of Latin America and the Caribbean, we believe that a new Fund is
required to provide the concentration of financial resources
needed by countries poised to make a major commitment to radically
overhauling and opening their investment regimes. We envision
that this Fund would place special emphasis on smaller countries
in the region, such as those in Central America and the Caribbean.
Resources will be channeled through three facilities in the
Fund.
♦
The Technical Assistance Facility will help finance technical
assistance to facilitate privatization and other investmentrelated policy reforms. It will also assist government
efforts to improve vital business infrastructure, without
which no amount of policy reform will enable a country to
attract additional private investment.
♦
The Human Resources Facility will fund grant assistance to
moderate social dislocations resulting from investment
reforms. With this kind of support, governments can pursue
aggressively within a window of opportunity while
minimizing the potential for social unrest and other
pressures on emerging democracies.
♦
The Enterprise Development Facility will channel marketpriced resources through non-governmental organizations and
other financial institutions to stimulate creation or
expansion of small and micro—sized enterprises. In this
way, the Fund will help entrepreneurs access capital and
make productive contributions to these economies.
Our goal is to establish a Fund of $1.5 billion over a five
year period. We are seeking authority from Congress for a U.S.
contribution of $500 million over five years. Based on extensive
discussions with the IDB and other creditor governments at the
recent IDB annual meeting, we are optimistic that other non
borrowing members of the IDB, many of whom have strong traditional
ties with the region, will provide the remaining resources. Most
notably, Japan has indicated that it will contribute an appropriate
amount to the Fund. In the context of a shared commitment among
donors to help countries take the steps to compete for capital, I
hope we can count on your support for the U.S. contribution.
6
Building Economic Confidence:
The Need to Address Debt Burdens
The overhang of external debt has constrained the resources
available for growth and tested the resolve of nearly every
government in Latin America and the Caribbean. By easing the
burden of debt for countries committed to necessary economic
reforms, we can help them attract new investment capital and
reinforce the rewards of sound economic policies.
The debt pillar of the Enterprise for the Americas Initiative
takes such a pragmatic approach. By proposing to reduce bilateral
debt owed to the U.S. Government by eligible countries, the
Initiative complements international efforts under the Brady Plan
to address commercial bank debt problems. Reducing bilateral
debt will be particularly important for the relatively small
countries of the region that owe a substantial portion of their
external debt to official creditors, rather than to commercial
banks.
Last year's farm bill provided the authority to reduce PL480 debt for countries pursuing strong economic and investment
reform programs and to channel local currency interest payments
to environmental projects in each country. We also have the
approval of the appropriators to proceed. The President has
signed an Executive Order providing for implementation of this
authority.
Several countries — including Chile, Jamaica, and Bolivia
— are well positioned to qualify for PL-480 debt reduction in the
next few months. Other countries could also move to qualify in
the near future. The potential for bilateral official debt
reduction has been welcomed throughout the region. Countries are
eager to benefit? we are working with them to establish eligibility
and will begin discussing reduction of their PL-480 debt once
they meet necessary conditions.
To offer the full potential benefits of the debt reduction
proposed under the Initiative, however, we must gain authority
from Congress to undertake reduction of AID debt. PL-480 debt
constitutes only about one-fourth of the $7 billion in concessional
debt owed to the U.S. by countries in the region. A far larger
share of this debt (some $5 billion) is owed to AID. Substantial
debt relief will therefore need to involve action on AID debt as
well. We are also seeking authority to sell a portion of
Eximbank loans and CCC assets in order to facilitate investments
in equity, environmental, or development projects in eligible
countries. These swaps will help reduce the stock of non
concessional, market-rate debt owed to the U.S. while promoting
productive contributions to debtor economies.
I want to emphasize that by reducing bilateral official debt,
we hope not only to ease countries' financial burdens and help
7
restore the confidence of investors but also to provide
significant support for the environment. Interest payments on
reduced concessional debt obligations will be made in local
currency into an Environmental Fund in the debtor country. The
resources in each Fund will be programmed by a local administering
body composed of representatives from the debtor country, the U.S.
government, and local non-governmental organizations.
Similar government cooperation with non-governmental
organizations will characterize the Washington oversight of this
process. The Environment for the Americas Board will advise the
U.S. Government on negotiation of environmental framework
agreements, ensure that local administering bodies are
appropriately constituted, and review annual programs and reports
on operations prepared by each local body. We look forward to
working with the environmental community, which has developed
valuable expertise both on funding projects and on building
community support for environmental protection and conservation.
By creating a dedicated stream of payments to support
environmental projects, the Initiative can help assure ongoing
support for sustained environmental progress. It will also make
an important contribution to building institutional capacity in
local organizations and, thereby, to generating long-term grass
roots support for protection and preservation of the environment.
Realizing a New Vision for the Hemisphere
Strong, vibrant Latin American and Caribbean economies will
benefit our hemisphere and the world as a whole. To respond to
the efforts underway in Latin America and the Caribbean, we must
be prepared to move forward on each element of the Initiative —
trade, investment and debt.
To work credibly with other countries toward a hemispheric
free trade area, it is critical that we gain fast track negotiating
authority. To proceed with support for the opening of investment
regimes and the reduction of bilateral debt, we also need
authority from Congress. The President transmitted on February
27 a legislative proposal that would provide the latter
authorities? positive action on this legislation will send a
strong signal to Latin America and the Caribbean about U.S.
commitment to following through on the Initiative.
The United States shares with its neighbors in Latin America
and the Caribbean high hopes for the future. As they turn toward
stronger, market-oriented economies, leaders throughout the
region are enthusiastically embracing our common objectives of
enhanced growth and prosperity. The United States must also do
its part. I hope we can count on your support.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 24, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $12,006 million of 2-year notes, Series Z-1993,
to be issued on April 30, 1991 and mature on April 30, 1993
were accepted today (CUSIP: 912827A51).
The interest rate on the notes will be 7 %. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
6.99%
7.00%
7.00%
Price
100.018
100.000
100.000
Tenders at the high yield were allotted 96%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
53,190
40,328,825
34,805
48,895
617,050
45,930
1,659,020
88,875
27,270
112,865
21,910
729,395
349.100
$44,117,130
Accepted
53,185
11,024,070
34,795
48,895
74,790
42,915
64,020
76,875
27,270
109,865
21,910
78,335
349.100
$12,006,025
The $12,006 million of accepted tenders includes $1,317
million of noncompetitive tenders and $10,689 million of
competitive tenders from the public.
In addition, $928 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $577 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
N B -1232
FREASURY NEWS
Ipartm ent off tho Treasury • Washington, D.c. • Telephone 566-2041
TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 2 P.M.
APRIL 25, 1991
STATEMENT BY
THE HONORABLE DAVID C. MULFORD
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON WESTERN HEMISPHERE AFFAIRS
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
I
welcome this opportunity to discuss with you the Enterprise
for the Americas Initiative.
Full implementation of the Initiative is a matter of high
priority for the Administration. Advancing the goals of the
Initiative is in the best interest of the United States. Our
economy is linked to Latin American and Caribbean countries
through a wide array of trade and investment ties, which the
Presidents Initiative is uniquely positioned to deepen and
expand for our mutual benefit. This is a region with which we
share a common cultural heritage, and whose many new leaders have
shown a strong commitment to democratic values and market-based
economic reforms.
These leaders have welcomed the Presidents proposals under
the Initiative, which holds out the hope of a future of strong
economic partnerships and sustained growth throughout the
hemisphere. We need to respond to their enthusiasm and the
efforts they are making to reform their economies. In his trips
to Mexico and South America late last year, President^Bush was
impressed with the commitment on the part of leaders in the
region to pursue reforms that will improve their economic
prospects and make them more competitive in attracting capital.
To move forward with these countries in advancing the aims
of the Initiative, the Administration depends on the support of
Congress. In particular, I seek your support for the legislative
proposal transmitted by President Bush on February 26 which Would
provide authority to implement fully the investment and debt
elements of the Initiative.
The President tailored the Initiative to the concerns of
Latin American and Caribbean countries themselves by proposing
action in three areas of vital importance to them — trade,
investment, and debt. The Initiative rests on these three
NB- 123 3
2
pillars, each of which represents a major priority for action. I
want to review with you briefly the progress made to date in each
of these areas.
Advancing Free Trade
As we work to expand trade through the Initiative, our long
term goal is to establish a hemispheric free trade area. In
announcing the Initiative, President Bush stated that the United
States stands ready to enter into free trade agreements (FTAs)
with Latin American and Caribbean countries, in particular with
groups of countries that have associated for the purpose of trade
liberalization.
The first step in this process is the FTA we propose to
negotiate with Mexico and Canada. Such an agreement would foster
sustained economic growth for all three countries, which together
compose a market of over 360 million people and $6 trillion in
output. This step toward a hemispheric free trade area has been
made possible by the remarkable reforms that have transformed
Mexico's economy in the last few years. These reforms are being
mirrored in other countries in the hemisphere. Fast track
authority is essential for us to seize this moment, to build upon
and cement this momentum towards more open economies and faster
growth throughout the hemisphere. Without fast track we will
miss a unique opportunity to form a new partnership in the
Western Hemisphere.
Meanwhile, to advance our goal of hemispheric free trade,
the Administration is negotiating framework agreements with
individual countries and groups of countries in the region.
Framework agreements establish fora for addressing and consulting
on bilateral trade and investment issues. They contain immediate
action agendas listing specific trade and investment issues of
concern to both parties and areas in which liberalization is
needed. Through these agreements, we can discuss the requirements
for free trade agreements and facilitate negotiations when the
appropriate time arrives.
Framework agreements have been signed since June with six
countries — Colombia, Ecuador, Chile, Honduras, Costa Rica, and
Venezuela — adding to those already in place with Mexico and
Bolivia. Negotiations are also underway with a number of other
countries.
I
want to emphasize the importance of the trade pillar to
the success of the Enterprise for the Americas Initiative and, in
reality, to the future of relations between the United States and
its neighbors. Free trade is a cornerstone of a broader economic
system based on market principles. It is that broader system
that the Enterprise for the Americas Initiative seeks to foster
jointly through its trade, investment, and debt pillars.
3
For the relatively small Latin American economies to open
themselves to imports means to accept a set of relative prices
determined by market forces and based on economic fundamentals.
The discipline of market prices limits the latitude to use
government intervention to distort resource allocation for the
benefit of the few and the detriment of the overall economy. For
example, opening borders to imports makes it increasingly
difficult to subsidize loss-making government-controlled
enterprises, protect industries through restricting new
competition, and set prices by decree. Clearly, a commitment to
free trade reflects a more fundamental commitment to a marketbased economy.
Why should Latin American countries accept agreements which
will require them to shoulder the greater burden of policy
reform? Ten, five, or even two years ago, the magnitude of the
reforms required would have given them pause. Today, however,
there is an emerging consensus in Latin America that the reforms
implied by free trade agreements — broader macroeconomic and
structural reforms as well as elimination of barriers to trade
and investment — are prerequisites for renewed economic growth.
Those countries that have already embarked on reform are
interested in seeking reciprocal elimination of trade barriers
from their trading partners. In this sense, the timing of the
Initiative is crucial. It has met with such an enthusiastic
response in Latin America because it harnesses an underlying
trend. But, while these countries are taking bold steps for
their future, the temptation to slip back is ever-present. Our
willingness to pursue FTAs would encourage Latin American
countries to deepen and accelerate an ongoing movement toward
open markets. It offers a way to make more permanent and
increase public support for these reforms.
Why is this a fair deal for the United States? What would
we gain from free trade with Latin American countries under the
Initiative? The U.S. currently supplies about forty percent of
Latin American and Caribbean imports — as established trading
partners, we are well positioned to benefit from increased
capacity and openness to trade on the part of Latin America and
the Caribbean. We will gain from having more prosperous neighbors,
and therefore more valuable trading partners, as reforms give
rise to faster growth. Furthermore, open, dynamic economies will
be stronger partners in the world trading system. Their success
will encourage other countries to adopt similar policies in
international fora, like the GATT.
Increasing Capital Flows to the Region
The investment pillar of the Initiative zeroes in on the
importance of increasing capital flows to Latin America and the
Caribbean.
4
A number of countries in the region have made substantial
progress in implementing macroeconomic and structural reforms.
These are fundamental steps toward stronger and more vibrant
economies. Without the needed capital to finance growth,
however, they will not experience the full benefits of marketoriented economic reform.
The need to attract capital in order to build upon reforms
already underway is at the heart of every country's development
challenge. Resources in today's world are limited. Commercial
banks are no longer extending loans that provide broad support
for economic growth. The lessons of the 1980s taught us that
more debt is not the answer, yet countries now face the challenge
of meeting their financing needs in the absence of significant
commercial bank lending. Creditor governments also face
constraints on their ability to provide economic assistance,
while events in Eastern Europe and the Middle East have added
heavily to demands for such assistance.
Private investment is therefore receiving new priority as a
source of capital for development and growth. Latin American and
Caribbean countries must compete more aggressively to draw the
interest of investors and to recover the savings of their own
people. To help countries undertake this challenge, we proposed
that the Inter-American Development Bank (IDB) establish a new
investment sector lending program. This program will provide
guidance and financial support for specific measures to open
investment regimes.
The IDB is already moving forward with this program.
Negotiations of investment sector loans have begun with four
countries, and we understand that the first loans are expected to
be ready for consideration by the IDB Board of Directors in June.
Two additional countries are planning to begin discussions with
the IDB in the near future. A number of other countries have
also expressed interest in pursuing IDB investment sector loans.
Reducing Debt Burdens and Providing Support for the Environment
The overhang of external debt has constrained the resources
available for growth and tested the resolve of nearly every
government in Latin America and the Caribbean. By easing the
burden of debt for countries committed to necessary economic
reforms, we can help them attract new investment capital and
reinforce the rewards of sound economic policies.
The debt pillar of the Enterprise for the Americas Initiative
takes such a pragmatic approach. By proposing to reduce bilateral
debt owed to the U.S. Government by eligible countries, the
Initiative complements international efforts under the Brady Plan
to address commercial bank debt problems. Reducing bilateral
debt will be particularly important for the relatively small
countries of the region that owe a substantial portion of their
external debt to official creditors, rather than commercial banks.
5
In last year's farm bill, the Administration gained authority
to reduce PL-480 debt for countries pursuing strong economic and
investment reform programs and to channel local currency interest
payments to environmental projects in each country. We have the
approval of the appropriators to proceed, and the President has
signed an Executive Order providing for implementation of this
authority.
Several countries — including Chile, Jamaica, and Bolivia
— are well positioned to qualify for PL-480 debt reduction in the
next few months. Other countries could also move to qualify in
the near future. The potential for bilateral official debt
reduction has been welcomed throughout the region. Countries are
eager to benefit? we are working with them to establish eligibility
and will begin discussing reduction of their PL-480 debt once
they meet necessary conditions.
I
want to emphasize that by reducing bilateral official debt,
we hope not only to ease countries' financial burdens but also to
provide significant support for the environment. If the debtor
country has entered into an environmental framework agreement,
interest payments on reduced concessional debt obligations will
be made in local currency into an Environmental Fund in the
debtor country. The use of resources from each Fund will be
determined by a local administering body composed of
representatives from the debtor country, the U.S. government, and
local non-governmental organizations.
This process for funding environmental projects with local
currency interest payments on reduced debt is designed to nurture
grass roots support for the environment in Latin America and the
Caribbean. The wealth of natural resources in the region cannot
be valued. While the amount of resources provided by local
currency interest payments will be limited, we believe that this
program can make a significant difference by targeting small
projects and building local community infrastructure for
addressing environmental issues. Furthermore, by bringing the
government and non-governmental organizations in individual
countries to serve together on local administering bodies, we can
promote the kind of partnership that will help these countries
devote greater attention to the protection and preservation of
the environment in the region.
To make this process effective, the Administration intends
to work closely with our own non-governmental environmental
organizations. For this reason, the Environment for the Americas
Board, which will oversee the environmental element of the
Initiative, will have a strong non-governmental component. This
Board will advise the U.S. Government on negotiation of
environmental framework agreements, ensure that local
administering bodies are appropriately constituted, and review
annual programs and reports on operations prepared by each local
body. We look forward to working with the environmental
community, which has developed valuable expertise both on funding
6
projects and on building community support for environmental
protection and conservation.
The President1s Legislative Proposal
Significant progress has indeed been made in advancing the
goals of each pillar of the Initiative. To move ahead with full
implementation of the Initiative, however, we must gain the
authority from Congress contained in the legislative proposal
transmitted by the President on February 26. These authorities
affect both the investment and debt elements of the Initiative.
Loans extended under the IDB*s new investment sector lending
program will make a critical difference in the competition for^
capital. However, additional, more directly targeted support is
also needed. For this reason, we have proposed creation of a new
Multilateral Investment Fund, administered by the IDB. This Fund
would direct resources to support specific investment reform
actions and would help ease some of the burden of undertaking
these measures.
Existing institutions, including the IDB and the InterAmerican Investment Corporation, continue to play a critical role
in the overall adjustment and development efforts of Latin
America and the Caribbean. We believe that a new Fund is required
to provide the concentration of financial resources needed by
countries poised to make a major commitment to radically
overhauling and opening their investment regimes. We envision
that the Fund would place special emphasis on smaller countries
in the region, such as those in Central America and the Caribbean.
Resources will be channeled through three facilities in the
Fund.
♦
The Technical Assistance Facility will help finance technical
assistance to facilitate privatization and other investmentrelated policy reforms. It will also assist government
efforts to improve vital business infrastructure, without
which no amount of policy reform will enable a country to
attract private investment.
♦
The Human Resources Facility will fund grant assistance to
moderate social dislocations resulting from investment
reforms. With this kind of support, governments can pursue
reforms aggressively within a window of opportunity while
minimizing the potential for social unrest and other
pressures on democracies.
♦
The Enterprise Development Facility will channel marketpriced resources through non-governmental organizations and
other financial institutions to stimulate creation or
expansion of small and micro-sized enterprises. In this
way, the Fund will help entrepreneurs access capital and
make productive contributions to these economies.
7
Our goal is to establish a Fund of $1.5 billion over a five
year period. We are seeking authority from Congress for a U.S.
contribution of $500 million over five years. Based on extensive
discussions with the IDB and other creditor governments at the
recent IDB annual meeting, we are optimistic that other non
borrowing members of the IDB, many of whom have strong traditional
ties with the region, will provide the remaining resources. Most
notably, Japan has indicated that it will contribute an appropriate
amount to the Fund. In the context of a shared commitment among
donors to help countries take the steps to compete for capital, I
hope we can count on your support for the U.S. contribution.
To offer the full potential benefits of the debt reduction
proposed under the Initiative, however, we must gain authority
from Congress to undertake reduction of AID debt. The authority
we have already gained to reduce PL-480 debt allows us to act on
only about one—fourth of the $7 billion in concessional debt owed
to the U.S. by countries in the region. A far larger share of this
debt (some $5 billion) is owed to AID. Substantial debt relief
will therefore need to involve action on AID debt as well. We
have also proposed to sell a portion of Eximbank loans and
Commodity Credit Corporation (CCC) assets acquired through CCC's
export credit guarantee programs in order to facilitate debt-forequity, debt-for-nature, or debt-for-development swaps in
eligible countries. These transactions will help reduce the
stock of non-concessional, market-rate debt owed to the U.S.
while promoting productive contributions to debtor economies.
Without additional authority from Congress, we would only be
in a position to implement pieces of the Initiative as proposed
by the President. As a result, our response to the concerted
efforts of our neighbors to reform their economies and attain
sustained growth would be partial at best. Positive action on
this legislation, on the other hand, will send a strong signal to
Latin America and the Caribbean about U.S. commitment to a new
partnership to benefit the hemisphere as a whole.
Realizing a New Vision for the Hemisphere
Strong, vibrant Latin American and Caribbean economies will
benefit our hemisphere and the world as a whole. To respond to
the efforts underway in Latin America and the Caribbean, we must
be prepared to move forward on each element of the Initiative —
trade, investment and debt.
The United States shares with its neighbors in Latin America
and the Caribbean high hopes for the future. As they turn toward
stronger, market-oriented economies, leaders throughout the
region are enthusiastically embracing our common objectives of
enhanced growth and prosperity. The United States must also do
its part. I hope we can count on your support.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 25, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $9,057 million of 5-year notes, Series N-1996,
to be issued on April 30, 1991 and mature on April 30, 1996
were accepted today (CUSIP: 912827A69).
The interest rate on the notes will be 7 5/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
7.69%
7.70%
7.70%
Price
99.734
99.694
99.694
$20,000 was accepted at lower yields.
Tenders at the high yield were allotted 84%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
25,869
30,650,271
16,136
33,041
31,488
19,140
919,291
26,673
15,787
29,879
4,856
688,930
34,448
$32,495,809
Accented
25,869
8,762,671
16,136
33,029
28,488
19,138
35,281
22,673
15,787
29,879
4,856
28,830
34.448
$9,057,085
The $9,057 million of accepted tenders includes $550
million of noncompetitive tenders and $8,507 million of
competitive tenders from the public.
In addition, $215 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $200 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
N B -1234
AS PREPARED FOR DELIVERY
EMBARGOED UNTIL 8:30 P.M.
(9:30 P.M. EDT)
April 25, 1991
Contact:
Desiree Tucker-Sorini
(202) 566-8773
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
REMARKS TO THE
INTERAGENCY SUPERVISION CONFERENCE
DALLAS, TEXAS
APRIL 25, 1991
Thank you, Tim [Ryan]. Chairman Seidman, Comptroller
Clarke, and your colleagues here tonight representing the Federal
Reserve, FDIC, OTS, OCC, and RTC — I appreciate the invitation
to speak to your conference and to discuss the U.S. economy and
the Administration's banking reform proposal.
I
have just returned from a trip to Europe and the Middle
East, where I consulted with our G-7 partners, as well as other
economic and business leaders in those regions. The purpose of
my trip, undertaken at the request of the President, was to
evaluate the financial and economic policies that will be needed
to address the new challenges facing the world community.
We live in a highly integrated global system in which
economic power is shared. A decade of prosperity based on
economic growth has brought with it expanding responsibilities
for all countries. A world of twenty-four hour global
communications, instantaneous fund transfers and interdependent
economies is necessarily a world of increased responsibility
sharing. Obviously, each country will look to its own interests,
but at the same time, as a community of nations, we must keep a
strong weather eye on the fact that we are economically
interdependent. The unique success of the international response
to Iraqi aggression demonstrates how a common cause widely agreed
to can advance our shared interests.
NB-1235
In the United States, we are meeting our international
responsibility by reaffirming our commitment to low-inflationary
economic growth. As the President said to a Joint Session of
Congress earlier this year, »'Our first priority is to get this
economy rolling again." Most economists anticipate an end to the
current recession by mid—year, and a resumption of moderate
growth as the year progresses. The return to positive growth
will be based on export opportunities, lower and more stable oil
prices, increased credit availability, and lower interest rates.
I
have no doubt we will see economic figures that send mixed
signals before we see clearer signs of a turnaround. And that is
why, in the long run, the most important domestic economic
development is the President's budget agreement with Congress
which has reformed Federal government spending and created the
framework for future economic growth.
Think about it. The 1990 budget agreement mandates a $492
billion reduction in federal borrowing over the next five years
and dictates that federal spending shall be governed by the
principle of pay—as—you—go. Since these reforms, the Federal
Funds rate has fallen from 8% in October 1990 to 6% today. This
was not an accident. This was President Bush's plan. Remember,
prior to the budget agreement, Chairman Greenspan said a
"credible, enforceable reduction in the budget deficit" would
result in lower interest rates. The President forged just such
an enforceable reduction package and interest rates have
dramatically declined.
Those who don't think this will help stimulate economic
growth are dead wrong. Americans who have received downward
adjustments in their variable rate mortgages and home equity
credit lines certainly understand what it means. Those who can
buy a car or a house with substantially lower monthly payments
know what it means. Lower interest rates and monthly payments
have always made a difference before and they will now.
Although these developments are encouraging, this does not
mean we have rested on our oars. And, we are taking additional
steps which will strengthen the economy both in the short-run and
the long-term.
In the short-run, in order to encourage the economic
turnaround, we have taken steps to address the credit crunch. On
March 1, 1991, your agencies announced a series of guidelines and
clarifications aimed at facilitating credit for sound borrowers.
These steps were developed and agreed to by your leadership to
assure that the supervisory process is not, in and of itself,
contributing to a tightening of credit. As your announcement
stated: "We do not want the availability of credit to sound
borrowers to be adversely affected by supervisory policies or
depository institutions' misunderstandings about them."
2
The guidelines and clarifications were issued to provide
examiners with the confidence to use their own common sense and
judgment. The new guidelines will also provide borrowers with
hope that appropriate lines of credit will be renewed. Customers
will believe that a worthy, new project has a chance for funding,
even in sectors where an institution may have a* concentration of
loans it is trying to reduce.
You and the 7,000 supervision professionals who work with
you have a critical role to play in this effort. Banks will lend
when they have financial strength and confidence. Unfortunately,
this is not always the case. Instead, we are told that a
widespread anxiety is being expressed by banks that regulatory
overkill is directly contributing to a lack of credit
availability.
But this is not an academic lecture. We recognize you have
a difficult job to do. Many of you may have vivid memories of
Congressional hearings called to evaluate the actions and
judgments of bank supervisors. Believe me, I know how you feel
— that your judgments are reviewed only when loans go bad and
second-guessed with the 20-20 vision of hindsight. It is not
often -- perhaps never — that an examiner receives public praise
for using balance and common sense, but that's exactly what your
responsibilities and the welfare of the country require that you
do.
We all realize that bank examination — just like bank
lending — is an art, not a science. And the new guidelines are
intended to complement the tools examiners employ as they do
their job.
You are on the front line of economic vitality in this
country. The financial industries you oversee perform an
essential role in stimulating and sustaining economic growth.
you must be mindful that the way you do your job can have a
profound effect on the willingness of banks to lend. The
regulators' recent guidelines were not intended to be just a
press release to be cast aside. They are meant to be an
expression of the philosophy of common sense. But, the
guidelines will remain only guidelines until you and your
colleagues apply them in your examinations.
I
should also make it clear that bankers have a
responsibility to meet. As President Bush said in his State of
the Union address, "Sound banks should be making sound loans,
now.'' I have urged the banks not to overreact and to keep
lending to their good customers. There are many ways to
strengthen a balance sheet in addition to shedding loans.
3
So
Many have said to us that bankers hesitate because of fear
of regulators, and that the regulators bear down too hard for
fear of being second-guessed. This has led to fingerpointing
between regulators and banks. Neither the banking industry, nor
the regulatory community will be able to resume its constructive,
time-honored roles if this state of mind continues. With your
help, we can achieve a balanced regulatory environment which
gives financial institutions the confidence to make sound loans,
while at the same time protecting the depositor from speculative,
risky investments.
We must address the current credit crunch, but we must also
come to terms with longer range problems in the financial
services industry. One of the Administration's top domestic
priorities is to modernize our antiquated 40- and 50-year old
banking laws. This is important not just for the financial
services sector, but for the economy as a whole. Businesses must
be able to count on our financial services firms, particularly
banks, in bad times as well as good.
As we have seen in the current economic downturn, weak banks
are forced to pull back just when their good customers need them
most. When loans stop at the first sign of trouble, jobshare
imperiled. If we expect to exert world economic leadership in
the 21st century, we must have a modern, world-class financial
services system in our country. Right here in the United States.
Consumers need a broader choice of financial products when
they go to the bank. Businesses and workers need strong, wellcapitalized banks that can keep lending in economic downturns.
The nation needs a banking system that is strong enough to
compete toe-to-toe with the best our international rivals have to
offer. And most of all, the taxpayer needs to be spared the
prospect of another costly and unnecessary cleanup.
Today, the United States does not have a single bank among
the world's 25 largest. Twenty years ago we led the standings
with the top three and had seven banks in the top 25. Of course,
the question of pure size is not the whole story. But against
the backdrop of an economy that is twice the size of our nearest
competitor's, I wonder if anyone can explain the complete absence
of U.S. banks from the list of world leaders.
Surely that statistic tells us something. To me, it is
strong evidence that something is very wrong. Would we be
comfortable with no aerospace companies in the world's top 25?
No pharmaceutical companies? No computer manufacturers? Of
course not.
4
This is not a size issue, but a competitiveness issue.
Foreign banks are increasing lending in the United States as
American banks lose market share here at home. While some bank
stock prices are up, two of our largest banks have recently
turned to foreign sources for a capital infusion.
The simple fact is, our banks — large and small — are
being asked to compete in a highly competitive world financial
services market with one hand tied behind their backs. For
example, we have out-of-date laws on the books that prohibit
banks from getting into new financial markets, and even keep them
from branching across state lines. Banks in California, Michigan
and Texas can open branches in Birmingham, England, but not in
Birmingham, Alabama•
These laws are totally out of touch with reality. And they
impose unnecessary expenses on banks and consumers that have been
estimated to cost $10 billion annually, compared to total
industry pre-tax profits of just $25 billion. Taking the simple
step of permitting interstate branching would significantly
improve the soundness of our banking system and could lead to
lower interest rates for American borrowers and lower transaction
costs for depositors.
Consumers have long since begun to ignore the artificial
restrictions on banking practices, using credit cards, cash
machines, and the 800 number to handle their financial affairs
when and where they want. Customers have increasingly turned
away from the banks, and now get auto loans from GMAC and Ford
Motor Credit, checking services from Vanguard and Fidelity mutual
funds, business loans through General Electric Credit Corporation
and Goldman Sachs, and they save at Merrill Lynch and Sears
Roebuck. Well-capitalized banks should be allowed to participate
in the full range of services in their natural markets — but to
do so safely, outside the bank and outside the federal deposit
insurance safety net.
We also have a deposit insurance system that has wandered
away from its original purpose of protecting only the small
depositor. This safety net now covers almost every depositor,
large and small, sophisticated and trusting, insured and
uninsured. The system has bailed out large, money-wise investors
who don't need the protection, and exposed the taxpayer to
potential losses.
What does this all add up to? Bank failures totalled 198 in
the 38 years from 1942 to 1980, but reached 206 in 1989 alone.
The Bank Insurance Fund (BIF) is at its lowest level in history
as a percentage of insured deposits. The FDIC has projected that
it will decline still further over the next two years. Without
an infusion of funds, the FDIC could find itself with too little
5
cash to pay for losses, resulting in possible exposure for the
taxpayer. The Bank Insurance Fund must therefore be
recapitalized with industry funds.
How do we reverse this trend? How do we help banks provide
better and less expensive services to the consumer, attract
capital, and lend when the economy is weak? The answer is plain:
We need to overhaul our outdated laws which hinder the banks
ability to provide consumers with better services, lower costs,
and the funds necessary to stimulate economic growth. As we
strengthen our banking system, we strengthen the ability of banks
to raise capital and compete internationally.
Our banks hold $2.8 trillion in deposits. That means that,
ultimately, there is simply no bank insurance fund large enough
to protect the taxpayer, unless and until we address the
,
underlying problems. We need to have deposit insurance reform,
supervisory reform, and a recapitalized Bank Insurance Fund. But
we also need interstate branching and broader financial
activities so that our banks can finance economic growth.
Some have suggested that any financial services legislation
passed this year should be restricted to just recapitalizing the
Bank Insurance Fund. This is the height of folly. We should
reform the industry and fix the problem, not just fund it*
The time has come to address these problems at their core;
to deal with them decisively and comprehensively? and to put this
country's financial services industry back where it belongs:
number one in the world.
If we leave the job half done — if we only tinker with the
problem — then we'll probably be back again, sooner rather than
later, recapitalizing the Bank Insurance Fund again, perhaps the
next time with taxpayer money. That's a prospect no one could
relish.
By facing up to the reality of the marketplace today, we can
help to ensure financial security for the future. Modernizing
our financial services industry, encouraging sound lending
practices, holding down the Federal Government's spending,
pushing for lower U.S. interest rates and encouraging low
inflationary economic growth around the world will contribute to
the strength of our own economy. With President Bush's
leadership we can achieve these policy objectives and provide for
a secure economic future, not only for all Americans, but for all
nations. With your help, we'll get it done.
Thank you.
###
6
FOR IMME Dlife''MB JJEiVSE
AS PREPARED FOR DELIVERY
CONTACT:
Cheryl Crispen
(202) 566-2041
Charlotte Mehuron
(817) 847-3864
THE HONORABLE NICHOLAS F . BRADY
SECRETARY OF THE TREASURY
DEDICATION CEREMONY FOR BEP WESTERN CURRENCY FACILITY
APRIL 2 6 , 1 9 9 1
FORT WORTH, TEXAS
Thank you, Cathi (Villalpando). It's a pleasure to be here
with some great Texans — including Senator Phil Gramm,
Representative Pete Geren, and Mayor Bob Bolen. And I'm happy to
extend greetings on behalf of another favorite son of Texas —
President George Bush.
I would also like to mention a great Texan whom we miss —
John Tower. John served this state and his country ably and with
distinction for nearly 30 years. I was fortunate to serve with
him in the Senate. His sudden loss is a tragic one for Texas and
the nation, and I know his pride for the Lone Star State still
lives on in many of you here for this celebration.
Today, we are making history. This is the first time the
Treasury Department will be printing currency outside of
Washington, D.C.
This is the result of five years of planning, hard work and
cooperative spirit. It is a significant achievement that will
buttress currency production in the United States, while spurring
economic growth here in Texas.
The story of America's currency is a story of progress.
When the first bills — or greenbacks — were issued in 1862 to
help pay for the Civil War, it was a small operation. Only six
employees were separating and sealing one- and two-dollar bills
in the basement of the Treasury Building in Washington. And the
operation has not stopped growing since.
By 1880, the operation was too big for the Main Treasury
Building, so a new facility was built. And 34 years later —
1914 — the Bureau of Engraving and Printing expanded once again
into an even larger building. Finally, a third annex building
was ready for business in 1938 — housing a total force of 3,000
employees and almost 25 acres of floor space.
NB-1236
2
For the next 50 years, the nation*s demand for currency
continued to increase — by about five percent every year.
America's population was expanding, and the demand for
dependable U.S. dollars overseas has grown and grown. In fact,
more than 60 percent of our circulating currency is now in
foreign countries throughout the world.
Here at home, the demand is also great. The average onedollar bill lasts only about 18 months. Five- and ten-dollar
bills last only two or three years. In 1991 alone, the Federal
Reserve System will need about eight billion new notes of all
denominations.
The opening of the Western Currency Facility means we now
have another state-of-the-art facility to help meet our
increasing currency needs. By 1994, this facility will be
capable of producing up to 40 percent of our nation's currency
supply — more than four billion notes every year.
I know we can count on the motivation and commitment of the
people here in Fort Worth. Fort Worth has been a forward-looking
city with a sound blueprint for growth. Business activity here
is diversified. The workforce is educated and highly trained.
This city is an ideal setting for any modern employer, and the
Treasury is proud to be a part of it.
While we are employing about 300 workers on this site, city
leaders believe every job here creates more jobs in the private
sector.
The new Western Currency Facility is a real success story
for Fort Worth and Texas. In 1985, the Bureau of Engraving and
Printing started the selection process with 85 possible sites.
In the end, Fort Worth was the choice. The community galvanized
its skills and resources to provide overwhelming support for the
project:
My friend, Senator Phil Gramm, has been a tireless and
consistent advocate in Washington. He never lets up
where Texas is concerned.
Mayor Bob Bolen also kept the enthusiasm alive by
lending his leadership and support from start to
finish.
The Fort Worth Chamber of Commerce played a key role in
securing contributions equalling $15 million for the
project. This includes a donation of 100 acres of
land, along with a promise to provide the building's
3
outer structure.
—
The U.S. Army Corps of Engineers and an architectural
team joined the Bureau of Engraving and Printing in
designing a facility to help meet the nation's needs
well into the 21st century.
And, Pete Daly and his colleagues at the Bureau have
also done a tremendous job of directing the project.
Today, the Western Currency Facility is ready for action
with a full staff of trained professionals — press operators,
mechanical examiners, bookbinders, security experts and managers.
They are the backbone of this operation, and they are making it
work. Starting this fiscal year, the facility will produce about
800 million one-dollar notes. And, as Texans, I'm sure you will
all recognize with pride the big "FW” printed on each bill.
The Western Currency Facility is now an important part of
Fort Worth. And to commemorate this occasion, I'd like to ask
Mayor Bolen to join me in unveiling the dedication plaque.
The plaque reads:
"The Western Currency Facility is a monument to the
commitment of local community and business leaders and the
United States Government. Their partnership has created the
first currency production facility outside of Washington,
D.C. May this facility stand as a cornerstone for the
industrial and technological development of Fort Worth."
I am confident all Americans will benefit from this
facility, and I look forward to watching it grow with the needs
of our nation. As this operation expands, we will make more than
money; we will make history.
Thank you all very much.
###
apartment off the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Contacts Bob Levine
April 25, 1991
(202) 5G6-2041
ASSISTANT SECRETARY (MANAGEMENT) DR. LINDA M. COMBS RESIGNS
Dr. Linda M. Combs, Assistant Secretary (Management), has
tendered her resignation to return to North Carolina to help care
for her mother, who is suffering from Alzheimer's disease.
In accepting her resignation, Secretary Nicholas F. Brady said,
“Linda has done an outstanding job as a member of the Treasury
team and she will be missed."
Dr. Combs has been responsible for directing the Treasury
Department's personnel and financial management, information
systems and administrative operations.
She has also been the principal policy advisor to the Secretary
and Deputy Secretary on the annual planning and budget process.
She was confirmed as Assistant Secretary on July 27, 19B9.
Prior to coming to the Department of the Treasury Dr. Combs
served in the Department of Veterans Affairs, the Department of
Education and as an advisor to the governor of North Carolina.
NB-1237
TREASUR¥.NEWS
apartment of the
I Washington,
C j Ji U U d 3 3 I
FOR IMMEDIATE RELEASE
CONTACT:
April 26, 1991
DEPT. Of THE TREASURY
d .c .
• Telephone 566-2041
Charlotte Mehuron
(817)847-3864
(202)287-0140
U.S. Currency Being Produced Outside of Washington for First Time
— Now Being Produced in Fort Worth, Texas
(Fort Worth, TX) •— Secretary of the Treasury Nicholas F.
Brady today accepted one of the first dollar bills printed
outside of Washington, D.C., at the dedication ceremony of the
new Bureau of Engraving and Printing Western Currency Facility in
Fort Worth, Texas.
In accepting the dollar bill, Secretary Brady said, "Today,
we are making history. For the first time, the Treasury
Department will print currency outside of Washington, D.C. Using
state-of-the-art technology, this new facility will be able to
meet the growing needs of currency production in the United
States and throughout the world.”
Currency production at the new facility began in January
1991 and the first notes are expected to be released into public
circulation by the Federal Reserve System by July 1991.
Approximately 800 million one dollar notes are scheduled for
production this fiscal year. When fully equipped in 1994, this
modern facility is expected to produce 4.5 billion notes per year
or 40 percent of the Federal Reserve System*s requirements.
Production efficiencies will result from advanced, high-speed
intaglio (engraved) printing presses, and a flexible, spacious
production and processing layout.
Fort Worth was selected for the new facility from 83 other
applicant cities. The winning proposal packaged nearly $15
million of local donations, including 100 acres of land, site
improvements and a 280,000 square foot building shell. In
addition to these private sector donations, the Federal
Government has invested $110,000 million to complete and equip
the facility.
Joining Secretary Brady at the Dedication Ceremony were
United States Treasurer Catalina V. Villalpando, Senator Phil
Gramm and Congressman Pete Geren. The Director of the Bureau of
Engraving and Printing Peter H. Daly, the Mayor of Fort Worth Bob
Bolen, and the Chairman of the Board of the Fort Worth Chamber of
Commerce Gary Cumbie also participated in the ceremony.
The Western Currency Facility is located at 9000 Blue Mound
Road, in Fort Worth, Texas.
oOo
NB-3238
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: 14
Author(s):
Title:
News Conference by Treasury Under Secretary David Mulford
Date:
1991-04-25
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
P re ss 566-2041
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
March 1991.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $181.9 billion on
March 31, 1991, posting an increase of $0.2 billion from
the level on February 28, 1991. This net change was the
result of a decrease in holdings of agency-guaranteed loans
of $35.2 million, while holdings of agency debt increased by
$46.3 million and holdings of agency assets increased by
$181.5 million. FFB made 25 disbursements during March.
FFB holding on March 31, 1991, were the highest in
the bank's history.
Attached to this release are tables presenting FFB
March loan activity and FFB holdings as of March 31, 1991.
N B -1239
Page 2 of 4
FEDERAL FINANCING BANK
MARCH 1991 ACTIVITY
DATE
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
12/1/98
3/3/03
9/3/91
7.601%
8.121%
6.443%
7.530% qtr.
8.286% ann.
AGENCY DEBT
EXPORT-IMPORT BANK
Note #95
Note #96
Note #97
3/1
3/1
3/1
$ 102,000,000.00
8,000,000.00
976,000,000.00
3/4
3/7
700,000,000.00
400,000,000.00
4/1/91
4/1/91
6.392%
6.403%
3/1
3/11
3/18
3/25
3/29
3/31
294,000,000.00
124,000,000.00
223,000,000.00
64,000,000.00
19,000,000.00
249,000,000.00
3/18/91
3/25/91
3/31/91
4/1/91
4/8/91
4/8/91
6.333%
6.391%
6.067%
6.182%
6.120%
6.043%
3/16
125,000,000.00
3/16/06
8.280%
56,700,000.00
3/31/01
8.173%
RESOLUTION TRUST CORPORATION
Note No. 91-02
Advance #6
Advance #7
TENNESSEE VALLEY AUIHQRITY
Short-term
Short-term
Short-term
Short-term
Short-term
Short-term
Bond
Bond
Bond
Bond
Bond
Bond
#84
#85
#86
#87
#88
#89
AGENCY ASSETS
FARMER'S HOME ADMINISTRATION
RHIF - CBO #57553
RTTRAT, ETECTRTFTCATION ADMINISTRATION
Certificates of Beneficial Ownership
CBO #33
3/31
8.451% ann.
Page 3 of 4
FEDERAL FINANCING BANK
MARCH 1991 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
15,322.00
3/31/94
7.411%
1,502,323.04
938,386.30
2,254,983.96
5/15/91
5/15/91
5/15/91
6.359%
6.391%
6.172%
2,514,938.40
3/1/96
7.753%
7.903% ann.
3/5
3/8
3/8
3/15
3/18
3/21
1,005,000.00
2,667,000.00
20,000.00
4,481,000.00
1,192,000.00
370,000.00
1/3/23
1/3/22
12/31/19
12/31/20
1/2/18
1/2/18
8.355%
8.291%
8.276%
8.242%
8.309%
8.335%
8.270%
8.207%
8.192%
8.159%
8.224%
8.250%
3/29
590,333,997.07
6/28/91
6.121%
DATE
INTEREST
RATE________
(other than
semi-annual)
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Morocco 9
3/1
$
GENERAL SERVICES ADMINISTRATION
U.S. Trust Company of New York
Advance #6
Advance #7
Advance #8
3/5
3/8
3/27
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
*Boston, MA
3/1
RURAL ELECTRIFICATION ADMINISTRATION
M & A Electric Power Coop. #337
Brazos Electric #230A
Brazos Electric #332
Tri-State Electric #336
Western Illinois Fewer #294
Combelt Power #292
TENNESSEE VATI.EV AUTHORITY
Seven States Energy Corporation
Note A-91-05
*maturity extension
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 4 of 4
FED E R A L FIN A N C I N G BANK
(in millions)
Program
March 31.
A g e n c y Debt:
Export-Import Bank
NCUA-Central Liqui d i t y Fund
Resolution T r ust C o r p o ration
T e nnessee V a lley Authority
U.S. Postal Service
sub-total*
A g ency Assets:
Farmers Home A d m i n i s t r a t i o n
DHHS-Health M a i n t e n a n c e Org.
DHHS-Medical Facilities
Rural Electrif i c a t i o n Ad m i n . - C B O
Small Business A d m i n i s t r a t i o n
sub-total*
G o v e r n m e n t - G u a r a n t e e d Loans:
DOD-Foreiqn M i l i t a r y Sales
DEd.-Student Loan M a r k e t i n g Assn.
D HUD-Community Dev. Block Grant
DHUD-Public H o using Notes +
General Services A d m i n i s t r a t i o n +
D O I-Guam Power A u t h o r i t y
DOI-Virgin Islands
NASA-Space C o m m u n i c a t i o n s Co. +
DON-Ship Lease Financing
Rural E l e c trification Adminis t r a t i o n
SBA-Small Business Investment Cos.
SBA-State/Local D e v e l o p m e n t Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
grand total*
^figures may not total due to rounding
+does not include c a p i t alized interest
$
1991
11,180.5
60.2
56,990.7
13,258.0
6,697.8
February 28.
$
1991
Net Cha n g e
3 / 1 / 91-3/31/91
$
11,370.2
63.2
55,890.7
14,119.0
6,697.8
-189.7
-3.0
1,100.0
-861.0
-0-
FY
'91 Ne t Chang«
10/1/90-3/31/9:
$
-159.3
3.6
15,509.0
-1,124.0
-014,229.2
88,187.1
88,140.9
46.3
52,669.0
69.6
82.7
4,463.9
7.3
52,544.0
69.6
82.7
4,407.2
7.5
125.0
-0-056.7
-0.2
620.0
-0-056. /
-1.1
57,292.5
57,111.0
181.5
675.6
4,730.1
4,850.0
222.1
1,903.4
483.3
29.1
24.7
32.7
1,624.4
18,903.5
309.9
719.9
2,395.1
22.4
177.0
4,769.0
4,850.0
224.7
1,903.4
478.6
29.7
24.7
32.7
1,624.4
18,906.4
313.4
723.0
2,383.5
22.5
177.0
-39.0
-0-2.7
-04.7
-0.7
-0-0-0-2.9
-3.1
-3.1
11.6
-0.1
-0-
-5,025.6
-30.0
-21.9
-47.4
115.9
-0.7
— 0.5
— 1,063.2
-47.9
-138.8
-72.6
-21.7
39.0
-0.9
-0-
36,427.4
36,462.6
-35.2
-6,316.3
$ 181,907.0
$ 181,714.5
$
192.6
$
8,588.6
FOR IMMEDIATE RELEASE
April 26, 1991
Contact:
Desiree Tucker-Sorini
202-566-8773
Statement by
Nicholas F. Brady
Secretary of the Treasury
A majority of the House Banking Committee including the
Republican caucus, joined by a number of Democrat members, have
voiced support for the need to do comprehensive ba n k reform as
part of the recapitalization of the Bank Insurance Fund.
In
addition, all the banking regulators agree there is a need for
comprehensive reform.
. ^ Chairman Gonzales and Subcommittee Chairman A n nunzio have
indicated^they intend to push ahead with a bill w hich
recapitalizes BIF and provides no structural reforms.
This narrow bill approach is the w rong w ay to go.
We must
reform the fundamental problems in the banking industry, not just
fund them.
We must fix the problem, not just feed it.
If we
fail to make comprehensive reforms now, we are likely to be back
money.
FDIC Chairman Seidman has said that the fund will not need
more resources before October, and perhaps much later than that.
Bank depositors are safe.
There is ample time to do the job
right.
I call on the House Banking Committee to consider and
adopt a comprehensive reform bill as part of the measures to
recapitalize BIF.
L e t ’s do the job once and do it right.
###
N B -1 24 0
provide about $ 1,600 million of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$10,139 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The bills will be issued on a discount basis under competi
tive 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.
I
The bills will be issued for cash and in exchange for
Treasury bills maturing
May 9, 1991.
In addition to the
maturing 52-week bills, there are $ 2 0 , 1 4 0 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 $ 1,679 million as
agents for foreign and international monetary authorities, and
$7,523 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 m o n e
tary authorities will be accepted at the weighted average bank
discount rate of accepted competitive tenders.
Additional
amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held
by them.
For purposes of determining such additional amounts,
foreign and international monetary authorities are considered to
hold $ 200
million of the original 52-week issue.
Tenders for
bills to be maintained on the book-entry records of the Depart
ment of the Treasury should be submitted on Form PD 5176-3.
NB-1241
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 m 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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
competitive 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 t e
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.
1/91
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. Com
petitive 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.
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.
8/89
m
niOQ363l
April 28, 1991
!fl«STATEMENT OF THE GROUP OF SEVEN
The Finance Ministers and Central Bank Governors of Canada,
France, Germany, Italy, Japan, the United Kingdom and the United
States met on April 28, 1991, in Washington, D.C. for an exchange
of views on current international economic and financial issues.
The Managing Director of the International Monetary Fund (IMF)
participated in the discussions of the economic situation and
outlook in the world economy.
The Ministers and Governors underscored that their countries
are part of a highly interdependent global economy in which
economic power and responsibility is shared. Accordingly, they
reiterated that the pursuit of international economic policy
coordination is essential to achieving their common objective of
sustained growth with price stability and reaffirmed their
support for the policy coordination process.
With this in mind, the Ministers and Governors reviewed the
global economic situation and prospects in the aftermath of the
Gulf War. They noted the signs of prospective economic recovery
and lower inflation in those countries which are in recession.
They also noted the persistence of high real interest rates and
the slowing of economic activity in those countries which until
recently had been experiencing strong expansion.
Against this background, Ministers and Governors emphasized
the importance of monetary and fiscal policies which provide the
basis for lower real interest rates and a sustained global
economic recovery with price stability. They believed that such
a medium-term strategy was the best way of reducing potential
risks and uncertainties in the current outlook. They reiterated
the importance of policies aimed at increasing global savings.
They agreed to monitor the situation closely and to take actions
as needed within the coordination process with a view to
achieving a sound recovery and a growing world economy.
Given the close linkage between trade and growth, the
Ministers and Governors also emphasized the importance of
bringing the Uruguay Round to a successful conclusion.
The Ministers and Governors also reviewed developments in
international financial markets and reaffirmed their commitment
to cooperate closely on exchange markets.
The Ministers and Governors welcomed the reform efforts
underway in Central and Eastern Europe, and in Latin America,
rrica, and Asia. They agreed that a strong global economic
recovery and open markets in the major industrial countries will
provide necessary support for these efforts. They noted the
difficult economic situation in the Soviet Union and the need for
sustained economic reforms.
The Ministers and Governors encouraged developing countries
to continue the pursuit of market-oriented reforms, and
underscored the importance of active IMF and World Bank support
for this effort, both through conditionality and financing. In
this connection, they reaffirmed their commitment to implement
the increase in IMF quotas by the end of the year.
pertinent of the Treasury • Washington, D.c. • Telephone S66-20I
to ¿ i i 0 f 3 6'39
I'EFT. OF THE
Remarks by
Secretary of the Treasury
Nicholas F. Brady
at the Morning Session of
the Interim Committee
of the International Monetary Fund
Washington, D.C.
April 29, 1 9 9 1
gtrenqfrfogjxi,
ng. the International Econom ic Environment
and Impijgatj^flng—of .the Middle East_crlsis and its Aftermath
JS
,Dfv®l°Pme^ts in Eastern Europe and the Middle East are only
reminders that we live in a highly interdependent world,
u n ? i ir* isolation.
These developments, coming on top of the
globalization of financial markets and the growing interconnections
among our economies, underscore an essential reality: while each
country looks to its own interests, we must work collectively to
achieve our common objectives of freedom and prosperity.
Th® dramatic developments in Eastern Europe, the Middle East
ana much of the developing world are an important backdrop to our
G a n g e s are underway in the industrial world as well,
including the reunification of Germany and the accelerated pace of
I?r??ratlon in the Eur°Pean Community, bringing with them both
challenges and opportunities.
. . The success of Desert Storm has shown what can happen when the
inuernationai community- focuses its energies on a singular
iow is the ti2iie to extend this spirit of international
EEBE! the major challenges we face together on the
economic front.
mu
Circumstances are significantly changed from the recent past,
ne g u i f oil producers are no longer major suppliers of capital to
tne world — indeed, over the foreseeable future these countries
r t t t naVe t0 direct their resources increasingly to internal needs,
current account surpluses are declining sharply, and funds
nee destined abroad are being used to build up the eastern part of
although the reduction in Japan’s current
account surplus is welcome, it also implies a reduction in the flow
OI funds from Japan to the rest of the world.
NB- 1242
2
Fostering an open, growing world economy is the roost effective
tool we have to meet the new challenges of a changing world and to
assure that strong support is provided to the reform efforts of
Latin America, Eastern Europe and many other developing countries«
Unfortunately, the world economy has slowed dramatically since our
meeting last September.
There are hopeful signs of recovery in some quarters. In
fact, here in the United States there have been some encouraging
signs. But a recovery of world economic activity is by no means
certain. Adjustment of structural fiscal deficits is underway in
the United States and a number of other countries. This should
strengthen public savings. But real interest rates remain high in
many countries. This dampens investment and growth prospects.
In these circumstances, monetary and fiscal policies should be
directed to providing the basis for lower real interest rates and a
sustained global economic recovery with price stability. Such a
strategy is the best way of reducing potential risks and
uncertainties in the current outlook and providing a framework of
confidence that will engender growth.
Strong world economic growth must also be accompanied by open
markets. This is especially important for countries in Eastern
Europe and the developing world striving to build growth on export
markets. We should all carefully review our trade policies to
consider whether we can open our markets more effectively to the
reforming economies of Eastern Europe.
President Bush has, in fact, announced an initiative to expand
Eastern European commercial opportunities with the United States«
We call on other countries to do the same. Furthermore, at a time
when the Soviet Union is experiencing economic difficulties,
countries should avoid using export credits to displace Eastern
European exports to that country.
Implications, of the Middle East__Crisls__and_Its Aftermath
As efforts proceed to build new arrangements for peace and
security in the Middle East, we must also give our attention to the
development and growth needs of the region. Multilateral
cooperation must also be,the cornerstone of efforts to promote
market-oriented reform and economic development in the Middle East.
Obviously, the countries of the region will have to play a key
role in charting a course for long-term development. We are
therefore pleased to see that the members of the Gulf Cooperation
Council (GCC) are establishing a new development program for
countries in the region. We also welcome the importance that has
been attached by the GCC to promoting economic reform and
supporting the program activities of the IMF and World Bank. This
will increase the effectiveness of development assistance and
promote stronger, market-oriented economies, while at the same time
catalyzing the support of other countries.
3
believe that an effective approach supporting long term
development in the Middle East would be one that is closely
associated with the World Bank and the IMF* This could be through
the establishment of a fund, facility, or subsidiary, within the
World Bank, supported by or coordinated with the IMF. We look
forward to working closely with countries in the Middle East and
elsewhere during the months ahead in order to develop the precise
the^regio^ * global strate9y to support long term development in
Thank you, Mr. Chairman.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of ^e^jj-bhc Debt • Washington, DC 20239
1BRARY BOON o
FOR IMMEDIATE RELEASE
April 29, 1991
ilK £1110 u 3 b 0
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $8,0®iST.fell^S^-’
b^^is-week bills to be issued
May 2 , 1991 and to mature August 1, 1991 were
accepted today (CUSIP: 912794WS9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 57%
5. 61%
5. 60%
Investment
Rate
5.74%
5.79%
5.78%
Price
98.592
98.582
98.584
$13,400,000 was accepted at lower yields.
Tenders at the high discount rate were allottei
The investment rate is the equivalent coupon-i:
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
35,890
21,817,295
23,920
48,645
54,090
34,070
1,326,410
61,315
8,040
40,225
28,945
483,870
430.285
$24,393,000
Accented
35,890
7,060,295
23,920
48,645
54,090
32,520
80,160
31,315
8,040
40,225
28,945
133,870
430.285
$8,008,200
Type
Competitive
Noncompetitive
Subtotal, Public
$20,283,940
1.257.160
$21,541,100
$3,899,140
1.257.160
$5,156,300
2,601,600
2,601,600
250.300
$24,393,000
250.300
$8,008,200
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-3243
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
tn ¿ i i 0 0 i b 4 i
FOR IMMEDIATE RELEASE
April 29, 1991
-nr tof &SUHY
i£PT.0 f TH& lUL
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $8,008 million of 26-week bills to be issued
May 2, 1991 and to mature October 31, 1991 were
accepted today (CUSIP: 912794XL3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.66%
5.69%
5.68%
Investment
Rate
5.92%
5.96%
5.95%
Price
97.139
97.123
97.128
$1,400,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 48%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
26,840
19,016,415
13,430
33,555
36,815
25,935
1,640,550
36,270
6,720
41,315
13,780
450,425
228.955
$21,571,005
Accepted
26,840
7,246,730
13,430
33,555
36,815
25,935
192,150
23,670
6,720
39,815
13,780
119,225
228.955
$8,007,620
Type
Competitive
Noncompetitive
Subtotal, Public
$18,027,745
773.560
$18,801,305
$4,464,360
773.560
$5,237,920
2,100,000
2,100,000
669.700
$21,571,005
669.700
$8,007,620
Federal Reserve
Foreign Official
Institutions
TOTALS
jfE PT. OF l HE TREASURY
|| Presar.d for Dellvary
Remarks by
Secretary of the Treasury
Nicholas r. Brady
at the Afternoon Session of
the Interim committee
of the international Monetary Fund
Washington, D.c.
April 29, 1991
The-International p^bt Situations
Erocress and Perspective
1
disc^ssed this morning, improved global growth is
I ^ B
t? our ability to meet the global challenges facing us
in the period ahead, including the external debt problems of
n?£ion* ’ Sustained low-inflation growth and more open
markets for LDC exports are essential to maximize the benefits of
macroeconomic and structural reforms in debtor nations♦
M
ÊÊBBBm M n**d to attract capital is at the heart of
every country*s development challenge* Limited global capital
«ÎÎÎh Ï?**' ^eluding a shift in the role of commercial banks^in
providing external finance and budgetary constraints on new
■</
I8SSS1 assistance within creditor governments, underscore the
need for developing countries to encourage new private investment
as a source of capital for development and growth. Such
investment can only be attracted by more open investment regimes,
programs to encourage such reforms should receive a higher
priority in all of the international financial institutions.
These themes should .be central to our continued
implementation of the debt strategy in the period ahead.
Secant Pr?‘Tr?lfff
As we begin our third year under the strengthened debt
egy' w*.can take hope from the progress made to date — *
whii« recognizing the challenges that still lie ahead. In
assessing progress within the strategy, we should consider first
tne sheer magnitude of debt covered through debt reduction
agreements and the number of countries involved. Accent
agreements with Venezuela, Uruguay and Nigeria bring the total to
sight countries which have now reached new financing and debt
reduction agreements with their commercial banks. These
NB-1245
2 i
countries account for some $125 billion in commercial bank debt,
or nearly half of the commercial bank debt of all of the major
debtor nations.
Niger is the first country to benefit from the IDA Debt
Reduction Facility in securing a commercial bank agreement, while
Jamaica and Senegal, have also reached multiyear rescheduling
agreements which permit debt buybacks.
Nearly a dozen additional countries — both middle and low
income — are at various stages of negotiations with their banks.
The variety of packages which have been negotiated to date
reflects positively on the flexibility of the debt strategy in
accommodating the diverse interests and needs of both commercial
banks and debtor nations. And the multiplicity of discussions
underway offers broad testimony that our approach remains a sound
one.
Perhaps more important, debtor countries are beginning to
experience stronger growth, access to voluntary bond markets, new
investment flows, and a repatriation of flight capital. Mexico
— which currently has a real GDP growth rate of 4% — has
recently received some $2-3 billion in foreign equity flows into
its stock market, has successfully floated bonds on the
Euromarket, and is now experiencing an over-financing of its
Treasury offerings. One third of the commercial banks chose the
new money option for Venezuela and capital is now being
repatriated. And Chile’s dramatic success in reducing debt
through its debt/equity swap program has helped to pave the way
for its recent $320 million Eurobond syndication with its
commercial banks.
"
Underlying these success stories are strong reform efforts
by each of these countries. All three have liberalized trade.
Chile has one of the most open investment regimes in Latin
America, and has inspired recent investment liberalization in
both Mexico and Venezuela. Mexico has privatized its airline,
copper, and trucking industries in the past year and a half, and
has announced some $20-25 billion in future privatizations of
government-owned enterprises in the banking, telecommunications,
steel, fertilizer, and insurance sectors. . Chile and Venezuela
are also moving to privatize key public enterprises. Financial
sector, tax, and price reforms are also helping to improve the
market orientation of debtor economies. The market's response
has been impressive.
Other debtor countries are also moving to implement similar
reforms. Argentina, in-particular, has already reduced its
external debt by $7 billion through the privatization of mao or
public enterprises, as an interim step toward a comprehensive
agreement with its commercial banks.
Challenges clearly remain. Not least of these has been the
continued growth in arrears to commercial banks by several
countries. Serious efforts need to be made to regularize
relations and address outstanding arrears as a prelude to
comprehensive debt reduction negotiations. In this regard,
following lengthy negotiations, Brazil recently reached an
agreement involving a down payment and refinancing of some $8
billion in arrears. This agreement is a step forward, although
further negotiations on a new financing package remain essential.
Those countries that have been experiencing significant
arrears must also move on a comprehensive front to introduce
sound macroeconomic and structural policies. Poor policy
underpinnings and growing arrears frequently go hand in hand.
Movement in these twin areas will help unleash new international
resources to support growth and development, while also setting
the stage for meaningful debt reduction.
Action bv Bilateral Creditors
Official bilateral creditors are also doing their part. The
international community is increasingly turning to a variety of
mechanisms to provide financial support for heavily indebted
countries which are undertaking economic reforms. New financial
assistance — particularly to low income countries — is
increasingly being provided on a grant basis. Maturities for
lower middle income countries have been extended to permit deeper
relief, and a portion of their debt to official creditors can be
converted into equity, or used to support environmental or
development programs.
In this context, we welcome the recent Paris Club action for
Poland, which reflects its exceptional economic and political
reform efforts, extreme dependence on bilateral creditors, and
need for dramatic relief to assure a viable economy. We would
also encourage other governments to "top up” this effort by
making use of the debt swap option, as the United States will be
doing to support vital environmental programs in Poland. Now
that it has reached agreement with the IMF on an economic reform
program, we believe that Egypt’s exceptional circumstances
warrant similar multilateral debt reduction by creditor
governments.
For the poorest countries, the Paris Club is reviewing its
current rescheduling options and considering proposals that would
extend additional relief. Bilaterally, creditor governments have
already forgiven some $6 billion in debt obligations for these
countries. The United States has recently received Congressional
authority to reduce food assistance debt, as well, for the least
developed countries. The combination of these bilateral and
* 4
multilateral efforts, together with new grant financing, should
have a substantial impact on the debt profiles of individual
countries over time.
Enterprise for the Americas
Finally, I would underscore our own commitment to the
President's Enterprise for the Americas Initiative, which pledges
debt reduction within the hemisphere for countries which are
liberalizing their investment regimes, as a complement to sound
IMF and World Bank programs*
Our initiative for Latin America*and the Caribbean has
struck a responsive chord within the hemisphere. Several
countries are already pursuing negotiations on investment reforms
with the Inter-American Development Bank, and several more have
expressed an interest in its new investment sector lending
program. I am confident that these efforts, together with the
creation of a new Multilateral Investment Fund to target support
for technical assistance, small businesses, and worker education
and retraining, can make an immense difference in the climate for
investment in the region, and to its future growth.
Conclusion
In short, we have experienced dramatic progress under the
international debt strategy during the past two years. The sheer
volume of debt covered by debt reduction agreements and the broad
range of reforms underway offers brighter prospects for many
debtor nations in the period ahead. We should take heart from
their success and, from their example, renewed commitment to /
market-oriented reform. Concerted efforts to improve global
growth and assure a successful Uruguay Round are also essential.
Through continued mutual effort, I am confident that we can ease
further debt problems and help provide an international
environment conducive to greater prosperity in the developing
world.
apartment of the Treasury • Washington, D.c. • Telephone 566-20«
Jt
IT !. U t In !
AS PREPARED FOR DELIVERY
FOR RELEASE AT 11:45 a.m.
April 30, 1991
ÌF&
Contact: Barbara Clay
202-566-5252
THE HONORABLE JOHN ROBSON
DEPUTY SECRETARY OF THE TREASURY
INTERNATIONAL INSTITUTE FOR SECURITIES MARKET DEVELOPMENT
APRIL 30, 1991
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
Thank you, Terry (Chuppe). It is a great pleasure to be
here to share some perspectives with our distinguished guests
from around the world.
The countries represented here today are part of a new era—
a renaissance of nations that have embraced a free market
philosophy and are trying to restructure economic systems that
have, for too long, retarded their standards of living. And you
in this room are the financial bricklayers of a vital part of
successful free market economies — efficient, fair, broad-based
capital markets.
Proof of successful economic reforms spans the globe and
captures the headlines every day. In Eastern Europe, Latin
America, the Caribbean, and in Asian and African countries,
reforms are taking hold with vigor. Many countries are
simultaneously struggling not only to establish free market
systems, but to nurture fragile democracies as well.
On every continent, countries are striving to build new and
improved free market systems. In many, the accomplishments have
been significant, and reformers can be proud.
But they cannot be complacent. Now is not the time for the
architects of emerging free markets to relax and wait for a knock
on the door of opportunity. Instead, they must muster the energy
and political courage to implement the reforms necessary for
continuing economic growth, and they must win the foreign trade
and capital they need to succeed in the competitive global
economy.
NB-1246
2
The competition for capital
These reforms are essential. Because, as your nations
progress along the path to market economies, there will be a
fierce competition around the world for a limited pool of
financial capital to fuel economic growth. As traditional
sources of capital become more preoccupied with their own needs—
German reunification, infrastructure investment in Japan, and
rebuilding after the Gulf War — the competition will intensify.
Every successful economy depends on the free flow of capital
— the United States, Japan, Germany — we all seek foreign
investment and trade to keep our economies strong.
Of course, there will be winners and losers in the global
competition for capital. The winners will be those countries
able to provide stable and open economic regimes that welcome
foreign investment and are free of the governmental barriers that
block productive activity.
In return, foreign companies and entrepreneurs will seek
those countries for investment opportunities, bringing new
technology and managerial skills. Businesses will open factories
that are built and operated by their citizens.
Their
agricultural and manufactured goods will be traded competitively
on the international markets. Their economies will grow and
prosper. And their standards of living will rise.
Sound economic policies
Fundamental to creating domestic capital and attracting
foreign investment is the pursuit of economic policies that favor
stability and growth. Sound macroeconomic policies will provide
the foundation for a dependable economic development. Excessive
regulation, inflation and rapidly fluctuating exchange rates can
only frighten away investors.
That is why the United States is helping many countries
develop policies and build the institutions essential for long
term growth and prosperity. As President Bush said, Hour
challenge in this country is to respond in ways to support the
positive changes now taking place...We must forge a genuine
partnership for free market reforms.” This conference is one
example. And there are many others.
But foreign assistance can only be a catalyst — not a
crutch. Successful economic reforms depend on long-term changes
from within.
3
And if the leaders of emerging free markets are serious
about building a lasting foundation for growth — serious about
competing for the world*s capital resources — then it*s time to
adopt structural reforms that liberalize investment regimes and
create private sector opportunity.
It's time to create environments where investors feel
comfortable doing business. That means less red tape, less
regulation by the government and more incentives for private
businesses to take hold.
Less government interference
The argument against government intervention is as old as
democracy itself. In the United States, we've been having the
same vigorous debate for over 200 years. And now, we hear the
same debate in new places. In Peru, the famous economist
Hernando de Soto put it this way:
"The challenge...is to come up with a legal and
institutional system...which transfers to private
individuals those responsibilities which the state has thus
far monopolized unsuccessfully."
Simply put, emerging free markets should take off the gloves
of government to shake hands with the private sector. Let your
economies work — even if the system seems imperfect. Allow a
little untidiness. The beauty of the free market is that the
smaller problems will usually work themselves out.
In Mexico, there is an ongoing effort by the government to
unleash its hold on hundreds of business entities. In 1982, the
state owned over 1,100 entities. By 1990, it had cut the number
in half.
That's a real victory for the Mexican people, ,who can look
forward to running more businesses on their own. Moreover, it is
tangible proof to foreign investors that Mexico is serious about
attracting more capital. And, what better evidence of success:
flight capital is now flowing back into Mexico.
Creating financial institutions
Still, there is more you can do. A successful and
attractive free market must also be the home of safe, sound and
established free market institutions. Efficient banks and
securities markets are all essential. That is why you here today
have such an important role to play in the future prosperity of
4
your homelands. That is why Chairman Breeden and the Securities
and Exchange Commission are sharing their expertise with you.
And that is why the United States is helping many nations to
learn the basic elements of management in a competitive
marketplace.
For many nations with young market economies, the most
ignored link in the reform chain is the banking system. Banks
are not functioning as efficient allocators of credit. They are
not creating incentives for savings. Instead, these countries
are stuck with financial dinosaurs — banks that have no capital
and no customers. So, it's time to set up new banks and convince
the people that their money can do more for their country in a
bank than under the mattress.
The same is true of securities markets. It is essential to
start providing capital infusions — even very modest ones — for
small business owners. Small and medium businesses are the
lifeblood of any economy, and you must do what you can to get
those businesses started and help them expand.
Under the skin of most of humanity beats the ambitious heart
of the entrepreneur. This is especially so in emerging
democracies — where butchers, bakers, mechanics and artists seek
to own the shops, garages and businesses once owned by the
government. Now, the setting is ripe for privatization and
investment. But potential owners need that first, important loan
or capital infusion to get started.
Don’t wait for the advanced structure
It doesn’t take much to start a bank, a stock market, or a
commodity exchange. The early banks in the United States were
only small offices with a safe, a ledger and a few pencils. The
first stock market in New York was not much more than a simple
auction of company stocks on the street curb.
The fact is, high-tech computers and hundreds of employees
are not prerequisites to starting financial institutions that
will attract foreign capital. Investors are not looking for
perfection? they're looking for progress and signs of life. The
advanced computers and systems will come in time.
A common mistake in the early stages of emerging free
markets is to strive for the same sophisticated financial
institutions that exist in the advanced, industrial West. But it
is neither realistic nor necessary to achieve in two years what
the United States has achieved in over two centuries. It is more
important to put in place something that meets your current needs
and on which you can build future technological expansion.
5
Changing attitudes
Perhaps the most important thing leaders of emerging free
markets can do now is to begin changing the attitudes of people
who have struggled under statist regimes.
Free markets work when they enjoy the trust and
understanding of the people who stand to benefit. Therefore, you
need a continuous campaign to inspire faith and recapture the
free market mentality.
The campaign can start with the people in this room. You
can be important missionaries for the free market. Any American
business executive will tell you that the best advertising tool
is not television or radio — it's word of mouth and example.
Convince the people that market economies will work, and you*11
have much of the hard work behind you.
Conclusion
The process of economic reform is difficult. Outsiders can
help, but in the end, successful transitions to free markets will
be accomplished primarily through the skills and the fortitude of
the people involved.
I'm confident that many countries represented here can, in
time, attain the same prosperity achieved in Western Europe after
World War II. But it will take hard work and commitment? it will
take access to capital? and it will take a change of ideas and
attitudes.
I look forward to applauding your future positive economic
developments. Good luck to all of you as you work to become
flourishing partners in the global economic community.
Thank you.
###
[TREASURY NEWS
Departm ent of tlio Treasury e Washington, D.c. # Telephone 566-204
PREPARED FOR DELIVERY
CONTACT:
CHERYL CRISPEN
(202) 566-2041
STATEMENT OF
THE HONORABLE ROBERT R. GLAUBER
UNDER SECRETARY OF THE TREASURY FOR FINANCE
BEFORE THE
BUSINESS EDITORS ASSOCIATION
April 30, 1991
o
o
Go q S morning. Let me begin by stating the obvious. The
% banking;industry and the Bank Insurance Fund are under stress,
a: T h § * fundamental problems which banks face require comprehensive
2 reformsir
|jJ
«C*
If the banking system remains weak, inefficient and unable
to compete, no bank insurance fund is large enough to protect the
taxpayers and their $2 trillion in insured deposits. If we only
tinker with the problem — for example, by simply recapitalizing
the Bank Insurance Fund — then we will not have addressed the
underlying causes that have brought the Fund to its present
state. Our motto must be "fix it, don't just fund it."
Otherwise, the chances are good that we will be recapitalizing
the Fund again, the next time perhaps with taxpayer money. That
is a prospect no one could relish.
The evidence of a financial system under stress is clear.
The Bank Insurance Fund, after increasing steadily for over 50
years, has now dropped to its lowest level in history as a
percentage of insured deposits. In the 38 year period between
1942 and 1980, there were a total of 198 bank failures, or about
5 per year. In 1989 alone, there were 206 failures. In 1990,
another 161 banks failed, including 131 small banks with under
$100 million in assets. The FDIC predicts that a further 180 to
230 banks could fail in 1991, and 160 to 210 more in 1992, in
each case over 70% of them being small banks. No one can
reasonably claim that the current system is working well for our
banking institutions, large or small. In fact, at year-end 1990,
the top 25 U.S. banks had the same market capitalization as IBM.
Why are all these failures occurring? One reason is that,
over the years, banks have become less competitive as banks'
traditional business has migrated to new products in other parts
of the financial services industry -- products that are off
limits for banks due to outdated laws. This trend has left the
banks to do too much risky lending to LBOs, Third World countries
and other less attractive borrowers. Another reason is that,
while we now allow interstate banking throughout almost the
N B -1247
entire nation, we impose enormous unnecessary costs on banks by
preventing them from branching across state lines. A third
reason is that our overextended deposit insurance safety net has
eliminated most of the incentive for sophisticated, large
depositors to monitor the activities of banks and check excessive
risk taking.
In part due to our failure to modernize, our international
competitive position has declined to the point where we have no
banks among the top 25 in the world. And as the economy has
slowed, some regions have experienced "credit crunches." Weak
banks have not been able to lend even to good customers, which
has exacerbated the recession and hampered recovery.
Fundamental Reforms
We believe comprehensive reform is needed to accomplish
three fundamental objectives. First, we must make deposit
insurance safe for taxpayers and depositors. That means better
capitalized banks, stronger supervision, and the return of
deposit insurance to its original purpose of protecting small
unsophisticated depositors in this country. It also means a
well-capitalized Bank Insurance Fund.
Second, we must modernize archaic laws to let banks catch up
with their customers and deliver products more efficiently to
consumers across the country — which translates into greater
convenience, lower interest rates and transaction fees for
customers, and more bank capital.
Third, we need to restore the international competitiveness
of our banking industry. Our economy is twice the size of our
nearest competitors, and a world class economy demands a world
class banking system.
We believe that our legislation will help accomplish each of
these objectives. Let me discuss each in turn.
MAKE DEPOSIT INSURANCE SAFE FOR DEPOSITORS AND TAXPAYERS
Deposit insurance should be returned to its historical
purpose of protecting small, unsophisticated depositors and avoid
bank runs. The bill does this in four ways.
First, it reduces the overextended scope of deposit
insurance and returns the system to its original purpose -protecting smaller unsophisticated savers. Federal deposit
insurance has become overextended, both in the size and inclusion
of coverage. When federal deposit insurance was introduced in
1933, accounts were covered up to $2,500, or about $25,000 in
today's dollars. This ceiling now stands at $100,000, resulting
in a quadrupling of effective coverage. In addition, the type of
2
accounts protected have been broadened to include, for example,
brokered deposits, pension pass-throughs and bank insurance
contracts (BICs). It is therefore not surprising that the amount
of insured deposits has doubled in only the last 9 years from $1
trillion to $2 trillion? and insured deposits as a percent of
total deposits have risen from 45% in 1934 to 76% in 1990.
The Administrations legislation addresses these concerns by
reforms which protect the small unsophisticated saver while at
the same time reducing the risk of a taxpayer bailout. We have
proposed eliminating insurance coverage for brokered deposits and
BICs and have carefully tried to eliminate "pass through"
coverage for depositors that are least in need of protection.
Defined benefit pension plans with professional management,
employer liability, and guarantees from the Pension Benefit
Guaranty Corporation are not in need of deposit insurance
protection as well. At the same time, however, the legislation
would preserve pass-through protection for self-directed defined
contribution plans, where individuals choose their own
investments and bear the risk of any loss.
Likewise, the use of multiple insured accounts has gotten
out of hand. It is time to impose limits, and ours is $100,000
per depositor per bank for most accounts, with a separate
$100,000 in coverage for retirement savings. While this limit is
important, it is obviously not radical. A couple can still get
up to $400,000 in insurance coverage in each bank, which is
hardly a small sum. Only about 3% of American households have
over $100,000 in any one institution. Since households typically
have several members, our proposal would most likely affect
substantially less than 3% of households. And insurance for
business accounts would not change.
Those who suggest that such clearly reasonable limits would
destroy the banking system or deprive the elderly of safe places
to invest are just plain wrong — and worse, are irresponsibly
and needlessly stirring up depositor fears.
Second, our legislation generally limits the FDIC to paving
off only insured deposits. Over the last 6 years (1985-90), the
FDIC has paid off about 99% of uninsured deposits, thereby
effectively guaranteeing all deposits in full. Our legislation
would generally require the FDIC to cover only insured deposits,
using the least costly resolution method.
As a consequence, the FDIC's current "too big to fail"
policy would be changed. The legislation would essentially
eliminate the FDIC's discretion to protect uninsured depositors
m bank failures. But it would also preserve the governments
3
ability to protect the financial system when necessary, even if
that requires the rare protection of uninsured depositors. We
believe this is critical for the stability of the financial
system.
Yet, some argue that the government should never protect
uninsured depositors. I believe it would be foolhardy for the
government to surrender its ability to protect uninsured
depositors were the entire financial system is at stake. No
foreign government has embraced that restriction.
Others argue that the government should always protect
uninsured depositors to be equally "fair” and would achieve this
goal by expanding the safety net to legally cover all bank
deposits. That would be equally foolhardy — what about fairness
to the taxpayer? Why should the taxpayer have to pick up the
tab?
The best way to address this problem is to create stronger
banks that don*t fail, which is what this legislation would do.
Third, the bill focuses on increased bank capital, by
applying Prompt Corrective Action (early supervisory
intervention) to undercapitalized banks to cut down_on bank
failures and potential cost to the taxpayer.
Our proposal recognizes that our regulatory system must be
better designed to catch problems early, before they mushroom
into costly failures. The combination of rules and flexibility
in our system of Prompt Corrective Action will help foster two
desirable results: regulators will be able to take action more
swiftly as capital declines. More importantly, banks will be
more likely to maintain strong levels of capital if they face the
certainty of decisive regulatory action as their capital
declines.
Some critics claim that capital is not a good leading
indicator of problems, and that Prompt Corrective Action relies
exclusively on capital. Both allegations are false. Numerous
studies have shown that capital is an excellent leading indicator
and simple to measure. But it is not a perfect early warning
system, and our legislation specifically recognizes its limits.
Even a well-capitalized bank will trigger supervisory
intervention if it is in an unsafe and unsound condition due to
loan concentrations or other regulatory problems. Prompt
Corrective Action does not rely exclusively on capital.
Fourth, the bill recapitalizes the Bank Insurance Fund by
increasing bank insurance premiums and authorizing FDIC
borrowings from the Federal Reserve. It does so in a way where
sufficient resources — $25 billion — are provided to the FDIC
to do the foreseeable job; it is financed by the banking industry
4
without substantially impairing its health; and it relies on
generally accepted accounting principles — no "smoke and
mirrors."
MODERNIZE ARCHAIC BANKING LAWS
Out-of-date laws no longer fit the way individuals and
corporations use banks today. Banks have to be allowed to catch
up to, and provide for, the needs of their traditional customers,
especially in times of credit crunch.
(Otherwise banks* profit
potential becomes even more hollowed out, thereby encouraging
involvement in riskier activities.) This updating can be
achieved while making the U.S. banking system more efficient, by
providing banking organizations nationwide interstate branching,
a full range of financial activities, and regulatory
restructuring. Commercial firms would be able to own banking
organizations through diversified holding companies, thereby
allowing the banking system to benefit from their capital and
managerial know-how. The resulting benefits should be lower
borrowing rates for customers, lower bank operating costs, and
higher earnings and capital.
Nationwide banking and branching. Interstate branching is a
perfect example. Now that 48 of the 50 states allow some form of
interstate banking, it is fair to say that the philosophical
debate over interstate banking is over. Yet interstate branching
is still virtually prohibited, imposing unnecessary costs on
banks. Our legislation would move to end these artificial
barriers, but in a way that recognizes the legitimate interests
of state governments. A state would still be able to restrict
intrastate branching of all state and national banks operating
within its borders. It would also have the ability to establish
activities restrictions for all of its own state banks and all
in-state branches of banks chartered in another state. The
Community Reinvestment Act would continue to apply, and states
could continue to apply state consumer protection laws to
branches or all out-of-state banks. Finally, states could tax
branches of all banks, state or national, to avoid any adverse
revenue impact resulting from changes in the law.
Nationwide interstate banking and branching would provide
tremendous benefits to consumers. Experience shows that greater
ease of entry would mean greater competition, which in turn would
lead to increased availability of credit and other financial
products, and to lower prices. The many consumers who live in
multistate areas would have easier everyday access to branches of
their banks. And more regionally diverse banking organizations
would be less vulnerable to regional economic woes, and therefore
less likely to fail.
5
Critics argus that these interstate activities would reduce
the need for small banks, draw funds out of local communities and
deprive rural areas of much needed sources of credit. There is
no credible evidence to support these hypothetical fears. Today,
in spite of interstate banking in 48 states, I am aware of no
evidence that out-of-state institutions are overrunning the
community banks. In fact, the evidence is to the contrary.
Studies show that community banks not only survive entry by outof-state rivals, they also tend to outperform them.
In states like New York, larger banks have actually decreased the
number of their branches in recent years in the face of stiff
competition from community banks. In California as well,
community banks continue to thrive and to compete quite
effectively with larger rivals, both in-state and out-of-state.
Smaller banks that serve local communities appear to have a
competitive advantage that their larger and more diversified
rivals cannot match —— they know their customers and their
communities. We fully expect that to continue to be the case.
Broader activities for banking organizations• Banking
organizations that are well capitalized would be permitted to
engage in a broader range of financial activities. The proposed
changes reflect the reality of the way that banking organizations
already do business. Banks already engage in many aspects of the
securities and insurance businesses through a patchwork system
created by changes to state laws, exceptions in federal laws, and
regulatory interpretations. But this hodgepodge system is costly
and burdensome, with numerous restrictions that keep our
financial companies from competing fairly, evenly and
effectively.
Under our proposal, bank holding companies would become
financial services holding companies and could engage in all of
the currently authorized financial services activities, and those
who maintained highly capitalized banks could engage in a broad
range of financial activities through affiliates.
But important safeguards would be in place to protect banks
from risks associated with new activities and to prevent unfair
competition. Any new activities would be carried out in
separately capitalized affiliates whose capital could not be
double counted as capital of the bank. Only companies with wellcapitalized banks could take advantage of these new activities,
and only if their banks were not in an unsafe or unsound
condition and were not engaging in unsafe or unsound practices.
If the bank's capital level should decline or if it otherwise
falls into an unsafe or unsound condition, the holding company
would have to fix the problem or face the prospect of strong
remedial action. This could include divestiture of either the
new financial activities or the bank itself, or, if that did not
occur, holding company capital requirements, dividend
restrictions, and much closer supervision.
6
In addition, a number of strict firewalls would exist
between the bank and its new affiliates. Section 23A of the
Federal Reserve Act would be strengthened to prevent certain
transactions between the bank and its affiliate. In addition,
banks would have to give prior notice to the regulator of any
loan exceeding 5 percent of capital. At the same time, under
revised section 23B of the Federal Reserve Act, bank loans to
customers of affiliates would also have to be conducted on an
arm's-length basis.
Strict disclosure rules would apply to sales of non—deposit
products not only by banks, but by affiliates of banks.
Customers would have to sign plainly worded forms acknowledging
that such products were not covered by federal deposit insurance.
The sale of securities of bank affiliates could not occur on the
bank's premises where deposits are accepted. And most important,
regulators have broad regulatory authority to impose limits on
transactions between banks and affiliates to prevent conflicts of
interest, unfair competition, and unsafe and unsound banking
practices.
Consumers would be a direct beneficiary of these reforms.
Consumers would choose from a much broader array of financial
products at the bank, with strengthened disclosure requirements.
And the increased competition provided by banks would lead to
lower transaction costs and lower interest rates. Finally,
broader financial activities would lead to better capitalized,
and safer and sounder banks.
Regulatory Restructuring. The bill would reorganize the
current federal regulatory structure for banks, which virtually
everyone admits is overlapping and often duplicative. The goal
is greater accountability, efficiency and consistency of
regulation and supervision, and a separation of the regulator and
the insurer. The new structure would have one federal regulator
for each banking organization, with the Federal Reserve
responsible for all state-chartered banks and their bank holding
companies and a new entity under the Treasury responsible for all
nationally-chartered banks and their bank holding companies.
The FDIC would primarily focus on insurance and resolutions. I
believe the result will be a simplified federal regulatory
structure that will be able to effectively administer the Prompt
Corrective Action program I mentioned earlier.
Diversified Holding Companies. The bill would also allow
diversified holding companies to own financial services holding
companies. These diversified holding companies would have no
limits on the type of activities in which they could engage.
They would provide a critical new source of capital for banks,
since 80 percent of the capital in this country is in commercial
companies. But these companies must be prepared to put up this
capital if they want to own banks — again, their ownership of
7
banks would be contingent on maintaining high bank capital
levels, and they would be subject to similar Prompt Corrective
Action penalties if bank capital should ever drop and the holding
company was unwilling to restore capital.
All of the firewalls that apply to bank transactions within
the financial services holding company would apply to bank
transactions with affiliates in the diversified holding
company — with one crucial difference. No bank, and no bank
affiliate within a financial services holding company, could
provide loans of any kind to the diversified holding company or
its subsidiaries. The bank simply could not become a commercial
company's "piggy bank" for private sources of credit. We believe
that this restriction, along with the other safeguards described
above, will be more than adequate to protect against abusive
lending practices.
Credit Crunch. The bill helps to address the current credit
crunch issue. Unless we are prepared to see the current lending
retrenchment by banks reoccur with each subsequent downshift in
the economy, comprehensive reform is necessary to allow banks to
perform their traditional role as the primary shock absorber in
the financial system. To have a banking system where certain
banks have lower credit ratings than the companies they serve
does not bode well for the future. If the country does not have
strong banks, a credit crunch will become a recurring problem
with every cyclical downturn.
Prospects for Comprehensive Reform
What are the prospects for comprehensive reform? There is
an increasingly clear public awareness that a problem exists and
that it must be promptly addressed. Editorial writers around the
country acknowledge the issue, many on Capitol Hill recognize the
need for reform, and the Administration has put forward a major
legislative proposal.
However, it is not surprising that such a broad bill would
attract the criticism of myriad special interest groups, each
opposed to one or more specific portions of the bill. In
addition, the banking industry itself is divided. Finally, many
in Congress, living through the S&L crisis, are frightened by the
prospects of broad change and appear to favor as little action as
possible — perhaps as little as only BIF recap and stronger bank
supervision.
8
i
Our response is clear: pass comprehensive legislation now.
If Congress does not face the fundamental problems confronting
the industry, it will simply have to face the issue later. The
S&L experience taught us the expensive lesson that avoiding the
need for fundamental reform will delay action but increase the
cost. The need for reform is clear. It cannot be ducked. It
must be faced? now rather than later.
Thank you.
*
*
*
9
*
*
d
>£PT. OF THE XREA-SH'RY STATEMENT OF
SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
AT THE MORNING SESSION
OF THE DEVELOPMENT COMMITTEE
OF THE WORLD BANK AND THE INTERNATIONAL MONETARY FUND
WASHINGTON, D.C.
APRIL 30, 1991
INTRODUCTION
Mr. Chairman, fellow Governors and distinguished guests:
pleasure for me to welcome the Development Committee to
Washington for its spring session.
It is a
I wish especially to welcome Chilean Finance Minister Foxley as
the new Chairman and express my appreciation to Yves Fortin for
his distinguished service as Secretary to the Committee for the
last three and a half years.
In addition, let me give my personal thanks to World Bank
President Barber Conable for five years of distinguished service.
It has been my pleasure to have known him and worked with him in
his many years of leadership in the U.S. Congress as well as at
the Bank.
FOREIGN INVESTMENT
I welcome the Committee's decision to revisit the vital topic of
the role of foreign investment in the development process. The
world has changed significantly in recent years, as indicated by
the momentous events in Central and Eastern Europe, as well as
the sweeping reforms underway in Latin America. The Bank and the
majority of its member nations have begun to recognize the key
role of the local private sector in development. Fortunately
there is now also growing awareness of the beneficial role which
foreign direct investment can play. Foreign investment can serve
as a partner to the local private sector, generating jobs and
providing a dynamic effect on an expanding local economy. It can
help underwrite successful privatization, as well as provide long
term technology transfer and access to export markets.
N B -1248
2
The Bank must help developing countries adopt appropriate
institutional and policy reforms that would attract foreign
direct investment, and encourage the return of flight capital.
In particular, it needs to develop further an investment sector
lending program which can be instrumental in encouraging the
required reforms to support directly the private sector. These
efforts are especially important for the severely indebted
nations. A discussion of this issue is particularly timely in
light of the proposed IFC capital increase.
IFC CAPITAL INCREASE
The United States fully appreciates the vital and unique role of
the IFC within the overall World Bank Group. The IFC has a solid
record in providing capital for worthy projects and investments
throughout the developing world. We believe that the IFC should
build on this record of many years and strengthen and broaden its
role in the 1990s. For this to be done the IFC will need
additional capital. We are prepared to support a capital
increase in the appropriate circumstances. For additional
capital to be most effective, however, we believe actions are
needed in three broad areas:
First, measures to enhance the focus, operations, and
priorities of the IFC itself.
Second, measures to strengthen communication and
collaboration between the IFC and the rest of the World Bank
Group.
Finally, measures to strengthen the focus of the World Bank
on the private sector so that the IFC is not operating in
isolation, but is part of a comprehensive World Bank effort
in support of private sector development.
We look forward to a comprehensive action plan to provide a clear
framework for the Bank's evolution towards the private sector in
the years ahead.
POVERTY ALLEVIATION
We commend the Bank for the increasing attention it is giving to
poverty alleviation. The U.S. believes strongly that poverty
considerations are integral to development and should be a top
priority for all countries. Assessments of whether a country's
policies and programs are consistent with the reduction of
poverty should be prepared for each borrowing nation, and updated
regularly. A country's commitment to poverty alleviation is
critical and should be taken into account in the allocation of
Bank resources.
3
DEBT
The debt situation of several developing countries is improving
through a combination of reform efforts, commercial bank packages
which include debt and debt service reduction as well as new
financing, and continued support from official creditors.
By offering support for commercial bank debt and debt service
reduction, the international debt strategy has allowed debtor
country officials to turn their attention to the key issues of
reforming and liberalizing their economies at home. In a number
of cases — Mexico, Chile, and Venezuela — these efforts are
reaping tangible results — economic growth, return of flight
capital, new investment flows, and access to spontaneous foreign
financing. This signal of a return to creditworthiness is
especially gratifying.
Official creditors are continuing to provide strong support for
debtor nations. For Poland and Egypt, we have supported
exceptional action due to their extraordinary situations. For
heavily indebted, low income countries, the Paris Club is
reviewing the implementation of existing options under Toronto
Terms, as well as possible additional measures to assist these
countries.
As a part of our commitment to assist the poorest countries on a
bilateral basis, the United States has agreed to forgive
approximately $1.1 billion in debt owed by Sub-Saharan African
countries. We also expect to begin implementing new authority
this year to reduce food assistance obligations of least
developed countries.
ENVIRONMENT
The U.S. is pleased to participate in the meeting of the Global
Environment Facility that will take place later this week. Over
the three year life of the facility, we intend to provide up to
$150 million in parallel financing through our Agency for
International Development.
We see the facility as an experimental pilot program. It should
test new approaches and techniques, fund projects which would
otherwise go unfunded, and fold the lessons learned into
mainstream development operations.
Our first priority will be to address outstanding issues of
organization and governance. The process should be open and
transparent, and provide opportunities for an exchange of views
with the scientific and technical community and NGOs. The U.S.
is prepared to review projects to ensure that the work program is
balanced, and that the projects provide global benefits and
lessons that can be incorporated into the ongoing and regular
4
lending programs of the Bank. It is essential to establish the
credibility of the facility through the selection of "good"
projects. We must therefore resist the temptation to move too
quickly until a proper foundation for operations has been laid.
URUGUAY TRADE ROUND
I would also like to mention the important subject of
international trade. Maintenance of a vibrant multilateral
trading system characterized by free and open markets will
provide a sound basis upon which developing countries can improve
their economic prospects. A successful Uruguay Round of
multilateral trade negotiations is necessary to strengthen the
trading system and improve market access for developing
countries.
Developing countries which have integrated themselves into the
global trading system and have begun or accelerated trade
liberalizing programs can greatly assist their own economic
prospects and maximize their gains from the trade negotiations.
It is in the economic interest of all trading nations to work
toward a successful Uruguay Round. Indeed, each of our nations
has the responsibility to ensure that the negotiations produce
broad ranging and sustainable results as quickly as possible.
Until we achieve such a conclusion to the Round, we must consider
our work, regrettably, unfinished.
CONCLUSION
It is clear that there are a number of important issues facing us
in the near future. I am sure the work of this Committee under
the able leadership of Chairman Foxley will meet these
challenges. Thank you.
Report to the Congress
on Property and Casualty
Insurance Company Taxation
Department of the Treasury
April 1991
Report to the Congress
on Property and Casualty
Insurance Company Taxation
Department of the Treasury
April 1991
D E P A R TM E N T O F T H E T R E A S U R Y
W ASHINGTO N
A SSIST A N T SE C R E T A R Y
April 1991
The Honorable Lloyd Bentsen
Chairman
Committee on Finance
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
Section 1025 of Public Law 99-514, the Tax Reform Act of
1986, directs the Secretary of the Treasury or his delegate to
conduct a study of (1) the treatment of policyholder dividends by
mutual property and casualty insurance companies, (2) the treatment
of property and casualty insurance companies under the minimum tax,
and (3) the operation and effect of, and revenue raised by, the
property and casualty insurance tax provisions of the Tax Reform
Act of 1986.
Pursuant to that directive, I hereby submit this
“Report to the Congress on Property and Casualty Insurance Company
Taxation.”
I am sending a similar letter to Senator Bob Packwood.
Sincerely
Kenneth W. Gideon
Assistant Secretary
(Tax Policy)
Enclosure
DEPARTMENT OF THE TREASURY
W A S H IN G T O N
•ASSISTANT S E C R E T A R Y
April 1991
The Honorable Dan Rostenkowski
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Section 1025 of Public Law 99-514, the Tax Reform Act of
1986, directs the Secretary of the Treasury or his delegate to
conduct a study of (1) the treatment of policyholder dividends by
mutual property and casualty insurance companies, (2) the treatment
of property and casualty insurance companies under the minimum tax,
and (3) the operation and effect of, and revenue raised by, the
property and casualty insurance tax provisions of the Tax Reform
Act of 1986.
Pursuant to that directive, I hereby submit this
"Report to the Congress on Property and Casualty Insurance Company
Taxation."
I am sending a similar letter to Representative
Bill Archer.
Sincerely,
1 Kenneth W. Gideon
Assistant Secretary
(Tax Policy)
Enclosure
TABLE O F CO NTEN TS
Page
1. In tr o d u c tio n a n d S u m m a r y
1
2.
T h e T a x R e f o rm A c t o f 1986
3
2.1
In tro d u c tio n
3
2 .2
C h an g e s in P ro p e rty a n d C asualty In su ra n c e C o m p a n y T a x a tio n
3
2 .3
C o rp o ra te A lte rn a tiv e M in im u m T ax
7
3.
E ffe c t o f th e T a x R e fo rm A c t o f 1986 o n T a x L ia b ilitie s
11
3.1
In tro d u c tio n
11
3 .2
R ev en u e E stim ates P re p a re d in 1986
11
3 .3
Im p a c t o f th e P ro p e rty a n d C asu alty In su ra n c e C o m p a n y T ax P ro v isio n s o n
R e g u la r T ax L iabilities: 1987
15
A lte rn a tiv e M in im u m T ax L iabilities fo r P ro p e rty an d C asu alty In su ra n c e
C o m p a n y C o n so lid ate d R etu rn s: 1987
23
C o n clu sio n
23
3 .4
3 .5
4.
T h e T a x T r e a tm e n t o f P o lic y h o ld e r D iv id e n d s P a id by I n s u r a n c e C o m p a n ie s
27
4.1
In tro d u c tio n
27
4 .2
P o licy h o ld e r-L e v el T ax atio n o f P o licy h o ld e r D ividends P a id by P ro p e rty
a n d C asu a lty In su ra n c e C o m p an ies
29
4 .2 .1
P o lic y h o ld e r D ividends by L ine o f B usiness
29
4 .2 .2
P o lic y h o ld e r D ividends fo r P erso n al C o v erag e
32
4 .3
4 .4
A rg u m e n ts R elatin g to D ifferences b etw een P ro p e rty a n d C asu alty In su ra n c e
a n d L ife In su ra n c e
38
S u m m ary a n d C o n clu sio n
39
A ppendix 1
R e q u ir e m e n t f o r th e R e p o rt
41
A ppendix 2
D e s c rip tio n o f th e S a m p le a n d M e th o d o lo g y
43
45
B ib lio g ra p h y
- v -
L IS T O F T A B L E S
Table
3.1
ZESE
R ev en u e E stim a te s fo r th e P ro p e rty a n d C asu alty In su ra n c e C o m p a n y
T a x P ro v isio n s U n d e r th e 1986 A ct
*4
C o m p a riso n o f A ctu al a n d E stim a te d C h an g es in T ax L iab ilities fro m th e
P ro p e rty a n d C asu alty In su ra n c e C o m p a n y P rovisions u n d e r th e 1986 A ct:
C a le n d a r Y e a r 1987
16
R e c o n c ilia tio n o f A ctu al a n d E stim a te d E ffect o f S e le cted P ro p e rty a n d
C asu a lty In su ra n c e C o m p a n y T ax R efo rm P ro v isio n s on C h an g es in T a x a b le
In c o m e , L osses, T ax C re d its, a n d T ax A fte r C redits: C a le n d a r Y e a r 1987
17
3.4
N e t W ritte n P rem iu m s fo r S ch ed u le P a n d 0 L ines:
19
3.5
N e t W ritte n P rem iu m s a n d U n e a rn e d P rem iu m s fo r P ro p e rty a n d C asu alty
In su ra n c e C o m p a n ies: 1973-89
21
A lte rn a tiv e M in im u m T ax B ase a n d L iabilities by T ax S tatu s o f C o m p a n ies
F ilin g P & C C o n so lid a te d T ax R etu rn s
24
P o lic y h o ld e r D ividends a n d P rem iu m s E a rn e d fo r P ro p e rty a n d C asu alty
In s u ra n c e C o m p a n ies by L ine o f B usiness: 1989
30
P o lic y h o ld e r D ividends a n d P rem iu m s E a rn e d fo r S to ck a n d M u tu a l P ro p e rty
a n d C asu a lty In su ra n c e C o m p a n ies by L ine o f B usiness: 1989
31
P o lic y h o ld e r D ividends a n d P rem iu m s E a rn e d fo r P ro p e rty a n d C asu alty
In s u ra n c e C o m p a n ies fo r P e rso n a l a n d C o m m e rc ial C o v erag e: 1989
33
3.2
3.3
3.6
4.1
4 .2
4 .3
4 .4
1978-89
P o lic y h o ld e r D ividends a n d N e t W ritten P rem iu m s fo r S to ck a n d M u tu a l P ro p e rty
a n d C asu a lty In su ra n c e C o m p a n ies fo r P erso n al a n d C o m m e rc ial C o v erag e:
34
1989
4 .5
P o lic y h o ld e r D ividends a n d P rem iu m s E a rn e d by L ine o f B usiness fo r S to ck
a n d M u tu a l P ro p e rty a n d C asu alty In su ra n c e C o m p an ies th a t P a id P o lic y h o ld e r
D iv id en d s fo r P e rso n a l C o verage:
4 .6
1989
36
N u m b e r a n d P e rc e n t o f P ro p e rty a n d C asu alty In su ra n c e C o m p a n ies th a t P a id
P o lic y h o ld e r D ividends fo r P e rso n a l C overage: 1989
- V ll
37
C H A P T E R 1.
IN T R O D U C T IO N A N D S U M M A R Y
T h e T a x R efo rm A ct o f 1986 (P ublic L aw 9 9 -5 1 4 ) (th e 1986 A ct) c h a n g e d su b sta n tia lly th e ta x a tio n
of c o rp o ra te in c o m e by re d u c in g th e to p c o rp o ra te ta x ra te fro m 4 6 p e rc e n t to 34 p e rc e n t, b ro a d e n in g
the c o rp o ra te in c o m e ta x b a se , a n d a d o p tin g a n a lte rn ativ e m in im u m tax . In a d d itio n to th o s e
general c h a n g e s, th e 1986 A c t c o n ta in e d specific p ro v isio n s th a t c h a n g e d th e ta x a tio n o f p ro p e rty
and casu alty in su ra n c e c o m p an ies. In o rd e r to m o n ito r th e effect o f th e sp ecific p ro v isio n s on
property a n d casu a lty in su ra n c e c o m p an ies, th e C o n g re ss re q u ire d th e T re a su ry D e p a rtm e n t to stu d y
the p ro p e rty a n d casu a lty in su ra n ce ta x p ro v isio n s a n d to ex am in e w h e th e r th e re v e n u e ta rg e ts
projected fo r th e p ro v isio n s w e re m e t.
T h e 1986 A ct also re q u ire d th e T re a su ry D e p a rtm e n t to study th e ta x tre a tm e n t o f p o lic y h o ld e r
dividends p a id by p ro p e rty a n d casu alty in su ra n c e c o m p an ies. U n d e r p re s e n t law , m u tu a l a n d sto ck
property a n d casu a lty in su ra n c e co m p an ies m ay d e d u c t d ividends a n d sim ila r d istrib u tio n s p a id to
their p o lic y h o ld e rs, b u t stock p ro p e rty a n d c asu alty in su ra n c e c o m p an ies m ay n o t d e d u c t d iv id en d s
paid to sh a re h o ld e rs. T h e C o n g ress re c o g n iz e d th a t it m a y b e a p p ro p ria te , as in th e case o f life
insurance c o m p a n ie s, to tre a t a p o rtio n o f th e p o lic y h o ld e r div id en d s o f m u tu a l p ro p e rty a n d
casualty in su ra n c e c o m p an ies as a d istrib u tio n o f earn in g s on e q u ity o f th e c o m p a n y . H o w ev e r, th e
C ongress also re c o g n iz e d th a t th e ru le th a t a p p lie s th is c o n c e p t to life in su ra n c e c o m p a n ie s is b o th
controversial a n d co m p lex . T h u s, th e 1986 A ct re q u ire d th e T re a su ry D e p a rtm e n t to stu d y th é ta x
treatm ent o f p o lic y h o ld e r d ividends p a id b y m u tu a l p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s b e fo re
the life in su ra n c e c o m p a n y ru le o r sim ilar ru le is c o n sid e re d fo r p ro p e rty a n d c asu a lty in su re rs.
T his re p o rt re sp o n d s to th e C o n g re ssio n a l m a n d a te c o n ta in e d in th e 1986 A ct.
findings a n d co n clu sio n s o f th is re p o rt a re th e follow ing:
T h e p rin c ip a l
0 T h e 1986 A ct ch an g e s in th e ta x a tio n o f p ro p e rty a n d casu a lty in su ra n c e c o m p a n ie s
in c re a se d lia b ilities fo r th e re g u la r ta x fo r c a le n d a r y e a r 1987 by a p p ro x im a te ly th e
e stim a te d a m o u n t ($ 1 .5 b illio n ). I t w as n o t p o ssib le to c a lc u la te th e effect o f th e
a lte rn a tiv e m in im u m ta x (A M T ) o n p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s, b e c a u se ta x
re tu rn d a ta g e n e ra lly c o n tain A M T in fo rm a tio n o n ly on a c o n so lid a te d b asis.
° A lth o u g h th e specific p ro p e rty a n d casu alty in su ra n ce c o m p an y ta x p ro v isio n s w e re e ith e r
over- o r u n d e re stim a te d , e stim atin g e rro rs w e re la rg e ly o ffse ttin g . T h e se e rro rs a re
re la te d la rg e ly to th e d ifficulty in fo rec astin g ta x p a y e rs ’ re sp o n se s to th e sig n ific a n t
c h an g e s e n a c te d u n d e r th e 1986 A ct a n d to lim itatio n s in th e a v ailab le d a ta .
°
T h e T re a su ry D e p a rtm e n t re c o m m en d s th a t C o n g ress n o t e x te n d a lim ita tio n o n th e
d e d u c tio n
fo r p o lic y h o ld e r d ividends to p ro p e rty a n d c asu alty in su re rs b e c a u se th e
c o n c e p tu a l b asis fo r such a lim ita tio n is flaw ed. T h e " p re p a y m e n t" an aly sis show s th a t
m u tu a l c o m p a n y p o lic y h o ld e r d ividends sh o u ld b e fully d e d u c tib le to p ro v id e e q u a l
c o rp o ra te -le v e l ta x tre a tm e n t o f eq u ity -lik e re tu rn s to m u tu a l a n d sto ck c o m p a n y
in v esto rs.
l
A p p e n d ix 1 c o n tain s th e re q u ire m e n t fo r th is study.
-
1-
-
°
2
-
T h e p re p a y m e n t analysis d o es n o t ad d ress th e p ro b le m th a t in v e stm en t re tu rn s to c e rta in
p o lic y h o ld e rs o f m u tu a l a n d stock in su ra n ce co m p an ies m ay e n jo y a p o lic y h o ld e r-le v e l
a d v a n ta g e b e ca u se p o lic y h o ld e r dividends a re n o t g en erally ta x a b le in c o m e to
p o lic y h o ld e rs b u t d ividends a re tax ab le in c o m e to sh areh o ld e rs. A n e x c e p tio n to th is
p o lic y h o ld e r-le v e l ad v an ta g e arises w h en th e p o lic y h o ld e r is a bu sin ess ra th e r th a n an
in d iv id u a l. B usinesses d e d u ct p re m iu m s p a id b u t in c lu d e p o lic y h o ld e r d iv id en d s in
in c o m e .
°
W h ile th e d isp a rity in th e tre a tm e n t o f p o lic y h o ld e rs a n d sh areh o ld e rs a t th e in d iv id u al
level c o u ld ju stify a c o rp o ra te -le v el p ro x y tax on th e e q u ity -lik e re tu rn s c o n ta in e d in
p o lic y h o ld e r d iv id en d s, th is d isp arity is co n sid e ra b ly sm aller fo r p ro p e rty a n d casu a lty
in su ra n c e c o m p an ies th a n fo r life in su ra n ce c o m p an ies. P o lic y h o ld e r div id en d s p a id by
p ro p e rty a n d c asu alty in su re rs a re su b stan tially less a n d a re p a id p rim a rily to bu sin ess
p o lic y h o ld e rs . T h e im p o sitio n o f a p ro x y tax w o u ld im p o se a co m p lia n ce b u rd e n b u t w o u ld
h a v e a m o d e st re v e n u e y ield . T h e re fo re , th e T re a su ry D e p a rtm e n t d o es n o t re c o m m e n d th e
im p o sitio n o f a p ro x y tax a t this tim e.
T h e re m a in d e r o f th is re p o rt is o rg a n iz e d as follow s. C h a p te r 2 d escrib es p rio r ta x law a n d the
c h a n g e s in p ro p e rty a n d casu alty in su ra n c e ta x atio n a n d th e a lte rn ativ e m in im u m ta x u n d e r th e 1986
A ct. C h a p te r 3 ex am in es th e effects o f th e p ro p e rty a n d casu alty in su ra n c e c o m p a n y provisions
e n a c te d u n d e r th e 1986 A ct on tax lia b ilities o f p ro p e rty a n d casu alty in su ra n c e c o m p an ies for
c a le n d a r y e a r 1987. C h a p te r 4 evaluates th e ta x tre a tm e n t o f p o lic y h o ld e r d iv id en d s p a id by
in s u ra n c e c o m p an ies a n d p re se n ts th e T rea su ry D e p a rtm e n t’s re c o m m e n d a tio n w ith re sp ec t to
p o lic y h o ld e r div id en d s p a id by p ro p e rty a n d casu alty in su ra n ce co m p an ies.
CHAPTER 2.
2.1
T H E T A X R E F O R M A C T O F 1986
I n tr o d u c tio n
T h e T a x R efo rm A ct o f 1986 (the 1986 A ct) c h a n g e d su b sta n tia lly th e ta x a tio n o f c o rp o ra tio n s a n d
their sh a re h o ld e rs. T h e 1986 A ct a d o p te d b a se -b ro a d e n in g m e asu re s d e sig n e d to in c re a se th e o v e ra ll
level o f c o rp o ra te in c o m e ta x es, w h ile at th e sam e tim e re d u c in g th e m ax im u m c o rp o ra te ta x ra te fro m
46 p e rc e n t to 34 p e rc e n t. T h e c o rp o ra te b a se b ro a d e n in g w as a cc o m p lish e d p rim a rily b y lim itin g
depreciation d e d u c tio n s, re d u c in g th e div id en d s re c eiv e d d e d u c tio n , e n a c tin g th e c o rp o ra te
alternative m in im u m ta x , a n d a d o p tin g im p o rta n t ch an g e s in a cc o u n tin g ru le s. T h e 1986 A ct also
repealed th e in v e stm e n t tax c re d it. In a d d itio n to th e g e n eral b a se -b ro a d e n in g m e a su re s th a t affe ct
the tax lia b ilities o f all c o m p an ies, th e 1986 A ct in c lu d e d several p ro v isio n s th a t sp ec ific a lly
affected th e m e a su re m e n t o f ta x ab le in c o m e o f p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s.
T his c h a p te r p ro v id es b a ck g ro u n d fo r th e e v alu a tio n o f th e re v e n u e effects o f th e c h an g e s in th e
1986 A ct o n p ro p e rty a n d casu alty in su ra n c e c o m p an ies c o n ta in e d in C h a p te r 3. T h e c h a p te r d e sc rib e s
in detail th e 1986 A c t’s ch an g es in th e ta x atio n o f p ro p e rty a n d casu a lty in su ra n c e c o m p a n ie s
(Section 2 .2 ). T h e c h a p te r also in clu d es a d e ta ile d d iscussion o f th e a lte rn a tiv e m in im u m tax
(Section 2 .3 ).
T h e ta x c h an g es d e sc rib e d in this c h a p te r b e c a m e effective fo r ta x a b le y e ars
beginning a fte r D e c e m b e r 3 1 , 1986.
2.2
C h a n g e s in P r o p e r ty a n d C a s u a lty I n s u r a n c e C o m p a n y T a x a tio n
T h e 1986 A ct c h a n g e d th e ta x a tio n o f p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s b y re q u irin g :
( 1) d isco u n tin g o f u n p a id losses: (2 ) th e in c lu sio n in in c o m e o f 20 p e rc e n t o f u n e a rn e d p re m iu m s ,
(3) p ro ra tin g o f ta x -e x em p t in c o m e ; (4) re p e a l o f th e p ro te c tio n a g a in st loss a c c o u n t (P A L ) fo r
m utual p ro p e rty a n d c asu alty in su re rs; a n d (5) a d o p tio n o f a sin g le d e d u c tio n fo r all sm all
com panies.
T h e se p ro v isio n s a re d iscu ssed belo w .
D iscounting o f U n p a id L osses
U n d e r ta x ru le s p rio r to th e 1986 A ct, p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s w e re a llo w e d a
deduction fo r losses p a id d u rin g th e ta x ab le y e a r a n d fo r th e n e t in c re a se (fro m y e a r-e n d to
year-end) in losses in c u rre d b u t u n p a id (u n p a id losses) a n d fo r loss a d ju stm e n t e x p en se s (L A E ).
U npaid lo sses w e re re d u c e d (and th e re d u c tio n in c lu d e d in ta x ab le in co m e) w h e n fu tu re lo sses w e re
actually p a id . F o r ta x p u rp o se s, u n p a id lo sses a n d L A E w e re c alc u la te d on a n o m in a l (u n d isc o u n te d )
basis, th a t is, w ith o u t re fe re n c e to th e fact th a t th e p re s e n t v alu e o f fu tu re lia b ilitie s (u n p a id
losses) is less th a n th e ir n o m in a l v alu e. T h e n e t e ffect o f th is ta x tre a tm e n t a llo w ed p ro p e rty a n d
casualty in su ra n c e c o m p an ies a c u rre n t d e d u ctio n fo r fu tu re costs. T h is d e d u c tio n e ffectiv ely
understated a p ro p e rty a n d c asu alty in su ra n c e c o m p a n y ’s in c o m e by th e d ifferen c e b e tw e e n th e n o m in a l
value a n d th e p re s e n t v alu e o f th e c o m p a n y ’s liab ility to p ay its u n p a id loss claim s.
-3-
-4T h e 1986 A ct c o n tin u e d to allo w th e c u rre n t d e d u ctio n o f u n p a id losses a n d loss adjustm ent
e x p e n se s. H o w ev er, th e A ct re q u ire d th a t such a m o u n ts b e c alc u la te d as th e d isc o u n te d v alu e of
u n p a id losses as d e fin e d by sectio n 846 o f th e In te rn a l R evenue C o d e. T h e d isc o u n tin g o f unpaid
losses g e n e ra lly re d u c es th e c u rre n t ta x d e d u ctio n fo r u n p a id losses. T h e 1986 A ct re q u ire d the
S e c re ta ry o f th e T re a su ry to calc u la te d isco u n t facto rs a n n u ally fo r each lin e o f b u sin ess show n on
a n n u a l sta te m e n ts filed w ith th e N a tio n al A ssociation o f In su ra n c e C o m m issio n e rs (N A IC ) using
c e rta in in te re st ra te a n d loss p a y m e n t p a tte rn s.
T h e se facto rs a re u sed by c o m p an ies to determ ine
th e ir d e d u c tio n fo r u n p a id losses.
T h e ru le s o u tlin e d in T h e G e n era l E x p lan a tio n o f th e T ax R efo rm A ct o f 1986 call fo r relatively
slo w er loss p a y m e n t p a tte rn a ssu m p tio n s fo r th e five lin es o f bu sin ess in c lu d e d in S c h e d u le P o f the
a n n u a l sta te m e n t -- a u to lia b ility , o th e r lia b ility , w o rk e rs ’ c o m p e n sa tio n , m e d ic al m a lp ra c tic e , and
m u ltip le p e ril -- th a n th e relativ ely fa st loss p a y m e n t a ssu m p tio n s o f th e lin es o f business
c o n ta in e d in S c h e d u le O .3 T h e d isco u n tin g ru le s specify m ax im u m loss p a y m e n t p e rio d s o f 15 years
fo r th e u n p a id losses o f th e S ch ed u le P lines a n d 3 y ears fo r u n p a id losses o f S c h e d u le O lines.
T h e G e n e ra l E x p lan a tio n also in d icates th a t loss p a y m e n t p a tte rn s u sed fo r th e calc u la tio n of
d isc o u n t fa c to rs fo r e ach lin e o f b u siness a re to b e re d e te rm in e d every five y ears.
In e ach loss p a y m e n t p a tte rn d e te rm in a tio n y e a r, loss p a y m e n t p a tte rn s fo r each lin e o f business
a re g e n e ra lly a ssu m e d to fo llo w loss p a y m e n t p a tte rn s b ased on th e m o st re c e n tly p u b lish e d aggregate
loss p a y m e n t d a ta illu stra te d in ex am p les in T h e G e n era l E x p la n a tio n .
D isco u n t ra te factors for
u n p a id losses in v ario u s fu tu re y e ars a re th e n c alc u la te d fo r th e losses in c u rre d e ach y e a r using
th e d e te rm in e d loss p a y m e n t p a tte rn s a n d th e statu to ry in te re st ra te fo r d isco u n tin g . F o r any
c a le n d a r y e a r, th e in te re st ra te to b e u sed fo r d isco u n tin g is th e av erag e o f th e F e d e ra l m id-term
in te re st ra te s in th e 60 m o n th s p re c e d in g th e b e g in n in g o f th e y e a r, as illu stra te d in T h e General
E x p la n a tio n . T h e d isco u n tin g ru le s w e re g en erally ex p ec te d to hav e a relativ ely g re a te r effect in
re d u c in g u n p a id losses ~ a n d th e a sso ciated ta x d e d u ctio n s - fo r S ch ed u le P lin es b e c a u se o f the
lo n g e r loss p a y m e n t p a tte rn s fo r th e se lines.
xT h e d e tails a re c o n ta in e d in Jo in t C o m m itte e on T a x a tio n , T h e G e n era l E x p la n a tio n o f th e Tax
R efo rm A ct o f 1986 (M ay 4 , 1987), p a g es 600 - 618.
2 S c h e d u les in th e a n n u a l statem e n ts show loss p a y m e n t p a tte rn s fo r th e u n p a id losses o f each
a c c id e n t y e a r show n on th e sch ed u les, e . g . , th e schedules show th e a m o u n t o f loss in cu rred in
c e rta in p rio r y e ars b u t u n p a id at th e b e g in n in g o f th e c u rre n t y e a r as w ell th e a m o u n t o f these
losses th a t a re p a id d u rin g th e c u rre n t y e a r fo r each lin e o f p ro p e rty a n d c asu alty insurance
b u sin ess.
3 U n d e r c e rta in c ircu m stan ces co m p an ies m ay also e lect to u se th e ir h isto ric a l e x p erien ce for
d e te rm in in g d isco u n t facto rs.
4B eg in n in g in 1989, th e N A IC a n n u al statem e n ts co m b in e S ch ed u le O a n d P in to S chedule P.
-5T his c h a n g e w as in te n d e d to c o rre c t th e p rio r o v e rsta te m e n t o f th e tru e e c o n o m ic v a lu e o f th e
insured lo ss. W ith o u t d isco u n tin g , th e lo n g e r th e p e rio d b e tw ee n th e claim a n d th e actu a l p a y m e n t,
the g re a te r th e o v e rsta te m e n t.
S in ce p rio r law fa ile d to re fle c t th e tim e v a lu e o f m o n e y , it
p erm itted c o m p a n ie s to u n d e rsta te th e ir in co m e.
Inclusion in In c o m e o f 20 P e rc e n t o f U n e a rn e d P rem iu m s
T h e u n d e rw ritin g in c o m e o f a p ro p e rty a n d casu a lty in su ra n c e c o m p a n y b e g in s w ith e a rn e d
prem ium s. P rio r to th e 1986 A ct, in d e te rm in in g p re m iu m s e a rn e d , th e in c re a se in u n e a rn e d p re m iu m s
shown o n th e N A IC a n n u al sta te m e n t w as d e d u c tib le fro m gross in c o m e . H o w ev er, ex p en se s in c u rre d ,
including acq u isitio n ex p en ses a ttrib u ta b le to u n e a rn e d p re m iu m s, w e re c u rre n tly d e d u c tib le . A s a
result, p rio r law m ism a tc h e d in c o m e a n d ex p en ses by p e rm ittin g a d e fe rra l o f an u n d is c o u n te d p o rtio n
of u n e a rn e d p re m iu m in c o m e w h ile a llo w in g a c u rre n t d e d u ctio n fo r th e a sso c iate d co sts o f e a rn in g
the d e fe rre d in c o m e .
T h e 1986 A ct re d u c e d th e c u rre n t d e d u c tio n fo r th e in c re ase in u n e a rn e d p re m iu m s , w h ic h h a s th e
same effect as d e n y in g c u rre n t d e d u c tib ility fo r a p o rtio n o f th e p re m iu m a c q u isitio n e x p en se s.
The 1986 A ct g en erally re q u ire d p ro p e rty an d c asu alty in su ra n c e c o m p an ies to re d u c e th e ir d e d u c tio n
for u n e a rn e d p re m iu m s by 20 p e rc e n t, w h ich w as d e e m e d to re p re se n t th e e x p en se s in c u rre d in
generating th e u n e a rn e d p re m iu m s. T h e A ct also p ro v id e d fo r th e in clu sio n in in c o m e o f 2 0 p e rc e n t
of u n e a rn e d p re m iu m s o u tsta n d in g p rio r to Jan u a ry 1, 1987.
P rorating o f T a x -E x em p t In c o m e
P rio r to th e 1986 A ct, p ro p e rty a n d casu alty in su ra n c e c o m p an ies w e re su b jec t to a ta x o n
investm ent in c o m e w h ich g e n erally in c lu d e d in te re st, d iv id en d s, a n d re n ts. H o w ev e r, a p ro p e rty a n d
casualty in su ra n c e c o m p an y th a t in c lu d e d ta x -e x em p t in te re st in in c o m e w as a llo w ed to d e d u c t th is
interest. P ro p e rty a n d c asu alty in su ra n c e co m p an ies w e re also a llo w ed d e d u c tio n s fo r d iv id e n d s
received.
T h e se c o m p a n ie s w e re also ta x e d on th e ir u n d e rw ritin g in c o m e w h ich c o n siste d o f p re m iu m s e a rn e d
reduced b y losses (an d ex p en ses) in c u rre d . T h e d e d u ctio n fo r losses in c u rre d g e n e ra lly re fle c te d
the losses p a id d u rin g th e y e a r p lu s an y in c re ase in losses in c u rre d b u t u n p a id . N o re d u c tio n in
the d e d u c tio n fo r u n p a id losses w as re q u ire d to tak e acc o u n t o f th e fa c t th a t d e d u c tib le in c re a se s
in u n p a id losses c o u ld b e fu n d e d w ith ta x -e x em p t in co m e.
5
S ee T h e G e n era l E x p la n a tio n , p a g e s 601 a n d 60 2 .
S ee T h e G e n era l E x p la n a tio n , p a g e 5 9 5 .
7T h e 1986 A ct g e n erally re q u ire d th e d e d u c tio n fo r u n e a rn e d p re m iu m s fo r in su rin g b o n d s to b e
reduced b y 10 p e rc e n t.
8
F o r b o n d in su ra n c e , th e in c lu sio n fa c to r fo r th e six years is 10 p e rc e n t.
-
6
-
T h e 1986 A ct re d u c e d th e d e d u ctio n o f p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s fo r losses
in c u rre d by 15 p e rc e n t o f th e in s u re r’s: ( 1) tax -e x em p t in te re st in c o m e , a n d ( 2 ) d iv id en d s received
d e d u c tio n .
T h is ta x c h a n g e is o fte n re fe rre d to as p ro ra tin g o f ta x -e x em p t in c o m e .
P ro te c tio n A g ain st Loss A cco u n t
P rio r to th e 1986 A ct, m u tu a l p ro p e rty a n d casualty in su ra n c e co m p an ies w e re perm itted
d e d u c tio n s fo r c o n trib u tio n s to p ro te c tio n a g ain st loss (PA L) tax a cco u n ts. T h e in te n t o f th e PAL
p ro v isio n w as to p ro v id e m u tu a l co m p an ies w ith a so u rce o f c ap ital in th e ev en t o f a catastrophic
lo ss, since m u tu a l c o m p an ies, u n lik e stock c o m p an ies, a re u n a b le to ra ise c a p ita l in capital
m a rk e ts.
T h e a m o u n t o f th e d e d u c tio n w as g en erally o n e p e rc e n t o f th e u n d e rw ritin g losses in c u rre d for
th e y e a r p lu s 25 p e rc e n t o f th e u n d e rw ritin g in c o m e , p lu s c e rta in w in d sto rm a n d o th e r lo sses.
In
g e n e ra l, c o n trib u tio n s to P A L a cco u n ts w e re tak en in to in co m e o ver a 5 y e a r p e rio d . T h e P A L account
th u s p ro d u c e d a 5 y e a r d e fe rra l o f c e rta in m u tu a l c o m p an y u n d e rw ritin g in c o m e . H o w ever, P A L account
ru le s re q u ire d th e re d u c tio n o f P A L b alan ces fo r each d o lla r o f N O L s u sed to offset c u rre n t taxable
in c o m e . S u b rac tio n s fro m P A L acco u n t balan ces in c re ase d ta x ab le in c o m e , d o lla r fo r d o lla r, until
th e P A L a c c o u n t b a lan c e w as z ero .
T h e 1986 A ct re p e a le d th e d e d u ctio n fo r c o n trib u tio n s to P A L a cc o u n t b a lan c e s. Congress
b e lie v e d th a t th e d e d u c tio n fo r co n trib u tio n s to th e P A L acc o u n t w as n o t serving its intended
p u rp o s e p rin c ip a lly b e ca u se th e P A L acco u n t p ro v id e d th e g re a test b e n efit w h e re le ast n e e d e d , Le.,
fo r m u tu a l c o m p an ies w ith c u rre n t ta x ab le in co m e th a t c o u ld b e n efit fro m d e fe rra l.
S m a ll c o m p a n y p ro v isio n s
U n d e r p rio r ta x law , m u tu a l p ro p e rty a n d casu alty in su ra n ce co m p an ies w ith less th a n $ 1 5 0 ,0 0 0 in
g ro ss re c e ip ts w e re e x e m p t fro m tax . M u tu al co m p an ies w ith gross re c eip ts fro m $ 1 5 0 ,0 0 0 to $500,000
c o u ld g e n erally elec t to b e ta x e d o nly on in v estm en t in c o m e .
M u tu al p ro p e rty a n d casualty
in su ra n c e c o m p a n ie s w ith gross re c e ip ts b etw een $ 5 0 0 ,0 0 0 a n d $ 1 , 110,000 g e n erally b e n e fite d from
9 T h e 1986 A ct also re q u ire s in clu sio n in in c o m e o f any excess o f th e re q u ire d re d u c tio n in the
d e d u c tio n fo r d isc o u n te d u n p a id losses ov er th e in c re ase in d isco u n ted u n p a id lo sses. T h e se changes
d o n o t a p p ly to th e in c o m e fro m stock o r o b lig atio n s a cq u ired b e fo re A u g u st 8 , 1986.
10 A d d itio n s to P A L a cco u n ts w e re z ero fo r co m p an ies fo r w h ich th e sum o f in v e stm en t in co m e and
u n d e rw ritin g in c o m e w as n eg ativ e.
11 S ee T h e G e n era l E x p la n a tio n , p ag es 618 an d 619.
12In a d d itio n , c o m p an ies th a t e lec te d to b e ta x ed on in v e stm en t in c o m e c o u ld b e n e fit from a
sp ec ia l ru le w h ich p h a se d in re g u la r tax on in v estm en t in c o m e as gross re c e ip ts in c re a se d from
$ 1 5 0 ,0 0 0 to $ 2 5 0 ,0 0 0 .
m
special p ro v isio n s th a t lo w e re d th e ir ta x liab ilities.
M u tu a l p ro p e rty a n d c asu a lty in s u ra n c e
com panies w ith gross re c e ip ts ex ceed in g $ 1 , 110,000 w e re g en erally ta x ed lik e o th e r c o rp o ra tio n s .
There w e re n o special ta x p ro v isio n s fo r sm all stock c o m p an ies.
T h e 1986 A ct re p e a le d th e se ru le s a n d , in th e ir p la c e , e x e m p te d n e t w ritte n p re m iu m s o r d ire c t
w ritten p re m iu m s fro m ta x fo r m u tu a l a n d stock p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s w ith less
than $ 3 5 0 ,0 0 0 o f n e t w ritte n p re m iu m s o r d ire c t w ritte n p re m iu m s (w h ich ev er is g re a te r). T h e 1986
Act also a llo w ed p ro p e rty a n d casu alty in su ra n c e co m p an ies w ith n e t o r d ire c t w ritte n p re m iu m s
(w hichever is g re a te r) b e tw e e n $ 3 5 0 ,0 0 0 a n d $ 1 , 2 0 0 ,0 0 0 to elec t to b e ta x e d o n ly o n in v e stm e n t
incom e.
T h e se c h an g e s w e re in te n d e d to sim p lify th e p rio r law ru le s a p p ly in g to c e rta in sm all a n d
ordinary m u tu a l c o m p a n ie s. T h e ch an g es also e lim in a te d th e d istin c tio n b e tw ee n sm all m u tu al^ an d
other c o m p a n ie s b y ex ten d in g th e b en efits to all elig ib le c o m p a n ie s, w h e th e r sto ck o r m u tu a l.
2.3
C o r p o r a te A lte rn a tiv e M in im u m T a x
In g e n e ra l, u n d e r p rio r law , c o rp o ra tio n s p a id a m in im u m ta x o f 15 p e rc e n t o n c e rta in ta x
p references, to th e e x te n t th a t th e a g g re g a te a m o u n t o f th e se p re fe re n c e s e x c e e d e d th e g re a te r o f
the re g u la r c o rp o ra te in c o m e ta x o r $ 1 0 ,0 0 0 . T his ta x w as p a id in a d d itio n to th e c o rp o ra tio n s
regular tax . T h e ite m s tre a te d as ta x p re fe re n ce s in c lu d e d a c c e le ra te d d e p re c ia tio n in excess o f
straight lin e d e p re c ia tio n ; p e rc e n ta g e d e p le tio n in excess o f b asis; a p o rtio n o f n e t c a p ita l g a in s,
and excess b a d d e b t reserv es o f fin a n c ial in stitu tio n s.
T h e p u rp o s e o f th e m in im u m tax w as to e n su re th a t n o ta x p a y e r w ith su b sta n tia l e c o n o m ic in c o m e
could a v o id sig n ific a n t ta x liab ility by u sin g ex clu sio n s, d e d u c tio n s, a n d c re d its.
C o n g re ss
concluded, h o w e v er, th a t th e p rio r m in im u m ta x w as in a d e q u a te b e ca u se it w as n o t d e sig n e d to d e fin e
a co m p re h en siv e in c o m e ta x b ase. M o re o v er, since m a n y im p o rta n t ta x p re fe re n c e s w e re n o t in c lu d e d
or w ere d e fin e d n a rro w ly , C o n g ress co n clu d e d th a t even w ith th e a d d -o n m in im u m ta x , c o rp o ra tio n s
w ere n o t b e in g ta x e d on th e ir eco n o m ic in co m e. C o n g ress also c o n c lu d e d th a t th e g o al o f ta x in g
co rp o ratio n s w ith su b sta n tia l eco n o m ic in c o m e c o u ld n o t b e ach iev ed b y b ro a d e n in g th e list o f ta x
preferences a n d w a n te d to e n su re th a t w h e n ev e r co m p an ies p u b lic ly re p o rte d e a rn in g s th e y w o u ld p a y
som e ta x fo r th e y ear.
In o rd e r to a d d re ss th e se p e rc eiv e d d eficien cies in th e c o rp o ra te m in im u m ta x , th e 1986 A ct
rep ealed th e e x istin g m in im u m ta x a n d c re a te d a new m in im u m tax fo r c o rp o ra tio n s k n o w n as th e
alternative m in im u m ta x (A M T ). T h e A M T w as d e sig n e d to e n su re th a t in e ac h ta x a b le y e a r th e
taxpayer g e n e ra lly m u st p a y a sig n ifican t ta x o n an a m o u n t m o re n e a rly a p p ro x im a tin g e c o n o m ic
13 T o d e te rm in e n e t a n d d ire c t w ritte n p re m iu m s fo r th e p u rp o s e o f th e se te sts, p re m iu m s o f
affiliated c o m p a n ie s g e n erally m u st b e tak en in to acco u n t.
14
S ee T h e G e n e ra l E x p la n a tio n , p a g e 6 20.
-
8
-
in c o m e .
In a d d itio n , th e A ct a d d re ssed th e c o n cern th a t co m p an ies th a t re p o rte d substantial
e a rn in g s p a id n o ta x . It re q u ire d th a t c o rp o ra tio n s in c lu d e in th e A M T ta x b a se an a d ju stm e n t based
o n fin a n c ia l sta te m e n t in c o m e re p o rte d by th e ta x p a y e r p u rsu a n t to p u b lic re p o rtin g re q u ire m e n ts or
in d isclo su re s m a d e fo r n o n -ta x reaso n s to re g u la to rs, sh a re h o ld e rs, o r c re d ito rs. T h is book
in c o m e a d ju stm e n t" w as re q u ire d fo r ta x ab le y e ars b e g in n in g in 1987 th ro u g h 1989. F o r ta x a b le years
b e g in n in g a fte r 1989, th e b o o k in c o m e a d ju stm e n t is re p la c e d by an a d ju stm e n t b a se d on a b ro a d , but
sta tu to rily d e fin e d , m e a su re o f eco n o m ic in c o m e k now n as a d ju ste d c u rre n t e a rn in g s (A C E ).
G e n e ra lly , th e ta x b a se fo r th e c o rp o ra te A M T is th e c o rp o ra tio n ’s ta x ab le in c o m e , in c re ase d by
ta x p re fe re n c e s fo r th e y e a r a n d a d ju ste d in a m a n n e r d e sig n e d to n e g a te th e d e fe rra l o f in c o m e or
a c c e le ra tio n o f d e d u ctio n s re su ltin g fro m th e re g u la r ta x tre a tm e n t o f c e rta in ite m s. T h e resulting
a m o u n t o f a lte rn a tiv e m in im u m ta x ab le in c o m e (A M T I), re d u c e d b y an e x e m p tio n a m o u n t, is su b ject to a
2 0 p e rc e n t ta x ra te . T h e e x e m p tio n a m o u n t is $ 4 0 ,0 0 0 , re d u c e d by 25 p e rc e n t o f th e a m o u n t b y which
A M T I exceed s $ 1 5 0 ,0 0 0 . T h e a m o u n t o f m in im u m tax lia b ility so d e te rm in e d m a y th e n b e offset
p a rtia lly by th e m in im u m ta x fo reig n tax c re d it, a n d to a lim ite d e x ten t b y in v e stm en t ta x credit
c a rry o v e rs. A c o rp o ra tio n is effectively re q u ire d to pay th e h ig h e r o f th e A M T o r th e re g u la r tax
fo r th e ta x a b le y e ar.
T h e c o m p u ta tio n o f c o rp o ra te A M T I is a tw o -step p ro c e ss. F irst, ta x ab le in c o m e is ad ju sted to
re fle c t specific sta tu to ry a d ju stm en ts a n d p re fe re n ce s. S eco n d , th e re su ltin g a m o u n t o f A M T I is
a d ju ste d fu rth e r to ta k e in to a cc o u n t th e b o o k in c o m e a d ju stm e n t fo r ta x ab le y e ars b e g in n in g m
th ro u g h 1989, o r th e A C E a d ju stm e n t fo r ta x ab le years b e g in n in g a fte r 1989.
T h e m o re sig n ifican t a d ju stm en ts a n d p re fe re n ce s in c lu d e th o se re la te d to accelerated
d e p re c ia tio n , d e p le tio n , in ta n g ib le d rillin g co sts, m in in g e x p lo ra tio n a n d d e v e lo p m e n t costs,
lo n g -te rm c o n tra c ts, in s ta llm e n t sales, ta x -e x em p t in te re st, a n d c h a rita b le c o n trib u tio n s.
The
a d ju stm e n t fo r th e n e t b o o k in c o m e o f c o rp o ra tio n s is c o m p u te d by in c re asin g A M T I b y 50 P e rc ® ^ ° j
th e a m o u n t by w h ich th e n e t b o o k in c o m e o f a c o rp o ra tio n exceeds u n a d ju ste d A M T I, h e ., AMTI
d e te rm in e d w ith o u t re g a rd to th e b o o k in c o m e a d ju stm e n t o r th e A M T n e t o p e ra tin g loss ded u ctio n .
T h e n e t b o o k in c o m e fo r th is p u rp o s e g e n erally is th e n e t b o o k in c o m e show n o n a taxpayer s
a p p lic a b le fin a n c ial statem e n t.
15 T e c h n ic a lly th e re g u la r ta x co n tin u e s to b e im p o se d , a n d th e excess o f th e te n ta tiv e m inim um
ta x o v e r th e re g u la r tax is a d d e d o n . C o rp o ra tio n s a re allo w ed a m in im u m ta x c re d it to th e extent
th e excess o f th e A M T o v e r th e re g u la r ta x is a ttrib u ta b le to p re fe re n ce s o r a d ju stm e n ts involving
th e tim in g o f a d e d u c tio n o r in c o m e in clu sio n . T his c re d it is a llo w ed as a re d u c tio n o f re g u la r tax
lia b ility o f th e ta x p a y e r in an y su b se q u e n t tax ab le y e a r, b u t m ay n o t b e u sed to re d u c e re g u la r tax
b e lo w A M T fo r th e su b se q u e n t y ear.
16 T h e a m o u n t o f th e A M T n e t o p e ra tin g loss fo r any ta x ab le y e a r g e n erally is e q u a l to th e amount
b y w h ic h th e d e d u ctio n s allo w ed in c o m p u tin g A M T I fo r th e ta x ab le y e a r (o th e r th a n th e d ed u ctio n tor
c a rry o v e rs to th e ta x ab le y e a r o f A M T n e t o p e ra tin g losses) ex ce e d th e gross in c o m e in clu d ab le in
A M T I fo r th e ta x a b le y e a r. In c o m p u tin g A M T I, N O L s a v ailab le fo r re d u c in g A M T I a re lim ite d to
p e rc e n t o f A M T I b e fo re N O L s.
-9F o r ta x a b le y e ars b e g in n in g a fte r 1989, th e b o o k in c o m e a d ju stm e n t is re p la c e d b y th e A C E
adjustm ent. T h e A C E a d ju stm e n t is e q u al to 75 p e rc e n t o f th e a m o u n t by w h ich th e a d ju ste d c u rre n t
earnings o f a c o rp o ra tio n e x ce e d u n a d ju ste d A M T I, i . e . , A M T I d e te rm in e d w ith o u t re g a rd to th e A C E
adjustm ent a n d th e A M T n e t o p e ra tin g loss d e d u c tio n . I f u n a d ju ste d A M T I ex ceed s A C E th e n A M T I is
reduced by 75 p e rc e n t o f th e d ifferen ce. H o w ever, th is re d u c tio n is lim ite d to th e a g g re g a te a m o u n t
by w hich A M T I h as b e e n in c re a se d by th e A C E a d ju stm e n t in p rio r y e ars. G e n e ra lly , A C E is th e
c o rp o ra tio n ’s u n a d ju ste d A M T I in c re a se d b y ite m s in c lu d a b le in c o m p u tin g e a rn in g s a n d p ro fits b u t
excluded fro m u n a d ju ste d A M T I a n d ite m s d e d u ctib le in d e te rm in in g u n a d ju ste d A M T I b u t n o t
deductible in d e te rm in in g e a rn in g s a n d p ro fits. A C E also in clu d es v ario u s ru le s g o v e rn in g th e
treatm ent o f specific item s.
CHAPTER 3.
3.1
E F F E C T O F T H E T A X R E F O R M A C T O F 1986 O N T A X L IA B IL IT IE S
I n tr o d u c tio n
At th e tim e o f th e 1986 A ct, th e specific p ro p e rty a n d c asu alty in su ra n c e ta x c h a n g e s w e re
estim ated to in c re a se re g u la r ta x re c e ip ts by $ 7 .5 b illio n b e tw ee n fiscal y e ars 1987 a n d 1991.
In
order to m o n ito r th e effect o f th e se p ro v isio n s a n d th e a lte rn ativ e m in im u m ta x (A M T ) o n p ro p e rty
and casu alty in s u re rs , C o n g re ss re q u ire d th e T re a su ry D e p a rtm e n t to stu d y th e re g u la r a n d m in im u m
tax an d to e x a m in e w h e th e r th e re v e n u e ta rg e ts p ro je c te d fo r th e p ro p e rty a n d c a su a lty in s u ra n c e
com pany ta x p ro v isio n s w e re m e t.
T his c h a p te r p re se n ts th e re su lts o f th e T re a su ry D e p a rtm e n t’s analysis o f th e e ffe ct o f th e
property a n d casu a lty in su ra n ce c o m p an y ta x p rovisions o n re g u la r ta x liab ilities fo r c a le n d a r y e a r
1987.
It c o m p a re s th e in c re ase in ta x liab ilities in 1987 a ttrib u ta b le to th e 1986 A c t’s p ro p e rty
and c asu alty in su ra n c e ta x p ro v isio n s w ith estim ate s m a d e w h e n ta x re fo rm w as e n a c te d .
It
reconciles th e d ifferen c e b e tw ee n c h an g e s in actu a l tax liab ilities fo r 1987 a n d th e e stim a te s a n d
discusses re a so n s fo r th e differen ces.
T his c h a p te r a lso ex am in es m in im u m ta x in fo rm a tio n p ro v id e d o n c o n so lid a te d ta x re tu rn s file d by
property a n d casu a lty in su ra n c e c o m p an ies a n d th e ir affiliates.
I t is n o t p o ssib le to c o m p a re
actual A M T lia b ilities to an A M T re v e n u e e stim a te fo r p ro p e rty a n d casu a lty c o m p a n ie s, b e c a u se A M T
receipts w e re n o t e stim a te d sep a ra te ly fo r eac h in d u stry w h en ta x re fo rm w as e n a c te d .
3.2
R e v e n u e E s tim a te s P r e p a r e d in 1986
R evenue e stim ate s asso c iate d w ith ch an g es in ta x le g islatio n a re m e a su re s o f th e d ifferen c es
betw een e x p e c te d ta x re v e n u es u n d e r th e n e w law a n d th e a m o u n t th a t w o u ld hav e b e e n c o lle c te d in th e
absence o f th e c h a n g e in law . H o w ever, o n ly th e actu a l c o llectio n s a fte r th e ta x law c h a n g e a re
observable. T h e co lle ctio n s th a t w o u ld hav e o c c u rre d in th e a b se n c e o f th e c h a n g e in law a re n o t
observable. T h u s, it is n e v e r p o ssib le to kn o w w ith c e rta in ty th e a ctu a l re v e n u e effect o f e n a c te d
legislation, b e c a u se o n ly o n e o f th e tw o am o u n ts re q u ire d to d e te rm in e th a t re v e n u e effe ct is
directly o b serv ab le .
T h e re v e n u e e ffect fo r th e p ro p e rty a n d casu alty in su ra n c e c o m p a n y p ro v isio n s ex clu d e s th e
effect o f th e 1986 A c t’s ch an g e s in th e ta x atio n o f B lue C ross-B lue S h ie ld c o m p a n ie s. T h e re v e n u e
effect fro m c h an g e s affectin g th e se c o m p an ies w as re p o rte d sep a ra te ly a n d in c lu d e d in th e to ta l fo r
life in su ra n ce c o m p a n ie s.
2
R e g u la r a n d m in im u m ta x liab ilities a n d re la te d in fo rm a tio n fo r 1987 a re b a se d o n a s a m p le o f
1987 tax re tu rn s filed b y p ro p e rty a n d casu alty in su ra n ce co m p an ies a n d c o m p a n ie s filin g
consolidated ta x re tu rn s w ith p ro p e rty a n d casu alty in su ra n c e c o m p an ies. A p p e n d ix 2 c o n ta in s a
description o f th e sam p le o f tax re tu rn s u sed in th is re p o rt.
-
11
-
-
12
-
E stim a te s o f th e effect o f ta x law ch an g es re q u ire estim ate s o f b o th th e b a se level of
c o lle ctio n s (K e., estim ate s o f co llectio n levels th a t w o u ld have o c c u rre d ab se n t th e c h a n g e in law)
a n d th e e ffect o f th e ch an g e in law o n th a t b ase. T h e estim ate s o f th e p ro p e rty a n d casualty
in su ra n c e c o m p a n y ta x ch an g es o f th e 1986 A ct w e re th e re su lt o f th is tw o -sta g e e stim a tin g process.
C o m p a riso n s o f th e in itia l re v e n u e e stim ates o f a ch an g e in ta x law w ith su b se q u e n t e stim ate s o f the
a c tu a l effects (th e su b ject o f th is c h ap te r) a re c o m p lic a te d by th e n e e d to d ise n ta n g le th e effect
o f th e c h a n g e in law , ch an g e s in th e b a se lin e fo rec ast, a n d in te ra ctio n s b e tw ee n th e tw o .
E stim a tin g th e re v e n u e effects o f p ro p o s e d ta x le g islatio n re q u ire s a c c u ra te fo rec asts o f many
d iffe re n t fa c to rs, in c lu d in g th e follow ing: (1) th e level o f eco n o m ic a c tiv ity , in c lu d in g b o th the
m a c ro -e c o n o m ic n a tio n a l fo rec ast a n d th e m a rk e t sh are o f th e p a rtic u la r eco n o m ic activ ity affected,
(2) th e ta x p a y e r’s eco n o m ic situ a tio n , in clu d in g ty p e s o f p ro d u c ts sold, p o rtfo lio c h o ice , a n d form
o f o rg a n iz a tio n ; (3) th e effect o f specific c h an g es in th e tax law o n p a rtic u la r ta x p a y e rs ’ econom ic
situ a tio n s in d e p e n d e n t o f b e h av io ral c h an g es; a n d (4) th e ta x p ay e rs re a c tio n to th e tax la.w
c h a n g e s.
I f th e se fa c to rs a re m issp ecified o r fo rec aste d in c o rre c tly , e stim a te d re c e ip ts will
d iffe r fro m a ctu a l c o llectio n s.
F o re c a sts o f th e se facto rs fo r th e re v e n u e estim ate s fo r th e p ro p e rty a n d casu a lty insurance
c o m p a n y ta x p ro v isio n s w e re g en erally b a se d on h isto ric a l d a ta fro m a n n u a l fin a n c ial statem ents
file d w ith th e N a tio n a l A sso ciatio n o f In su ra n c e C o m m issio n ers a n d ta x re tu rn s.
T h e se d a ta were
d ifficu lt to u se as th e basis fo r fo rec astin g fo r tw o re a so n s. F irst, th e T a x R efo rm A ct o f 1986
sig n ific a n tly c h a n g e d in c o m e ta x atio n a n d th e rules th a t a p p ly specifically to p ro p e rty a n d casualty
in su ra n c e c o m p a n ie s. T h e se ch an g es w e re likely to affect h isto ric a l re la tio n sh ip s a m o n g financial
v a ria b le s a n d tre n d s in fin a n c ial d a ta . S eco n d , th e availab le d a ta fro m a n n u a l fin a n c ial statem ents
a n d ta x re tu rn s d e fin e th e p ro p e rty a n d casu alty in su ra n c e in d u stry d ifferen tly , a n d u se different
ru le s to m e a su re in c o m e a n d to co n so lid ate a ffiliated c o m p an ies. M o re o v e r, th e av ailab le corporate
ta x re tu rn d a ta w e re o u td a te d .
T h e p o te n tia l m isclassificatio n o f p ro p e rty a n d casu alty in su ra n ce c o m p a n ie s in th e available
d a ta so u rces is a p o ssib le so u rce o f estim atin g e rro rs. F o r re g u la to ry p u rp o s e s, co m p an ies are
classifie d as life o r p ro p e rty a n d casu alty in su ra n ce co m p an ies b a se d u p o n th e ty p e o f c h a rte r for
w h ic h th e y o rig in a lly a p p lie d .
H o w ever, b ecau se o f th e le g al d e fin itio n s o f life insurance
c o m p a n ie s a n d p ro p e rty a n d casu alty in su ra n ce co m p an ies fo r F e d e ra l in c o m e ta x p u rp o s e s, some
c o m p a n ie s c h a rte re d as life in su ra n ce co m p an ies file p ro p e rty a n d c asu alty in su ra n c e ta x returns
(1 1 2 0 P C ) a n d so m e co m p an ies c h a rte re d as p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s file life
in su ra n c e ta x re tu rn s (1 1 2 0 L ). T h u s, th e u se o f a n n u al sta te m e n t d a ta m ay misclassify certain
c o m p a n ie s fo r F e d e ra l in c o m e ta x p u rp o se s. M o re o v er, th e ta x re tu rn d a ta fro m th e IR S Statistics of
In c o m e (S O I) p ro g ra m m ay m isclassify so m e p ro p e rty a n d casualty in su ra n c e c o m p a n ie s because
c o n so lid a te d ta x re tu rn s a re classified by in d u stry g ro u p b a se d o n th e in d u stry g ro u p fro m w hich the
la rg e s t p e rc e n ta g e o f to ta l re c e ip ts is derived.
3A n n u a l sta te m e n t d a ta a re c o m p ile d by A .M . B est C o.
-13A n o th e r difficulty is th a t m e asu re s o f in c o m e d iffer fo r ta x a n d fin a n c ia l a c c o u n tin g p u rp o s e s.
For e x a m p le , a n n u al sta te m e n t ru le s allo w a d e d u c tio n fo r th e n o m in a l in c re a se in u n p a id losses o f
property a n d casu a lty in su re rs, w h e rea s th e ta x ru le s lim it th e d e d u c tio n to th e c h a n g e in
discounted u n p a id lo sses. T h u s, th e u se o f a n n u al sta te m e n t d a ta re q u ire s a d ju stm e n ts to a c c o u n t
for th e se d ifferen c es a n d such a d ju stm en ts a re a p o te n tia l so u rce o f e rro r.
C o n so lid a tio n ru le s d iffer fo r a n n u a l sta te m e n t a n d ta x re p o rtin g . A n n u a l s ta te m e n t re p o rtin g
rules d o n o t a llo w c o n so lid atio n w ith n o n -p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s, w h e re a s ta x
rules g e n e ra lly allo w such c o n so lid atio n . As a re su lt, a n n u al statem e n ts la ck re lia b le d a ta o n n e t
operating losses (N O L s) a n d c u rre n t losses o f c o m p an ies filing c o n so lid a te d ta x re tu rn s w ith
property a n d casu a lty in su ra n c e c o m p an ies. T h e se a m o u n ts w e re e stim a te d fro m ta x re tu rn d a ta .
In a d d itio n , sp ecial ru les fo r c o n so lid atio n b e tw ee n life in su ra n c e a n d n o n life c o m p a n ie s c an
limit th e a m o u n t o f re v e n u e fro m th e p ro p e rty a n d c asu alty in su ra n c e c o m p a n y c h a n g e s. T h e ru le s
limit th e losses o f a p ro p e rty a n d c asu alty in su ra n c e c o m p an y th a t can b e u sed to o ffset life
insurance c o m p a n y in c o m e to th e le sse r o f 35 p e rc e n t o f life in su ra n c e in c o m e o r 35 p e rc e n t o f th e
property a n d casu a lty in su ra n c e c o m p a n y losses. B ecau se o f th e se lim ita tio n s, it is p o ssib le th a t
the 1986 A c t’s c h an g e s c o u ld hav e no c u rre n t effect o n c o n so lid a te d ta x a b le in c o m e .
4
T h e 1986 A ct c o n ta in e d six ch an g e s in p ro p e rty a n d c asu alty in su ra n c e ta x a tio n .
required:
T h e A ct
(1)
d isc o u n tin g o f u n p a id losses;
(2)
th e in clu sio n o f 20 p e rc e n t o f th e a n n u al in c re ase in u n e a rn e d p re m iu m s in ta x a b le in c o m e
(10 p e rc e n t fo r b o n d in su ra n ce );
(3)
th e in c lu sio n o f 2 0 p e rc e n t o f th e 1986 y e a r-e n d u n e a rn e d p re m iu m s in ta x a b le in c o m e (10
p e rc e n t fo r b o n d in su ra n c e in c o m e ) o v e r th e six y e a r p e rio d b e g in n in g in 1987;
(4)
a re d u c tio n in d e d u ctio n s fo r losses by a sp ecified p ro p o rtio n o f ta x -e x e m p t in te re st a n d
d iv id en d s re c eiv e d (th e p ro ra tio n ru le );
(5)
re p e a l o f p ro te c tio n a g ain st loss (PA L) acco u n ts; an d
(6)
a d o p tio n o f a sin g le tax ru le fo r sm all p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s.
T a b le 3 .1 c o n tain s th e re v e n u e estim ate s m a d e at th e tim e o f 1986 A ct fo r th e six p ro v isio n s
described a b o v e. T h e T re a su ry D e p a rtm e n t a n d th e Jo in t C o m m itte e on T a x a tio n (JC T ) e stim a te d th a t
the p ro v isio n s w o u ld in c re ase re g u la r ta x re c eip ts b y $ 7 .5 b illio n b e tw ee n fiscal y e ars 1987 a n d
1991.
4
T h e se c h an g e s a re d iscu ssed in C h a p te r 2.
-1 4 -
T able 3 .1
Revenue E stim a te s fo r th e P ro p e rty and C asu a lty In su ra n c e Company Tax P ro v is io n s
Under th e 1986 Act
($ m illio n s )
--------------------------- —----------------- [—
1987
P ro v is io n
1988
F is c a l Years
1990
1989
1991
T o ta l
T re a su ry E s tim a te s:
374
667
757
714
566
3,078
I n c lu s io n in income of
20 p e rc e n t unearned premiums
230
318
255
234
245
1,282
Unearned premiums fo r
o u ts ta n d in g b a lan c e s
254
432
469
512
495
2,162
P r o r a tio n r u le
19
74
156
258
358
865
R epeal o f PAL account
58
76
68
44
24
270
-14
-33
-27
-25
-24
-123
921
1,534
1,678
1,737
1,664
7,534
871
1,454
1,636
1,745
1,842
7,548
D isc o u n tin g o f unpaid lo s s e s
Changes in unearned premiums:
A doption o f sm all company
p ro v is io n
T o ta l
J o i n t Committee on T ax atio n
E s tim a te s :
T o ta l
A
O ffic e o f Tax A n a ly sis
LDril 1991
-15A pproxim ately 41 p e rc e n t o f th e re v e n u e w as e stim a te d to re su lt fro m th e u n p a id loss d isc o u n tin g
change. T h e te m p o ra ry a n d p e rm a n e n t u n e a rn e d p re m iu m ch an g es w e re e x p e c te d to a c c o u n t fo r 29
percent a n d 17 p e rc e n t o f th e re v e n u e in c re a se , resp ec tiv e ly . T h e p ro ra tio n ru le a n d P A L a c c o u n t
changes w e re e x p e c te d to a cc o u n t fo r 11 a n d 4 p e rc e n t o f th e re v e n u e in c re a se , re sp e c tiv e ly . T h e
small c o m p a n y c h an g e s w e re e stim a te d to lo w e r th e to ta l re v e n u e gain by a p p ro x im a te ly 2 p e rc e n t.
T h e re v e n u e estim ate s fo r th e p ro p e rty a n d c asu alty in su ra n ce c o m p a n y p ro v isio n s w e re c a lc u la te d
after tak in g in to a cc o u n t c o rp o ra te ta x ra te re d u c tio n s. S ince th e e stim ate s s o u g h t to d e te rm in e
the a m o u n t o f re c e ip ts th a t w o u ld re su lt fro m th e p ro p e rty a n d casu a lty in su ra n c e c o m p a n y ta x
changes, th e y tak e in to a cc o u n t lo sses, N O L s, a n d c red its o f all c o m p a n ie s filin g c o n so lid a te d
returns w ith p ro p e rty a n d c asu alty in su ra n c e co m p an ies.
T h e re v e n u e estim ate s ex clu d e th e effect o f th e p ro p e rty a n d c asu alty in su ra n c e c o m p a n y ta x
provisions o n c o rp o ra te m in im u m ta x re c e ip ts. T h e se effects w e re in c lu d e d in th e e stim a te o f to ta l
corporate m in im u m ta x re c e ip ts w h ich w e re re p o rte d sep a ra te ly by T re a su ry a n d th e J C T .
3.3
Impact of the Property and Casualty Insurance Tax Provisions on Regular Tax
Liabilities: 1987
W hen ta x re fo rm w as e n a c te d , th e T re a su ry D e p a rtm e n t e stim a te d th a t th e c h a n g e in c a le n d a r y e a r
liabilities fo r th e re g u la r ta x a ttrib u ta b le to th e p ro p e rty a n d casu a lty in su ra n c e c o m p a n y
provisions w o u ld b e $ 1 .5 b illio n fo r c a le n d a r y e a r 1987. T a b le 3 .2 show s th a t th e actu a l c h a n g e s in
liabilities n e a rly e q u a le d th e e stim a te ($ 1 .5 b illio n ). A lth o u g h th e a ctu a l c h a n g e in lia b ilitie s
for c e rta in p ro v isio n s d iffered su b stan tially fro m th e e stim a te , th e se d ifferen c es w e re la rg e ly
offsetting.
A ctual ta x lia b ilities a ttrib u ta b le to th e 1986 A c t’s ch an g es w e re $ 1 ,4 7 2 m illio n fo r c a le n d a r
year 1987, a b o u t $63 m illio n (4 p e rc e n t) lo w e r th a n th e $ 1 ,5 3 5 m illio n o f e stim a te d lia b ilitie s.
Table 3 .2 c o m p a re s a ctu al a n d e stim a te d ch an g es in liab ilities fo r e ac h p ro v isio n fo r c a le n d a r y e a r
1987.
T h e u n p a id loss d isc o u n tin g p ro v isio n a n d p ro ra tio n ru le in c re a se d lia b ilities b y a la rg e r
am ount th a n e stim a te d . T h e u n e a rn e d p re m iu m ch an g es a n d th e P A L a c c o u n t c h a n g e in c re a s e d
liabilities b y less th a n e stim a te d , a n d th e sm all c o m p an y c h a n g e p ro v isio n re d u c e d lia b ilitie s b y a
sm aller a m o u n t th a n a n tic ip a te d .
R econciliation o f A ctual a n d E stim a te d R eceip ts
T a b le 3 .3 re co n ciles th e actu a l a n d e stim a te d effects o f th e d isco u n tin g o f u n p a id loss
discounting, th e p ro ra tio n ru le fo r ta x -e x em p t in c o m e , a n d th e te m p o ra ry a n d p e rm a n e n t c h a n g e s in
the d e d u c tio n fo r u n e a rn e d p re m iu m s o n ta x ab le in c o m e a n d ta x a fte r c re d its. T h e se p ro v isio n s w e re
estim ated u sin g a d e ta ile d c o m p u te r m o d e l. T h e P A L a cc o u n t a n d sm all c o m p an y c h an g e s w e re p ro je c te d
separately a n d a re also d iscu ssed below .
T a b le 3 . 2
C o m p a r is o n o f A c t u a l a n d E s t i m a t e d C h a n g e s i n T ax L i a b i l i t i e s fro m t h e P r o p e r t y a n d C a s u a l t y
I n s u r a n c e C om pany P r o v i s i o n s u n d e r t h e 1 9 8 6 A c t :
C a le n d a r Y ear 1987*
A c tu a l
C h an g e i n
L ia b ilitie s
| ($ m i l l i o n s )
1
(1 )
|
E s tim a te d |
|
C hange in j D if f e r e n c e
| L ia b ilitie s !
(1 ) - (2 )
| ($ m i l l i o n s ) | ($ m i l l i o n s )
(3 )
1
(2 )
|
A c tu a l
S h a re
¡o f T o ta l
j(p e rc e n t)
1
(4 )
|E s t i m a t e d
S h a re
o f T o ta l
(p e rc e n t)
1
(5 )
\
947
623
324
64
41
I n c l u s i o n i n in c o m e o f
20 p e r c e n t u n e a r n e d p re m iu m s
139
383
-2 4 4
9
25
U n e a r n e d p re m iu m s f o r
o u ts ta n d in g b a la n c e s
324
423
-9 9
22
28
60
32
28
4
2
1
97
-9 6
0
6
*:
k
-2 3
23
0
-1
1 ,4 7 2
1 ,5 3 5
-6 3
100
100
D is c o u n tin g
o f u n p a id l o s s e s
C h a n g e s i n u n e a r n e d p re m iu m s :
P ro ra tio n
ru le
R e p e a l o f PAL a c c o u n t
S m a ll c o m p a n y p r o v i s i o n
T o ta l
April 1 9 9 1
Department of the Treasury
Office of Tax Analysis
* E x c l u d e s t h e m inim um t a x .
* * L e s s t h a n $1 m i l l i o n
D e t a i l s may n o t a d d t o
re v e n u e l o s s .
to ta ls
b e c a u se o f ro u n d in g .
-1 7 T a b le
3 .3
Reconciliation of Actual and Estimated Effect of Selected
Property and Casualty Insurance Company Tax Reform Provisions
on Changes in Taxable Income, Losses, Tax Credits,
and Tax After Credits:
Calendar Year 1 9 8 7
($ millions)
Actual
Effect
(1 )
| Estimated
I
Effect
1
(2 )
| Difference
| (1 ) - (2 )
Change i n :
Taxable income (before
current losses and
NOLs) attributable to
1. D is c o u n tin g o f u n p a id l o s s e s
6 ,2 1 3
3 ,5 1 5
2 ,6 9 8
2 . I n c l u s i o n i n in c o m e o f
20 p e r c e n t u n e a r n e d p re m iu m s
916
1 ,9 7 8
- 1 ,0 6 2
2 ,1 3 4
2 ,1 9 8
-6 4
397
95
302
9 ,6 6 1
7 ,7 8 6
1 ,8 7 5
a n d NOLs
4 ,8 6 1
3 ,8 4 5
1 ,0 1 6
T a x a b le in c o m e a f t e r
NOLs a n d c u r r e n t l o s s e s
4 ,8 0 0
3 ,9 4 1
859
Tax b e f o r e
1 ,8 0 0
1 ,4 6 2
338
328
0
328
1 ,4 7 2
1 ,4 6 2
10
3. I n c l u s i o n i n in c o m e o f
20 p e r c e n t o f b e g i n n i n g o f
y e a r u n e a r n e d p re m iu m s
4. P r o r a t i o n
ru le
T o ta l
C u rre n t lo s s e s
ta x
c re d its
Tax c r e d i t s
Tax a f t e r
ta x
c re d its
d e p a r tm e n t o f t h e T r e a s u r y
O f f i c e o f T ax A n a l y s i s
N o te:
D e t a i l s may n o t a d d t o
A p ril
to ta ls
b e c a u se o f ro u n d in g .
19$1
-18T a b le 3 .3 show s th a t th e ch an g e in ta x ab le in c o m e b e fo re c u rre n t losses a n d N O L s a ttrib u ta b le to
u n p a id loss d isc o u n tin g , th e ch an g e s in th e u n e a rn e d p re m iu m d e d u c tio n , an d th e p ro ra tio n ru le were
u n d e re stim a te d by $ 1 .9 b illio n . H o w ev er, th e use o f N O L s a n d c u rre n t losses w e re u n d e re stim a te d by
$ 1 .0 b illio n a n d ta x c red its w e re u n d e re stim a te d by $ 0 .3 b illio n . T h e u n d e re stim a te o f th e change
in ta x a b le in c o m e w as la rg e ly offset by th e u n d e re stim ate s o f th e ch an g e s in th e u se o f NOLs,
c u rre n t lo sses, a n d ta x c re d its. T h e se effects a re d iscussed in d e tail b elo w .
D isco u n tin g o f u n p a id loss
T h e im p a c t o n ta x ab le in c o m e o f th e re q u ire m e n t to d isco u n t u n p a id losses w as u n d e re stim a te d by
$ 2 .7 b illio n (T ab le 3 .3 ). T his u n d e re stim a te re su lted fro m e rro rs in th e fo rec asts o f th e grow th in
u n d isc o u n te d u n p a id losses a n d loss ex p en ses a n d th e im p a c t o f d isco u n tin g o n th e ta x d e d u c tio n for
th e se a m o u n ts.
T h e e stim a te d c h a n g e in u n d isc o u n te d u n p a id losses w as $ 3 1 .8 b illio n c o m p a re d to th e actual
c h a n g e o f $ 3 3 .8 b illio n . G ro w th ra te s fo r u n p a id losses have v a rie d c o n sid e ra b ly o v e r tim e a n d thus
a re d ifficu lt to p re d ic t. T h e m o d e l e stim ate d th a t th e 1987 d isco u n tin g calc u la tio n s w o u ld reduce
th e tax d e d u c tio n fo r th e in c re ase in u n p a id losses to 8 8 .9 p e rc e n t o f its u n d isc o u n te d v a lu e. The
a c tu a l re d u c tio n fa c to r w as 8 1 .6 p e rc e n t.
T h e d isco u n tin g facto rs in th e m o d e l w e re b a se d on 1984 loss p a y m e n t p a tte rn s a n d distribution
o f lo sses b e tw e e n v ario u s lin es o f bu sin ess. T h e actu a l d isco u n tin g fa c to rs w e re b a se d o n th e 1987
d is trib u tio n o f u n p a id losses b y lin e o f b u siness a n d 1985 loss p a y m e n t tim e p a tte rn s , b o th o f which
re s u lte d in a g e n eral le n g th e n in g o f th e tim e d is trib u tio n o f loss p a y m en ts re la tiv e to th e loss
p a y m e n t p a tte rn s im p lic it in th e m o d e l’s calcu latio n s. T y p ica lly , th e M u ltip le P e ril a n d Auto
L iab ility lin es o f busin ess have relativ ely sh o rt p a y o u t p a tte rn s c o m p a re d to th e W orkers’
C o m p e n sa tio n , M ed ic a l M a lp ra c tic e , a n d O th e r L iability lines o f b u sin ess. T a b le 3 .4 show s that net
w ritte n p re m iu m g ro w th fo r th e sh o rte r p a y o u t lines g en erally ex ce e d ed th e g ro w th fo r th e longer
p a y o u t lin e s in th e y e ars p re c e d in g 1984 (the m o st c u rre n t y e a r fo r w h ich a n n u a l sta te m e n t d a ta was
a v ailab le a t th e tim e th e estim ate s w ere m a d e ).5 F ro m 1985 th ro u g h 1987, p re m iu m gro w th was
g e n e ra lly m o re ra p id fo r lines o f b u siness w ith lo n g e r loss p a y o u t p e rio d s. T a b le 3 .4 also shows
th a t S c h e d u le O lin e s, w hich g e n erally have fa ste r loss p a y m e n t p a tte rn s, h a d sm a lle r a v erag e growth
ra te s th a n th e S c h e d u le P lines in 1985 a n d 1986.
L o n g e r loss p a y m e n t p a tte rn s re su lt in g re a te r d isco u n tin g o f u n p a id losses a n d therefore a
sm a lle r tax d e d u c tio n . In a d d itio n , th e d isco u n t ra te assu m ed by th e m o d e l w as 7 .0 p e rc e n t compared
to th e a c tu a l d isco u n t ra te o f 7 .2 p e rc e n t. H ig h e r d isco u n t ra te s re d u c e th e d isc o u n te d value of
fu tu re losses a n d th u s re d u c e th e d e d u ctio n fo r d isco u n ted u n p a id losses. F u rth e r, th e discounting
5
P re m iu m in fo rm a tio n by lin e o f business in th e ta b le is lim ite d to lines o f b u sin ess fo r which
S c h e d u le P A n n u a l S ta te m e n t in fo rm a tio n w as av ailab le in 1987. T h e im p a c t o f discounting is
g e n e ra lly g re a te st fo r th e se lines since th e d isco u n tin g calc u la tio n ru le s fo r S c h e d u le P lines
a ssu m e losses a re p a id o u t o v er lo n g e r p e rio d s o f tim e th a n o th e r ( e .g ., S ch ed u le O ) categories of
u n p a id losses.
-19Table 3.4
Net W ritten Premiums fo r Schedule P and 0 Lines:
1978-89
Schedule P Lines
i
F a ste r Payout Lines
Slower Payout Lines
| M ultiple i
A ll
i
i
i
i
Auto
| P e ril
Other
| Workers
| Medical
Schedule P ¡Schedule 0
Year | L ia b ility | Lines
| L ia b ility ¡Compensation¡Malpractice! Lines
Lines
($ m illio n s)
|
1978
20,383
14,057
6,490
11,300
1,216
53,446
25,293
1979
22,102
15,977
6,612
13,164
1,204
59,060
27,857
1980
23,319
17,261
6,415
14,238
1,276
62,508
31,221
1981
24,395
18,269
6,046
14,616
1,338
64,666
32,800
1982
26,226
19,425
5,668
13,945
1,490
66,756
35,249
1983
28,080
20,496
5,679
14,005
1,568
69,829
37,140
1984
30,217
22,229
6,479
15,107
1,775
75,807
38,832
1985
36,087
26,933
11,544
17,048
2,769
94,380
38,267
1986
44,081
32,241
19,365
20,431
3,492
119,609
46,335
1987
49,205
34,774
20,874
23,429
4,004
132,285
56,240
1988
52,520
35,636
19,077
26,135
4,028
137,397
62,242
1989
56,024
36,084
18,434
28,241
4,278
143,061
63,181
11
10
6
12
Growth Rates (percent)
1979
8
14
2
16
1980
6
8
(3)
8
(1)
6
1981
5
6
(6)
3
5
3
5
1982
8
6
(6)
(5)
11
3
7
1983
7
6
0
0
5
5
5
1984
8
8
14
8
13
9
5
1985
19
21
78
13
56
25
1986
22
20
68
20
26
27
(1)
21
1987
12
8
8
15
15
11
21
1988
7
2
(9)
12
1
4
11
1989
7
1
(3)
8
6
4
2
Department of the Treasury
Office of Tax A nalysis
A p ril 1991
Source: A.M. Best Company, Aggregates and Averages, Property and C asualty 1984-89 E d itio n s.
-
20
-
c o m p u ta tio n s m a y have o v e re stim ate d th e v alue o f th e e lec tio n u n d e r S ec tio n 84 6 (e) o f th e Internal
R ev en u e C o d e th a t a llo w ed som e co m p an ies to u se th e ir ow n loss p a y m e n t p a tte rn s to c o m p u te discount
fa c to rs by lin e o f b u siness ra th e r th a n p u b lish e d IR S d isco u n t fa c to rs.
A ll th e se factors
c o n trib u te d to u n d e re stim a tin g th e effect o f th e ru les re q u irin g th e d isco u n tin g o f u n p a id losses.
U n e a rn e d P re m iu m C h an g es
T h e effect o n ta x ab le in c o m e o f in clu d in g 20 p e rc e n t o f th e in c re ase in th e u n e a rn e d prem ium s
w as o v e re stim a te d b y $ 1 .1 b illio n (T ab le 3 .3 ). H isto rically , g ro w th ra te s in u n e a rn e d p re m iu m s have
v a rie d g re a tly fro m y e a r to y e a r, closely track in g th e gro w th in n e t w ritte n p re m iu m s (T ab le 3.5).
T h e m o d e l u se d a g g re g a te n e t w ritte n p re m iu m gro w th ra te a ssu m p tio n s to e stim a te th e ch an g e in
u n e a rn e d p re m iu m s. F o r 1987, a n e t w ritte n p re m iu m gro w th o f 15 p e rc e n t w as a ssu m e d w hile the
a c tu a l p re m iu m g ro w th w as 9 p e rc e n t. T his d ifferen ce acco u n ts fo r m o st o f th e o v e re stim ate .
T h e e stim a te fo r th e effect o n ta x ab le in c o m e o f in c lu d in g 20 p e rc e n t o f 1986 e n d o f year
u n e a rn e d p re m iu m s in tax ab le in c o m e ra ta b ly o v er th e n ex t six years w as u n d e re stim a te d by $64
m illio n . E stim a te s o f 1987 u n e a rn e d p re m iu m levels w e re b a se d on estim ate s o f a v erag e n e t written
p re m iu m g ro w th ra te s. A n n u al p re m iu m gro w th ra te s a re m o re v a ria b le (T ab le 3 .5 ).
P ro ra tio n R ule
T h e m o d e l u n d e re stim a te d th e effect on ta x ab le in c o m e o f th e p ro ra tio n ru le — in clu d in g 15
p e rc e n t o f c e rta in p rev io u sly ta x -e x em p t in co m e in ta x ab le in c o m e — by $ 0 .2 b illio n (T ab le 3.3).
P ro p e rty a n d casu a lty c o m p an y p u rc h a se s o f ta x -e x em p t b o n d s in c re ase d in re sp o n se to th e 1986 Act
c h a n g e s. In te re s t in c o m e fro m ta x -e x em p t b o n d s d e clin ed fro m $ 6 .4 b illio n to $ 6 .3 b illio n fro m 1984
to 1985, a n d th e n g rew to $ 7 .3 b illio n in 1986 a n d $ 9 .1 billio n in 1 9 8 7 .7 T h e d isco u n tin g and
u n e a rn e d p re m iu m ch an g e s c au se d som e p ro p e rty a n d c asu alty co m p an ies to b e re g u la r tax p ay ers. The
g e n e ra l lo w e rin g o f tax ra te s re d u c e d th e sp re a d b etw een tax ab le a n d ta x -e x em p t b o n d s. T h e combined
im p a c t o f th e se c h an g e s p ro v id e d incentives fo r p u rc h a se s o f ta x -e x em p t b o n d s by p ro p e rty and
c a su a lty c o m p a n ie s. M o st o f th e u n d e re stim a te o f th e p ro ra tio n ru le on ta x ab le in c o m e is explained
by th e u n d e re stim a te o f th e im p a c t o f th e 1986 A ct ch an g es on th e p u rc h a se o f ta x -e x e m p t bonds by
p ro p e rty a n d casu a lty c o m p an ies. T h e re m a in d e r is a ttrib u ta b le to u n d e re stim a te s o f ta x -e x em p t bond
y ield s a n d th e d iv id en d s th a t w e re su b ject to th e p ro ra tio n ru le.
N O L s a n d C u rre n t Losses U sed
T h e in c re ase in th e u se o f N O L s a n d c u rre n t losses w as u n d e re stim a te d by $ 1 .0 b illio n . The
e stim a te s o f N O L s a n d losses u n d e re stim a te d th e use o f losses o f c o n so lid a te d affiliates a n d NOLs to
6
T h e in c o m e fro m ta x -e x e m p t b o n d s p u rc h a se d a fte r A ugust 7 ,1 9 8 6 , a n d th e ta x d e d u c tib le portion
o f d iv id en d s re c eiv e d o n stock p u rc h a se d a fte r A u g u st 7, 1986, w e re su b ject to p ro ra tio n .
A . M . B est C o ., B e s t’s A g g re g ates an d A verages, P ro p e rty -C a su a lty , 1985-88 E d itio n s.
-
21-
Table 3.5
Net Written Premiums and Unearned Premiums for
Property and Casualty Insurance Companies:
1973-89
i
r
Change in
Net
Written
Premiums
(p e r c e n t )
Change in
Unearned
Premiums
(p e r c e n t )
Year
Net
Written
Premiums
($ millions)
1973
4 2 ,4 8 0
1974
4 5 ,1 5 2
6 .3
1 9 ,8 8 1
4 .9
1975
4 9 ,9 6 7
1 0 .7
2 1 ,5 2 9
8 .3
1 976
6 0 ,9 5 9
2 2 .0
2 4 ,8 5 0
1 5 .4
1 977
1 9 .8
2 8 ,3 8 7
1 4 .2
1978
7 3 ,0 3 0
8 2 ,3 4 1
1 2 .7
3 1 ,3 7 5
1 0 .5
1 979
9 1 ,3 5 9
1 1 .0
3 4 ,5 8 5
1 0 .2
1 980
9 6 ,5 5 6
5 .7
3 6 ,4 4 6
5 .4
1 981
1 0 0 ,2 9 4
3 .9
3 7 ,8 1 6
3 .8
198 2
1 0 4 ,0 3 8
3 .7
4 0 ,1 2 6
6 .1
1 983
1 0 9 ,2 4 7
5 .0
4 2 ,3 0 2
5 .4
1984
1 1 8 ,5 9 1
8 .6
4 5 ,8 3 2
8 .3
1985
1 4 4 ,8 6 0
2 2 .2
5 6 ,8 5 0
2 4 .0
1 986
1 7 6 ,9 9 3
2 2 .2
6 7 ,3 7 4
1 8 .5
1 987
1 9 3 ,6 8 9
9 .4
7 2 ,3 0 2
7 .3
198 8
1 9 7 ,8 8 5
2 .2
7 6 ,8 3 1
6 .3
1 989
2 2 0 ,6 2 0
1 1 .5
7 9 ,9 4 1
4 .0
|
Unearned
Premiums
($ millions)
1 8 ,9 4 4
Department of the Treasury
Office of Tax Analysis
S o u rce :
A.M. Best, Aggregates and Averages,
1975-90 Editions.
April 1991
Property and C a s u a l t y ,
-
22
-
o ffset in c re ase s in th e in c o m e o f p ro p e rty a n d casualty in su ra n ce c o m p an ies re su ltin g fro m th e 1986
A ct c h an g e s to th e p ro p e rty a n d c asu alty in su ra n ce c o m p an y tax ru le s. T h is e rro r re su lte d from lags
in th e av ailab ility o f ta x re tu rn d a ta c o m b in e d w ith tax re p o rtin g c o n v en tio n s a n d d a ta lim itations,
p a rtic u la rly a b o u t c u rre n t losses o f co m p an ies in o th e r in d u strie s filing c o n so lid a te d re tu rn s with
p ro p e rty a n d c asu alty in su ra n c e co m p an ies.
T a x C re d its
T h e u se o f ta x cre d its w as u n d e re stim a te d by $ 0 .3 b illio n . T h is e stim a tin g e rro r resulted
p rim a rily fro m d a ta lim itatio n s re la te d to th e d e fin itio n o f th e in d u stry fo r S O I ta x statistics
(d iscu ssed ab o v e). M an y o f th e c red its u sed ag ain st th e in c o m e o f p ro p e rty a n d casu a lty insurance
c o m p a n ie s w e re e a rn e d b y c o m p an ies in o th e r in d u stries filing c o n so lid ate d re tu rn s w ith p ro p e rty and
casu a lty in su ra n c e c o m p an ies. T h e S O I tax statistics in c lu d e th e se c red its in th e to ta ls fo r other
in d u strie s. S o m e o f th e c red its u sed w ere in v estm en t tax c re d it (IT C ) carry -o v ers fro m 1986, the
y e a r th e IT C w as re p e a le d .
P A L A c co u n t a n d Sm all C o m p an y C hanges
In a d d itio n to th e fo u r ta x ch an g es d iscu ssed ab o v e, th e 1986 A ct re p e a le d P A L a cc o u n ts, which
a llo w ed m u tu a l p ro p e rty a n d c asu alty in su ra n ce co m p an ies to d e fe r tax o n a p o rtio n o f th e ir income.
It also lib e ra liz e d th e ru les th a t e x e m p te d som e sm all p ro p e rty a n d c asu alty in su ra n c e com panies
fro m ta x a n d a llo w ed o th e rs to elect to ex clu d e th e ir u n d e rw ritin g in c o m e fro m ta x a b le in co m e. The
1987 c a le n d a r y e a r estim ate s fo r th e re p e a l o f P A L acco u n ts a n d th e sm all c o m p a n y c h an g e s w ere $97
m illio n a n d -$23 m illio n , resp ectiv ely . B ased u p o n th e d a ta fro m th e sam p le o f ta x re tu rn s in the
S O I c o rp o ra te ta x d a ta b ase fo r 1987, it a p p e a rs th a t th e c o m b in e d effect o f th e se provisions on
lia b ilitie s w as $1 m illio n .
S in ce re lia b le d a ta on th e m a g n itu d e a n d d istrib u tio n o f N O L s w e re u n a v ailab le a t th e time
e stim a te s fo r th e se p ro v isio n s w e re m a d e , th e e stim ates e x a g g e ra te d th e re v e n u e loss attrib u ta b le to
th e se sp ec ia l ta x d e fe rra l a n d tax re d u c tio n m e asu re s in p re -ta x re fo rm p e rio d s. T h u s, th e revenue
in c re a se fro m th e re p e a l o f P A L a cco u n ts w as o v e re stim ate d . T h e o v erestim ates o f re v e n u e effects of
th e re p e a l o f th e P A L a cco u n ts a n d th e c h an g es in sm all c o m p an y p ro v isio n s w e re also largely
a ttrib u ta b le to u n d e re stim a te s o f av ailab le N O L s. P A L acc o u n t b alan ces a n d th e asso ciated tax
d e fe rra l a re re d u c e d d o lla r fo r d o lla r by N O L s used. In a d d itio n , th e la rg e r e x clu sio n fo r small
c o m p a n ie s d id n o t re d u c e rev en u es by th e a m o u n t e stim ate d b e ca u se th e use o f N O L s by such com panies
w as u n d e re stim a te d .
g
T h e S O I c o rp o ra te d a ta b ase w as used to ev alu ate actu al re c e ip ts fo r th e se p ro v isio n s, because
c o m p a n ie s in th e sp ecial sam p le (d escrib ed in A p p e n d ix 2) h a d m in im a l P A L b alan ces a n d generally
h a d n e t o r d ire c t w ritte n p re m iu m s th a t ex ceed ed th e sm all c o m p an y th re sh o ld s.
-23-
3.4
Alternative Minimum Tax Liabilities for Property and Casualty Insurance Company
Consolidated Returns: 1987
T his sec tio n p re se n ts in fo rm a tio n o n m in im u m ta x liab ilities o f p ro p e rty a n d casu a lty in su ra n c e
com panies a n d c o m p an ies in o th e r in d u strie s th a t file c o n so lid a te d re tu rn s w ith p ro p e rty a n d
casualty in su ra n c e c o m p an ies. B ecau se m in im u m ta x liab ilities a re d e te rm in e d o n a c o n so lid a te d
basis, it w as n o t p o ssib le to e stim a te th e m in im u m tax lia b ility a ttrib u ta b le to c o m p a n ie s in th e
property a n d casu a lty in su ra n c e in d u stry .
D a ta fro m ta x re tu rn s g e n erally in c lu d e d o n ly th e
inform ation n e e d e d to c o m p u te m in im u m ta x lia b ilities on a c o n so lid a te d b a sis, such as m in im u m tax
adjustm ents, p re fe re n c e s, a n d N O L s. M o re o v e r, it is n o t p o ssib le to c o m p a re e stim a te d re c e ip ts fo r
the p ro p e rty a n d c asu alty in su ra n c e co m p an ies w ith actu a l lia b ilities b e c a u se o n ly a g g re g a te
corporate m in im u m ta x re c e ip ts w e re e stim a te d fo r th e 1986 A ct.
T h e m in im u m ta x liab ilities fo r p ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s a n d a ffilia te d
com panies w e re $175 m illio n fo r 1987 (T ab le 3 .6 ). A p p ro x im a te ly 32 p e rc e n t o f th e p ro p e rty a n d
casualty in su ra n c e c o m p a n ie s ’ c o n so lid a te d tax re tu rn s in th e sam p le h a d m in im u m ta x lia b ilitie s.
T a b le 3 .6 p ro v id es in fo rm a tio n o n th e co m p o sitio n o f th e a lte rn a tiv e m in im u m (A M T ) ta x b a se by
tax status o f th e c o n so lid a te d re tu rn s .
C o m p a n ies th a t p a id o nly th e m in im u m ta x (a n d n o re g u la r
tax d u e to th e p ro p e rty a n d c asu alty in su ra n c e c o m p an y ch an g es) o w ed a p p ro x im a te ly $11 5 m illio n .
G enerally, th e se c o m p an ies h a d n o re g u la r ta x liab ility b e ca u se N O L s o ffset th e in c re a se in ta x a b le
incom e b e fo re N O L s a ttrib u ta b le to th e p ro p e rty a n d casu a lty in su ra n c e c o m p a n ie s ta x c h a n g e s.
Because th e u se o f N O L s to o ffset a lte rn ativ e m in im u m ta x ab le in c o m e is lim ite d , th e se c o m p a n ie s
paid A M T . T h e m in im u m ta x p a id b y th e se c o m p an ies is la rg e ly a ttrib u ta b le to th e b o o k in c o m e
preference, w h ich a c c o u n te d fo r 64 p e rc e n t o f th e m in im u m ta x b a se b e fo re N O L s.
R etu rn s in th e sam p le th a t p a id b o th re g u la r tax a n d m in im u m ta x p a id $ 6 0 m illio n in a lte rn a tiv e
m inim um tax . G e n era lly th e se c o m p an ies p a id th e m in im u m ta x b e ca u se N O L s re d u c e d re g u la r ta x
liability b e lo w m in im u m ta x lia b ility , b u t w e re in su fficien t to e lim in a te re g u la r ta x lia b ility .
A pproxim ately 55 p e rc e n t p e rc e n t o f th e c o n so lid a te d re tu rn s in th e sam p le p a id o n ly re g u la r ta x .
For th e se c o m p a n ie s, th e ta x effe ct o f th e la rg e r m in im u m ta x b a se w as m o re th a n o ffset b y lo w e r
m inim um ta x ra te .
T h e re m a in in g 13 p e rc e n t o f re tu rn s in th e sam p le w ith n o m in im u m ta x h a d n o re g u la r ta x
liability a ttrib u ta b le to th e p ro p e rty a n d casu alty in su ra n c e c o m p an y ta x c h an g e s. M o st o f th e se
com panies w e re n o t ta x ab le b e ca u se c u rre n t losses b e fo re N O L s m o re th a n o ffset m in im u m ta x
preferences. S o m e c o m p an ies th a t p a id n o taxes d u e to th e p ro p e rty a n d casu a lty in su ra n c e c o m p a n y
tax c h an g e s filed c o n so lid a te d re tu rn s w ith life in su ra n c e c o m p an ies a n d p a id ta x o n th e ir life
insurance in c o m e .
3.5
Conclusion
T h e a ctu a l in c re a se in re g u la r ta x liab ilities fo r c a le n d a r y e a r 1987 fo r th e p ro p e rty a n d
casualty in s u ra n c e c o m p a n y ta x p ro v isio n s n e a rly e q u a le d th e a m o u n ts e stim a te d at th e tim e o f th e
1986 A ct. T h e specific p ro v isio n s, h o w e v er, w e re e ith e r over- o r u n d e re stim a te d . T h e se e rro rs a re
-2 4 T able 3 .6
A lte r n a tiv e Minimum Tax Base and L i a b i l i t i e s
by Tax S ta tu s o f Companies F ilin g P&C C o n so lid ate d Tax R etu rn s*
($ m illio n s )
Minimum | Minimum
Tax P aid ; ¡Tax P aid ;
No R egular j R egular
Tax From
Tax From
P&C Tax
P&C Tax
Changes
Changes
\
| No Minimum
Tax P aid ;
R egular
Tax From
P&C Tax
Changes
\
No Minimum
Tax Paid;
No Regular
Tax From
P&C Tax
Changes
R eg u lar ta x a b le income b e fo re NOLs
Minimum ta x a d ju stm e n ts
Minimum ta x p re fe re n c e s **
Book income p re fe re n c e
1,192
730
119
3,615
1,785
39
42
744
15,287
220
117
1,418
177
6
29
469
Minimum ta x base b e fo re NOLs
A lte r n a tiv e ta x NOLs
Exem ptions
5,656
3,892
★★★
2,610
846
irfck
17,042
3,949
i
681
734
***
A lte r n a tiv e minimum ta x a b le income
T e n ta tiv e minimum tax
AMT fo r e ig n ta x c r e d i t
1,764
353
220
1,764
353
34
13,093
2,619
492
402
80
2
133
319
2,127
78
8
259
4,383
112
115
60
0
0
24
8
55
13
T e n ta tiv e minimum ta x
Income ta x b e fo re c r e d i t s
Minus fo r e ig n ta x c re d it* * * *
A lte r n a tiv e minimum tax
P e rc e n t o f companies
D epartm ent o f th e T rea su ry
O ffic e o f Tax A n a ly sis
*
D e ta ils may n ot add to t o t a l s because o f ro u n d in g .
**
E xcludes book income p re fe re n c e .
***
Less than $1 m illio n .
k i r k
A p ril 1991
**** in c lu d e s r e g u la r ta x on income n o t a t t r i b u t a b l e to th e p ro p e rty and c a s u a lty
company ta x changes.
-25related la rg e ly to th e sig n ifican ce o f th e ch an g es e n a c te d u n d e r th e T ax R efo rm A ct o f 1986 a n d to
lim itations in th e a v ailab le d a ta , p a rtic u la rly w ith re sp e c t to N O L s a n d c re d its. E stim a tin g e rro rs
w ere la rg e ly o ffse ttin g , so th a t th e a g g re g a te e stim a te d ch an g e in lia b ilities fo r th e p ro p e rty a n d
casualty in su ra n c e ta x p ro v isio n s n e arly e q u a le d th e actu a l c h a n g e in lia b ilities fo r 1987.
CHAPTER 4.
4.1
THE TAX TREATMENT OF POLICYHOLDER DIVIDENDS PAID BY
INSURANCE COMPANIES
Introduction
U n d e r p re s e n t law , m u tu a l a n d sto ck in su ra n c e co m p an ies g en erally a re a llo w e d to d e d u c t
dividends a n d sim ila r d istrib u tio n s p a id to th e ir p o lic y h o ld e rs. T h e se d istrib u tio n s a re in c lu d e d
in the in c o m e o f th e re c ip ie n t o n ly a fte r th e fu ll a m o u n t o f p re m iu m s p a id h as b e e n re c o v e re d
(unless th e p o lic y h o ld e r d e d u c te d th e p re m iu m s). D ividends p a id to in d iv id u a l sh a re h o ld e rs b y sto ck
insurance c o m p a n ie s a re n o t d e d u c tib le b y th e c o m p an y a n d a re in c lu d e d in th e in c o m e o f th e
shareholder.
An e x c e p tio n to th e g e n e ra l ru le th a t p ro v id es fo r d ed u ctib ility o f p o lic y h o ld e r d iv id e n d s p a id
arises fo r m u tu a l life in su ra n c e c o m p an ies. U n d e r th e D eficit R ed u c tio n A ct o f 1984 (th e 1984 Act^
mutual life in su ra n c e co m p an ies m u st re d u c e th e d e d u ctio n fo r p o lic y h o ld e r d iv id e n d s p a id .
Congress e n a c te d this lim ita tio n b e ca u se it b eliev ed th a t a p o rtio n o f th e p o lic y h o ld e r d iv id e n d s
paid by m u tu a l life in su ra n c e co m p an ies is a d istrib u tio n o f c o rp o ra te e a rn in g s to th e p o lic y h o ld e rs
as ow ners. A b se n t such a lim ita tio n o n th e d e d u ctio n fo r p o lic y h o ld e r d iv id e n d s, it w as a rg u e d ,
mutual life in su ra n c e c o m p an ies w o u ld b e p ro v id e d a ta x a d v an ta g e b e c a u se sto ck life in su ra n c e
com panies c a n n o t d e d u c t a m o u n ts p a id to th e ir sh areh o ld e rs as d iv id en d s.
A lth o u g h C o n g re ss sig n ifican tly o v e rh a u led th e tax tre a tm e n t o f p ro p e rty a n d c asu a lty in s u ra n c e
com panies u n d e r th e T a x R efo rm A ct o f 1986 (the 1986 A ct), it d id n o t e x ten d th e a p p lic a tio n o f a
lim itation o n th e d e d u ctib ility o f p o lic y h o ld e r d ividends to m u tu a l p ro p e rty a n d c asu a lty in su ra n c e
com panies. C o n g re ss re c o g n iz e d th a t th e lim ita tio n o n th e d e d u c tio n fo r p o lic y h o ld e r d iv id e n d s as
applied to life in su ra n c e c o m p an ies h as b e en b o th c o m p le x a n d c o n tro v e rsial.
T h u s, th e 1986 A ct
required th e T re a su ry D e p a rtm e n t to study th e tax tre a tm e n t o f p o lic y h o ld e r d iv id en d s p a id b y m u tu a l
property a n d casu a lty in su ra n c e c o m p an ies b e fo re a lim ita tio n o n th e d e d u ctib ility o f p o lic y h o ld e r
dividends o r o th e r a p p ro a c h is c o n sid e re d fo r such in su re rs.
T h e a p p ro p ria te ta x tre a tm e n t o f p o lic y h o ld e r d ividends is p ro b le m a tic b e ca u se in th e in su ra n c e
industry c u sto m e rs (p o licy h o ld ers) o fte n also p a rtic ip a te as ow n ers o r p a rt ow n ers o f th e b u sin e ss,
since th e y p ro v id e c ap ital to th e bu sin ess th a t earn s in c o m e . A m a jo r d ifficu lty in ta x in g th e
incom e o f m u tu a l a n d stock in su ra n c e co m p an ies is th a t th e to ta l in c o m e o f c o m p a n ie s sellin g
"p articip atin g " p o lic ie s c an n o t b e id e n tifie d d ire c tly . A " p a rtic ip a tin g " p o lic y is o n e th ro u g h
'S e e g e n e ra lly , S ections 8 0 8 (a )(2 ), 8 3 2 ( c ) ( l l) , 7 2 (e )(5 )(c ), 30 1 (c) o f th e In te rn a l R ev en u e
Code.
S ee In te rn a l R ev en u e C o d e S ectio n 809.
3
Jo in t C o m m itte e o n T a x a tio n , G e n era l E x p lan a tio n o f th e T ax R efo rm A ct o f 1 9 8 6 , M ay 4 , 1987,
p. 621.
-27-
-28w h ic h a p o lic y h o ld e r effectively b u y s n o t o nly in su ra n ce p ro te c tio n , b u t also a n equity-like
in te re st in th e in su ra n ce c o m p a n y . T h e re tu rn th a t a p a rtic ip a tin g p o lic y h o ld e r m a y receiv e on the
e q u ity in te re st is d ifficu lt to id e n tify o r m e a su re b e ca u se th e re tu rn can b e re c eiv e d in many
fo rm s, in c lu d in g in c re a se d p o lic y h o ld e r div id en d s, re d u c e d p re m iu m s, o r in c re a se d a m o u n ts credited
to p o lic y cash v alu es. F u rth e r, p o lic y h o ld e r dividends m ay b le n d to g e th e r m a n y e le m e n ts, including
p ric e re d u c tio n s, in te re st p a y m en ts (reflectin g th e c o m p a n ie s’ u se o f an y re d u n d a n t p re m iu m s betw een
re c e ip t a n d re p a y m e n t), re p a y m e n t o f th e p o lic y h o ld e r’s in v e stm en t p rin c ip a l, a n d equity-like
re tu rn s . N o t all o f th e se item s a re a p p ro p ria te ly ta x e d a t th e c o rp o ra te level. M o re o v e r, the
id e n tific a tio n a n d m e a su re m e n t o f e q u ity -lik e re tu rn s to p a rtic ip a tin g p o lic y h o ld e rs is even more
d ifficu lt in th e case o f stock co m p an ies b ecau se th e se p o lic y h o ld e rs sh are th e e q u ity risk with
sto ck c o m p a n y sh areh o ld e rs.
T h e 1984 A ct re q u ire d th e T re a su ry D e p a rtm e n t to study th e effects o f th e A c t’s life insurance
ta x p ro v isio n s, in c lu d in g th e ta x tre a tm e n t o f life in su ra n c e c o m p an y p o lic y h o ld e r d iv id en d s. The
T re a s u ry D e p a rtm e n t’s F in al R ep o rt to th e C ongress o n L ife In su ra n c e C o m p a n y T a x a tio n (th e Find
R e p o rt) in c lu d e d an ev alu a tio n o f th e lim itatio n on th e d e d u c tio n fo r p o lic y h o ld e r d iv id en d s p a id by
m u tu a l life in su ra n c e co m p an ies a n d c o n clu d e d th a t th e lim itatio n is c o n c e p tu a lly flaw ed .
This
c o n c lu sio n re lie s to a la rg e e x te n t on th e "p re p a y m e n t a n a ly sis," w h ich show s th a t u n d e r certain
a ssu m p tio n s th e fu ll d e d u ctib ility o f p o lic y h o ld e r dividends d o es n o t c o n fe r a ta x ad v an ta g e on
m u tu a l life in su ra n c e c o m p an ies.
A c co rd in g to th e p re p a y m e n t an aly sis, a lim itatio n on th e d e d u c tio n fo r p o lic y h o ld e r dividends
is u n n e c e ssa ry b e c a u se an y d e d u ctio n o f c o rp o ra te e arn in g s th ro u g h m u tu a l c o m p a n y policyholder
d iv id e n d s is ex actly offset by th e a d d itio n a l ta x d u e fro m m u tu a l c o m p an ies w h e n th e y ra ise capital
th ro u g h p re m iu m s b y selling p a rtic ip a tin g in su ra n ce po licies. S to ck c o m p a n ie s, in c o n tra st, are not
re q u ire d to in c lu d e in in c o m e c ap ital c o n trib u tio n s o f th e ir sh areh o ld e rs. U n d e r th e prepaym ent
a n aly sis, a ta x o n p a id -in c ap ital co m b in e d w ith th e fu ll d e d u ctib ility o f th e re tu rn to
c o n trib u to rs (p o lic y h o ld e r dividends) p ro v id es th e sam e a fte r-ta x re tu rn a t th e c o m p a n y level and
th e sam e ta x to th e g o v e rn m e n t in p re s e n t v alu e as th e exclusion o f p a id -in c a p ita l c o m b in e d w ith no
d e d u c tio n fo r d iv id en d s p a id to sh areh o ld e rs.
S ince th e p re p a y m e n t an aly sis show s th a t the
c o n c e p tu a l b asis fo r a lim itatio n on th e d e d u ctio n fo r p o lic y h o ld e r div id en d s fo r m u tu a l life
in s u ra n c e c o m p a n ie s is flaw ed , ex ten d in g th is a p p ro a c h to m u tu a l p ro p e rty a n d casu a lty insurance
c o m p a n ie s is in a p p ro p ria te .
T h e p re p a y m e n t analysis d oes n o t ad d ress th e p ro b le m th a t p o lic y h o ld e rs e n jo y a ta x advantage at
th e in v e sto r level.
T h e fo llo w in g section discusses th e p o lic y h o ld e r-le v e l ta x a d v an ta g e and
e v alu a te s its sig n ifican ce fo r in v esto rs in p ro p e rty a n d casu alty in su ra n c e c o m p an ies.
4
S ee th e D e p a rtm e n t o f th e T re a su ry , F in al R ep o rt to th e C o n g ress o n L ife In s u ra n c e C om pany
T a x a tio n , (A u g u st 1989), C h a p te r 5. A study by th e G e n era l A cco u n tin g O ffice also re a c h e d this
c o n c lu sio n . S ee U n ite d S tates G e n era l A cco u n tin g O ffice, A llo catio n o f T axes W ith in the_D g
In s u ra n c e In d u s try (O c to b e r 1989).
-29-
4.2
Policyholder-Level Taxation of Policyholder Dividends Paid by Property and Casualty
Insurance Companies
P o licy h o ld e rs e n jo y a tax a d v a n ta g e at th e in v e sto r level b e ca u se re tu rn s to c a p ita l c o n ta in e d
in p o lic y h o ld e r d iv id en d s g en erally a re e x clu d e d fro m ta x ab le in c o m e b u t s h a re h o ld e rs ’ d iv id e n d s a re
taxed w hen rec eiv e d ( a n d ‘stock a p p re c ia tio n is ta x ed w h en th e stock is so ld ). T h is ta x a d v a n ta g e
accrues to p a rtic ip a tin g p o licies issu e d b y b o th stock a n d m u tu a l in su ra n c e c o m p a n ie s.
A n e x c e p tio n to th e p o lic y h o ld e r-le v e l ta x ad v an ta g e o ccu rs w h e n th e p o lic y h o ld e r is a b u sin ess
rather th a n a n in d iv id u al. B usinesses a re p e rm itte d to d e d u ct p re m iu m s p a id , b u t in c lu d e fu lly in
taxable in c o m e p o lic y h o ld e r div id en d s receiv ed .
T o th e e x te n t th a t a p o rtio n o f p re m iu m s
represents a n eq u ity -lik e c o n trib u tio n th ro u g h a re d u n d a n t p re m iu m , th e c u rre n t d e d u c tio n o f th e
redundant p re m iu m a n d th e la te r in c lu sio n in in c o m e o f p o lic y h o ld e r d iv id en d s is e q u iv a le n t in
present v a lu e to th e a b se n c e o f a d e d u c tio n fo r sh are p u rc h a se s a n d th e ex clu sio n fro m in c o m e o f
shareholder div id en d s receiv ed by c o rp o ra tio n s.
T h u s, p o lic y h o ld e r e q u ity g e n e ra lly h a s n o
policyholder-level tax a d v an ta g e o v er s h a re h o ld e r e q u ity w h e n th e p o lic y h o ld e r is a b u sin e ss. T h e
following sectio n s ex am in e d a ta o n p o lic y h o ld e r d ividends p a id by p ro p e rty a n d casu a lty in su re rs fo r
business a n d p e rso n a l co v erag e.
4.2.1
Policyholder Dividends By Line of Business
D a ta o n p o lic y h o ld e r div id en d s fo r p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s by lin e o f b u sin ess
for 1989 show th a t m o st p o lic y h o ld e r div id en d s w e re p a id on w o rk e rs ’ c o m p e n sa tio n p o lic ie s, w h ic h
are sold p rim a rily to b u sin esses (T ab le 4 .1 ). P ro p e rty a n d c asu alty in su ra n c e c o m p a n ie s p a id 63
percent o f p o lic y h o ld e r div id en d s in th e w o rk e rs ’ c o m p e n sa tio n lin e , 17 p e rc e n t in th e p e rs o n a l a u to
lines, a n d 2 0 p e rc e n t in all o th e r lin es.
F o r th e w o rk e rs ’ c o m p e n sa tio n lin e , p o lic y h o ld e r
dividends w e re 6 p e rc e n t o f p re m iu m s. P o lic y h o ld e r div id en d s as a p e rc e n t o f p re m iu m s w e re 2 .3
percent o r less fo r all o th e r lin es.
T a b le 4 .2 show s th e b re a k d o w n o f p o lic y h o ld e r div id en d s fo r sto ck a n d m u tu a l p ro p e rty a n d
casualty in su ra n c e c o m p an ies by lin e o f b u sin ess fo r 1989. P o lic y h o ld e r d iv id en d s in th e w o rk e rs ’
com pensation lin e p re d o m in a te fo r b o th stock a n d m u tu a l p ro p e rty a n d casu a lty in s u ra n c e c o m p a n ie s .
5 S ee g e n e ra lly In te rn a l R ev en u e C o d e S ections 162, 6 1 , a n d 63.
6 E q u ity in v e stm en ts in a m u tu a l c o m p a n y a n d in a stock c o m p an y a re n o t fully e q u iv a le n t b e c a u s e
up to th irty p e rc e n t o f sh a re h o ld e r div id en d s receiv ed by c o rp o ra tio n s a re ta x a b le . S e e In te rn a l
Revenue C o d e S ectio n 2 4 3 .
-30Table 4.1
Policyholders Dividends and Premiums Earned fo r
Property and Casualty Insurance Companies by Line of Business:
1 Policyholder Dividends
I Amount
|
Percent
1($ m illio n s)I of T otal
F ire
A llie d Lines
Farmowners Multi P e r il
Homeowners M ulti P e r il
Commercial M ulti P e r il
Ocean Marine
Inland Marine
F in an cial Guaranty
Medical M alpractice
Earthquake
Group Accident & Health
C redit Accident & H ealth
Other Accident & H ealth
Workers' Compensation
Other L ia b ility
Auto Liab. (P riv a te )
Auto Liab. (Commercial)
Auto Damage (P riv a te )
Auto Damage (Commercial)
A irc ra ft
F id e lity
Surety
G lass
B urglary and Theft
B o iler and Machinery
C redit
In te rn a tio n a l
Reinsurance (A,B,C, & D)
W rite-in s
T o tal
Department of the Treasury
O ffice of Tax A nalysis
Source:
A. M. Best Company
1989
|
Premiums Earned
1 Dividends/
|
Amount
| Percent | Premiums
I ($ m illio n s) 1 of T o tal 1 (percent)
17.8
10.4
7.9
83.0
64.3
3.7
9.7
0.0
95.1
1*8
0.0
0.0
0.1
1,715.1
86.3
267.2
108.6
197.5
27.8
0.0
0*8
10*6
0»3
1*3
0.9
0*0
0.0
1.2
1*3
0.7
0.4
0.3
3.1
2.4
0.1
0.4
0.0
3.5
0.1
0.0
0.0
0.0
63.2
3.2
9.8
4.0
7.3
1.0
0.0
0.0
0.4
0.0
0.1
0.0
0.0
0.0
0.0
0.1
4,675.7
2,054.8
922.7
17,349.7
17,402.2
1,222.5
4,324.1
351.0
4,222.7
360.1
2,739.6
243.0
1,532.2
28,069.0
18,522.6
43,073.9
11,934.7
29,397.4
5,196.3
583.7
942.1
1,693.6
21.2
103.3
621.4
899.0
170.3
7,063.1
550.0
2.3
1.0
0.4
8.4
8.4
0.6
2.1
0.2
2.0
0.2
1.3
0.1
0.7
13.6
9.0
20.9
5.8
14.3
2.5
0.3
0.5
0.8
0.0
0.1
0.3
0.4
0.1
3.4
0.3
0.4
0.5
0.9
0.5
0.4
0.3
0.2
0.0
2.3
0.5
0.0
0.0
0.0
6.1
0.5
0.6
0.9
0.7
0.5
0.0
0.1
0.6
1.3
1.5
0.1
0.0
0.0
0.0
0.3
2,713.1
100.0
206,242.2
100.0
1.3
A pril
Table
4.2
Policyholder Dividends and Premiums Earned for Stock and Mutual
Property and Casualty Insurance Companies by Line of Business: 1989
Mutual Companies
Stock Companies
1
1
|1 Policyholder Dividends 1 Premiums Earned |Dividends/||Policyholder Dividends | Premiums Earned |Dividends/
1Percent | Premiums
Amount | Percent | Amount 1Percent | Premiums | Amount |Percent | Amount
1
_1| ($ millions) | of Total|($ millions) |of Total | (percent) | ($ millions) |of total | ($ millions) |of Total | (percent)
Fire
Allied Lines
Farmowners Multi Peril
Homeowners Multi Peril
Commercial Multi Peril
Ocean Marine
Inland Marine
Financial Guaranty
Medical Malpractice
Earthquake
Group Accident &Health
Credit Accident &Health
Other Accident &Health
Workers' Compensation
Other Liability
Auto Liab. (Private)
Auto Liab. (Commercial)
Auto Damage (Private)
Auto Damage (Commercial)
Aircraft
Fidelity
Surety
Glass
Burglary and Theft
Boiler and Machinery
Credit
International
Reinsurance (A,B,C, &D)
Write-ins
Total
Department of the Treasury
Office of Tax Analysis
Source: A. M. Best Company
5.0
2.9
0.0
1.6
47.0
0.0
0.4
0.0
9.0
0.0
0.0
0.0
0.0
1,065.6
30.7
7.9
58.5
4.4
22.9
0.0
0.7
10.3
0.3
1.5
0.4
0.0
0.0
0.1
0.1
1,269.3
0.4
0.2
0.0
0.1
3.7
0.0
0.0
0.0
0.7
0.0
0.0
0.0
0.0
84.0
2.4
0.6
4.6
0.3
1.8
0.0
0.1
0.8
0.0
0.1
0.0
0.0
0.0
0.0
0.0
100.0
2,903.6
1,396.9
332.8
8,192.5
12,682.6
1,075.9
3,234.9
343.1
2,106.9
190.6
1,202.5
207.9
541.8
19,773.1
15,549.5
19,037.2
8,889.8
13,196.5
3,962.0
503.7
817.4
1,527.2
16.8
81.1
404.6
889.6
111.2
6,281.2
530.5
125,983.6
2.3
1.1
0.3
6.5
10.1
0.9
2.6
0.3
1.7
0.2
1.0
0.2
0.4
15.7
12.3
15.1
7.1
10.5
3.1
0.4
0.6
1.2
0.0
0.1
0.3
0.7
0.1
5.0
0.4
100.0
0.2
0.2
0.0
0.0
0.4
0.0
0.0
0.0
0.4
0.0
0.0
0.0
0.0
5.4
0.2
0.0
0.7
0.0
0.6
0.0
0.1
0.7
1.6
1.8
0.1
0.0
0.0
0.0
0.0
1.0
12.9
7.4
7.9
81.4
17.3
3.7
9.3
0.0
86.1
1.8
0.0
0.0
0.1
649.6
55.7
259.3
50.1
193.1
4.8
0.0
0.0
0.2
0.0
0.1
0.5
0.0
0.0
1.1
1.4
1,443.8
0.9
0.5
0.6
5.6
1.2
0.3
0.6
0.0
6.0
0.1
0.0
0.0
0.0
45.0
3.9
18.0
3.5
13.4
0.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.1
100.0
1,772.1
657.9
589.9
9,157.3
4,719.6
146.5
1,089.1
7.8
2,115.8
169.4
1,537.1
35.1
990.4
8,295.9
2,973.1
24,036.7
3,044.9
16,200.9
1,234.3
80.0
124.7
166.4
4.4
22.3
216.8
9.5
59.0
781.9
19.5
80,258.6
2.2
0.8
0.7
11.4
5.9
0.2
1.4
0.0
2.6
0.2
1.9
0.0
1.2
10.3
3.7
29.9
3.8
20.2
1.5
0.1
0.2
0.2
0.0
0.0
0.3
0.0
0.1
1.0
0.0
100.0
0.7
1.1
1.3
0.9
0.4
2.5
0.9
0.0
4.1
1.1
0.0
0.0
0.0
7.8
1.9
1.1
1.6
1.2
0.4
0.0
0.0
0.1
0.2
0.3
0.2
0.0
0.0
0.1
7.3
1.8
April 1991
T h e w o rk e rs ’ c o m p e n sa tio n lin e acc o u n te d fo r 84 p e rc e n t o f p o lic y h o ld e r d iv id en d s p a id b y stock
c o m p a n ie s an d 45 p e rc e n t o f p o lic y h o ld e r dividends p a id by m u tu al c o m p an ies. F o r m u tu a l com panies,
p riv a te a u to lines a c c o u n te d fo r 31 p e rc e n t o f p o lic y h o ld e r d ividends. O n a v e ra g e , m u tu a l com panies
p a y m o re p o lic y h o ld e r d ividends as a p e rc e n t o f p re m iu m s th a n stock c o m p a n ie s. T h e ra tio of
p o lic y h o ld e r d iv id en d s to p re m iu m s in 1989 w as 1.8 p e rc e n t a n d 1.0 p e rc e n t fo r m u tu a l c o m p an ies and
sto ck c o m p a n ie s, re sp ectiv ely .
A sso ciatio n s re p re se n tin g th e p ro p e rty a n d casu alty in su ra n c e in d u stry (b o th sto ck a n d mutual
c o m p a n ie s) a rg u e th a t th e im p o rta n c e o f p o lic y h o ld e r d ividends in th e w o rk e rs ’ c o m p e n sa tio n line
re fle c ts a fo rm o f p ric e c o m p e titio n in a re g u la te d m a rk e t. B ase ra te s fo r w o rk e rs ’ com pensation
c o v e ra g e a re e sta b lish e d by state law a n d in su rers g en erally a re p re v e n te d fro m c h a rg in g less than
th e b a se ra te s w ith o u t re g u la to ry a p p ro v a l. P o licy h o ld e r d ividends p ro v id e a m e ch a n ism fo r reducing
th e effective p ric e o f a w o rk e rs ’ c o m p en sa tio n c o n tra c t b e ca u se in su re rs a re p re v e n te d from
a d ju stin g p re m iu m s w h en th e c o n tra c t is sold. T h u s, it is a rg u e d th a t p o lic y h o ld e r d ividends are
th e re su lt o f p ric e c o m p e titio n a n d a re n o t re tu rn on eq u ity .
T h e e x te n t to w h ich p o lic y h o ld e r dividends c o m p rise p ric e re b a te s, re tu rn s on e q u ity , o r return
o f c a p ita l c a n n o t b e d e te rm in e d w ith av ailab le d a ta . As n o te d ab o v e, h o w ev er, th e prepaym ent
an aly sis show s th a t w h en p o lic y h o ld e rs a re bu sin esses, as a p p e a rs to b e th e case fo r w orkers’
c o m p e n s a tio n p o lic y h o ld e rs, th e p re se n t ta x tre a tm e n t o f p o lic y h o ld e r d ividends d o es n o t confer a
p o lic y h o ld e r-le v e l tax ad v an ta g e .
T h e lines o f b u siness fo r w h ich a p o lic y h o ld e r-le v e l tax
a d v a n ta g e m a y b e re le v an t a re th e p e rso n a l lines.
4.2.2
Policyholder Dividends for Personal Coverage
I t is n o t p o ssib le to m e a su re p recisely p o lic y h o ld e r d ividends fo r p e rso n a l c o v erag e , because
th e av ailab le d a ta on p o lic y h o ld e r d ividends g en erally do n o t d istin g u ish b e tw ee n p e rso n al and
c o m m e rc ia l lin es o f in su ra n c e bu sin ess. T h e e x cep tio n s a re h o m e o w n ers m u ltip le p e ril, private
p a ss e n g e r a u to lia b ility , a n d p riv a te p a sse n g e r ph y sical d a m a g e , w h ich a re id e n tifie d personal
lin e s. H o w ev e r, o th e r lin es th a t m ay b e view ed as p rim a rily c o m m e rcial in c lu d e so m e personal
c o v e ra g e , such as acc id e n t a n d h e a lth , fire , a n d a llied lin es. T h u s, th e d a ta fo r homeowners
m u ltip le p e ril a n d th e p e rso n a l a u to lines p ro v id e an in d ic a tio n o f th e im p o rta n c e o f policyholder
d iv id e n d s fo r p e rso n a l co v erag e.
T a b le 4 .3 show s th a t p o lic y h o ld e r d ividends fo r th e th re e lin es o f busin ess th a t a re primarily
p e rs o n a l (h o m e o w n e rs m u ltip le p e ril a n d th e p riv a te a u to lines) w e re $54 8 m illio n in 1989, or 20
p e rc e n t o f to ta l p o lic y h o ld e r d ividends p a id by p ro p e rty a n d casu alty in su re rs. T a b le 4 .4 shows
th a t m u tu a l c o m p a n ie s p a id $5 3 4 m illio n in p o lic y h o ld e r d ividends fo r p e rso n a l c o v erag e (9 7 percent
o f th e in d u stry to ta l) c o m p a re d w ith $14 m illio n fo r stock co m p an ies (3 p e rc e n t o f th e industry
to ta l). P o lic y h o ld e r div id en d s fo r p e rso n a l co v erag e a v erag e d 1.1 p e rc e n t o f p re m iu m s fo r mutual
c o m p a n ie s a n d w e re in sig n ific a n t fo r stock co m p an ies.
A llian ce o f A m e ric an In su re rs, N a tio n al A ssociation o f In d e p e n d e n t In s u re rs , a n d National
A sso c ia tio n o f M u tu a l In su ra n c e C o m p a n ies, R ep o rt C o n ce rn in g T ax atio n o f M u tu al a n d S tock Property
a n d C asu a lty In su re rs (Jan u ary 8, 1990), p p . 8-9.
-33-
Table 4.3
P olicyholder Dividends and Premiums Earned fo r Property and C asualty
Insurance Companies fo r Personal and Commercial Coverage: 1989
Policyholder Dividends
Percent
Amount
| ($ m illio n s) 1 of T otal
|D ividends/
Premiums Earned
Percent | Premiums
Amount
|($ m illio n s) 1 of T otal | (p ercen t)
Total Personal Lines:
547.7
20.2
89,821.1
43.6
0.6
Homeowners MP
Auto Liab (P riv .)
Auto Phys (P riv .)
83.0
267.2
197.5
3.1
9.8
7.3
17,349.7
43,073.9
29,397.4
8.4
20.9
14.3
0.5
0.6
0.7
2,165.4
79.8
116,421.1
56.4
1.9
Workers' Comp
Other
1,715.1
450.3
63.2
16.6
28,069.0
88,352.1
13.6
42.8
6.1
0.5
Total A ll Lines
2,713.1
100.0
206,242.2
100.0
1.3
Total Commercial Lines:
Department of the Treasury
Office of Tax A nalysis
Source:
A. M. Best Company
—
~~
A p ril 1991
Table 4.4
Policyholder Dividends and Net Written Premiums for Stock and Mutual Property and Casualty
Insurance Companies for Personal and Commercial Coverage: 1989
]
Stock Companies
|
Mutual Companies
1 Policyholder Dividends! Net Written Premiums|
¡Policyholder Dividends! Net Written Premiums|
Amount | Percent | Amount |Percent ¡Dividends/1 Amount |Percent
Amount ¡Percent ¡Dividends/
| ($ millions) | of Total|($ millions) ¡of Total| Premiums j($ millions) ¡of to tal |($ millions)¡of Total| Premiums
\
13.9
1.1
40,718.4
32.2
0.0
533.8
37.0
50,514.6
61.6
1.1
Homeowners MP
Auto Liab (Priv.)
Auto Phys (Priv.)
1.6
7.9
4.4
0.1
0.6
0.3
8,261.5
19,302.8
13,154.0
6.5
15.3
10.4
0.0
0.0
0.0
81.4
259.3
193.1
5.6
18.0
13.4
9,409.4
24,673.7
16,431.4
11.5
30.1
20.1
0.9
1.1
1.2
1,255.4
98.9
85,721.7
67.8
1.5
910.0
63.0
31,433.3
38.4
2.9
Workers' Comp
Other
1,065.6
189.8
84.0
15.0
19,738.3
65,983.4
15.6
52.2
5.4
0.3
649.6
260.5
45.0
18.0
8,503.1
22,930.2
10.4
28.0
7.6
1.1
Total All Lines
1,269.3
100.0
126,440.1
100.0
1.0
1,443.8
100.0
81,947.9
100.0
1.8
Total Commercial Lines:
Source:
-3 4 -
Total Personal Lines:
-35T he d a ta p re s e n te d in T ab les 4 .3 a n d 4 .4 in c lu d e b o th c o m p an ies th a t p a id p o lic y h o ld e r d iv id e n d s
and those th a t d id n o t. As a re su lt, th e av erag e ra tio o f p o lic y h o ld e r d iv id en d s to p re m iu m s
understates th e a v erag e fo r co m p an ies th a t a ctu ally p a id such div id en d s. T a b le 4 .5 p ro v id e s d a ta on
policyholder d iv id en d s a n d p re m iu m s fo r co m p an ies th a t p a id p o lic y h o ld e r d iv id e n d s, i . e . , it
excludes c o m p a n ie s th a t d id n o t p ay p o lic y h o ld e r d ividends fo r th e p a rtic u la r lin e o f b u sin ess.
Table 4 .5 show s th a t p o lic y h o ld e r d ividends fo r p e rso n a l co v erag e a v e ra g e d 2 p e rc e n t fo r m u tu a l
com panies th a t p a id such d iv id en d s, c o m p a re d w ith 0 .2 p e rc e n t fo r sto ck c o m p a n ie s. F o r m u tu a l
com panies p o lic y h o ld e r div id en d s as a p e rc e n t o f p re m iu m s fo r p e rso n a l c o v e ra g e v a rie s b y lin e o f
business. P o lic y h o ld e r div id en d s as a p e rc e n t o f p re m iu m s w e re m o re th a n tw ic e as la rg e fo r
hom eow ners m u ltip le p e ril th a n fo r th e p e rso n a l a u to lines fo r m u tu a l c o m p a n ie s th a t a c tu a lly p a id
policyholder d iv id en d s fo r th o se lines.
In d u stry re p re se n ta tiv e s a rg u e th a t, if p o lic y h o ld e r div id en d s fo r p e rso n a l c o v e ra g e c o n ta in an
elem ent o f re tu rn on e q u ity th a t c o n fe r a tax a d v an ta g e , th e y w o u ld b e sig n ific a n t a n d p a id
prim arily by m u tu a l c o m p an ies. T a b le 4 .3 show s th a t p o lic y h o ld e r div id en d s fo r p e rs o n a l c o v e ra g e
are less th a n o n e p e rc e n t o f p re m iu m s. H o w ever, m u tu a l c o m p an ies a c c o u n t fo r v irtu a lly all
policyholder d iv id en d s fo r p e rso n a l c o v erag e a n d p ay th e m a t a h ig h e r ra te th a n sto ck c o m p a n ie s
(Table 4 .4 ). A p p ro x im a te ly 7 .6 p e rc e n t o f th e m u tu a l co m p an ies th a t w ro te b u sin ess in th e p e rs o n a l
lines p a id p o lic y h o ld e r d ividends fo r p e rso n a l c o v erag e , c o m p a re d w ith 2 .5 p e rc e n t o f sto ck
com panies (T ab le 4 .6 ) .
T h u s, th e se d a ta p ro v id e so m e su p p o rt fo r th e in d u stry view th a t
policyholder d iv id en d s a re sm all relativ e to p re m iu m s a n d a re p a id by a re la tiv e ly sm all fra c tio n o f
com panies th a t p ro v id e p e rso n a l co v erag e.
In d u stry re p re se n ta tiv e s also n o te th a t th e ra tio o f p o lic y h o ld e r d iv id en d s to p re m iu m s v a rie s
among p e rso n a l lin es a n d p o lic y h o ld e rs, a n d su g g est th a t p o lic y h o ld e r d iv id en d s re fle c t a fim T s
circum stances in a p a rtic u la r m a rk e t.
I f m u tu a l c o m p a n y p o lic y h o ld e r d iv id en d s a re a re tu rn on
equity, it is a rg u e d , th e y w o u ld b e p a id p ro p o rtio n a te ly to all p o lic y h o ld e rs, as is th e case w ith
respect to d iv id en d s p a id to sh areh o ld e rs o f th e sam e class o f stock.
H ow ever, d ifferen c es in th e ra te a t w h ich p o lic y h o ld e r d iv id en d s a re p a id a m o n g lin e s o f
business m a y re fle c t d ifferen ces in th e d e g re e o f risk. In a d d itio n , d ifferen c es in th e ra te a t
which p o lic y h o ld e r div id en d s a re p a id m ay re fle c t th e fact th a t p o lic y h o ld e r d iv id en d s a re n o t a
precise m e a su re o f th e re tu rn s th a t a p a rtic ip a tin g p o lic y h o ld e r receives on his e q u ity in te re st.
8
L e tte r to K en n eth G id e o n , A ssistant S ec re tary fo r T ax P o licy , T re a su ry D e p a rtm e n t, fro m
Alliance o f A m e ric an In su re rs, N a tio n al A ssociation o f In d e p e n d e n t In su re rs a n d N a tio n a l A sso c ia tio n
of M utual In s u ra n c e C o m p a n ie s, M ay 3 1 , 1990.
Ib id , p . 7.
10
A lliance o f A m e ric an In su re rs, N a tio n al A ssociation o f In d e p e n d e n t In s u re rs , a n d N a tio n a l
A ssociation o f M u tu a l In su ra n c e C o m p a n ie s, R ep o rt C o n ce rn in g T a x a tio n o f M u tu a l a n d S to ck P ro p e rty
and C asualty In s u re rs , p . 10.
Table 4.5
Policyholder Dividends and Premiuns Earned by Line of Business for Stock and Mutual Property and Casualty
Insurance Companies that Paid Policyholder Dividends for Personal Coverage: 1989
1
Stock Companies
|
Mutual Companies
| Policyholder Dividends| Premiums Earned [Dividends/¡Policyholder Dividends 1 Premiums: FampH |Dividends/
Amount | Percent j Amount | Percent | Premiums | Amount | Percent | Amount | Perçait | Premiums
| ($ millions)| of Total|($ millions)[of Total| (percent)j($ millions)!of total |($ millions)!of Total! (percent)
Total Personal Lines:
13.9
1.1
6,317.8
6.2
0.2
533.8
37.0
24,727.6
36.8
2.2
Homeowners MP
Auto Liab (Priv.)
Auto Phys (Priv.)
1.6
7.9
4.4
0.1
0.6
0.3
880.3
3,490.9
1,946.6
0.9
3.4
1.9
0.2
0.2
0.2
81.4
259.3
193.1
5.6
18.0
13.4
1,574.2
13,969.7
9,183.7
2.3
20.8
13.7
5.2
1.9
2.1
Total Commercial Lines:
1,255.4
98.9
95,916.9
93.8
1.3
910.0
63.0
42,532.9
63.2
2.1
Workers' Comp
Other
1,065.6
189.8
84.0
15.0
19,137.5
76,779.3
18.7
75.1
5.6
0.2
649.6
260.5
45.0
18.0
8,007.1
34,525.8
11.9
51.3
8.1
0.8
Total All Lines
1,269.3
100.0
102,234.6
100.0
1.2
1,443.8
100.0
67,260.5
100.0
2.1
Departmait of the Treasury
Office of Tax Analysis
Source: A. M. Best Company
I
u>
Ol
April 1991
I
-3 7 -
T able 4 .6
Number and P e rc e n t o f P ro p e rty and C asu a lty In su ra n c e Companies
th a t Paid P o lic y h o ld e r D ividends fo r P e rso n a l C overage: 1989
T o ta l
Stock Companies | M utual Companies ]
P e rc e n t
Number
P e rc e n t
P e rc e n t 1 Number
Number
17
2 .5
33
7 .6
50
4 .5
5
0 .7
26
6 .0
31
2 .8
Auto l i a b i l i t y ( p r iv a te )
12
1 .8
19
4 .4
31
2 .8
Auto p h y s ic a l ( p r iv a te )
11
1.6
19
4 .4
30
2 .7
Total P e rs o n a l L in es:
Homeowners MP
Department o f th e T rea su ry
O ffice o f Tax A n a ly sis
Source:
A. M. B est Company
A p ril 1991
-38A s d iscu ssed in th e p rev io u s sectio n , p o lic y h o ld e r dividends m ay b le n d to g e th e r p ric e reductions,
in te re st p a y m e n ts, a n d e q u ity -lik e re tu rn s.
M o re o v er, eq u ity re tu rn s fo r particip atin g
p o lic y h o ld e rs m a y b e rec eiv e d in a v ariety o f w ays, such as th ro u g h re d u c e d p re m iu m s. H o w ever, to
th e e x te n t th a t p o lic y h o ld e rs c h an g e in su re rs, it is less likely th a t e q u ity -lik e re tu rn s w o u ld be
p a id in th e fo rm o f re d u c e d p re m iu m s. B o th th e e x ten t to w h ich p o lic y h o ld e r d iv id e n d s contain
e q u ity re tu rn s a n d e q u ity re tu rn s a re receiv ed in o th e r fo rm s a re im p o ssib le to determ ine
e m p iric a lly .
4.3
Arguments Relating to Differences between Property and Casualty Insurance and Life
Insurance
R ep rese n tativ es o f th e p ro p e rty a n d casualty in su ra n ce in d u stry also a rg u e th a t a lim itatio n on
p o lic y h o ld e r d iv id en d s sh o u ld n o t b e im p o se d on p ro p e rty a n d casu alty in su re rs b e ca u se p ro p e rty and
c asu a lty in su ra n c e differs fro m life in su ra n ce in several re sp ec ts.
F irst, re p re se n ta tiv e s o f th e p ro p e rty a n d casualty in su ra n ce in d u stry c o n te n d th a t the
re se m b la n c e th a t a m u tu a l c o m p an y p o lic y h o ld e r b e ars to an o w n e r is c lo se r w ith a life insurance
p o lic y th a n w ith a p ro p e rty a n d casu alty in su ra n ce p o licy .
B ecau se life in su ra n c e policies
g e n e ra lly a re lo n g e r-te rm c o m m itm e n ts b a se d on relatively p re d ic ta b le m o rta lity ra te s, th e y m ay be
m o re c lo sely tie d to th e c o m p a n y ’s in v estm en t p e rfo rm a n c e . In c o n tra st, p ro p e rty a n d casualty
p o lic ie s a re sh o rt-te rm co n tra cts o fte n fo r m o re h ig h ly v a ria b le risks.
W h erea s c e rta in life
in s u ra n c e p o lic ie s a re h e ld fo r m a n y y e ars, p ro p e rty a n d casu alty in su ra n c e c o v erag e te n d s to have a
sh o rt d u ra tio n , such as six-m onths to o n e y e ar. T h u s, it is a rg u e d th a t a p ro p e rty a n d casualty
in su ra n c e p o lic y h o ld e r’s re la tio n sh ip o nly w eakly resem b les a tra d itio n a l o w n e rsh ip re la tio n sh ip .
A lth o u g h p ro p e rty a n d casu alty in su ra n ce co n tra cts a re sh o rt-te rm , th e e x te n t to which
p o lic y h o ld e rs re n e w th e ir po licies w ith th e sam e c o m p an y a n d th u s a re affiliate d w ith th e ir property
a n d casu a lty in su ra n c e c o m p an y fo r lo n g p e rio d s is u n c lea r. T h e d u ra tio n o f p ro p e rty a n d casualty
c o n tra c ts m a y n o t acc u ra te ly refle c t e ith e r th e d u ra tio n o f th e re la tio n sh ip b e tw ee n the
p o lic y h o ld e r a n d th e in su ra n c e c o m p an y o r th e closeness o f th a t re la tio n sh ip to a traditional
o w n e rsh ip in te re st.
R ep rese n tativ es o f th e p ro p e rty a n d casu alty in su ra n ce in d u stry a rg u e th a t p ro p e rty a n d casualty
in su ra n c e p o lic y h o ld e rs a re unlikely to receiv e an in v estm en t-lik e re tu rn d u rin g th e te rm o f the
p o lic y b e c a u se th e p o licies a re sh o rt te rm .
T his a rg u m e n t m o re a p p ro p ria te ly a d d re sses th e amount
a n d fo rm o f p a y m e n t o f an y in v estm en t-lik e re tu rn . P o licy h o ld e r div id en d s fo r short-duration
c o n tra c ts c o n tain a n in v e stm en t-lik e re tu rn b ecau se th e in su ra n ce c o m p an y invests th e redundant
11 S ee E m il M . S u n le y , F e d e ra l In c o m e T ax atio n o f M u tu al an d S tock P ro p e rty /C a s u a ltv Insurance
C o m p a n ie s (N o v e m b e r 2 8 , 1988), p p . 3 1-2.
A llia n c e o f A m e ric an In su re rs, N a tio n al A ssociation o f In d e p e n d e n t In s u re rs , a n d N ational
A sso c ia tio n o f M u tu a l In su ra n c e C o m p a n ies, R ep o rt C o n ce rn in g T a x a tio n o f M u tu al a n d S to ck Property
a n d C asu a lty In s u re rs , p . 17.
-39prem ium s it receiv es. T h u s, p o lic y h o ld e r d ividends c o n tain an p o lic y h o ld e r-le v e l a d v a n ta g e w ith
respect to ^any in v e stm en t-lik e e lem en t fo r p a rtic ip a tin g p o licies o f b o th m u tu a l a n d sto ck
com panies.
T he d u ra tio n o f an in su ra n c e c o n tra c t m ay also affect w h e th e r th e in v e stm en t-lik e re tu rn is p a id
in the fo rm o f p o lic y h o ld e r d ividends o r p re m iu m a d ju stm en ts.
L ife in s u ra n c e in d u stry
representatives p o in t o u t th a t life in su ra n c e co m p an ies m ay set p re m iu m s o v e r a p e rio d o f y e a rs a n d
reflect fa v o ra b le e x p e rie n c e th ro u g h p o lic y h o ld e r d iv id en d s, w h ile p ro p e rty a n d c asu a lty in su re rs
may reflect fa v o ra b le e x p e rie n c e b y p e rio d ic ally re se ttin g p re m iu m s.
P ro p e rty a n d casu a lty in su ra n c e in d u stry re p re se n ta tiv e s also n o te th a t u n lik e m a n y life
insurance p o lic ie s, p ro p e rty a n d c asu alty policies do n o t g e n e ra te a cash s u rre n d e r v a lu e . T h u s , it
is argued th a t th e p u rc h a se r o f p ro p e rty a n d casu alty in su ra n c e is p u rc h a sin g in su ra n c e a n d is n o t
making an in v e stm en t.
A lth o u g h cash v alue p o licies a re likely to c o n tain la rg e r in v e stm e n t
returns, sh o rt-te rm po licies also e a rn in v estm en t-lik e re tu rn s since p ro p e rty a n d casu a lty in su re rs
invest th e p re m iu m s th e y receiv e. T h u s, p o lic y h o ld e r d ividends m a y p ro v id e a p o lic y h o ld e r-le v e l
advantage w ith re sp e c t to th is in v estm en t re tu rn , re g a rd le ss o f w h e th e r th e p o lic y h as a cash
surrender v alu e.
F inally, it is a rg u e d th a t p ro p e rty a n d c asu alty in su ra n c e is risk ie r th a n life in s u ra n c e ,
because p ro p e rty a n d casu a lty in su ra n c e c o m p an ies c a n n o t m e a su re th e m a g n itu d e o f th e ir risks w ith
as m uch p re c isio n . L ife in su ra n c e po licies p a y th e face a m o u n t o f th e p o lic y w h e n th e in s u re d d ies
and life in su re rs a re a b le to p re d ic t th e o c cu rren c e o f d e a th a c c u ra te ly fo r m e m b e rs o f la rg e g ro u p s
of individuals. P ro p e rty a n d c asu alty in su re rs do n o t know w h e th e r a p a rtic u la r p o lic y w ill p ro d u c e
a loss, th e n u m b e r o f losses th a t w ill o c c u r w ith re sp e c t to th e p o lic y , o r th e a m o u n t o f th e
loss.
W h e th e r p ro p e rty a n d c asu alty in su ra n ce is risk ie r th a n life in su ra n c e is b e y o n d th e sc o p e
of this re p o rt. N e v erth ele ss, if th e in d u s try ’s a rg u m e n t is a c c e p te d , o n e likely o u tc o m e is th a t th e
expected re tu rn o n e q u ity w ill b e la rg e r to c o m p e n sa te in v esto rs fo r th e g re a te r risk.
4.4
Summary and Conclusion
T he T re a su ry D e p a rtm e n t re c o m m en d s th a t C o n g ress n o t e x ten d a lim ita tio n o n th e d e d u c tio n fo r
policyholder d iv id en d s to p ro p e rty a n d casu alty in su ra n c e c o m p an ies b e ca u se th e c o n c e p tu a l b asis fo r
Em il M . S u n le y , O p . C it., p . 33.
14
L e tte r to K e n n eth W . G id e o n , A ssistant S ecretary (T ax P o licy ), D e p a rtm e n t o f th e T re a s u ry ,
from T h e o d o re R . G ro o m a n d M a tth e w J. Z in n , d a te d A u g u st 8, 1990.
15
L e tte r to K e n n eth W . G id e o n , A ssistant S ecretary (T ax P o licy ), D e p a rtm e n t o f th e T re a s u ry fro m
Donald C . A le x a n d e r, A p ril 3, 1990.
16
A lliance o f A m e ric an In su re rs, N a tio n a l A ssociation o f In d e p e n d e n t In s u re rs , a n d N a tio n a l
Association o f M u tu a l In su ra n c e C o m p a n ies, R ep o rt C o n cern in g T a x a tio n o f M u tu a l a n d S to c k P ro p e rty
gpd C asualty In s u re rs , p . 14-17.
-40a lim ita tio n is flaw ed . T h e p re p a y m e n t analysis show s th a t m u tu a l c o m p an y p o lic y h o ld e r dividends
sh o u ld be fu lly d e d u c tib le to p ro v id e eq u al c o rp o ra te -le v el tax tre a tm e n t o f e q u ity -lik e re tu rn s to
m u tu a l a n d sto ck c o m p a n y in v esto rs. A cco rd in g to th e p re p a y m e n t analysis a ta x on p a id -in capital
c o m b in e d w ith a fu ll d e d u c tio n o f d ividends to p o lic y h o ld e rs is eq u iv alen t in p re s e n t v a lu e term s to
th e e x clu sio n o f c ap ital c o n trib u tio n s co m b in e d w ith no d e d u ctio n fo r div id en d s to sh areh o ld e rs.
T h e p re p a y m e n t an aly sis d o es n o t ad d ress th e p ro b le m th a t re tu rn s to p a rtic ip a tin g policyholders
o f m u tu a l a n d stock in su ra n c e co m p an ies m ay e n jo y a p o lic y h o ld e r-le v e l a d v a n ta g e because
p o lic y h o ld e r div id en d s a re n o t ta x ab le in c o m e to p o lic y h o ld e rs b u t div id en d s a re ta x ab le to
s h a re h o ld e rs. A n e x ce p tio n to th is p o licy h o ld e r-le v e l a d v an ta g e arises w h e n th e p o lic y h o ld e r is a
b u sin ess ra th e r th a n an in d iv id u al. S ince businesses d e d u ct p re m iu m s p a id b u t in c lu d e policyholder
d iv id e n d s in in c o m e , a p o lic y h o ld e r-le v e l tax ad v an ta g e g en erally d o es n o t a rise betw een
c o n v e n tio n a l e q u ity a n d p o lic y h o ld e r eq u ity .
D a ta o n p o lic y h o ld e r d ividends p a id by p ro p e rty a n d casu alty in su re rs show th a t most
p o lic y h o ld e r d iv id en d s a re p a id in th e w o rk e rs’ co m p en sa tio n lin e. S in ce w o rk e rs ’ com pensation
p o lic ie s a re p u rc h a se d p rim a rily by bu sin esses, it is u nlikely th a t a sig n ifican t policyholder-level
ta x a d v a n ta g e arises w ith re sp e c t to p o lic y h o ld e r dividends o n th e se p o lic ie s.
H ow ever, a
p o lic y h o ld e r-le v e l ta x ad v an ta g e arises w ith re sp e c t to th e in v e stm en t-lik e re tu rn c o n ta in e d in
p o lic y h o ld e r d iv id en d s fo r p e rso n a l co v erag e, such as th e h o m eo w n ers m u ltip le p e ril a n d th e personal
a u to lin es o f b u sin ess.
C u rre n t law g e n erally does n o t ta x th e e q u ity -lik e in c o m e o f p a rtic ip a tin g p o lic y h o ld e rs o f life
in su ra n c e c o m p a n ie s o r p ro p e rty a n d casualty in su ra n ce co m p an ies a t th e in d iv id u a l level. This
p ro b le m is n o t lim ite d to m u tu a l c o m p an y p o lic y h o ld e rs, since b o th stock a n d m u tu a l c o m p a n ie s issue
p a rtic ip a tin g p o lic ie s. T h e d isp arity in th e tre a tm e n t o f p o lic y h o ld e rs a n d sh are h o ld e rs at the
in d iv id u a l level c o u ld ju stify a c o rp o ra te -le v el tax on th e e q u ity re tu rn c o n ta in e d in policyholder
d iv id e n d s as a p ro x y fo r th e a b se n t individual-level tax. H ow ever, as an e m p iric a l m a tte r, this
d is p a rity is c o n sid e ra b ly sm aller fo r in v esto rs in p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s than
fo r life in su ra n c e co m p an ies b e ca u se th e a m o u n t o f p o lic y h o ld e r div id en d s p a id b y p ro p e rty and
c a su a lty in su re rs is su b sta n tia lly sm aller th a n th a t p a id by life in su re rs a n d policyholder
d iv id e n d s p a id by p ro p e rty a n d c asu alty in su re rs a re p a id p rim a rily to busin ess policyholders.
S in ce th e im p o sitio n o f a p ro x y tax o n p ro p e rty a n d casu alty in su ra n ce c o m p an ies w o u ld im pose a
c o m p lia n c e b u rd e n b u t w o u ld hav e m o d e st re v e n u e y ie ld , th e T re a su ry D e p a rtm e n t d o es n o t reco m m en d a
p ro x y ta x at th is tim e .
APPENDIX 1 - REQUIREMENT FOR THE REPORT
The T ax R efo rm A ct o f 1986 (P .L . 9 9 -5 1 4 ) c o n tain s th e follow ing re p o rtin g re q u ire m e n t:
"Sec. 1025.
S T U D Y O F T H E T R E A T M E N T O F P R O P E R T Y A N D C A S U A L T Y IN S U R A N C E
C O M P A N IE S .
The S e c re tary o f th e T re a su ry o r his d e le g a te shall c o n d u ct a stu d y o f—
(1) th e tre a tm e n t o f p o lic y h o ld e r dividends by m u tu a l p ro p e rty
c o m p a n ie s,
a n d c a su a lty in su ra n c e
(2) th e tre a tm e n t o f p ro p e rty a n d casu alty in su ra n ce c o m p an ies u n d e r th e m in im u m ta x , a n d
(3) th e o p e ra tio n a n d effect of, a n d re v e n u e ra ise d b y , th e a m e n d m e n ts m a d e by th is su b title .
Not la te r th a n Ja n u a ry 1, 1989, such S e c re tary shall su b m it to th e C o m m itte e o n W ays a n d M e a n s o f
the H ouse o f R ep rese n tativ es, th e C o m m itte e on F in a n c e o f th e S e n a te , a n d th e Jo in t C o m m itte e o n
T axation, th e re su lts o f such stu d y , to g e th e r w ith such re c o m m e n d a tio n s as h e d e te rm in e s to b e
ap p ro p riate. T h e S e c re tary o f th e T re a su ry shall have a u th o rity to re q u ire th e fu rn ish in g o f such
inform ation as m a y b e n e ce ssa ry to carry o u t th e p u rp o se s o f th is s e c tio n ."
Section 11831 o f th e O m n ib u s B u d g et R eco n ciliatio n A ct o f 1990 (P .L . 101-508) e x te n d e d th e d a te fo r
filing this stu d y to Ja n u a ry 1, 1992.
-41-
APPENDIX 2 - DESCRIPTION OF THE SAMPLE AND METHODOLOGY
The S a m p le a n d S a m p le W eights
T h e e stim a te s o f a ctu a l 1987 ta x liab ilities a re b a se d on d a ta fro m a sa m p le o f ta x re tu rn s o f
the la rg e st p ro p e rty a n d c asu alty in su ra n c e c o m p an ies. T h e sam p le c o n siste d o f 96 o f th e 100
largest, as m e a s u re d b y n e t w ritte n p re m iu m s, a ffiliated p ro p e rty a n d casu a lty in s u ra n c e c o m p a n y
groups. F o r m a n y c o m p a n y g ro u p s , som e p ro p e rty a n d casu alty in su ra n c e c o m p a n ie s in th e g ro u p file d
separate ta x re tu rn s so th e d a ta c o lle ctio n p ro cess involved th e a ssem b ly o f d a ta fro m m u ltip le ta x
returns. M u c h o f th e d a ta n e e d e d fo r th e study cam e fro m a n IR S c o rp o ra te S O I d a ta ta p e a n d a
special IR S d a ta p ro je c t. T h e T re a su ry D e p a rtm e n t o b ta in e d a d d itio n a l d a ta re q u ire d fo r th e stu d y
from th e c o m p a n ie s.
T h e sa m p le c o m p a n ie s h a d a p p ro x im a te ly 8 5 .5 p e rc e n t o f n e t w ritte n p re m iu m s fo r th e in d u s try in
1987. T h e e stim ate s o f re g u la r a n d m in im u m taxes fo r th e c o m p an ies n o t in th e sa m p le w e re
calculated by m u ltip ly in g th e a v erag e o f tax to n e t p re m iu m s w ritte n fo r th e sam p le c o m p a n ie s b y th e
difference b e tw e e n n e t w ritte n p re m iu m s fo r th e in d u stry a n d n e t w ritte n p re m iu m s fo r th e s a m p le
com panies.
I f th e ra tio b e tw ee n ta x a n d p re m iu m s is in v a ria n t w ith re s p e c t to th e lev el o f
prem ium s, th e se ra tio estim ate s (an d th e re fo re th e ta x estim ate s fo r th e m issin g c o m p a n ie s) a re
unbiased. T h e in v a ria n ce c o n d itio n w as te ste d b y c o m p a rin g th e ra tio o f th e to p 50 c o m p a n ie s to th e
rest o f th e sa m p le .
It w as n o t p o ssib le , a t th e 95 p e rc e n t c o n fid e n ce lev el, to re je c t th e
hypothesis o f in v a ria n ce .
Data C h eck in g a n d E rro r R eso lu tio n P ro ce d u re s
T h e in te rn a l co n siste n cy o f d a ta ite m s re q u ire d fo r th e c o m p u ta tio n o f th e c h an g e s in ta x a b le
incom e w e re te ste d a n d d a ta e rro rs c o rre c te d . F o r e x a m p le , in so m e cases th e c o n siste n cy te stin g
resulted in th e d e te c tio n o f in c o rre c tly tra n sc rib e d S ch ed u le E a n d F d a ta fro m th e 112 0 P C fo rm ,
which w as u s e d to d e te rm in e th e p o te n tia l effect o f th e d isc o u n tin g , p ro ra tio n in g , a n d u n e a rn e d
prem ium re se rv e c h an g e s o n th e c o m p a n y ’s ta x ab le in c o m e . In th e se cases, co p ies o f ta x re tu rn s w e re
used to c o rre c t th e u n d e rly in g d a ta tra n sc rip tio n p ro b le m s. N e t w ritte n p re m iu m s fro m e ac h c o m p a n y
group w e re c o m p a re d to n e t w ritte n p re m iu m s fo r th e c o m p a n y g ro u p B est C o m p a n y d a ta ta p e s w e re u s e d
to d e term in e c o m p a n y g ro u p s w h ich filed m u ltip le 1 120PC ta x re tu rn s . S u p p le m e n ta l ta x d a ta w e re
collected fro m such c o m p an ies w h e n p re lim in a ry availab le d a ta w e re d e te rm in e d to b e in su ffic ie n t.
W hen d a ta o n u n d isc o u n te d reserves w e re n o t re p o rte d o n ta x re tu rn s , th e u n d isc o u n te d re se rv e d a ta
were o b ta in e d fro m B est C o . d a ta ta p es.
C om p u tatio n P ro c e d u re s
T ax re tu rn d a ta fro m th e sam p le co m p an ies w e re u sed to e stim a te th e m a x im u m p o te n tia l in c re a se
in taxable in c o m e a ttrib u ta b le to th e 1986 A ct pro v isio n s. F o r e ach ta x re tu rn , th e a c tu a l effe ct
of the p ro v isio n s o n th e ta x ab le in c o m e show n on th e re tu rn w as also d e te rm in e d . T h e a c tu a l effe ct
-43-
-44c o u ld b e less th a n th e p o te n tia l effect if th e p ro p e rty a n d c asu alty in su ra n c e c o m p a n y o r an y o f the
c o n so lid a te d c o m p an ies h a d c u rre n t losses o r N O L s th a t offset th e im p a c t o f th e p ro p e rty and
c a su a lty in su ra n c e c o m p a n y tax ch an g e s. In d e te rm in in g th e a ctu a l effect o f th e p ro p e rty and
c asu a lty in su ra n c e c o m p a n y ch an g e s on th e in co m e show n o n c o n so lid a te d ta x re tu rn s , th e 35 percent
ru le fo r life-n o n life c o n so lid a te d re tu rn s w as tak en in to a cc o u n t. T h is ru le lim its th e use of
n o n life lo sse s a g ain st life in c o m e to th e m in im u m o f 35 p e rc e n t o f e lig ib le n o n life losses o r 35
p e rc e n t o f life in su ra n c e su b g ro u p in c o m e . F o r several co m p an ies in th e sa m p le , consolidated
ta x a b le in c o m e w as solely a ttrib u ta b le to life su b g ro u p in c o m e a n d th e u se o f n o n life losses was
c o n stra in e d by life su b g ro u p in c o m e . F o r such c o m p an ies, c o n so lid a te d ta x ab le in c o m e a n d tax was
u n c h a n g e d b y th e 1986 A ct p ro v isio n s even th o u g h th e ta x ch an g e s re d u c e d th e n o n life losses o f the
c o m p a n ie s.
BIBLIOGRAPHY
A lexander, D o n a ld C ., L e tte r to th e T re a su ry D e p a rtm e n t, R e T a x a tio n o f P ro p e rty a n d C asu a lty
C o m p an ies, A p ril 3, 1990.
A. M . B est C o m p a n y , A g g re g ates a n d A v erag es, P ro p e rty -C a su a lty , 1984 th ro u g h 1990.
Alliance o f A m e ric an In su re rs, N a tio n a l A ssociation o f In d e p e n d e n t In s u re rs , a n d N a tio n a l
A ssociation o f M u tu a l In su ra n c e C o m p a n ies, L e tte r to T re a su ry D e p a rtm e n t (an d a tta c h m e n t), R e p o rt
C o ncerning T a x a tio n o f M u tu a l a n d S tock P ro p e rty a n d C asu alty In s u re rs , J a n u a ry 8, 1990.
Alliance o f A m erican In su re rs, N a tio n al A ssociation o f In d e p e n d e n t In s u re rs , a n d N a tio n a l
A ssociation o f M u tu a l In su ra n c e C o m p a n ies, L e tte r to T re a su ry D e p a rtm e n t R e P o lic y h o ld e r
D ividends P a id by P & C C o m p an ies in P erso n al L ines: A S u p p le m e n t to R e p o rt C o n c e rn in g
T axation o f M u tu al P ro p e rty an d C asualty In s u re rs , M ay 3 1 , 1990.
G room , T h e o d o re R . a n d M atth ew J. Z in n , L e tte r to th e T re a su ry D e p a rtm e n t, R e T a x a tio n o f M u tu a l
P ro p erty a n d C asu alty C o m p a n ies, A u g u st 9, 1990.
Insurance Services O ffice,
In c ., T ax L aw C h an g es a n d P ro p e rty a n d C asu a lty In s u re rs ,
A
C o m p reh en siv e A n a ly sis, S e p te m b e r 1989.
Price W a te rh o u se , P ro p e rty a n d C asu alty In su ra n c e In d u s try , S urvey o f 1987 F e d e ra l In c o m e T a x
L iab ility , A p ril 2 0 , 1989.
Price W ate rh o u se , P ro p e rty a n d C asu alty In su ra n c e In d u s try , S urvey o f 1988 F e d e ra l In c o m e T a x
L iab ility , M a rc h 2 7 , 1990.
Sunley, E m il, F e d e ra l T a x a tio n o f M u tu al a n d S tock P ro p e rty /C a su a lty C o m p a n ie s , N o v e m b e r
1988.
U.S. C o n g re ss, G e n era l A cco u n tin g O ffice, A llo catio n o f T axes w ith in th e L ife In su ra n c e In d u s tr y ,
O ctober 1989.
U.S. C o n g re ss, Jo in t C o m m itte e on T a x a tio n , G en eral E x p lan a tio n o f th e T ax R efo rm A ct o f 1 9 8 6 ,
M ay 4 , 1987.
U.S. D e p a rtm e n t o f th e T re a s u ry , In te rim R ep o rt to C ongress on L ife In su ra n c e C o m p a n y T a x a tio n , Ju n e
1988.
U.S. D e p a rtm e n t o f th e T re a su ry , F in al R ep o rt to th e C ongress on Life In su ra n c e C o n g re ss on L ife
In su ran ce C o m p a n y T a x a tio n , A u g u st 1989.
-45-
D epartm en t o f th e Treasury
Washington, D.C. 20220
O fficial Business
Penalty fo r Private Use, $ 3 0 0
Report to Congress
on the
Depreciation of Business - Use Passenger Cars
Department of the Treasury
April 1991
Report to Congress
on the
Depreciation of Business - Use Passenger Cars
Department of the Treasury
April 1991
DEPARTMENT OF THE TREASURY
W ASHINGTO N
A SSIST A N T S E C R E T A R Y
April 1991
The Honorable Dan Rostenkowski
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Section 7612(f) of Public law 101-239, the Omnibus
Budget Reconciliation Act of 1989, directs the Secretary of the
Treasury or his delegate to conduct a study of the proper class
life for cars and light trucks and submit a report to the
Congress within one year of enactment. The Omnibus Budget
Reconciliation Act of 1990 extended the date for submission of
the report to April 15, 1991. Pursuant to those directives, I
hereby submit the "Report to Congress on the Depreciation of
Business Passenger Cars." A report on the depreciation of light
trucks is expected to be submitted in July.
I am sending a similar letter to Representative
Bill Archer
Sincerely
Assistant Secretary
(Tax Policy)
Enclosure
D E P A R TM E N T O F T H E T R E A S U R Y
W A S H IN G T O N
ASSISTANT S E C R E T A R Y
April 1991
The Honorable Lloyd Bentsen
Chairman
Committee on Finance
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
Section 7612(f) of Public law 101-239, the Omnibus
Budget Reconciliation Act of 1989, directs the Secretary of the
Treasury or his delegate to conduct a study of the proper class
life for cars and light trucks and submit a report to the
Congress within one year of enactment. The Omnibus Budget
Reconciliation Act of 1990 extended the date for submission of
the report to April 15, 1991. Pursuant to those directives, I
hereby submit the "Report to Congress on the Depreciation of
Business Passenger Cars." A report on the depreciation of light
trucks is expected to be submitted in July.
I am sending a similar letter to Senator Bob Packwood.
Sincerely,
Assistant Secretary
(Tax Policy)
Enclosure
T a b l e of C o n t e n t s
C hapter I. In tro d u ctio n and P rin cip al F in d in g s ............................................................................
A . M andate fo r T his S tu d y ..........................................................................................................
B . P rin cip al F in d in g s .....................................................................................................................
1
1
2
C hapter II. In d u stry B a c k g ro u n d ......................................................................................................
5
C hapter IEL D ata C o llectio n and M e th o d o lo g y ............................................................................ 7
A . P u b lic m eetin g s ........................................................................................................................ 7
B . D escrip tio n o f th e D a ta ............................... ........................................................................... 7
C. S tru ctu rin g th e D a ta ................................................................................................................
8
D . M e th o d o lo g y ............................... •............................................................................................. 10
C hapter IV . R esu lts o f th e A n a ly s is ................................................................................................ 15
C hapter V . Issu es in S ettin g C lass L iv e s ........................................................................................
A . E stim atio n I s s u e s ......................................................................................................................
B . A d m in istrativ e I s s u e s ...............................................................................................................
C . C o n cep tu al Issu es ....................................................
21
21
22
23
C hapter V I. C o n clu sio n and R ecom m endations ......................................................................... 25
A ppendix A . T h e M andate fo r D ep reciatio n S tu d ie s .................................................. .............. 27
A ppendix B . M odels S tu d ied an d S am ple S iz e s ......................................................................... 29
A ppendix C . D eterm in atio n o f E q u iv alen t E conom ic L iv es fro m th e A ge-P rice P ro file
and P attern o f S a le s ............................................................................................................................... 31
R e fe re n c e s ................................................................................................................................................ 33
A c k n o w le d g m e n ts.................................................................................................................................. 33
T a b l e of Fig ures
Figure 1.--R elatio n sh ip o f A g e-P rice P ro file and V ario u s S traig h t-L in e
D epreciation S c h e d u le s ........................................................................................................................
Figure 2 .—R ep resen tativ e C om pact M o d e l................................... ................................................
Figure 3 .—R ep resen tativ e In term ed iate M odel .............................................................................
Figure 4 .—R ep resen tativ e S tan d ard M odel ....................................................................................
Figure 5 .—R ep resen tativ e F o reig n M odel ......................................................................................
Figure 6 .—N o n fleet P assen g er C ars .................................................................................................
12
15
16
17
18
19
T a b l e of Ta b l e s
T able 1.—In v estm en t in B u sin ess-U se P assen g er C ars b y In d u stry S e c to r........................... 5
T able 2 .—D istrib u tio n o f P a sse n g e r C ar S ales ....................................................................
T able 3 .—U n ad ju sted and A d ju sted E q u iv alen t E conom ic L ives o f F leet C ars
by Size C lass ...................................................... ,................................................................................... 19
-v-
6
C h a p t e r I. Introduction a n d Principal Fi n d i n g s
A . M a n d a t e for T h i s S t u d y
T his study o f th e d e p reciatio n o f b u sin ess-u se p a sse n g er cars has b een p rep ared b y th e
O ffice o f T ax A n aly sis (O T A ) in resp o n se to a C o n g ressio n al m an d ate in th e O m nibus B u d g et
R eco n ciliatio n A ct o f 1989 (P .L 101-239). S ectio n 7 6 1 2 (f) o f th e A ct, w h ich becam e effe ctiv e
D ecem ber 1 9 ,1 9 8 9 , d ire c ted T reasu ry to co n d u ct a stu d y on th e p ro p e r class life fo r cars and
lig h t tru ck s and to re p o rt its fin d in g s to th e C ongress w ith in one y ear. T h e O m nibus B u d g et
R eco n ciliatio n A ct o f 1990 e x ten d ed th e due date fo r th e re p o rt to A p ril 1 5 ,1 9 9 1 . A re p o rt on
th e d ep reciatio n o f lig h t tru c k s is ex p ected to b e su b m itted to C o n g ress la te r th is year.
O T A conducts stu d ies o f th e d ep reciatio n o f o th e r a ssets, in clu d in g assets n o t ex p ressly
req u ested fo r study by th e C o n g ress, as p a rt o f its g en eral m an d ate u n d er S ectio n 1 6 8 (i)(l)(B )
o f th e In te rn a l R evenue C ode (IR C ), as m o d ified b y th e T ax R efo rm A ct o f 1986. (S ee E x h ib it
1 o f A ppendix A .)
T his p ro v isio n d irected th e T reasu ry to "m o n ito r and analyze actual
ex p erien ce w ith re sp ec t to all d ep reciab le assets", and g ran ted T reasu ry th e au th o rity to change
th e classific atio n and class liv e s o f a ssets. T h e T ech n ical and M iscellan eo u s R evenue A ct o f
1988 (T A M R A ) rep ealed T re a su ry ’s au th o rity to a lte r asset classes o r class liv e s, b u t th e rev ised
S ectio n 168(i) con tin u ed T re a su ry ’s re sp o n sib ility to "m o n ito r and analyze actu al ex p erien ce
w ith re sp ec t to all d ep reciab le assets" (see E x h ib it 2 o f A p p en d ix A ).
T he General Explanation o f the Tax Reform A ct o f 1986 in d icates th a t th e d eterm in atio n
o f th e class liv e s o f d ep reciab le assets sh o u ld b e b ased on th e ir a n tic ip ate d u sefu l liv es and th e
an ticip ated d eclin e in th e ir v alu e o v er tim e, a fte r ad ju stm en t fo r in flatio n (see E x h ib it 3 o f
A ppendix A ). U nder c u rre n t law , th e u sefu l life o f an asset is ta k en to be its e n tire econom ic
lifesp an o v er all u sers com bined, and n o t ju s t th e p e rio d it is re ta in e d by a sin g le ow ner. T he
General Explanation also in d icates th a t, if th e class life o f an asset is d eriv ed fro m th e d eclin e
w ith age o f its m ark et v alu e, such life (w hich, to av o id co n fu sio n , is h e re a fte r re fe rre d to as its
e q u iv alen t econom ic life ) sh o u ld b e se t so th a t th e p re se n t v alu e o f stra ig h t-lin e d ep reciatio n
o v er th e eq u iv alen t econom ic life eq u als th e p re sen t v alu e o f th e d eclin e in v alu e o f th e asset
(both d isco u n ted at an ap p ro p riate ra te o f in terest).
A s d escrib ed in C hap ters IQ and IV , an u n ad ju sted e q u iv alen t eco n o m ic life w as d eriv ed
fo r a b ro ad sp ectru m o f b u sin ess-u se p asse n g er cars. In its stu d y o f th e d e p reciatio n o f ren tal
clo th in g (tu x ed o s), w h ere it w as assum ed th a t sep arate accounts w ere n o t k e p t fo r e ach tu x ed o ,
-
1-
O T A com puted th e e q u iv alen t econom ic life fro m th e estim ate d decline in v alue w ith age o f
th e tu x ed o s, w ith o u t co n sid erin g th e p o te n tia l g ain s o r lo sses in cu rred u p o n th e retirem en t o f
each tu x ed o 1. In th is re p o rt, su ch calcu lated e q u iv alen t econom ic life is referred to as th e
unadjusted eq u iv alen t eco n o m ic life.
B u sin ess-u se p a sse n g er cars h ave u n iq u e ch arac te ristic s. U nlike m o st o th er b usiness
equ ip m en t, p asse n g er cars are ty p ic a lly sold b efo re th e end o f th e ir u sefu l life as veh icles.
M oreover, u n lik e a n u m b er o f o th e r b u sin ess assets fo r w h ich an estab lish ed resale m ark et ex ists,
u sed b u sin ess-u se p a sse n g er cars are n early alw ays a cq u ired fo r h o u seh o ld (o r n o n -business)
u se.2 T he an aly sis o f th e d ep reciatio n o f b u sin ess-u se p a ssen g er cars in th is re p o rt is thus
som ew hat d ifferen t fro m th e an aly sis u sed in p rio r O T A d ep reciatio n stu d ies. In th o se studies
th e an aly sis to o k in to acco u n t th e d eclin e in th e a sse t’s m ark et v alu e w ith age, th e p a tte rn o f
asset retirem en ts, and th e ta x con seq u en ces o f th e retire m e n ts. S uch analy sis, h ow ever, ignores
th e econom ic im p licatio n s o f th e re la tiv e ly in freq u e n t sales o f u sed assets. B y co n trast, an
adjusted eq u iv alen t eco n o m ic life fo r b u sin ess p a sse n g er cars w as d eriv ed in th is study th at
accounts n o t only fo r th e d eclin e in valu e o f th e cars w ith age, b u t also fo r th e ir co nversion from
b u sin ess to n o n -b u sin ess u se and th e tax g ains and lo sse s th a t arise from th e ir sale at d ifferen t
ages. H ow ever, b ecau se o f th e re la tiv e ly sh o rt p e rio d p asse n g er cars rem ain in b u sin ess use,
retirem en ts are ig n o red in calcu latin g th e ir a d ju sted eq u iv alen t econom ic life .
U n d er c u rren t la w , p a sse n g er cars u sed in a tra d e o r b u sin ess, in clu d in g tax icab s, h av e a
class life o f th re e y ears, re g a rd le ss o f w h eth er th ey are ow ned, leased , o r ren ted by th e ir b usiness
u sers. U nder S ectio n 1 6 8 (e)(3 )(B )(i) o f th e IR C , h o w ev er, p assen g er cars are assig n ed to the
fiv e-y ear p ro p erty re c o v ery class, reg ard less o f th e ir class life .
L ikew ise, u n d er S ection
168(g)(3)(D ), th e altern ativ e d ep reciatio n system reco v ery p e rio d fo r p a ssen g er cars is fiv e
y ears.
B. Principal Fin d i n g s
A d istin ctio n b etw een fle e t and n o n -flee t v eh icles is g en erally reco g n ized in th e industry,
w h ich is b rie fly d escrib ed in C h ap ter H. F leet v eh icles are d efin ed b y th e in d u stry as p assen g er
1 Treasury submitted a report to Congress in August 1989 on the depreciation o f rental clothing {Report to Congress
on the Depreciation o f Clothing Held for Rental). In March 1990, Treasury submitted separate reports to Congress on
the depreciation o f scientific instruments, fruit and nut trees, and horses {Report to Congress on the Depreciation of
Scientific Instruments; Report to Congress on the Depreciation o f Fruit and Nut Trees; Report to Congress on the
Depreciation o f Horses).
2 For this study, OTA accepts the industry assertion that nearly all sales o f business-use passenger cars are made directly
or indirectly to households.
-
2
-
cars h eld by th e ir b u sin ess ow ners in g roups o f 10 o r m ore. A ll o th e r b u sin ess-u se p assen g er
cars are d efin ed as n o n -flee t v e h ic le s. F leets m o stly include v eh icles ow ned by lo n g -term leasin g
firm s and d aily re n ta l firm s, b u t also in clu d e v eh icles ow ned d irectly b y th e ir b u sin ess u sers
(private fle e ts). N o n -fleet v eh icles in clu d e p assen g er cars ow ned by th e ir b u sin ess users as w ell
as cars leased by th e ir b u sin ess u sers from n o n -fleet lesso rs and re ta il d ealersh ip s.
T h e p rin c ip a l fin d in g s o f th is stu d y are th a t p assen g er cars u sed in b u sin ess fle e ts h av e
an ad ju sted eq u iv alen t eco n o m ic life o f 2.8 y ears, and th a t n o n -flee t b u sin ess-u se p assen g er
cars have an ad ju sted e q u iv alen t econom ic life o f 4.5 y ears.3 W eig h tin g th e p resen t v alu es
u n d erly in g th e tw o liv es by each se c to r’s share o f tax -d ep reciab le in v estm en t in p assen g er cars
y ields an average ad ju sted eq u iv alen t econom ic life ran g in g fro m 3.5 years to 3.8 y ears,
depending o n th e re la tiv e w eig h t g iv en to n o n -fleet le ase d v eh icles. T h is w eig h tin g issu e is
d iscu ssed in m ore d etail in C h ap ter V .
W hile th e estim ated eq u iv alen t econom ic liv es are sig n ifican tly d ifferen t fo r fle e t and
n o n -fleet p assen g er cars, O T A does n o t recom m end estab lish in g sep arate asset classes fo r
b u sin ess-u se p asse n g er cars u n d e r th e M o d ified A ccelerated C o st R eco v ery S ystem (M A C R S).
A s d iscu ssed in C h ap ter V , th e d ifferen ce in econom ic liv e s fo r fle e t and n o n -flee t v eh icles is
ex p lain ed m o stly by d ifferen ces in m iles tra v e lle d durin g th e first tw o y ears o f service. W hile
m ileage and o th e r u se-relate d ch arac te ristic s are clo sely co rrelated w ith fle e t/n o n -flee t statu s,
such status does n o t by its e lf d eterm in e a v e h ic le ’s in ten sity o f u se. M o reo v er, any d istin ctio n
b ased on ow n ersh ip w o u ld p o se d iffic u lt ad m in istrativ e p ro b lem s o f d e fin itio n and enforcem en t.
A s n o ted in C h ap ter V I, b ased on th e above fin d in g s T reasu ry recom m ends th a t th e class
life fo r M A C R S asset class 0 0 .2 2 (A u to m o b iles, T axis) b e chan g ed fro m 3 y ears to 3.5 y ears.
3 Passenger cars are defined as four-wheeled vehicles manufactured or sold primarily for use on public streets, roads,
and highways, and rated at 6,000 pounds unloaded vehicle weight or less. Limousines and taxi cabs are included
without regard to w eight Multipurpose vehicles, sport utility vehicles, and passenger vans are not included in this
report
-3-
C h a p t e r II. I n d u s t r y B a c k g r o u n d
W h ile sales o f p a sse n g er cars to h o u seh o ld s are an im p o rtan t p a rt o f th e n a tio n a l econom y,
sales to b u sin esses are also sig n ifican t. A cco rd in g to th e B ureau o f E co n o m ic A n a ly sis (B E A ),
busin ess sp en t $50 b illio n in 1989 on new p a sse n g er cars, accounting fo r o n e-th ird o f to ta l
dom estic p a sse n g er c a r sales and about 1 2 p ercen t o f to ta l b u sin ess in v estm en t in new eq u ip m en t.
A s n o ted , fo r th is study b u sin ess-u se p a sse n g er cars have b een c lassifie d in to tw o m a jo r
categ o ries: fle e t cars and n o n -flee t cars. A cco rd in g to in d u stry c la ssific atio n , fle e ts co n sist o f
cars ow ned by firm s w ith 10 o r m o re cars. A ll o th e r b u sin ess-u se cars are d efin ed fo r th is study
as n o n -flee t cars. T h e m ajo rity o f fle e t cars are ow ned by lo n g -term (30 days o r m o re) le asin g
firm s and sh o rt-term (less th an 30 days) re n ta l firm s, w ith a sm all p o rtio n ow ned d ire c tly by
th e ir b u sin ess u sers (p riv ate fleets). N o n -fleet cars are m o stly ow ned by sm all and m ed iu m -sized
busin ess firm s in a w id e v ariety o f in d u stries, in clu d in g sm all le sso rs. T h ese d istin ctio n s by
ty p e o f ow n ersh ip are o f in te re st due to th e d ifferen ces o b serv ed in resale p ric e s and h o ld in g
p erio d s. T ab le 1 show s 1989 in v estm en t in p a sse n g er cars by e a c h in d u stry secto r.
T a b le 1 .—In v e s tm e n t in B u sin e ss-U se
P a s se n g e r C a rs b y In d u s tr y S e c to r, 1989
(U n its in T h o u s a n d s, D o lla rs in B illio n s)
P e rc e n ta g e
D is trib u tio n
I n d u s try
N um ber of
A c q u isitio n
S e c to r
V eh icles
C o st
N um ber
C o st
1,953
25.0
56.3
4 9 .9
Fleet
L ease
894
25.8
R en tal
907
2 6 .2
P riv ate
152
4 .4
Non-fleet
1,514
25.1
43.7
50.1
Total
3,467
50.1
100.0
100.0
Sources: B u reau o f E conom ic A n aly sis, Automotive Fleet F act Book. A c q u isitio n c o st by
secto r estim ate d b y O T A .
-5-
T h e co m p o sitio n o f p assen g er cars acq u ired fo r b u sin ess p u rp o ses d iffers som ew hat from
those acq u ired fo r n o n -b u sin ess p u rp o ses. T ab le 2 com pares th e d istrib u tio n by size class o f
all p assen g er cars so ld in m odel y e ar 1989 w ith th a t fo r b u sin ess fle e ts.4 B usiness fleets are
m ore h eav ily c o n cen trated in co m p act and in term ed iate m odels, w ith lease and p riv a te fleets
esp ecially h eav ily co n cen trated in in term ed iate-sized m odels. T he re su lts p resen ted in th is
study, th o u g h , are fo r th e d ep reciatio n o f b u sin ess-u se v eh icles only. B ecause th e d ep reciatio n
p a tte rn v aries by size class, and becau se th e d istrib u tio n b y size class d iffers betw een veh icles
acq u ired fo r h o u seh o ld use and b u sin ess u se, th e re su lts show n in th is re p o rt fo r bu sin ess-u se
cars can n o t be g en eralized to all p assen g er cars.
Table 2.--Distribution of Passenger Car Sales,
Model Year 1989
(Number of Cars in Thousands)
Size
All Passenger
Cars
Business-Fleet
Passenger Cars
Class
Number
Percent
Number
Percent
Domestic plus selected
imports
8,409.5
81.5
1,922.5
92.6
S ubcom pact
2,264.7
21.9
334.1
16.1
C om pact
2 ,110.9
20.5
544.2
26.2
In term ed iate
2,428.8
23.5
676.7
32.6
S tan d ard
832.7
8.1
178.9
8.6
L uxury
772.4
7.5
188.6
9.1
Other imports
1,908.5
18.5
154.3
7 .4
Total
10,318.0
100.0
2,076.8
100.0
S ource:
Automotive Fleet Fact Book, p . 22.
4 The classification o f cars in this table differs from that used elsewhere in this report Automotive Fleet Fact Book
includes government fleet cars, and classifies only selected imports in the specific size class categories. While
adjustments to fleet data were generally made in this report to exclude government cars and to include all imports in
a single category ("foreign"), such adjustments were not made in Table 2 for comparability with the available data for
"All Passenger Cars".
-
6
-
C h a p t e r I Q . D a t a Collection a n d M e t h o d o l o g y
A . Public m e e t i n g s
P u b lic m eetin g s w ere h eld at th e T reasu ry D epartm ent in Jan u ary and M arch o f 1990 to
d eterm in e th e scope o f th e stu d y , d iscu ss th e study d esig n and g en eral m eth o d o lo g y , and d escrib e
the k in d o f d a ta n eed ed fo r th e study. T h e first p u b lic m eetin g w as ann o u n ced in th e F ed eral
R eg ister on D ecem b er 21, 1989, and in v itatio n s w ere ex ten d ed to each o f th e m ajo r tra d e
asso ciatio n s rep resen tin g d ifferen t sectors o f th e b u sin ess-u se c ar and lig h t tru c k in d u stry .
In v itatio n s w ere also sen t to ex ecu tiv es o f th e la rg e st le asin g and re n ta l firm s in th e U n ited
S tates.
A t th e se m eetin g s, it w as d eterm in ed th a t th e scope o f th e study should in clu d e all
autom obiles and lig h t/m ed iu m d u ty tru ck s d esig n ed fo r u se o v er-th e-ro ad and u sed in a tra d e
o r b u sin ess. T his coverage w as g en erally u n d ersto o d by T reasu ry and in d u stry p a rtic ip a n ts to
in clu d e b o th fle e t and n o n -flee t v e h icles, and v eh icles th a t are le a se d o r ow ned by th e ir u sers.
A lth o u g h no attem p t w as m ade to d efin e "light" o r "m edium -duty" tru c k s, d a ta c o lle ctio n fo r
tru ck s w as lim ited to those w ith a g ro ss v eh icle w e ig h t o f 3 3,000 lb s. o r le ss. T h is d e cisio n
e ffectiv ely elim in ated larg e tra c to r-tra ile r tra c k s fro m th e sco p e o f th e stu d y , and it p reserv ed
fle x ib ility in u ltim ately d efin in g lig h t and m edium duty tra c k s fo r c lassific a tio n p u rp o ses.
U nlike m any o f th e p rev io u s d e p reciatio n stu d ies co n d u cted by O T A , n o survey o f th e
in d u stry w as co n d u cted o r p ro p o sed . In stead , d ata w ere so lic ited d ire c tly fro m a lim ite d n u m b er
o f ow ners o f b u sin ess-u se v eh icles b ased on v eh icle sp ecificatio n s th a t w ere p ro p o sed and
developed at th e p u b lic m eetin g s. T h is d a ta-co llec tio n p ro ced u re w as ad o p ted b ecau se o f th e
rela tiv e ly sh o rt tim e fram e g ran ted by th e C ongress fo r co m p letio n o f th is stu d y , and becau se
o f th e a v ailab ility o f m ach in e-read ab le d ata fro m sev eral o f th e firm s th a t ag reed to p a rtic ip a te
in th e study.
B. Description of the D a t a
F irm s p a rtic ip a tin g in th e study w ere asked to p ro v id e O T A w ith d e tailed d a ta on
ch aracteristics o f cars and lig h t tra c k s e ith e r d isp o sed o f d u rin g th e la st few y ears o r in th e ir
fle e t in v en to ry a t th e tim e th e d ata w ere p ro v id ed . E ach o b serv atio n in each d a ta set w as to
in clu d e, at a m inim um , th e v e h ic le ’s V eh icle Id e n tifica tio n N um ber, o rig in al a cq u isitio n c o st,
-7-
th e m o n th and y e ar o f acq u isitio n , th e sale p ric e (n et o f refu rb ish in g c o sts), and th e m onth and
y e ar o f d isp o sitio n . Som e d a ta sets also in clu d ed th e ty p e o f d isp o sitio n and th e m ileage o f th e
cars at d isp o sitio n . A ll o f th e d ata w ere re c eiv e d by O T A fro m M ay th ro u g h A u g u st o f 1990.
D ata fo r fle e t p assen g er cars w ere receiv ed fro m fo u r m a jo r n atio n al leasin g firm s and
th ree la rg e p riv a te fle e t ow ners5. D ata fo r n o n -flee t v eh icle d isp o sitio n s and m ileage w ere
o b tain ed fro m a sam ple o f b u sin ess ta x retu rn s p re p a red b y th e S ta tistic s o f Incom e D iv isio n o f
th e In te rn a l R ev en u e S ervice. D esp ite rep eated req u ests to th e m a jo r re n ta l c ar tra d e associations
and o th e r in d u stry rep resen tativ es, O T A w as u n ab le to o b tain p asse n g er car d ata from th e daily
re n ta l sec to r o f th e ind u stry .
A lth o u g h th e daily re n ta l sec to r accounts fo r n e arly o n e -h a lf o f fle e t p assen g er car
p u rch ases, n o t all o f th is in v estm en t is c ap italiz e d and d ep reciated fo r tax p u rp o ses, since m any
o f th e v eh icles are sold w ith in th e sam e tax y e a r th ey are acq u ired . T h is h o ld in g p erio d has
d e clin ed in re c en t y ears, as b o th dom estic and fo reig n auto m an u factu rers (som e o f w hom h o ld
la rg e eq u ity stak es in daily re n ta l firm s) h av e in creased th e ir sales to such firm s by agreeing to
re-p u rch ase th e cars at g u aran teed p ric e s a fte r ju s t sev eral m onths o f u se. T hese cars are th en
ty p ic a lly sold by th e m an u factu rers to th e ir re ta il d ealersh ip s and are in tu rn sold by such
estab lish m en ts to h o u seh o ld s as "nearly new " u sed cars.
P assen g er c ar d ata fro m th re e o f th e leasin g firm s and tw o o f th e p riv a te fle e t firm s w ere
an aly zed in d e tail.6 A lth o u g h O T A h ad req u ested d a ta on d isp o sitio n s fo r th e p erio d 1983
th ro u g h 1989, o nly one o f th e le asin g firm s w as able to p ro v id e a sig n ifican t n u m b er o f
d isp o sitio n s p rio r to 1985. T h u s, th e g reat m ajo rity o f th e d isp o sitio n s re p re se n t sales, w recks,
and o th e r d isp o sitio n s d u ring th e y ears 1985 th ro u g h 1989.
C. Structuring the D a t a
S in ce d e p reciatio n o f p a ssen g er cars is lik e ly to v ary by m odel and class, and since the
co m p o sitio n o f p a ssen g er car fle e ts v aries o v er tim e , p assen g er cars w ere classifie d by
m a n u fa ctu rer’s m odel w h en ev er p o ssib le .
A m a n u fa ctu rer’s m o d el is d efin ed as a set o f
5 The American Automotive Leasing Association (AALA) and the National Association o f Fleet Administrators
(NAFA) assisted in this study by coordinating the collection o f data from their participating member firms.
6 Data provided by one o f the leasing firms and one o f the private fleet firms were not analyzed because the data were
incomplete. However, due to the relatively large sample o f com plete data, these firms were inot asked to ^subm it then
information The five data sets that were analyzed provided m total useable observations for 773,000 passenger cars,
w ith 469,000 dispositions and 304,000 cars in inventory. The vast majority o f the observations (97 percent) were
provided by the three leasing firms.
-
8
-
p assen g er cars w ith th e sam e b a sic d esig n featu res o v er a n u m b er o f d ifferen t m o d el y ears, and
in cludes all p a sse n g er c a r o b serv atio n s w ith th o se featu res fro m all re le v an t m odel y ears. B y
cons tra c tio n , it in clu d es cars th a t m ay d iffe r in ch arac te ristic s su ch as body ty p e , en g in e ty p e,
and o p tio n al eq u ip m en t.7
F o r th e fle e t a n aly sis, 35 sp ecific d om estic m odels and 11 fo reig n n am ep lates w ere
id e n tifie d th a t re p re se n t all m a jo r m an u factu rers (b o th do m estic and fo reig n ) and six d ifferen t
classes. M o d els w ere ch o sen fo r study o n ly w hen th ere w ere a su fficien tly la rg e n u m b er o f
v eh icle d isp o sitio n s sp read o v e r several y ears. C o n seq u en tly , little o r no w eig h t w as g iv en in
th e o v erall re su lts to m o d els d isco n tin u ed early in th e sam ple p e rio d o r in tro d u ced la te in th e
sam ple p erio d .
S in ce m any o f th e sam e m odels o ccu rred in m o re th a n one d ata set, a to ta l o f 145
m o d el-d ata sets w ere sep arately analyzed. (S ee A p p en d ix B fo r a listin g o f th e m o d els stu d ied
and th e n u m b er o f d isp o sitio n s observed fo r e ach class.) L ease fle e ts in clu d ed a m uch w id er
v ariety o f m o d els th a n p riv a te fle e ts. T he m odels an d n am ep lates liste d in A ppendix B acco u n t
fo r 392,121 p asse n g er c ar d isp o sitio n s, o r ab o u t 84 p e rc e n t o f th e to ta l u seab le p assen g er c ar
o b serv atio n s in th e sam ple. N o n -flee t v eh icles co u ld n o t b e stra tifie d b y m ake, m o d el, o r size
class due to th e re la tiv e ly sm all n u m b er o f o b serv atio n s fo r th is secto r.
B o th th e u n ad ju sted and a d ju sted eq u iv alen t eco n o m ic liv e s w ere d eriv ed (as d escrib ed
below in S ectio n D ) fo r each m o d el ch o sen fo r stu d y in each d a ta set. D ata fro m m odel y ears
1985 and 1986 w ere an aly zed sep arately in o b tain in g th e a d ju sted e q u iv alen t econom ic liv es
fo r fle e t v e h icles.8 M o d els w ere th en gro u p ed in to one o f six size c lasses, as d efin ed by
Automotive F leet F act Book. A w eig h ted average eq u iv alen t eco n o m ic life w as d eriv ed fo r
each c lass in each d a ta set, w ith w eig h ts eq u al to th e firm ’s m o d el y e ar 1989 in v estm en t in th a t
m odel.9 T h ese re su lts w ere th a n aggregated o v er firm s (d a ta sets) to o b ta in e q u iv alen t econom ic
liv es fo r e ac h class.
7 Models were identified consistently across data sets and over tim e using the standard 17 digit V ehicle Identification
Number (VIN) assigned by the manufacturer. For example, the "Ford Taurus" m odel includes all observations with a
VIN car line/series code indicating Ford Taurus for m odel years 1986 through 1990, including four-door sedans and
station wagons. Due to sm aller sample sizes, foreign cars were generally analyzed at the broader "nameplate" level,
which refers to all o f the m odels produced by one production division o f a manufacturer.
8 A model year is defined as a manufacturer’s annual production period that includes January 1 o f the year referenced.
A model year typically begins in September or October, but can start earlier.
9 In deriving the weighted average, the estim ated equivalent econom ic lives for each m odel were converted to present
values, and these were weighted by each m odel’s share o f investment. The weighted average present value was then
converted into an average equivalent econom ic life. This weighting procedure was follow ed at each level o f aggregation.
-9-
F in ally , eq u iv alen t econom ic liv es fo r each class w ere w eig h ted by th e o bserv ed fle e t
share o f 1989 in v estm en t in th e class to o b tain a single eq u iv alen t econom ic life fo r fleets. T he
n o n -flee t sam ple w as to o sm all (121 new p a ssen g er car d isp o sitio n s) to stra tify by m odel, m odel
y e ar, o r class.
C o n seq u en tly , a sin g le e q u iv alen t econom ic life fo r n o n -flee t veh icles w as
estim ated o v er a ll m o d els and m o d el years.
D. Methodology
A s su g g ested in th e General Explanation o f the Tax Reform A ct o f 1986, th e class life o f
an asset is to b e d eterm in ed fro m th e d eclin e in its v alu e w ith age. T h is life (w hich fo r clarity
has been re fe rre d to as th e a sse t’s eq u iv alen t econom ic life ) can b e e ith e r lo n g e r o r sh o rter th an
its u sefu l life (i.e ., th e p e rio d o v er w h ich th e asset p ro v id es serv ice), d epending up o n w h eth er
th e p a tte rn o f its d eclin e in v alu e w ith age (its "age-price p ro file") is m o re o r le ss ra p id th an
straig h t-lin e d ep reciatio n .
A n asset th a t declines in v alu e le ss rap id ly th a n straig h t-lin e
d ep reciatio n h as a lo n g e r econom ic life , and an asset th a t declin es m ore ra p id ly in v alu e th an
straig h t-lin e d ep re cia tio n h as a sh o rte r econom ic life , th a n th e a sse t’s u sefu l life . (F or a m ore
com plete d iscu ssio n see H u lten and W y k o ff [1981].)
F o r e ac h m o d el ch o sen fo r study in each d ata set, b o th an u n ad ju sted eq u iv alen t econom ic
life and an eco n o m ic life a d ju sted fo r sales w ere d eriv ed . T h e u n ad ju sted eq u iv alen t econom ic
life w as o b tain ed by eq u atin g th e p re se n t v alu e o f econom ic d ep reciatio n (i.e ., th e d eclin e in
v alu e o f th e asset) w ith th e p re sen t v alu e o f stra ig h t lin e d e p reciatio n , b o th d isco u n ted at a fo u r
p e rc en t re a l ra te . T h e stra ig h t lin e d ep reciatio n is calcu lated o v er a reco v ery p e rio d eq u al to
th e u n ad ju sted eco n o m ic life . In calcu latin g th e u n ad ju sted eq u iv alen t econom ic life , th e tax
im p licatio n s o f th e actu al sales (fro m w h ich th e ag e-p rice p ro file is ob tain ed ) are ig n o red . In
p a rtic u la r, b o th stra ig h t lin e d ep reciatio n and econom ic d ep reciatio n are c o n sid ered o v er the
e n tire u sefu l life o f th e v e h ic le s.10 (S ee A ppendix C fo r a m o re d etailed d escrip tio n o f the
an aly sis.)
T h e d eclin e in v alu e is o b tain ed fro m an estim ated ag e-p rice p ro file , w h ich rep resen ts the
average in flatio n -ad ju ste d v alu e o f th e m odel (relativ e to its average in itia l acq u isitio n co st) at
each age. In c o n tra st to th e B ox-C ox p ro ced u re u sed by H u lten and W y k o ff (1981) and W y k o ff
(1989), in th is study th e ag e-p rice p ro file fo r each m odel w as d eterm in ed statistic a lly by fittin g
10 The unadjusted equivalent econom ic life is obtained numerically using a computer program that chooses a test
solution for that life, uses this solution to calculate the present value o f straight line depredation, and then determines
a new solution based on the resulting difference in present values. This process continues until the present value of
depredation over the straight line life equals the present value o f econom ic depredation with a very sm all tolerance.
-
10
-
a fifth -o rd e r p o ly n o m ial o f v eh icle age (in m o n th s) to in flatio n -ad ju ste d re la tiv e resale p ric e s.
A ll n o rm al sales o v er th e en tire sam ple p e rio d fo r th e m odel w ere u sed to determ in e th e
p aram eters o f th e reg ressio n e q u atio n .11
It w as im p o rtan t to estim ate th e d eclin e in v alu e o f a m o d el fro m fa irly co m p lete d a ta th a t
in clu d e, at a m inim um , th e first tw o y ears o f e ac h m o d e l’s life . In g en eral, on ly m odel y ears
1985 and 1986 m et th ese co n d itio n s. S in ce d a ta fo r d isp o sitio n s p rio r to 1985 w ere g en erally
n o t p ro v id e d by th e in d u stry , a larg e p ercen tag e o f first-y e a r and seco n d -y ear sales fo r m odel
y ears p rio r to 1985 w ere m issin g . C o n v ersely , re la tiv e ly few cars in m odel y e a r fleets from
1987 th ro u g h 1989 h ad been disp o sed o f by la te 1989 o r early 1990.
W hereas th e u n ad ju sted eq u iv alen t econom ic life is o b tain ed by eq u atin g th e p re sen t
v alu es o f straig h t-lin e and econom ic d ep reciatio n o v er th e e n tire u sefu l life o f th e p a ssen g er
cars, th e ad ju sted eq u iv alen t econom ic life is o b tain ed b y eq u atin g th e p re se n t v alu es o f
stra ig h t-lin e and econom ic d ep reciatio n o nly o v er th e p e rio d th e p a sse n g er cars rem ain in
b u sin ess u se. In ad dition, th e ad ju sted eq u iv alen t eco n o m ic life also ta k es in to acco u n t th e
p re se n t v alu e o f th e lo ss (o r gain) in c u rre d u p o n th e tra n sfe r o f th e p a sse n g er cars fro m b u sin ess
to n o n -b u sin ess use. T hus, in co n tra st to th e u n a d ju sted e q u iv alen t eco n o m ic life , th e tax
im p licatio n s o f sales o f veh icles (w h ich re su lt in th e ir tra n sfe r to n o n -b u sin ess u se) are tak en
in to account.
T h e stra ig h t lin e d ep reciatio n is calc u la te d o v er a p e rio d eq u al to th e a d ju sted eq u iv alen t
eco n o m ic life , and b o th straig h t-lin e and eco n o m ic d e p reciatio n are c o n sid ered o n ly up to th e
d ate o f sale. G ains and lo sses are com puted as th e d ifferen ce b etw een th e stra ig h t-lin e ad ju sted
b a sis and th e actual valu e at th e tim e o f sale. B ecau se m o st o f th e v eh icles are so ld w ell b efo re
th e en d o f th e ir u sefu l life and ex p erien ce a p re se n t v alu e o f eco n o m ic d ep reciatio n o v er th e ir
re te n tio n p e rio d th at exceeds th e p re sen t v alu e o f th e (h y p o th etical) stra ig h t-lin e d ep reciatio n
(in clu d in g th e g ain o r lo ss on d isp o sitio n ), th e ad ju sted eq u iv alen t eco n o m ic life is le ss th an th e
u n ad ju sted e q u iv alen t econom ic life.
F ig u re 1 illu stra te s th e relatio n sh ip b etw een th e a g e-p rice p ro file and v a rio u s stra ig h t-lin e
d ep reciatio n schedules: th e c u rren t law altern ativ e d e p reciatio n sy stem (A D S ), th e u n ad ju sted
stra ig h t-lin e eq u iv alen t econom ic life , and th e ad ju sted stra ig h t-lin e eq u iv alen t eco n o m ic life ,
11 A ckerlof (1970) suggested that because buyers o f used passenger cars have imperfect information regarding the
quality o f the car purchased, only ’lem ons" are sold. Although this point may have some relevance for household-use
vehicles, it would appear to be less important for business-use cars, m ost o f which are sold after a relatively short period
-
11-
Figure 1: Relationship Between Age-Price Profile
and Various Straight-Line Depreciation Schedules
Alternative
Depreciation System
Straight-Line
Equivalent (unadj.)
Straight-Line
Equivalent (adj.)
Age-Price
Profile
Age in Years
fo r a single rep re se n ta tiv e d om estic com pact m odel. T h e ag e-p rice p ro file (so lid lin e ) drops
ra p id ly o v er th e m o d e l’s first y e ar o f serv ice, and th e n at su ccessiv ely slo w er ra te s o v er ages
tw o , th re e , and fo u r, b efo re tu rn in g dow n sh aip ly after age fo u r.12 T h e ad ju sted b a sis as calculated
u n d er A D S (lo n g -d ash ed lin e in F ig u re 1) reach es zero a fte r fiv e y ears fo r all p asse n g er cars.
(F o r co n v en ien ce, th e ap p licab le h a lf-y e a r co n v en tio n is ig n o red .)
F o r th is m o d el, th e ad ju sted b asis u sin g th e u n ad ju sted stra ig h t-lin e eq u iv alen t schedule
(sh o rt-d ash ed lin e ) reach es zero at 3.8 y ears. A s d iscu ssed b elo w , w hen th is m o d e l’s observed
p a tte rn o f d isp o sitio n s is ta k en in to acco u n t (and th e re su ltin g g ains and lo sses in clu d ed in the
an aly sis), th e a d ju sted b a sis u n d er th e adjusted stra ig h t-lin e e q u iv alen t schedule (d o tted lin e in
F igure 1) reach es zero a fte r 2 .9 y ears.
R ep resen tativ es o f th e le ase secto r o f th e in d u stry h av e argued th a t th e c u rren t law
altern ativ e d e p reciatio n sy stem (w hich en ters th e a d ju sted c u rre n t earn in g s com ponent for
co rp o rate tax p ay ers su b ject to th e altern ativ e m inim um tax ) is to o slow , esp ecially w hen the
12 The estimated age-price profile is determined by fitting a fifth-order polynom ial through the actual relative price
observations. Although the polynom ial crosses the x axis at an age o f about 5 years, there are no observations for cars
older than 4.5 years.
-
12-
re la tiv e ly sh o rt re te n tio n p e rio d o f p asse n g er cars c h a rac te ristic o f th e ir in d u stry is re c o g n ize d .13
T hus, if a car from th e m odel show n in F ig u re 1 w ere so ld at age tw o by a tax p ay er usin g A D S ,
th e ta x p a y e r’s ad ju sted b asis in th e c a r a t th a t age w o u ld be ab o u t 60 p erc en t o f th e c a r’s o rig in al
co st (p o in t B in F igure 1), w hereas its sales p ric e , as re fle c te d in th e ag e-p rice p ro file, w o uld
be ab o u t 37 p ercen t o f its o rig in al co st.
W hile su ch tax p ay ers w ould be ab le to claim a ta x lo s s , th e p re sen t v alu e o f th e d ep reciatio n
d ed u ctio n s (rep resen ted b y th e p a th A B in F ig u re 1) p lu s th e p re se n t v alu e o f th e lo ss (rep resen ted
by th e d istan ce B D ), w o u ld b e m uch le ss th a n th e p re se n t v alu e o f econom ic d ep reciatio n
(rep resen ted b y th e p a th A D ). I f th e cars rem ain ed in b u sin ess use a fte r th e ir d isp o sitio n , th is
d eficien cy o v er th e first tw o y ears w o u ld n o t b e p a rtic u la rly re le v an t, since th e p resen t valu e
o f th e d ep reciatio n d eductions and d isp o sitio n g ain s and lo sse s w o u ld be co n sid ered o v er th e
e n tire u sefu l life o f th e car, reg ard less o f o w n ersh ip ch an g es. H o w ev er, in d u stry rep resen tativ es
claim th a t no m o re th an fiv e p e rc en t o f th e b u sin ess-u se cars so ld are p u rc h a se d by o th e r b u sin ess
u se rs. In accep tin g th is statem en t d escrib in g a u n iq u e asp e c t o f th e re sa le m ark et fo r b u sin ess-u se
v e h icles, O T A also accepts th e c o rresp o n d in g im p lic a tio n th a t th e p re se n t v alu es should b e
eq u ated only o v er th e m ore lim ited p e rio d d u rin g w h ich p a sse n g e r cars are u sed fo r b u sin ess
p u rp o ses.
E ven if tax p ay ers w ere allow ed to d ep reciate th e cars alo n g th e u n ad ju sted straig h t-lin e
eq u iv alen t schedule (sh o rt-d ash ed lin e ), th e p re se n t v a lu e o f th e d e p reciatio n d eductions
(rep resen ted b y th e p a th A C ) p lu s th e p re se n t v alu e o f th e lo ss in c u rre d a t d isp o sitio n (rep resen ted
by th e d istan ce C D ) w o u ld still b e le ss th a n th e p re se n t v a lu e o f eco n o m ic d ep reciatio n to th e
tim e o f d isp o sitio n . T h is is n o t su rp risin g . B y c o n stru ctio n , th e p re se n t v alu es o f d e p reciatio n
u n d er th e u n ad ju sted eq u iv alen t stra ig h t-lin e sch ed u le and th a t o f eco n o m ic d e p reciatio n are
eq u al o nly w hen th e asset is h e ld u n til th e end o f its u sefu l life . A d isp arity w ill alw ays arise
if th e asset is ty p ically co n v erted to n o n -b u sin ess use p rio r to th a t age.
T h e ad ju sted eq u iv alen t stra ig h t-lin e sch ed u le is d esig n ed to re fle c t b o th th e d isp o sitio n
o f th e cars p rio r to th e en d o f th e ir u sefu l life and th e g ains and lo sse s in c u rre d u p o n d isp o sitio n .
I f tax p ay ers d ep reciated th e ir cars along th is schedule (rep resen ted b y th e p a th A E ), th e n a g ain
(rath e r th a n a lo ss) w o u ld o ccu r w hen th e car is so ld a t age tw o (rep resen ted by th e d istan ce E D
in F ig u re 1). T h e ad ju sted straig h t-lin e eq u iv alen t sch ed u le re fle c ts th e e n tire o b serv ed p a tte rn
o f d isp o sitio n s, and n o t ju s t th o se d isp o sitio n s at age tw o . T h u s, ev en if th e ta x p a y e r w ere to
13 See, for exam ple, Pies and Fischer (1990).
-13-
use th is sch ed u le, a d isp arity in p re se n t valu es w ould g en erally arise. T h e p re sen t valu es o v er
th e p e rio d o f th e c a rs’ b u sin ess u se w ill b e eq u al only on average fo r all tax p ay ers w ho ow n
th is p a rtic u la r m odel o f p a sse n g er car.
-14-
C h a p t e r IV. Results of the Analysis
T his c h ap te r p re sen ts th e re su lts o f ap p ly in g th e m eth o d o lo g y d escrib ed above in C h ap ter
ILL F o r illu stra tio n , fo u r sp ecific m odels (rep resen tativ e com pact, in term ed iate, standard, and
fo reig n m o d els) are d iscu ssed . T h e ag g reg ate re su lts fo r fle e t and n o n -flee t p assen g er cars are
th e n p resen ted . In F ig u re 2, th e ag e-p rice p ro file fo r th e re p re se n ta tiv e com pact m odel (m odel
y e ar 1986) ow ned b y le ase firm A is ag ain show n, to g e th e r w ith th e u n ad ju sted and ad ju sted
straig h t-lin e e q u iv alen t schedules. A lso show n is th e o b serv ed d isp o sitio n p ro b a b ility cu rv e
(lo n g -d ash ed lin e in F ig u re 2). L ease firm A on av erag e h o ld s th is m odel 2.8 y ears, and no cars
o f th is m odel are h e ld b y th is firm bey o n d 4 .5 y ears.
Figure 2: Representative Com pact Model
Age-Price Profile, Straight-Line Equivalent
Schedules, and the Disposition Probability
Age-Price Profile
Straight-Line
Equivalent (unadj.)
Straight-Line
Equivalent (adj.)
Disposition
Probability
Age in Years
F ig u res 3 th ro u g h 5 show th e ag e-p rice p ro file , u n ad ju sted and a d ju sted stra ig h t-lin e
eq u iv alen t sch ed u les, and d isp o sitio n p ro b a b ility cu rv e fo rre p re se n ta tiv e in term ed iate, stan d ard ,
and fo reig n m o d els, re sp ec tiv e ly , th a t w ere am ong th e 46 m o d els stu d ied fo r th is re p o rt. T he
in term ed iate m o d el (m odel y e a r 1986) is ow ned by lease firm B , th e stan d ard m o d el (m odel
y e ar 1986) is ow ned b y le ase firm C , and th e fo reig n m odel (m odel y e a r 1985) is also ow ned
by le ase firm B .
-15-
W hile th e shapes o f th e ag e-p rice p ro files fo r th e rep re se n ta tiv e com pact m odel (F igure
2) and th e rep re se n ta tiv e in term ed iate m odel (F ig u re 3) are sim ila r o v er th e first th ree y ears,
th e curve fo r th e in term ed iate m o d el declin es m o re ra p id ly a fte r age th re e , resu ltin g in a sh o rter
u n ad ju sted eq u iv alen t eco n o m ic life fo r th a t m odel. W h ile th e a d ju sted eq u iv alen t econom ic
life fo r th e in term ed iate m o d el is also sh o rter, th e d ifferen ce in ad ju sted e q u iv alen t econom ic
liv es b etw een th e tw o m o d els is n o t v ery sig n ifican t. T h is is th e re su lt o f a som ew hat w id er
ran g e o f h o ld in g p e rio d s fo r th e co m p act m odel, w hich re su lts in re la tiv e ly m o re d ispositions
in la te r y ears a t a g ain th a n fo r th e in term ed iate m odel.
Figure 3: Representative Intermediate Model
Age-Price Profile, Straight-Line Equivalent
Schedules, and the Disposition Probability
Age-Price Profile
Straight-Line
Equivalent (unadj.)
Straight-Line
Equivalent (adj.)
Disposition
Probability
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Age in Years
F o r th e rep re se n ta tiv e stan d ard m odel (F igure 4 ) and th e rep re se n ta tiv e fo reig n m odel
(F igure 5), th e ag e-p rice p ro file s d eclin e le ss ra p id ly in th e early y ears, re su ltin g in longer
u n ad ju sted eq u iv alen t eco n o m ic liv e s th a n fo r th e com pact and in term ed iate m odels.
T he
ad ju sted eq u iv alen t eco n o m ic life fo r th e rep resen tativ e fo reig n m o d el (3.6 y ears) is lo n g e r than
14 The slight upturn in the age-price profile at 4.5 years for the representative foreign m odel in Figure 5 is a result of
sparse
on dispositions after age 4. The fitted curve turns down after age 5 and reaches zero at 5.7 years o f age.
-16-
fo r any o f th e rep re se n ta tiv e d o m estic m o d els. T his is due n o t on ly to a h ig h e r u n ad ju sted
e q u iv alen t eco n o m ic life (4.7 y ears), b u t a lso a lo n g e r average h o ld in g p e rio d (3.1 y ears) re la tiv e
to th e re p re se n ta tiv e dom estic m odels.
Figure 4: Representative Standard Model
Age-Price Profile, Straight-Line Equivalent
Schedules, and the Disposition Probability
Age-Price Profile
Straight-Line
Equivalent (unadj.)
Straight-Line
Equivalent (adj.)
Disposition
Probability
T ab le 3 sum m arizes th e e stim ate d ad ju sted and u n ad ju sted eq u iv alen t econom ic liv e s by
class fo r fle e t p a sse n g er cars. A s d escrib ed above, th e liv e s show n fo r each categ o ry rep resen t
th e w e ig h ted average o f th e liv e s fo r each m o d el stu d ied , as n o ted in A ppendix B . T h e o v erall
life fo r p riv a te fle e ts (o v er all m o d els) is n early th e sam e as th a t fo r lease fleets. T he fle e t
estim ates p re sen te d in T ab le 3 com bine th e re su lts fo r b o th fle e t ty p es. T his sim ilarity in o v erall
liv es is n o t su rp risin g , sin ce in d u stry rep re se n ta tiv e s claim th a t p riv a te fle e ts are m an ag ed m uch
th e sam e w ay as le ase fle e ts, and th a t p riv a te n o n -leasin g firm s w ill sw itch b etw een le asin g and
-17-
Figure 5: Representative Foreign Model
Age-Price Profile, Straight-Line Equivalent
Schedules, and the Disposition Probability
Age-Price Profile
Straight-Line
Equivalent (unadj.)
Straight-Line
Equivalent (adj.)
Disposition
Probability
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Age in Years
b u y in g fro n i y e ar to y e ar depending on m ark et and firm co n d itio n s. T h e o v erall u n ad ju sted
eq u iv alen t econom ic life o f 3.7 y ears fo r fle e t p assen g er cars fo u n d in th is study is som ew hat
shorter th an th e re su lts re p o rte d by W y k o ff (1989) reg ard in g b u sin ess-leased p assen g er cars.
F ig u re 6 p re sen ts th e ag e-p rice p ro file , u n ad ju sted and ad ju sted straig h t-lin e schedules,
and d isp o sitio n p ro b a b ility cu rv e fo r th e en tire sam ple o f n o n -fle e t p assen g er cars. I t is clear
th a t th e ag e-p rice p ro file fo r th e n o n -fle e t v eh icles dro p s le ss ra p id ly in th e first tw o y ears o f
serv ice th an fo r any o f th e fle e t categ o ries show n in F ig u res 2 th ro u g h 5. In a d d itio n , th e p attern
o f d isp o sitio n s is d ifferen t th a n fo r fle e t v eh icles, w ith sig n ific a n t d isp o sitio n p ro b a b ilities at
b o th re la tiv e ly young and re la tiv e ly o ld ages.
15 Wykoff reported annual economic depreciation rates for business-leased passenger cars that imply an unadjusted
equivalent economic life of about 4.5 years. These depreciation rates were estimated for four specific passenger car
models owned by a leasing firm. Although WykofFs study differs somewhat from this one in scope and methodology,
the Hifferanra in unadjustedequivalent economic lives appears to be largely due to a higher first-year rate of depreciation
found in this study.
-18-
T a b le 3 .—U n a d ju ste d a n d A d ju s te d E q u iv a le n t
E c o n o m ic L iv es o f F le e t C a rs b y S ize C la ss
A d ju s te d L ife
S ize
U n a d ju s te d
M o d el Y e a r
M o d el Y e a r
C la ss
L ife
1985
1986
S ubcom pact
3.3
2.4
2.3
C om pact
3.6
2.6
2.7
In term ed iate
3.6
2.7
2.7
S tan d ard
4 .2
3.1
3.1
L uxury
4.5
3.5
3.5
F o reig n
4.5
3.8
3.9
3.7
2.8
2.8
T o tal
Figure 6: Nonfleet Passenger Cars
Age-Price Profile, Straight-Line Equivalent
Schedules, and the Disposition Probability
Age-Price Profile
Relative Value/Disposition Probability
Straight-Line
Equivalent (Unaclj.)
Straight-Line
Equivalent (Adj.)
Disposition
Probability
Age in Years
-19-
A lth o u g h n o t ev id en t in F ig u re 6, th e ag e-p rice p ro file does n o t re a ch a m inim um value
u n til age 10, and th e u n ad ju sted stra ig h t-lin e eq u iv alen t schedule reach es zero at 7.0 y ears. T he
relativ ely la rg e differen ce b etw een th e u n ad ju sted e q u iv alen t econom ic life (7.0 y ears) and the
adjusted eq u iv alen t econom ic life (4.5 y ears) fo r th e se cars can b e a ttrib u te d m o stly to th e slow
decline in v alu e th a t o ccu rs a fte r age fiv e.
-
20
-
C h a p t e r V . Issues in Setting Class Lives
A . E s t i m a t i o n Issues
S ev eral e stim atio n issu es arose d u rin g th e co u rse o f th e study and th e ir re so lu tio n affects
th e fin al re su lts. T h e m o st im p o rtan t issu e co n cern s th e reliab ility o f th e estim ate d a d ju sted
e q u iv alen t eco n o m ic life fo r n o n -fle e t v e h icles, and th e related m a tte r o f p ro p e rly w eig h tin g
th a t estim ate in co m p u tin g th e o v erall ad ju sted e q u iv alen t econom ic life .
S ince th e fle e t
estim ates w ere b a se d o n n early 4 0 0 ,0 0 0 d isp o sitio n s and th e n o n -fleet estim ates w ere b ased on
only 121, n o n -fle e t estim ates are fa r m ore u n c ertain th an fle e t estim ates.
N ev erth eless, th e d ifferen ce in th e estim ate d a d ju sted e q u iv alen t econom ic liv e s (2.8 y ears
fo r fle e t v eh icles v s. 4 .5 y ears fo r n o n -flee t v e h icles) appears reaso n ab le in lig h t o f d ifferen ces
in in te n sity o f u se. M ileag e d ata p ro v id e d b y fle e t firm s show th a t fle e t v eh icles are d riv en an
average o f 2 5,000 m iles p e r y e ar in each o f th e first tw o y ears o f serv ice. D ata on m ileag e
p attern s fo r n o n -fle e t v eh icles o b tain ed fro m a sam ple o f b u sin ess ta x retu rn s in d icate th a t such
v eh icles are d riv e n an average o f 15,000 m iles p e r y e a r d u ring th e first tw o y ears. M oreover,
th e re su lts fo r n o n -fle e t v eh icles are co n siste n t w ith th e fin d in g s o f o th e r stu d ies th a t w ere b ased
on n o n -flee t p a sse n g er c a rs.16
G iv en th e la rg e d ifferen ce in estim ate d liv e s, p ro p e rly w eig h tin g th e estim ate s in to a single
class life becom es v ery im p o rta n t
D ata fro m th e B ureau o f E conom ic A n aly sis and th e
Automotive F leet F act B ook su g g est th a t a fte r ex clu d in g d aily re n ta l firm s and ad ju stin g fo r
lo w er ra te s o f b u sin ess-u se and tax c a p italiz a tio n am ong n o n -flee t v eh icles, fle e ts o f 10 o r m ore
veh icles acco u n t fo r 40 p e rc e n t o f th e annual c a p italiz e d in v estm en t in b u sin ess-u se p assen g er
cars w h ile n o n -fle e t v eh icles acco u n t fo r 60 p e rc en t. A w eig h ted average ad ju sted eq u iv alen t
econom ic life o f 3.8 y ears w o u ld b e o b tain ed u sin g th o se shares as w eights.
A b o u t o n e -th ird o f th e n o n -flee t v e h icles, h o w ev er, are acquired by in d ep en d en t le asin g
firm s and re ta il d ealers fo r le ase to b o th b u sin ess and n o n -b u sin ess u sers. W hen u sed fo r b u sin ess
p u rp o ses, th e se cars are p ro b ab ly d riv en m ore lik e fle e t cars th an n o n -flee t cars, and w o u ld
d ep reciate in a m an n er m o re sim ilar to fle e t v eh icles. T his w ould su g g est w eig h tin g the. fle e t
estim ate a t 60 p e rc e n t, and th e n o n -fle e t estim ate at 4 0 p ercen t, resu ltin g in a w e ig h ted av erag e
ad ju sted e q u iv a le n t eco n o m ic life o f 3.5 y ears.
16 Wykoff (1989) reported that the unadjusted present values of economic depreciation estimated from five studies
based mainly on household-use cars averaged .873 (pp. 280-282). This study found an unadjusted present value of
economic depreciation for non-fleet passenger cars of .874.
-
21-
A n o th er im p o rtan t estim atio n issu e concerns th e w eig h tin g o f th e ad ju sted e q u iv alen t
econom ic liv e s d eriv ed fo r th e d ifferen t fle e t c lasses. A s show n in tab le 3, th ese liv es ran g e
from a low o f 2.3 y ears fo r dom estic subcom pact v eh icles to h ig h s o f 3.5 years fo r dom estic
lu x u ry v eh icles and 3 .9 y ears fo r fo reig n v eh icles. T h e o v erall fle e t ad ju sted e q u iv alen t econom ic
life o f 2.8 y ears w as d eriv ed b y w eig h tin g th e size class liv es by th e sam ple firm s’ m odel y e ar
1989 in v estm en t in v eh icles in each o f th o se classes. A n altern ativ e is to w eig h t th e size class
liv es by in d u stry -w id e fle e t in v estm en t in th o se classes. T his w o u ld re su lt in an aggregate fle e t
u n ad ju sted eq u iv alen t econom ic life o f 3.1 y ears. H ow ever, in d u stry -w id e in v estm en t d ata
in clu d e re n ta l firm in v estm en t, w h ich is n o t sep arately id en tified . In d u stry sources in d icate th a t
re n ta l fle e ts are m o re h eav ily co n cen trated in d om estic lu x u ry cars and im ports th an are lease
and p riv a te fleets.
A fin a l estim atio n issu e concerns th e use o f th e h a lf-y e a r co n v en tio n fo r ta x d ep reciatio n
p u rp o ses and its im p act on th e calc u la te d eq u iv alen t econom ic life . In its study o f th e d ep reciatio n
o f re n ta l clo th in g , O T A fo u n d th a t co n sid eratio n o f th e g en erally re q u ire d use o f th e h alf-y e a r
co n v en tio n fo r ta x p u rp o ses red u ced th e c alcu lated eq u iv alen t econom ic life by ab o u t o n e-h alf
y ear. H ow ever, th is re su lt w as larg ely due to th e seaso n al p a tte rn o f in v estm en t in re n ta l clo th in g ,
w h ich p la ce d m o st in v estm en t in th e first h a lf o f th e fisc a l y ear. F leet p assen g er c ar inv estm en t
is fa irly sm oothly d istrib u te d o v er firm s’ fiscal y ears, w ith about o n e -h a lf o f v eh icles acquired
by th e m id d le o f th e fisc al y ear. A ssum ing th a t n o n -flee t in v estm en t fo llo w s a sim ilar p attern ,
th e n eg lect o f th e h a lf-y e a r co n v en tio n fo r th e an aly sis in th is re p o rt is n o t lik e ly to b e sig n ifican t.
B. Adm inis trati ve Issues
T he sig n ific a n t d ifferen ce in e stim ated ad ju sted eq u iv alen t econom ic liv e s fo r fleet
v eh icles and n o n -fie e t v eh icles ra ises th e issu e o f estab lish in g sep arate M A C R S classes fo r
b u sin ess-u se p a sse n g er cars b ased on ty p e o f u se, o w nership, o r som e o th er re la te d criterion.
W hile th e d a ta c lea rly in d icate th a t v eh icles h e ld in fle e ts d ep reciate m ore ra p id ly th a n n o n -fleet
b u sin ess cars, th is d ifferen ce appears to arise fro m d ifferen ce in th e in ten sity w ith w h ich such
v eh icles are u sed , ra th e r th an th e ir ow nership o r u se. A c lassific atio n o f p assen g er cars based
on an ticip ated m ileag e p a tte rn s o r an ticip ated h o ld in g p e rio d at th e tim e v eh icles are p laced in
service w o u ld p o se m a jo r d efin itio n a l and en fo rcem en t p ro b lem s.
A c lassific a tio n system th a t d istin g u ish es v eh icles b ased on th e size o f a firm ’s leasing
a ctiv ity w o u ld approxim ate a c lassific atio n b ased on in te n sity o f u se, and w o u ld b e sim p ler to
ad m in ister (a lth o u g h still n o t w ith o u t som e d iffic u lt p ro b lem s). S u ch a c lassific atio n system ,
-
22
-
how ever, w o u ld create an in cen tiv e fo r le asin g as com pared to ow n in g p a sse n g er cars th a t is
n o t n ecessarily d esirab le.
A d d itio n al accounting and co m pliance co m p lex ity w ould be
in tro d u ced fo r firm s th a t b o th ow n and le ase v eh icles. B o th th e A m erican A uto m o tiv e L easin g
A sso ciatio n , w h ich re p re se n ts la rg e le a sin g firm s, and th e N atio n al V eh icle L easin g A sso ciatio n ,
w hich rep resen ts sm all and m id -siz e d le asin g firm s, have e x p ressed reserv a tio n s to T reasu ry
co n cern in g th e esta b lish m e n t o f sep arate M A C R S classes fo r p asse n g er cars b ased o n ow nership.
C. C o n c e p t u a l Issues
T h e General Explanation o f th e T ax R efo rm A ct o f 1986 states th a t th e class life fo r an
asset class sh o u ld b e d eterm in ed p rim arily by eq u atin g th e p re se n t v alu e o f straig h t-lin e
d e p reciatio n and th e p re se n t v alu e o f econom ic d ep reciatio n . I t d id n o t in d icate w h eth er th e
fa c t th a t th e ow ners o f th e assets m ay in som e cases n o t be able to claim d e p reciatio n d eductions
o v er a p o rtio n o f th e assets* u sefu l life sh o u ld b e co n sid ered . T reasu ry b eliev es th a t in th e case
o f b u sin ess-u se p a sse n g e r cars, a v ery la rg e frac tio n o f w h ich are tra n sfe rre d fro m b u sin ess use
to n o n -b u sin ess u se w e ll b efo re th e en d o f th e v e h ic le ’s u sefu l life , th is fa c t sh o u ld b e co n sid ered .
M ore sp ec ific a lly , T reasu ry b eliev es th a t in eq u atin g th e p re se n t v alu es o f straig h t-lin e and
econom ic d ep reciatio n fo r b u sin ess-u se p asse n g er cars, only th a t p a rt o f th e u sefu l life o v er
w hich th e asset is u sed fo r b u sin ess p u rp o ses is relev an t. T reasu ry b eliev es th a t th e gains o r
lo sses in c u rre d by tax p ay ers a t th e tim e th e asset is co n v erted fro m b u sin ess u se to n o n -b u sin ess
use should also b e c o n sid e re d in d eterm in in g th e class life . F o r th is re a so n , th e reco m m en d atio n s
in th e fo llo w in g ch ap te r are b a se d on th e estim ated a d ju sted e q u iv alen t econom ic life o f
p assen g er cars, w h ich ta k es th e se fa c to rs in to a c c o u n t
T h e u n ad ju sted eq u iv alen t eco n o m ic liv e s, w hich do n o t tak e th e se facto rs in to account,
have also b een p re sen te d in th is rep o rt. T h ese estim ated u n ad ju sted eq u iv alen t econom ic liv e s
are, h o w ev er, lo n g e r th an th e eco n o m ic liv e s O T A w ould h av e e stim ate d h a d it fo cu sed o n th e
en tire u sefu l life o f p a sse n g er cars (and n o t ju s t th e p e rio d o v e r w h ich th e cars are u sed in
b u sin ess). M ore sp ec ific a lly , th e re p o rte d eq u iv alen t econom ic liv e s do n o t allo w fo r th e u ltim a te
retirem en t (scrap p ag e) o f th e v e h icles. T h is is n o t a v ery sig n ifican t o m issio n w h en a tte n tio n
is fo cu sed on ly on th e p e rio d th e v e h icles are h e ld fo r b u sin ess u se, b u t it is im p o rtan t w hen
vehicles are stu d ied o v e r th e ir e n tire u sefu l life . In su ch case, a m o re c o n cep tu ally c o rre c t
-23-
econom ic life is d eriv ed fro m th e retirem en t-ad ju sted ag e-p rice p ro file. T he la tte r is obtained
by m u ltip ly in g th e u n a d ju sted ag e-p rice p ro file by th e su rv iv o r fu n ctio n , w h ich is th e fractio n
o f in v estm en t o f a g iv en v in tag e th a t rem ains in serv ice at e ach ag e.17
T his study estim ate d an u n ad ju sted eq u iv alen t econom ic life fo r n o n -flee t p assen g er cars
o f 7.0 years. B ased on a su rv iv o r fu n ctio n fo r all p a ssen g er cars d eriv ed from re su lts rep o rted
b y H u (1983), th e eq u iv alen t econom ic life ad ju sted fo r retirem en ts is 6.3 y ears. T his life is
q u ite clo se to th e 6 .2 y e a r retirem en t-ad ju sted e q u iv alen t life th a t co rresp o n d s to th e econom ic
d ep reciatio n fo r p asse n g er cars o bserved by H u lten and W y k o ff (1981). T h u s, although the
d a ta ob tain ed fo r th is study co v er only th e p e rio d p assen g er cars are u sed in b u sin ess, th e d ata
fo r n o n -flee t v eh icles p ro v id e an estim ate o f a to ta l eq u iv alen t econom ic life fo r p assen g er cars
th a t is n early th e sam e as th a t sug g ested by th e w o rk o f H u lten and W ykoff.
17 See, for example, page 22 of R eport to Congress on the Depreciation o f Scientific Instruments.
-24-
C h a p t e r VI. C o n c l u s i o n a n d R e c o m m e n d a t i o n s
T h is study has fou n d th a t th e ad ju sted e q u iv alen t econom ic life o f fle e t p a ssen g er cars,
ex clu d in g d aily re n ta l fle e ts, is 2.8 y ears, w h ile th e a d ju sted eq u iv alen t econom ic life o f n o n -flee t
p a ssen g er cars is 4 .5 y ears. T hese d ifferen ces ap p ear to b e a ttrib u tab le to d ifferen ces in m iles
d riv en d u rin g th e first tw o y ears o f serv ice. W hile th e re is som e m e rit to estab lish in g sep arate
asset classes fo r th ese tw o d ifferen t classes o f p a sse n g er cars, th e b en efits do n o t ap p ear to
ex ceed th e co n sid erab le d e fin itio n al and co m p lian ce p ro b lem s th a t w ould arise.
W hen th e estim ated econom ic liv es are w eig h ted by b u sin ess in v estm en t in fle e t and
n o n -flee t p assen g er cars, an average econom ic life ran g in g fro m 3.5 y ears to 3.8 y ears is ob tain ed ,
depending on th e re la tiv e w eig h t g iv en to n o n -flee t v eh icles. D ue to th e re la tiv e u n certain ty o f
the n o n -fle e t estim ate, and th e ex clu sio n o f daily re n ta l fle e ts from th e study, a class life o f 3.5
y ears seem s ap p ro p riate. T hus, T reasu ry recom m ends th a t th e class life fo r M A C R S asset class
00.22 (A utom obiles, T ax is) be chan g ed fro m 3 y ears to 3.5 y ears.
U n d er c u rren t law , th is reco m m en d atio n , if ad o p ted , w o u ld have no effe ct on th e
d ep reciatio n dedu ctio n s claim ed by tax p ay ers fo r p a sse n g er cars.
S ectio n 1 68(e)(3)(B )(i)
assigns au tom obiles and lig h t g e n eral p u rp o se tru ck s to th e fiv e -y e a r p ro p erty reco v ery class,
reg ard less o f th e ir class liv es. I f th is p ro v isio n w ere re p ealed , p a ssen g er cars w o u ld be assig n ed
to th e th re e -y e a r p ro p erty M A C R S reco v ery class, w h eth er o r n o t th e recom m ended change in
th e class life w ere en acted . (T he th re e -y e a r p ro p erty reco v ery class g en erally inclu d es p ro p erty
w ith a class life o f fo u r y ears o r le ss.) L ik ew ise, u n d e r S ectio n 168(g)(3)(D ), th e altern ativ e
d ep reciatio n system reco v ery p e rio d fo r au tom obiles and lig h t g en eral p u rp o se tru ck s is fiv e
y ears, reg ard less o f th e ir class liv es.
I f th is p ro v isio n w ere rep ealed , tax p ay ers u sin g th e
altern ativ e d ep reciatio n system co u ld d ep reciate th e ir p a ssen g er cars o v er th ree y ears (based on
th e cu rre n t law class life ) o r o v er 3.5 y ears (based on th e recom m ended class life).
-2 5 -
A p p e n d i x A . T h e M a n d a t e for Depreciation Studies
Exhibit 1.
Section 168(i)(l)(B) of the Internal Revenue Code as Revised by the Tax Reform Act of 1986
(i) Definitions and Special Rules.
F o r p u rp o ses o f th is s e c tio n -
(1) Class Life.
(B ) S ecretarial au th o rity .
T rea su ry ~
T he S ecretary , th ro u g h an o ffice esta b lish e d in th e
(i) sh all m o n ito r and analyze actu al ex p erien ce w ith re sp e c t to all d ep reciab le
a ssets, and
(ii) e x cep t in th e case o f re sid en tial re n ta l p ro p erty o r
n o n resid en tial real p ro p e rty —
(I) m ay p rescrib e a new class life fo r any p ro p erty ,
(IQ in th e case o f assig n ed p ro p e rty , m ay m o d ify any
assig n ed item , o r
(HQ m ay p rescrib e a class life fo r any p ro p e rty w h ich
does n o t have a class life w ith in th e m eaning o f
su b p arag rap h (A ).
A ny class life o r assig n ed item p rescrib ed o r m o d ified u n d er th e p re c ed in g sen ten ce sh all
reaso n ab ly re fle c t th e an ticip ated u sefu l life , and th e an ticip ated d eclin e in v alu e o v er tim e,
o f th e p ro p e rty to th e in d u stry o r o th e r group.
Exhibit 2.
Section 168(i)(l) of the Internal Revenue Code as Revised by the Technical and Miscellaneous
Revenue Act of 1988
Definitions and Special Rules.
F o r p u rp o ses o f th is sectio n —
(1) C la ss Life. E x cep t as pro v id ed in th is sectio n , th e term "class life" m ean s th e class
life (if any) w h ich w o uld be ap p licab le w ith re sp ec t to any p ro p e rty as o f Jan u ary 1,
1986, u n d e r su b sectio n (m ) o f sectio n 167 (d eterm in ed w ith o u t re g a rd to p a ra g rap h
(4) and as if th e tax p ay er h ad m ade an e lectio n u n d er such su b sectio n ). T h e S ecretary ,
th ro u g h an o ffice estab lish ed in th e T reasu ry , sh all m o n ito r and an aly ze actu al
ex p erien ce w ith re sp ec t to all dep reciab le assets.
-27-
Exhibit 3.
Provisions for Changes in Classification from the General Explanation of the Tax Reform
Act of 1986 (pp. 103-104)
T h e S ecretary , th ro u g h an o ffice estab lish ed in th e T reasu ry D epartm ent is authorized to
m o n ito r and analyze actu al ex p erien ce w ith all tan g ib le d ep reciab le a ssets, to p re scrib e a new class
life fo r any p ro p erty o r c lass o f p ro p erty (o th er th an re a l p ro p erty ) w hen a p p ro p ria te , and to prescrib e
a class life fo r any p ro p erty th a t does n o t h av e a class life . I f th e S ecretary p rescrib es a new class
life fo rp ro p e rty , su ch life w ill b e u sed in d eterm in in g th e c lassific atio n o f p ro p erty . T he p rescrip tio n
o f a new class life fo r p ro p erty w ill n o t change th e A C R S class stru ctu re, b u t w ill affect th e A C RS
class in w h ich th e p ro p erty falls. A ny classificatio n o r re c lassific a tio n w o u ld b e p ro sp ectiv e.
A ny class life p re scrib ed u n d er th e S e c re tary ’s a u th o rity m u st re fle c t th e an ticip ated useful
life , and th e an ticip ated d eclin e in v alu e o v er tim e, o f an asset to th e in d u stry o r o th er group. U seful
life m eans th e econom ic life span o f p ro p erty o v er all u sers co m b in ed and n o t, as u n d er p rio r law ,
th e ty p ic a l p e rio d o v er w h ich a tax p ay er hold s th e p ro p erty . E v id en ce in d icativ e o f th e u sefu l life
o f p ro p e rty , w h ich th e S ecretary is ex p ected to tak e in to acco u n t in p re scrib in g a class life , includes
th e d ep reciatio n p ra c tice s fo llo w ed by tax p ay ers fo r bo o k p u rp o ses w ith re sp ec t to th e property,
and u sefu l liv e s e x p erien ced b y ta x p ay e rs, according to th e ir re p o rts. It fu rth e r in cludes independent
ev id en ce o f m in im al u sefu l life U th e term s fo r w h ich new p ro p e rty is le ase d , u sed u n d er a service
co n tract, o r fin an ced — and in d ep en d en t ev id en ce o f th e d eclin e in v alu e o f an asset o v er tim e, such
as is a ffo rd ed b y resale p ric e data. I f resale p rice d ata is u sed to p re scrib e class liv e s, such resale
p ric e d a ta sh o u ld b e a d ju sted dow nw ard to rem ove th e effects o f h isto ric a l in flatio n . T his adjustm ent
p ro v id es a la rg e r m easu re o f d ep reciatio n th an in th e absence o f such an adjustm ent. C lass lives
usin g th is d ata w o u ld b e d eterm in ed such th at th e p re sen t v alu e o f straig h t-lin e d epreciation
d ed u ctio n s o v er th e class life , d isco u n ted at an appropriate re a l ra te o f in te re st, is eq u al to th e present
v alu e o f w h at th e e stim ated d eclin e in v alu e o f th e asset w o u ld b e in th e absence o f in flatio n .
In itia l stu d ies are ex p ected to co n cen trate on p ro p erty th a t now has no A D R m idpoint.
A d d itio n a lly , clo th in g h e ld fo r re n ta l and scien tific in stru m en ts (esp ecially th o se u sed in connection
w ith a co m p u ter) sh o u ld be stu d ied to d eterm ine w h eth er a change in class life is appropriate.
C ertain o th e r assets sp ecifically assig n ed a reco v ery p e rio d (in clu d in g h o rses in th e th ree-y ear
class, q u a lifie d te ch n o lo g ical eq u ipm ent, co m puter-based cen tral o ffice sw itching equipm ent,
re sea rc h and e x p erim en tatio n p ro p erty , certain ren ew ab le en erg y and biom ass p ro p erties,
sem ico n d u cto r m an u factu rin g equ ip m en t, ra ilro a d tra c k , sin g le-p u rp o se ag ricu ltu ral o r h o rticu ltu ral
stru ctu res, telep h o n e d istrib u tio n p la n t and com parable eq u ip m en t, m u n icip al w aste -w a ter treatm ent
p la n ts, and m u n icip al sew ers) m ay n o t b e assigned a lo n g e r c lass life b y th e T reasu ry D epartm ent
if p laced in serv ice b efo re Jan u ary R 1992. A d d itio n ally , au to m o b iles and lig h t tru ck s m ay n o t be
re c la ssifie d b y th e T reasu ry D ep artm en t d u ring th is fiv e -y e a r p erio d . S u ch p ro p e rty p laced in
serv ice a fte r D ecem ber 3 1 ,1 9 9 1 , and b efo re Ju ly 1 ,1 9 9 2 , m ay b e p re scrib ed a d ifferen t class life
if th e S ecretary h as n o tified th e C om m ittee on W ays and M eans o f th e H ouse o f R epresentatives
and th e C om m ittee on F in an ce o f th e S enate o f th e p ro p o sed change at le a st 6 m o n th s b efo re the
d ate o n w h ich such change is to tak e effect.
-
28-
A p p e n d i x B. M o d e l s Stu died a n d S a m p l e Sizes
18
Subcompact (16,636)
Intermediate (247,831)
C hevy C av alier (4)
F ord E sco rt (3)
F ord M u stan g (2)
D odge 600 (3)
C h ry sler N ew Y o rk er (3)
C hevy C eleb rity (4)
P o n tiac 6000 (5)
P o n tiac G rand P rix (3)
O lds C u tlass C iera (4)
.O lds C utlass S uprem e (3)
B uick C entury (4)
F o rd T aurus (3)
F ord T h u n d erb ird (3)
C hevy C itatio n (3)
C h ry sler L eB aron G TS (3)
M ercury S ab le (3)
M ercury M arquis (3)
P lym outh C arav elle (3)
Compact (64,472)
D odge L an cer
F o rd T em po
P o n tiac G rand A M
M ercury T opaz
P ly m o u th R e lia n t
O lds C u tlass C alais
D odge A ries
(3)
(4)
(2)
(3)
(4)
(1)
(3)
Standard (34,501)
F ord C row n V ic to ria
C hevy C ap rice
M ercury G ran d M arquis
O lds D elta 88
B u ick L eS abre
(3)
(5)
(3)
(4)
(3)
Luxury (21,347)
B u ick E lectra
C ad illac
F ord L T D B rougham
L in co ln
O lds D elta 98
Foreign (7,334)
M erced es-B en z
H onda
Jag u ar
N issan
T o y o ta
V olvo
BM W
M azda
V olksw agen
P o rsch e
A udi
18 The total number of dispositions for all models in the class is shown in parenthesis after the class name; the
number of data sets in which a particular model appeared is shown in parenthesis after the model name.
-29-
(4)
(3)
(4)
(3)
(1)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
A p p e n d i x C . D e t e r m i n a t i o n of E q u i v a l e n t E c o n o m i c Lives f r o m the A g e - P r i c e
Profile a n d Pat tern of Sales
T h is ap p en d ix first d escrib es th e eq u atio n s u sed to calcu late th e u n ad ju sted eq u iv alen t
econom ic life fo r each sp ecific p asse n g er c ar m odel. T he com p u tatio n o f th e ad ju sted eq u iv alen t
econom ic life , w h ich allow s fo r th e d isp o sal o f assets b efo re th e en d o f th e ir u sefu l life , is th e n
discussed.
T h e first step in v o lv es o b tain in g th e age-price p ro file fo r a p a rtic u la r m odel. T h e re la tiv e
value o f th e cars as a fu n c tio n o f age is ob tain ed fo r e ach m odel by fittin g th e o b serv ed av erag e
sales p ric e s (ex clu d in g w reck s) at each age by a fifth degree p o ly n o m ial. A verage d isp o sitio n p ric e s
are calc u la te d fo r each m o n th in w hich d isp o sitio n s tak e p lace. A ll sale p ric e o b serv atio n s are
adjusted fo r in fla tio n and d iv id ed by th e in itia l c o st o f cars to o b tain re la tiv e v a lu es, V (t). T he
regression eq u atio n is:
V ( t ) - \ = a 1t + a 2t 2+ a 3t2+ a 4t * + a st 5,
(1)
w h ere th e n o rm alized v alu e is u n ity a t age zero , t rep resen ts age, and th e a* are th e reg re ssio n
co efficien ts19. T h e n e g ativ e o f th e d eriv ativ e o f th e fitte d fu n c tio n V (t) p ro v id es th e a sse t’s eco nom ic
d epreciation as a fu n c tio n o f its age. T h e p re sen t v alu e o f th is econom ic d e p reciatio n fu n ctio n
(PV ED ) is th e to ta l d isco u n ted v alu e o f econom ic d ep reciatio n . It is fo u n d by in te g ra tin g th e
discounted v alu e o f d ep reciatio n from age zero to th e age at w h ich th e asset v alu e is a t a m inim um
(typically z ero ).
(2)
w h ere M is th e age at w hich th e m inim um asset v alu e is reach ed (its u sefu l life ), and r is th e
discount ra te .
T h e p re se n t v alu e o f straig h t-lin e d ep reciatio n o v er a life L is g iv en by:
(3)
T h e stra ig h t-lin e life w ith th e sam e p resen t v alu e as P V E D can be d eterm in ed fro m E q u atio n
3 by n u m erical m eth o d s. T h is life is th e u n ad ju sted eq u iv alen t eco n o m ic life .
19 Average sale price observations are weighted in the regression by the initial cost of the cars represented.
-31-
T he fa c t th a t th e assets are n o t all h eld u n til th e en d o f th e ir u sefu l life is now considered.
C u rren t law re q u ire s th e ta x p ay e r to tre a t as a g ain (o r claim a lo ss) an am ount eq u al to th e difference
b etw een th e ad ju sted b a sis o f th e asset and its sales v alu e. E q u atio n 4 co rrects E q u atio n 3 to include
th e fa c t th a t assets are c o n v erted (v ia sale) to n o n -b u sin ess use p rio r to th e en d o f th e ir usefu l life,
and to tak e acco u n t o f th e ta x g ain o r lo ss claim ed w hen th e assets are sold.
ÇE
l-e^
\
N
I
N
w here y is th e sh o rte st and z is th e lo n g e st h o ld in g p e rio d in th e d isp o sitio n p ro b ab ility
d istrib u tio n ch arac te riz ed b y th e fu n ctio n D (t), and w here E is th e ad ju sted eq u iv alen t econom ic
life . In th is stu d y , th e v alu e o f D (t) is o b tain ed from th e o b serv ed p a tte rn o f d isp o sitio n s20.
T he first in te g ra l p ro v id e s th e p re sen t v alu e o f straig h t-lin e d ep reciatio n , p lu s any gains or
lo sse s fo r p asse n g er cars re tire d b efo re th e ad ju sted econom ic life w eig h ted by th e dispo sitio n
p ro b a b ility , D (t). T h e first te rm in th e o u ter b rack et o f th e in teg ran d re fle c ts th e ag g reg ate p resen t
v alu e o f stra ig h t-lin e d ep re cia tio n up to th e tim e o f sale. T h e term s in th e in n er b rack et ex p ress the
p re sen t v alu e o f th e g ain o r lo ss at th e tim e o f sale. T h e g ain o r lo ss is th e d ifferen ce b etw een the
rem ain in g b a sis, 1 - t/E , and th e re la tiv e v alu e, V (t), o f th e asset at th e tim e o f d isp o sitio n . S im ilarly,
th e seco n d in te g ra l p ro v id es th e p re sen t v alu e o f econom ic d e p reciatio n fo r th e p o rtio n o f assets
d isp o sed o f a fte r th e ad ju sted eq u iv alen t econom ic life. T h e first te rm in th e b ra c k et in th e integrand
re fle c ts th e p re se n t v alu e o f stra ig h t-lin e d ep reciatio n , w h ile th e second term lik ew ise adjusts for
th e p re sen t v alu e o f th e g ain on sale (th e ad ju sted b asis fo r cars o f age g re a ter th a n E is zero).
• E q u atio n 5 co rrects E q u a tio n 2 to allow fo r th e fa c t th a t n o t all th e cars are h e ld u n til th e end
o f th e ir u sefu l life:
PVED ’ =
D(T)
(a j + 2 a2t + 3 a3t2+ 4a 4f3 + 5a5tA)e~r,dt
(5)
E q u atio n 4 is so lv ed fo r th a t life , E , th a t p ro v id es th e sam e p re sen t v alu e a s d eterm in ed from
E q u atio n 5 u sin g a co m b in atio n o f an aly tical and n u m erical tech n iq u es.
e q u iv alen t eco n o m ic life re p o rte d fo r each m o d el ty p e.
T his is th e adjusted
F o r fle e t v e h icles, sep arate adjusted
e q u iv alen t econom ic liv e s w ere calc u la te d fo r 1985 and 1986 m odel y ears fo r e ach o f th e m odels
and d a ta sets. A sin g le estim ate w as o b tain ed fo r th e n o n -flee t v eh icles.
20 The disposition probability distribution is calculated by first fitting the cumulative disposition function, which
measures the fraction o f the initial cost that has been sold by age t, by a fifth degree polynom ial function. This function
is then differentiated to obtain the disposition probability distribution D(t). Where appropriate, the function is truncated
so that only the bell shaped portion o f this function is used to represent the disposition probability distribution.
-32-
Ref eren ces
A ckerlof, G eorge, "T he M ark et fo r L em ons," Quarterly Journal o f Economics 84 (1970) d o .
488-500.
B obit P u b lish in g C o., Automotive Fleet F act B ook , 1990, V ol. 29 S u p p lem en t, R edondo B each ,
CA.
H u, P a tricia , "S crappage and S u rv iv al R ates o f P assen g er C ars and T rucks in 1970-1982," sub m itted
to D epartm ent o f E nergy (1983), O ak R idge N atio n al L ab o rato ry , O ak R id g e, T N .
H ulten, C harles R . and F ran k C . W ykoff, "T he M easurem ent o f E conom ic D ep reciatio n ," in
Depreciation, Inflation, and the Taxation o f Income From Capital , ed. by C . H u lten T he U rban
In stitu te (W ashington, D .C ., 1981) p p. 99-103.
Pies, R o g er A . A n d D avid J. F isch er, "H ow D isp o sitio n s A ffect D eterm in atio n o f D ep reciatio n
C lass L ife," T ax N o tes, A p ril 2 ,1 9 9 0 , p p . 85-96.
U.S. D ep artm en t o f C om m erce, B ureau o f E conom ic A n aly sis, u n p u b lish ed c ap ital sto ck
w orksheets, 1990.
*
W ykoff, F ran k C ., "E conom ic D ep reciatio n and th e U ser C o st o f B u sin ess-L eased A u to m o b iles,"
in Technology and Capital Formation , ed. by D .W . Jo rg en so n and R . L andau, MET P ress
(C am bridge, 1989).
Acknowledgments
This re p o rt w as p re p a red by R o b ert E . Y uskavage and H udson M iln er. W illiam C hen and Jam es
D utrow p ro v id ed p ro g ram m in g assistan ce.
-33-
partment of the Treasury, «.Washington, D.C. • Telephone 566-2041 il
FOR IMMEDIATE RELEASE
APRIL 30, 1991
■PACHPV
CONTACT: BARBARA CLAY
202-566-5252
CHARLES H. DALLARA
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
TO LEAVE TREASURY
Secretary of the Treasury Nicholas F. Brady announced today that
Charles H. Dallara, Assistant Secretary for International
Affairs, will leave the Treasury Department to accept a position
in the private sector.
In announcing Mr. Dallara*s departure, Secretary Brady said,
"Charles has had a long and distinguished career at Treasury.
His breadth of experience has proved invaluable. His sound
judgment, depth of knowledge, and tireless efforts will be missed
by me both professionally and personally."
Mr. Dallara has served as Assistant Secretary for International
Affairs since May 1989. Prior to assuming this post, Mr. Dallara
served in a number of other senior positions at the Treasury
Department. From October 1988-May 1989, Mr. Dallara served as
Assistant Secretary for Policy Development and Senior Policy
Advisor to the Secretary. From 1984-1989, he had the dual
responsibilities of U.S. Executive Director at the IMF and Senior
Deputy Assistant Secretary for International Economic Policy.
Prior to that, Mr. Dallara was the Deputy Assistant Secretary of
Treasury for International Monetary Affairs (1983—1984) and U.S.
Alternate Executive Director at the IMF (1982-1983).
During his tenure at the Treasury Department, Assistant Secretary
Dallara has played a central role in U.S. international economic
policy. He was instrumental in the development of the
international economic policy coordination process. In his
current position, Mr. Dallara has worked closely with Secretary
Brady and Under Secretary David C. Mulford in the development and
implementation of the "Brady Plan," the international debt
strategy. He was also involved in the launching and conduct of
the Structural Impediments Initiative (SII), trade negotiations
initiated by President Bush in 1989 to reduce structural trade
barriers in both the Japanese and U.S. economies.
Mr. Dallara holds a Bachelor of Science degree (B.S.) from the
University of South Carolina, as well as a Master of Arts (M.A.),
a Master of Arts in Law and Diplomacy (M.A.L.D.) and a Ph.D from
the Fletcher School of Law and Diplomacy, Tufts University. He
resides in Falls Church, Virginia, with his wife, Carolyn, and
their two children, Stephen and Emily.
NB-1249
FOR IMMEDIATE RELEASE
AS PREPARED FOR DELIVERY
qf TT" TR£ASffi$*frtact: Cheryl Crispen
l> 1 f* *
202-566-2041
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
50TH ANNIVERSARY DEDICATION CEREMONY
U.S. SAVINGS BONDS STAMP
APRIL 30, 1991
WASHINGTON, D.C.
Thank you. It is a great pleasure to be here and an honor
to join Postmaster General Anthony Frank, Treasurer Cathi
Villalpando, and the rest of our Savings Bonds supporters for
this celebration.
We are here to dedicate a special postage stamp honoring the
50th Anniversary of U.S. Savings Bonds. It was fifty years ago,
on this same date in 1941, that President Franklin Roosevelt
announced the introduction of the Series E Savings Bond to the
nation. It was a new idea — a government security at an
affordable price. And President Roosevelt called on all
Americans to join in a "great partnership" to make the new
program work for the American people.
History proves that the resulting partnership was a success.
By the end of World War II, Americans had bought more than $50
billion in Bonds. Since then, we've purchased at least $250
billion more — including the $8 billion sold by last year's top
flight Savings Bonds team.
Over the years, the Treasury Department has worked with
bankers, business men and women, labor leaders and other
volunteers to maintain the strength and endurance of the program.
It has been a partnership in the best tradition of American
volunteerism — the public and private sectors working together
for the national good.
Today, we are fortunate to have with us some of the
committed individuals who represent that partnership. And there
are thousands of others who share in the same commitment — from
local leaders to national organizers. You all make positive and
lasting contributions to the Savings Bonds effort.
As Franklin Roosevelt said, when he kicked off the first
bond campaign 50 years ago: "Th[e] character of the campaign is
national in the best sense of the word — for it is going to
reach down, I hope, to the individual and the family in every
community, and on every farm, in every State and possession in
the United States."
NB-1250
2
As Savings Bonds sales have grown, so has the number of
dedicated volunteers. You know the true value of a solid
investment, and you know the benefits this program will generate
for the American people. I believe FDR's hope for a broad
national campaign was
and his aspirations met.
Savings Bonds are strong investments that work for everyone.
They offer benefits to savers, to companies offering the Payroll
Savings Plan, and the United States.
For savers, the Bonds offer a unique combination of
benefits, including market-based interest rates and earnings that
are not subject to state and local taxes. Savings Bonds also are
backed by the full faith and credit of the United States
Government — making them the safest savings instrument
available.
For companies, the payroll savings program offers a unique
partnership with the federal government that encourages national
saving.
For the United States, bond sales contribute to financing
the nation's government.
This stamp we are dedicating today recognizes the importance
and longevity of the Savings Bonds program. While the stamp
honors the solid tradition of our past, it serves as a reminder
that Savings Bonds can help Americans save for the future — for
a new home, a college education, or retirement. Americans know
they can turn to Savings Bonds for a safe and sound investment
opportunity.
Special thanks go to Postmaster General Anthony Frank, whose
personal support helped bring about the unveiling of this
commemorative design. This new stamp is not only an honor for
the Savings Bonds program — it's also one heck of an advertising
campaign. There aren't many ads that reach out and touch as many
people as the U.S. Mail.
U.S. Savings Bonds are now the most widely-held government
security in history, and they remain a basic way for all
Americans to save and invest. During this 50th anniversary
celebration, it is a great honor to see our program commemorated
on a U.S. Postage stamp. It is a fitting tribute to the hard
work of Americans who have made Savings Bonds a distinguished
tradition for our nation.
Thank you.
lartment of tho Treasury • Washington, D.c. • T e le p h o n e 56 G-2 oai
FOR RELEASE AT 4:00 P.M.
April 30, 1991
1
Office of Financing
202/376-4350
SEPT. OF THE TREASURY
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approxi
mately $17,200 million, to be issued May 9, 1991.
This
offering will result in a paydown for the Treasury of about $ 2,950
million, as the maturing bills are outstanding in the amount of
$20,140 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, May 6, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$8,600
million, representing an additional amount of bills
dated February 7, 1991,
and to mature August 8, 1991
(CUSIP No. 912794 XB 5), currently outstanding in the amount
of $ 10,552 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $8,600
million, to be
dated May 9,. 1991,
and to mature November 7, 1991
(CUSIP
No. 912794 XM 1).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest.
Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing May 9, 1991.
In addition to the
maturing 13-week and 26-week bills, there are $10,139 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 aggre
gate amount of maturing bills held by them.
For purposes of deter
mining such additional amounts, foreign and international monetary
authorities are considered to hold $1,479
million of the original
13-week and 26-week issues.
Federal Reserve Banks currently hold
$1,679 million as agents for foreign and international monetary
authorities, and $7,523 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).
N B -1251
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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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.
1/91
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. Com
petitive 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.
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.
8/89
apartment a# the Treasury • Washington, o.c. • Telephone 566-2041
I ay
FOR IMMEDIATE RELEASE
April 30, 1991
¿110 0 3 6 3 5
Contact:
)EPT. Of THE TREASURY
Barbara Clay
202-566-5252
TREASURY NAMES LIBYAN FRONTS
The Treasury Department today identified 48 companies, banks, and
organizations as entities and agents of the Government of Libya. The
action is part of an ongoing Treasury investigation of Libyan efforts
to engage in financial transactions and acquire goods and services in
circumvention of the U.S. economic embargo against Libya.
In announcing today's action, R. Richard Newcomb, the Director of
Treasury's Office of Foreign Assets Control (OFAC), stated that,
"Libya's policies and actions, including its continued refusal to
disavow terrorism as a tool of international policy, make such a
listing particularly useful in redirecting public attention to the
comprehensive sanctions program in place against Libya.”
As a result of today's action by OFAC, the listed entities are now
considered "Specially Designated Nationals”, or agents of the
Government of Libya, bringing them under the existing embargo and
asset freeze put in place against Libya by President Reagan in January
1986. All assets of Specially Designated Nationals of Libya within
U.S. jurisdiction, including overseas branches of U.S. banks, are
blocked. Transactions by U.S. persons with Specially Designated
Nationals of Libya are prohibited unless licensed by the Treasury
Department. The last known address is given for each Specially
Designated National of Libya.
Doing business with a Libyan Specially Designated National is^
equivalent to doing business with the Government of Libya, which
carries criminal penalties of up to $500,000 per violation for
corporations and up to $250,000 per violation for individuals, as well
as prison sentences of up to 12 years for individuals and senior
corporate officers. In addition, OFAC may impose administrative civil
penalties of up to $10,000 per violation.
The list of Specially Designated Nationals of Libya may be expanded or
amended at any time, as new information becomes available to the
Treasury Department. Persons with information on companies or
individuals trading with Libya or acting on behalf of the Government
of Libya may call the OFAC Enforcement Division at 202-566-5021. All
calls will be kept confidential.
oOo
®1252
PREPARED STATEMENT OF R. RICHARD!.NEWebWk
DIRECTOR, OFFICE OF FOREIGN ASSETS CONTROL
DEPARTMENT OF THE TREASURY
before the
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
May 1, 1991
Chairman Pickle and members of the subcommittee:
offire°nf roorning. I am R. Richard Newcomb, the Director of the
DeDartmpnt ^ eign Assets Control (FAC) at the United States
t V m
m
2 L ? reas?ry: 1 aPPear before the subcommittee today
« 1 « ln formulating, administering, and
k Sw I u
Ind Libya"0”10 SanCtions P ^ a m s imposed against Iraq,
for
responsibility within the Executive Branch
5 ? L ^ ? pl®“®ntlng the financial and trade sanctions currently in
irfg Kuiaitrea
S^ ^ ° 3 H I
of “entries.
In addition to the
Libyan sanctions, we administer comprehensive
sanctions against Cuba, Vietnam, North Korea, and Cambodia? fI c
Iran
Srilrllntlv6, ^ 0^
6”'1531'90-°Urrently in effect against
and interpret the import and new
Comlrohl?t pr°i1r:i'tl0nS lmP°sed against South Africa by the
Comprehensive Anti-Apartheid Act of 1986, and continue to
W
m
m
B B B B m
U
S
B
■ ■
contras ejecting
RePublics. In recent years, we administered
leoile fn w? n0m:LC sa"ctlons Programs against the Sandinista
regime in Nicaragua and the Noriega regime in Panama.
the MiddleeE a s L r ^ SX?reSSed interest in the programs affecting
to thedI r L E xnwlli^rr®v' ”ly COIMlents today will be directed
effectively
and Llbyan Programs, our assessment of the
Imoloved
Pr°grams! and specific strategies we have
■FX3|
fulfilling our mission, including a vigorous
Specially Designated Nationals program.
N B -1253
2
Description and Regulatory Evolution
of the Iraq. Kuwait, and Libyan Sanctions Programs
As you know, Iraq*s invasion of Kuwait on August 2 resulted
in the^ immediate declaration of a national emergency by the
President under the International Emergency Economic Powers Act
("IEEPA”) and the issuance of Executive Orders No. 12722 and
No. 12723, freezing all Iraq and Kuwait government assets in the
United States, or under the control of U.S. persons, and imposing
a comprehensive trade embargo against Iraq similar in scope to
the one imposed under IEEPA against Libya in 1986.
Following the August 6 resolution of the United Nations
Security Council calling on U.N. member states to impose sweeping
economic sanctions against Iraq and occupied Kuwait, the
President on August 9 issued Executive Order No. 12724 broadening
the sanctions previously imposed against Iraq and Executive Order
No. 12725 extending the same comprehensive sanctions program to
Kuwait, then under Iraqi control. With respect to Iraq, the
August 9 Executive order prohibited the following transactions,
most of which had been prohibited under the August 2 order;
(1) imports and exports between the United States and
Iraq, including activity promoting such transactions;
(2) dealing in property of Iraqi origin exported from
Iraq after August 6;
(3) transactions related to travel to Iraq (with
limited exceptions);
(4) transactions related to transportation to or from
Iraq, including the use of Iraqi-registered vessels or
aircraft;
(5) the performance of contracts in support of
projects in Iraq; and
(6) the commitment or transfer of funds or other
financial or economic resources to the Government of
Iraq.
The August 9 order also continued in effect the blocking of Iraqi
government property.
Since the liberation of Kuwait by the Allied Military Forces
in Operation Desert Storm, the prohibitions of August 9 on most
trade and financial transactions with respect to Kuwait have been
removed by the issuance of general licenses authorizing such
transactions. Except for seven Kuwaiti banks, the U.S. property
of the Government of Kuwait has now been effectively unblocked by
general license. The seven banks, while remaining blocked, have
3
been issued specific licenses to use their assets to settle preAugust 2 obligations. Also the seven banks have been licensed to
engage in letter of credit and foreign exchange transactions. We
anticipate that the banks will be unblocked and fully able to
operate in the United States by the end of this month.
A comprehensive economic sanctions program similar to that
against Iraq was imposed by the President against Libya in
January 1986. Although these sanctions were also imposed under
the authority of IEEPA, they were a deliberate response to
Libya's longstanding support of international terrorism
(including hostage-takings and bombings), rather than an
immediate response to a particular act of aggression. As in the
case of the Iraq and Kuwait sanctions, the Libyan sanctions were
developed by Treasury with the assistance of the Departments of
State and Justice, the White House staff, and the National
Security Council.
The Libyan sanctions block the U.S. property of the Govern
ment of Libya, prohibit imports to and exports from Libya,
prohibit financial transactions with Libya (including extensions
of credit), and prohibit travel transactions. As I will discuss
in greater detail shortly, the Libyan Sanctions Regulations
("LSR") 31 C.F.R. Part 550, promulgated by FAC to implement the
Libyan sanctions, include within the definition of the
"Government of Libya" any organization or person designated by
the Secretary of the Treasury as having been determined to be
owned or controlled by, or acting on behalf of, the Government of
Libya. The Iraqi Sanctions Regulations ("ISR"), 31 C.F.R. Part
575, provide the Director of FAC with similar authority in
defining the "Government of Iraq."
Effectiveness of Implementation of
Iraqi Sanctions and Kuwaiti Asset Protections
The objectives of the August 2 and 9 Executive orders were
to deprive Iraq of any economic or financial benefit as a result
of its illegal invasion and occupation of Kuwait, and to preserve
and protect the substantial U.S. assets of the Government of
Kuwait for the benefit of their rightful owner. Due to the swift
and coordinated actions of the President, the National Security
Council, and the Treasury and State Departments on the night of
the Iraqi invasion, the legal authority to implement the
sanctions was in place and the operational responsibility
assigned before U.S. financial markets opened on August 2.
We believe much of the initial success in implementing the
sanctions after the decisive steps taken by the President can be
attributed to the quick and rational application of the
restrictions by the Treasury administrative apparatus to the
complex commercial and financial relationship that existed
4
between the United States, Kuwait, and Iraq. In many cases,
these actions set the pace or became the model for the sanctions
programs administered by other countries.
The moshu immediate and pressing problems we faced in the
aftermath of the Executive orders were identifying which
institutions were actually owned or controlled by the Governments
of Kuwait and Iraq, winding down financial and commercial
transactions entered into prior to the sanctions, and structuring
a regulatory program that provided a reasonable degree of
investment flexibility for the billions of dollars of blocked
Kuwaiti property while ensuring that the property remained fully
protected.
The President's orders immediately and effectively
immobilized tens of billions of dollars of Kuwaiti and Iraqi
government-owned assets in the United States• These orders
interfered with or halted altogether billions of dollars of
capital flows. These included foreign exchange contracts, oil
payments, repurchase agreements and currency swaps, payments to
international banking syndicates, and a wide variety of overnight
investment arrangements involving capital markets in different
political jurisdictions.
Resolving the problems resulting from the blocking orders
was a complicated and difficult task, especially in today's
sophisticated capital markets with their international scope and
highly developed dependence on the execution of interlocking
contractual obligations. We have had considerable experience
over the years in freezing the assets of adversarial countries,
but not since World War II have we been tasked with imposing and
administering such a large scale protective asset freeze
involving a country with such complex and extensive multinational
investment holdings as Kuwait. In addition, most past asset
freezes had not occurred suddenly, but after a period of
escalating international tensions; this freeze was imposed
literally overnight.
Almost immediately, our blocking program developed into a
two track approach. First, we had to identify and make known to
the financial and export communities the Kuwaiti banks and other
institutions frozen by the Executive orders and how pre-existing
financial and other contractual arrangements could be completed,
wound down, or continued without violating the freeze order.
Second, we had to identify, license, and develop operational
guidelines for the Kuwaiti government-owned institutions
determined to be under the control of legitimate authorities so
they could continue to' function within the international
framework established by the U.N. sanctions program.
The day after the freeze, Friday, August 3, we issued
guidance to U.S. persons concerning the completion of existing
5
c°ntracts involving pre-invasion oil shipments en route to the
.S., securities transactions, foreign exchange contracts, and
letter of credit payments to U.S. exporters for goods and
exP°rted to Ira<3
Kuwait prior to the effective date.
Tnat day we also began what became an extensive and ongoing
cooperative consulting process with the Kuwaiti authorities, as
H H P I many of the companies and financial institutions
affected by the freeze. Over the weekend of August 5, we
b?anfm:j-tted to the Federal Reserve Bank of New York
( FRBNY ) the first in a series of determinations concerning the
blocked status of certain prominent Middle Eastern, Pan-Arab, and
Kuwaiti banks and financial institutions. We also met with U.S.
and Kuwaiti representatives of various companies affected by the
freeze order.
Over the next couple of months we met daily with a wide
variety of parties affected by the freeze. We issued numerous
ln^er?r3^3^ Ve rulin?s inv°iving a wide variety of transactions
and additional blocking status determinations concerning various
institutions. These complicated and fact—intensive
determinations, especially those involving banks in which other
countries had interests, had to be made under severe time
constraints. These constraints arose because delays of just a
day or two in determining the status of a bank could cause severe
runs by concerned depositors who feared their funds might
incidentally be caught in the freeze if the bank were determined
to be owned or controlled by the Governments of Kuwait or Iraq.
It also became apparent to us over this period that many other
countries were taking blocking actions with respect to the
individual institutions based upon our determinations.
We also worked extensively with the Government of Kuwait
during this period to ascertain which of the blocked Kuwaiti
governmental institutions had sufficient senior officials and
management personnel outside of Kuwait to resume limited
operations. We met with CEO's and other senior officials of the
Kuwait controlled institutions to tailor specific FAC licenses
designed to permit U.S. persons, including holders of blocked
property belonging to the institutions, to engage in specified
types of transactions involving the institutions. This licensing
scheme was followed to ensure that transactions permitted by the
licenses remained subject to U.S. jurisdiction and control while
allowing the institutions sufficient flexibility to resume
operations. Most of these institutions were owned or controlled
bY
Kuwait Investment Office or the Kuwait Investment
Authority.
In addition to the regular meetings with the Kuwaitis and
other affected parties since August 2, we have consulted
regularly with the Federal Reserve Bank of New York and various
U.S. Government agencies, including the Departments of State,
Commerce, and Defense, the Customs Service, the FBI, the NSC, and
6
members of the intelligence and law enforcement communities. We
also established an ongoing program with foreign governments to
meet regularly with their embassies to coordinate actions and
ensure uniform application of all U.N. resolutions and partici
pated in coordination meetings with our allies in such forums as
the Bank for International Settlements, the Organization for
Economic Cooperation and Development, the European Economic
Community Commission, and the United Nations.
On the domestic side, we believe the longer term
effectiveness of the sanctions can be attributed to the intensive
efforts of the many U.S. Government agencies affected and the
high level of cooperation exhibited by the Federal Reserve
System, the other bank supervisory and regulatory agencies, and
the financial and export communities.
The Customs Service was
in a position to assist us by monitoring all imports and exports
and did so completely and effectively. Many exports to Iraq or
Kuwait already on the high seas were returned to the United
States; others were diverted to other destinations, either
voluntarily or by direction of the naval forces participating in
the quickly-assembled multinational blockade. Internationally,
the unprecedented level of cooperation and unanimity of purpose
exhibited by the U.N. member states participating in the
sanctions program has been remarkably successful in preventing
inadvertent leaks in any particular political jurisdiction from
turning into a serious hemorrhaging of the embargo.
The same level of cooperation and unanimity of purpose was
exhibited domestically as well. FAC's Enforcement Division
conducts and coordinates investigations of substantive violations
of the embargo and accordingly maintains daily operational
liaison with the U.S. Customs Service and the Federal Bureau of
Investigation. Similarly, FAC routinely coordinates its
activities with the Departments of State, Defense, Commerce, and
Justice, and the intelligence community.
Census of Blocked Iraqi Assets and Claims Against Iraq
On February 8, we issued regulations requiring that all
United States persons holding blocked Iraqi property, and all
United States nationals with claims against Iraq, file reports of
such assets or claims with FAC. Since the reporting deadline of
March 15, we have been reviewing, tabulating, and evaluating the
reports filed.
The reports filed reveal that the value of blocked Iraqi
property in the United States exceeds $1.2 billion. This
property consists principally of bank deposits frozen on
August 2, amounts subsequently paid into blocked accounts by
purchasers of Iraqi oil en route to the United States on
7
August 2, and a miscellaneous variety of Iraqi government-owned
tangible properties and credits. Approximately $420 million
additional was reported as blocked in the offshore branches of
U.S. banks, primarily in the United Kingdom.
Almost 1,100 individuals, corporations, banks, and U.S.
Government agencies have reported billions of dollars in claims
against Iraq. These range from claims asserted by individuals
for personal property looted in Kuwait to losses of future
business and concession rights. Inasmuch as these claims have
not been submitted to a formal claims resolution body, much less
adjudicated, it would be inappropriate to speculate as to their
actual aggregate value. The process by which the claims will be
adjudicated and settlements funded will be determined once the
details of the U.N. reparations plan are worked out.
We have already held several meetings with the larger
claimants who have raised issues we believe require examination
in order to obtain a clearer and more complete picture of their
losses. These meetings enable us to more effectively evaluate
the various settlement options or scenarios likely to be put
forth.
Specially Designated Nationals
As noted earlier, the ISR and LSR provide the Secretary of
the Treasury with authority to include within the definition of
the target country government those individuals and entities
which have been determined to be acting on behalf of, or
controlled by, the target government. This authority greatly
enhances the effectiveness of these sanctions programs by
forestalling a potential avenue of sanctions evasion by
Specially Designated Nationals— agents and front companies of
Iraq and Libya.
The effect of being designated a Specially Designated
National, or SDN, is significant. The SDN is exposed inter
nationally as a target government agency, instrumentality, or
controlled entity acting either overtly or covertly as a front,
and all of the SDN's property within the jurisdiction of the
United States (including financial assets in U.S. bank branches
overseas) is blocked. U.S. persons are prohibited from engaging
in any transaction involving property in which the SDN has an
interest, which includes all financial and trade transactions,
and all holders of SDN property must report those holdings to
FAC. In the case of Iraq, which is subject to multinational
sanctions, being identified as an Iraqi SDN by the United States
provides a basis for other governments to take similar steps to
include the specifically identified individuals and entities
within their sanctions programs.
8
Through information obtained by FAC from a combination of
investigative sources, including other U.S. agencies, we have
undertaken a major initiative to identify front companies and
agents used to acquire technology, equipment, and other resources
for Iraq. On April 1, Treasury formally identified 52 businesses
and 37 individuals as Iraqi SDNs and 160 merchant ships as Iraqiowned or controlled, thus prohibiting their use by U.S.
businesses and individuals. This action was the culmination of
many months of domestic and international investigative effort
coordinated by Treasury with domestic and foreign investigative
resources. Approximately half of the designated Iraqi SDNs are
part of the Iraqi military-industrial network.
In practice, an Iraqi SDN is an Iraqi government body,
representative, intermediary, or front (whether overt or covert)
that is located outside Iraq and functions as an extension of the
Government of Iraq. It may be a firm created by the Iraqi
Government, or it may be a third-party company that otherwise
becomes owned or controlled by the Iraqi government or that
operates on behalf of the Government of Iraq. No criminal
linkage is necessary for being placed on the SDN list. Ownership
or control by the Iraqi government or acting on its behalf would
suffice to qualify a person for designation.
For U.S. persons, dealing with an SDN is equivalent to doing
business with the government of the target country, an activity
which is prohibited and subject to severe penalties. For
example, under the Iraq Sanctions Act, civil penalties of up to
$250,000 may be imposed administratively. Criminal fines of up
to $1 million per violation may be imposed on both individuals
and corporate entities, and prison sentences of up to 12 years
are authorized for individuals, including officers, directors, or
agents of a corporation who are knowingly involved in a corporate
violation of the sanctions.
U.S. persons may be designated as SDNs and, as such, would
have their assets blocked by FAC, effectively putting them out of
business. It should also be noted that a U.S. firm in which Iraq
holds a controlling interest was immediately blocked under terms
of the August 2 Executive order.
Among the entities identified as SDNs were the MatrixChurchill Corporation of Solon, Ohio, and Bay Industries, Inc.,
of Santa Monica, California, two U.S. corporations on which FAC
had previously served blocking notices. Matrix-Churchill's role
in Iraq’s international arms and technology acquisition network,
performed under cover of a seemingly innocuous machine tool sales
and service business,-has received widespread publicity in recent
months.
Yesterday, we named 48 entities, all located outside the
United States, as Libyan SDNs. Libya's policies and actions,
including its continued refusal to disavow terrorism as a tool of
international policy, make such a listing particularly useful at
this time in redirecting public attention to the comprehensive
sanctions program in place against Libya.
Neither the Libyan nor the Iraqi SND list is intended as a
static document, but will be continuously augmented as additional
front companies and agents are identified.
It was a pleasure appearing before this subcommittee this
morning. I will be pleased to respond to any questions.
#####
NEWS
Ti,®o*ury • Washington,
d .c .
• Telephone see -204
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
May 1, 1991
CONTACT: Office of Financing
202/376-4350
TREASURY MAY QUARTERLY FINANCING
The Treasury will raise about $18,025 million of new cash
and refund $18,976 million of securities maturing May 15, 1 9 9 1 ,
by issuing $13,500 million of 3-year notes, $11,750 million of'
10-year notes, and $11,750 million of 30-year bonds. The $18,976
million of maturing securities are those held by the public,
including $1,099 million held, as of today, by Federal Reserve
Banks as agents for foreign and international monetary
authorities.
The three issues totaling $37,000 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
will be added to that amount. Tenders for such accounts will be
accepted at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
hold $3,662 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 30-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
N B -12 54
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
MAY 1991 QUARTERLY FINANCING
May 1, 1991
Amount Offered to the Public . . . .
$13,500 million
$11,750 million
$11,750 million
10-year notes
Series B-2001
(CUSIP No. 912827 A8 5)
Listed in Attachment A
of offering circular
May 15, 1991
May 15, 2001
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
30-year bonds
Bonds of May 2021
(CUSIP No. 912810 EJ 3)
Listed in Attachment A
of offering circular
May 15, 1991
May 15, 2021
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
November 15 and May 15
$1,000
$1,000
To be determined after auction
To be determined after auction
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10%
Accepted in full at the average
price up to $1,000,000
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., 7.10%
Accepted in full at the average
price up to $1,000,000
None
None
None
Full payment to be
submitted with tender
Full payment to be
submitted with tender
Full payment to be
submitted with tender
Acceptable
Acceptable
Acceptable
Tuesday, May 7, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Wednesday, May 8, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Thursday, May 9, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Wednesday, May 15, 1991
Monday, May 13, 1991
Wednesday, May 15, 1991
Monday, May 13, 1991
Wednesday, May 15, 1991
Monday, May 13, 1991
Description of Security:
Term and type of security .
Series and CUSIP designation
3-year notes
Series S-1994
(CUSIP No. 912827 A7 7)
CUSIP Nos. for STRIPS Components . . Not applicable
Issue date ......
Maturity date . . . .
Interest rate . . . .
May 15, 1991
May 15, 1994
To be determined based on
the average of accepted bids
Investment yield . .
To be determined at auction
Premium or discount .
To be determined after auction
Interest payment dates . . .
November 15 and May 15
Minimum denomination available . . . $5,000
Amount required for STRIPS . . . . Not applicable
Terms of Sale:
Method of sale . .
Competitive tenders
Noncompetitive tenders .........
Accrued interest
payable by investor ............
Payment Terms;
Payment by non-institutional
investors ...................
Deposit guarantee by
designated institutions .........
Key Dates:
Receipt of tenders ............
a) noncompetitive .............
b) competitive ...............
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury . . . .
b) readily-collectible check . . . .
EMBARGOED UNTIL GIVEN
EXPECTED AT 10:00 A.M.
TESTIMONY OF
THE HONORABLE JEROME H. POWELL
ASSISTANT SECRETARY 07 THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON EDUCATION AND LABOR
SUBCOMMITTEE ON LABOR-MANAGEMENT RELATIONS
May 2, 1991
Chairman Williams, Representative Roukema, and members of
the Subcommittee, thank you for the opportunity to address the
implications of the Administration's legislative proposal, H.R.
1505, the Financial Institutions Safety and Consumer Choice Act
of 1991, for pension plan participants of private employers and
state and local governments. I am especially honored to present
these views to the Subcommittee on Labor-Management Relations, a
Committee before which the Treasury Department rarely has the
opportunity to appear.
Purpose of the Administration's Proposal
Let me begin by putting our pass-through insurance proposal
in the context of our overall bill. H.R. 1505 is the
Administration's comprehensive approach to modernize our outdated
banking laws to make our banking system stronger and safer. It
is the legislative culmination of an 18-month study by the
Treasury Department of‘the banking system, as mandated by the
Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA). We believe this comprehensive approach to banking
reform is the only way to truly resolve the underlying problems
in the banking system — merely recapitalizing the Bank Insurance
Fund, as some have suggested, will only put off the day of
reckoning and increase the exposure of the taxpayer. As
Secretary Brady has said many times, we need to fix the banking
problem, not just fund it.
We believe that comprehensive reform must accomplish three
fundamental obj ectives:
—
N3-1255
First, we must make deposit insurance safe for
taxpayers and depositors. That means stronger
supervision, better capitalized banks, and the return
of deposit insurance to its original purpose of
protecting average depositors. It also means a better
capitalized Bank Insurance Fund.
—
Second, it is time to modernize archaic laws to let
banks catch up with their customers to deliver products
more efficiently to consumers across^the country —
which translates into greater convenience, lower
interest rates and transaction fees for consumers, and
more bank capital.
——
Third, we need to restore the preeminent international
position of our banking industry. Our economy is twice
the size of our nearest competitor's, and a world class
economy requires a world class banking system.
We believe that our legislation will help accomplish each of
these objectives.
Moreover, an important piece of this comprehensive
legislation is the subject of today's hearing. This is our
proposal to reduce the taxpayer's current exposure to losses from
"pass-through" deposit insurance, while preserving basic deposit
insurance coverage for those pension plan participants that truly
require protection.
My testimony today will explain how pass-through deposit
insurance currently works, how it sometimes exposes the taxpayer
to large losses, and how the Administration's bill would limit
this exposure. Throughout this discussion it is critical to keep
in mind one fundamental point: the more deposit insurance is
used to cover new kinds of bank deposits, the more the taxpayer
is exposed to losses. We must therefore be very careful about
anv expansion of deposit insurance coverage beyond its original^
purpose of protecting small, unsophisticated depositors. This is
exactly why the Administration and a number of members of
Congress have proposed legislation to scale back pass-through
coverage, including Congressmen Gonzalez, Wylie, Roukema, and
others.
How Pass-Through Insurance Works
Despite the explicit $100,000 limit on federal deposit
insurance for any one deposit account, a single deposit account
well in excess of $100,000 may be fully protected with pass
through insurance. This pass-through coverage can occur when a
fiduciary deposits funds for the benefit of beneficiaries, with
$100,000 of deposit insurance "passing through" to each of the
beneficiaries. Because these fiduciary accounts are maintained
for the benefit of others — and not for benefit of the fiduciary
that actually deposits the funds and is the nominal "owner" of
the account — the Federal Deposit Insurance Corporation (FDIC)
2
has often determined that "pass through" treatment is
appropriate.
In making these determinations, the FDIC has established two
conditions that must be satisfied to ensure that a deposit
account is truly held for the benefit of others. First, the
account must be held as either an irrevocable trust or by an
agent, nominee, custodian, conservator, guardian, or trustee on
behalf of true, identifiable owners (the "beneficial" owners).
This ensures that the nominal owner of the account is not the
true beneficiary.
Second, the beneficiaries must be truly likely to receive
the funds placed in the account, which in more technical language
means that the interests of the beneficial owners must be
determinable without the consideration of certain contingencies.
Thus, for example, an irrevocable trust in which the beneficiary
is to receive funds only upon completion of medical school
involves a contingency that may very well not occur; pass-through
coverage would therefore be denied. But an irrevocable trust in
which the beneficiary is to receive funds upon the death of the
grantor involves a contingency that will occur? pass-through
coverage would therefore apply.
This two-prong eligibility test appears plausible at first,
and the results sometimes make sense. For example, in cases
where deposited funds are not used for investment purposes or
where the trustee is not a sophisticated investor, it may be
appropriate for deposit insurance to pass through to the
beneficiaries. Thus, escrow accounts established by either
lawyers for clients or landlords for tenants would appear to be a
prudent use of pass-through insurance.
Nevertheless, the test can also produce broad expansions of
deposit insurance coverage, and indeed, the trend of FDIC
determinations has clearly been to expand pass-through treatment
beyond these focused examples. As a result, deposit insurance
has extended to larger and larger classes of depositors whose
funds are managed by increasingly sophisticated investors. In
particular, pass-through deposit insurance now applies to the
deposits of large, professionally—managed pension plans, most of
which already have important protections for beneficiaries that
are already required by the laws governing pension plans. In
addition, pass-through protection has also been interpreted to
extend to certain kinds of deposits that are marketed to pension
plans and have unusual interest rate risk features — so-called
Bank Investment Contracts, or "BICs."
It is these last expansions of deposit insurance — and
therefore taxpayer exposure — that the Administration's bill is
intended to address. To understand our proposal, however, it is
important to set forth in somewhat greater detail the types of
3
pension plans that receive pass-through coverage. These include
both defined benefit plans and defined contribution plans.
Defined Benefit Plans. A defined benefit plan provides a
definite formula under which the amount of a participant's
pension is determined, such as a specific dollar amount for each
year of credited service. In defined benefit plans, the amount
of the employer's contribution is actuarily determined each year
based upon such factors as the number and age of the participants
and the investment returns of plan assets.
Participants in defined benefit plans enjoy five layers of
protection from the investment risk associated with the
investment of plan assets. Each of these protections fully
applies to plan deposits in banks, wholly apart from deposit
insurance. First, the fiduciaries that deposit plan assets m
banks are subject to strict fiduciary laws that require prudent
investment decisions. Second, these plans, especially the larger
ones, typically employ sophisticated investment professionals to
make informed decisions on how best to safely invest plan
assets — unsophisticated plan participants are not responsible
for investment decisions. Third, the plan sponsor, typically the
employer, is responsible for making additional contributions to
the pension plan if the assets of the plan are inadequate to
cover the plan's obligations — or put another way, the plan
sponsor bears the investment risk. Fourth, if the plan sponsor
fails, any controlled group of which it is a member 1S
responsible. Finally, if all else fails, defined benefit plans
are generally insured by the Pension Benefit Guaranty Corporation
(PBGC).
In short, pass-through deposit insurance for defined benefit
plan deposits in banks represents a sixth and unnecessary layer
of investment risk protection for plan participants. In fact,
amounts paid through deposit insurance when a bank fails have the
principal effect of insulating the employer from his
responsibility to fund the pension.
Defined contribution Plans. Unlike a defined benefit plan,
a defined contribution plan provides an individual account for
each participant. A participant's beneficial interest is
determined by the value of his or her account, which is based on
the amount of contributions allocated to the account, adjusted
for any income, expenses, and investment gains or losses charged
against the account. Money purchase plans, profit-sharing plans,
stock bonus plans, 401(k) plans, and employee stock ownership
plans are all types of defined contribution plans.
Unlike beneficiaries of defined benefit plans, beneficiaries
of defined contribution plans bear the investment risk of plan
investments (rather than plan sponsors), and such plans are not
covered by PBGC insurance. Nevertheless, persons with control
4
over plan assets are still governed by fiduciary investment tlaws
that require prudent investment, and many defined contribution
plans employ professional money managers to invest planifunds
wisely. When such professionally managed defined contribution
plans invest funds in bank deposits, pass—through deposit
insurance becomes an additional and unnecessary layer of
protection for plan beneficiaries.
The situation is different, however, for defined
contribution plans that are "self-directed.11 Participants in
self-directed defined contribution plans have varying levels of
discretion to choose how funds m their accounts^will be
invested. The number of investment options provided to each
participant depends on the structure of the plan. Some plans
permit participants a broad range of discretion to choose
individual securities or any other type of investment. The more
typical plan provides several broad investment vehicles from
which to choose, such as equity funds, bond funds, money market
funds, or bank deposits.
Where broad discretion is permitted, there is obviously
little or no professional management provided to the participant.
But even where professionally managed investment options are
provided, the effect of professional management is reduced by the
discretion of the participant to allocate contributions among the
options — put another way, there is no professionally managed
diversification of risk.
In short, unlike the beneficiaries of defined benefit plans,
the participants in self—directed defined contribution plans make
their own investment decisions and allocations, bear the full
risk of loss, and receive no back-up federal protection from the
PBGC. When such participants decide to place their money in a
bank, their situation is not much different from the average
depositor outside of a pension plan that saves money for
retirement in a savings account. In this situation the need for
federal deposit insurance appears much more compelling.
statistical Data
Data provided by the Department of Labor suggest the ^
expansion of taxpayer exposure through pass-through deposit
insurance. Let me caution the Subcommittee, however, that the
data represent approximations based on year-end 1988 surveys, and
that more precise statistics are not available at this time.
Current estimates show nearly $150 billion in employee
benefit plan assets on deposit with depository institutions.
Of some 740,000 private pension plans, approximately 610,000
maintain deposits of less than $100,000 in depository
institutions. These smaller pension plans obviously are not
affected by proposals to reduce pass-through coverage since the
5
deposits of such plans are fully insured up to $100,000 in each
bank, even without pass-through coverage.
The approximately 130,000 remaining private pension plans do
maintain deposits of more than $100,000 in depository
institutions, with pass-through treatment applying to amounts in
excess of $100,000. These plans cover more than 33 million
participants and hold almost $700 billion in total assets.
Moreover, these plans have deposited 13 percent, or about $90
billion, of their assets in depository institutions. Of this
total, at least $13 billion would receive ordinary deposit
insurance coverage based on the fact that the first $100,000 in
each account would be insured.
Therefore, assuming that no individual participant's
benefits exceed $100,000, pass-through deposit insurance coverage
would apply to the remaining $77 billion. This $77 billion
represents a rough approximation of the taxpayer's additional
exposure from the application of pass-through deposit insurance
to private pension plans.
The Administration's Proposal
With this background, let me now explain the
Administration's proposal. H.R. 1505 provides that pass-through
insurance would no longer extend to the deposits of defined
benefit plans and defined contribution plans that are not selfdirected. At the same, pass-through treatment would remain in
effect for the deposits of defined contribution plans that are
self-directed. Finally, deposit insurance would be eliminated
altogether for Bank Investment Contracts that create significant
interest rate risk for the issuing banks, and this elimination
would apply regardless of whether the BICs were deposits of
defined benefit plans or defined contribution plans.
Our policy reasons for reducing pass through coverage in
this manner should now be apparent, at least in part. First, any
expansion of deposit insurance coverage directly increases
taxpayer exposure, and pass through treatment for pensions plans
is clearly a broad expansion of the "federal safety net."
Second, the recommended reductions in pass-through coverage
only apply to pension plan beneficiaries that already have other
protections from investment risk under federal law and otherwise.
We recognize that pension plan beneficiaries often fit the
profile of the small, unsophisticated depositors that deposit
insurance was designed to protect. Nevertheless, unlike
depositors outside of pension plans, a number of these pension
fund beneficiaries receive other important protections that make
deposit insurance unnecessary. As described above, beneficiaries
of defined benefit plans have five layers of protection from
losses stemming from bank deposits, obviating the need for a
6
sixth layer of protection in deposit insurance* By contrast,
participants in self-directed defined contribution plans have
less protection since they make their own investment decisions
and bear the entire risk of loss? they would keep their pass
through coverage.
Third, pass-through deposit insurance eliminates market
discipline from some of the very participants who would be the
best able and most likely to provide it — sophisticated
professional investors. Indeed, there is very little difference
between a professional investor who manages money for a pension
fund and one who manages money for a money market mutual fund.
Each is paid to invest other people's money? each is required by
a set of federal laws to invest this money prudently? and each
invests substantial sums in bank deposits. Yet the deposits of
the sophisticated pension fund manager receive total deposit
insurance coverage, while the deposits of the money market fund
manager are almost entirely uninsured.
Such differential treatment makes little sense. While it
has been argued that pension fund managers have not relied
extensively on pass-through insurance to date because of certain
legal ambiguities, this reluctance to rely on the federal
guarantee will disappear as pass through insurance becomes more
widely recognized. Now is the time to remove the unnecessary
part of the guarantee, before it becomes a crutch for all
professional pension fund managers and before it is used
extensively to fund weak institutions.
Finally, the Administration's bill removes deposit insurance
from Bank Investment Contracts to prevent the federal guarantee
from extending to a deposit instrument that can create
substantial interest rate risk for issuing banks. Let me
elaborate on exactly how this provision would work.
Bank Investment Contracts
Some BICs, called "bullet" contracts, have relatively simple
terms that resemble a traditional certificate of deposit. Others
are more complicated, providing for a "window" period when
deposits may be made at a contractually guaranteed interest rate.
Some BICs also allow plan sponsors or participants to withdraw
funds at book value prior to the contract's maturity. In the
case of "window" BICs, unanticipated changes in prevailing
interest rates above or below the contract interest rate during
the window period may result in unanticipated deposit inflows or
withdrawals, thereby exposing the bank to interest rate risk.
Although hard data are difficult to obtain, it is estimated that
about $10 billion is currently invested in BICs of all kinds.
In traditional certificates of deposit, interest rate risk
is shared with the depositor. If market rates go up during the
7
term, the customer "loses." Conversely, the bank "loses" if
market rates go down during the term. However, customers are
allowed to fund BICs with a pre-determined yield over a period of
time. Therefore, depending on the contractual arrangements of
the BIC, the customer may be able to take advantage of any change
in market interest rates to the detriment of the bank. Should
market rates go down, the customer may be able to invest more
funds in the BIC at a contractually higher interest rate than he
might have originally planned. Should rates go up, the customer
may deposit less.
Our bill would eliminate pass-through insurance for "window"
BICs because of the interest rate risk problems they pose. Banks
would still be permitted to offer "window" BICs to pension fund
managers, but without federal deposit insurance. At the same
time, bullet BICs would be treated like any other deposit for
pass-through purposes.
State and Local Plans
Before closing, let me briefly discuss pension plans for
state and local governments. The Administration's pass-through
proposal does not disturb the status quo for these plans —
defined benefit plans would continue to receive pass-through
treatment, while so-called "457 Plans" would continue to be
ineligible for pass-through treatment.
Most state and local government plans are defined benefit
plans. However, unlike private defined benefit plans,
beneficiaries are not protected from bank losses by federal
safeguards included in the Empoyee Retirement Income Security Act
of 1974 ("ERISA"), and plans are not insured by the Pension
Benefit Guaranty Corporation. Moreover, many of these plans are
smaller, have no professional management, and rely heavily on
insured deposits as a safe vehicle to invest funds. Community
banks also rely heavily on these investments. Accordingly, the
Administration concluded that it was not appropriate to eliminate
pass-through coverage in these circumstances.
Another type of plan used by state and local governments,
and also some non-profit organizations, is authorized under
Section 457 of the Internal Revenue Code. These are the socalled 457 Plans, which are really deferred compensation plans
rather than pension plans. The FDIC has determined that 457
Plans are not eligible for pass-through deposit insurance.
Because Section 457 of the Internal Revenue Code states that the
funds of such plans are required to "remain solely the property
and rights of the employer," the FDIC decided that the employer
was the true owner of the bank deposits of such plans, rather
than the employees whose compensation was deferred. Accordingly,
the FDIC determined that deposit insurance coverage could not
8
•»pass through" to beneficiaries that do not technically own their
accounts.
The now defunct Federal Savings and Loan Insurance
Corporation, however, permitted pass-through coverage for 457
Plans. Pursuant to authority granted to it under FIRREA, the
FDIC has determined that savings associations may not continue to
accord 457 Plans with pass-through coverage beyond January 29,
1992.
H.R. 1505 would preserve the status quo for all 457 Plans:
plan deposits in banks would not receive pass-through treatment,
and plan deposits in thrifts would only continue to receive such
treatment until the FDIC phase-out rule takes effect. The
Administration does~not believe that pass-through treatment
should be extended to plans where it does not currently extend.
Conclusion
In conclusion, some may argue that pension plan participants
represent those very same average individuals deposit insurance
serves to protect. As depositors, that may often be true. But
as beneficiaries of pension plans covered by several layers of
financial protection, the analogy breaks down. Only participants
in self-directed defined contribution plans exercise the personal
control and risk necessary to render their status comparable to
that of the average depositor. And in these cases, we believe it
is entirely appropriate to continue pass-through coverage.
Let me close by again stressing the importance of
comprehensive reform. None of us wants to visit these issues
again, especially if we have to ask the taxpayers for assistance.
Yet, I fear that we are likely to find ourselves in that very
position if we opt for a piecemeal approach to reform.
Thank you again, Mr. Chairman, for the opportunity to
present the Administration^ views to the Committee. I will be
happy to answer any questions you may have.
9
■ I PUBLIC
DEBT NEWS
Department of the Treasury • BureaüJ>BJfcèI^bRPiM>t® ^W ashington, DC 20239
FOR IMMEDIATE RELEASE
May 2, 1991
Office of Financing
202-376-4350
Hit 3 31 0 C?
RESULTS OF TREASU^'S^
s9Sf 52-WEEK BILLS
Tenders for $11,811 million of 52-week bills to be issued
May 9, 1991 and to mature May 7, 1992 were
accepted today (CUSIP: 912794YM0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.69%
5.71%
5.71%
Investment
Rate
6.05%
6.07%
6.07%
Price
94.247
94.227
94.227
Tenders at the high discount rate were allotted 72%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
23,745
30,245,485
14,280
28,645
27,255
20,770
1,221,780
20,560
10,280
28,190
12,735
838,715
397.185
$32,889,625
Accented
23,745
11,021,430
14,280
28,645
27,255
18,770
116,780
14,000
10,280
28,190
12,735
97,715
397.185
$11,811,010
Type
Competitive
Noncompetitive
Subtotal, Public
$28,844,215
845.410
$29,689,625
$7,765,600
845.410
$8,611,010
3,000,000
3,000,000
200.000
$32,889,625
200.000
$11,811,010
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $20,000 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1256
THE SECRETARY OF THE TREASURY
NMEN1
ENTER
A T P
.
17 89
.
■'
,
Report of
THE SECRETARY OF THE TREASURY
on
GOVERNMENT- SPONSORED
ENTERPRISES
April 1991
TH E SEC R ETA R Y OF TH E T R E A S U R Y
W ASHINGTON
April 29, 1991
The Honorable J. Danforth Quayle
President of the Senate
United States Senate
Washington, D.C. 20510
Dear Mr. President:
I am pleased to transmit the April 1991 Report of the
Secretary of the Treasury on Government-sponsored Enterprises.
This Report has been prepared to meet the statutory requirements
in section 1404 of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA)(Pub. L. No. 101-73) and in
section 13501 of the Omnibus Budget Reconciliation Act of 1990
(OBRA)(Pub. L. No. 101-508).
FIRREA requires the Treasury to assess in two annual
studies the financial safety and soundness of the GSEs and to
study the impact of GSE operations on Federal borrowing. The
Treasury submitted the first annual report under FIRREA in May
1990. OBRA requires the Treasury to assess the financial
soundness of GSEs, the adequacy of the existing regulatory
structure for GSEs, the financial exposure of the Federal
Government posed by GSEs, and the effects of GSE activities on
Treasury borrowing.
The enclosed study, which is intended to meet the
requirements of FIRREA and OBRA, presents principles that are
essential to effective financial safety and soundness regulation.
It also includes an analysis of the financial condition of the
GSEs performed by the Standard & Poor's Corporation, and updates
the findings in the 1990 Report regarding the impact of GSE
activities on Treasury borrowing. We will submit proposed
legislation shortly implementing the recommendations in this
study to authorize Federal regulation of the financial safety and
soundness of the GSEs.
I
am also transmitting the Report to the Speaker of the
House of Representatives.
Sincerely,
Nicholas F. Brady
Enclosure
TH E S E C R ETA R Y OF TH E T R E A S U R Y
W ASHINGTON
April 29, 1991
The Honorable Thomas S. Foley
Speaker of the House
House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
I
am pleased to transmit the April 1991 Report of th
Secretary of the Treasury on Government-sponsored Enterprises.
This Report has been prepared to meet the statutory requirements
m section 1404 of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA)(Pub. L. No. 101-73) and in
section 13501 of the Omnibus Budget Reconciliation Act of 1990
(OBRA)(Pub. L. No. 101-508).
FIRREA requires the Treasury to assess in two annual
studies the financial safety and soundness of the GSEs and to
study the impact of GSE operations on Federal borrowing. The
Treasury submitted the first annual report under FIRREA in May
1990. OBRA requires the Treasury to assess the financial
soundness of GSEs, the adequacy of the existing regulatory
structure for GSEs, the financial exposure of the Federal
Government posed by GSEs, and the effects of GSE activities on
Treasury borrowing.
The enclosed study, which is intended to meet the
requirements of FIRREA and OBRA, presents principles that are
essential to effective financial safety and soundness regulation.
It also includes an analysis of the financial condition of the
GSEs performed by the Standard & Poor's Corporation, and updates
the findings in the 1990 Report regarding the impact of GSE
activities on Treasury borrowing. We will submit proposed
legislation shortly implementing the recommendations in this
study to authorize Federal regulation of the financial safety and
soundness of the GSEs.
I am also transmitting the Report to the President of
the Senate.
Sincerely,
Nicholas F. Brady
Enclosure
TABLE OF CONTENTS
Page
Section 1404 of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ............................
xi
Section 13501 of the Omnibus Budget Reconciliation Act
of 1990 .................................................. xiii
P r e f a c e .................................................... xvii
Executive Summary ............................
xix
Chapter 1: THE NEED FOR FINANCIAL REGULATION
Magnitude and Concentration of GSE Activity ................
2
No Imminent Threat, But Concerns Not Hypothetical ..........
2
Chapter 2: EFFECTIVE FINANCIAL SAFETY AND SOUNDNESS REGULATION
Principles of Effective Regulation of GSEs
................
Primacy of safety and soundness regulation
7
. . . . . . .
7
Sufficient regulatory stature ..........................
8
Use of private market risk assessment mechanisms
9
....
Basic regulatory powers for financial safety and
soundness...............................................10
Chapter 3: EXISTING REGULATORY STRUCTURE OF GSES
O v e r v i e w .....................................................16
Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation
Description of Regulatory Environment ..............
17
Financial Institutions Review Board ............
18
Current Regulatory Authorities of HUD ..............
19
Capital standards ..............................
19
Financial disclosure
20
vii
..........................
Books and records and internal controls ........ 20
Examination authority ..........................
20
Enforcement authority ..........................
20
Other regulatory authorities
..................
21
Description of Regulatory Environment ..............
21
Current Regulatory Authorities of the Finance Board .
22
Federal Home Loan Banks
Capital standards ............................
Financial disclosure
•
..........................
23
24
Books and records and internal controls.......... 24
Examination authority ..........................
24
Enforcement authority ..........................
25
Other regulatory authorities
..................
26
Description of Regulatory Environment ..............
27
Current Regulatory Authorities of the FCA ..........
29
Capital standards ..............................
29
Financial disclosure
31
Farm Credit System
..........................
Books and records and internalcontrols............32
Examination authority .
32
Enforcement authority ..........................
33
Other regulatory authorities
34
..................
Farm Credit System Insurance Corporation
..........
35
Powers of the Insurance Corporation ............
36
Federal Agricultural Mortgage Corporation
Description of Regulatory Environment ..............
37
Current Regulatory Authorities of the FCA ..........
37
viii
Capital standards ..............................
37
..........................
38
Examination authority ..........................
38
Enforcement authority ..........................
38
Other regulatory authorities
..................
38
Description of Regulatory Environment ..............
38
Financial disclosure
Student Loan Marketing Association
Chapter 4: ADEQUACY OF THE EXISTING REGULATORY STRUCTURE OF
GSES
Adherence to Principles of Effective Regulation ............
41
Primacy of financial safety and soundness regulation
41
Regulatory stature
. .
....................................
42
Use of private market mechanisms of risk assessment . . .
42
Basic regulatory powers for financial safety and
soundness...............................................43
Conclusions and Recommendations ............................
46
Chapter 5: IMPACT OF GSE OPERATIONS ON FEDERAL BORROWING
F i n d i n g s .................................................... 47
Re-assessing the Impact on Treasury Borrowing Cost
........
47
Impact of GSE Operations on Overall Interest Rates
........
51
Conclusions.................................................. 52
Chapter 6: S&P EVALUATION OF THE SAFETY AND SOUNDNESS OF THE
G S E S .......................................... 53
ix
EXCERPT FROM THE FINANCIAL INSTITUTIONS
REFORM RECOVERY AND ENFORCEMENT ACT OF 1989
PUBLIC LAW NO. 101-73
Section 1404.
Studies of Relationship Between Public Debt and
Activities of Government-sponsored Enterprises.
(a)
In General.
In order to better manage the bonded
indebtedness of the United States, the Secretary shall conduct 2
annual studies to assess the financial safety and soundness of
the activities of all Government-sponsored enterprises and the
impact of their operations on Federal borrowing.
(b)
Access to Relevant Information.
(1)
Information from GSE's.
Each Government-sponsored
enterprise shall provide full and prompt access to the
Secretary to its books and records, and shall promptly
provide any other information requested by the Secretary.
(2)
Information from Supervisory Agencies.
In conducting
the studies under this section, the Secretary may request
information from, or the assistance of, any Federal
department or agency authorized by law to supervise the
activities of any Government-sponsored enterprise.
(3)
Confidentiality of Information.
(A)
In General.
The Secretary shall determine and
maintain the confidentiality of any book, record, or
information made available under this subsection in a
manner generally consistent with the level of
confidentiality established for the material by the
Government-sponsored enterprise involved.
(B)
Exemption from Public Disclosure Requirements.
The Department of the Treasury shall be exempt from
section 552 of title 5, United States Code, with
respect to any book, record, or information made
available under this subsection and determined by the
Secretary to be confidential under subparagraph (A).
(C)
Penalty for Unauthorized Disclosure.
Any officer
or employee of the Department of the Treasury shall be
subject to the penalties set forth in section 1906 of
title 18, United States Code, if—
(i) by virtue of his employment or official
position, he has possession of or access to any
book, record, or information made available under
this subsection and determined by the Secretary to
be confidential under paragraph (A); and
xi
(ii) he discloses the material in any manner other
than—
(I) to an officer or employee of the
Department of the Treasury? or
(II) pursuant to the exceptions set forth in
such section 1906.
(c) Assessment of Risk.
In assessing the financial safety and
soundness of the activities of Government-sponsored enterprises,
and the impact of their activities on Federal borrowing, the
Secretary shall quantify the risks associated with each
Government-sponsored enterprise. In quantifying such risks, the
Secretary shall determine the volume and type of securities
outstanding which are issued or guaranteed by each Governmentsponsored enterprise, the capitalization of each Governmentsponsored enterprise, and the degree of risk involved in the
operations of each Government-sponsored enterprise due to factors
such as credit risk, interest rate risk, management and
operations risk, and business risk. The Secretary shall also
report on the quality and timeliness of information currently
available to the public and the Federal Government concerning the
extent and nature of the activities of Government-sponsored
enterprises and the financial risk associated with such
activities.
(d)
Reports to Congress.
The Secretary shall submit to the
Congress—
(1) by May 15, 1990, a report setting forth the results of
the 1st annual study conducted under this section? and
(2) by May 15, 1991, a report setting forth the results of
the 2nd annual study conducted under this section.
(e)
Definitions.
(1)
For purposes of this section:
Government-sponsored Enterprise.
The term "Government-
sponsored enterprise” means—
(A) the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, the Federal
Home Loan Bank System, the Farm Credit Banks, the Banks
for Cooperatives, the Federal Agricultural Mortgage
Corporation, the Student Loan Marketing Association,
the College Construction Loan Insurance Association,
and any of their affiliated or member institutions? and
(B) any other Government-sponsored enterprise, as
designated by the Secretary.
(2)
Secretary.
The term "Secretary" means the Secretary of
the Treasury or his delegate.
xii
EXCERPT FROM THE OMNIBUS BUDGET
RECONCILIATION ACT OF 1990
PUBLIC LAW NO. 101-508
Section 13501.
Financial Safety and Soundness of Governmentsponsored Enterprises.
(a) Definition.
For purposes of this section, the terms
"Government-sponsored enterprises" and "GSE" mean the Farm Credit
System (including the Farm Credit Banks, Banks for Cooperatives,
and Federal Agricultural Mortgage Corporation), the Federal Home
Loan Bank System, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, and the Student Loan
Marketing Association.
(b)
Treasury Department Study and Proposed Legislation.
(1) The Department of the Treasury shall prepare and submit
to Congress no later than April 30, 1991, a study of GSEs
and recommended legislation.
(2) The study shall include an objective assessment of the
financial soundness of GSEs, the adequacy of the existing
regulatory structure for GSEs, the financial exposure of the
Federal Government posed by GSEs, and the effects of GSE
activities on Treasury borrowing.
(c)
Congressional Budget Office Study.
(1) The Congressional Budget Office shall prepare and
submit to Congress no later than April 30, 1991, a study of
GSEs •
(2) The study shall include an analysis of the financial
risks each GSE assumes, how Congress may improve its
understanding of those risks, the supervision and regulation
of GSEs' risk management, the financial exposure of the
Federal Government posed by GSEs, and the effects of GSE
activities on Treasury borrowing. The study shall also
include an analysis of alternative models for oversight of
GSEs and of the costs and benefits of each alternative model
to the Government and the markets and beneficiaries served
by GSEs.
(d)
Access to Relevant Information.
(1) For the studies required by this section, each GSE
shall provide full and prompt access to the Secretary of the
Treasury and the Director of the Congressional Budget Office
to its books and records and other information requested by
xiii
the Secretary of the Treasury or the Director of the
Congressional Budget Office.
(2) In preparing the studies required by this section, the
Secretary of the Treasury and the Director of the
Congressional Budget Office may request information from, or
the assistance of, any Federal department or agency
authorized by law to supervise the activities of a GSE.
(e)
Confidentiality of Relevant Information.
(1) The Secretary of the Treasury and the Director of the
Congressional Budget Office shall determine and maintain the
confidentiality of any book, record, or information made
available by a GSE under this section in a manner consistent
with the level of confidentiality established for the
material by the GSE involved.
(2) The Department of the Treasury shall be exempt from
section 552, of title 5, United States Code, for any book,
record, or information made available under subsection (d)
and determined by the Secretary of the Treasury to be
confidential under this subsection.
(3) Any officer or employee of the Department of the
Treasury shall be subject to the penalties set forth in
section 1906 of title 18, United States Code, if—
(A) by virtue of his or her employment or official
position, he or she has possession of or access to any
book, record, or information made available under and
determined to be confidential under this section? and
(B) he or she discloses the material in any manner
other than—
(i) to an officer or employee of the Department
of the Treasury; or
(ii) pursuant to the exception set forth in
such section 1906.
(4) The Congressional Budget Office shall be exempt from
section 203 of the Congressional Budget Act of 1974 with
respect to any book, record, or information made available
under this subsection and determined by the Director to be
confidential under paragraph (1).
(f)
Requirement to Report Legislation.
(1) The committees of jurisdiction in the House shall
prepare and report to the House no later than September 15,
xiv
1991, legislation to ensure the financial soundness of GSEs
and to minimize the possibility that a GSE might require
future assistance from the Government.
(2) It is the sense of the Senate that the committees of
jurisdiction in the Senate shall prepare and report to the
Senate no later than September 15, 1991, legislation to
ensure the financial safety and soundness of GSEs and to
minimize the possibility that a GSE might require future
assistance from the Government.
(g)
President's Budget.
The President's annual budget
submission shall include an analysis of the financial condition
of the GSEs and the financial exposure of the Government, if any,
posed by GSEs.
xv
PREFACE
The failure of many federally insured thrift institutions in
the 1980s, and the massive Federal funding required for their
resolution, have focused the attention of the Administration and
Congress on other areas of taxpayer exposure to financial risk.
With this concern in mind, Congress enacted legislation requiring
the Secretary of the Treasury to study and make recommendations
regarding the financial safety and soundness of Governmentsponsored enterprises (GSEs).
TREASURY STUDY REQUIREMENTS
FIRREA
The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA) requires the Secretary to "conduct two
annual studies to assess the financial safety and soundness of
the activities of all Government-sponsored enterprises and the
impact of their operations on Federal borrowing."1 The first of
these studies was submitted to Congress on May 31, 1990, while
the second is due on May 15, 1991.
The May 1990 Report of the Secretary of the Treasury on
Government Sponsored Enterprises (1990 Report) fulfilled the
statutory requirements set out in FIRREA. It discussed the
history and development of each GSE and analyzed its financial
safety and soundness taking into consideration business risk,
credit risk, interest rate risk, and management and operations
risk. It analyzed the level of capital of each GSE in relation
to the risks it undertakes. It reviewed the timeliness and
quality of the financial information that each GSE provides to
the public and the Federal Government. Finally, it reported on
the impact of GSE activities on Federal borrowing.
OBRA
Release of the 1990 Report resulted in increased focus on
the financial condition of the GSEs, the need for reform of their
current Federal regulation, and the appropriate structure for
regulation. The debate resulted in additional legislation, a
provision of the Omnibus Budget Reconciliation Act of 1990
(OBRA), which requires the Secretary of the Treasury to provide
"an objective assessment of the financial soundness of GSEs, the
adequacy of the existing regulatory structure for GSEs, the
1 Subsection 1404(a) of FIRREA.
xvii
financial exposure of the Federal Government posed by GSEs, and
the effects of GSE activities on Treasury borrowing.”2
1991 Treasury Study Approach
This 1991 report is designed to meet the study requirements
of FIRREA and OBRA. It includes an objective assessment of the
financial soundness of the GSEs. In this regard, the Treasury
contracted with the Standard & Poor's Corporation (S&P) for an
analysis of the financial safety and soundness of the GSEs.3
S&P has assessed the likelihood that a GSE might not be able to
meet its future obligations from its own resources and has
expressed that likelihood as a traditional credit rating. This
likelihood correlates directly with the risk to the taxpayer that
a GSE will become financially troubled and need a Federal
Government rescue entailing an expenditure of, or a commitment to
spend, taxpayer money.
As required by OBRA, Treasury has analyzed the adequacy of
the existing regulatory structure for each of the GSEs and has
developed what it considers to be the essential principles of
effective financial safety and soundness regulation.
Finally, Treasury has also updated and expanded upon its
findings in the 1990 Report regarding the impact of GSE
activities on Treasury borrowing.
2 Subsection 13501(b) of OBRA.
3 S&P was not asked to examine Connie Lee, because S&P has
rated the claims-paying ability of Connie Lee as triple A on a
stand-alone basis, nor Farmer Mac, since it has not yet become
fully operational.
xviii
EXECUTIVE SUMMARY
The Need for Greater Taxpayer Protection from GSE Financial Risk
The public missions of the GSEs and the importance of their
activities to the U.S. economy have led investors to believe
that Congress would rescue a GSE if it were in financial
difficulty. As a result, they ignore the usual credit
fundamentals of GSEs and look to the Federal Government as
the ultimate guarantor of GSE obligations.
The concentration of potential taxpayer exposure from GSEs
is obvious when compared to the thrift and banking
industries. The total of credit market debt plus mortgage
pools of the five GSEs included in this study is greater
than the total deposits of the more than 2,000 insured S&Ls
and about one-third the size of the deposits of the more
than 12,000 insured commercial banks.
Consequently, the potential taxpayer exposure from GSEs,
rather than being dispersed among many thousands of
institutions, is dependent upon the managerial abilities of
the officers of a relatively small group of entities.
BecauseIthe GSEs are insulated from the private market
discipline applicable to other privately owned firms, more
sffective Government regulation is needed to provide
sustained outside discipline to these entities.
Effective Financial Safety and Soundness Regulation
Treasury has developed regulatory principles that will
reduce the likelihood of another financially painful
Government rescue.
Any regulatory framework should embody the following
principles:
-
Financial safety and soundness should be given primacy
over other public policy considerations in GSE
regulation.
-
The regulator must have sufficient stature to avoid
capture by the GSEs or special interests.
-
Private market risk assessment mechanisms can be used
to help the regulator assess the financial safety and
soundness of the GSEs.
xix
—
The basic statutory authorities for financial safety
and soundness regulation should be consistent across
all GSEs. In this regard, the regulator should have
the authority to set capital standards? require
financial disclosure? prescribe, if necessary, adequate
standards for books and records and other internal
controls? conduct examinations? and enforce compliance
with the rules and standards which it establishes.
Adequacy of Existing Regulatory Structure for GSEs
——
The regulatory structure for the GSEs has lapses of
varying degrees when compared to the proposed regulatory
principles.
It would be beneficial to make the scope of HUD's regulatory
authorities more explicit. HUD has proposed new regulations
to deal with specific aspects of its general regulatory
authority. Safety and soundness oversight should be given
primary consideration in HUD's regulatory role.
The Federal Housing Finance Board has the necessary
regulatory authorities and the stature needed to regulate
effectively the financial safety and soundness of the
Federal Home Loan Banks.
—
The primary focus of the Farm Credit Administration is on
the financial safety and soundness of the Farm Credit System
and Farmer Mac. Consequently, it has all of the necessary
regulatory authorities and the stature to be an effective
financial safety and soundness regulator of the System.
However, the FCA needs to have increased authority over
Farmer Mac.
Sallie Mae is virtually unregulated. Thus, no Federal
agency has the necessary authorities to provide it with
effective financial safety and soundness regulation.
impact of GSE Operations on Treasury Borrowing
Major macroeconomic trends that cannot be separated from the
impact of GSE financing activities have offset any potential
upward pressures on Federal borrowing costs from GSE
activity. Accordingly, the available statistical evidence
does not show that GSE borrowing has had a direct effect on
the cost of Federal borrowing.
xx
S&P Ratings
—
At the Treasury's request, S&P assessed the likelihood that
a GSE might not be able to meet its future obligations from
its own resources and has expressed that likelihood as a
traditional credit rating. The S&P ratings for the GSEs as
of April 1991 are:
The Farm CreditSystem
BB
The Federai Home LoanBank System
AAA
Freddie Mac
A+
Fannie Mae
A-
Sallie Mae
AAA
These ratings are not intended to supersede the AAA
assessments S&P has given the various securities of the GSEs
presently trading in the market.
Recommendations
—
Proposed regulatory structure:
statutory authorities
four regulators with basic
Separate "arms-length" Bureau of HUD
-
Financial oversight over Fannie Mae and Freddie Mac
through creation of a separate "arms-length" bureau of
HUD.
Federal Housing Finance Board
-
Retain financial oversight over the FHLBanks.
Farm Credit Administration
-
Retain financial oversight over the Farm Credit System
and Farmer Mac.
Treasury
-
Enhance financial oversight over Sallie Mae.
Necessary changes to current structure
HUD
-
Safety and soundness oversight of Fannie Mae and
Freddie Mac should have primacy over other regulatory
goals.
-
Transfer responsibility for financial safety and
soundness oversight of Fannie Mae and Freddie Mac to a
new separate Marms—length” bureau of HUD. The Director
of the new bureau will be appointed by the President
and confirmed by the Senate, and may be removed only by
the President; the Director will operate with the
general oversight of, and report directly to, the
Secretary of HUD; the bureau should be separately
funded through assessments on Fannie Mae and Freddie
Mac, as proposed in the President's 1992 Budget; and
the bureau will provide an annual report on its
operations to Congress.
Federal Housing Finance Board
-
Amend the statute to make financial safety and
soundness of the FHLBanks the Finance Board's primary
regulatory goal.
Farm Credit Administration
Increase financial oversight over Farmer Mac,
particularly with respect to authority to set capital
standards.
Give the Insurance Corporation access to the capital of
the associations.
Treasury
-
Increase financial oversight over Sallie Mae to make it
consistent with the safety and soundness authorities of
the other regulators.
Proposed capital standards
-
The regulator should have the authority to promulgate
risk-based capital standards. The standards should
take into account the differing risk characteristics of
on- and off-balance sheet classes of assets. While
risk categories may be established for different lines
of business, the overall capital requirement should be
for the whole firm.
xxii
The regulator can use stress tests and/or other
analytical techniques deemed appropriate by the
regulator to determine the necessary amount of capital
to protect against credit risk and interest rate risk.
An additional amount of capital should be required to
protect against management and operations risk and
business risk.
For financially significant new activities, the
regulator needs the flexibility to determine in advance
how the risks of the activity should be assessed for
purposes of the capital requirements.
The regulator can contract with nationally recognized
statistical rating organizations to assess the
financial health of the GSEs. If a GSE is rated the
highest investment grade, it will be exempt from
regulatory capital requirements and the frequency of
reports and examinations may be reduced.
The regulator should ensure achievement of such capital
requirements through the use of suitable enforcement
powers, including the right at all times to take action
in the event the GSE engages in an unsafe and unsound
practice.
xxiii
CHAPTER 1
THE NEED FOR FINANCIAL REGULATION
The Federal charters and other substantial ties to the
Government of the GSEs have led to the perception in the
securities markets that there is an implied Government guarantee
of GSE obligations.1 The public policy missions of the GSEs,
which include financial intermediation in agriculture, housing,
and education, the importance of their activities to the U.S.
economy, their growing size, and the rescue of the Farm Credit
System in the 1980s also have led credit market participants to
conclude that the Government would rescue a GSE if it were in
financial difficulty.
As a result of the belief that Congress would use taxpayer
funds to prevent the failure of a GSE, investors ignore the usual
credit fundamentals of the GSEs and look to the Federal
Government as the ultimate guarantor of GSE obligations.
Therefore, some GSEs are in a position to increase financial
leverage virtually unconstrained by the market or by effective
oversight. Greater leverage results not only in higher returns
for GSE shareholders (see Table 1), but also in potentially
greater taxpayer exposure if a GSE experiences financial
difficulty.
Table 1
After-Tax Return on Equity
(percent)
Fannie Mae*
Freddie Mac*
Sallie Mae*
FHLBanks*
Mortgage bankers**
Comm, banks***
S&P 500
Source: *
**
-
*** -
1990
1989
1988
1987
33.9
20.4
27.4
11.4
n. a.
7.8
12.0
30.7
25.0
30.5
12.0
24.9
27.6
30.2
9.9
0.7
13.3
14.8
25.1
28.2
27.3
10.4
5.3
2.0
11.8
0.0
7.8
13.6
Standard and Poor's.
Mortgage Bankers' Association. Estimate for 1989
is the latest available.
FDIC, for FDIC-insured commercial banks.
1 For a table presenting GSE links to the Federal
Government, see the introduction to the 1990 Report.
1
2
Because GSEs are insulated from the private market
discipline applicable to other privately owned firms, more
effective Government regulation can provide sustained outside
discipline to these entities. Providing such discipline is an
important public policy goal because mismanagement of the GSEs
would pose serious risks to the U.S. economy. Financial
insolvency of even one of the major GSEs would strain the U.S.
and international financial systems and could result in a
taxpayer-funded rescue operation.
Thus, the Government has an interest in establishing
effective financial safety and soundness regulation for GSEs to
protect the taxpayers* interests more than private market
mechanisms have done.
MAGNITUDE AND CONCENTRATION OF GSE ACTIVITY
A look at the magnitude and growth of GSE activity in the
financial markets gives an indication of the immense size of
their operations. The outstanding obligations of the GSEs,
including direct debt and mortgage-backed securities, totaled
$981 billion at the end of calendar year 1990 (see Table 2).
GSE debt represents almost 90 percent of the outstanding debt of
all private domestic financial intermediaries. In 1990, GSE
obligations accounted for nearly 14 percent of all funds raised
in the credit markets (see Table 3). That represents more than
four times the volume of activity of all other private domestic
financial intermediaries combined.
The concentration of potential taxpayer exposure with GSEs
is obvious when compared to the thrift and banking industries.
The total of credit market debt plus mortgage pools of the five
GSEs included in this report is greater than the total deposits
of the more than 2,000 insured S&Ls and about one-third the size
of the deposits of the more than 12,000 insured commercial banks
(see Chart 1). Consequently, the Federal Government's potential
risk exposure from GSEs, rather than being dispersed across many
thousands of institutions, is dependent on the managerial
abilities of the officers of a relatively small group of
entities.
NO IMMINENT THREAT, BUT CONCERNS NOT HYPOTHETICAL
The Treasury concluded in its last report on GSEs that none
of these institutions poses an imminent financial threat. That
conclusion has been reaffirmed by the assessment of the financial
3
Table 2
Outstanding Debt *
($ b illio n s, en d o f calen d ar year)
A n n ual
Business
Financial Intermediaries
GSEs**
Federal Government
Treasury (From public)
Other Federal ***
State & local
Foreign
Households
Total Credit Market Borrowing
Memo:
** GSEs
Debt Issues
Fannie Mae
Freddie Mac
FHLBanks
Farm Credit System
Sallie Mae
Total Debt Issues
Mortgage-backed securities
Fannie Mae
Freddie Mac
Total Mortgage-backed
Total GSE
*** Other Federal
Fed Agency
GNMA Mortgage Pools
FICO & REFCORP
Total Other
1980
1986
1987
1988
1989
1990
1,438.1
291.8
177.2
2,724.8
730.4
536.7
2,945.5
864.5
655.3
3,182.2
990.0
748.1
3,399.9
1,078.8
862.6
3,528.2
1,103.7
981.0
737.8
98.9
286.6
197.2
1,430.2
4,657.8
1,811.7
266.3
510.1
238.3
2,596.1
9,414.4
1,955.2
322.2
558.9
244.6
2,879.1
10,425.3
2,095.2
368.9
604.5
253.9
3,191.5
11,434.3
2,245.2
405.3
634.1
261.5
3,501.7
12,389.1
2,536.6
467.7
648.8
284.8
3,834.1
13,384.9
55.2
4.6
37.3
63.0
****
160.1
93.6
13.4
88.8
62.3
12.2
270.3
97.1
17.5
116.4
55.2
16.5
302.7
105.5
24.8
136.5
54.6
22.0
343.4
116.1
24.1
136.1
56.6 '
28.6
361.5
123.4
28.4
117.9
56.1
39.0
364.8
****
17.1
17.1
97.2
169.2
266.4
140.0
212.6
352.6
178.3
226.4
404.7
228.2
272.9
501.1
299.8
316.4
616.2
177.2
536.7
655.3
748.1
862.6
981.0
5.0
93.9
3.6
262.7
0.0
266.3
5.2
315.8
1.2
322.2
22.6
340.5
5.8
368.9
24.2
368.4
12.7
405.3
32.4
404.1
31.2
467.7
s(: s){
:(•
98.9
Sources: Federal Reserve Board Flow-of-Funds data; GSE balance sheets.
* Changes in outstandings will not necessarily be equal to flows reported by the Federal Reserve Board due
to changes in universe coverage and changes in accounting (valuation) methods.
4
Table 3
Net Market Borrowing
($ b illio n s, calen d ar year)
P eriod
1 9 8 0 -8 5
A n n ual
1 9 8 6 -9 0
1986
1987
1988
1989
1990
1,104.6
313.5
263.1
1,053.2
447.1
567.7
292.6
242.8
125.6
92.8
211.9
56.3
114.5
114.9
123.4
191.0
127.4
118.6
938.5
134.0
199.0
90.6
1,017.8
4,061.0
912.5
252.2
174.8
54.7
1,455.2
4,917.4
214.7
51.0
36.2
9.7
293.0
1,131.7
143.4
55.8
48.8
4.5
302.2
991.7
140.0
46.7
45.6
6.3
314.9
1,014.7
150.0
36.3
29.6
10.9
285.0
894.5
Memo:
* GSEs
Debt Issues
Fannie Mae
Freddie Mac
FHLBanks
Farm Credit System
Sallie Mae
Total Debt Issues
45.5
8.1
44.0
16.7
8.6
122.9
29.5
16.6
43.5
-13.0
30.4
107.0
-0.3
1.6
14.4
-6.8
3.6
12.5
3.5
4.1
27.6
-7.1
4.3
32.4
8.4
7.3
20.1
-0.6
5.5
40.7
10.6
-0.7
-0.4
2.0
6.6
18.1
Mortgage-backed securities
Fannie Mae
Freddie Mac
Total Mortgage-backed
55.0
85.2
140.2
244.8
215.9
460.7
42.2
68.7
110.9
42.8
43.4
86.2
38.3
13.8
52.1
49.9
46.5
96.4
115.1
263.1
567.7
123.4
118.6
92.8
114.5
118.4
-2.4
136.4
****
29.1
191.9
31.2
252.2
0.4
50.6
****
1.5
53.1
1.2
55.8
17.4
24.7
4.6
46.7
1.6
27.8
6.9
36.3
Business
Financial Intermediaries
GSEs*
Federal Government
Treasury (From public)
Other Federal**
State & local
Foreign
Households
Total Credit Market Borrowing
Total GSE
** Other Federal
Fed Agency
GNMA Mortgage Pools
FICO & REFCORP
Total Other
134.0
111.1
51.0
Sources: Federal Reserve Board Row-of-Funds data; GSE balance sheets.
26.7
118.4
264.4
62.4
14.6
23.3
260.1
884.8
7.3
4.3
18.2
-
0.5
10.4
3.3
71.6
43.5
8.2
35.7
18.5
62.4
Chart 1
Trillions $
Concentration of Potential Federal Exposure
December 31,1990
5 GSEs
Sources: FDIC, OTS, and GSE balance sheets.
12,338 Banks
6
safety and soundness of the GSEs by S&P that was done at the
request of the Treasury. However, that GSEs can get into^
financial difficulty is more than a hypothetical possibility.
Both the Farm Credit System and Fannie Mae experienced financial
stress during the 1980s. Federal assistance was provided to the
Farm Credit System: the Agricultural Credit Act of 1987 provided
up to $4 billion of Federal guarantees for bonds issued to assist
System institutions and authorized Federal payment of interest on
the guaranteed obligations.
The financial difficulties encountered by Fannie Mae in the
early 1980s, for which direct Federal assistance was not
required, is an example of the potential for a GSE's financial
condition to deteriorate while its access to the credit markets
remains unimpeded. Fannie Mae, unlike the Farm Credit System,
was able to pursue strategies that worked to restore profit
ability without the benefit of financial assistance from the
Government. The financial strain experienced by both GSEs
demonstrates the need for sensible, well—constructed regulations
that provide incentives to management to operate their
institutions in a financially safe manner, so as to prevent such
situations from developing again.
Since there is no imminent financial threat from the
activities of the GSEs, the temptation may exist not to create a
more sensible and effective regulatory structure. However, such
a course is inappropriate. The experience with the troubled
thrift industry and the Farm Credit System vividly demonstrates
that taking action once a financial disaster has already taken
place is costly and difficult. The most prudent policy goal
should be to establish a regulatory framework that will reduce
the likelihood of another financially painful Government rescue.
As is discussed in Chapter 4, the regulatory structure for GSEs
has lapses of varying degrees to the point that the current
structures are not adequate to provide sufficient assurance that
the GSEs will be operated in a financially safe and sound manner
over the longer term.
CHAPTER 2
EFFECTIVE FINANCIAL 8AFETY AND SOUNDNESS REGULATION
PRINCIPLES OF EFFECTIVE REGULATION OF GSES
A framework of effective regulation of GSEs should adhere to
the following principles:
First, the primary focus of GSE regulation should be
financial safety and soundness. Effective financial safety and
soundness regulation of GSEs can only be performed by agencies
that have the goal of maintaining GSE solvency as their primary
regulatory role. Maintaining GSE solvency and ensuring the long
term financial viability of GSEs should be the principal
objective of the Federal Government.
Second, the regulator must have sufficient stature to avoid
capture by the GSEs or special interests. To be effective and
avoid capture, the regulator must have strong statutory powers
and highly qualified staff.
Third, the private sector should play a role in helping the
Federal Government to assess the safety and soundness of GSEs. A
combination of public and private sector oversight would reduce
the risk of regulatory failure and, thus, GSE insolvency.
Fourth, the basic statutory authorities for safety and
soundness regulation must be consistent across all GSEs.
Oversight can be tailored through regulations that recognize the
unique nature of each GSE.
Primacy of safety and soundness regulation
Financial safety and soundness regulation of GSEs must be
the primary statutory goal of regulators, or regulatory conflict
in the existing structure may compromise effective safety and
soundness regulation. In times of economic stress, a regulator
with unclear or dual statutory objectives (safety and soundness
versus promotion of another public policy goal) may decide to
subordinate its safety and soundness responsibility in favor of
the achievement of other public policy goals. Therefore, unless
a regulator has an explicit primary statutory mission to ensure
safety and soundness, the Government may be exposed to excessive
risk.
Congress created the GSEs to serve the credit needs of
particular sectors of the economy, and the GSE charters define
7
8
the specific program missions they were assigned to accomplish.1
However, by virtue of the other characteristics bestowed on the
GSEs that create the impression that they are similar to Federal
agencies, the GSEs are effectively insulated from private market
discipline. Thus, the nucleus of any regulatory structure should
be financial safety and soundness in order to maintain financial
solvency and to ensure the long-term financial viability of the
GSEs so that they can perform their missions as Congress
intended.
While it is true that one responsibility of Government is to
choose among competing objectives, the current regulatory
structure for GSEs does not impart to financial safety and
soundness concerns the preeminent position that these concerns
should have. This structure can be improved so as to reduce
conflicts in agency missions in order that the public interest
objective of assuring that the GSEs are managed prudently is
performed effectively.
Sufficient regulatory stature
The responsibility for financial safety and soundness
regulation needs to be performed by an agency with sufficient
stature to withstand political pressure, from whatever source, to
weaken regulatory standards in order to meet other goals. The
agency needs the ability to withstand any tendency to be
captured.
The problem of avoiding capture appears to be particularly
acute in the case of regulation of GSEs. The principal GSEs are
few in number; they have highly qualified staffs; they have
strong support for their programs from special interest groups;
and they have significant resources with which to influence
political outcomes. A weak financial regulator would find GSE
political power overwhelming and even the most powerful and
respected Government agencies would find regulating such entities
a challenge. Clearly, it is vital that any GSE financial
regulator be given the necessary support, both political and
material, to function effectively.
Highly motivated and exceptionally qualified staffs are
necessary to regulate the GSEs effectively. Both the prestige of
the agency and the level of pay are important in this connection.
While pay levels can be adjusted to be competitive, the prestige
of the agency will be both a function of the agency*s management
1 Given that the charters are designed to establish the
general range of the operations of the GSEs, there are decisions
to be made on whether proposed new programs are within the scope
of a GSE's intended authority.
9
and the importance ascribed to its function by the executive and
legislative branches.
Funding for the regulatory agency should be provided by
assessments on the GSEs. The GSEs should have the responsibility
to fund regulation designed to assure their safety and soundness,
and certainly they have the financial ability to do so. The
regulatory agency*s budget should be exempt from the normal
appropriations process. This exemption is justified since
taxpayer funds are not being expended. Also, removal from the
normal appropriations process should assist the regulator in
dealing with the capture problem.
The Treasury Department is under no illusions concerning the
capture problem. No regulatory structure can ensure that it will
hot happen. Continued recognition of the importance of ensuring
prudent management of the GSEs and vigilance in this regard by
both the executive and legislative branches will be necessary.
Use of private market risk assessment mechanisms
The traditional structure and elements of financial
oversight are an important starting point for GSE regulation.
However, Governmental financial regulation over the last decade
has failed to avert financial difficulties in the banking and
thrift industries. Additionally, the financial services industry
has become increasingly sophisticated in the creation of new
financial products, and the pace of both change and product
innovation has accelerated in the last several years. As a
result, to avoid the prospect that GSEs might operate beyond the
abilities of a financial regulator and to protect against the
inherent shortcomings in applying a traditional financial
services regulatory model to entities as unique as GSEs, it would
be appropriate for the regulator to enlist the aid of the private
sector in assessing the creditworthiness of these firms.
Nationally recognized statistical rating organizations
(NRSROs) are one example of private sector entities that have
extensive experience in assessing the credit quality of diverse
business entities, and they represent a private sector resource
that can be used in assessing the financial condition of the
GSEs. The regulator should have the ability to use NRSROs or
other private sector entities to assess the financial health of
the GSEs. The information from the private sector would serve as
an independent source of information that would assist the
regulator in assuring financial safety and soundness.
2 9 4 -1 0 4 0 - 9 1
2 QL 3
10
Basic regulatory powers for financial safety and soundness
There are certain basic, but essential, regulatory powers
that should form the core of effective financial oversight for
each GSE. Taken together, these powers would ensure regulatory
consistency for all GSEs while, at the same time, allowing for
regulatory discretion in overseeing safety and soundness of
individual GSEs.
Consistency of financial oversight does not imply that the
regulatory burden is the same irrespective of the GSEs* relative
risk to the taxpayer. Weaker GSEs should be subjected to much
closer scrutiny than financially sound GSEs. However, the basic
powers of the regulator to assure financial safety and soundness
should be essentially the same for all GSEs.
Regulatory discretion is necessary within these broad powers
because the GSEs are unique entities and, as such, need capital
requirements that reflect the nature of the risks inherent in the
way each conducts its business. Additionally, because financial
products and markets change rapidly, regulatory discretion would
allow for flexibility to deal with the changing financial
environment.
The elements of effective financial safety and soundness
regulation include the following authorities for the regulatory
agency:
(1)
authority to determine capital standards?
(2) authority to require periodic disclosure of
relevant financial information?
(3) authority to prescribe, if necessary, adequate
standards for books and records and other internal controls?
(4)
authority to conduct examinations? and
(5) enforcement authority, including cease and desist
powers, and the authority to take prompt corrective action
for a financially troubled GSE.
These authorities are discussed below.
Capital standards.
The ability to establish standards
prescribing the capital adequacy of GSEs is the single most
important regulatory tool needed to ensure their financial safety
and soundness. Capital requirements should be stringent enough
to assure that the possibility of GSE insolvency is remote?
however, they should not be set so high that a GSE cannot
reasonably be expected to carry out its public purpose mission
effectively.
11
The perception of credit market participants of an implied
Government guarantee of GSE obligations gives GSEs virtually
unlimited access to borrowed capital irrespective of their
financial condition. By way of example, one GSE, Fannie Mae, has
stated, "We can fund all across the yield curve, in quantities we
determine [emphasis added]."2 Furthermore, Fannie Mae has
asserted that it has "proven, assured, and relatively low-cost
liquidity, even in tough times...."3 As a result, if a GSE
encounters financial difficulty, management is in the position to
employ even greater financial leverage in an effort to restore
the GSE to profitability. GSE status makes this option
attractive because the potential gains will accrue to
stockholders, while potential losses, if severe, can be left for
the taxpayer to cover. Currently, some GSEs are among the most
thinly capitalized of U.S. financial entities (see Chart 2).
An appropriate capital standard serves three functions.
First, by putting shareholder capital at risk, it provides a GSE
with incentives traditionally imposed by the market to manage
risk carefully, thus providing taxpayer protection. Second, it
helps ensure the long-term financial viability of GSEs so that
their services remain available to their intended constituencies.
Third, it serves as a monitoring device for changes in a GSE's
financial condition.
Regulatory discretion in establishing capital standards is
important. Because the nature of the risks that GSEs undertake
can change over time, the regulator should have flexibility to
determine and, subsequently, to modify capital rules.
A capital standard should be linked to the risks and the
amount of business a GSE undertakes. The principal risks are
interest rate risk, credit risk, management and operations risk,
and business risk. Interest rate risk relates to the sensitivity
of a GSE's financial performance to changes in interest rates and
in the differentials of interest rates for various maturity
sectors. Credit risk is the exposure of a GSE to borrower
default on the loans it has made, purchased, or guaranteed.
While judgment needs to be exercised in assessing these risks,
they can be mathematically modeled after certain key assumptions
have been made by the regulator.
Management and operations risk and business risk are not
easily modeled. Assessments of the quality of a GSE's management
and the efficiency of its operations are subjective. Assessment
of the business climate for a GSE is also hardly subject to
2
February 28, 1991 letter from Fannie Mae to S&P, p. 2.
(Fannie Mae provided a copy of this letter to the Treasury.)
3
Ibid.
Chart 2
Percent
Major Providers of Mortgage Credit
Capital-to-Asset** Ratios
December 31,1990
* Capital includes com m on stock, additional paid-in capital, and retained earnings, but not loan-loss reserves or subordinated debt.
** Total assets include on-balance sheet assets plus off-balance sheet contingent liablities risk adjusted according to appropriate institutional
criteria.
Sources: Federal Reserve, Office of Thrift Supervision, and GSE balance sheets.
13
precise measurement. Nevertheless, there should be an additional
capital requirement to cover these types of risk, over and above
the amount deemed necessary to cover interest rate and credit
risk.
Finally, for financially significant new activities of the
GSEs, the regulator needs the flexibility to determine in advance
how the risks of the activity should be assessed for purposes of
capital requirements. While it can be argued that, for the
larger GSEs, any new program at its inception will be small when
compared to the GSE*s established activities and thus cannot
conceivably threaten the financial health of the corporation, the
regulator should also not be faced with a fait accompli. The
regulator needs to be able to assess the financial implications
of new activities for the risk profile of the GSE and set capital
levels accordingly. Moreover, the regulator should be able to
modify initial capital treatment as experience demonstrates that
this is appropriate.
Financial disclosure.
Access to information on a timely
basis is a key ingredient of financial safety and soundness
regulation. The financial safety and soundness regulator should
have the authority to require periodic reporting of relevant
financial information in order to monitor the financial condition
of the GSEs it regulates.
While access to every conceivable GSE record may not be
necessary, the ability of the regulator to obtain all relevant
financial information should be unquestioned and not subject to
any delaying tactics or legal challenge. The regulator must have
the ability to monitor developments affecting the financial
health of the GSEs.
Books and records and internal controls.
The safety and
soundness regulator needs to have the ability to assure that
internal controls and information systems are adequate.
Deficiencies in this area can jeopardize the financial safety and
soundness of a GSE just as surely as inadequate capitalization.
The regulator needs to be able to assess the adequacy of internal
controls and information systems through examinations. The
regulator should also have the authority to prescribe rules in
this area as it deems necessary.
Examination authority.
The safety and soundness regulator
should be required to perform a full examination of each GSE at
least annually to assure that all requirements are being met and
that the organization is being managed prudently. Examinations
are crucial to assure the accuracy of information being provided
to the regulator and the effectiveness of internal management
controls.
14
Examinations should prove useful to both the regulator and
the GSE. As a result of these examinations, the staff of the
regulatory agency would become familiar with, and understand the
operations of, the GSE and may uncover potential problems so that
corrective action can be taken before trouble occurs. This is in
the interest of both the GSE and the regulator because an
uninformed regulator can just as easily err on the side of
excessive caution as on the side of laxness.
Finally, knowledge that there will be thorough financial
examinations periodically will provide management with additional
incentives to run their operations efficiently.
Enforcement authority.
The regulator needs to have
sufficient enforcement authority to assure compliance with
financial safety and soundness standards. While it should rarely
become necessary to utilize the more draconian of such powers,
having them ensures that the regulator has sufficient authority
to perform its mission.
It is contemplated that the regulator should be able to
interact with the GSEs in a more informal manner than a listing
of enforcement powers might suggest. Similar to other
regulators, the GSE regulator should find it possible to reach
understandings with the GSEs on issues and enter into letters of
agreement or memoranda of understanding.
However, in order for the regulator to be taken with the
utmost seriousness by the GSEs, the regulator should be given a
full panoply of enforcement powers. The use of the more serious
enforcement tools, it is hoped, would never prove necessary.
Their availability to the regulator, though, should assist it in
effectively assuring the financially safe and sound management of
the GSEs.
The regulator should have the authority to require GSEs to
rectify deficiencies in capital, information reporting,
recordkeeping, and internal controls. It should also have ceaseand-desist powers and the ability to remove, for cause, the
directors and top management of the corporation in extreme
situations. Finally, it should have the authority to take prompt
corrective action for a GSE that falls below certain minimum
capital levels.
Not all regulatory authorities should be punitive in nature.
A GSE that can demonstrate financial safety and soundness of the
highest order should be subject to less oversight than weaker
GSEs. This could take the form of exemption from regulatory
capital requirements, reduction in the frequency of reports and
examinations, and possible elimination of the requirement of
prior approval for new activities.
15
Receivership and conservatorship. The authority to put
insolvent entities in receivership or conservatorship is most
commonly discussed and used in the regulation of banks and
thrifts. In fact, the FCA and the Finance Board have this
authority for Farm Credit institutions and the FHLBanks,
respectively. However, the issue becomes more complicated for
the other GSEs.
As a practical matter, receivership is not a credible
regulatory option for an entity as large as certain GSEs. GSE
financial difficulties would not develop overnight, and effective
financial regulation should preclude the need to focus on
receivership as a regulatory alternative. Nevertheless, given
the significance to the economy of a financial failure of the
magnitude that a GSE failure would represent, the ability to
appoint a conservator may be appropriate.
If any of the GSEs were to approach insolvency, Congress
might act to avert a GSE failure because of the significant
economic impact involved and the implication for domestic social
policy. However, such future developments cannot be foreseen.
While it is extremely unlikely that conservatorship power would
ever be used, it would be prudent for a regulator to have this
power in order to manage a fast-moving disaster with both
domestic and international economic implications.
CHAPTER 3
EXISTING REGULATORY STRUCTURE OF GSEs
OVERVIEW
Responsibility for regulatory oversight of the GSEs is
currently divided among several Federal agencies. HUD has
primary regulatory responsibilities over Fannie Mae and Freddie
Mac. The Federal Housing Finance Board is the regulator for the
FHLBank System. The Farm Credit Administration has regulatory
oversight of the Farm Credit System and Farmer Mac. The Treasury
and the Department of Education have only minimal regulatory
authority over Sallie Mae.
Each agency exercises varying degrees of oversight over the
GSE(s) which it regulates. At the one extreme are the FHLBanks
which are regulated by an agency that has broad administrative
powers, including control over budgets, salaries, and the
appointment of several FHLBank directors. At the other extreme
is Sallie Mae which is virtually unregulated.
The regulatory environment for most of the GSEs includes
frequent interaction with the Department of the Treasury. With
the exception of the Farm Credit System and Farmer Mac, the
Secretary of the Treasury must approve most of the debt and
mortgage-related securities issued by the GSEs.1 However, the
Treasury uses its authority to coordinate the timing of issuances
of Federal agencies and GSEs so that the securities are marketed
in an orderly way. Treasury does not analyze the business
operations or capital adequacy of the GSE as part of the approval
process; therefore, it does not function as a financial safety
and soundness regulator.
With the exception of the Farm Credit System, the President
has the authority to appoint a fixed number, though a minority,
of directors to each GSE's board of directors. The duties and
responsibilities of Presidentially appointed directors are the
same as those of shareholder-elected directors. Directors are
traditionally responsible for seeing that management maximizes a
corporations profits and thus shareholder wealth, and for
ensuring adherence with the corporate charter as well as all
applicable laws and regulations. In addition, all GSE directors
must ensure that the GSE's public policy purposes are fulfilled
in accordance with its Federal charter. However, no director
currently has an explicit obligation to minimize taxpayer
exposure to risk.
1 For the specific security approval powers of the Secretary
of the Treasury for each GSE, see the 1990 Report.
16
17
chapter examines the existing regulatory structure for
the GSEs with respect to financial safety and soundness
regulation. The following descriptions are based on information
provided to the Treasury by the various agencies.
FEDERAL NATIONAL MORTGAGE ASSOCIATION AND FEDERAL HOME LOAN
MORTGAGE CORPORATION
Description of Regulatory Environment
HUD oversees the activities of Fannie Mae and Freddie Mac.
HUD was created by the Department of Housing and Urban
Development Act of 1965 to promote the sound development of the
nation's communities and metropolitan areas.2 Under the Act,
HUD|s duties are to act as housing and urban development policy
advisor to the President and as coordinator of Federal programs
promoting housing and fostering growth in urban areas.3
Within the broad scope of the duties outlined above, HUD was
given both general and specific regulatory authority over Fannie
Mae in 1968 and Freddie Mac in 1989.4 The Charter Acts of
Fannie Mae and Freddie Mac state that HUD "shall have general
regulatory power over [Fannie Mae and Freddie Mac] and shall make
such rules and regulations as shall be necessary and proper to
ensure that the purposes of [the Charter Acts] are
accomplished."
The Charter Acts also give HUD certain specific
powers over Fannie Mae and Freddie Mac which help to define its
role as a regulator (see below).
Historically, HUD's focus as a regulator has centered on
ensuring that $ its interpretation of the purposes of the Charter
Act were carried out? however, its philosophy and application of
2 42 U.S.C. 3531 et sea.
3 42 U.S.C. 3532.
4 HUD was given regulatory authorities over Fannie Mae in
Fannie Mae's Charter Act (12 U.S.C. 1717 et seg.) and Freddie Mac
under the Federal Home Loan Bank Act (12 U.S.C. 1451 et sea.) as
amended by FIRREA.
----- * '
5 The statement of HUD's general regulatory power over
Fannie Mae is contained in 12 U.S.C. 1723a(h), and the statement
regarding its power over Freddie Mac is in 12 U.S.C. 1452(b).
18
regulatory authority have varied over the years.6 In fact,
prior to acquiring regulatory responsibilities over Freddie Mac,
HUD did not have any full-time staff assigned to Fannie Mae
regulation? staff resources were devoted to Fannie Mae regulation
on an as-needed basis.7
Financial Institutions Review Board
Since the passage of FIRREA, HUD has expanded its regulatory
focus to include supervising, on a full-time basis, the financial
safety and soundness of Fannie Mae and Freddie Mac. HUD created
a new regulatory review board and staff to coordinate and
exercise its existing regulatory oversight over Fannie Mae and
its new oversight authority over Freddie Mac. The Financial
Institutions Review Board (FIRB) consists of the Deputy Secretary
of HUD, the General Counsel, the Assistant Secretary for HousingFHA Commissioner, the Assistant Secretary for Policy Development
and Research, the Assistant Secretary for Community Planning and
Development, and the President of GNMA.
The Board determines HUD's policy with respect to the
regulation of Fannie Mae and Freddie Mac and in connection with
the Secretary of HUD's responsibilities as a member of the
Oversight Board of the Resolution Trust Corporation. FIRB is
authorized to have a staff consisting of a Director, three^
economists, and one financial institutions examiner. Funding for
the regulatory oversight of Fannie Mae and Freddie Mac is
determined by the Executive Branch, and salary levels for its
staff are set by the General Schedule. HUD does not have the
authority to assess Fannie Mae or Freddie Mac for the cost of
regulation. The President's 1992 Budget contains a proposal
that, if enacted by Congress, would authorize HUD to collect fees
to cover its expenses in regulating Fannie Mae and Freddie Mac.
HUD has drafted new regulations for Freddie Mac and has
prepared a revised draft of its regulations for Fannie Mae.
These regulations are under review within the Administration at
this time. The intent of the new regulations is to ensure that
both Fannie Mae and Freddie Mac are operating under similar and
6 Under Secretary Alfred A. DelliBovi stated
Senate Banking Committee on February 9, 1990 that
say that HUD has not had a systematic approach in
philosophy or the management of its regulation of
before the
"It is fair to
either the
[Fannie Mae]."
7 HUD response to a Treasury question concerning regulation
of Fannie Mae and Freddie Mac, February 26, 1991.
8 Budget of the United States Government. Fiscal Year 1992,
Part 4-721.
19
uniform regulatory oversight, as well as to update the
regulations for Fannie Mae.
HUD interprets its general regulatory authority over Fannie
Mae and Freddie Mac to include authority to establish regulations
that go beyond its specific statutory powers, as contained in
Fannie Mae's and Freddie Mac's Charter Acts. Fannie Mae and
Freddie Mac have differing interpretations of HUD's general
regulatory authority.9 Fannie Mae officials believe that the
general regulatory power does not authorize HUD, for example, to
issue capital directives or cease and desist orders, or to
disapprove risky activities. Freddie Mac officials, on the other
hand, believe HUD has broad flexibility to promulgate rules
defining its powers over Freddie Mac.
Current Regulatory Authorities of HUD
According to statute, HUD has the following specific
authorities relating to the financial safety and soundness of
Fannie Mae and Freddie Mac.10
Capital standards
HUD has statutory authority to regulate the capital level of
Fannie Mae and Freddie Mac as it relates to levels of outstanding
unsecured debt.11 FIRREA imposes a capital requirement of
unsecured debt to total capital of 15-to-l on Freddie Mac and
reaffirms the same capital requirement for Fannie Mae. HUD has
the authority to increase the statutory ratio, that is, to make
the capital requirement less stringent, and has done so, but it
cannot lower it below 15-to-l.12
While the statutory ratio requirement can be a constraint on
the growth of Freddie Mac or Fannie Mae because it sets a maximum
leverage requirement, it is not an appropriate measure for
overall capital adequacy. The outstanding mortgage-backed
9 Fannie Mae and Freddie Mac responses to Treasury questions
regarding regulatory oversight and structure, February, 1991.
10 HUD's specific powers over Fannie Mae are set forth in 12
U.S.C. 1717(b), 1718(c), 1719(b), and 1723a(h). Its powers over
Freddie Mac are set forth in 12 U.S.C. 1452(b).
11 Regulatory capital for Fannie Mae and Freddie Mac
includes equity, reserves, and subordinated debt.
12 The ratio for Fannie Mae has been altered through changes
in regulations five times, to as high as 30-to-l, which was in
effect between late 1982 and the spring of 1987. The ratio was
last changed on December 31, 1988 when it was lowered from 25-to1 to 20-to-l.
20
securities (MBS) guaranteed by these GSEs are not accounted for
in the statutory requirement and, therefore, MBS issuance is not
restrained by a requirement that it be supported by a specific
level of capital. Moreover, the statutory capital requirement
does not take into account the quality of assets or the interest
rate risk in the portfolio. In order to be meaningful, any
capital requirement must, at a minimum, include off-balance sheet
obligations; thus, the capital requirement should include MBS,
since they represent a significant portion of the risk of the
operations of Fannie Mae and Freddie Mac.
Financial disclosure
HUD has statutory authority to require Fannie Mae and
Freddie Mac to make reports on their activities as it deems
advisable. Through its general regulatory power, HUD has
required extensive periodic reports on specific Fannie Mae
activities, as well as an annual study that details Fannie Mae's
business plans.13 Since FIRREA, HUD has requested additional
extensive information from both Fannie Mae and Freddie Mac. HUD
has used this data from the operations of both GSEs to develop
models that enable it to assess credit risk and interest rate
risk.
Books and records and internal controls
HUD does not have explicit statutory authority to prescribe
rules to ensure the adequacy of internal controls and information
systems at Fannie Mae and Freddie Mac. However, HUD believes it
has powers in this area under its general regulatory authority.
Examination authority
HUD is authorized to examine and audit the books and
financial transactions of Fannie Mae and Freddie Mac. HUD has
never conducted an extensive examination or audit of Fannie Mae
in the past. HUD officials state that the Department is
currently building the capacity to conduct bank-type examinations
of both GSEs. HUD is also in the process of contracting with a
private—sector firm to conduct an initial examination and to set
up procedures and criteria for future examinations.
Enforcement authority
According to HUD, its general regulatory authority gives it
sufficient enforcement powers over Fannie Mae and Freddie Mac.
HUD also has specific statutory enforcement powers. Its only
specific statutory authorities are its ability to limit dividends
13
24 C.F.R. 81.21-25.
21
and to change capital requirements, subject to the 15-to-l
ininiinuin, but both authorities suffer defects as true enforcement
powers. HUD only has specific authority to limit cash dividends
on common stock to a rate determined to be a fair rate of return
after consideration of current earnings and capital condition.
Moreover, as described previously, its specific authority over
capital standards is limited to on—balance sheet activities, and
HUD is unable to impose stricter capital standards than the
statutory 15-to-l leverage ratio.
Other regulatory authorities
Prior approval.
HUD has the power to approve, prior to
initiation, programs of Fannie Mae and Freddie Mac involving the
purchase, servicing, sale, or lending on the security of, or
otherwise dealing in, conventional mortgages. Historically,
HUD's criteria for new programs have included consideration of
both housing goals and the risk to the Government, but with
different emphases at different times. Since FIRREA, HUD has
increased the emphasis given to the risks to the Government posed
by new programs.
Low- and moderate-income requirements.
HUD may require that
a reasonable portion of the mortgage purchases of Fannie Mae and
Freddie Mac be related to the national goal of providing adequate
housing for low- and moderate-income families, but with reason
able economic return to the GSEs. HUD currently requires 30
percent of Fannie Mae's annual mortgage purchases to be secured
by housing for low- and moderate-income families.14
FEDERAL HOME LOAN BANKS
Description of Regulatory Environment
The Finance Board is an independent agency within the
Executive Branch that oversees the FHLBanks. It was created by
FIRREA, which transferred the authority of the Federal Home Loan
Bank Board with respect to the FHLBanks to the Finance Board.
The Finance Board expects to be fully staffed at 88
employees by June 1991 and is funded through semiannual
assessments on the FHLBanks. FIRREA directs the Finance Board to
consult with, and maintain comparability with the compensation
of, the Federal banking regulators. The Finance Board recently
adopted a permanent compensation plan modeled after that of the
Federal Deposit Insurance Corporation and the Resolution Trust
Corporation Oversight Board.
See 24 C.F.R. 81.2 for HUD's definition of low— and
moderate-income families.
22
The Finance Board is composed of four part-time directors
and one full-time director, who are appointed by the President,
and the Secretary of HUD who serves ex officio. FIRREA requires
that the directors have extensive experience in housing finance
or a commitment to providing specialized housing credit. At
least one director must be from an organization representing
consumer or community interests. The Finance Board*s appointed
directors were sworn in on December 18, 1990.
The statutory mission of the Finance Board includes both
financial safety and soundness and programmatic responsibilities.
FIRREA set forth the following duties for the agency:
(1)
to supervise the FHLBanks?
(2) to ensure that the FHLBanks carry out their housing
finance mission;
(3) to ensure the FHLBanks remain adequately capitalized
and able to raise funds in the capital markets? and
(4) to ensure that the FHLBanks operate in a safe and sound
manner.15
The agency*s two stated strategies for fulfilling its
statutory mission are establishing its credibility as a safety
and soundness regulator and establishing the Bank System as the
nation*s premier housing lender.16 The Finance Board views its
primary mission as ensuring the safe and sound operations of the
FHLBanks through examinations, audits, and financial reporting.
The second strategy involves ensuring that the FHLBanks meet
their public purpose by providing housing finance as efficiently
as possible. This includes providing the leadership to help the
FHLBanks adapt to changes in the thrift industry and expand their
lending to commercial banks and credit unions.
Current Regulatory Authorities of the Finance Board
The Finance Board has broad statutory powers over the
FHLBanks. It uses these powers to ensure the safety and
soundness of the FHLBanks and to ensure that they carry out their
public purpose of providing home finance. These powers enable
the Finance Board to take preventive action to protect individual
FHLBanks which are jointly and severally liable for the Bank
System*s consolidated obligations. The FHLBank Act provides that
15 12 U.S.C. 1422a(a) .
16 Response of the Finance Board to Treasury questions
regarding regulation of the FHLBanks, February 19, 1991.
23
individual FHLBanks may exercise their powers subject to the
approval of the Finance Board.17 The Finance Board also
approves applications for new members to the Bank System.
Capital standards
The Finance Board has an explicit statutory duty to ensure
that the FHLBanks remain adequately capitalized. The FHLBanks
are currently subject to both legislative and regulatory capital
requirements. The FHLBank Act requires members to hold capital
stock in their FHLBank equal to the greater of .3 percent of the
member's total assets, one percent of the member's mortgagerelated assets, or 5 percent of a member's outstanding
advances.
The Finance Board is developing credit-risk-based
capital standards for the FHLBanks that will include off-balance
sheet items.
However, the statutory stock purchase
requirement for advances effectively sets the capital-to-advances
ratio at a minimum of 5 percent.
The regulatory requirement, which is also required by
consolidated bond covenants, mandates that the Bank System's
consolidated obligations not exceed 12 times the sum of its
capital stock and reserves. As of year-end 1990, consolidated
obligations comprised about three-quarters of the Bank System's
liabilities.
The Finance Board also controls the FHLBanks' capital
holdings through its approval of the FHLBanks' quarterly
dividsnds. Quarterly dividend data are reviewed to determine
regulatory and financial appropriateness of projected individual
FHLBank dividends. If a FHLBank were found to have insufficient
capital, its permissible dividend payments could be reduced.
Finally, the Finance Board can limit the redemption of
capital stock should a FHLBank's financial condition warrant.
Every institution that belongs to the Bank System must purchase
stock, which is not traded on a secondary market. The stock is
redeemable at par value ($100 share), unless the Finance Board
determines that a FHLBank's paid-in capital is, or might be,
17 12 U.S.C. 1432(a) .
18
Advances have traditionally constituted virtually all of
the Bank System's assets, although the advance-to-asset ratio has
declined recently, from 90 percent in 1980 to 71 percent at
year-end 1990.
19
The Finance Board expects to address interest rate risk
through a separate policy which would limit a FHLBank's exposure
to interest rate risk.
24
impaired. In this case, the Finance Board may order the FHLBank
to withhold a pro-rata share of the impaired capital.20
Financial disclosure
As noted above, the Finance Board collects a wide variety of
financial data on a regular basis, which are used to monitor
interest rate, credit, and lending concentration risk of
individual FHLBanks and the Bank System as a whole. The Finance
Board recently developed a model to measure FHLBanks* exposure to
interest rate risk. The Finance Board plans to use the model to
monitor and set limits on the FHLBanks* interest rate risk
exposure.21
Debt financing requests by individual FHLBanks are used to
forecast monthly debt requirements of the Bank System and ensure
adequate financing coordination among the FHLBanks. Internal
audit reports on FHLBank operations and external audit reports on
FHLBank financial statements are provided on an annual basis.
Finally, the Finance Board reviews the minutes of the meetings of
the FHLBank boards of directors and their committees.
Books and records and internal controls
The Finance Board has the authority to ensure that the
internal controls and information systems of the FHLBanks are
adequate. If deficiencies are found in this area, the Finance
Board can issue a supervisory letter or directive that would
require the FHLBanks to promptly correct the deficiencies.22
Examination authority
The FHLBank Act requires the FHLBanks to be examined
annually.23 The Finance Board began on-site examinations in
20 12 U.S.C. 1426(e) .
21 The model measures the durations of equity for each of
the FHLBanks under current interest rate conditions and after 200
basis point increases and decreases in interest rates.
22 The Finance Board states it has the authority to do so
under 12 U.S.C. 1422b(a), which gives it the power to issue
orders necessary to fulfill the provisions of the FHLBank Act.
23
12 U.S.C. 1440.
25
March 1991.24 The Examination Division currently employs three
individuals; it is slated to have a staff of eight in place by
the end of 1991. The scope of the examinations generally focuses
on credit/collateral positions, funding operations, management,
and regulatory compliance. In addition, the Finance Board will
perform special and follow-up examinations as necessary. Finance
Board officials believe that much of the information-gathering,
monitoring, and analysis associated with oversight of the
FHLBanks does not require an on-site presence. They expect to
monitor and examine some issues off-site, based on specific
information requests and other documentation and information
routinely received.
The Finance Board reviews daily information on certain
balance sheet items, off-balance sheet activity, investments, and
consolidated obligations to monitor compliance with minimum
reserve (liquidity) requirements, leverage ratio limitations, and
investment limitations. Operational information is used to
monitor director eligibility25 and the FHLBanks correspondent
banking services' compliance with the Private Sector Adjustment
Factor. FHLBank monthly balance sheets, income statements, cash
flow statements, and investment activities are reviewed as well.
The Board receives updated 12-month income projections as part of
the FHLBanks' quarterly dividend proposals.
All internal audit departments prepare an annual audit plan,
which is reviewed by the Finance Board. Finance Board staff
attends FHLBank audit committee meetings. In addition, the
Finance Board receives copies of all internal audits and minutes
and reports of the FHLBanks' audit committees.
Enforcement authority
The statute gives the Finance Board authority to suspend or
remove officers and directors for cause.26 The Finance Board
may also issue supervisory letters, supervisory and capital
directives, and restrict dividends. The Finance Board states it
has implicit authority to issue temporary and permanent cease and
4 In 1990, supervisory visits were made to all FHLBanks.
In addition, the Finance Board has conducted analyses of each
FHLBank's internal audit department, financial performance and
regulatory compliance.
25 Under FIRREA, no person who is an officer or director of
a member institution that fails to meet any minimum applicable
capital requirement is eligible to become a director of a
FHLBank.
26 12 U.S.C. 1422b(a) (2) .
26
desist orders, although FIRREA did not give it the explicit
authority to do so.27 The statute does not authorize the
Finance Board to assess civil money penalties.
The Finance Board has initiated several enforcement actions
since August 1989. Most of these actions were supervisory
letters addressing investments in excess of authorized levels.
Another matter involved the violation of the Finance Board's
limitation on a FHLBank president's compensation.
Other regulatory authorities
Prior approval.
The Finance Board has the power to approve
new and existing activities.28 Permissible types and amounts of
FHLBank investments are set forth in the Finance Board's funds
management policy. A FHLBank must petition the Finance Board if
it wants a waiver from the guidelines. The Finance Board
generally reviews petitions on safety and soundness grounds. For
example, last year it withheld approval of a request by the
FHLBank of Dallas to purchase participations in construction
loans on the grounds that the proposed investments did not
satisfy statutory requirements.29
The Finance Board also approves the FHLBanks' debt
offerings. It can limit indirectly other activities through
approval of the individual FHLBank budgets.
Budgets.
Analysis of FHLBank budgets includes review of
budgeted expenditures, projected advances, net income, and
variances between each FHLBank's approved operating and capital
budgets and actual expenditures. Beginning with the 1991 FHLBank
budgets, the Finance Board established specific performance goals
for each FHLBank, including targets for operating expenses
relative to income.
Officers and directors.
For each of the 12 FHLBanks, the
Finance Board appoints six of the directors and supervises the
election of the remainder, for a total of at least 14 directors.
By statute, at least two of each FHLBank's appointed directors
27 The Finance Board states it has the authority under 12
U.S.C. 1422b(a), which gives it the power to issue orders
necessary to fulfill the provisions of the FHLBank Act, and under
12 U.S.C. 1432(a)(1), which gives the Finance Board authority to
restrict powers granted to the FHLBanks by law.
28 12 U.S.C. 1432(a) and 1422b(a) .
29 The Finance Board is in the process of revising the funds
management policy.
27
must be representatives from organizations representing consumer
or community interests. The Finance Board designates the chair
and vice-chair of each FHLBank's board of directors and the
geographic area of elective directorships in each district. The
Finance Board approves the compensation of FHLBank presidents and
directors.
Strategic planning. The Finance Board has established a
strategic planning directorate, which has as its primary
responsibility the strategic planning for the Bank System,
including membership and credit product issues. The regulator
also reviews and approves annual strategic plans for the
individual FHLBanks (from which capital and operating plans are
developed) and mid-year updates of the strategic plans. These
are used to monitor the FHLBanks* goals and objectives.
Liquidations/reorganizations of FHLBanks. The Finance Board
has broad powers in this area, within a statutory framework that
mandates that there be at least eight, but not more than twelve,
FHLBanks. The statute provides that the Finance Board may
liquidate or reorganize a FHLBank whenever it finds such action
will aid the efficient and economical accomplishment of the
FHLBank Act. In the case of any liquidation or reorganization,
another FHLBank may, with the approval of the Finance Board,
acquire assets of any such liquidated or reorganized FHLBank and
assume part or all of the liabilities.
FARM CREDIT SYSTEM
Description of Regulatory Environment
The Farm Credit Administration is an independent agency in
the Executive Branch, created to regulate and examine the banks,
associations, and related institutions and organizations of the
Farm Credit System chartered under the Farm Credit Act of 1971,
as amended (the Act). Prior to 1985, the FCA actively promoted
the System, essentially acting as the System's voice on most
matters affecting it. The FCA had a 13-member board, all
appointed by the President. Twelve of these members, however,
were selected from lists of nominees selected by System
representatives in the twelve Farm Credit districts. As a
result, these members were more likely to have allegiances to the
System. The FCA had no explicit enforcement powers and used its
numerous prior approval authorities to exert influence on the
28
day-to-day decisions of System banks, including credit decisions
on individual loans.30
With the Farm Credit Amendments Act of 1985, Congress gave
the FCA a mandate to be a stronger regulator.
The 1985
legislation and the Agricultural Credit Act of 1987 gave the FCA
enforcement powers, changed the board structure and, to a large
extent, removed the FCA from the day-to-day management activities
of System institutions.
The management of the FCA is vested in a full-time, threemember board, appointed by the President with the advice and
consent of the Senate. The board members, one of whom is
designated as chairman by the President, serve six-year terms and
are reguired to be Mbroadly representative of the public
interest.1,32
The Chairman, who also serves as the agency's chief
executive officer, is required to consult on a regular basis
with:
(1) the Secretary of the Treasury concerning System
borrowing ?
(2) the Board of Governors of the Federal Reserve
System concerning the effect of System lending activities on
national monetary policy; and
(3) the Secretary of Agriculture concerning the effect
of System policies on farmers, ranchers, and the
agricultural economy.
30 The FCA has had numerous other approval authorities,
including approval of interest rates on loans offered by each of
the System banks.
31 The House Report for the Farm Credit Amendments Act of
1985 (H. Rep. No. 425, 99th Cong., 1st Session, 1985, p. 3) reads
as follows:
The Farm Credit Administration, an existing federal agency
that supervises Farm Credit System activities, would be
reorganized and strengthened. The Farm Credit Administra
tion would abandon past practices that amount to day-to-day
participation in management of System activities and would
become an arm's-length regulator like other similar federal
agencies.
32
12 U.S.C. 2242.
29
The FCA is organized into six functional offices and has 526
employees, 356 of whom are in the Office of Examination.33 FCA
operating expenses are covered by assessments on System
institutions.
Current Regulatory Authorities of the FCA
The FCA's general authorities include the authority to
promulgate rules and regulations for the implementation of the
Farm Credit Act, to examine and regulate System institutions, and
to require such reports from System institutions as it deems
necessary.34 The FCA also has more specific, enumerated
authorities which include the authority to establish standards
for System institutions with respect to loan security
requirements and to conduct loan and collateral security review.
In addition, the FCA has the authority to regulate the borrowing,
repayment, and transfer of funds and equities among System
institutions.
The FCA's authorities with regard to setting capital
standards, examining System institutions, requiring reports and
other financial disclosure, taking enforcement actions, and
forcing mergers or liquidations are spelled out in the Act. The
following sections contain more thorough descriptions of these
authorities, as well as the FCA's prior approval authorities.
Capital standards
The Agricultural Credit Act of 1987 required the FCA to
"establish minimum permanent capital adequacy standards" for
System institutions; these standards were required to "specify
fixed percentages representing the ratio of permanent capital of
the institution to the assets of the institution, taking into
consideration relative risk factors as determined by the Farm
Credit Administration."35 The definition of permanent capital
includes retained earnings, allocated and unallocated earnings,
surplus (less allowance for losses), and at-risk stock.36
33 Data are from FCA, as of March 11, 1991.
34 12 U.S.C. 2243.
35 12 U.S.C. 2154; section 301(a) of P.L. 100-399.
36 At-risk stock includes voting and nonvoting stock
(including preferred stock), equivalent contributions to a
guaranty fund, participation certificates, and allocated
equities. It does not include stock and allocated equities
protected as a result of the 1987 Act.
(12 U.S.C. 2154a).
30
Although the FCA has little discretion regarding the
definition of permanent capital, it retains significant
discretion as to the appropriate level of capital and the risk
weighting of assets. The FCA issued regulations in 1988 setting
risk-based capital standards of 7 percent for all System
institutions. 7 The risk weightings of assets for these
standards are roughly comparable to those promulgated by the
commercial bank regulators. For example, cash has a 0 percent
weighting; Treasury securities have a 10 percent weighting; State
and local government obligations backed by full faith and credit
have a 20 percent weighting; and rural housing loans secured by
first lien mortgages have a 50 percent weighting. One difference
between these standards and those adopted by the commercial bank
regulators is that the general allowance for losses does not
count as a component of capital.38
The failure of an institution to meet its minimum capital
standard may be deemed by the FCA to constitute an unsafe and
unsound practice, thus giving the FCA the authority to take one
of a number of enforcement actions. The FCA may also require an
institution with inadequate capital to submit and adhere to a
plan describing the means and timing by which the institution
will achieve its required capital level. The FCA may consider
the institution's progress in adhering to its plan when the
institution seeks the FCA's approval for any proposal that would
divert earnings, diminish capital, or otherwise adversely affect
the ability of the institution to comply with its plan. Finally,
System institutions may not pay dividends, patronage refunds, or
retire stock, if doing so would cause the institution to fail to
meet its minimum capital standards.39
Another component of the FCA's capital standards requires
the System's Banks for Cooperatives (BCs) to add at least 10
percent of annual earnings to unallocated surplus until
unallocated surplus is equal to one-half of their 7 percent
minimum capital requirement.40 The FCA argued that this was
37 12 C.F.R. 615.5205.
38 Under the guidelines adopted by the Office of the
Comptroller of the Currency, the allowance for loan losses may be
counted as a part of Tier 2 capital, up to 1.25% of risk-weighted
assets.
39 12 U.S.C. 2154.
40 This requirement was the FCA's response to a practice
common to the BCs at the time the FCA issued these capital
standards. "Allocated surplus" is a non-cash distribution to
stockholders. Like cash dividends, it decreases a BC's taxable
income; however, it also counts as capital for purposes of a BC's
31
necessary because the BCs only had a small level of capital funds
not allocated to their borrowers. Therefore, in the interest of
safety and soundness, the FCA required a buffer consisting of
unallocated equity. This requirement is conceptually similar to
the Tier 1 and Tier 2 classifications of capital for commercial
banks. It may be appropriate to consider a similar requirement
for all other System institutions, particularly given some of
Treasury's concerns expressed in the 1990 Report regarding the
quality of borrower stock as capital.
Financial disclosure
The FCA has the authority to regulate the preparation by
System institutions of information on their financial condition
and operations for dissemination to stockholders and investors.
The FCA has used this authority to issue regulations containing
minimum information requirements for System institutions'
quarterly and annual reports to shareholders. These reports are
required to include financial statements prepared in accordance
with generally accepted accounting principles and audited by a
qualified public accountant.41
Each System institution is also required to submit a
quarterly report of condition and performance, or call report, to
the FCA. These call reports are similar in format and level of
detail to those filed by banks and thrifts with their Federal
regulators.42
The FCA also has a loan accounting report system (LARS),
which consists of detailed loan data at the individual loan
level. The FCA requires System institutions to submit this data
on computer tapes on a quarterly basis. LARS is used as an
additional tool to assist the FCA's examination process, as well
as for special projects.
minimum capital standards. The FCA issued the additional
standard for the BCs to create a buffer between allocated
equities (borrower stock and allocated surplus) and any losses
greater than the reserve for loan losses.
(53 C.F.R. 40045
(1988)) .
41
There are several exceptions to generally accepted
accounting principles that are established by statute.
42
12 C.F.R. 621.10.
32
Books and records and internal controls
The FCA has broad statutory authorities to regulate and
examine System institutions, as well as specific authorities to
monitor management effectiveness and prescribe uniform financial
reporting standards. These authorities give the FCA adequate
power to require effective internal controls and information
systems.43
Examination authority
The FCA is required to examine System institutions at least
once each year.44 These examinations are required to include an
analysis of credit and collateral quality and capitalization of
the institution, an appraisal of the institution's management,
and an appraisal of the institution's application of policies
carrying out the Farm Credit Act, FCA regulations, and the
institution's effectiveness in servicing all eligible
borrowers.45 This last requirement seems to imply that the
FCA's responsibilities could be construed to include forcing
System institutions to make loans to all "eligible borrowers."
However, during discussions on this topic, FCA staff suggested
that, in practice, the FCA's sole concern is that System
institutions' extension of credit be sound from a business
perspective.
Like other financial institution regulators, the FCA uses a
rating system (CAMEL) which rates institutions on a scale of one
to five for capital adequacy, asset quality, management and
administration, earnings, and liquidity. Examiners calculate 26
key statistics and are expected to consider numerous qualitative
factors when rating institutions. Any institution receiving a
CAMEL rating of 3 (or worse) is automatically referred to the
Office of Regulatory Enforcement, which must then consider
whether (and in what form) to take action.
FCA examiners do not generally examine each loan in an
institution's portfolio, but use sampling techniques which are
likely to concentrate more heavily on new, large and troubled
loans. Institutions which are considered riskier generally
receive more comprehensive examinations. For example, one part
of an examination consists of the examiner's recommendations for
43
12 U.S.C. 2254 and 12 U.S.C. 2257(a).
44 Except Federal land bank associations, which the FCA is
only required to examine once every three years.
45 12 U.S.C. 2254.
33
future examination requirements, including follow-up activities
and the time and staffing required for such activities.
The FCA is authorized to publish the report of examination
of any System institution that fails to comply with an FCA
recommendation (based upon an examination) within 120 days of
receiving notification of the recommendation. The FCA board may
also require examinations of the condition of any organization
(other than a federally regulated financial institution) with a
loan from any System institution.
Enforcement authority
The FCA has essentially the same enforcement powers that
commercial bank regulators have. These include the authority to
issue cease and desist orders, to suspend or remove directors and
officers, and to require payment of civil money penalties.
Cease and desist orders.
If the FCA believes that an
institution is engaging in an unsafe or unsound practice, or is
violating a law, rule or regulation, the FCA may fix a time and
place for a hearing to determine whether a cease and desist order
should be issued.46 However, if the FCA determines that an
institutions actions are likely to cause insolvency or sub
stantial dissipation of assets or earnings prior to completion of
a hearing, the FCA may issue a temporary cease and desist
order.47
Suspension or removal of directors or officers.
The FCA may
remove a director or officer of a System institution if the FCA
believes that the individual has violated a law, rule or
regulation, or has engaged in an unsafe or unsound practice, or
has breached a fiduciary duty.48 The FCA may also remove a
director or officer who has been charged with a felony if that
individual's continued service might pose a threat to the
interests of the institutions shareholders or investors in
System obligations (or impair public confidence in the
institution or the System) ,49
Civil money penalties.
If an institution, officer,
director, or employee violates the terms of a final cease and
desist order, the FCA may require payment of a civil money
46 12 U.S.C. 2261.
47 12 U.S.C. 2262.
48 12 U.S.C. 2264.
49
12 U.S.C. 2265.
34
penalty of up to $1,000 per day. The FCA may also require
payment of a civil money penalty of up to $500 per day for a
violation of a regulation or provision of the Farm Credit Act.50
Since 1986, the FCA increasingly has made use of its
enforcement powers, particularly for issues involving asset
quality and credit administration, capital adequacy, and quality
of management. In 1990, the FCA took 89 enforcement actions,
including 10 cease and desist orders.51
Other regulatory authorities
Prior approval.
The FCA continues to have a number of prior
approval authorities, such as the offering of new services52,
the issuance of most Systemwide obligations, modifications of the
boundaries of farm credit districts, and the merger,
consolidation, or division of the territories of System
institutions.
Mergers or liquidations of system institutions.
The FCA may
require an association to merge with another association if it
determines, with the concurrence of the board of the supervising
bank, that an association has failed to meet its outstanding
obligations or failed to conduct its operations in accordance
with the Act.53 The FCA may also appoint a conservator or
receiver for any System institution if it determines that one of
the following conditions exists:
(1)
The institution is insolvent.
(2) There has been a substantial dissipation of assets
or earnings due to violations of law, rules or regulations,
or to any unsafe or unsound practice.
50
12 U.S.C. 2268.
51 Other enforcement actions included 16 supervisory
letters, 6 agreements, 36 follow-up letters, 15 conditions of
reorganization, 2 amended cease and desist orders, and 4
conditions of corporate restructuring.
52 The FCA has issued regulations requiring System
institutions to seek FCA prior approval for new services.
(12 C.F.R. 618.8000). Numerous sections of the statute were
cited as the authority for these regulations, including 12 U.S.C
2020, 12 U.S.C. 2076, and 12 U.S.C. 2128.
53
12 U.S.C. 2183.
35
(3) The institution is in an unsafe or unsound
condition.
(4) The institution has committed a willful violation
of a final cease and desist order.
(5) The institution is concealing its books, papers,
records, or assets, or is refusing to make such materials
available for inspection to an FCA examiner.
(6) The institution is unable to make a timely payment
of principal or interest on any insured obligation issued by
the institution.
The last forced liquidation of a System institution involved
an association in 1989. Prior to that the Federal Land Bank of
Jackson was put into receivership in 1988.
Farm Credit System Insurance Corporation
The Insurance Corporation was created by the Agricultural
Credit Act of 1987 to ensure Mthe timely payment of principal and
interest on notes, bonds, debentures, and other obligations” of
System banks.54 The Insurance Corporation is also required to
satisfy any defaults of System institutions on their Financial
Assistance Corporation bond interest and principal payments and
to ensure the retirement of any liquidated institution's
protected borrower stock. In addition, the Insurance Corporation
may provide assistance to troubled banks.
The members of the Board of the Insurance Corporation are
also the members of the FCA Board, although the Insurance
Corporation's Chairman is required to be a member other than the
FCA Chairman. The Insurance Corporation will not assume its full
statutory authorities until January 1, 1993.
The Insurance Corporation's sources of funds include $260
million which was transferred from the FCA (the "revolving
fund"), premiums assessed on System banks, and interest earned
from investments. The target level for the fund, the "secure
base amount," is set by statute at two percent of insured
obligations.55 As of December 31, 1990, the net worth of the
54 12 U.S.C. 2277a-l.
55 12 U.S.C. 2277a-4. Premium levels are also set by
statute: 15 basis points on the banks' accrual loans; 25 basis
points on banks' nonaccrual loans? 1.5 basis points on the
guaranteed portions of federally guaranteed loans made by the
banks (and in accrual status); and 3 basis points on the
36
Insurance Fund was about $300 million, or just under one-third of
the secure base amount.
One of the principal reasons for the Insurance Corporation^
creation was the difficulty of implementing the "joint and
several liability" mechanism during the 1980s.56 This mechanism
(which will stand behind the Insurance Corporation when it
becomes fully operational in 1993) legally binds all System banks
to stand behind all Systemwide obligations, should one bank be
unable to redeem its share of a maturing obligation. One problem
with joint and several liability that is shared by the Insurance
Corporation, however, is the difficulty of accessing capital in
the System at the association level. Because only System banks
are bound by the joint and several liability agreement, there was
in the past significant reluctance on the part of some associa
tions to inject additional capital into a troubled bank in which
they held stock. Similarly, under current law, the Insurance
Corporation does not have the authority to tap association
capital when a bank fails.
Powers of the Insurance Corporation
The Insurance Corporation is authorized to make examinations
and require information and reports from System institutions. If
the FCA finds reason to appoint a conservator or receiver for a
System institution, the conservator or receiver is required to be
the Insurance Corporation. The Insurance Corporation may make
loans to, purchase the assets or securities of, assume the
liabilities of, or make contributions to, any troubled insured
bank for one of the following reasons:
(1)
to prevent putting the bank in receivership?
(2)
to restore the bank to normal operation? or
(3) to reduce the risks to the Insurance Corporation
when severe financial conditions threaten numerous banks.
Before giving assistance to a System bank, the Insurance
Corporation must determine that the cost of assistance is less
than the cost of liquidation.
guaranteed portions of State government-guaranteed loans made by
the banks (and in accrual status). When the secure base amount
is reached, the Insurance Corporation is required to reduce the
premiums to an amount sufficient to ensure maintenance of the
secure base amount.
56 See discussion on page D-53 of 1990 Report.
37
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
Description of Regulatory Environment
The Agricultural Credit Act of 1987, which chartered
Farmer Mac as an institution of the Farm Credit System, gave the
FCA general supervisory authorities over the corporation.57 The
FCA may assess Farmer Mac for the costs of these regulatory
activities.58
Current Regulatory Authorities of the FCA
The FCA's regulatory authorities with respect to Farmer Mac
include examination, safety and soundness supervision and
enforcement authorities, but not general rule-making authority.
During consideration of the 1990 Farm Bill, the FCA failed in an
attempt to have its statutory authorities over Farmer Mac
expanded to include an express grant of general rule-making
authority. The FCA argues that such authority is needed in order
to make its ability to use safety and soundness enforcement
powers more effective. The FCA contends that without general
rule-making authority, it is limited to taking reactive, "after
the fact” enforcement actions, rather than preventive actions
through rules and regulations.
Farmer Mac staff indicated that the FCA's current
authorities are more than adequate for it to act in response to
any safety and soundness concerns. Indeed, Farmer Mac believes
that general rule-making authority would give the FCA too much
influence over Farmer Mac's day-to-day business and management
decisions.
Capital standards
The FCA believes that capital must be adjusted periodically
to reflect the risk in an institution's operations and, thus, is
an appropriate subject for examiner review. However, without
general rule-making authority, it is not certain that the FCA has
the authority to set capital standards by regulation.
57 12 U.S.C. 2279aa-l.
58
12 U.S.C. 2279aa-ll.
38
Financial disclosure
Fanner Mac is required to publish an annual report prepared
in accordance with generally accepted accounting principles,
containing such information as required by the FCA. This report
is also required to be audited by an independent public
accountant?59 The FCA also requires Farmer Mac to file a call
report on a quarterly basis.
Examination authority
The FCA has the authority to
and financial transactions and to
regulations for implementing such
required to examine Farmer Mac at
examine Farmer Mac's condition
promulgate rules and
examinations.60 The FCA is
least annually.
Enforcement authority
The FCA, in its role as supervisor of Farmer Mac's safety
and soundness, has the same enforcement powers that it has for
other System institutions. These include the authority to issue
cease and desist orders, suspend or remove directors and
officers, and require payment of civil money penalties.
Other regulatory authorities
Prior approval authority.
The FCA has no prior approval
authorities over Farmer Mac.
STUDENT LOAN MARKETING ASSOCIATION
Description of Regulatory Environment
No Federal agency has statutory authority to regulate Sallie
Mae business operations or capital adequacy. The Higher
Education Act of 1965 specifically states that:
Nothing in this section [pertaining to Department of
Education and Treasury approval of Sallie Mae obligations]
shall be construed so as to authorize the Secretary of
Education or the Secretary of the Treasury to limit,
59 Ibid.
60
Ibid.
39
control, or constrain programs of the Association or support
of the Guaranteed Student Loan Program by the
Association.61
The Department of Health and Human Services is also without
authority to regulate Sallie Mae.
Sallie Mae is subject, from time to time, to the same type
of review of its student loan servicing operations that applies
to other holders of guaranteed student loans. Such reviews are
undertaken by the General Accounting Office, the Department of
Education, and the Department of Health and Human Services.
These reviews are confined to Sallie Mae guaranteed loan
servicing operations and do not analyze overall business
operations or capital adequacy.
The Department of Education Office of Postsecondary
Education and the State and private nonprofit guarantee agencies
which insure Guaranteed Student Loan Program (GSLP) loans conduct
reviews of Sallie Mae compliance with Department of Education due
diligence regulations (pertaining to loan servicing) and other
aspects of lender participation in GSLP.62 The Department of
Education Inspector General also has authority to conduct
periodic reviews of Sallie Mae participation in GSLP. The
findings and recommendations of these offices may result in
regulatory or legislative changes affecting the GSLP and Sallie
Mae loan servicing operations.
Sallie Mae is required to submit a report of its annual
audit by a certified independent auditing firm to the Secretary
of the Treasury and is required to provide the Secretary of the
Treasury with access to all Sallie Mae books and records.63 The
Secretary, in turn, is required to report to the President and
Congress on the financial condition of Sallie Mae, including ”a
report of any impairment of capital or lack of sufficient capital
noted in the audit.”64 In recent years, Sallie Mae has
submitted its publicly available annual reports to the Secretary
of the Treasury and other financial information upon request of
Treasury staff. The Treasury has not noted any impairments of
61 20 U.S.C. 1087-2 (h) (2) .
62 34 C.F.R. 682.208, 682.411. For example, interest and
special allowance billings and loan disbursements.
(34 C.F.R.
682.207, 682.304, 682.414(c)(2)).
63 20 U.S.C. 1087-2 (j) .
64 20 U.S.C. 1087-2 (k) .
40
Sallie Mae capital. Sallie Mae is also required to submit annual
reports on its operations and activities to the President and
Congress.65
65
20 U.S.C. 1087-2(n).
CHAPTER 4
ADEQUACY OF THE EXISTING REGULATORY STRUCTURE FOR GSEs
This chapter examines the adequacy of the existing
regulatory structure for GSEs with respect to the principles of
financial safety and soundness regulation established in
Chapter 2 of this report. This examination reveals that, to
varying degrees, the structure falls short of the necessary
elements for effective safety and soundness regulation.
ADHERENCE TO PRINCIPLES OF EFFECTIVE REGULATION
Primacy of financial safety and soundness regulation
The primary focus of GSE regulation should be financial
safety and soundness. Unfortunately, not all of the current
regulators have explicit statutory authority that makes financial
safety and soundness oversight the primary regulatory goal.
Indeed, one GSE, Sallie Mae, has no safety and soundness
regulator.
HUD has general regulatory powers over Fannie Mae and
Freddie Mac to ensure that the housing-related public purposes of
the two GSEs are accomplished. Historically, HUD's regulatory
focus has centered on considerations of housing goals and the
risk to the Government, but with different emphases at different
times. Thus, financial safety and soundness oversight of Fannie
Mae has not always been the primary regulatory goal.
Three of the four statutory duties of the Finance Board
relate to safety and soundness oversight. They are:
(1)
to supervise the FHLBanks;
(2) to ensure that the FHLBanks remain adequately
capitalized and able to raise funds in the capital markets?
and
(3) to ensure that the FHLBanks operate in a safe and
sound manner.
The remaining statutory directive requires the Finance Board to
ensure that the FHLBanks carry out their housing finance mission.
The FCA has statutory safety and soundness authorities, and
the legislative history surrounding the 1985 reorganization of
the FCA clearly suggests that Congress intended for the FCA to be
a financial safety and soundness regulator. Moreover, Congress
41
2 9 4 -1 0 4 O -
91 -
3 QL 3
42
patterned FCA enforcement powers after those of commercial bank
regulators.
Regulatory stature
Stature helps to determine how effective a regulator can be
in the financial safety and soundness oversight of GSEs. As
discussed in Chapter 2, stature is determined by a number of
factors including a clear political mandate to ensure financial
safety and soundness, financial independence, and the regulator's
slate of authorities, particularly its ability to establish and
enforce meaningful capital standards. The current regulatory
structure for the GSEs lacks some of these necessary factors.
HUD needs a clear statutory mandate to make safety and
soundness its primary regulatory role. As discussed below, HUD
does not have a well-defined set of regulatory powers for
effective financial safety and soundness regulation. It would
benefit from clarification of its financial safety and soundness
regulatory powers. Also, HUD should have the ability to charge
Fannie Mae and Freddie Mac assessments to cover the costs of
effective regulation. Alone among current regulators, HUD does
not have this authority.
In contrast to HUD, the FCA has clear enforcement
authorities, a statutory mandate to ensure safety and soundness,
and the ability to fund its operations through assessments on the
FCS. The Finance Board also has sufficient enforcement
authorities and the ability to charge the FHLBanks to cover the
costs of regulation. However, the Finance Board needs its
regulatory goal clarified in statute in order to make safety and
soundness its primary focus.
Use of private market mechanisms for risk assessment
None of the GSE regulators currently uses private market
mechanisms, such as NRSROs, to supplement their ability to
oversee the financial safety and soundness of the GSEs. The use
of private market mechanisms would help to diminish the chances
of regulatory failure by providing an independent assessment of
risk exposure to the Federal Government. Any inconsistencies
between the private and public sector assessments of risk would
need to be resolved. This resolution process would serve to
enhance the body of regulatory knowledge, thereby reducing risk
to the Government.
43
Basic regulatory powers for financial safety and soundness
The current regulatory structure does not embody a
consistent set of basic regulatory powers for the financial
oversight of each GSE. The Treasury and the Department of
Education have minimal regulatory authority over Sallie Mae. The
Finance Board has broad regulatory powers. The FCA's powers
parallel those of bank regulators and are adequate for effective
financial oversight of the FCS; however, its powers over Farmer
Mac are not sufficient. To avoid any questions concerning its
authority, HUD should be provided with a statutory listinq of
enumerated regulatory powers.
Capital standards.
With respect to Fannie Mae and Freddie
Mac, the current statutory leverage ratio is inappropriate as an
W È Ê È k i measu5e of capital adequacy.
This ratio does not reflect
off-balance sheet activity, and it is not linked to the risks
undertaken by Fannie Mae and Freddie Mac. Consequently, the
statutory capital requirements cannot be used effectively bv HUD
to cover the risks undertaken.
*
y
The FCA has significant discretion in determining the
level of capital and the risk weighting of assets for
the FCS. However, at-risk stock is included in capital by
statute. Future legislation might again convert at-risk stock to
the functional equivalent of debt, as happened in 1987. Also it
ls
certain that the FCA has the authority to set appropriate
capital standards by regulation for Farmer Mac.
The Finance Board has the ability to set risk-based capital
standards, although it has not yet done so. It currently
requires a Bank Systemwide maximum debt—to—equity ratio of 12—to—
1. The ability of the Finance Board to determine risk-based
capital standards for the FHLBanks, however, is constrained
somewhat by the statutory stock purchase requirement for
advances. The stock purchase requirements are related to most
but not all, on— and off-balance sheet items.
Financial disclosure.
All of the GSEs are subject to
financial disclosure requirements. Information on GSE
activities, financial statements, and risk assessment are
reported regularly to regulators.
Books and records and internal controls.
FCA and the
Finance Board both have the authority to prescribe rules and
standards to ensure the adequacy of internal controls and
information systems. HUD's existing regulations do not
specifically address its authority in this area.
44
Farmer Mac at least once each year and uses the bank regulatory
CAMEL rating system to rate institutions for capital adequacy,
asset quality, management and administration, earnings, and
liquidity. The Finance Board recently began its annual
examinations of the FHLBanks. These examinations are designed to
cover the FHLBanks1 credit/collateral positions, funding
operations, management, and regulatory compliance.
HUD, in contrast, has yet to conduct an examination of
Fannie Mae or Freddie Mac. HUD is in the process of contracting
with the private sector to conduct an initial examination and to
set up procedures and criteria for future examinations. However,
HUD itself may have difficulty conducting quality examinations in
the future without the ability to offer the competitive salaries
necessary to attract highly qualified examiners.
The Secretary of the Treasury has access to all Sallie Mae
books and records and is required by statute to report annually
to the President and Congress on the financial condition of
Sallie Mae.
Enforcement authority.
Enforcement authority varies
markedly among the GSE regulators. The FCA has essentially the
same enforcement powers that bank regulators have. The Finance
Board has many of the important enforcement authorities needed by
a financial safety and soundness regulator, but lacks explicit
authority for others. HUD believes that its general regulatory
authority gives it sufficient enforcement authority over Fannie
Mae and Freddie Mac. The Treasury has no enforcement powers
regarding Sallie Mae.
Cease and desist orders. The FCA has statutory authority to
issue cease and desist orders if it determines that an
institution is engaging in an unsafe or unsound practice, or is
violating a law, rule or regulation. The FCA has increasingly
made use of this authority. The Finance Board, on the other
hand, does not have explicit statutory authority to issue cease
and desist orders. However, the Finance Board believes that it
has implicit authority to do so based on its authority to issue
orders necessary to fulfill the provisions of the Federal Home
Loan Bank Act. To date, the Finance Board has not issued a cease
and desist order.
Other enforcement powers. In addition to cease and desist
orders, the FCA's other enforcement powers include the authority
to suspend or remove directors and officers and require payment
of civil money penalties.
The Finance Board also has the power to suspend or remove
directors and officers for cause and limit dividends. However,
the Finance Board has not developed a set of guidelines or
45
regulations that would trigger early intervention at
predetermined levels of safety and soundness.
Receivership and conservatorship. The FCA has the power to
appoint a conservator or receiver for any FCS institution under a
set of strict conditions comparable to those of bank regulators.
However, it is unclear that FCA has the authority to appoint a
conservator or receiver for Farmer Mac. The Finance Board has
the power to put a FHLBank into receivership and conservatorship
under its powers to liquidate and reorganize the FHLBanks. HUD,
however, does not have explicit receivership and conservatorship
authority over Fannie Mae and Freddie Mac.
Other regulatory powers.
Prior approval. HUD, the Finance Board, and the FCA (with
the exception of the FCA's authority over Farmer Mac) all have
prior approval authorities over new activities. All three
regulators have used their prior approval authority (HUD only
recently) for safety and soundness concerns.
Low-and moderate-income requirements. HUD currently
requires 30 percent of Fannie Mae's annual mortgage purchases to
be secured by housing for low- and moderate-income families.
Budgets.
budgets.
The Finance Board analyzes and approves FHLBank
Officers and directors. For each of the 12 FHLBanks, the
Finance Board appoints six of the directors and supervises the
election of the remainder, for a total of at least 14 directors.
The Finance Board designates the chair and vice-chair of each
FHLBank's board of directors. The Finance Board approves the
compensation of FHLBank presidents and directors. Neither HUD
nor the FCA have similar authorities with respect to the officers
and directors of the GSEs that they regulate.
Strategic planning. The Finance Board has established a
s^^^t-egic planning directorate, which has as its primary
responsibility the strategic planning for the Bank System. HUD
and the FCA do not have authorities in this area.
Mergers or liguidations/reorganizations. The Finance Board
may liquidate or reorganize a FHLBank whenever it finds such
action will aid the efficient and economical accomplishment of
the FHLBank Act.
The FCA may require an association to merge with another
association if it determines, with the concurrence of the board
of the supervising bank, that an association has failed to meet
46
its outstanding obligations or failed to conduct its operations
in accordance with the Act.
CONCLUSIONS AND RECOMMENDATIONS
HUD does not have financial safety and soundness as its
primary regulatory goal and, therefore, suffers from regulatory
conflict. HUD also lacks the appropriate regulatory funding
mechanism. To avoid controversy over HUD's regulatory authority,
it would be beneficial to make the scope of its regulatory
authorities more explicit.
The financial safety and soundness oversight of Sallie Mae
is nonexistent. No Federal agency has the safety and soundness
authorities necessary for effective financial oversight. The
Treasury should be given increased oversight responsibilities,
consistent with the safety and soundness authorities of the other
regulators.
The Finance Board has the necessary regulatory powers and
the stature needed to effectively regulate the financial safety
and soundness of the FHLBank System. However, its statute should
be modified to make its financial safety and soundness mission
its primary regulatory role.
Congress restructured the FCA in 1985 to make it more of a
financial safety and soundness regulator. The FCA has as its
primary goal the safety and soundness regulation of the FCS, and
it has the regulatory powers and stature to be an effective
safety and soundness regulator for the FCS. With regard to
Farmer Mac, the FCA also has safety and soundness authorities,
although it does not have general rule-making authority. The FCA
needs to have increased authorities over Farmer Mac.
CHAPTER 5
IMPACT OF 6SE OPERATIONS
ON FEDERAL BORROWING
FINDINGS
The Treasury's analysis of the impact of GSE operations on
Federal borrowing in the 1990 Report using the flow-of-funds
framework was updated for this report.
This analysis was
supplemented with an extensive review of the economic literature
related to the impact of GSE operations on Federal borrowing
costs.
Based on this analytical work, the Treasury's conclusion
remains as stated in the 1990 Report:
One might expect the GSE financing activities to raise
the cost of Federal borrowing.
Given their close, favored
relationship with the U.S. Government, the GSEs generate
credit market instruments that for market participants are
relatively close substitutes for Treasury securities.
The available statistical evidence does not show that
GSE borrowing has had a direct effect on the cost of Federal
borrowing.
Major macroeconomic trends that cannot be
separated from the impact of GSE financing activities offset
any potential upward pressures on Federal borrowing costs
from GSE activity.1
RE-ASSESSING THE IMPACT ON TREASURY BORROWING COST
The statistical evidence for the last decade does not show
that GSE borrowing had a direct effect on the cost of Federal
borrowing.
In fact, Chart 3 shows that GSE financing activities
were inversely associated with observed movements in Treasury
yields during much of the period, or that net new GSE borrowing
rose while Treasury yields fell.
The inverse relationship reflects broad macroeconomic trends
the impacts of which more than offset whatever pressures arose
from GSE borrowing.
Large inflows of foreign savings mitigated
any upward pressures on Treasury borrowing rates.
Lower
inflationary expectations led to declines in the inflation
premium that domestic and foreign investors required.
The
support for U.S. credit markets from foreign inflows and lower
1 1990 Report, p. 27.
47
Chart 3
Treasury Yields Versus Net New GSE Borrowing
Yield (%)
Borrowing In $ bil.
140
120
-
100
00
-
80
60
40
20
Calendar Year
Source: Yield on Last Trading Day of Year, Treasury
Federal Reserve Board Flow-of-Funds (Adjusted).
49
inflation led to lower interest rates,
yields.2
including mortgage
In addition, total borrowing declined substantially after
peaking in 1986 and helped to obscure whatever pressures GSE
borrowing m ay have exerted on Federal borrowing costs.
Also, a
large part of the increase in GSE obligations in the 1980s
resulted from exchanges (or swaps) of whole mortgages for GSE
mortgage-backed securities (see Chart 4).
These swaps led to
increases in outstanding GSE obligations without increasing the
total demand for credit.
Using the results of portfolio models, inferences can be
drawn that GSE operations raise Federal borrowing costs, although
measures of the cost impacts vary greatly.
GSE borrowing
converts the illiquid, high-risk debt of GSE-assisted sectors
into new highly liquid capital market securities that bear a GSE
guarantee against default.
Converting private-sector obligations
into GSE obligations generates securities that are close
substitutes for Treasury securities.
From 1980 through 1990,
$830.8 billion of these close substitutes for Treasury securities
were issued, or 45 percent of the $1,851.0 billion in net new
issuance of Treasury debt held by the public (see Table 3 in
Chapter 1).
From 1986 through 1990, net additions to GSE
securities as a percent of net additions to Treasury securities
averaged 62.2 percent per year.
One portfolio model that analyzed the substitution between
Federal obligations and broad categories of other debt concluded
that an increase in the volume of private borrowing can lead to a
small increase in Treasury yields, perhaps one basis point or
less.3 The broad categories of financial assets used in this
model did not include GSE securities.
One could argue, however,
that GSE borrowing has a greater impact on Treasury yields
because the characteristics of GSE securities result in a higher
degree of substitutability between GSE and Treasury securities
than between the other debt categories that were used in the
study and Treasury securities.
2 Foreign saving as a percent of the available saving pool
in the U.S. shot upward from a mere .2 percent in 1982 to a peak
of 18.9 percent in 1987 before it fell to 11.1 percent in 1989.
Inflation in the Consumer Price Index fell sharply from its 1979
peak of 13.3 percent to a low of 1.1 percent in 1986 before it
accelerated to 6.1 percent in 1990.
3 Jeffrey Frankel, "Portfolio Crowding-Out, Empirically
Estimated," Quarterly Journal of E c o n o m i c s . 100, Supplement,
1985, pp. 1041-1065.
Chart 4
Net New GSE Borrowing
Borrowing In $ bil.
Calendar Year
Source: G S E Balance Sheets
51
Another model based on portfolio theory implied that
increases m the volume of GSE securities relative to Treasury
securities would have a strong impact on the difference between
GSE and Treasury yields in the short run, but not in the longer
run.4 The analysis concluded that arbitrage would reduce the
impact of relative quantities on the spread between GSE and
Treasury yields over time.
In the absence of highly segmented
markets, any impact of a change in relative quantities on a
specific yield spread would eventually be arbitraged across all
categories of securities.
Over the longer run, prepayment risks,
liquidity considerations, and other technical factors are likely
to dominate spreads among categories of financial assets.
IMPACT OF GSE OPERATIONS ON OVERALL INTEREST RATES
If GSE borrowing were to increase the total demand for
credit, the overall level of interest rates could rise.5 For
example, if GSEs increase the flow of credit into housing,
consumer borrowing for goods, such as refrigerators and carpets
that are complements of purchases of homes, could increase.
Including the impacts of complementary demands, simulations from
flow-of-funds models constructed in the early 1970s, before
mortgages were securitized on a large scale, show that interest
rates rose, perhaps by as much as 10 basis points per $1.0
billion of incremental credit demand in the mortgage markets, in
response to higher overall expenditures associated with an
increase in GSE borrowing.6
The advent of Government National Mortgage Association and
GSE mortgage-backed securities in the early 1980s improved the
efficiency of mortgage markets and reduced mortgage rates by
Barry Bosworth, Andrew Carron, and Elizabeth Rhyne, The
Economics of Federal Credit Programs (Washington, D.C.: The
Brookings Institution, 1987), Appendix A, p. 203.
5 A number of econometric studies have attempted to measure
the impact of fiscal policy in general on interest rates, but the
empirical tests have reached different conclusions and have not
resolved the controversy.
For a review of some of these studies,
see either U.S. Treasury Department, "The Effects of Deficits on
Prices of Financial Assets: Theory and Evidence", Treasury
B u l l e t i n . March 1984, or The Congressional Budget Office,
Deficits and Interest Rates: Theoretical Issues and Empirical
Evidence. (Washington, D.C.: The Congressional Budget Office,
1989).
pp.
6 Bosworth,
184-186.
Carron,
and Rhyne,
o p
. c i t ., Appendix A,
52
around 30 basis points.7 Lower mortgage yields helped to
stimulate demands for home purchases and purchases of
complementary goods and services.
Yet, more recent flow—o f — funds
models, including the quarterly Federal Reserve model, estimate
only small impacts on Treasury yields, in contrast to results of
the earlier models.8
CONCLUSIONS
The law of supply and demand would suggest that GSE net new
demands for credit should raise Treasury borrowing costs.
Additionally, GSE borrowing that lowers the relative borrowing
costs of subsidized sectors and stimulates increases in
complementary credit demand can raise total borrowing and
pressure the overall level of interest rates higher.
However, as
observed in the 1980s, upward pressure on interest rates
generated directly or indirectly by GSE operations can be offset
by macroeconomic forces, including inflows of foreign savings,
declines in inflationary expectations, structural changes, and
reductions in the demand for credit from other sectors of the
economy.
The substitution of GSE securities for Treasury
securities can raise Treasury yields relative to GSE yields, but
over time the impact of substitution can be arbitraged across all
categories of securities.
7 patric Hendershott and James Shilling, "The Impact of the
Agencies on Conventional Fixed-Rate Mortgage Yiel d s , ” Journal o f
Real Estate. Finance, and E c o n o m i c s , Vol. 2 (June 1989), pp. 2:
101-115.
8 "The Effects of Mortgage-Related Securities on Corporate
Finance," a study prepared by the Federal Reserve Board of
Governors, August 1986, pp. 29-31.
CHAPTER 6
S&P EVALUATION OF
THE SAFETY AND SOUNDNESS OF THE 6SE8
The Treasury contracted with S&P for an analysis of the
financial safety and soundness of the GSEs.
S&P has assessed the
likelihood that a GSE might not be able to meet its future
obligations from its own resources and has expressed that
likelihood as a traditional credit rating.
These ratings are not
intended to supersede the A AA assessments S&P has given the
various securities of the GSEs presently trading in the market.
There have been a number of studies that have examined the
relationship between credit ratings and actual default
experience.
Although statistical assumptions and methodologies
amon9 the s t u d i e s , they show clearly that credit ratings
and actual default experience are strongly inversely related.
For example, as Table 1 shows, the 15-year cumulative default
rate for corporate bonds that had initially been rated Aaa was
1.7 percent.
The rates rise to 6 percent for the low end of
investment grade (Baa) and to nearly 30 percent for B-rated
firms.
Table 1
15-year Cumulative Default Rates for
Corporate Bonds vs. Initial Credit Rating
(1970-1989, percent)
Ratina
15-yr. Default
____ R a t e s _____
Aaa
Aa
A
Baa
Ba
B
1.7
1.9
2.4
6.1
18.0
28.7
Source:
"Corporate Bond Default Rates,
Investor Service, April 1990.
1970-1989” , M o o d y * s
1 See for example, Edward I. Altman, "Measuring Corporate
Bond Mortality and Performance” , July 1988, and "Corporate Bond
Defaults and Default Rates, 1970-1989", Moody's Investor Service
April 1990.
'
53
FINAL REPORT
CONTRACT NO. TOS-91-4
Evaluation of Safety and Soundness
Farm Credit System
(including the Farm Credit Banks and Banks for Cooperatives)
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Student Loan Marketing Association
April s,
©
1991
1991 Standard & Poor’s Corporation.
TABLE OF CONTENTS
INTRODUCTION
.......................................................
A-l
FARM CREDIT S Y S T E M ................................................
A-5
FEDERAL HOME LOAN BANK S Y S T E M .....................................
A - 18
FEDERAL HOME LOAN MORTGAGE C O R P O R A T I O N .........................
A - 25
FEDERAL NATIONAL MORTGAGE ASSOCIATION
A-36
STUDENT LOAN MARKETING ASSOCIATION
...........................
...............
A-46
INTRODUCTION
The Treasury Department has asked Standard & Poor's (S&P) to provide
an assessment of the financial safety and soundness of certain gov e r n
ment sponsored enterprises (GSE's).
The GSE's to be included are:
Farm Credit System
(including the Farm Credit Banks and Banks for Cooperatives)
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Student Loan Marketing Association
This report provides
an assessment of the
financial safety
and
soundness of these GSE's in the form of a rationale and a risk to the
government credit rating for each GSE expressed in traditional letter
symbols.
The report also summarizes the major factors which lead to
each conclusion, including analysis of key balance sheet information.
Finally, balance sheet information relevant to the analysis is provided
for each GSE.
In making the determination of the degree of risk involved in the
operations of each GSE, S&P has incorporated the evaluation of such
factors as credit risk, interest rate risk, management and operations
risk, and business risk where these factors are relevant to the GSE.
In our analysis S&P assumed that the GSE
operates within
its
authorizing legislation and we assume that there is no infusion of cash
from the federal government.
Authorizing legislation provides some
benefits to the GSE such as attractive cost of funds but also can be
constricting in that the GSE can only do business as defined in the
legislation and cannot diversify if warranted by economic conditions or
other factors.
This is S&P's approach to assessing the risk to the
government of these GSE's and other entities with implicit federal
support.
The assessment of the financial safety and soundness is presented in
the form of a rating symbol which is used by S&P.
Our rating symbols
range from 'AAA' at the highest end to 'D' at the lowest.
'D' is
automatically assigned when an issuer defaults on its debt or files for
bankruptcy protection.
S&P has provided debt ratings publicly since
1923 and uses the following symbols as defined below:
'AAA':
Debt rated 'AAA' has the highest rating assigned by
Capacity to pay interest and repay principal is extremely strong.
S&P.
A-2
'AA': Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
'A':
Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
'B B B *: Debt rated ’B B B ' is regarded as having an adequate capacity
to pay interest and repay principal.
Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal
for debt in this category than in higher
rated categories.
' B B ' : Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues.
However,
it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
'B':
Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments.
Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal.
'CCC*:
Debt rated 'CCC' has a currently identifiable vulnerability
to default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal.
In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
'CC':
The rating 'CC' is typically applied to debt subordinated to
senior debt that is assigned an actual/implied 'CCC-' debt rating.
'C':
The rating 'C' is typically applied to debt subordinated to
senior debt which is assigned an actual/implied 'CCC-’. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
'D':
Debt rated 'D' is in payment default.
The 'D' rating category
is used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless S&P
A-3
believes that such payments will be made during such grace period.
The
'D' rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+ ) or minus (-) :
The ratings from 'AA'
modified by the addition of a plus or minus sign
standing within the major rating categories.
to 'C C C
m ay be
to show relative
An S&P rating expresses our opinion of credit quality in the form of
these letter symbols.
A credit rating is not a recommendation to
purchase, sell or hold a particular security.
The rating performs the
isolated function of credit risk evaluation.
The rating does not mean
that S&P has performed an audit, nor does it attest to the authenticity
of the information provided by the GSE and upon which the rating m ay be
based.
Ratings do not create a fiduciary relationship between S&P and
users of the ratings as there is no legal basis for the existence of
such a relationship.
Over time, ratings may change as a result of the dynamics of an
ongoing business as well as economic and other factors. A rating can be
provided on a one-time basis as of &. specific date or can be monitored
over time. These GSE ratings are being provided on a one-time basis.
The risk to the federal government evaluation as expressed in our
traditional rating symbols is comparable to ratings used to assess other
issuers.
S&P uses the same symbols to express ratings for entities
including
corporations,
municipalities,
sovereign
governments
and
financial institutions. While each type of issuer has unique ch a r a cter
istics, the rating symbols as defined above apply to all.
Each GSE evaluation was done by a committee of analysts, including
senior members of the Ratings Group.
In accomplishing this wo r k S&P
used teams of analysts who had expertise in the areas related to the
business of each GSE.
For example, for housing related GSE's, analytic
expertise was utilized from three different rating departments which
deal in residential mortgages and lending.
Bringing these teams
together provided the best input to evaluate these GSE businesses.
These GSE's have been evaluated on a going concern basis, assuming
that they are ongoing, operating businesses.
A variety of quantitative
and qualitative factors were analyzed and considered in the d e t e r m i n a
tion of the risk to the government rating. The resulting credit opinion
was determined by reviewing all relevant factors - no one factor drives
the conclusion.
All factors are interactive and weighed within their
relevance to the creditworthiness of the particular GSE.
A-4
S&P has followed four of the five G S E 's since 1983. The Federal Home
Loan Banks were added in 1986. While the risk to the investor relies on
the implicit support of the federal government and not the underlying
financial situation of the GSE, S&P has monitored the underlying credit
quality of the G S E 's . In 1987, the U.S. Department of Housing and Urban
Development asked S&P to provide such an evaluation of the credit
quality of the Federal National Mortgage Association.
In 1989 the Senate Banking Committee asked S&P to provide an
assessment of the underlying credit quality of certain GSE's.
Using
public information, S&P provided our assessment of the risk to the
government for the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation, the Federal Home Loan Banks, the Farm
Credit System and the Student Loan Marketing Association.
Since that
time these evaluations have been widely discussed and reported.
The
evaluations provided for this report used the same methodology S&P used
previously.
A-5
FARM CREDIT SYSTEM
(including the Farm Credit Banks and Banks for Cooperatives)
(FCS or System)
Risk to Government Credit Rating:
'BB'
Rationale
The Farm Credit System has undergone significant change in the last
few years and continues to undergo change.
Many of the factors
contributing to its near collapse in the m i d - 1 9 8 0 's have been improved:
the System is consolidating, working towards better enforcement of more
uniform underwriting and loan review standards,
instituting more
sophisticated interest rate risk management procedures, and moving
towards instituting quasi-market discipline mechanisms. However, the
monoline character of its business, coupled with weak capitalization and
earnings power, and continued poor asset quality lead S&P to the below
investment grade assessment on the Farm Credit System.
Even a moderate
farm recession is likely to cause some banks to require assistance,
leaving the system as a whole undercapitalized.
If the "joint and
several" provision proves difficult to enforce or a substantial amount
of the capital stock is redeemed at par, the requirement for assistance
could be heavier.
Factors Supporting C o n c l u s i o n .
Market Position
The FCS was created in 1916 to serve as reliable source of a g r icul
tural credit, when alternative sources were few.
This remains its
stated mission though within the prescriptions for making safe and sound
loans. It now provides a diminished share of about 25% of agricultural
credit,
with commercial banks providing 36% and FmHA,
insurance
companies and pension funds providing the remainder.
The ability to
borrow at preferential rates helped it gain market share from 1950 to
the mid-1980's.
Especially during the 1973-1982 period, its policy of
pricing loans on the basis of the average cost of funds, rather than the
marginal, allowed it to offer loans at below market rates in a rising
rate environment, fueling a burst of market share gains.
That pricing
policy worked in reverse when rates started to fall.
Its objective
after 1987 has been to price loans at a spread over the marginal cost of
funds.
With regulatory pressure to build retained earnings, the banks
have had an incentive not to under-cut the competition in pricing. Thus,
the erosion in market share has not been reversed.
A-6
During
the
period
in
the
mid-1980's
when
FCS
rates
were
above-market, it was presumably the least creditworthy who did not leave
the system.
The clientele is, however, far more creditworthy than that
of the FmHA.
The FCS has another competitive advantage over the majority of the
so called Mag banks" which are small and have limited legal lending
limits. The size of its banks allows it to focus on loans to the larger
of the small and medium-sized farmers. It has also been a major player
in real estate lending, which is riskier than shorter term production
loans.
Business Risk
The overriding risk for the FCS is that of being a monoline provider
of credit.
Notwithstanding the geographic diversity of the system, and
the ability to provide the full spectrum of farm related loans, loan
quality remains partly dependent on the health of the highly volatile
farm economy.
Farm incomes and land values are regularly buffeted by
factors largely beyond farmers' control, such as weather, commodity
prices and farm price support p r o g r a m s .
An additional business risk is the prospect of losing market share
to competitors.
Because many Farm Credit Banks' (FCB) need to build
capital, they cannot capitalize on their cost of funds advantage to
maintain share through favorable pricing.
In addition, as the trend
toward ever-larger
farms continues,
the FCS's natural market of
medium-sized farmers will dwindle. The FCS could find itself at a
competitive disadvantage to larger financial institutions able to
service large farms. Losing share presents the hazard that the banks
will be loathe to cut infrastructure apace, but will compete instead by
tiering down to less creditworthy customers.
Structural Risk
One element of risk to the government is that the FCS operates with
very little in the way of external or market sources of discipline,
although this has been identified as a problem by the System and some
progress has been made in evolving towards some form of discipline. The
equity holders are likely to remain weak disciplinarians.
It is
inherent in a cooperatively owned structure that the borrowers could be
subject to the conflicting incentives of keeping the borrowing terms
favorable for themselves and their friends, and maintaining the safety
of their c a p i t a l .
The latter incentive may be overshadowed by the
former.
In any case, their equity stake is very small, often just the
A-7
lesser of $1000 or 2% of their loan amount,
prin c i p a l .
and is added to the loan
There is also little in the way of market discipline through
adjustment of funding costs.
True, spreads widened on bonds wh e n the
FCS was perceived to be on the brink of failure but this did not address
risk taking by individual banks.
The FCB's can charge differential
rates to the Associations to which they lend funds based upon risk but
may be reluctant to do so except in cases of extreme underperformance.
Another risk is that the regulatory and other watchdog bodies have
until now proven reluctant to enforce discipline at the very early
stages.
Many of the tools at hand are really a form of final solution
that can lead to the closing of a bank. The Farm Credit Administration
(FCA) can issue cease and desist orders and the Funding Corporation can
deny funds.
While extremely sensitive to making the heavy hand of
central control felt, the System is developing towards improving its
early disciplinary mechanism.
Interest Rate Risk
Asset/liability management has been vastly improved since the
mid-1980's, but some moderate interest rate risk is likely to remain due
to structural factors that cannot be managed away.
Foremost is the difficulty of managing prepayment risk.
During the
mid-1980's a mismatch emerged when a substantial number of borrowers
left the System.
They prepaid their loans, leaving the banks with a
large proportion of high rate non-callable long term debt. In part, fear
of losing their capital when the banks were troubled caused many
borrowers to flee. The fact that capital stock is now more statutorily
"at risk" means that this motivation for prepayment remains to some
extent, though the ability to retire capital is contingent on the
financial health of the bank.
The other major factor that led to
prepayments in the past, the availability of lower cost loans elsewhere,
is less likely to come into play, however, because of the shift to
marginal cost pricing.
It should be noted that prepayment data are not
available. While a database is being built, the predictive value may be
limited by the greater diversity of factors affecting prepayments of
farm loans compared to home m o r t g a g e s .
Another factor affecting the ability to match maturities is the fact
that variable rate loans are not tied to any market index, but are set
at the discretion of management.
The Funding Corporation, acting in an
advisory capacity on asset/liability management can assist the banks on
the long term advisability of moving rates in lockstep with the market,
A-8
but has little power to dictate practice.
However, there appears to be
significant consensus among the banks to move rates with the market.
Asset/liability management is done on a very decentralized basis,
compounding the difficulty of obtaining asset/liability reports with any
assurance of comparability of data.
Modeling capacities vary from
institution to institution.
Manageable risk appears to have come down substantially since the
mid-1980's, largely due to marginal cost or market pricing, as well as
the consultation resource represented by the Funding Corporation and its
ability to utilize derivative products and issue
at a variety of
maturity dates. On a gap analysis, the banks are slightly asset
sensitive in the short term and matched longer term.
The greatest
vulnerability remains prepayment risk, and the will to maintain pricing
spreads in a rising rate environment.
Much of the recent widening of the net interest margin has been due
to a reduction i n the drag from nonperforming assets. If the interest
lost on problem loans is added back to interest income, the margin
appears to have been remarkably steady for the past five years.
In
addition, the run-off and repurchases of high cost debt in the open
market have helped reduce funding costs.
If trends towards marginal
cost pricing and reducing funding costs continue, the margin could
stabilize between 2.0% and 3.0%. Some of the FCB's have already achieved
those levels.
Credit Risk
By its very nature as a monoline provider of finance to a highly
cyclical industry, the FCS takes a very high degree of credit risk. In
addition, both because of its mandate to be a consistent provider of
credit and because it is restricted from other types of lending, the FCS
may be less likely to pull back from lending into an agricultural
downturn than a more diversified lender would.
Underwriting standards appear to have been much improved since the
mid-1980's. While setting underwriting standards remains the responsi
bility of the individual associations a consensus is being built around
some guiding principles. For instance, land loans, which had often been
underwritten purely on a collateral value basis through the mid-1980's,
must now focus on the borrower's income capacity to meet payments. Loan
to value ratios are limited to 85% of value. This is a very liberal
limit; however, practice is more conservative. In addition, regulators
and management seem to have an understanding that one of the problems in
the m i d - 1 9 8 0 's farm depression was that land prices had outstripped the
A-9
economic value of the land and that a recurrence of this phenomenon must
be prevented.
In general, the recognition of problems in underwriting practices has
been beneficial; nevertheless, underwriting standards appear to be
uneven bank to bank, with some having more stringent controls and review
procedures than others. Once again, the variability results from both
variations in management sophistication and willingness to conform to
outside pressures, and is inherent in any fragmented, confederate
structure.
Another major concern relating to credit risk is concentrations of
risk to single borrowers.
The Associations other than the Banks for
Cooperatives (BC'S) must limit loans to one borrower to 20% of capital,
a very lenient standard.
The BC's can have even greater concentrations
of capital.
According to the FCA, most Associations have some loans at
their regulatory lending limit.
The Farm Credit Administration is in
the process of rewriting regulations on this point.
Even assuming good underwriting standards, agricultural lending
would be very risky in the sense that there can be a great variability
in loss experience over the course of an agricultural cycle.
The
financial troubles of the farm economy in the 1980's were the worst seen
since the Great Depression.
During the prior 50 years, cycles had been
shallower.
The 1980's recession was caused by a sharp fall in crop
prices, and a sharp drop in farm exports, coupled with the bursting of
a speculative bubble that had sent farm land prices far above its
economic value as measured by the present value of any reasonable income
assumptions. There can be no assurance, however, that an equally severe
recession will not occur again.
To put some dimension on the extent of the problems
in the
mid-1980's, nonperforming assets (including 90 days past dues) for the
FCS peaked at 16% in 1986. Net chargeoffs were about $3.5 billion
cumulatively, or about 33% of peak nonperforming assets, and 5% of total
loans. In addition, the cumulative income lost from the nonperforming
assets since 1985 was about $2.5 billion.
It should be noted that the
Banks for Cooperatives fared much better and suffered relatively few
problems.
On the surface the loss and nonperforming rates for the FCS were more
favorable than those turned in by the major commercial bank agricultural
lenders. However, while commercial banks' nonperformers have fallen
sharply in the last few years, the FCS's have remained extremely high at
9*5%, despite four very good years for the farm economy. Chargeoffs were
A - 10
also lower than at commercial banks even though small commercial banks
were granted regulatory forbearance to spread losses over several years.
The continued poor loan quality stems from a pronounced tendency to
carry bad loans rather than write them off and/or foreclose. Within the
portfolio of nonperforming loans, nonaccrual loans and Other Property
Owned or Other Real Estate (ORE) have declined substantially, as many of
the loans migrated to restructured loan status.
The restructured loan
category, which is loans that have been restructured on concessionary
terms and are now performing according to those terms, is about 4% of
loans, a much higher percentage than that found at commercial banks. A
stipulation to restructure loans if that is a less costly option than
foreclosure appears to have been interpreted as a requirement to favor
the restructuring option.
That the FCS also faces greater legal
obstacles in foreclosing than do the commercial banks may also serve to
encourage restructuring.
1990
%
%
%
%
Nonaccruals/loans
Restructured/loans
Nonaccrual+restructured/loans
Nonperforming assets(NPA)/
Loans + ORE
% NPA + 90 days/loans
% All high risk loans/loans
% Interest lost/nonperforming
loans(npl)
% Reserve/loans
% Reserve/NPA
% Reserve/npl
% Reserve/high risk total
% Net chargeoffs
% Recoveries/chargeoffs
1989
1988
1987
1986
5.13
3.72
8.85
5.03
4.67
9.70
6.47
4.00
10.47
9.97
2.52
12.49
12.13
0.62
12.75
9.46
9.78
13.95
10.53
11.13
14.77
11.61
12.60
16.78
13.92
15.14
21.93
14.37
16.42
24.05
3.73
2.96
31.10
33.47
21.09
0.04
77.42
5.41
3.11
29.29
32.08
20.87
-0.01
102.96
7.89
3.61
30.71
34.49
21.26
0.79
36.17
11.62
5.62
39.71
45.02
25.21
0.91
38.92
10.03
6.24
42.61
48.93
25.47
2.06
18.65
The reserve for loan losses is thin relative to potential losses in
a severe agricultural recession.
Interpretations of Generally Accepted
Accounting Principles
(GAAP) standards on reserves can vary.
In
general, reserves must be adequate to cover probable losses inherent in
the portfolio.
Depending on the economic assumptions built into the
case for probable loss levels, reserve requirements can be set at
varying levels.
S&P believes that current reserve levels, are unlikely
to suffice in a period of significant adversity.
Profitability
Most of the strength of profits since 1988 has been generated by
reversals of the reserve for loan losses.
However, underlying profit
ability also returned in 1988 and has improved in each year to what are
now respectable but modest levels.
Assuming a normalized level of
provisions of about 0.25% of loans, operating profitability represented
A-ll
a 0.73% return on assets in 1990. This is largely a reflection of a
reduced drag from nonperforming assets and expense c o n t r o l s . Overhead
expenses have dropped to 54% of revenues in 1990, from 130% in 1987.
Even normalizing for the effect of the reduced drag from nonperforming
loans (adding back income lost from nonperforming loans), expenses show
considerable improvement.
Further improvements in profitability can
come from widening the net interest margin, which ma y require a
discipline of holding loan pricing above 2.0% over the marginal cost of
funds, as well as some additional retirements of high cost debt from the
early 1980's.
In addition, further consolidations in the System could
also yield cost savings.
%
%
%
%
%
%
%
Net Interest Margin (NIM)
NIM + income loss on loans
Expense/revenues
Expense/revenues +inc.loss
Expense/loans
Return on Assets (adjusted)
Return on Assets (stated bet.
extr. items.)
1990
1989
1988
1987
1986
2.00
2.28
53.81
47.98
1.47
0.73
1.67
2.11
64.56
52.46
1.46
0.41
1.28
1.97
81.87
55.59
1.42
0.05
0.79
1.98
130.53
57.46
1.43
-0.50
1.07
2.08
89.01
48.94
1.27
-0.06
1.02
1.11
1.42
-0.03
-2.55
Funding
FCB's do not suffer liquidity crises in the way that commercial
banks do because the FCS's implicit government support makes it
virtually immune from a crisis of confidence. FCB's fail either because
they become insolvent in an accounting sense, bringing regulatory
intervention, or because they run out of collateral (including loans or
securities), which is required to be able to tap System debt.
% Capital stk.+surp./Debt
% Cash+Investments/FCS debt
% Cash,Invest.+loans/FCS debt
1990
1989
1988
1987
1986
6.90
19.05
110.00
6.01
20.28
110.00
3.68
16.37
111.00
2.44
17.02
112.00
2.33
18.27
111.00
Capital
By any definition of capital, FCS remains thinly capitalized for the
riskiness of its business line. The higher cyclicality of agricultural
lending compared to many other lines of lending, plus the FCS's tendency
to carry the bad loans through rough times indicates the need for even
more capital than many other types of monoline lenders.
That need is
offset by the consideration that given the FCS's agency status in
accessing the capital markets, capital is not needed for the maintenance
A-12
of investor confidence in order to retain access to funds.
Capital is
therefore more exclusively a loss absorbing reserve.
A farm recession
of the same severity as the mid-1980's would likely leave the System
short of capital by regulatory s t a n d a r d s .
It is important to discuss what is included in capital.
Protected
capital, which was stock purchased by borrowers prior to October 1988
upon which repayments are to be made at par, is clearly not at risk and
should be classified among liabilities.
Capital stock, which was
contributed by borrowers as a condition of borrowing subsequent to
October 1988, is statutorily "at risk" but can be retired at par when
the borrower repays his loan as long as the institution is adequately
capitalized.
Thus, S&P considers capital stock a weaker form of
capital, and look primarily to the surplus account for a measure of core
capital strength.
Restricted capital, or the accrued payments into the
newly established insurance fund, is also a form of capital but while
the insurance fund is intended to be drawn upon before "joint and
several" liability is triggered in the potential event of default by an
FCB, it is also intended to be used to repay Financial Assistance
Corporation (FAC) preferred stock and redeem protected capital should a
bank prove unable to do so.
In addition, in evaluating risk to the government, we consider the
likelihood of repayment by banks receiving financial assistance from
FAC. Of the $4 billion borrowing capacity of FAC, $1.3 billion has been
used so far.
S&P expects that only moderate use would be made of the
remaining $2.7 billion of the FAC facility.
Payment on the 15 year FAC
bonds Is made by the federal government for the first five years, 50% by
the government and 50% by the FCS for the second five years and 100% by
the FCS for the last five years, with the FCS responsible for the
repayment of principal.
The insurance fund can be channeled for this
purpose.
If the insurance fund target does not surpass the original
goal of 2% of Systemwide Debt, or about $1.1 billion (up from $438
million now) the fund may not be available to do more than help repay
FAC preferred stock over the intermediate term.
Of the current $438
million fund, $350 million will be used to repay FAC assisted to the
Federal Land Bank of Jackson.
Stronger forms of capital have been increasing in recent years, with
protected capital being converted to "at risk" borrowers' capital, and
surplus growing to 4.3% from 2.1% in 1986.
"At risk" capital stock and
surplus have grown to 6.3% of assets. Under the most generous interpre
tation of capital, including restricted capital, the ratio is 7.0%.
Each bank is required to reach 7% permanent capital against risk
adjusted assets by 1992.
While the System as a whole surpasses that
level, certain individual banks may not be in compliance. Loan leverage
A-13
(capital stock + surplus + r eserves/loans) remains very high, however,
and the percentage of capital and reserves has not increased signifi
cantly since 1985, because most retained earnings have been generated
from taking reserves back into income as loan guality improved.
% Capital stock+surplus +
restricted capital/assets
% Cap. stk.+surp./assets
% Cap. stk.+surp.+reserve/loans
% Cap. stk.+surp.+res.-1/3
noryperformers/loans
% Surplus/assets
% Nonperforming assets/cap.
stk.+surp.+ reserve
% Cap. stk.+surp./Debt
1990
1989
1988
1987
1986
7.24
6.55
11.09
5.88
5.33
9.83
3.27
3.27
7.53
2.16
2.16
8.19
2.07
2.07
8.73
7.92
4.31
6.30
3.58
3.61
2.90
3.47
2.16
3.86
2.07
84.47
7.42
98.90
6.01
109.98
3.68
102.52
2.44
97.79
2.33
Another farm recession, may lead to losses that would reduce capital
below adequate levels and require government assistance.
The extent of
that assistance will depend not only on the depth of the recession but
potentially on the use of the "joint and several liability" provision.
Given the apparent independent-mindedness of many of the Associations
and banks, and the experience of the mid-1980's there may be resistance
if this provision is ever invoked. The FCB's are by no means homogeneous
in their financial strength. Therefore, it is not enough to assess the
financial strength of the consolidated system. Several of the FCB's are
currently very weak (Spokane, Louisville, St. Paul, Omaha, Western), and
some operating with assistance from FAC at present. These are likely to
experience significant stress in the event of even a moderate farm
recession.
The extent to which government assistance may be needed for the FCS
also be interrelated with the level of federal farm support
programs during periods of stress.
Support programs have been at
historically high levels during the last four years, contributing
indirectly to the improved health of the FCS.
294-104 O - 91 - 4 QL 3
A-14
Farm Credit System (Consolidated)
Balance Sheet
1990
1989
1988
1987
1986
Real estate loans
2 9 ,416
30,245
32,182
3 4 ,3 4 6
NA
Intermediate loans
10,673
10,020
9,256
9,9 2 7
NA
Loans to co-ops
11,083
10,442
9,990
8,225
NA
Total loans
5 1 ,1 7 2
50,707
51,428
5 2 ,498
5 8 ,249
Reserves
1,516
1,578
1,858
2,951
3,635
290
273
238
299
437
10,392
11,236
8,703
9,109
10,976
Total assets
63,515
63,954
61,616
62,238
70,101
Avg. earning assets
61,671
60,316
61,636
64,303
7 3,259
Avg. assets
63,735
62,785
61,927
66,170
7 4 ,9 6 7
5 6 ,0 7 2
56,739
54,621
55,275
62,478
Protected capital
1,241
1,683
3,289
* 3,6 8 4
* 4,1 8 8
Capital stock
1,422
1,117
227
0
0
Surplus
2,739
2,291
1,785
1,346
1,453
438
350
0
0
0
($ in m illions)
Assets
Cash
Investments
Liabilities
Total FCS debt
Restricted capital
*Capital stock prior to October 1988 could automatically be retired at par upon retirement o f debt and will be considered
protected capital for purposes o f this worksheet.
A-15
Farm Credit System (Consolidated)
Income Statement
($ in millions)
1990
1989
1988
1987
1986
Net interest income
1,235
1,006
787
509
781
41
285
681
196
-1 ,7 9 8
Nonint. inc. (before gains)
157
148
112
97
129
Noninterest expense (oper)
749
745
736
791
805
31
67
79
-12
-233
Net income (stated, before
extraordinaiy item)
647
695
878
-17
-1,913
*Net income (adjusted)
466
258
33
-333
-46
Negative provision
Nonrecurring income
*Net income assuming a positive provision fo r loan losses o f 0.25% o f loans in each year and before nonrecurring income.
A - 16
Farm Credit System (Consolidated)
Loan Quality
1990
1989
1988
1987
1986
Nonaccrual loans
2 ,627
2,553
3,329
5 ,234
7 ,066
Restructured loan
1,902
2,366
2,058
1,321
363
Other property owned
(ORE)
346
468
663
876
1,101
90 days past due
131
259
432
515
1.037
Total npa + 90 day
5,006
5,646
6,482
7 ,9 4 6
9 ,567
Other high risk
2 .1 8 2
1.915
2.259
3 .7 5 8
4.705
Total high risk
7 ,1 8 8
7,561
8,741
11,704
14,272
Chargeoffs
93
169
647
799
1,662
Recoveries
72
174
234
311
310
Net chargeoffs
21
-5
413
488
1,352
($ in m illions)
Farm Credit Banks
(September 30, 1990)
($ in millions)
Baltimore
Springfield
2,688
3,051
1,654
248
87
36
6,914
3,302
3,666
133
89
37
117
25
109
74
20
10
159
54
133
208
587
230
-26
336
162
333
199
246
419
283
373
61
66
174
432
405
27
18
255
237
600
113
137
169
R estructured
42
906
40
17
2
75
320
109
172
111
9
ORE
16
144
22
9
5
19
25
53
17
4
51
Columbia
Loans
Allowance
A ssets
St. Paul
Spokane
4,033
5,780
153
5,366
FAC pfd. stk.
C apital stock
Surplus
N et incom e(bef. extr.)
N onaccrual loans
4.2
St. Louis
Omaha*
W estern
W ichita
3,411
3,605
5,043
3,352
3,567
3,616
40
117
213
122
163
76
106
2,010
4,204
4,237
6,185
4,059
4,045
4,923
107
14.0
6.2
35.2
48.2
Louisville
Texas
90
13.1
54.8
61.9
30
1.6
4.4
2.4
-0.4
0.0
4.0
1.7
3.9
-0.5
11.63
5.02
-0.03
12.14
11.23
8.40
4.93
6.55
11.65
10.28
11.80
Allowance/loans
3.79
4.29
3.24
1.18
2.36
3.43
5.91
2.42
4.86
2.13
2.93
N pa’s/loans
5.75
25.64
17.41
1.74
1.51
10.23
16.14
15.11
9.01
7.06
6.33
29.86
249.08
544.19
11.02
11.47
74.26
137.91
144.59
47.48
51.22
33.33
ROA
1.58
1.27
0.18
0.53
0.41
1.10
1.15
0.27
1.33
2.12
0.79
N IM
3.02
2.09
1.39
2.30
2.66
2.50
2.42
1.60
2.69
3.24
2.24
0.10
0.10
0.12
-0.02
0.00
0.16
0.05
0.10
0.00
-0.47
0.43
N et chargeoffs
-12.3
11.9
R atios (%)
Capital
stk .+ surpl/assets
N pa’s/cap.+ su rp l.+ res.
N et chargeoffs
* December 31, 1990
A - 18
FEDERAL HOME LOAN BANK SYSTEM
(FHLBanks or System)
Risk to the Government Credit Rating:
'AAA'
Rationale
The assessment of the Federal Home Loan Bank System reflects its
strong risk adjusted capitalization, adequate levels of profitability,
excellent credit loss experience, and the continuing importance of the
role it plays in providing liquidity to residential mortgage lenders.
Although the thrift industry, the primary user of the System's services
in the past, has been contracting substantially, and is expected to
continue to do so, the System still plays a role in serving the
surviving portions of the industry.
In addition, the liberalization of
membership standards enacted by the Financial Institutions Reform and
Recovery Act of 1989 (FIRREA) enables the System to attract new members.
While profitability measures will likely suffer from reduced demand for
advances, and capital levels have been restricted by heavy contributions
in support of the thrift resolution process, the System as a whole
should remain strong.
Asset risk is minimal, given that advances to
members are secured and collateralization standards are conservative.
Even should pressures stemming from the desirability of increasing
dividends to maintain current membership and attract new members lead to
increased
asset
leverage,
capitalization
measures
should
remain
appropriate for the rating category, given management's continuing
commitment to strong capitalization.
Factors Supporting C o n c l u s i o n .
Business/Market Position
The Federal Home Loan Bank System raises funds on a consolidated basis
for its twelve member banks, which funds are then advanced to members
(primarily thrifts) of the twelve banks.
Given the radical contraction
in the size of the thrift industry (the industry currently has about $1
trillion in assets, down from $1.4 trillion at its peak, and deposits of
$850 billion, down from $1 trillion), the System's business position has
been under pressure.
At year-end 1990 advances outstanding dropped 17%
to $117 billion from $142 billion a year earlier, reflecting the loss of
membership from thrift failures and reduced financing needs for the
thrift industry as a whole.
A-19
While Savings Association Insurance Fund (SAIF) insured thrifts must
still belong to their local Federal Home Loan Bank, state chartered Bank
Insurance Fund (BIF) insured thrifts have the option to belong or not.
There was concern that voluntary members might leave the system after
enactment of the Financial Institutions Reform and Recovery Act in
August 1989, but few have chosen to do so to date.
FIRREA took
virtually all retained earnings (about $3 billion, including Financing
Corporation (FICO) contributions) from the FHLBanks to support the
thrift resolution process, mandated ongoing contributions (about $300
million a year) to support the process, and mandated funding for
affordable housing (initially $50 million a year), all of which have led
to reduced profitability and consequently lower dividends at the 12
banks, making membership less attractive.
FIRREA also opened up membership to commercial banks and credit
unions, and about 116 new members have joined, with Norwest bank (assets
of $12 billion) being the largest, and another 72 applications in
process.
Given the requirement that members contribute capital to the
FHLBank to which they belong, as well as concern about the possibility
of future contributions to support deposit insurance from the twelve
banks, it does not appear likely that there will be a rush of larger
commercial banks into the system.
As a result, the FHLBank system is
likely to remain primarily associated with the thrift industry, with its
fortunes tied to that industry.
As a result, further shrinkage in
FHLBank advances is highly likely, at least for the immediate future.
While this scenario could have adverse consequences upon System
earnings, it would not jeopardize the System's capacity to make full and
timely payment of consolidated obligations.
Management
The Federal Home Loan Bank System falls under the oversight of the
Federal Housing Finance Board (FHFB), which was created by FIRREA.
The
recently created Board has assembled a staff in Washington and will
focus upon the broad issues that will determine the future effectiveness
of the System.
Although the Board has the authority to influence to
some degree the operating policies of the individual FHLBanks, there is
no reason to believe that this influence would deter the FHLBanks from
operating in the conservative manner that has long characterized their
performance.
While the Board has broad oversight responsibilities for the System
as a whole, it does not manage the individual banks within the System.
S&P has met in recent years with the managements of most of the twelve
individual banks. They are professional bankers who run their individu
al banks on conservative principles, within the mandate of the system as
A-20
a whole to facilitate home finance.
They are sharply sensitive to risk
management issues as these relate to both credit and interest rate risk,
and all, to varying degrees, are sensitive to the need to "market" their
b a n k s ' services to present and potential m e m b e r s .
Asset Quality
The quality of the System's assets has historically been excellent,
with no bank ever having had a credit loss.
The banks are secured
lenders to their members, and all establish their own lending policies
within guidelines established by the FHFB. Although these policies vary
slightly
among
the
banks,
requiring
varying
degrees
of
overcollateralization to secure advances, all are conservative.
A
provision of FIRREA, which restricts the type of collateral a bank may
accept to secure advances, has served to further standardize lending
practices among the banks.
There is some exposure to the FSLIC
Resolution Fund, since a few banks have taken FSLIC notes and yield
maintenance agreements as collateral for advances.
These notes, issued
by FSLIC prior to 1989 primarily as part of the southwest plan, have
become obligations of the Resolution Fund, which ultimately has recourse
to the Treasury to meet its obligations. The FHLBank of Dallas has some
$5 billion of this exposure, but S&P feels comfortable with the credit
of the Resolution Fund because of its access to the Treasury.
In addition to the advances, the banks have investment portfolios,
heavily invested in fed funds, repos and mortgage backed securities
(MBSs) . The fed funds are mostly overnight, with some maturities out to
three months.
Credit exposure is monitored and managed by the banks.
Repos are secured and overcollateralized.
Collateralized mortgage
obligations (CMOs) held for investment are rated and are short tranches.
In summary, the credit risks on the balance sheets of the twelve banks
are limited.
Barring a collapse in the value of mortgages, which
constitute most of the collateral securing advances, credit losses in
any material degree are not expected or likely.
Profitability
The System as a whole and each of the constituent banks have histori
cally been good earners, reflecting their attractive funding as GSE's,
their very low expense ratios, and their non-tax paying status.
In
effect, the banks have substantial control over their level of profit
ability, since even at a mark up to their own cost of funds they could
still offer attractive financing to their members.
The contribution of
a significant proportion of their capital as a result of FIRREA and the
ongoing contributions that they must make will impede profitability in
the future, and has already begun to do so in 1990, when ROA fell to
A-21
.83% from 1.00% the year earlier.
Nonetheless, even should p r o f i t a b i l
ity drop further, on a risk adjusted basis it would likely remain
consistent with the rating.
Funding/Interest Rate Risk Management
The banks are principally funded by the proceeds from the consolidated
obligations,
supplemented with deposits placed by their members.
Managements are keenly aware of interest rate risk, and the banks are
closely matched in their assets and liabilities, substantially limiting
exposure to changes in r a t e s .
They are protected against prepayment
risk by borrower penalties that protect the banks for at least 90% of
their exposure from prepayments.
Given "agency status"
for the
consolidated securities, as well as very strong stand alone fundamen
tals, funding is a strength of the System as a whole and of the twelve
member b a n k s .
Capital
Even after contribution of some $3 billion for support of the thrift
resolution process, the System as a whole and each FHLBank remains well
capitalized, especially given their secured lending practices. Average
equity/assets fell to 7.45% in 1990 from 8.36% a year earlier, r e flect
ing the heavy thrift resolution process contributions, but these are now
completed. Further contributions will come from ongoing earnings.
In
the face of the drop in both earnings and capital, many of the individu
al banks have switched to stock from cash d i v i d e n d s . Although the banks
do not have any regulatory capital standards to which they must adhere,
a regulation under which they operate mandates a 12:1 consolidated debt
to equity ratio.
Even should this regulation be changed to allow
somewhat greater dividending and consequently higher leverage, it would
be unlikely that the banks individually or the System as whole would
fall
below
capital
standards
consistent with
the
rating,
given
management's sensitivity to the desirability of a strong capital
position.
Although S&P's analysis has focused upon a consolidated view of the
System as a whole, it is important to add that the twelve Federal Home
Loan Banks each individually exhibit strong credit quality.
Although
the banks are independently managed and influenced by different economic
conditions in their respective markets, their financial profiles are
similar.
They all have a history of very strong asset quality (no
credit losses), good profitability
(with a range of ROAs of 0.59% to
1.03% in 1990), and strong capital levels (which ranged from 5.67% to
9.54% at 1990 year-end).
A-22
Federal Home Loan Banks (Combined)
Balance Sheet
($ in m illions)
Period End:
1990
1989
1988
1987
1986
117,100
141,807
152,799
133,058
108,645
4 5,389
35,196
18,530
18,132
2 0 ,0 5 4
3 ,197
3,793
3,534
2 ,9 8 7
2,9 8 0
165,686
180,796
174,863
154,177
131,679
31,114
25,913
19,050
20,355
2 6 ,9 5 2
1,471
80
383
639
417
118,519
136,798
136,513
116,383
89,590
2 ,9 5 7
3,800
3,397
3,055
2 ,9 1 2
154,061
166,591
159,343
140,432
119,871
11,625
14,205
15,520
13,745
11,808
165,686
180,796
174,863
154,177
131,679
A sse ts
A dvances
C a s h a n d in v e s tm e n t
O th e r a s s e ts
T o ta l a s s e ts
L ia b ilitie s
D e p o s its
O th e r b o rro w in g s
C o n s o lid a te d o b lig .
O th e r lia b ilitie s
T o ta l lia b ilitie s
E q u ity
T o t. lia b ilitie s & e q u ity
A-23
Federal Home Loan Banks (Combined)
Income Statement
($ in millions)
1990
1989
1988
1987
1986
Interest income
14,414
17,026
13,514
11,279
10,630
Interest expense
12,899
14,951
11,899
9,979
9,525
1,515
2,075
1,615
1,300
1,105
0
0
0
0
0
Other operating income
277
303
294
442
742
Other expense
371
599
458
403
370
Pretax income
1,421
1,779
1,451
1,339
1,477
0
0
0
0
0
1,421
1,779
1,451
1,339
1,477
47
4
3
-11
-15
1,468
1,783
1,454
1,328
1,462
Net interest income
Provision for loan losses
Tax expense
Income before extraordinary
Extraordinary items
Net income
A-24
Federal Home Loan Banks (Combined)
Ratio Analysis
1990
1989
1988
1987
1986
Profitability/Efficiency
1,451.00 1,328.00 1,462.00
1,468.00
1,783.00
-17.67
22.63
9.49
-9.17
35.00
Return on assets (%)
0.85
1.00
0.88
0.93
1.20
Return on equity (%)
11.37
12.00
9.94
10.39
13.34
Non-int income/non-int exp. (%)
74.66
50.58
64.19
109.68
200.54
Overhead/adjusted oper. inc. (%)
20.70
25.19
23.99
23.13
20.03
Non-int exp/avg assets (%)
0.21
0.34
0.28
0.28
0.30
Effective tax rate (%)
0.00
0.00
0.00
0.00
0.00
Net chargeoffs/advances (%)
0.00
0.00
0.00
0.00
0.00
Non-performers/advances
0.00
0.00
0.00
0.00
0.00
70.68
78.43
87.38
86.30
83.25
Avg. equity/avg. advances (%)
9.98
10.06
10.24
10.53
10.99
Avg. equity/avg. assets (%)
7.45
8.36
8.89
8.94
8.99
-2.58
8.09
15.11
17.28
117.51
Avg Advance Growth (%)
-12.12
3.06
17.79
21.68
122.05
Avg Equity Growth (%)
-13.10
1.57
14.53
16.61
116.85
Net income ($ in millions)
Change in NI from previous year (%)
Asset Quality
Liquidity
Advances/assets (%)
Capital
Avg Asset Growth (%)
A-25
Federal Home Loan Mortgage Corporation
(Freddie Mac)
Risk to Government Credit Rating: 'A+'
Rationale
The assessment reflects the company's consistent financial results,
sound management and operating strategies, and solid capitalization
relative to the risk profile of its total mortgage portfolio. Freddie
Mac's financial and operating strategies are prudent as they focus on
proactive credit risk management and containment of interest rate risk.
Credit and interest rate revenue sources tend to complement each other
and the resulting dynamic reduces earnings volatility under many volume
and interest rate scenarios. Operations are vulnerable to declining
national or regional housing values. A major risk to Freddie Mac is a
sustained economic disruption with a resulting decline in housing
values.
Resources available to Freddie Mac to pay worst case losses
include existing capital as well as the values in its off balance sheet
guarantee business.
Going forward, S&P anticipates that Freddie Mac
will continue to build capital both in an absolute sense and relative to
the growth of the portfolio.
Factors Supporting Conclusion:
Management and Corporate Strategy
S&P's opinion with regard to Freddie Mac's management and overall
policies, planning and control functions is quite positive.
For the
most part, long tenure is the case for many senior managers. Department
heads are generally knowledgeable, open, and well informed..
S&P's generally favorable assessment of the company's planning and
risk management functions is qualified primarily to the extent that the
company's multi-family program was not well managed prior to 1989.
Management has subsequently dealt with problems promptly and openly and
has established policies and organizational structures to attempt to
avoid a recurrence of the problem.
Credit Risk
The cornerstones of Freddie Mac's financial and operating strategies
have been the proactive management of credit risk and the ongoing
confinement of interest rate risk. Freddie Mac's consistent historical
outperformance of other residential mortgage lenders and residential
294-104 0 - 9 1
5 QL 3
A-26
real estate financial guarantors in the areas of delinquency and default
related losses seems primarily to be a function of a corporate-wide
commitment to credit quality. S&P believes that this is evidenced by,
among other things, Freddie Mac's willingness to suffer periodic credit
policy related market share deterioration.
Credit policy is set at the highest management levels for all
components of the risk management function. These include: underwriting
guidelines, credit risk sharing, quality control, seller/servicer
management, and geographic diversity. This commitment to credit risk
management has not, over the long term, materially constrained growth or
impaired the company's overall public purpose mission.
Interest Rate Risk
Over 95% of Freddie Mac's servicing portfolio of about $338.2 billion
(12/31/90) was financed with pass through securities, resulting in an
off balance sheet sale and a shifting of interest rate risk to the
participation certificate investor.
The company's on balance sheet
mortgage portfolio ($16.8 billion net of match funded multi class
securities as of 12/31/90), and associated interest rate risk exposure
is viewed by Freddie Mac as something of an undesirable but manageable
cost of doing business.
It allows Freddie Mac to achieve scale and
improve liquidity for new securities.
As a benchmark, Freddie Mac s
retained portfolio is capped at 5% of the total servicing portfolio.
Management is committed to maintaining this relationship. It believes
that a larger exposure relative to the sold portfolio would expose the
firm to unnecessary risk and potentially severe losses were interest
rates to move by several hundred basis points.
To better manage its
interest rate risk, and measure its run-off or liquidation value,
Freddie Mac calculates its market value net worth on a quarterly basis
and subsequently stresses this calculation against a range of interest
rate movements.
As part of the Treasury Department study of certain GSE's, Freddie
Mac's model as of December 31, 1989 indicated that a 300 basis point
increase in rates would reduce present value net worth to $4.5 billion.
Correspondingly, a 300 basis point decrease would lower present value
net worth to $3.5 billion. On this date market value net worth was $4.5
billion while book value was $1.9 billion.
This moderate sensitivity
principally benefits from the present value of the company's servicing
"guarantor fee" component and the fact that its value is negatively
correlated with the retained portfolio.
However, as with any modeling or valuation exercise, underlying
assumptions play an important role. For example, Freddie Mac assumes
A-27
that existing reserves represent a reasonable proxy for future losses.
Nevertheless, based on its review of key model variables, S&P believes
that Freddie Mac is about as insulated from shifting interest rates as
it can be, given the nature of its business.
Business Review
Freddie Mac's only competition in the conforming conventional market
is the Federal National Mortgage Association (Fannie Mae). Outstanding
"insured" debt for this duopoly was in excess of $690 billion at the end
of 1990, about 25% of total outstanding residential debt. The residen
tial mortgage debt growth rate was about 10% form most of the 1980s.
S&P's expectations for growth going forward is not unlike the current
consensus of industry analyst opinion. Near term, lender and finance
company capital adequacy constraints in combination with heightened
investor credit quality concerns should contribute to continued Fannie
Mae and Freddie Mac volume growth. Longer term, changing demographics
could reduce demand for housing, potentially resulting in a lower volume
and slower property appreciation in relation to historical trends.
Market share ($ in billions)
Year
FNMA Purchases
FHLMC
1985
1986
1987
1988
1989
1990
$45.2
91.4
83.8
78.0
92.3
120.7
$44.0
103.5
76.8
44.1
78.6
75.5
Given the incremental risks associated with a monoline insurance
product, concentrations and development of insurance writing activity by
state, Metropolitan Statistical Area (MSA), loan to value ratio, various
product types and loan features were reviewed.
Concentrations or
positions in higher class risk categories ultimately result in more
stringent loss assumptions as it pertains to S&P's capital adequacy
assessment.
For example, given the limited development history
associated with the various adjustable rate mortgage products, especially payment shock concerns in a prolonged rising rate environment, ARM
foreclosures in S&P's depression model are assumed to take place at a
rate of 1.5 times that of fixed rate foreclosures, all other variables
held equal.
A-28
As of December 31, 1990, Freddie Mac had off balance sheet contingent
credit loss liabilities of about $316.3 billion plus mortgage assets
totaling $21.8 billion. These were distributed by loan type as follows:
$287.5
Single family fixed
38.4
Single family ARM
12.3
Multi-family and other
$338.2
Characteristic
95 LTV
80-90 LTV
<80 LTV
Current avg LTV
Buydown
2-4 units
Non Owner
Condos
Fixed*
ARM*
Multi-Familv
5.2%
14.5
80.3
54.0
8.5%
22.3
69.2
73.0
0.5%
7.7
91.8
n. a .
2.4%
4.8
3.5
5.9
0.4%
4.5
2.4
11.3
n .a .
n .a .
n .a .
n.a.
*expressed as a percentage within the sub-category.
When viewed in aggregate and compared to other residential lenders and
financial guarantors, Freddie Mac has had an advantage in the area of
historical credit risk management. Freddie Mac partially credits its
thrift versus mortgage banker mix dominance as a positive contributing
factor, since thrift strategy was primarily to swap and hold its
participation certificates. As this mix changes, additional risk may be
introduced.
Because Freddie Mac is aware of this, S&P does not
anticipate any material change in loss experience going forward.
By Freddie Mac's own admission, multi-family underwriting was woefully
inadequate.
In particular, Freddie Mac was not selective of its
customers and borrowers and it was not adequately servicing its loans.
While accounting for only about 3% of the total portfolio, it becomes
more significant when viewed in terms of operating leverage at 4:1.
Delinquencies (90 days or more) have risen to 0.56% for the fourth
quarter of 1990 from 0.19% in 1986. Correspondingly, foreclosures in
progress have increased from 0.55% in 1986 to 2.09% as of December,
1990.
However, as previously mentioned, Freddie Mac has taken what
appear to be reasonable steps and is aggressively addressing the
problems.
A-29
The adjustable rate mortgage (ARM) sub-portfolio is second to the
multi-family sub-portfolio in terms of incremental risk. ARM's comprise
about 11.4% of Freddie Mac's total servicing portfolio.
Current ARM
loss development is moderate at a three month delinquency rate of 0.31%
and foreclosures in process of 0.44% at the end of the fourth quarter of
1990. Nevertheless, concerns about this product's limited development
history and potential payment shock related foreclosures relative to
fixed rate loans remain.
A sometimes overlooked but extremely beneficial relationship from a
credit loss perspective is Freddie Mac's relationship with the mortgage
insurance industry. A comparison between Freddie Mac and the Mortgage
Insurance Companies of America (MICA) of defaulted fixed rate 95% LTV
business written in selected years demonstrates this point.
Ever to Date Defaults Processed by Year of Origination
Fixed Rate 95% LTV's
Year of Origination
FHLMC
MICA*
1981
1982
1983
1984
13.1%
14.0
8.6
5.5
15.5%
18.8
12.8
9.0
includes 95% LTV ARMS.
The interesting implication here is that Freddie Mac's underwriting
as it pertains to this category of loans originated in 1981 and 1982
appears to have been only slightly better than the mortgage insurance
industry's underwriting efforts.
However, Freddie Mac's earnings
greatly benefitted from its first loss mortgage insurance protection.
Compared with Freddie Mac's exceptional earnings track record, the
mortgage insurance industry in 1987 alone had underwriting losses
(losses incurred less premiums earned) totaling almost $1 billion
dollars.
Operations are vulnerable to declining national or large regional
housing values.
A major risk to Freddie Mac is a sustained economic
disruption with a resulting decline in housing values.
In addition,
revenue is primarily a function of a monoline product line - residential
mortgages. This constraint limits product and revenue stream diversifi
cation and can curb opportunities for reallocation of resources.
Finally, Freddie Mac is mandated to provide liquidity for low and
moderate income housing with a reasonable economic return.
Freddie
A-30
Mac's underwriting guidelines today are prudent and mitigate concern for
taking on "risky" low and moderate income housing loans but Congressio
nal sentiment and Freddie Mac's activity should be monitored going
forward. Monitoring is made easier through Freddie Mac's organizational
structure which designates an office specifically for affordable housing
initiatives.
Operating Performance
In terms of most measures of growth, earnings and profitability,
Freddie Mac has historically been a consistent performer in the finance
and the financial service sectors. Notwithstanding its cost of funds and
other GSE operating advantages, it has never had an unprofitable quarter
in its history.
Freddie Mac can access the capital markets in good
times and bad, at favorable terms, because of its GSE status.
In
addition, the quality of earnings is strong as a generally conservative
accounting approach is taken. Most importantly from an interest rate
risk and capital adequacy standpoint, net interest margin and overall
earnings are relatively less volatile as the dynamics of float, premium,
and portfolio revenue tend to complement one another.
Going forward,
S&P's expectation is for continued consistent financial service sector
operating performance.
Revenue
($ in millions)
1985
1986
1987
1988
1989
12/90
Int. and discount
Int. on investments
Mgt. and gty income
1,349
254
188
1,336
357
301
1,114
627
472
1,442
833
465
2,016
1,169
572
2,053
1,258
654
Total int. expense
1,291
1,394
1,422
1,783
2,668
2,692
500
22
600
72
791
14
957
(5)
1,089
34
1,273
31
Provision for mtg loss
Administrative exp
79
81
120
110
175
150
204
194
278
217
474
243
Net income before tax
362
442
480
554
628
587
Net int. margin
Other income
Operating revenue can be generally clas sified into three areas:
management and guarantor fees , retained portfolio interest income, and
float income.
About 52% of total revenue in 1989 was guarantor fee
related. This relationship was virtually unchanged through 1990 at 51%Explosive growth for this revenue category was fueled by corresponding
residential debt securitization growth.
While sharp declines in
A-31
interest rates will, from time to time, result in refinancing growth and
reduction of the existing fee base, corresponding new guarantees should
include many of those same canceled policies.
S&P's expectation with
regard to this scenario is for a minimal net impact.
1990 guarantor fee income grew by 14.3% on the strength of corre
sponding growth in the company's outstanding insurance guaranty (off
balance sheet servicing portfolio) base. While there are reports from
time to time of market share driven fee concessions, conversations with
seller/servicers suggest that this is not a near term concern.
About 32% of 1990 total revenue, net of interest expense is float
income.
Freddie Mac benefits from about a thirty day float period
between the time it receives principal and interest remittances from the
respective servicers to the time that payments to investors are due.
Going forward, market acceptance of the Gold P.C. will have the effect
of reducing float income. Without consideration for volume gains, S&P's
expectation is that this revenue loss will be offset by increased
guarantor fee pricing.
Total interest income, net of interest expense, relating to the
retained portfolio accounts for about 17% of total revenue. As previous
ly mentioned, changes in interest income and float income due to
interest rate movements tend to offset each other and result in lower
net interest margin volatility. For example, revenue through 1989 was
split 53% management fee, 32% float and 15% investment portfolio. As a
result of a subsequent 100 basis point decline in short term rates,
second quarter 1990 revenue was distributed as follows: management fee
53%, float 30% and investment portfolio 17%.
Freddie Mac's loan loss reserves are established for all loans
serviced based upon general mortgage product type (single family fixed
rate, ARM's, and multi-family) with higher reserve rates for the higher
risk ARM's and multi-family. Annual reserve provisions are made for
each year that the loan remains in the portfolio.
Reserves as a
percentage of total credit loss exposure for Freddie Mac have increased
from about 0.15% in 1987 to about 0.19% at December 31, 1990.
Also
during this period, reserve provisions have comfortably exceeded losses
actually incurred.
Capitalization
Over the past ten years, total assets have increased more than seven
fold from $5.4 billion at year-end 1980 to $40.6 billion at December 31,
1990. Balance sheet growth has been funded primarily with debt. Over
this period, the equity to total asset ratio has fluctuated between 4.0%
A-32
in 1980 and 5.5% at December 31,1990. The inclusion of $316.4 billion
of guaranty related contingent liabilities results in an on and off
balance sheet operating leverage ratio of about 167:1.
Recently, this ratio has been used by analysts attempting to draw
comparisons with the failed thrift industry. While this relationship is
a convenient starting point in a capital adequacy assessment, it is
overly simplistic as it ignores several key capital adequacy determi
nants: underwriting quality, credit risk profile, and capital generation
capabilities. Ultimately, capital is adequate or insufficient only
within the context of the unique risks of a business.
S&P believes that, in borrowing from S&P's structured finance and
private mortgage insurance criteria and the private mortgage insurance
capital adequacy model, resources available to pay losses include not
only capital and reserves, but also anticipated premium and investment
income appropriately discounted for "depression” related expectations.
In effect, the capital generation and recourse availability aspect of
S&P's existing methodology is not unlike certain components of Freddie
Mac's present value capital calculation. In addition to giving credit
for resources to meet guarantee obligations which go beyond capital and
reserves, about 18% of the total servicing portfolio is insured by the
private mortgage insurance industry. Because a majority of these
financial guarantors have claims paying ability ratings at or above
'AA', credit can be given for this most of this "ceded" insurance risk.
While overall exposure in the multi-family program is small compared
to the total portfolio, ($10.7 billion in the fourth quarter of 1990) it
is quite sizable relative to the capital base.
Freddie Mac has,
however, made appropriate response to the problem. It has reallocated
key human and other resources to this area. In December 1989, as both
delinquencies and losses trended upward, Freddie Mac altered its
underwriting guidelines to lower LTV's to 70% and increase debt service
coverage.
In October 1990, Freddie Mac closed down new purchases of
multi-family in its Cash Program. Virtually all losses were in the Cash
Program.
For internal capital adequacy management purposes, Freddie Mac uses
a mark to market (current property value) approach. The more conserva
tive approach used by S&P and most capital market participants in
estimating expected foreclosure frequency and loss severity relies on
original loan to value ratios. This approach gives a lesser degree of
property appreciation "credit" for loan seasoning.
Based on the
original LTV approach, Freddie Mac is able to withstand most loss
scenarios.
Therefore, S&P believes Freddie Mac to be in a strong
capital position. S&P's expectation is that the company will continue
to build capital going forward.
A-33
Federal Home Loan Mortgage Corp.
Balance Sheet
($ in millions)
1990
1989
1988
1987
1986
Cash and investments
6,808
5,397
5,525
4,670
3,612
Reverse repurchase agreements
9,063
5,765
9,107
5,859
4,495
21,395
21,329
16,815
12,258
13,012
2,199
1,772
1,509
1,325
144
Real estate owned
417
271
224
175
130
Unamortized mtge sales disc., etc
697
928
1,172
1,387
1,836
40,579
35,462
34,352
25,674
23,229
Due to PC investors
6,427
6,670
5,011
4,192
5,958
Total debt securities
28,375
24,102
24,846
17,461
13,378
495
347
289
238
197
2,566
2,045
2,036
2,086
1,997
580
382
586
515
746
38,443
33,546
32,768
24,492
22,276
2,136
1,916
1,584
1,182
953
40,579
35,462
34,352
25,674
23,229
Assets
Mortgages, net
Accounts receivable and other
Total assets
Liabilities
Reserve for losses on sold mtges
Subordinated debt
Other liabilities
Total liabilities
Total shareholders’ equity
Tot. liabilities & s’holders’ equity
A-34
Federal Home Loan Mortgage Corp.
Income Statement
($ in millions)
1990
1989
1988
1987
1986
Interest income
3,311
3,185
2,402
1,821
1,709
Interest expense
2,692
2,668
1,910
1,422
1,394
619
517
492
399
315
654
572
465
392
292
Gain (loss) on sale of loans
-3
0
-2
13
31
Other
34
34
-3
1
38
685
606
460
406
361
General and administrative
243
217
194
150
114
Provision for loan and REO losses
474
278
204
175
120
Total other expense
717
495
398
325
234
Income bef taxes &
extra items
587
628
554
480
442
Income taxes
173
191
173
179
195
Net income
414
437
381
301
247
Net interest income
Other income
Loan fees and service charges
Total other income
Other Expense
A-35
Federal Home Loan Mortgage Corp.
Ratio Analysis
1990
1989
1988
1987
1986
Profitability
Net income ($ in millions)
414.00
437.00
381.00
301.00
247.00
Return on assets (%)
1.09
1.25
1.27
1.23
1.24
Return on equity (%)
20.43
24.97
27.55
28.21
28.52
G & A/Total Assets (%)
0.60
0.61
0.56
0.58
0.49
G & A/Total Revenues (%)
6.08
5.72
6.78
6.74
5.51
29.47
30.41
31.23
37.29
44.12
0.10
0.08
0.06
0.06
0.03
Avg. total loans/Avg. total assets (%)
57.48
55.30
48.43
51.67
67.27
Total loans/total assets (%)
52.72
60.15
48.95
47.74
56.02
Avg. equity/avg. loans (%)
9.27
9.05
9.51
8.44
6.47
Avg. equity/avg. assets (%)
5.33
5.01
4.61
4.36
4.35
Equity/total loans (%)
9.98
8.98
9.42
9.64
7.32
Equity/total assets (%)
5.26
5.40
4.61
4.60
4.10
Equity + res./tot. assets + PC (%)
0.77
0.78
0.76
0.63
0.62
Equity/total assets + PC (%)
0.60
0.62
0.61
0.49
0.48
Asset growth (%)
14.43
3.23
33.80
10.53
40.04
Equity growth (%)
11.48
20.96
34.01
24.03
22.34
Dividend payout ratio
23.43
27.23
21.78
23.92
29.55
Internal growth rate of capital (%)
15.65
18.17
21.55
21.46
20.09
Effective tax rate (%)
Asset Quality
Charge-offs/Avg Loans + PC (%)
Liquidity & Asset!Liability Mix
Capitalization
A-36
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Fannie Mae)
Risk to the Government Credit Rating:
'A-'
Rationale
The assessment of the Federal National Mortgage Association reflects
its strong market position, the improvement that it has made in managing
interest rate risk, and the overall high quality of its assets, both on
and off the balance sheet.
These strengths are partially offset by
concerns about the company's thin capital base and the narrowly margined
nature of its two principal businesses.
Since Fannie Mae maintains a
sizable portfolio of primarily fixed rate mortgages on its balance
sheet, which it funds with capital markets borrowings, results can be
adversely affected by sustained moves in interest rates. While Fannie
Mae maintains capital to protect against this risk, as well as credit
risk in both the on and off balance sheet portfolios,
the current
levels of protection are, in S&P's view, consistent with the assigned
rating.
Moreover, Fannie Mae has not been immune to the historical
earnings cyclicality that has characterized other entities involved in
the mortgage business, and already thin margins earned on both its
guaranty business and its portfolio of held mortgages could be pressured
given adverse economic scenarios.
Factors Supporting Conclusion.
Market Position
Fannie Mae benefits from a strong market position in both of its
principal businesses. That is, as a guarantor of conventional mortgages
and as a portfolio holder of mortgages.
Its only competition in the
conventional market is the Federal Home Loan Mortgage Corporation.
Outstanding guarantees for this duopoly were in excess of $620 billion
at the end of 1989, about 25% of total outstanding residential debt of
$2.5 trillion.
The residential mortgage growth rate was about 10% a
year for most of the 1980s. S&P's expectations for growth in the future
mirror that of the consensus of industry opinion.
Near term, capital
adequacy constraints in the thrift and bank industries in combination
with heightened credit quality concerns should contribute to continued
Fannie Mae and Freddie Mac volume growth.
Longer term, changing
demographics could reduce demand for housing, possibly resulting in a
lower volume of sales activity and slower property appreciation.
A-37
As market share data on loan purchases shows, Fannie Mae has outpaced
Freddie Mac in recent years.
This is all the more striking in that
Fannie Mae only entered the guaranty business in 1981.
In part, the
gains represent Fannie Mae's being the first to guaranty adjustable rate
mortgages (ARMs), as well as the flexibility that maintaining a
portfolio on balance sheet provides, but they also suggest that Fannie
Mae has been more aggressive than Freddie Mac in recent years in
courting business.
Market share ($ in billions)
Year
1985
1986
1987
1988
1989
1990
FNMA purchases
$ 45.2
91.4
83.8
78.0
92.3
120.7
FHLMC purchases
$ 44.0
103.5
76.8
44.1
78.6
75.5
In its portfolio business, Fannie Mae benefits from its good access
to funds at attractive rates.
It does not have to compete as a
depository for funds, but can raise what it needs from the capital
markets, which are national and international in scope.
While Fannie Mae has historically specialized in guaranteeing single
family and, to a much lesser degree, multifamily mortgages, new product
initiatives, like its proposed purchase program for construction loans,
bear monitoring in the future. While any new product initiatives are
likely to remain limited in scope, they could have the potential to
increase Fannie Mae's risk profile.
Management
Fannie Mae has had a recent change in leadership. David Maxwell, who
had served as Chairman since 1981, resigned and James Johnson, who had
served as Vice Chairman since early 1990, became Chairman in February
1991. The new Chairman has publicly stated that he will continue the
policies and direction established by Mr. Maxwell.
Fannie Mae can
generally be
characterized by stability in senior management. This
has provided for continuity and consistency in pursuing strategic
directions.
A-38
Asset Quality
Fannie Mae's primary balance sheet risk is in its mortgage portfolio,
as the following shows:
12/31/90
($133,113)
Mortgage portfolio
Investments
Cash
Int. receivable
Rec. currency swap
OREO
Other
85.5%
7.4%
3.1%
0.8%
1.8%
0.3%
1.1%
12/31/89
($124,315)
86.7%
6.7%
2.8%
0.9%
1.4%
0.4%
1.1%
12/31/85
($99,076)
95.4%
—
—
—
4.6%
In addition to the balance sheet, MBS outstanding at 1990 year-end
were $300 million, up from $228 million a year earlier and $55 billion
at 1985 year-end.
The composition of the mortgage portfolio (not including off-balance
MBS) was as follows:
Single family
FHA/VA
Fixed (30 yr)
ARMS
Seconds
Multi-family
FHA/VA
Fixed (30 yr)
ARMS
1990
1989
1985
10.0%
62.0%
18.0%
1.0%
11.0%
60.0%
20.0%
1.0%
28.0%
46.0%
17.0%
3.0%
4.0%
5.0%
0.0%
4.0%
4.0%
0.0%
5.0%
1.0%
0.0%
Within the portfolio, certain trends are apparent. There has been a
move away from single family FHA/VA mortgages; an increase in
multi-family mortgages; and a slight move away from seconds; in all, a
moderate pick-up in credit risk.
MBS Off-balance Sheet:
1990
($299,833)
Single Family
Fixed (30 yr)
Intermediate
ARMS
Multi-family
Fixed
ARMS
70.0%
13.0%
14.0%
1989
($228,232)
1985
($54,987)
6 8 .0 %
11.0%
80.0%
6 .0 %
17.0%
12.0%
1 .0 %
1 .0 %
1 .0 %
0 . 1%
2 .0 %
3.0%
The guarantee business remains overwhelmingly single family; there is
a smaller proportion in 30 year fixed rate loans, with a greater
proportion in ARMS and intermediate.
MBS breakdown by risk:
1985
1989
1990
Non-recourse
30%
59%
67%
Recourse
70%
41%
33%
As apparent in the table above, Fannie Mae has taken on more credit
risk, with the trend strongly towards non-recourse transactions.
In
recourse transactions Fannie Mae can turn to the seller of the mortgages
to cover losses, but if the seller does not perform, Fannie Mae must; in
non-recourse transactions Fannie Mae alone must cover losses.
This
trend towards non-recourse transactions is likely to continue, since for
capital management purposes banks and thrifts want to rid themselves of
recourse on mortgages that they sell.
Although Fannie Mae has not shared detailed portfolio and MBS
characteristics with S&P, a substantial amount of information on these
characteristics is public and has been factored into the analysis.
As of year-end 1990, 90% of both conventional single family mortgages
in portfolio and MBS outstanding were in loans purchased since January
1, 1986, that is, when Fannie's new underwriting standards became opera
tional. The revised guidelines, according to Fannie Mae, led to lower
loan to value (LTV) on many purchased loans.
A-40
At year-end 1990, 77% of conventional single family loans in portfolio
and backing MBS had original LTV of 80% or below, and 34% had LTV of 70%
or below.
The mortgage portfolio and MBS are well diversified by region and by
states within regions, but California alone accounted for 25% of the
total.
In general, Fannie Mae’s portfolio and MBS have tended to
reflect those markets that have experienced heightened mortgage
origination activity, exposing itself to risk should these markets
experience deterioration.
This regional exposure, however, has been
manageable within the context of its overall geographic diversification.
Fannie Mae’s credit history has been good in the second half of the
1980's. Charge-offs to average portfolio loans plus MBS ran at 12 to 13
basis points in the mid-1980s, and have been on a declining trend since:
down to 6 basis points in 1990.
These numbers include multi-family
experience. While current market conditions in several regional markets
suggest that credit experience could be under some pressure in coming
years, in S&P's view it is unlikely that potential deterioration would
be substantial.
Reported delinquency (loans 90+ days past due, in relief, and in
foreclosure) rates have also been good. Fannie Mae reports delinquency
by number of loans, not outstanding balances, and only on Fannie Mae at
risk (non-recourse) loans. The delinquency rate at 1990 year-end was
.58% of total loans (1.02% of in portfolio loans and 0.33% in MBS), down
from 0.69% a year earlier (1.11% in portfolio and 0.36% in MBS) and
1.48% at 1985 year-end.
Acquired property and foreclosure claims at 1990 year-end were 0.3%
of the balance sheet, down from 0.4% a year earlier.
Based upon the available data, it is possible to conclude that Fannie
Mae's credit history has been very strong over the past few years
compared to that of most financial institutions, but a little weaker
than that of several high quality thrifts operating in strong markets,
which have historically had only a few basis points in charge-offs.
Fannie Mae's good record reflects the preponderance of low LTV single
family residential mortgages which it guarantees and are in its
portfolio; the generally low loss recorded for single family mortgages
throughout the country in recent decades; its tightened underwriting
standards, which reflect the trend towards tightening of mortgage
underwriting nationally in recent years; and the geographically
diversified nature of its exposure.
A-41
Profitability
Fannie Mae has accomplished a strongly improving trend in profitabili
ty. Return on balance sheet assets was 0.91% in 1990, after consistent
ly rising since the 1 basis point loss of 1984. Reflecting the narrow
margined nature of both the portfolio and guarantee businesses, however,
adjusted for MBS outstanding, ROA in 1990 was 0.31%, up from .026% in
1989.
While profitability has been driven by fees generated in the
guaranty business, portfolio profitability has also improved, as
measured by the net interest margin:
this was 1.39% in 1990, up from
1.16% in 1989 and 0.15% in 1985. General and administrative expense as
a percent of revenues has been rising, but is still very modest at 2.25%
in 1990, up from 2.20% in 1989 and 1.68% in 1986.
The provision for
losses has been a drain on income, but a modest one.
Reflecting the
competition with Freddie Mac, fees on MBS have been under pressure
despite strong demand for the guarantees provided by both companies.
Should demand weaken, pricing could be pressured further.
While the
strong improvement in profitability is a positive development, the
relatively low adjusted profitability earned by Fannie Mae is a risk
factor, since adverse developments that affect pricing, loss experience,
or funding could have a severe effect upon already thin earnings power.
While the portfolio business generates both funding and interest rate
risk, it does provide a valuable source of income for Fannie Mae, as
well as providing some diversification. Should the guarantee business
falter, Fannie Mae could still generate earnings from its portfolio'.
Liquidity/Funding
As a GSE Fannie Mae has good access to capital markets for both long
and short term funds, and this is a considerable strength. Fannie Mae
has gone to great pains in recent years to correct the interest rate
mismatch that caused it difficulty in the early 1980s.
Management
focuses upon the balance sheet's duration gap, which was down to 3
months at December 31, 1990, a vast improvement from the 36 months at
1980 year-end. Mortgage assets, as measured by Fannie Mae, have been
shortened to an average life of 41 months from 62 months. While this
reflects the greater proportion of ARMS and intermediate term loans in
the portfolio, it also involves assumptions on prepayments.
In
addition, average life of liabilities has gone to 38 months from 26,
reflecting efforts to issue more longer term debt.
Looking at the one year maturity gap, again as presented by Fannie
Mae, there is much improvement. The gap moved from a negative 2% to a
positive 4% from the end of 1985 through the end of 1989.
It was a
negative 16% at 1984 year-end.
A-42
In managing interest rate risk, Fannie Mae has issued more callable
debt in recent years, lengthened the maturities of overall debt, and
also uses hedging.
While Fannie Mae has definitely made progress in
managing its interest rate risk, it still could be adversely affected by
changes in interest rates, especially if there is a sustained rise in
rates to much higher levels. Despite good efforts to manage interest
rate risk,
Fannie Mae has about three quarters of its mortgage
portfolio in long term fixed rate mortgages, which are funded relatively
short. This embedded interest rate risk must be reflected in appropri
ate capitalization, along with credit risk.
Capitalization
Risk adjusted capitalization has been improving at Fannie Mae, and
management has said that equity and reserves would total at least $6
billion by 1991 year-end. Balance sheet leverage has improved to 2.96%
equity/assets at 1990 year-end, from 2.41% a year earlier and 1.02% at
1985 year-end. Significantly, and despite the very rapid growth in the
guaranty business, leverage measures including the off balance sheet
guarantees have also improved. Equity plus reserves/total assets plus
MBS reached 1.06% at 1990 year-end, up from 1.01% a year earlier and
0.74% at 1986 year-end.
Since capital must protect against
credit,interest rate and other business risks, further progress in risk
adjusted capitalization would have to be made for consideration to be
given to a higher rating.
A-43
Federal National Mortgage Association
Balance Sheet
($ in millions)
1990
1989
1988
1987
1986
Cash and equivalents
4,178
8,338
2,672
2,142
1,630
Investm ents & other securities
9,868
3,532
5,476
3,783
232
113,875
107,756
99,867
93,470
93,949
Interest receivable
1,032
1,064
939
811
904
Receivable from currency swap
2,376
1,796
1,717
1,573
1,054
370
448
418
416
414
1,414
1,381
1,169
1,264
1,438
133,113
124,315
112,258
103,459
99,621
346
346
353
352
340
123,403
116,064
105,459
97,057
93,563
0
0
0
0
0
2,418
2,424
2,173
2,145
2,305
90
153
157
298
278
Payable from currency swap
1,755
1,355
1,150
958
779
O ther liabilities
1,160
982
706
838
1,174
129,172
121,324
109,998
101,648
98,439
3,941
2,991
2,260
1,811
1,182
133,113
124,315
112,258
103,459
99,621
Assets
Mortgage portfolio, net
Acquired property
O ther assets
Total assets
Liabilities
Escrow deposits
Total debt
O ther borrowings
incl fed funds & rev repo
Accrued interest payable
Deferred income taxes
Total liabilities
Total shareholders’ equity
Tot. liabilities & s’holders’ equity
A-44
Federal National Mortgage Association
Income Statement
($ in millions)
1990
1989
1988
1987
1986
Interest income
12,069
11,080
10,226
9,843
10,107
Interest expense
10,476
9,889
9,389
8,953
9,723
1,593
1,191
837
890
384
536
408
328
263
175
7
9
12
-81
31
Other
107
60
69
53
83
Total other income
650
477
409
235
289
Administrative
286
254
218
197
175
Provision for losses
310
310
365
360
306
Total other expense
596
564
583
557
481
Income bef taxes &
extra items
1,647
1,104
663
568
192
474
297
156
192
87
1,173
807
507
376
105
Net interest income
Other income
Loan fees and service
charges
Gain (loss) on sale of loans
Other Expense
Income taxes
Net income
Federal National Mortgage Association
Ratio Analysis
1986
1987
1988
1989
1990
Profitability
1,173.00
807.00
507.00
376.00
105.00
Return on assets (%)
0.91
0.68
0.47
0.37
0.11
Return on equity (%)
33.87
30.73
24.90
25.12
9.58
G & A/Total Assets (%)
0.21
0.20
0.19
0.19
0.18
G & A/Total Revenues (%)
2.25
2.20
2.05
1.95
1.68
556.99
468.90
383.94
451.78
219.43
1.39
1.16
0.89
1.00
0.40
29.00
27.00
24.00
34.00
45.00
0.06
0.08
0.12
0.13
0.12
Avg. total loans/Avg. total assets (%)
86.09
87.76
89.63
92.29
94.84
Total loans/total assets (%)
85.55
86.68
88.96
90.34
94.31
Avg. equity/avg. loans (%)
3.13
2.53
2.11
1.60
1.16
Avg. equity/avg. assets (%)
2.69
2.22
1.89
1.47
1.10
Equity/total loans (%)
3.46
2.78
2.26
1.94
1.26
Equity/total assets (%)
2.96
2.41
2.01
1.75
1.19
Equity + res./tot. assets + MBS (%)
1.06
1.01
0.94
0.90
0.74
Equity/total assets + MBS (%)
0.94
0.88
0.80
0.76
0.61
Asset growth (%)
7.08
10.74
8.50
3.85
0.55
Equity growth (%)
31.76
32.35
24.79
53.21
17.15
Dividend payout ratio
14.74
12.76
11.24
7.71
14.29
Internal growth rate of capital (%)
28.88
26.81
22.10
23.18
7.30
Net income ($ in millions)
Net int. income/non-int. expense (%)
Net margin (%)
Effective tax rate (%)
Asset Quality
Charge-offs/Avg Loans + MBS (%)
Liquidity & AssetILiability Mix
Capitalization
A-46
STUDENT LOAN MARKETING ASSOCIATION
(Sallie Mae)
Risk to the Government Credit Rating: 'AAA'
Rationale
The assessment of Sallie Mae reflects its consistently good operating
performance, the high quality of its asset base, and its strong risk
adjusted capitalization.
Sallie Mae has managed well the servicing
risks attendant upon guaranteed student loans, which, along with
advances secured by such loans, comprise the preponderant part of the
company's balance sheet. While student loans themselves do not have a
good credit history, the insured nature of the loans either held or
taken as collateral substantially protect the holder from risk.
Moreover, capital is maintained at levels to protect against a variety
of risks, including the remote risk of guarantor failure. Leverage has
increased in recent years, reflecting an active stock buyback program,
but Sallie Mae remains appropriately capitalized on a risk adjusted
basis.
Although pricing pressures on guaranteed student loans have
contributed to a narrowing of margins, Sallie Mae has continued to
achieve strong profitability, reflecting both its low operating expense
and attractive cost of funds.
Factors Supporting Conclusion.
Market Position
Sallie Mae specializes in the purchase and holding of government
guaranteed student loans, and also provides warehouse financing on a
secured basis for financial institutions and others (state agencies and
non-profit loan originators) that are active originators of government
guaranteed student loans. Sallie Mae also maintains a sizable portfolio
of short term investments for liquidity purposes and makes a limited
number of loans to educational institutions for facilities construction
and invests in student loan revenue and facilities bonds. Sallie Mae is
not itself a student loan guarantor, but a provider of liquidity to the
guaranteed student loan market.
It has also capitalized the College
Construction Loan Association (Connie Lee) with $53 million and has a
commitment to provide another $25 million under certain conditions.
Connie Lee, which is 75% owned by Sallie Mae, is a loan guarantor. It
is rated 'AAA' by S&P on a stand alone basis.
A-47
The student loan business has been a growth area in recent years, with
guaranteed loans going from outstandings of $23 billion in 1982 to some
$53 billion at September 30, 1990. At the latter date, Sallie Mae held
about 31% of outstandings, by far the largest market share. Growth in
loans outstanding should continue to be healthy in future years, given
the continuing strong interest in education among the American people
and rising tuition expense.
The guaranteed student loan programs,
however, may come under tighter restrictions, reflecting governmental
concern about the credit experience and overall cost to the government
of these loans, which has worsened in recent years.
In 1990, the
program cost the government $4.4 billion, of which about $2.5 billion
was gross default and claim costs, and the remainder subsidy expense.
The brunt of any restrictions, however, would likely deal with trade
school related loans, since this is where the bad credit experience has
been centered, leaving financing for college and graduate school, which
account for the bulk of the loans, unaffected.
The growing
unattractiveness of holding and servicing student loans by private
financial institutions, a function of some widely publicized problems,
could be to Sallie Mae's benefit in the longer term, facilitating its
growth in market share.
The proportion of loans held by Sallie Mae that are serviced in house
has been rising significantly, and is now well over 50%. It maintains
seven servicing centers and on a visit to one of the largest S&P found
that it was technologically advanced. The company has a well organized
and defined growth strategy as far as training, capacity and workflow
are concerned. While there could be risk attendant upon the start up
and rapid growth of newer centers, Sallie Mae's extensive experience in
servicing student loans should enable it to manage this potential risk.
Sallie Mae also uses outside services, and monitors their performance to
mitigate risk.
Management
Last year the first CEO, Edward Fox, resigned, as did the General
Counsel.
Last July, Sallie Mae's Board appointed Lawrence Hough as
President and Chief Executive Officer and Timothy Greene as General
Counsel.
Both Mr. Hough and Mr. Greene had experience at Sallie Mae
prior to their current positions. At the same time, the Board appointed
Albert Lord as Executive Vice President and Chief Operating Officer, a
newly created position.
Mr. Lord had previously served as the Chief
Financial Officer.
Even with these changes, management at Sallie Mae
has followed consistent policies in recent years.
More attention has been given to credit policy, as evidenced by the
creation of a high level credit function.
In late 1989, Sallie Mae
A-48
appointed William Wingate as Senior Vice President for Credit Analysis.
Mr. Wingate's responsibilities are primarily directed at evaluating and
monitoring counterparty risk, an important function in maintaining high
quality, low risk asset exposure.
Asset Dispersion/Quality
Asset growth at Sallie Mae has been brisk in recent years:
total
assets of $41.1 billion as of December 31, 1990 were up 16% from 1989
year end and up 44% from 1988 year end. The composition of assets was
as follows:
Insured loans
Warehouse advances
Cash & investments
Other
1990
1989
1988
46.8%
23.2%
27.3%
2.7%
45.1%
24.2%
27.7%
3.0%
46.1%
27.9%
22.9%
3.1%
In terms of trends in asset dispersion, the single most noteworthy
point is the growth in the investment portfolio as a proportion of the
balance sheet and a corresponding decline in warehouse advances as a
proportion.
The investment portfolio is maintained for liquidity reasons, and also
generates income. Since Sallie Mae funds on a low cost basis as a GSE,
it is able to make a spread between its cost of funds and the yield on
this investment portfolio. This is a high grade, short term portfolio,
comprised heavily of fed funds (69% of the portfolio at 1990 year-end),
and supplemented primarily with Treasury securities, money market
preferred stock (high grade issues), and student loan revenue and
facilities bonds.
Sallie Mae's portfolio of insured student loans represents the largest
part of its business. These loans are purchased from primary origina
tors (banks, thrifts, state agencies, non-profit originators) and
virtually all are ultimately insured by the U.S. Government. Insurance
coverage aside, student loans do not have a very good credit history.
The national default rate in 1990 was 6.8% (claims paid during the year
to loans in repayment), and the cumulative national rate (total defaults
since inception of the program to loans that have entered repayment) was
14.1% on a gross basis and 9.6% on a net basis (net takes into consider
ation recoveries). The insured nature of these loans provides consider
able comfort to the holder or to a warehouse lender that has taken these
loans as collateral, but there could be problems related to claims
payments. Claims may be rejected if the holder has not followed proper
A-49
procedures; for example, if it has not made adequate effort at collec
tion.
This underscores the importance of good servicing, which we
believe Sallie Mae has; it has never had a significant problem with its
claims.
Another area of risk to the holder of a guaranteed student loan stems
from the system of reinsurance. Loans have a primary guarantor, usually
a state agency or not for profit organization, which guarantor is in
turn reinsured by the U.S. government. The loan holder makes claim to
the primary guarantor, who pays the holder and seeks reimbursement from
the government for losses. A guarantor is reimbursed 100% for claims it
pays. However, if the loss experience of a guarantor exceeds certain
levels, the government could limit reimbursement to 80%-90% of the loss
amount.
Primary guarantors maintain their own reserves, but limited
reimbursement could jeopardize the ability of the primary guarantor to
meet its obligations to the holder of the loan.
Warehouse loans made by Sallie Mae are secured credits, with
protection provided by over collateralization levels geared to the type
of collateral. The majority of collateral is GSLs, which are viewed as
low risk. While Sallie Mae has a broad creditor base and monitors the
credit of its borrowers, the collateral is an important element of
protection, since many originators of student loans, especially thrifts,
are not good unsecured credits.
Overall, student loan asset risk at Sallie Mae is limited, but
advances and investments can pose additional risk.
Moreover, the
complexities involved in originating and servicing student loans
underscore that holding them is not riskless, given the claims proce
dures risks and the reinsurance system, both of which expose the holder
to potential loss. While Sallie Mae has mitigated servicing risk, it is
exposed to some degree to reinsurance risk.
Profitability
Sallie Mae has and continues to be a strong earner. ROA has trended
downwards from 0.94% in 1985 to 0.78% in 1990, in part reflecting the
growth in the investment portfolio and the narrower returns on this line
of business and in part tighter pricing on student loans.
Reflecting
increased leverage, ROE has actually increased to 28% in 1990 from 20%
in 1985. Sallie Mae benefits from its funding as a GSE, as well as from
its market position as a titan within the guaranteed student loan
business.
While Sallie Mae's margins are narrow, and have been
declining, it benefits from an extraordinary low expense ratio.
Overhead to operating income at 16% compares favorably to that of other
financial institutions.
The stability of Sallie Mae's ratio reflects
A-50
the wholesale nature of its operations and also suggests good cost
controls. Net income also benefits from the historical absence of any
provision for loan losses, reflecting the minuscule credit losses
sustained by Sallie Mae over the years.
Funding and Asset Liability Management
Sallie Mae’s funds are raised in the public debt markets.
As a
government sponsored enterprise with significant links to the Treasury,
Sallie Mae is perceived by the markets as an "agency" and benefits
accordingly.
Sallie Mae issues both long and short term debt, with a
current breakdown between the two of 62% long term (maturities greater
than one year) and 38% short term.
The relative proportion of short
term has risen in recent years, reflecting the growth in the investment
portfolio, which tends to be short term in nature, mitigating any
concern about the shift.
The high proportion of long term debt
mitigates liquidity risk.
Sallie Mae carefully manages its interest rate risk position and its
reported gap position shows minimal exposure to interest rate risk.
Student loans, while fixed to the borrower, are floating rate assets to
Sallie Mae since the government pays a spread over T-bills to the holder
of the loan. Its warehouse advances are either floating rate or matched
funded to term, and its investment portfolio is also predominantly short
term. Long term liabilities carry floating rates or fixed rates that
are either matched to fixed rate assets or swapped into floating rates.
Sallie Mae carefully monitors its swap exposure and counterparty risk.
Capital
Measured in terms of asset leverage or loan leverage, leverage has
risen substantially in recent years. Average equity to loans has gone
from 5.69% in 1985 to 4.11% in 1990 and average equity to assets has
gone from 4.77% in 1985 to 2.83% in 1990.
Although strong earnings,
combined with a modest (20%) payout ratio, have led to good earnings
retention, capital has been pressured by an aggressive policy of stock
repurchasing. Given the rating category, in S&P’s view, Sallie Mae is
not overcapitalized and continued leverage could have negative implica
tions. Nonetheless, capital is currently appropriate to the asset and
business risks of Sallie Mae at the 'AAA' level.
A-51
Student Loan Marketing Association
Balance Sheet
($ in millions)
1990
1989
1988
1987
1986
Cash and investments
11,251
9,840
6,567
3,836
3,122
Insured student loans, net
19,242
16,029
13,202
10,043
8,175
Warehousing advances
9,528
8,601
7,989
8,357
6,527
Other assets
1,102
1,018
869
627
408
41,123
35,488
28,627
22,863
18,232
Short-term debt
14,801
14,965
9,820
6,571
4,517
Long-term debt
24,243
18,623
17,164
14,871
12,624
Other liabilities
987
862
844
737
436
40,031
34,450
27,828
22,179
17,577
1,093
1,037
800
684
655
41,124
35,487
28,628
22,863
18,232
Period End:
Assets
Total assets
Liabilities
Total liabilities
Equity
Tot. liabilities & equity
A-52
Student Loan Marketing Association
Income Statement
($ in millions)
1990
1989
1988
1987
1986
Interest income
3,503
3,169
2,172
1,582
1,300
Interest expense
3,024
2,751
1,799
1,269
1,036
479
418
373
313
264
Other Expense
79
70
62
50
42
Pretax income
400
348
311
263
222
Tax expense
99
90
85
81
78
Net income
301
258
226
182
145
Net interest income
A-53
Student Loan Marketing Association
Ratio Analysis
1990
1989
1988
1987
1986
Profitability
Net income ($ in millions)
301.00
258.00
226.00
182.00
145.00
16.67
14.16
24.18
25.52
17.21
Return on assets (%)
0.78
0.79
0.80
0.88
0.80
Return on equity (%)
27.42
30.47
30.18
27.26
21.53
1.44
1.49
1.63
1.77
1.82
16.49
16.75
16.62
15.97
15.91
0.21
0.21
0.24
0.24
0.26
Effective tax rate (%)
24.75
25.86
27.33
30.80
35.14
Dividend payout (%)
22.59
18.60
14.60
14.84
15.86
Net charge-offs/loans (%)
0.00
0.00
0.00
0.00
0.00
Non-performing loans/loans (%)
0.00
0.00
0.00
0.00
0.00
Loans/assets (%)
64.93
62.16
67.93
71.74
74.22
Temp, investments/assets (%)
27.36
27.73
22.94
16.78
17.12
Avg. equity/loans (%)
4.11
3.83
3.84
4.05
4.96
Avg. equity/assets (%)
2.83
2.59
2.91
3.23
4.09
Avg. asset growth (%)
17.07
27.56
24.74
25.20
25.55
Avg. loan growth (%)
21.03
13.45
18.55
21.22
23.34
Avg. equity growth (%)
25.89
13.40
12.35
-1.04
7.53
Change in NI from prev. year (%)
Net interest margin (%)
Overhead/adj. operating income (%)
Non-int exp/avg assets (%)
Asset Quality
Liquidity
Capital
Ü.S. GOVERNMENT PRINTING OFFICE : 1991 0 - 294-104 QL 3
UBLIC DEBT NEWS
fpartment of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
Ü4 UH ?
F O R IM M E D I A T E R E L E A S E
M ay 3, 1991
^ C o n ta c t: P e t e r H o lle n b a c h
(2 0 2 ) 376 -4 3 0 2
BUREAU OF THE PUBLIC DEBT AIDS SAVINGS BONDS OWNERS
AFFECTED BY KANSAS TORNADOS
T h e B u re a u o f th e P u b lic D e b t to o k a c tio n to a ssist v ictim s o f th e to r n a d o s th a t h it th e
W ich ita, K a n sa s a r e a by e x p e d itin g th e re p la c e m e n t o r p a y m e n t o f U n ite d S ta te s S avings
B o n d s fo r o w n e rs in th e a ffe c te d a re a .
T h e e m e rg e n c y p r o c e d u r e s a r e e ffe c tiv e
im m e d ia te ly fo r p ay in g a g e n ts a n d o w n e rs in B u tle r a n d S e d g w ic k c o u n tie s a n d w ill
re m a in in e ffe c t th ro u g h M ay 31, 1991.
P u b lic D e b t’s a c tio n w aiv es th e n o rm a l six -m o n th m in im u m h o ld in g p e r io d f o r S e rie s E E
savings b o n d s p r e s e n te d to a u th o riz e d p a y in g a g e n ts fo r r e d e m p tio n by re s id e n ts o f th e
a ffe c te d a re a . M o s t fin a n c ia l in s titu tio n s s e rv e as p a y in g a g e n ts fo r sav in g s b o n d s .
T h e re p la c e m e n t o f b o n d s lo st o r d e s tro y e d w ill a lso b e e x p e d ite d b y P u b lic D e b t. B o n d
o w n ers s h o u ld c o m p le te fo rm P D - 1048, a v a ila b le a t m o s t fin a n c ia l in s titu tio n s o r th e
F e d e ra l R e s e rv e B a n k . B o n d s o w n e rs s h o u ld in c lu d e as m u c h in f o r m a tio n as p o s sib le
a b o u t th e lo st b o n d s o n th e fo rm . T h is in fo r m a tio n s h o u ld in c lu d e in s c rip tio n s (in c lu d in g
S o cial S e c u rity N u m b e rs ), a p p ro x im a te d a te s o f issu e , b o n d d e n o m in a tio n s a n d s e r ia l
n u m b e rs if a v a ila b le . T h e c o m p le te d fo rm m u s t b e c e rtifie d by a n o ta r y p u b lic o r a n
o ffice r o f a fin a n c ia l in s titu tio n . C o m p le te d fo rm s s h o u ld b e fo r w a rd e d to P u b lic D e b t’s
Savings B o n d s O p e ra tio n s O ffice in P a rk e rs b u rg , W e s t V irg in ia .
T h e B u re a u o f th e P u b lic D e b t is th e T r e a s u ry a g en cy c h a rg e d w ith fin a n c in g a n d
a c c o u n tin g fo r th e n a tio n ’s p u b lic d e b t. A m o n g its re s p o n s ib ilitie s is th e a d m in is tr a tio n
of th e U .S . Savings B o n d s p ro g ra m .
oOo
PA -53
TREASURY NEWS
«partmant of tho Treasury • Washington,
d .c .
• Telephone 566-2041
TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 11 A.M.
Remarks by
Secretary of the Treasury
Nicholas P. Brady
before the
Council of the Americas
Washington, D.C*
Kay 6, 1991
The Enterprise for the Americas Initiative:
Realizing the Vision of Enhanced Growth and Prosperity
I can think of no more appropriate group to address on the
Enterprise for the Americas Initiative. Those of you here today
are acutely aware of the importance of the common cultural
heritage shared by the nations in this hemisphere. All of us
have been profoundly moved by the strong commitment to democratic
values and market-based economic reforms demonstrated by the many
new leaders of Latin America and the Caribbean. Moreover, each
of us — and the private sector organizations and governments we
represent throughout the hemisphere — have an important role to
play in realizing the vision set forth by President Bush last
June.
The Initiative sets us on a path toward a future in which:
o
markets are increasingly open;
private investors, both at home and abroad, provide new
resources to help build stronger economies;
external debt burdens are reduced to manageable levels;
citizens throughout the hemisphere benefit from
enhanced growth and prosperity;
resources are dedicated to support the preservation of
the environment; and
democratic systems and values are reaffirmed and
strengthened•
NB-1257
2
Such a future depends on establishing policies which foster
efficient and robust market activity and active participation of
all citizens in the economy. Sound macroeconomic policies,
liberalized trade and investment regimes, and eased debt burdens
are all critical to building the potential for sustained growth.
The major industrial countries have a special responsibility
to pursue a dynamic strategy which fosters an open growing world
economy. Such an approach is needed to encourage those countries
pursuing reform and to contribute to the supportive economic
environment to enable these efforts to succeed. At our recent
meeting, the G-7 ministers recognized the importance of monetary
and fiscal policies providing the basis for a reduction in real
interest rates and a sustainable global economic recovery with
price stability. Attainment of these goals will strengthen
export markets and reduce debt service burdens, thereby enabling
Latin America to achieve higher growth.
Advancing Free Trade
The first pillar of the Enterprise for the Americas
Initiative focuses on trade. Free trade is a cornerstone of a
broader economic system based on market principles. The
Initiative aims to promote more open trade regimes, with the
ultimate objective a hemispheric free trade area. A successful
conclusion of the Uruguay Round will also make a key contribution
to our goals of trade and investment liberalization under the
Initiative, and we will continue working with Latin American and
Caribbean countries towards this end.
We are beginning down this road towards free trade with
Mexico and Canada. This step has been made possible by the
remarkable reforms that have transformed Mexico's economy in the
last few years. A Free Trade Agreement among our three countries
would foster sustained economic growth for all three countries,
which together compose a market of over 360 million people and $6
trillion in output. Gaining fast track authority from the U.S.
Congress is essential for us to seize this moment, to build upon
and cement the momentum towards more open economies and faster
growth throughout the hemisphere.
We are also extending the potential for free trade
throughout the hemisphere by negotiating framework agreements
with individual countries and groups of countries in the region.
Framework agreements establish fora for consulting on bilateral
trade and investment issues and working towards trade
liberalization. We are pleased that six countries have signed
agreements since June, and we hope that negotiations with
additional countries will also bear fruit in the near future.
Through these agreements, we can discuss the requirements for
free trade agreements and facilitate negotiations when the
appropriate time arrives. Chile has expressed an interest in FTA
3
negotiations and we are using the framework agreement to explore
this possibility.
Latin American and Caribbean countries have given the
Initiative an enthusiastic response. Last December I accompanied
President Bush on his trip to Latin America, and witnessed that
enthusiasm. During this trip Latin American leaders expressed
personal views about the Initiative. Let me cite a few:
President Menem of Argentina decleared: ”... Argentina sees
with hope the promising possibilities which may emerge from
the ... Enterprise for the Americas.”
President Collor of Brazil stated: "The Bush Plan heralds
the United States* will to build a constructive agenda visa-vis Latin America."
In the words of President Lacalle of Uruguay:
"Your
historic Initiative of the Americas ... was scarcely
unveiled when we realized that it implied a qualitative
change in the hemispheric relations and because of this, Mr.
President, we hastened to support and praise it ... "
Finally, President Aylwin of Chile affirmed: President
Bush's "... vision of a free trade area covering the whole
continent is a bold concept, in line with the aspirations
and interests of all Americans ... This could be an historic
opportunity, and we should not let it slip through our
fingers."
The prospect of hemispheric free trade encourages Latin
American countries to deepen and accelerate an ongoing movement
toward open markets, and with open borders it becomes
increasingly difficult to subsidize government-controlled
enterprises, restrict new competition, and set prices by decree.
Why is this a fair deal for the United States?
First, we
benefit from elimination of barriers to our exports of goods and
services. Second, we will gain from having more prosperous
neighbors, and therefore more valuable trading partners, as
reforms give rise to faster growth. Third, open, dynamic
economies will be stronger partners in the world trading system.
Their success will encourage other countries to adopt similar
policies. Finally, we have an interest in the prosperity of
Latin America that goes beyond immediate economic benefits — an
interest that rests on a shared heritage, ties of family and
culture, and geographical proximity.
Increasing Capital Flows to the Region
The need to attract capital is at the heart of every
country's development challenge. Resources in today's world are
4
limited. The role of commercial banks in providing external
finance has shifted dramatically in recent years. Creditor
governments also face budgetary constraints on their ability to
provide economic assistance, while events in other areas such as
Eastern Europe and the Middle East have added heavily to demands
for such resources.
Private investment is therefore a new priority source of
capital for development and growth. Latin American and Caribbean
countries must compete aggressively to draw investment and to
recover the savings of their own people.
Several countries in the region are already gaining improved
access to voluntary bond markets, new investment flows, and a
repatriation of flight capital. Mexico — with a growth rate of
4% — has recently received some $2-3 billion in foreign equity
flows into its stock market, has successfully floated bonds on
the Euromarket, and is now experiencing substantial demand for
its Treasury offerings. One third of Venezuela's commercial
banks chose to provide new money as part of a recent debt
agreement, and capital is now being repatriated. Chile's
dramatic success in reducing debt to commercial banks through its
debt/equity swap program has helped pave the way for its recent
$320 million Eurobond syndication with its commercial banks.
These developments are encouraging. They confirm the
potential for economies in the region to make the transition from
crisis to performance. But more needs to be done to improve the
ability of Latin American and Caribbean countries to compete for
capital.
The kinds of investment reforms that are needed include:
o
the reform of financial sectors to facilitate private
investment credits?
o
the codification of liberal investment policies;
o
the privatization of state-owned businesses? and
o
the adoption of internationally accepted dispute
settlement procedures.
To help countries undertake these reforms, the InterAmerican Development Bank (IDB) is moving forward with a new
investment sector lending program. It has begun, or will soon
initiate, evaluations of investment regimes and discussions of
possible reforms with Bolivia, Chile, Colombia, Costa Rica,
Jamaica and Uruguay.
5
The IDB and International Investment Corporation (IIC) will
continue to be essential to the overall adjustment efforts of
Latin America and the Caribbean. However, we must go beyond the
effort of the IDB and the IIC to provide targeted support,
particularly of a grant nature, for technical assistance to help
secure these reforms. Assistance is also needed to help moderate
social dislocations resulting from sweeping investment reforms,
and to improve access to capital for micro enterprises. We are
therefore working to create a new $1.5 billion Multilateral
Investment Fund, administered by the IDB, to provide the
concentration of financial resources needed by countries poised
to make a major commitment to radically overhauling and opening
their investment regimes.
We are seeking Congressional authority for a U.S.
contribution to this Fund of $500 million over five years. We
are pleased that Japan has indicated that it will contribute an
appropriate amount to the Fund, and we are optimistic that other
creditor countries will provide the remaining resources.
Reducing Debt Burdens and Providing Support for the Environment
The external debt burdens of Latin American and Caribbean
countries cannot be overlooked in our effort to help revitalize
their economies. External debt problems have constrained growth
and diverted attention from needed domestic reforms. Debt
reduction can be an important complement to economic reforms in
order to restore confidence in their economies.
Under the debt component of the Enterprise for the Americas
Initiative we will reduce bilateral debt owed to the U.S.
Government by countries which qualify, thereby helping them
attract new investment capital and reinforcing the rewards of
sound economic policies.
Debt reduction under the Initiative complements
international efforts under the Brady Plan to address commercial
bank debt problems. Reducing bilateral debt will be particularly
important for the relatively small countries of the region that
owe a substantial portion of their external debt to official
creditors, rather than to commercial banks.
The Administration has gained authority from Congress to
reduce concessional food assistance debt for countries pursuing
strong economic and investment reform programs.
Several
countries — including Chile, Jamaica, and Bolivia — are well
positioned to qualify for such debt reduction in the next few
months. Other countries could also move to qualify in the near
future. The potential for bilateral official debt reduction has
been welcomed throughout the region and countries are eager to
benefit — we will begin discussing reduction of their food
assistance debt as they meet necessary conditions.
6
I want to emphasize that by reducing bilateral official
debt, we hope not only to ease countries' financial burdens but
also to provide significant support for the environment. This
will be accomplished by channeling interest payments in local
currency to fund environmental projects in each country. While
the resources provided through these funds will be limited, we
believe that this program can make a significant difference by
targeting small projects and building local community support for
the environment.
To offer the full potential benefits of the debt reduction
proposed under the Initiative, however, we must gain additional
authority from Congress to reduce debts owed to A.I.D. and sell a
portion of Eximbank loans and Commodity Credit Corporation (CCC)
assets to facilitate debt-for-equity, debt-for-nature, or debtfor-development swaps. We are working hard to achieve such
authorities this year.
Stepping U p to the Challenge
The United States shares with its neighbors high hopes for
the future. As they turn toward stronger, market-oriented
economies, Latin American and Caribbean leaders are embracing the
Initiative as a means of achieving our common objectives of
enhanced growth and prosperity. They cannot realize this vision
alone. We must all do our part.
In many cases, governments throughout the region must do
more to improve the prospects for productive trade and
investment. The U.S. Government needs to follow through in
gaining Congressional authority to carry out the Initiative.
However, without a receptive business community that is
willing to respond to opportunities created, no amount of policy
change can realize economic potential of our hemisphere. We must
look to the private sector to both encourage policy change where
it is needed, and to take advantage of the opportunities it
provides. Latin America and the Caribbean already have moved to
ease restraints in many areas; their markets are known to
Americans? and the potential for growth in trade is substantial.
The Initiative gives us the chance to deepen and expand for
the mutual benefit of all countries in the hemisphere the wide
array of trade, investment, and cultural ties we share. We look
forward to working with you toward this aim.
portment off the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 6, 1991
CONTACT: Office of Financing
202/376-4350
TREASURY CHANGES TIME FOR ANNOUNCEMENT OF OFFERINGS
The Department of the Treasury today announced a new standard
release time for all announcements of regularly scheduled hill,
note, and bond issues* The new release time will be 2i30 p.m.,
Eastern Time* This will apply to all announcements previously made
at 4:00 p.m., as well as the 52-week bill announcements which have
been made at 12:00 Noon* The Department will continue to announce
weekly bills on Tuesdays and 52-week bills on Fridays* Cash
management bills will also be announced at 2:30 p*m* unless
circumstances dictate otherwise.
The Department also announced that the next quarterly
financing press conference, scheduled for July 31, 1991, as
well as all subsequent press conferences, will begin at 2:00 p.m.,
Eastern Time*
OOO
NB-1258
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-376-4350
FOR IMMEDIATE RELEASE
May 6, 1991
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $8,601 million of 13-week bills to be issued
May 9, 1991 and to mature August 8, 1991 were
accepted today (CUSIP: 912794XB5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.48%
5.50%
5.50%
Investment
Rate
5.65%
5.67%
5.67%
Price
98.615
98.610
98.610
Tenders at the high discount rate were allotted 77%.
The investment rate is the equivalent coupon-issue yield,
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
41,810
23,882,385
24,435
49,200
51,725
40,750
1,456,880
51,935
9,220
34,900
23,300
580,910
940.210
$27,187,660
Accented
41,795
7,011,225
23,985
49,200
51,725
39,520
192,780
19,635
9,220
34,900
23,300
163,660
940.210
$8,601,155
Type
Competitive
Noncompetitive
Subtotal, Public
$22,965,450
1.798.395
$24,763,845
$4,378,945
1.798.395
$6,177,340
2,323,315
2,323,315
100.500
$27,187,660
100.500
$8,601,155
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -1259
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
May 6, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $8,603 million of 26-week bills to be issued
May 9, 1991 and to mature November 7, 1991 were
accepted today (CUSIP: 912794XM1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 58%
5. 62%
5. 61%
Investment
Rate
5.84%
5.88%
5.87%
Price
97.179
97.159
97.164
Tenders at the high discount rate were allotted 83%
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
34,815
19,712,255
11,785
40,805
52,985
28,010
1,399,625
37,695
10,305
49,830
17,130
417,785
678.855
$22,491,880
Accepted
34,815
7,038,855
11,785
40,805
52,985
28,010
453,375
26,845
10,295
49,830
17,130
159,285
678.855
$8,602,870
Type
Competitive
Noncompetitive
Subtotal, Public
$18,386,300
1.276.380
$19,662,680
$4,497,290
1.276.380
$5,773,670
2,200,000
2,200,000
629.200
$22,491,880
629.200
$8,602,870
Federal Reserve
Foreign Official
Institutions
TOTALS
N B -1260
PUBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR RELEASE AT 3 :0 0 PM
May 6, 1991
Contact: Peter Hollenbach
(202) 376-4302
PU BLIC DEBT ANNOUNCES ACTIVITY F O R
SECU R ITIES IN TH E STR IPS PR O G R A M F O R A PR IL 1991
Treasury’s Bureau of the Public Debt announced activity figures for the month of April 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program
(STRIPS).
’
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$495,965,790
Held in Unstripped Form
$372,715,075
Held in Stripped Form
$123,250,715
Reconstituted in April
$3,558,400
The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures are
included in Table VI of the 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
P A -5 4
FOR IMMEDIATE RELEASE
May 7, 199
Kay 7 !f]
f\
CpNTACT: Office of Financing
Tenders for $13,560 million of 3-year notes, Series S-1994,
to be issued May 15, 1991 and to mature May 15, 1994
were accepted today (CUSIP: 912827A77).
The interest rate on the notes will be 7 %. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
7.07%
7.09%
7.09%
Price
99.814
99.761
99.761
$110,000 was accepted at lower yields.
Tenders at the high yield were allotted 59%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
40,965
30,549,650
35,935
53,190
92,630
43,005
2,075,065
73,275
32,735
81,290
• 25,215
550,630
147,645
$33,801,230
Accepted
40,965
12,079,240
35,930
53,160
74,180
40,545
697,355
62,455
32,735
81,290
25,215
188,930
147.645
$13,559,645
The $13,560 million of accepted tenders includes $1,080
million of noncompetitive tenders and $12,480 million of
competitive tenders from the public.
In addition, $1,453 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $3,062 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1261
TREASURY NEWS
iportment off the Treasury • Washington, o.c. • Telephone 566-2041
FOR RELEASE AT 2:30 P.M.
May 7, 1991
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 $18,400 million, to be issued May 16, 1991.
This offering will result in a paydown for the Treasury o f a b o u t
$1,975 million, as the maturing bills are outstanding in the
amount of $20,370 million. Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500,
Monday, May 13, 1991,
prior to 12:00 noon for noncompetitive tenders and prior to
1:00 p.m., Eastern Daylight Saving time, for competitive tenders.
The two series offered are as follows:
91-day bills (to maturity date) for approximately
$9,200
million, representing an additional amount of bills
dated February 14, 1991, and to mature August 15, 1991
(CUSIP No. 912794 XC 3 ) f currently outstanding in the amount
of $10,292 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $9,200
million, to be
dated
May 16, 1991,
and to mature November 14, 1991 (CUSIP
No. 912794 XN 9).
The bills will be issued on a discount basis under competi- ,
tive 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 16, 1991.
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 competi
tive 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 $ 964
million as agents for foreign and international
monetary authorities, and $5,117 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-1262
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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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.
1/91
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. Com
petitive 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.
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.
8/89
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
May 8, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 10-YEAR NOTES
Tenders for $11,956 million of 10-year notes, Series B-2001,
to be issued May 15, 1991 and to mature May 15, 2001
were accepted today (CUSIP: 912827A85).
The interest rate on the notes will be 8 %. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
8.06%
8.07%
8.07%
Price
99.593
99.526
99.526
$288,000 was accepted at lower yields.
Tenders at the high yield were <allotted 49%.
,
‘
n
TENDERS RECEIVED AND ACCEPTED ( m thousands)^
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
22,465
33,526,314
7,254
17,270
94,899
14„600
823,452
29,848
11,707
21,914
7,333
303,780
3.393
$34,884,229
o
Accepted "n
22,46511,675,333u-i
7,254^
17,270g;
25,899^
14,600-<
100,992
26,532
11,707
21,914
7,283
21,230
3.371
$11,955,850
S3»
■
—»
itC
03
cu
cxz-
CD
CD
o
o
Jc-
~ijrg
—J
Xr-
Ol
1—-E
o
The $11,956 million of accepted tenders includes $530
million of noncompetitive tenders and $11,426 million of
competitive tenders from the public.
In addition, $17 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $400 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
The minimum par amount required for STRIPS is $25,000.
Larger amounts must be in multiples of that amount.
N B -1263
EMBARGOED UNTIL GIVEN
EXPECTED AT 10:00 A.M.
TESTIMONY OF
THE HONORABLE ROBERT R. GLAUBER
UNDER SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ECONOMIC STABILIZATION
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
May 9, 1991
Chairman Carper, Mr. Ridge, and members of the Subcommittee,
thank you for this opportunity to explain the Administration's
proposal to roll back the Federal Deposit Insurance Corporation's
"too-big-to-fail" policy, which currently results in the
protection of all uninsured depositors in most bank failures,
particularly larger ones. This broad expansion of the federal
deposit insurance guarantee has greatly increased taxpayer
exposure. It is also unfair to those smaller banks that do not
receive this blanket de facto protection. Our proposal ends this
routine protection of uninsured depositors without compromising
the safety and stability of our financial system. We firmly
believe that this is the most sensible way to address this very
difficult problem.
Let me acknowledge at the outset that the Administration's
proposal preserves the flexibility of the government to protect
the nation's financial system in times of crisis. In rare cases
this may result in the protection of uninsured depositors in bank
failures. These rare occasions will no doubt raise some of the
same questions of unfairness and taxpayer exposure as today's
policy of routinely protecting most uninsured deposits. But a
policy that risks our financial system to avoid an exceptional
case of "unfairness" would be dangerous and irresponsible.
In the end, the only way to truly eliminate our continual
confrontations with the unfairness of protecting uninsured
depositors is to fix the underlying system. Other countries
rarely confront the "too big to fail" issue because they rarely
have bank failures. We simply must have fewer costly bank
failures and fewer threats to our economy. That means
comprehensive reform that results in stable and profitable banks;
prompt corrective action for weak banks? streamlined supervision?
N B -1264
2
and a recapitalized bank insurance fund. And that, Mr. Chairman,
is exactly what the Administration has set forth before Congress
in H.R. 1505, the "Financial Institutions Safety and Consumer
Choice Act of 1991."
With that introduction, let me now turn to the body of my
statement, beginning with a description of what we do and don*t
mean when we use the term "too-big-to-fail."
Understanding Too-Big-to-Fail
The term "too-big-to-fail" is a misnomer. When the doctrine
is invoked, the institution involved still fails — shareholders
are wiped out; subordinated debtors and unsecured creditors
typically lose part of their investments? and management is
replaced. There is no FDIC or taxpayer "bailout" of shareholders
or managers.
Instead, "too-big-to-fail" is a part of the FDIC's current
policy to routinely extend deposit insurance protection beyond
the $100,000 limit to uninsured depositors. Indeed, over 99
percent of uninsured depositors have been protected in the
resolution of failed banks during the last five years. In a very
few of these situations, the failure to provide such protection
would clearly have resulted in serious risk to the financial
system. But in most cases, the protection of uninsured
depositors occurred in resolutions that did not involve systemic
risk through the routine use of so-called "purchase and
assumption” transactions, or "PSAs." Both situations are
described in more detail below.
Protecting Uninsured Depositors to Prevent Systemic Risk
Protecting uninsured depositors to prevent systemic risk —
the classic "too big to fail" policy — first gained notoriety in
1984 when the FDIC protected the uninsured depositors and other
creditors of the Continental Bank of Illinois and its holding
company. The policy came into sharp public focus again with the
recent failure of the Bank of New England. In both of these
cases it was feared that imposing losses on uninsured depositors
would create genuine risk to the financial system.
What is systemic risk? Gerald Corrigan of the Federal
Reserve Bank of New York described it as the danger "that failure
or instability in one institution or in one segment of the
financial markets can quickly be transmitted to other^
institutions or segments of the markets, thereby causing a more
generalized crisis of confidence with all of its potential for
instability in the financial and real sectors of the economy."
This would include cases that threaten (1) widespread loss of
consumer confidence and resulting contagious depositor runs, (2)
potentially severe problems for the correspondent banking
3
network, and (3) the breakdown of the payments system. Any or
all of these events could result in major dislocations in the
provision of regional or national business and trade credit, and
potential disruption of domestic and international economic
stability.
In the case of Continental there were significant concerns
about the financial impact that bank closure and a deposit—payoff
might have had on the large number of Continental's smaller,
banks. Approximately 1000 banks had correspondent
relationships with Continental at the time of its failure.
Sixty-six of these banks had uninsured deposits exceeding 100
percent of capital, and 113 had deposits equalling 50-100 percent
of capital. If Continental's uninsured depositors had not been
protected, its failure would have substantially weakened a large
number of its small correspondent banks with serious consequences
for consumer confidence and the financial system.
More recently, the threat of systemic risk resulted in the
protection of uninsured depositors of the Bank of New England.
As you may recall, the situation was a tinder box. Uninsured
credit unions in nearby Rhode Island had recently failed, with
widespread publicity attending the inability of average
depositors to withdraw their funds. As the Bank of New England
teetered on the brink of insolvency, there were signs that even
federally insured depositors in neighboring banks were beginning
to line up for the withdrawal of their deposits. This volatile
situation, along with the considerable concern over the impact
closure and a deposit-payoff would have on the availability of
credit in the fragile New England economy, led to the decision to
protect uninsured depositors.
Much as we might not like it, the threat of systemic risk is
real. While much progress has been made to reduce the threat of
systemic risk in bank failures, and while more steps can and
should be taken to further reduce such risk, we cannot blindly
dismiss the fact that it remains with us. Indeed, to our
knowledge no government has forfeited its ability and
responsibility to protect the stability of its financial system,
even if that means protecting uninsured depositors. None. We
should not be the first to try this dangerous experiment.
Routine Protection of Uninsured Depositors in P&As
While the cases of genuine systemic risk caused by bank
failures are relatively rare, the FDIC has nevertheless extended
full insurance protection to virtually all uninsured depositors
in recent years. This is so because of the almost exclusive
reliance by the FDIC on purchase and assumption transactions.
In
P&A transactions, acquiring institutions purchase all of the
assets and assume all of the liabilities —— including uninsured
deposits — of failed institutions.
4
How has this broad expansion of the federal safety net been
justified? p&As have long been defended as less expensive to the
FDIC than simply paying off insured depositors and liquidating an
institution's assets. It has been argued that the cost of
protecting uninsured deposits is offset by the premium paid by
acquirers for core deposits and the going concern value of an
intact institution. As a result, while one of every three
failures — the smallest ones — received no FDIC coverage for
uninsured depositors in recent bank failures, over ninety-nine
percent of uninsured deposits have been fully protected during
the record period of bank failures since 1985.
While the P&As may very well be less costly than an insured
deposit payoff, they may not always be the least costly
resolution method — indeed, current law does not require the
FDIC to adopt the least costly resolution method. An alternative
resolution method, called an insured deposit transfer, may often
be the least costly.
In this method an acquirer pays a premium
to acquire a failed bank's assets and only^its^insured^deposits,
not its uninsured deposits. Almost by definition, an insured
deposit transfer will be less costly than a P&A whenever the
failed bank's franchise value resides largely in its core
deposits — the FDIC receives essentially the same premium as it
would in a P&A, but it would not incur the additional cost of
protecting uninsured depositors.
Protecting uninsured depositors when it is not the least
costly resolution method is an unjustified expansion of the
federal deposit insurance guarantee that increases taxpayer
exposure and removes market discipline from the system.
It is
also unfair to the smallest depository institutions that receive
no such protection.
Problems from Protecting Uninsured Deposits
There are three fundamental problems arising from the
current policy of routinely protecting most uninsured deposits:
increased taxpayer exposure to losses; the removal of market
discipline over weak and risky banks; and the unfairness of
protecting some uninsured deposits but not others.
Increased Taxpayer Exposure. Increasing the scope of the
federal guarantee directly increases taxpayer exposure whenever
protecting uninsured deposits is not the least costly resolution
method. By one estimate, protecting uninsured deposits in the
six transactions involving systemic risk in the last five years
cost the FDIC $883 million.
In addition, the FDIC fully
protected approximately $5 billion of uninsured deposits in
purchase and assumption transactions where insured deposit
transfers might have been a less costly resolution method.
5
Removal of Market Discipline. Deposit insurance is intended
to provide stability to the banking system by protecting small,
unsophisticated depositors. But it was never intended to cover
sophisticated investors with large deposits in banks, who are an
important source of market discipline on bank risk-taking. The
routine extension of deposit insurance to all such investors
removes this market discipline, allowing weak banks to stay in
business longer and accumulate losses that will ultimately be
borne by the insurance fund or the taxpayer. Such a policy also
undermines the nominal statutory limits on deposit insurance
coverage.
Unfairness. The protection of uninsured depositors in large
banks but not small banks can give large banks an unfair funding
advantage for large deposits. This unfairness was brought into
sharp contrast with the recent decisions to protect uninsured
depositors in the resolution of the Bank of New England, and not
to protect them in the resolution of the Freedom National Bank in
Harlem.
As we all know, the unfairness of protecting some uninsured
depositors but not others has become the battle cry of smaller
banks around the country, and with good reason. There are
basically three ways to address this fairness problem.
The first is to expand the current practice even further —
that is, to simply protect all depositors, insured and uninsured,
at all banks. This is the position preferred by small banks as
being most fair because it would neutralize bank size as a major
factor in the competition for funds. But it would not be fair to
taxpayers. Their exposure could only go up. Extending the
federal safety net of deposit insurance to all deposits
eliminates all market discipline, even from sophisticated
depositors, and that can only make the banking system more risky.
The second approach is never to protect uninsured deposits.
This approach, too, would be "fair.” Banks of all sizes would be
treated identically and uninsured depositors would have no
incentive to place funds on the basis of protection in the event
of failure. But this approach creates problems of systemic risk.
It is simplistic and dangerous.
We believe that the only sensible solution is a third
approach that balances all of the factors involved — one that
rolls back the routine protection of uninsured depositors,
preserves the government's ability to protect the financial
system, and embraces new ways to reduce the systemic risk
involved in bank failures.
6
The Administration's Proposal
In our recently completed study of deposit insurance and
banking, the too-big-to-fail problem was among the most difficult
addressed. We arrived at our recommendations only after a long
and hard examination of the issue and considerable dialogue with
the regulatory agencies, representatives of the industry, and
other interested parties.
Our approach is intended to reduce taxpayer exposure and
reduce unfairness to small banks. It would roll back the toobig-to-fail doctrine to true instances of systemic risk and make
it the rare exception in bank failures. The routine coverage of
uninsured deposits would be eliminated by demanding "least cost
resolutions." The regulators would be made more visible and
accountable when they do decide to protect uninsured depositors.
And specific measures would directly reduce systemic risk.
Least Cost Resolution. Our legislation would amend the
Federal Deposit Insurance Act to explicitly require the FDIC to
choose the bank resolution method that results in the least cost
to the insurance fund. While this provision does not prohibit
the FDIC from using P&A transactions, we expect that it would
generally lead to greater reliance on insured deposit transfers
that would not protect uninsured depositors.
Systemic risk exception. While systemic risk could still be
used as a reason to protect uninsured depositors, the
Administration's proposal includes new procedures to make this a
much more visible and accountable determination — which we
believe will help limit its use to rare instances of genuine
systemic risk. The FDIC would not be permitted to factor
systemic risk into its selection of a resolution method. Rather,
the determination of systemic risk would be reserved to the
Federal Reserve Board and the Treasury Department acting jointly,
but in consultation with the Office of Management and Budget and
the FDIC. Upon such a determination, these agencies could direct
the FDIC to provide insurance coverage for all depositors or take
other appropriate action to lessen risk to the system.
The Federal Reserve is responsible for financial market
stability, and because government action could require Federal
Reserve discount window loans, it ought to be formally involved
in systemic risk decisions. Also, since the Administration is
directly accountable to the taxpayer, the Treasury and OMB have a
legitimate role to play in this determination. By broadening the
decision-making in this way, both government flexibility and
accountability can be achieved. Furthermore, we think that
lodging this decision at the highest levels of government with
high visibility will mean that uninsured depositors are protected
much less often.
7
Proposals to Reduce Systemic Risk. Finally, our legislation
would reduce systemic risk directly, which in turn will reduce
the occasions when uninsured depositors need to be protected.
Our principal proposal in this area is to improve the liquidity
mechanism in bank failures.
Uninsured depositors that are unprotected in bank failures
do not lose all their funds; instead, they typically receive a
partial recovery based on their claim on bank assets. This
partial recovery can be substantial, sometimes amounting to over
90 percent of the value of uninsured deposits.
The problem is that partial recovery can take long periods
of time during which the value of the deposits can be tied up in
a failed bank receivership. This temporary loss of liquidity
magnifies the systemic risk problems associated with depositor
losses, especially from the payments system and correspondent
banking networks.
Our proposal authorizes a new means for the FDIC to provide
immediate liquidity to uninsured depositors in bank failures
based on the FDIC*s average recovery experience from
receiverships over a time period to be determined by the Agency.
This provision in our bill, based on a proposal by the American
Bankers Association, could significantly reduce the systemic risk
involved in bank failures.
In addition, our legislation includes measures to reduce
payments system risks, including (1) the bilateral netting of the
mutual obligations of banks, (2) statutory elimination of the
risk that a receiver or liquidator of a failed member of a
clearing organization could negate the netting rules of the
clearing organization, and (3) preemption of any injunction or
similar order issued by a court or agency that would interfere
with the netting procedures governed by the Act.
Indeed, our proposals build on the numerous efforts that
have been made over the years to reduce the risks associated with
payments, clearance and settlement arrangements. The Federal
Reserve already has mechanisms in place to secure its large
dollar payments system, Fedwire. These mechanisms include
guaranteed final payment, bilateral caps among institutions, and
real time monitoring of the flow of funds over the system. In a
similar vein, the Clearing House for International Payments
(CHIPS) not long ago instituted a cross guarantee arrangement
among its member institutions that significantly reduces systemic
risk in the event of a large bank failure.
We will continue to work to reduce threats of systemic risk
based on liquidity problems and faulty payments mechanisms. By
doing so we will progressively diminish the number of systemic
risk situations that require uninsured depositor protection.
8
Paying for TBTP
The decision as to who pays for genuine systemic risk
resolutions is a difficult one to make. It is argued by some
that the cost should be borne by the taxpayer because of the farreaching economic implications of a systemic breakdown.
Protecting the financial system protects more than just banks,
and banks should not be held uniquely accountable for the costs
of maintaining stability.
On the other hand, preventing systemic risk uniquely
benefits the banking industry, and not just the largest banks.
Stability and depositor confidence are critical to the viability
of all banks. And although the protection of large deposits in
large banks clearly benefits large banks generally, it also
directly benefits smaller correspondent banks and indirectly
benefits all banks that are susceptible to contagious depositor
runs.
On balance, because of these direct benefits, we believe
that the industry should pay for the costs of preventing systemic
risk. Accordingly, H.R.1505 requires the FDIC to pay for the
cost of protecting uninsured depositors in the rare circumstances
of systemic risk where it would be required.
H.R. 2094
Before concluding, let me provide some observations about
the treatment of uninsured depositors in H.R. 2094, which was
marked up in the Subcommittee on Financial Institutions last
Tuesday. This bill prohibits the FDIC from protecting uninsured
depositors beginning in 1995, even if it would reduce costs to
the taxpayer. And while the bill was improved in Subcommittee
with an amendment that would preserve the Federal Reserve*s
current authority to address liquidity problems in
undercapitalized banks, we believe that even the amended text^
leaves too little flexibility to address systemic risk. We will
continue to support amendments that would improve the language to
address both of these problems.
Conclusion
In conclusion, we believe that ours is the most balanced
approach to the problem of protecting uninsured depositors given
the competing considerations of systemic risk, taxpayer exposure,
market discipline, and fairness. Chairman Greenspan has said
that not all large bank failures require a too-big-to-fail
resolution. We agree, and we provide a specific mechanism for
handling bank failures that should decrease the number of such
resolutions without ignoring the dangers of genuine systemic risk
situations.
9
Furthermore, by making the protection of uninsured
depositors the rare exception, not the rule, we help to
accomplish several fundamental objectives. Taxpayer exposure is
reduced. Market discipline is increased, as the doctrine of
"constructive ambiguity" becomes much more of a reality — even
depositors In the very largest banks will never be completely
sure about whether their deposits will be fully protected, which
is healthy. And small and large banks will be treated much more
equally, resulting in few unfair funding advantages to large
institutions.
Still, as long as we have repeated instances of costly bank
failures, there will still be some unfairness resulting from
systemic risk situations. What we really need to do is what I
said at the outset — fix the system so we don't continually have
these costly failures. We cannot affort to keep putting
ourselves in the position of having to make the choice between
protecting small banks and protecting the taxpayer.
The key is to make the banking industry economically viable
through comprehensive reform. Banking organizations must be able
to offer a full range of services to compete with their rivals,
domestically and internationally. They must be able to locate
their places of business where they choose and attract capital
from financial and non-financial firms. And they must be
regulated more effectively with prompt corrective action that
stops smaller problems from mushrooming into large losses to the
insurance fund. H.R. 1505 addresses all of these requirements.
Those who suggest we must end the "too-big-too-fail"
problem before we fix the system have it got it exactly
backwards? instead, we must fix the system in order to eliminate
the unfairness of "too-big-to-fail."
**********
Mr. Chairman, that concludes my formal statement. I would
now be pleased to answer any questions you or other members of
the Subcommittee might have.
TREASURY NEWS
•partmant of tha Treasury • Washington, D.c. • Telephone 566-204
ADDRESS BY
GEORGE A. FOLSOM
GOVERNOR AD INTERIM FOR THE UNITED STATES
TO THE TWENTY-FOURTH ANNUAL MEETING OF
THE ASIAN DEVELOPMENT BANK
VANCOUVER, BRITISH COLUMBIA, CANADA
APRIL 25, 1991
Madam Chairman, President Tarumizu, fellow delegates, I
welcome the opportunity to speak on behalf of the United States at
the Twenty-Fourth Annual Meeting of the Asian Development Bank.
Although we are far from Asia, it is fitting that our Canadian
hosts have arranged for us to meet in Vancouver.
We are within
sight of the Pacific Ocean, which links many of the Bank's member
countries and over which most of the trade, travel, and other
communications between Asia and North America take place.
On
behalf of my delegation, I would like to thank our hosts for the
kindness and hospitality they have extended to us.
I would also like to welcome the Mongolian People's Republic,
which became a member of the Bank only two months ago, and Turkey,
which joined just last week. The two bring different perspectives
to the issues related to the Bank's operations, and both they and
the Bank will benefit from their involvement in the Bank's
activities.
Economic Developments
These annual meetings are valuable insofar as they offer us an
opportunity to focus on the growing interdependence of our
economies, the challenges we face, and the efforts underway to meet
those challenges.
According to the International Monetary Fund (IMF), world
economic growth declined from about three percent in 1989 to two
percent in 1990.
This decline is not particularly surprising,
considering the shocks the international economy endured last year,
including the conflict in the Middle East and the subsequent
volatility in the price of oil? uncertainties associated with the
2
restructuring of Eastern Europe and the unification of Germany, and
the volatility of the economic situation m the Soviet Union.
These events occurred at the same time as growth in a number of
industrial economies was already declining.
The countries of Asia as a whole fared somewhat better than
many in other areas of the world. Growth in the region slowed only
slightly, to 5.25 percent, and overall increases in real per capita
cutout were registered.
As in previous years, growth has been
strongest and most sustained in the NIEs
Hong
Korea,
Taiwan and Singapore — as well as in China, Indonesia, Malaysia,
and Thailand. The strength of economic activity m t h e s e / d o m e s ®
is due in part to their access to foreign markets, strong domestic
demand, and increased foreign investment.
We expect that this pattern will continue. The IMF projects
that if the Asian countries follow sound economic policies, growth
in Asia will increase slightly, to an average of 5.5 percent in
1991.
For some countries, however, the road to further economic
growth and development will be more difficult.
Included in thi^
group are a number of the Bank's developing member countries
India, Bangladesh, Pakistan, Sri Lanka, and the Philippines. These
countries experienced substantial increases m their oil import
bills and/or significant drops in their current account earnings
from lost exports and lost remittances from workers in the Gulf.
The economic dislocations they suffered compounded policy-related
economic problems they were already experiencing.
U.S. Links to Asia
The United States has supported international efforts to help
these countries toward a speedy recovery from the effects of the
recent crisis. We are motivated by my government s long-standing
concern for their economic growth and development.
But, at the
same time, there is a strong measure of mutual interest involved.
The Asia-Pacific region is by far our largest trading P^tner.
Since 1980, when our Pacific trade first exceeded our Atlantic
trade, U.S. trans-Pacific trade has increased by an average of 9
percent annually? during that period, trans-Atlantic growth
averaged 7 percent.
U.S. investment m the developing Asian
countries is also significant, having totaled $20.9
fe
1989.
These and other economic ties bind us to the countries of
Asia and give us a continuing strong interest in fostering their
economic well-being.
The active U.S. role in the Asia-Pacific
Cooperation Conference is further evidence of this abidi g
interest.
3
Uruguay Round
In this connection, I want to pause for a moment to urge
member countries to renew their commitment to maintaining the
international trading regime as embodied in the General Agreement
on Tariffs and Trade (GATT).
plays an increasingly important role in determining the
economic performance of individual nations.
The growth of U.S.
trade with the rest of the world in relation to our overall
economic activity highlights this point:
in 1970 the ratio of
total U.S. merchandise trade to GNP was 8 percent; by 1990, the
ratio was over 16 percent. Including services, trade as a share of
U.S. GNP is over 20 percent.
Trade is also a major engine of growth for the global economy,
particularly for economies in the Asian region.
The ratio of
exports of goods and non-factor services to GDP for the developing
countries of East Asia increased from 8 percent in 1965 to 30
percent in 1988.
The importance of trade to the Pacific Basin
countries, as measured by the ratio of their total trade to GDP
was over 40 percent in 1988.
'
The countries of Asia will be significant beneficiaries of a
successful Uruguay Round that is truly trade liberalizing —
encompassing industrial trade, agriculture, and financial and other
services. The developing countries of the region should be among
those with the greatest relative economic gains. And the developed
countries and dynamic economies of the region will benefit by
assuring and broadening their market access and accelerating their
economic growth, innovation, and dynamism.
My government will do all that is practicable to ensure that
the promise of the Uruguay Round is fulfilled.
We call on all
governments represented here to do the same.
Economic Reform
Increasingly, governments throughout the world are coming to
understand that a free trade and investment regime supported by
prudent fiscal and monetary policies is the key to economic growth
and can contribute to political stability. The European Bank for
Reconstruction and Development, whose inaugural meeting I attended
Dust last week, will reinforce the reform movement in that region.
Its purpose is to foster the transition of central and eastern
European countries towards open, market-oriented economies which
promote private and entrepreneurial initiative.
Likewise, leaders in Latin America, supported by the InterAmerican Development Bank, increasingly are enacting sound, market-
oriented economic policies that demonstrate their movement toward
increased growth and sustained development.
President Bush's
Enterprise for the Americas Initiative is designed to support and
strengthen these efforts.
Many of the countries of Asia are in the vanguard of the
market-oriented reform movement.
Indonesia, for example, has
adopted outward-looking economic policies and macroeconomic
adjustment programs.
By virtue of its sound economic program,
Indonesia has attracted high levels of investment, both domestic
and foreign, and enjoys access to capital flows from international
financial institutions and private sources. It is no surprise that
last year Indonesia posted a GDP growth rate of over 7 percent, one
of the highest in the region. Pakistan and Sri Lanka are two other
countries that have been moving ahead in recent months with
concrete steps to deregulate aspects of their economies and open
them to market forces.
Unfortunately, although the wind is clearly blowing in the
direction of reform, some countries have failed to move forward or
have retreated from liberalizing measures instituted earlier. We
now know beyond doubt which economic models for growth and
development are most successful.
It is unfortunate, therefore,
that some governments continue to maintain measures such as
disincentives to foreign investment, trade and tariff barriers,
inappropriate exchange rates, and restrictive financial sectors.
In some countries, fiscal imbalances remain unaddressed. A renewed
commitment
to structural
reforms,
including
accelerated
privatization? trade and investment liberalization? and reform of
banking, securities, and exchange markets would stimulate economic
growth, relieve balance of payments pressures, and contribute more
fully to the adjustment of global imbalances.
ADF Negotiations
The Asian Development Bank has played a key role in
encouraging many of the countries that have implemented successful
economic reform programs. We believe the Bank could be even more
influential in the future in helping them further and urging on the
countries which have not yet accepted the need for reform. We will
judge the success of the negotiations on the replenishment of the
Asian Development Fund by the extent to which the agreed changes in
its policies and programs enable it to realize that potential and
thus enhance its contribution to the economic growth and
development of its developing member countries.
Role of the Bank
I would like to focus on four important areas which we believe
are critical for maximizing the impact of the Bank on the economies
5
of its developing member countries:
promotion of sound, growth-oriented economic policies?
—
encouragement of market economies and the private sector?
strengthening of environmental policies and programs? and
improvement of the quality of its lending program.
I will also comment on other aspects of ADB operations as well.
Economic Policy.
The Asian Development Bank has made
important steps in recognition that an appropriate policy
environment will pay rich dividends in the growth of borrowing
countries, and directly enhance the success of the development
projects it supports.
We believe, however, that there is room for improvement in the
Bank's policy input.
Its lending programs should be based on
country strategies.
These strategies should analyze the policy
environment in the country concerned, recommend changes to speed
growth, and define clear sectoral priorities for the Bank's
lending.
The Bank should establish procedures to assess country
economic performance on an annual basis, and use the results of
those assessments as an indicator for allocating loans.
A key element in the Bank's decisions on lending to a country
should be whether it has a medium-term macroeconomic program. We
believe that the Bank should operate in countries which have
supportive economic environments which will ensure the success of
the projects it supports. Where such conditions do not exist, the
ADB should work with the government of the country concerned to
ensure that appropriate policies are put in place.
Beyond that, the continuing policy dialogue should be
conducted during country programming missions. Senior and middle
managers should be directly involved.
Policy dialogue should
infuse both program and project lending, and lead to reforms
reflected in loan covenants. We also believe that program lending
should be used judiciously, in support of clearly defined economic
reform programs when the likelihood of the measures being
implemented is high.
We also place a great deal of importance on improved
cooperation and collaboration between the ADB and other lenders in
the region, particularly the World Bank and the IMF. We favor more
frequent meetings between the ADB and World Bank staffs at the
country level. A greater effort to increase such contacts through
exchanges of visits to headquarters, meetings of field missions,
6
joint missions, and other means would also be helpful.
Market Economies/Private Sector.
We now know that
development works best when public resources are directed to the
tasks that government must perform, leaving the rest of economic
activity to the private sector. A most important role for the Bank
is to foster a hospitable economic and regulatory climate in
borrowing countries.
This must be based on market-oriented
policies
within
which
private
enterprise
can
flourish.
Policy-based lending to the financial and industrial sectors which
encourages market-oriented economic policies, can play a key role.
The Bank can also be a catalyst in expansion of private
investment.
We supported strongly the decision last year to
allocate $650 million for the ADB's private investments and loans
through 1992. We believe it must use these funds in countries and
sectors where it is a pioneer, not just another investor.
We also believe that the Bank should begin taking a "private
sector first" approach to project design and selection.
Private
financial intermediaries should be utilized in preference to their
more ineffective public sector counterparts.
The Bank should
actively encourage DMC governments to keep out of sectors best left
to private enterprise. In project design, the Bank should examine
how public services can be provided by private firms.
In this
regard, we welcome the Management's creation of a task force to
study how to integrate private sector operations into the Bank's
overall activities, and hope it will lead to dramatic advances in
the directions we have suggested.
Environment. We congratulate the Bank's Management on its
progress on environmental issues. A very important step forward
was its establishment of an Environmental Office in the Office of
the President and provision of greater budget and personnel support
for the work program in that Office.
We are pleased with the
increases that have taken place in its technical assistance
programs to strengthen the environmental capabilities of borrowing
countries. We look forward to further emphasis on this area and to
increases in lending levels for other environmentally-beneficial
projects and programs.
We are also pleased with the Bank's plan to strengthen the
environmental impact assessment (EIA) process.
Furthermore, we
want to urge Management to go forward with this plan as rapidly as
possible. For us, this is the most important environmental issue
in the Bank.
The Management should make copies of assessments
available to the Board of Directors at least 120 days in advance of
Board action on specific projects.
Copies of the assessments
and/or comprehensive summaries of them should also be provided to
the public.
7
Furthermore, we believe that public participation is an
essential element of the environmental impact assessment process.
Non-governmental organizations and local community groups are often
seriously affected by some of the projects that the Bank helps to
finance.
They have views that should be considered in the
development of projects, and they need an opportunity to express
those views as part of the EIA process.
After the end of this
year, my government will be unable to support projects that have a
significant effect on the environment unless the EIAs are made
available to the Board and the EIAs or comprehensive summaries of
them have also been provided to the public.
We have noted the Bank's intention to expand its support of
programs to protect tropical forest resources.
We encourage
Management to accelerate its efforts in this direction over the
next year. Conservation of primary forest areas and protection of
biological diversity need much greater emphasis. Improvements in
agricultural and land use policies and development of other
relevant national strategies should be made only in the context of
sound forest management practices.
The Bank should also help
promote implementation of a reformed and strengthened Tropical
Forestry Action Plan and assist in formulating and implementing
master plans for the sustainable use of forest resources.
Another focus of environmental concern has been the need for
more intensive work on conservation and efficiency in the energy
sector.
There is a broad consensus that investments in energy
conservation and efficiency measures can very often be more costeffective than investments in additional generating capacity. We
fully endorse the Bank's intention to give more attention to enduse efficiencies and the development of renewable energy resources.
We also encourage the Bank to place greater reliance on integrated,
least-cost planning and a higher priority for the environmental
aspects of our energy assistance programs.
The Bank will find it difficult to manage its existing
environment activities, as well as expand them or add new ones,
without further increasing the staff resources it devotes to this
area.
We recommend that it take immediate steps to recruit or
reallocate personnel to its expanded environmental work programs.
Project Quality. The ADB has traditionally been strongest in
its project lending.
In this area as well, however, we see
considerable potential for the Bank to further improve the quality
of its projects by:
devoting more resources to project preparation?
introducing more rigor into its risk analysis when calculating
the economic rate of return of a project;
8
providing
technical
assistance
implementation capability? and
to
improve
project
strengthening the post-evaluation process so that the Bank's
experience with past projects is taken more fully into account
in the design of new ones.
We believe that the Bank's senior management must become more
actively involved in monitoring project quality and supporting a
uniform high standard for Bank projects. Management should provide
clear guidance to the staff that projects of doubtful viability
should be held back. The Bank's staff should also be encouraged to
point out weaknesses in proposed projects and to innovate in
project design. We recommend the creation of a project monitoring
unit under a vice president to ensure that economic, financial, and
feasibility standards are met. We also suggest that steps be taken
to reduce the bunching of loans for consideration by the Board of
Directors late in each year.
I would now like to turn to several other areas of the Bank's
operations.
Poverty Alleviation
The deep-rooted poverty in many parts of Asia remains a
serious concern of my government.
The Bank's promotion of
sustainable growth is a potent weapon in its efforts to assist
borrowers in attacking poverty.
The Bank can also help by
carefully
designing
sustainable
projects
which
emphasize
income-generating activities or contribute to the development of
human capital. Moreover, such projects are more likely to succeed
when implemented through private and local agents, such as NGOS,
than when government bureaucracies are relied on. We also believe
that poverty alleviation projects can be evaluated by the same
standards that apply to all Bank lending.
Women in Development
The Bank's poverty alleviation activities should also be
closely integrated with its efforts to promote the role of women in
development. The Bank has begun to address these issues in project
design, but as distinctly separate elements. We believe that both
should be approached in an integrated fashion from the point at
which a project is conceived.
Pacific Island DMCs
The United States supports the Bank's efforts to address the
unique development problems of the Pacific Island DMCS.
The
Board's approval of the recommendation of the Board-Management
9
Working Group on Bank Operations in the South Pacific to delegate
substantial responsibilities to the South Pacific Regional Office
was commendable, but we await Board discussion of a possible South
Pacific Fund.
We hope this reorganization will increase the
effectiveness of our assistance to these countries in the years
ahead.
Organizational issues
We believe that further changes in the Bank's organization are
required.
We support the Management's efforts to establish a
strategic planning capability and hope that these efforts will
result in the creation of a dynamic planning process which will
provide the Bank a clear sense of direction for the years ahead.
We also favor the engagement of an outside group to examine
the suitability of further organizational changes, such as a
revitalization of the personnel and budget functions and a possible
reorganization of the Bank along East-West lines. We believe such
reforms would result in greater efficiency and effectiveness in the
Bank's operations.
Staffing issues will continue to be an important concern in
the 1990s, as the emphasis of the Bank's lending shifts to areas
such as protection of the environment and promotion of the private
sector. We applaud recent measures to codify the Bank's personnel
policies and provide for external arbitration of personnel
grievances.
However, we believe that there is still a need for
modification of the Bank's job classification and promotion
policies to ensure that its recruitment and personnel practices are
professional, merit-based, and competitive.
Financial Policies
The Bank continues to have an excellent reputation in the
financial markets, which has enabled it to begin to move away from
several highly conservative policies.
We support last year's
decision to elevate the level of Bank borrowings in relation to
callable capital. This step, along with the calling of bonds with
restrictive covenants on Bank borrowings, will allow the current
general capital increase to be extended without adversely affecting
the Bank's standing in the markets.
We would also suggest
exploring the sale of portions of the Bank's loan portfolio to the
secondary market, perhaps through securitization.
Finally, we would recommend that the Bank provide its
borrowers with greater transparency in their foreign exchange
exposure on Bank loans, perhaps by using single-currency loans. We
support the survey of borrowers' currency disbursement preferences
currently underway, which could lead to progress in this area.
10
Conclusion
As the Bank moves into the 1990s, we are optimistic about the
prospects for economic development in the region and the Bank's
ability to play a part in encouraging that process.
I want to
convey the strong support of the United States for the Bank's
efforts and to express appreciation for its past and present
contributions to development in Asia and the Pacific.
We look
forward to working with other members of the Bank, along with its
Management and staff, in shaping the Bank's strategy for the 1990s.
»'PUBLIC DEBT NEWS
^
Department of the T rek ll^ ^ ^ ^BUtehti of'ftl^Public Debt
FOR IMMEDIATE
May 9, 1991
?5i 0 0 4 6 6 0
Washington, DC 20239
CONTACT: Office of Financing
202-376-4350
RESULTS 0O F f:TR^3TOy'S AUCTION OF 30-YEAR BONDS
Tenders for $11,753 million of 30-year bonds to be issued
May 15, 1991 and to mature May 15, 2021 were
accepted today (CUSIP: 912810EJ3).
The interest rate on the bonds will be 8 1/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
8.19%
8.24%
8 .21 %
Price
99.278
98.728
99.057
$5,000 was accepted at lower yields.
Tenders at the high yield were allotted 41%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
2,529
16,277,014
3,133
2,120
16,301
5,064
725,926
8,211
226
3,096
4,440
301,727
663
$17,350,450
Accepted
2,529
11,440,924
3,133
2,120
16,301
5,064
225,026
8,211
226
3,096
4,440
41,677
663
$11,753,410
The $11,753 million of accepted tenders includes $239
million of noncompetitive tenders and $11,514 million of
competitive tenders from the public.
In addition, $200 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
The minimum par amount required for STRIPS is $320,000.
Larger amounts must be in multiples of that amount.
NB-1265
TREASURY NEWS
Department of the Treasury • Washington. D.C. • Talanhona
s s s -s o a i
FOR RELEASE ON DELIVERY
Expected at 10:00 A.M.
May 10, 1991
STATEMENT OF THE HONORABLE
ROBERT R. GLAUBER
UNDER SECRETARY OF THE TREASURY
FOR FINANCE
BEFORE
THE SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
Mr. Chairman and Members of the Committee:
It is a pleasure to be here today to discuss the results of
the Treasury's second study of Government-sponsored enterprises
or GSEs. This study was submitted to Congress on April 30.
The failure of many federally insured thrift institutions in
the 1980s, and the massive Federal funding required for their
resolution, have focused the attention of the Administration and
Congress on other areas of taxpayer exposure to financial risk.
With this concern in mind, Congress enacted legislation requiring
the Secretary of the Treasury to study and make recommendations
regarding the financial safety and soundness of GSEs.
The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA) requires the Treasury to conduct two annual
studies to assess the financial safety and soundness of the
activities of all Government-sponsored enterprises. The first of
these studies was submitted to Congress in May 1990.
The Omnibus Budget Reconciliation Act of 1990 (OBRA)
requires the Treasury to provide an objective assessment of the
financial soundness of GSEs, the adequacy of the existing
regulatory structure for GSEs, and the financial exposure of the
Federal Government posed by GSEs. In addition, OBRA requires the
Treasury to submit to Congress recommended legislation to ensure
the financial soundness of GSEs. Legislation reflecting the
approach identified in the April 30th report will be submitted
shortly.
The 1991 study is intended to meet the study requirements of
FIRREA and OBRA. It includes an objective assessment of the
financial soundness of the GSEs, which was performed by the
Standard & Poor's Corporation (S&P) at the Treasury's request.
The study also includes the results of the Treasury's analysis of
the existing regulatory structure for GSEs and recommendations
for changes to this structure.
NB-1266
2
Based on 'the S&P analysis of the financial safety and
soundness of the GSEs, we have concluded, as ve did last year,
that no GSE poses an imminent financial threat. Because there is
no immediate problem, there may be the temptation to follow the
old adage "if it's not broke, don't fix it". We, however,
believe that this course of action would be inappropriate. The
experience with the troubled thrift industry and the Farm Credit
System in the 1980s vividly demonstrates that taking action once
a financial disaster has already taken place is costly and
difficult.
Also, the immense size and concentration of GSE activities
serve to underscore the need for effective financial safety and
soundness regulation of GSEs. The outstanding obligations of the
GSEs, including direct debt and mortgage-backed securities,
totaled almost $1 trillion at the end of calendar year 1990.
Thus, financial insolvency of even one of the major GSEs would
strain the U.S. and international financial systems and could
result in a taxpayer-funded rescue operation.
The concentration of potential taxpayer exposure with GSEs
is obvious when compared to the thrift and banking industries.
The total of credit market debt plus mortgage pools of the five
GSEs included in this report is greater than the total deposits
of the more than 2,000 insured S&Ls and about one-third the size
of the deposits of the more than 12,000 insured commercial banks.
Consequently, the Federal Government's potential risk exposure
from GSEs, rather than being dispersed across many thousands of
institutions, is dependent on the managerial abilities of the
officers of a relatively small group of entities.
Despite the size and importance of their activities, GSEs
are insulated from the private market discipline applicable to
other privately owned firms. The public policy missions of the
GSEs, their ties to the Federal Government, the importance of
their activities to the U.S. economy, their growing size, and the
rescue of the Farm Credit System in the 1980s have led credit
market participants to view these GSEs more as governmental than
as private entities. Because of this perception, investors
ignore the usual credit fundamentals of the GSEs and look to the
Federal Government as the ultimate guarantor of GSE obligations.
Therefore, some GSEs are in a position to increase financial
leverage virtually unconstrained by the market or by effective
oversight. Greater leverage results not only in higher returns
for GSE shareholders, but also in potentially greater taxpayer
exposure if a GSE experiences financial difficulty.
Given the need for effective financial oversight of the
GSEs, the Treasury has developed four principles of effective
safety and soundness regulation. These principles are:
3
I.
Financial safety and soundness regulation of GSEs must be
given primacy over other public policy goals.
Regulation of GSEs involves multiple public goals. Without
a clear statutory preference, a current GSE regulator need not
give primary consideration to safety and soundness oversight.
Therefore, unless a regulator has an explicit primary statutory
mission to ensure safety and soundness, the Government may be
exposed to excessive risk.
II.
The regulator must have sufficient stature to avoid capture
by the GSEs or special interests.
The problem of avoiding capture appears to be particularly
acute in the case of regulation of GSEs. The principal GSEs are
few in number? they have highly qualified staffs? they have
strong support for their programs from special interest groups?
and they have significant resources with which to influence
political outcomes. A weak financial regulator would find GSE
political power overwhelming and even the most powerful and
respected Government agencies would find regulating such entities
a challenge. Clearly, it is vital that any GSE financial
regulator be given the necessary support, both political and
material, to function effectively.
The Treasury Department is under no illusions concerning the
capture problem. No regulatory structure can ensure that it will
not happen. Continued recognition of the importance of ensuring
prudent management of the GSEs and vigilance in this regard by
both the executive and legislative branches will be necessary.
III.
Private market risk mechanisms can be used to help the
regulator assess the financial safety and soundness of
GSEs.
The traditional structure and elements of financial
oversight are an important starting point for GSE regulation.
However, Governmental financial regulation over the last decade
has failed to avert financial difficulties in the banking and
thrift industries. Additionally, the financial services industry
has become increasingly sophisticated in the creation of new
financial products, and the pace of both change and product
innovation has accelerated in the last several years. As a
result, to avoid the prospect that GSEs might operate beyond the
abilities of a financial regulator and to protect against the
inherent shortcomings in applying a traditional financial
services regulatory model to entities as unique as GSEs, it would
be appropriate for the regulator to enlist the aid of the private
sector in assessing the creditworthiness of these firms.
4
iv.
The basic statutory authorities for safety and soundness
regulation must be consistent across all GSEs. Oversight
can be tailored through regulations that recognise the
unique nature of each GSE.
The basic, but essential, authorities that a GSE regulator
should have include:
(1)
authority to determine capital standards;
(2) authority to require periodic disclosure of
relevant financial information;
(3) authority to prescribe, if necessary, adequate
standards for books and records and other internal controls;
(4)
authority to conduct examinations; and
(5) authority to take prompt corrective action and
administrative enforcement, including cease and desist
powers, for a financially troubled GSE.
Consistency of financial oversight over GSEs does not imply
that the regulatory burden is the same irrespective of the GSEs1
relative risk to the taxpayer. Weaker GSEs should be subjected
to much closer scrutiny than financially sound GSEs. However,
the basic powers of the regulator to assure financial safety and
soundness should be essentially the same for all GSEs.
Regulatory discretion is necessary within these broad powers
because the GSEs are unique entities and, as such, need
regulatory oversight that reflects the nature of the risks
inherent in the way each conducts its business. Additionally,
because financial products and markets change rapidly, regulatory
discretion would allow for flexibility to deal with the changing
financial environment.
The Treasury has analyzed the adequacy of the existing
regulatory structure of the GSEs against the backdrop of the four
principles of effective financial safety and soundness
regulation. We have found some deficiencies in the existing
regulatory structure for GSEs and recommend that the following
changes be made to the structure in order to ensure more
effective financial safety and soundness regulation of GSEs.
Separate ••arm* s-length1' Bureau of HUD
Financial safety and soundness oversight of Fannie Mae and
Freddie Mac should have primacy over other regulatory goals.
Moreover, the responsibility for this oversight should be
transferred to a new, separate "arm's-length" bureau of HUD. The
Director of the new bureau should be appointed by the President
5
and confirmed by the Senate, and be removable only by the
President; the Director should operate with the general oversight
of, and report directly to, the Secretary of HUD? the bureau
should be separately funded through assessments on Fannie Mae and
Freddie Mac, as proposed in the Presidents 1992 Budget? and the
bureau should provide an annual report on its operations to
Congress•
Federal Housing Finance Board
The Finance Board should retain financial oversight over the
FHLBanks. However, its statute'should be amended to make
financial safety and soundness of the FHLBanks the Finance
Board's primary regulatory goal.
Farm Credit Administration
The FCA should retain financial oversight over the Farm
Credit System and Farmer Mac. Moreover, the FCA's financial
oversight over Farmer Mac, particularly with respect to authority
to set capital standards, should be increased. Also, the
Insurance Corporation should be given access to the capital of
the associations.
Treasury
The Treasury's oversight over Sallie Mae should be increased
to make it consistent with the safety and soundness authorities
of the other regulators.
In conclusion, given the immense size of GSEs and the
tremendous concentration of potential risk in so few
institutions, the taxpayer is entitled to expect Congress and the
Administration to focus on more effective oversight of these
institutions. The recommendations which I have outlined will
form the basis for the GSE legislation the Administration will
propose. We believe that the passage of this legislation will
result in more effective safety and soundness oversight of these
important entities, thereby sharply reducing the threat the
taxpayer would be called upon for another costly and painful
financial rescue. Moreover, effective safety and soundness
oversight, by assuring the long-term financial viability of the
GSEs, will enhance the effectiveness of these entities in
achieving their public purposes. Action on this legislation will
send a strong signal that we have learned some important lessons
from the recent and painful difficulties we have experienced in
the financial services industry.
This concludes my prepared statement.
answer any questions that you may have.
o 0 o
I will be happy to
TREASURY N E W S ©
Department of the Treasury • Washington, D.c. • Telephone 566^04
For Immediate Release
March 13, 1991
Contact: Barbara Clay
566-5252
THE HONORABLE JOHN ROBSON
DEPUTY SECRETARY OF THE TREASURY
INTER-AMERICAN CENTER OF TAX ADMINISTRATORS
MAY 13, 1991
Thank you, Francisco (Gill, President of CIAT Executive
Council). It is a great pleasure to welcome the ministers and
international banking and tax officials with us today. You have
an ambitious agenda for this conference, and I am confident you
will continue to have a beneficial impact on tax administration
throughout the hemisphere, as you have for nearly a quarter
century since your founding.
The countries represented here today have similar economic
goals and common needs for quality tax administration systems.
We depend on each other for trade and reciprocal investment. And
-- as the global economy grows increasingly interlinked and
interdependent — we recognize the importance of maintaining
strong, growth-oriented economies in all nations.
Fundamental to creating capital and attracting foreign
investment is the implementation of economic policies that favor
stability and growth. Sound macroeconomic policies provide the
foundation for sustained economic development. Excessive
taxation, regulation and inflation — and rapidly fluctuating
exchange rates — can only frighten away investors.
The design and administration of a nation's tax system has a
major impact on whether it creates an environment hospitable to
investment, trade, and economic growth. Repressive tax regimes
will smother economic activity and deter investment. The tax
system should offer incentives to entrepreneurs and risk-takers - particularly no or low capital gains taxes, a tax structure
that lets business make and keep a fair prpfit for its owners,
and a tax system that is efficiently and even-handedly
administered. So you in this room can influence importantly the
prosperity of your respective homelands.
Today, the United States is helping many countries — in
this hemisphere, in Eastern Europe, and elsewhere — develop
policies and build the institutions essential for long-term
economic growth and prosperity. As President Bush said, "our
challenge in this country is to respond in ways to support the
positive changes now taking place...We must forge a genuine
partnership for free market reforms."
1267
2
When President Bush travelled in Mexico and elsewhere in
Latin America late last year, he was impressed with the vision
and commitment of many of the leaders he met to pursue reforms
that will improve their countries' economic prospects. To
encourage and support these reforms, President Bush proposed the
Enterprise for the Americas Initiative — which aims to help
Latin American and Caribbean countries achieve sustained
economic growth by expanding trade, increasing investment, and
reducing debt burdens.
Free trade is a cornerstone — not only of the Enterprise
Initiative — but of a broader economic system based on market
principles. The Enterprise for the Americas Initiative seeks to
foster that broad free-market system and encourage Latin American
economies to open themselves to imports and accept prices
determined by market forces.
Our long term goal is to forge a hemispheric free trade
area. A critical first step in this process is the North
American Free Trade Agreement we propose to enter with Mexico and
Canada. Such an agreement would foster economic growth for all
three countries, which together compose a market of over 360
million people and $6 trillion in annual output.
This step toward expanding free trade has been inspired by
the remarkable economic reforms that are transforming Mexico's
economy. And these reforms are being mirrored in other countries
throughout the hemisphere.
The Administration is negotiating framework agreements right
now with individual countries and groups of countries throughout
Latin America and the Caribbean to begin to reduce trade
barriers. Since last June, framework agreements have been signed
with six countries — Columbia, Ecuador, Chile, Honduras, Costa
Rica and Venezuela — adding to those already in place with
Mexico and Bolivia.
Investment and capital flows are also critical elements of
economic growth. And to help countries attract needed capital,
the Enterprise Initiative first looks to the Inter-American
Development Bank to develop an investment-sector lending
program — conditioned on countries' liberalization of their
investment regimes.
The President has also proposed the creation of a
Multilateral Investment Fund within the IDB to provide additional
support for investment reforms — for instance, through technical
assistance and worker retraining and education — and to make
3
credit and equity financing available to small enterprises. We
welcome Japan's willingness to participate in the Multilateral
Investment Fund, and we are encouraging other countries to do the
same.
With regard to debt, the Initiative holds out the promise of
reducing official bilateral debt to the U.S. in exchange for
countries pursuing strong economic reforms — including measures
to open their investment regimes.
Environmental Framework Agreements are another important
part of the President's plan. We are supporting a broad range of
environmental projects within the hemisphere. And a recent
proposal by the Administration to the U.S. Congress would
authorize forgiveness of official debt and channeling local
currency interest payments into environmental projects.
We also believe that a reduction in tax barriers to crossborder investment can contribute to economic growth. We are now
in active negotiations with Mexico for a double tax convention
and have held preliminary discussions with other countries in the
hemisphere. We are encouraged by these developments.
These are exciting times, and we share your ambitious
visions. Much is riding on the success of these trade,
investment, environmental, and tax burden reduction
opportunities. With your help, we will rise to the challenge and
make our countries more competitive and prosperous in the decade
ahead.
The last 25 years have been productive ones for CIAT members
in terms of sharing information and developing cooperative
technical programs. And with your current discussions focusing
on strategic planning and tax modernization, I would be inclined
to say that your best years are still ahead of you.
I salute you on 25 years of accomplishment. Your work now
and in the future is crucial to moving this hemisphere toward
sustained economic growth.
Thank you, and good luck for a successful conference.
###
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
May 13, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $9,224 million of 13-week bills to be issued
May 16, 1991 and to mature August 15, 1991 were
accepted today (CUSIP: 912794XC3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 47%
5. 50%
5. 50%
Investment
Rate_____Price
5.64%
98.617
5.67%
98.610
5.67%
98.610
Tenders at the high discount rate were allotted 81%
The investment rate is the equivalent coupon-issue
TENDERS RECEj.v £.D AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
36,515
18,900,210
21,970
47,505
173,310
34,005
1,648,235
55,465
7,735
34,625
25,060
655,980
1.010.295
$22,650,910
Accepted
36,515
7,231,715
21,970
47,505
113,810
33,625
358,635
15,465
7,735
34,625
25,060
286,980
1.010.295
$9,223,935
Type
Competitive
Noncompetitive
Subtotal, Public
$17,958,895
1.918.305
$19,877,200
$4,531,920
1.918.305
$6,450,225
2,667,110
2,667,110
106.600
$22,650,910
106.600
$9,223,935
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1268
May 9, 1991
The Honorable Robert Michel
Republican Leader
House of Representatives
Washington, DC 20515
Dear Mr. Leader:
I wanted to follow up personally on the President's May 1
letter to you regarding the critical importance of extending,
unencumbered, fast track negotiating authority. The President
has requested this extension to carry out a far-reaching trade
agenda which includes: the Uruguay Round, the North American
Free Trade Agreement (NAFTA), and the Enterprise for the Americas
Initiative. Without the extension, our negotiating credibility
would be called into question, seriously undermining the U.S.
leadership role in world trade and our prospects for a strong
global economy.
In the debate on fast track, Congress has focused on the
proposed NAFTA. In my view, the case for giving the
Administration the traditional tools to negotiate a NAFTA is
compelling.
Mexico has embarked upon a process of economic reforms that
has caused a dramatic increase in its market potential for U.S.
exports. Already U.S. exports to Mexico have increased from
$12.2 billion in 1986 to $28.4 billion in 1990, as Mexican
economic growth has accelerated. Further liberalization under a
free trade arrangement is certain to result in additional
economic gains for both our countries:
o
Mexico still has higher trade barriers than the United
States, with tariffs averaging 10% as opposed to 4% for the
United States. Significant nontariff barriers also remain,
so there is room for greater U.S. export expansion.
o
As Mexico develops economically, its consumers and
industries will demand more goods and services. The United
States particularly benefits from Mexican growth: for each
dollar Mexico spends on imports, 70 cents is spent on U.S.
goods; for each dollar of GNP growth in Mexico, 15 cents is
spent on U.S. goods.
o
According to the International Trade Commission, a NAFTA
could present many new opportunities for U.S. exports, in
such areas as: manufacturing,‘ including telecommunications,
computers, and electronic components; grain and oilseed
growers; cement; and service providers, including U.S.
banking and securities firms.
-
2-
Environmental and labor issues have been the center of much
attention in Congress. The President has sent to you a report
outlining what has already been achieved and our plan for future
bilateral efforts on these issues. Combined with Mexico's strong
commitment, and the economic development Mexico will achieve
through a NAFTA, our joint efforts will result in higher living
standards, a better workplace and cleaner environment for all.
Mexico is taking a courageous and historic step by linking
the future of its economy to ours. Both of our countries will
draw strength and prosper from a NAFTA. With your support and
your input, I am sure we can achieve this goal. I can assure you
that we will continue consulting closely with Congress every step
of the way to ensure that the agreement reached is in the best
interest of the American people.
Sincerely,
Nicholas F. Brady
ID EN TIC AL LETTER SENT TO ALL MEMBERS OF CONGRESS
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
May 13, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $9,233 million of 26—week bills to be issued
May 16, 1991 and to mature November 14, 1991 were
accepted today (CUSIP: 912794XN9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 61%
5. 63%
5. 63%
Investment
Rate
5.87%
5.89%
5.89%
Price
97.164
97.154
97.154
Tenders at the high discount rate were allotted 72
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED .
AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,940
21,309,790
17,710
46,370
68,820
37,365
1,735,735
36,195
7,785
39,475
15,045
524,440
714.620
$24,581,290
Accepted
27,940
7,952,550
17,710
46*370
68,820
34,835
202,735
16,195
7,785
37,475
15,045
90,440
714.620
$9,232,520
Type
Competitive
Noncompetitive
Subtotal, Public
$20,092,710
1.365.980
$21,458,690
$4,743,940
1.365.980
$6,109,920
2,450,000
2,450,000
672.600
$24,581,290
672.600
$9,232,520
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1269
ANNUAL TRADE PROJECTION REPORT TO CONGRESS
Prepared Jointly by the Department of the Treasury
and the Office of the United States Trade Representative
April 1991
ANNUAL TRADE PROJECTION REPORT - 1991
Table of Contents
I.
Introduction
1
II.
Review of Recent Developments
2
III. Projections for 1991 and 1992
16
IV.
Policy Issues
25
V.
Impact of Trade Barriers
27
PART IS
INTRODUCTION
The Omnibus Trade and Competitiveness Act of 1988 (P.L. 100418) contains numerous reporting requirements, including, in
Section 1641, a requirement for an Annual Trade Projection
Report.
The report is to include: a review and analysis of key
economic developments in countries and groups of countries that
are major trading partners of the United States; projections for
developments in various macroeconomic variables in the reporting
year and the following year; conclusions and recommendations for
policy changes to improve the outlook; and, a discussion of the
impact on U.S. trade of market barriers and other unfair
practices.
The legislation specifies that the report is to be prepared
jointly by the Treasury Department and the Office of the United
States Trade Representative, in consultation with the Chairman of
the Board of Governors of the Federal Reserve System. The report
is to be submitted on March 1 of each year to the Senate Finance
Committee and the Ways and Means Committee of the House of
Representatives.
Part II of this report reviews recent macroeconomic
developments in countries or groups of countries that are major
trading partners of the United States, as well as key recent
developments in the U.S. economy. Part III presents projections
for main macroeconomic variables in 1991 and 1992 for the same
countries and country groups. These two parts are organized as
follows: Section 1 discusses economic growth, trade and current
account developments, and policy trends in the industrial
countries; Section 2 discusses developments elsewhere in the
global economy. Part IV reviews policy issues raised by these
projections. Part V discusses the impact on U.S. trade of market
barriers and other unfair practices. Parts I-IV were prepared by
the Treasury Department; Part V was prepared by the Office of the
Trade Representative.
Readers are, in addition, referred to the Treasury
Departments semi-annual Report to Congress on International
Economic and Exchange Rate Policy, which discusses key issues,
including exchange rate developments, in considerable depth and
provides a more detailed review of important recent historical
trends. That report is also prepared pursuant to the Omnibus
Trade and Competitiveness Act of 1988.
2
PART IIS
REVIEW AND ANALYSIS OF DEVELOPMENTS IN 1990
1. Industrial Countries
The macroeconomic performance of the major industrial
countries in 1990 reflected a number of largely anticipated
underlying trends as well as unanticipated developments arising
in large part from the Persian Gulf crisis.
The slowdown in the overall pace of economic growth that was
widely forecast for the second half of the year proved sharper
than expected due in large part to heightened consumer/investor
uncertainties and higher oil prices. Growth trends in the
individual economies continued to diverge significantly, with
strong growth persisting only in Japan and Germany, while the
United States, U.K. and Canada slipped into recession by yearend. Measured inflation rates appear to have peaked in the
middle/late part of the year for many countries, despite the oil
price spike and other transitory developments, and underlying
trends indicated a modest improvement in the "core" inflation
picture toward year-end. The external adjustment process
continued as further declines were recorded in the largest trade
and current account imbalances.
A. U.S. Economic Performance
Latest available data confirm a pronounced slowdown in U.S.
GNP growth in 1990, extending the steady loss of momentum
underway since the first quarter of 1988. On an annual average
basis, GNP rose 1.0 percent in real terms in 1990, after growth
of 2.5 percent in 1989 and 4.4 percent in 1988. The slowdown was
evident in each of the major national accounts line items except
government consumption, which accelerated only slightly. As was
the case in 1989, export growth was by far the strongest
individual component (continuing to exceed real import growth by
a large margin), and personal consumption growth the weakest.
Total domestic demand grew more slowly than overall GNP (0.5
percent on average), extending an important trend that has been
underway since 1987. Thus, improving net exports continued to
make a positive contribution to growth.
Consumer prices rose 5.4 percent in 1990 after an increase
of 4.8 percent in 1989. Excluding the more volatile food,
shelter and energy components, consumer prices rose at an annual
average rate of 4.9 percent in 1990 versus 4.4 percent in 1989.
(Energy prices rose 8.3 percent on average and 18.1 percent on a
December-to-December basis.) The broader, fixed weight GNP
deflator rose only marginally to 4.6 percent (from 4.5 percent in
1989) though there was a pickup in measured price pressure during
the second half.
3
On the external side, the merchandise trade deficit narrowed
$6.2 billion to $108.7 billion, while the current account deficit
narrowed $10.7 billion to $99.3 billion. On the national
accounts basis, the deficit on net exports of good and services
declined $20.3 billion in real terms, to $33.8 billion.
The improvement in the U.S. external position on the balance
of payments basis derived from a decrease in the merchandise
trade deficit, an increase in the surplus on services, and a
shift to a surplus on investment income. The trade deficit in
1990 was equivalent to just under 2 percent of GNP, versus 3.5
percent of GNP when the deficit was at its nominal peak ($159.5
billion) in 1987. The current account deficit was equivalent to
1.8 percent of GNP last year versus 3.6 percent of GNP ($162.3
billion) in 1987.
The national accounts allow us to look at this movement in
real terms. On this basis real net imports of goods and services
fell to the equivalent of about 0.8 percent of GNP in 1990, a
major improvement relative to its peak level of 3.5 percent of
GNP in 1986. Since the 1986 peak, the deficit on net exports has
declined about $96 billion. This shift on the external side has
had a significant positive impact on overall U.S. GNP performance
in recent years, accounting for approximately 21 percent of total
U.S. GNP growth since 1986, and about 50 percent in 1990.
The external correction in 1990 reflected the continued
relative strength of U.S. exports. Merchandise exports rose 8.8
percent, or $28.8 billion in value terms, in 1990 on the balance
of payments basis? merchandise imports increased 5 percent, or
$22.6 billion. In real terms (i.e., in 1982 prices), national
accounts data indicate a 6.4 percent increase in goods and
services exports in 1990 versus a 2.8 percent increase in
imports. This continues the roughly 2:1 growth rate differential
that has been observed since 1986.
External account trends on both the balance of payments
basis and the national accounts basis are presented in the chart
on the following page. Substantial progress has clearly been
made by both measures, though the price-adjusted NIPA aggregate
shows considerably more adjustment since 1986.
The reason for the discrepancy lies with differences in the
behavior of export and import prices in recent years. Import
price increases have exceeded export price increases (roughly 6
percent per year versus about 4 percent) since 1986, which tends
to inflate the nominal value of imports relative to exports and
therefore diminish the decline in the nominal deficit.
(For
example, the total bill for petroleum imports rose $11.2 billion,
or 22 percent, in 1990 reflecting a 20 percent price increase but
only a 1.3 percent volume increase.) When these price effects
4
are filtered out, the underlying volume trends may be seen more
clearly; and it is these developments which relate most directly
to real variables such as output and employment.
U.S. External Account Trends
($ billions)
50
50
0
0
CO
c
o
-50
-50
-100
-100
-150
-150
j5
81
82
83 84
85
* Net exports of goods and services
on a national accounts basis
86
87
88
89
90
A number of important trends in U.S. bilateral and regional
merchandise trade imbalances continued in 1990: the aggregate
U.S. deficit with other industrialized countries improved
further, as did the deficit with the Newly Industrialized Asian
economies (NIEs); but the deficit with OPEC members widened.
The U.S. balance with the 12 European Community member
countries continued to improve, registering its first surplus
($4.9 billion) since 1982. Since its peak deficit of $22.3
billion in 1986 the U.S. balance with the EC has improved $27.2
billion. Surpluses with the U.K. and the Benelux countries
continued to increase, and the bilateral balance with France
moved slightly into surplus. However, the U.S. bilateral deficit
with Germany widened moderately (to $9.7 billion) due to a
rebound in U.S. imports? U.S. exports to Germany continued to
grow solidly.
ALTERNATE MEASURES OF EXTERNAL ACCOÜCT TRENDS
The national income and product accounts {NIPA)
presentation of the; foreign sector differs front the more
traditionally used balance of payments presentation largely
because of different treatment of ¿ n u m b e r of international
transactions* In the case of the United States, the most
important difference is in the treatment:of interest paid
to foreigners on their holdings of U.S. government
securities* These flows are included in the balance of :
payments reckoning (as part of the current account) but are
excluded from the NIPA measure. in addition, the two
measures give different treatment to capital gains and
losses on direct investment flows and to all transactions
between the United States and its territories and Puerto
Rico* Finally, the NIPA presentation is most familiar in
its real, or price-adjusted, form (1982 dollars for the
United States), while balance of payments aggregates are
always shown as current nominal values*
:
A particular attribute of thé NIPA measurement is that by
separating the domestic side of the economy (essentially
private and public consumption and investment) from the
external side (exports and imports of goods and services),
it clearly identifies the relative contribution of each to
the overall growth p e r f o r m a n c e in addition, current value
NIPA aggregates may be adjusted with import and export
price deflators to uncover underlying volume developments
in goods and services flows,: The resulting real aggregates
are important in gauging the impact of external sector
trends on output and employment. The balance of payments
measure, on the other hand, provides the most comprehensive
and internationally comparable picture of international
transactions and is therefore more useful in analyzing
:
developments in thé context of financial market trends and
global payment patterns.
The U.S. bilateral trade imbalance with Japan declined
almost $8 billion further in 1990, albeit to a still high level
of $41.8 billion. Total adjustment since the deficit peak in
1987 has been $15.1 billion. U.S. imports from Japan declined in
1990 for the first time since 1975 while U.S. exports continued
to grow. Exports to Canada grew moderately, but slightly
outpaced import growth, narrowing the U.S. bilateral deficit
slightly to $9.4 billion.
(Canada is by far the largest U.S.
trading partner, with inward and outward flows accounting for
nearly 20 percent of total U.S. trade.)
The U.S. deficit with OPEC rose to $24.8 billion, its
highest level since 1981. As noted above, price developments
were largely responsible for the increase. Since 1988, the U.S.
trade deficit with OPEC has risen $15.5 billion, offsetting
nearly half of the overall U.S. deficit reduction achieved with
the rest of the world during the past two years and thus
contributing importantly to the observed slowdown in the overall
rate of trade deficit reduction.
The U.S. trade deficit with the non-OPEC member developing
countries remained essentially unchanged at $39.4 billion.
Bilateral deficits declined against each of the four Asian NIEs,
bringing the combined deficit with the NIEs to $21 billion?
deficit reduction against these countries has totaled nearly $14
billion. Despite reduced U.S. deficits with Mexico (the third
largest U.S. trading partner) and Brazil, the U.S. deficit with
other countries in the Western Hemisphere (excluding Canada)
widened by about $1.5 billion to $10.1 billion.
A number of developments in the commodity composition of
trade flows in 1990 are worth noting. Exports of non-automotive
capital goods rose 11 percent (nominal terms, balance of payments
basis) while such imports increased just under 4 percent.
Consumer durables exports grew 20 percent while imports grew less
than 1 percent, though the net U.S. deficit remained large ($33
billion). Exports of automotive products rose 5.5 percent while
imports were essentially unchanged? however, the deficit also
remains large (about $20 billion) in this sector.
B. Economic Developments in Other Industrial Countries
I . Growth Trends
Real GNP growth in the foreign industrialized countries
(OECD members excluding the United States) continued to
decelerate in 1990, slipping from 3.7 percent to 3.3 percent.
Japan was again the major country growth leader in 1990, as
real GNP growth accelerated to 5.6 percent, from 4.7 percent in
1989. Domestic demand growth remained steady at 5.8 percent (vs.
5.7 percent in 1989). Thus, the growth gap between GNP and
domestic demand has narrowed from 1.4 percentage points in 1988
to l.o percentage points in 1989 and 0.2 percentage points in
7
1990. Private consumption spending again advanced nearly 4.5
percent, balancing the competing influences of solid income gains
and a late-year, Gulf war-related deterioration in consumer
confidence. Rebounds in public and residential investment
outlays offset a modest easing in business investment, keeping
overall investment growth quite strong. On the external side,
import and export growth rates (real terms; NIPA basis) both
slowed substantially? import growth continued to exceed export
growth, but by a smaller margin (12.5 percent vs. 10.7 percent)
than in any year since 1987.
GNP growth in the four largest European countries slowed by
about one-half of a percentage point, as did domestic demand
growth. However, the divergences in the growth performances of
the individual countries that had begun to emerge in 1989 widened
further in 1990. Specifically, growth accelerated in Germany but
slowed in France, Italy and the U.K.
Germany saw GNP growth strengthen from 3.8 percent in 1989
to an estimated 4.5 percent last year. Domestic demand growth
accelerated even more sharply, from 2.7 percent to 4.6 percent.
With real disposable income benefitting from higher wages, stable
inflation, and a substantial tax cut, private consumption growth
rose to its highest level in two decades (approximately 4.5
percent). Investment spending also accelerated, as unificationrelated demand bolstered both the equipment and construction
sectors. On the foreign trade side, goods and services imports
grew to meet the higher domestic demand while softer conditions
in key markets slowed export growth somewhat. Nevertheless,
external developments had a small net positive effect on German
GNP in 1990.
(Note: These data apply to western Germany only.
GNP data for eastern Germany — formerly the GDR — have not been
published by the German government.)
Growth slowed further in the United Kingdom in 1990, with
pronounced weakness emerging during the second half of the year.
Real GNP growth slipped to an annual average rate of 0.6 percent.
Domestic demand growth fell by 0.3 percent as private consumption
expenditures rose less than 2 percent and fixed investment
outlays contracted by about 1.5 percent. However, the external
picture improved substantially relative to 1989. Export growth
picked up a bit to just under 5 percent, while import growth fell
to less than 3 percent in the face of weak domestic demand? as a
result, the foreign trade sector exerted a net expansionary
effect on the U.K. economy in 1990.
France also experienced weaker growth in 1990, though the
economy remains on a path of continued moderate expansion.
Capital investment activity slowed, as did stock accumulation;
private consumption held generally firm, although surveys
suggested diminished consumer confidence toward year-end. On the
8
external side, the rate of export growth was halved (to just
under 5 percent) and lagged the rate of import growth by about
one percentage point. In Italy real GNP remained on a path of
continued, but appreciably weaker, growth; industrial production
contracted in the second half and was slightly negative for the
year. Investment activity lost steam — as did household
consumption and exports — but all nonetheless remained on a
positive track. As elsewhere, consumer and business surveys
indicate a downturn in confidence during the second half.
The situation in Canada is similar to that of the U.K. in
that it, too, is experiencing an anticipated adjustment to the
excessive demand pressures that emerged in 1988. Private
consumption growth remained positive in 1990, but much weaker,
and fixed investment spending contracted? export growth picked up
and import growth slowed. Overall, real GNP advanced 0.9 percent
in 1990 (after 3.0 in 1989) and domestic demand growth dropped
from 4.2 percent to zero.
The smaller OECD countries also turned in a generally weaker
performance in 1990. Weighted average GNP growth in these
countries (essentially the rest of Europe, plus Australia and New
Zealand) slipped from about 3.8 percent in 1989 to an estimated
2.8 percent in 1990. As in the larger countries, domestic demand
growth slowed more sharply, especially in Australia and New
Zealand. In particular, investment activity cooled in most of
the smaller economies after several years of unusual strength.
II. Trade and Current Account Developments
Additional progress was made in 1990 in reducing the largest
trade and current account imbalances outside the United States
(i.e., those of Japan, Germany and the U.K.). Numerous other
OECD countries experienced moderate deteriorations in their
external positions due in the main to the unanticipated oil price
surge during the second half of the year.
Japan1s current account surplus declined substantially again
in 1990, falling $21 billion to $35.8 billion. The 1990
correction followed a $22 billion decline in 1989, and brought to
$51 billion the total decline in the Japanese surplus since its
peak in 1987. In terms of GNP, the current account surplus
declined over the same period from 3.6 percent to the equivalent
of 1.2 percent last year. The trade surplus declined an
additional $14 billion in 1990 (to $64 billion, or 2.2 percent of
GNP), bringing the total correction to about $32 billion since
the 1987 peak. The invisibles deficit rose $19 billion over the
same period.
9
Several factors contributed to the additional Japanese
external adjustment in 1990. The growth of import volume (census
basis) continued to exceed (though only marginally) that of
exports, as has been the case since 1986. Secondly, the terms of
trade moved against Japan again in 1990, due in part to the
increase in oil prices: import unit values rose by 10.2 percent
while export unit values rose 3.4 percent. Thus, volume changes
aside, price changes alone would have boosted the import bill and
reduced the surplus. In the invisibles account, higher deficits
on travel, transportation, and transfers contributed to a $8.3
billion deficit increase.
The external adjustment process in Japan mirrors that of the
United States in one important respect: the nominal balance of
payments data do not fully express the amount of underlying
(i.e., price-adjusted) adjustment that has occurred. The chart
below illustrates the differences.
Japanese External Account Trends
(Yen trillions)
80 81 82 83 84 85
* Net exports of goods and services
on a national accounts basis
86
87
88
89
90
10
tIn dollar terms, the Japanese current account surplus
declined by about 60 percent between 1987 and 1990.
However, on
a price-adjusted national accounts basis the degree of adjustment
has been larger. In volume terms, Japanese imports of goods and
services increased 45 percent between 1986 and 1990 while export
volume simultaneously rose about 14 percent.
German trade and current account surpluses declined
substantially in 1990? in the case of the current account, this
was the first time the surplus failed to increase in over a
decade. In dollar terms the current account surplus declined
almost $11 billion (19.5 percent) to $44.5 billion? the trade
surplus declined $6.4 billion (9 percent) to $65 billion. Given
the appreciation of the deutschemark against the dollar the
correction was larger in DM terms: 31 percent and 12 percent,
respectively• The correction on both the trade and current
accounts was significant as a percent of GNP, though by this
measure both remain quite large.
( The trade surplus dropped
from 6.3 to 4.4 percent of GNP? the current account surplus from
4.6 percent to 2.5 percent.)
German External Account Trends
(DM billions)
* Net exports of goods and services
on a national accounts basis
11
The pronounced strengthening of domestic demand boosted
import absorption significantly? volume rose nearly 11 percent in
1990 (balance of payments basis) after 7.7 percent in 1989.
Export volume growth, on the other hand, was limited to 2 percent
by slower demand growth abroad as well as by higher domestic
absorption of goods that might otherwise have been exported. The
picture on the national accounts basis in 1990 also reflected the
external adjustment that was underway. Growth of goods and
services exports slowed to about 9.6 percent in real terms while
real import growth accelerated to 11.5 percent.
Unification has necessitated some major presentational
changes in Germany*s foreign trade statistics and posed
some challenges in interpreting the new data. Since the
division of Germany, balance of payments data for the
Federal; Republic (FRG) did not include commerce with the
German Democratic Republic (GDR)^reflecting the fact that
thè GDR was not considered a separate country. Commerce
with :the GDR was accounted for in an entirely separate set
of statistics.
(The external line items in the FRG
national accounts> in contrast, included commerce betweén
the FRG and the GDR.) since »July 1990yrhowever, the German
government has published all-Gérman balance of payments
data, i.e., including the former GDR.
(GNP and inflation
data continue to cover wèstern Germany only.)
Thesé data will: heed to be treated carefully for some time
given the lack of direct comparàbility with earlier data
and the major structural changes that are underway in
Germany. For example, there has been a large shift in the
import sourcing of former GDR firms from traditional
suppliers in the USSR and Eastern Europe, which counted as
imports in the external accounts of the former GDR, to FRG
suppliers, which is now treated as internal commerce.;
Similarly, there has been a jump in the amount of
merchandise being imported into the FRG (counted as
traditional imports) for "re-export" to the former GDR,
which is not counted as foreign traded
v
The deterioration in the trade and current accounts of the
United Kingdom that had been underway for a number of years was
reversed in 1990. The current account deficit eased back
considerably from its 1989 peak of $31.3 billion to $22.8
billion? the trade deficit was reduced from $39 billion in 1989
12
to $31 billion last year. Both nevertheless remain fairly large
in proportion to GNP: the trade deficit was equivalent to 3.4
percent of GNP? the current account deficit was 2.4 percent. The
U.K.'s external correction in 1990 reflected several factors:
the sharp cooldown in domestic demand (and imports)? continued
improved performance on the export side; and, a large increase in
net direct investment earnings.
While the four largest external imbalances narrowed in 1990,
developments in the other major industrial countries were mixed.
In France the trade deficit widened moderately to about $9.5
billion reflecting higher oil import costs and some loss of
external competitiveness due to the effective appreciation of the
franc. Italy1s trade deficit narrowed slightly due in part to an
exchange rate related decline in import prices, while the current
account deficit widened to about $12 billion due mainly to
negative developments on the tourism account. Canada1s trade
surplus widened to about $9 billion reflecting both a modest
export recovery and much weaker import growth; the current
account deficit remained substantial, at $13.7 billion or 2.4
percent of GNP.
III. Macroeconomic Policy Developments
The growing divergence among the cyclical positions of the
major countries combined with the heightened uncertainty arising
from the outbreak of the Persian Gulf crisis to create a more
challenging environment for economic policy makers. The main
priorities remained achievement of sustained growth over the
medium-term, low inflation, and consolidation of the public
sector finances.
The monetary authorities in the industrial countries
continued to focus primarily on trying to balance judgments about
the prospects for inflation, on the one hand, against judgments
about the cyclical position and underlying strength of the
national economies on the other. As a general matter, the
monetary authorities have continued the cautious approach they
have pursued in recent years, with the reduction of inflation
expectations being given particular emphasis.
The principal medium-term objective of fiscal policy remains
to strengthen budgetary positions in order to increase national
saving and complement monetary policies aimed at price stability.
As a general matter, greater efforts have been made in recent
years to limit the growth of public expenditures and to improve
the efficiency of tax regimes. Nevertheless, budgetary
developments in individual countries continue to be strongly
affected by the impact of cyclical trends, as well as (in the
case of Germany) unanticipated structural changes.
13
Japan1s fiscal position strengthened further in 1990, with
the general government budget surplus (including the eguivalent
of federal, state and local budgets) increasing to an estimated
2.8 percent of GNP. Revenue growth has been boosted by continued
strong economic activity while expenditures have been restrained
in the context of a long-standing commitment to reduce public
borrowing. Monetary policy was maintained on the cautious side
m 1990 reflecting the continued economic strength and concern
about the potential inflationary implications of oil prices and
negotiations; the Bank of Japan raised the discount rate
twice during the year, from 4.25 percent to 6 percent.
Unification has dramatically changed the fiscal situation in
Germany. After recording a small general government budget
surplus in 1989 (0.2 percent of GNP), the overall public sector
account (including the former GDR) moved sharply into deficit in
1990 (2.3 percent of GNP). Net public sector borrowing rose to
an estimated 3.1 percent of GNP in 1990. The shift reflects the
impact of both unanticipated expenditures associated with
unification as well as the final stage of Germany*s multi-year
tax reform program. Introduction of German Economic and Monetary
Union m mid-1990 (including the conversion of Ost Marks to
Deutschemarks) makes it difficult to interpret trends in the
monetary aggregates. Nevertheless, the Bundesbank's policy
orientation was one of caution in the face of the perceived
inflation potential of unification; the discount rate was raised
from 6 to 6.5 percent in early 1991 and market interest rates
rose appreciably at both the long and short ends.
The French authorities continued to pursue a policy of
monetary restraint in order to preserve French export
competitiveness against the background of the existing exchange
rate parities within the European Monetary System's Exchange Rate
Mechanism (ERM). Fiscal policy remained cautious and, on
balance, mildly contractionary. In Italy, a trend toward lower
interest rates persisted until the latter part of the year when a
return to higher rates became necessary to preserve the lira's
ERM parities. On the fiscal side, the authorities remained on a
course of slow consolidation in an effort to continue to slow the
rise in the burden of public debt and reduce a central government
deficit that now stands at about 11 percent of GNP.
The United Kingdom's commitment to monetary restraint was
given added impetus by its October 1990 entry into the ERM, and
by the priority this accords to reducing substantially the U.K.'s
relatively high inflation rate. The central government budget"
surplus remained broadly unchanged in 1990 (as a percent of GNP)
as the government persisted with its program of medium-term
fiscal restraint in support of its basic inflation objectives.
Monetary conditions remained generally tight in Canada as well,
reflecting concern about the potential inflation implications of
14
several years of robust domestic demand growth. Fiscal policy
continues to be formulated in the context of a medium-term effort
to reduce the relatively large public sector deficit.
2._Economic Trends Outside the Industrial Countries
The economic performance of the developing countries (LDCs)
generally deteriorated in 1990 and regional disparities widened
relative to 1989. Real GNP growth (weighted average) slipped to
just below 1 percent from an estimated 3.1 percent in 1989
reflecting the industrial country slowdown as well as the
structural shifts underway in Eastern Europe and the unsettled
situation in the Middle East. The median inflation rate moved up
slightly to about 10 percent, though rates in a handful of
individual countries were extremely high. The combined LDC
current account deficit rose marginally: the fuel exporting
countries moved into surplus for the first time since 1985 while
the non-fuel exporters experienced a higher deficit.
The LDC growth slowdown in 1990 reflected reduced growth in
each of the major geographic regions. Asian economy growth
slipped slightly to about 5 percent but was still by far the best
regional performance. A rebound of Korean growth helped maintain
aggregate growth in the four Asian NIEs at about 6-1/2 percent
despite weaker expansion in Taiwan. The African economies
continued to expand, though at a more moderate 2 percent
estimated pace; the sub-Saharan economies maintained positive
but weaker, GNP growth but experienced a further decline on a o e r
capita basis.
p
The European, Middle Eastern and Latin American LDCs
contracted on average in 1990, particularly those with debt
servicing difficulties. Despite the benefits accruing to some
oil producing countries, economic activity in the Middle East
region was strongly affected by the commercial and financial
disruption of the Iraqi invasion of Kuwait. Most of Latin
America was adversely affected by deteriorating terms of trade,
although the oil producing countries were net beneficiaries.
Mexico turned in its second consecutive year of real growth in
the 3 percent range, and the Venezuelan economy rebounded
strongly from its deep recession of 1989. In other cases, such
as Brazil, transitional weakness in 1990 reflected in part the
implementation of stabilization policies designed to address
long-standing underlying economic imbalances.
The overall inflation picture in the LDCs continued to be
seriously skewed by very high recorded rates in a relatively few
larger economies. On a GNP weighted average basis, LDC inflation
is estimated to have remained near its 1989 level of about 105
percent. Latin American and European LDCs continue to have the
most serious inflation problems, as was the case during the
15
entire decade of the 1980s. Argentina and Brazil both had annual
?IoSa9!»,COnf “eruPiiCe inflation in the range of 2,500 percent in
:l990, though m both cases a deceleration was emerging by year
enc**
Ifostern Europe, price reforms, a large monetary
overhang, and higher oil prices produced a surge in measured
inflation rates in some countries.
However, the inflation picture was less striking elsewhere.
As noted above, the median LDC inflation rate is estimated to
have been closer to about 10 percent in 1990, or little changed
H
1?«9. Indeed, preliminary estimates suggest that weighted
inflation rates may have declined somewhat in Africa, Asia, and
the Middle East in 1990.
The overall current account position of the LDCs changed
relatively little in 1990, with their aggregate deficit
increasing from $21 billion to about $27 billion. However, some
substantial regional divergences emerged, largely reflecting
developments in commodity markets, especially for oil. The major
oil exporters moved from rough balance in 1989 to a surplus of
about $15 billion as export volumes and prices rose.
Meanwhile, the combined current account deficit of the nonoil LDCs increased, mainly reflecting a deterioration in their
terms of trade (import price increases in excess of export price
increases) and weaker demand growth in key export markets. The
aggregate surplus of the four Asian NIEs declined for the third
consecutive year, to about half of the $30 billion peak surplus
recorded in 1987.
(Of the approximately $6 billion decline in
the NIEs' trade surplus in 1990, about $4 billion was accounted
for by the group's declining bilateral surplus with the United
States.) Eastern Europe's trade deficit widened in 1990 as a
result of higher oil bills and import growth? thus, higher net
transfer receipts notwithstanding, the region's current account
moved into a small deficit.
16
PART III:__ PROJECTED DEVELOPMENTS IN 1991 and 1992
The global economic expansion underway since 1983 is
H
continue this year — albeit at a slower pace than in
1990
and to gain renewed strength in 1992.
As usual, the
global trend will mainly reflect developments in the industrial
•l e s ' w ^ ere aggregate real GNP growth of around 1 percent in
1991 is expected to pick up to the 2-1/2 to 3 percent range in
1992. The LDCs are expected to record modestly improved growth
this year (just under 1 percent) and return to about a 3-1/2
percent rate in 1992.
Consumer price inflation in the industrial
countries this year should ease slightly from 1990*s 5 percent
rate and then drop back to the 4 percent range in 1992.
Average
inflation in the LDCs is forecast to decline substantially in
1991 and 1992 as rates are brought down in Eastern Europe and
Latin America.
.
World trade growth (in real terms) should continue to run at
its historical rate of just over twice the pace of output growth
or 2-1/2 percent in 1991 and around 5-1/2 percent in 1992.
Thus*
international trade will remain an important source of stimulus
and support for output growth.
The continued cyclical
divergences among the major economies should support some further
current account adjustment this year, particularly in terms of
GNP.
Wi t h these divergences expected to narrow in 1992, however
some renewed widening in key current account imbalances cannot be
ruled out.
Projections for Foreign Industrial Economies
A. Economic Growth
Economic expansion is expected to continue, albeit at a
slower aggregate pace, in industrial countries outside of the
United States in 1991 and to regain some of its m o mentum in 1992.
The m ajor cyclical divergences which emerged clearly in 1990 are
forecast to persist this year but then narrow significantly in
1? 92,
Specifically, the current recession in the U.K. and Canada
should give w ay to recovery later this year and in 1992 while the
rapid growth rates observed in Japan and Germany in 1990 give way
to a more moderate pace this year and next.
There are likely to be some significant shifts in the
composition of growth in the industrial countries this year and
next.
We a k (or negative) private consumption growth in the
recessionary economies in 1991 is expected to pull the industrial
country average to well below rates recorded during the expansion
to date.
This applies as well to private investment growth,
which for the past several years has been a principal source of
aynamism in the industrial economies.
As recovery takes hold in
the English-speaking countries in 1992, however, the overall
picture is likely to "normalize," with private consumption and
17
investment rates trending back toward a level more consistent
with historical experience.
International trade activity should continue to track
closely wi t h industrial country output trends.
Trade volume
growth is therefore forecast to slow somewhat further this year
but then pi c k up again in 1992.
Given the technical assumption
of stable oil prices and exchange rates, current account
developments should be driven mainly by cyclical trends and the
shifts in competitiveness that have already been observed.
Thus,
the relatively we a k economies should see reduced external
deficits this year, as should Germany given its special
circumstances.
The expected return to a more uniform growth
pattern in the major economies in 1992, however, suggests that
substantially less adjustment may be in prospect? indeed, a lull
in the foreign adjustment process, or even a reversal in some
cases, cannot be ruled out.
Japanese growth is forecast to slow this year but should
nevertheless remain the highest among the Summit countries.
Consumer spending will probably ease relative to 1990, but will
continue to get support from high employment and wage growth, as
well as a post-war improvement in confidence.
Investment
spending is likely to slow substantially in 1991, the product of
a squeeze on profits, higher capital costs, and several years of
very strong investment activity.
These trends, coupled with
continued restraint on public sector spending growth, will pull
domestic demand off its recent 6 percent growth path, though it
should continue to outstrip GNP growth by a small margin.
GNP
prospects for 1992 would appear to be broadly similar, with
private consumption and investment maintaining growth rates in
about the ranges likely to be observed this year.
Over the two
year 1991-92 period, therefore, annual GNP growth in the 3-1/2 to
4 percent range is anticipated.
Prospects for the German economy are more uncertain than at
any time during the past decade, with the still insufficiently
understood costs and effects of unification being felt throughout
the economy.
Nevertheless, with the passage of some of the
special growth-boosting factors at play in the domestic economy
last year, German GNP expansion is likely to slow during the
course of the next 7 quarters.
Private consumption growth is
expected to be contained by the absence of the stimulus of last
year's tax cut, the new tax increases to finance unification, and
the generally heightened level of uncertainty among households.
Plant and equipment investment growth is also likely to ease
after two consecutive years of impressive strength, though
unification-related construction demand (both residential and
business) will provide continued support.
Overall GNP growth
averaging about 2-1/2 percent this year and next can
realistically be anticipated.
18
Indications thus far suggest that 1991 will be an important
f i n c h e d ° ? Q Q n ar f°r H
th? Sil£jL and C a n a d a - Both economies
finished 1990 on a contractionary note, and while some renewed
t m »**11 m o m f ntum should develop over the next few quarters, latest
IMF projections suggest that GNP growth for 1991 as a whole
coiild be moderately negative.
Domestic demand growth is likely
to be weak e r than GNP as high interest rates and strained profit
positions will continue to put pressure on investment spending
while household budget consolidation (and a tax increase in ?
Canada) limits private consumption to only minimal growth.
The
recovery forecast for the latter part of this year is expected to
gain some strength in 1992.
Contributing factors should be a
^e^ ri . t ° /P ° Sltlve investment growth (aided by a more supportive
inflation/monetary environment) and some rebound of consumer
spending (partly reflecting improved s e n t i m e n t ) .
T^ e
industrial countries (including France and Italy)
are expected to follow a pattern of slower growth in 1991 givinq
way to renewed, though moderate, strengthening in 1992.
Most of
?neK^+-KC On°m:LeS4.®ntered 'l'991 with a significant loss of momentum
in both consumption and investment growth, reflecting the
slowdown in the English-speaking countries, the effects of high
real interest rates, and the uncertainty generated by the Persian
Gulf crisis and the oil price spike.
Consumer and business
confidence fell sharply throughout continental Europe during the
second half of 1990, and made itself felt in w e aker order books
and employment data.
However, the restoration of growth in the recessionary
economies during the course of this year, coupled with an
improved outlook in the wake of the Persian Gulf war, should
support stronger growth during the latter part of this year and
into 1992.
The overall pattern of private consumption and fixed
investment is thus likely to be a dip to a lower rate of growth
tnis year followed by a rebound in 1992.
An average real GNP
growth rate of about 2 percent in 1991 should be followed in 1992
*>y a return to roughly last year's 2-1/2 percent rate.
B. E x t ernal Account Developments
The g e n e ^al Pattern of major country growth forecast for
1991
relatively strong growth in the main surplus countries
and relatively wea k growth in the deficit countries — should
support further reductions in the largest trade and current
account i m b a l a n c e s .
In Japan, export volume growth is expected to slow further
this year reflecting demand weakness in key foreign markets.
However, Japanese import absorption is also likely to slow due to
19
CURRENT ACCOUNT SITUATION IN PERSPECTIVE
The net current account surplus of the six foreign Summit
countries (i•e* > excluding the United States) h a s be e n
reduced from $123 billion in 1986 to an estimated $ 2 2
billion in 1990.
Divergences in individual country
imbalances measured as a percent of GNP have also been
sharply reduced.
In 1986 the United States had ai current
account deficit equivalent to 3.4 percent of GNP? at the
same time, Germany had a surplus of .4*4 percent and Japan a
surplus of 4.3 percent H By last ye a r the u. S ¿ deficit h ad
been cut to about 1.8 percent of GNP/: w h i l e the Japanese
and German surpluses were reduced to 1.2 and 2.9 p ercent of
GNP/ respectively.
the less robust pace of domestic demand, and the technical
assumption of relative stability for oil prices will eliminate a
very important reason for last year's higher import bill.
These
factors are expected to limit the scope for further trade surplus
reduction in 1991, even though in volume terms the expansion of
imports will continue to exceed that of exports.
A n y correction
that does emerge may therefore be relatively small (especially
compared to the large adjustment observed last y e a r ) , and a
modest increase in the Japanese trade surplus cannot be ruled
out.
The current account, moreover, will remain strongly
influenced by the rising deficit on the invisibles account
(services and t r a n s f e r s ) . In particular, Japanese official
transfers will rise sharply on a one-time basis in connection
with contributions in support of coalition efforts in the Persian
Gulf.
Thus, the current account surplus may well increase
marginally from its $35.8 billion level of 1990.
Developments in 1992 should reflect a number of factors.
Import growth should gain support from the anticipated
acceleration of domestic demand, while exports benefit from the
recovery of demand growth in foreign markets.
However, given the
still substantial gap between imports and exports, a reduction in
the Japanese trade surplus will require total imports to grow at
least 25 percent faster than total exports.
Due in part to the
inevitable uncertainty about price developments in 1992, it is an
open question whether this differential will obtain.
Changes in
the invisibles account are expected to normalize after this
year's unusual developments:
a continued increase in investment
income earnings balanced against further growth in tourism
outflows.
Overall, a moderate nominal increase in the Japanese
current account surplus is anticipated? in terms of GNP it may
move slightly above the 1-1/2 percent mark.
20
*c°°“nt devel°P®ents in Germany will continue to be
unification as wfi?y he strV ctural shifts in trade arising from
transfers
on
as .som? ,lmP ? rtant developments in official
transfers.
On the trade side, imports will reflect domestic
demand growth which should remain solid (albeit less strong than
need assooi
19 9 0 ) ' as wel1 as the incremental import
need associated with restructuring in the former GDR.
Exports
are likely to be limited by both weaker growth elsewhere in
in addif?oneli aa *5® t£a<i? diverting effects of unification.
H H H H H
trade trends in the former East Germany (included in
the balance of payments accounts since 1990) will have an
■
H
B
The Eastern states registered a large surplus
¡S|^Gh 3 D
H
collaP sed (due to a switch in sourcing to the
¡ H B |
exports remained fairly steady.
This year, however
east German exports to the CMEA countries are expected to fail
t° the introduction of trade on a hard currency
basis.
Finally, the invisibles deficit will be boosted this year
support, as well as assistance for the U S S R and
debt relief for Eastern Europe,
in aggregate, the German current
account surplus is expected to decline substantially this yea r to
under 1 percent of GNP (versus almost 3 percent in 1990). Y
Determinants of trade account developments in 1992 are
l
a
H
H
H
H | anticipated revival of foreign demand
growth in 1992 (especially among Germany*s major European tradina
partners); a partial fading of Germany's unification-related
import surge; and, the assumed absence of any special
developments in oil prices or exchange rates.
On the current
account, investment income growth will be balanced against the
continuation of transfers at relatively high levels.
Thus
i«r?Q Q o ' S t ^ ade and current account adjustment is likely to slow
m 1992, and may well reverse.
T£ e U n ited Kingdom is forecast to record trade and current
account deficits in 1991-1992 that are appreciably lower than
those recorded in the 1988-1990 period.
The pronounced weakness
or u .k . demand this year, coupled with the relative strength of
demand abroad, should both support British export growth and
compress import growth.
However, this adjustment impulse is
expected to lose some force in 1992 with the narrowing of the
R
H
d f-Yer9 ence between the U.K. and key trading partners.
Given the linkage of the pound to the European Exchange Rate
M e c h ^ i s m , the U.K.*s relative inflation performance will have
important implications for its competitiveness in future years*
current inflation differentials would imply a loss of British
competitiveness3 in import-competing and export sectors.
Thus
the British trade and current account deficits are forecast to
decline substantially this year in both nominal terms and as a
percent of GNP, but then increase again slightly in 1992.
21
■
relatively small current account deficit in France is
expected to change little this year but decline in 1992 due in
large part to cyclical factors and the relatively solid
competitive position of French exports. Prospects for
improvement of trade and current account deficits in Italv remain
constrained by relatively high unit labor cost increaSifT
M
Itallan demand slowing relative to some of its
k ^ i £?dlng p f t n e r s / modest declines in both deficits in 1 9 9 1
and 1992 cannot be ruled out.
. P 1®
industrial countries are not expected to
register any dramatic external account shifts in the 1991-92
period; the aggregate current account deficit of the group is
forecast to remain at around the $30 billion level o f 1990.
bvS| i s t M i i ^ 0ntR ^ h o° !}ave
? ingle largest deficit, followed
b y AMStj^lia.
Both Sweden and Finland have turned in
^ ^ n^ ? l l y .higherJdeficits recently, the prod u c t of both
|h § H m S| Prices and relatively strong domestic demand growth;
in neither case is a quick turnaround seen as likely.
Natural
ga® Z XP ° ? f haVe P rotected the Netherlands from the oil price
8 M B
have been buoyed by German demand; as a
H
i
the Dutch current account surplus has strengthened
and
should expand further, given slowing domestic absorption. '
C.
Policy Directions
H § E |
a g e n e fal matter, the industrial countries continue to
fiscal policy course directed to improving the strength
and balance of the public finances over the m e d i u m term.
K M M M B
policies remain generally geared toward expenditure
¡■h B B D B
.e doss °f momentum of the current expansion
notwithstanding.
Fiscal restraint is seen increasingly as an
essential complement to a monetary policy approach geared
especielly toward price stability and the preservation of
national competitiveness over the longer term.
fbe immediate situation in Germany is obviously very
r-oi,,?r e n t 'J-refleCt:i'ng as H does the compelling and unanticipated
requirements associated with unification.
Years of successful
51 -? ..consolidation cut the general government budget from a
H H i l B 3 -7 Percent of GNP in 1982 to a surplus of 0.2 percent
of GNP m 1989.
However, heavy unification-related costs,
coupled wi t h long-planned tax relief, overwhelmed additional
growth-generated revenue in 1990 and boosted the deficit sharply
about 2.1 percent of GNP.
A combined federal, state and
government deficit (all-Germany) of about DM 140
million (or about 5 percent of GNP) has been officially targeted
i°r 1991, and additional tax measures were recently taken to
deftoT?cthiS ° ^ eCtiY ® ‘ There are good prospects for declining
uericits over the medium term, but continued large borrowing
needs can nevertheless reliably be anticipated.
22
■■■■■■r
6
V
e
n
u
e
B
Budget surpluses in Japan continued to gr o w in 1990
the
aa well as a c a r i o u s
approach on the expenditure side.
Between 1983 and 1990 the
percent H
H
I
■
M B H H B
m o v e d .from a deficit equivalent to 3.6
H
■
surplus equivalent to an estimated 2.8
f G N ? ‘, The central government budget deficit (excluding
the large social security surplus) fell to I low level in ?990
9
Projections for Non-Industrial cauni-Hoo
to B
M
B
I
f°r the less developed countries continue
v , ^ T ™ tier*.flgillflCantly alon<3 regional lines.
As a group
LDCS are expected to show m o d e s t l y bettlr output
growth this year, accelerating to a higher level in 1992
PThe
aggregate LDC current account deficit is forecast £ o w i d 4 n
substantially in 1991 and 1992 due mainly to reconstruction and
SitSSUST*
ln
”Udl*
« « moving
ieSai“ ""
& aia? i IEs are l i k e l y to continue as the LDC growth
leaders
remaining on a path of steady 6 percent aggregate g r o w t h
driven less by exports than during the 1980s.
Mo s t countries In
the region will, benefit from the assumed stability of oil prices
at around their pre-war level as well as, in 1992, the forecast
growth acceleration in the industrial countries?
o ther A^ifn
should also benefit from the (at least partial)
region?11 0 ” ° f
erruP ted worker remittance flows from the Gulf
Import volume growth that remains in excess of export v o l u m e
growth is forecast to contribute to a further redaction in the
current account surplus of the NIEs this year.
However a
portion of this correction may be reversed in 1992 as
'
some£h»he? h ng growth in trading partner countries narrows
Tniiu
ihe c y c l }cal differential between the NIEs and the
Industrial countries.
.. A ^ 9 r®9ate growth in Latin America is expected to improve
stabili^iJ
* contract}on as the benefits of market-oriented
1 Zf t x ?n P ro9 ra®s begin to emerge.
With effective
implementation of these measures, inflation could be
^“^ ^ n t i a l i y reduced and real GNP growth restored to the 3
¡¡¡■EH H B H
1992 • For a number of countries, the adoption
s L u ? ^ reh? n ! 1Ve ad3Ustment measures has cleared the way for
o ^ ? i f?'C an^ debt reduction agreements and promoted private
capital inflows and a return of flight capital.
23
Latin America's aggregate current account deficit is
expected to narrow slightly in 1991-92 relative to the higher
level of 1990.
While the earnings of oil p r o d ucing countries
will decline, those of other commodity exporters should improve,
and recovery in North America should support bett e r export
performance.
Economic prospects for the Middle East remain highly
uncertain in light of continued political unrest and the regional
effects of the U.N. mandated economic sanctions against Iraq.
With numerous countries likely to recover only slowly from direct
war damage and the disruption of important commercial ties, the
regional economy as a whole is expected to contract somewhat
further this year.
However, growth prospects for 1992 would
appear substantially better given the expectation of
reconstruction activity, renewed oil production in some
countries, and restoration of some traditional commercial links.
Reconstruction demands, resumed growth, and relative oil
price stability will, however, put pressure on external accounts.
Thus, after registering a roughly $12 billion surplus in 1990,
the aggregate Middle East current account position is likely to
move back into deficit this year and next.
Growth m Africa was limited last year in part b y negative
terns of trade effects (higher oil prices coupled with lower
prices for important commodity exports) as well as the slowdown
in world trade growth.
Positive elements of the picture for 1991
and 1992 are the assumed stability of oil prices, demand recovery
outside the region, and a possible modest recovery in non-fuel
commodity prices.
Overall output growth is therefore expected to
pick up moderately to the 3 to 4 percent range through 1992.
The current account improvement recorded for Africa as a
whole in 1990 was due in large measure to earnings gains by oil
exporters.
Market developments assumed for this year and next,
however, will reverse much of this improvement through negative
terms of trade effects, in addition to the negative effect of
slower w orld trade growth.
24
The countries of Eastern Europe are in a state of
fundamental economic and political transition and will remain so
for many years.
Far-reaching institutional and structural
changes are being implemented against the background of a
vulnerable economic situation characterized by large underlying
imbalances, both domestic and external.
Together wi t h
substantial revisions in basic data for these economies, this
makes the near-term forecasting challenge more than usually
difficult.
For most of Eastern Europe, output is likely to
continue to contract this year, though at a muc h slower pace than
in 1990.
Contributing factors are expected to be:
the
transition to hard currency trade arrangements? financial
restraint to combat inflation pressures? and, the ongoing s hake
out in the manufacturing sector.
Pursuit of appropriate policies
will help arrest the downturn and contribute to a moderate output
recovery in 1992.
A further increase in the combined current account deficit
of the Eastern European countries in 1991-92 seems virtually
assured.
Key elements will be the fact that hard currency
imports are being substituted for internal CMEA trade flows in
manufactured goods, and the renegotiation of oil trade
arrangements with the USSR guarantees a higher oil bill even at
current w orld prices.
25
PART IV:
POLICY ISSUES
The industrial
@FedFRASER