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Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 3, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,025 million of 13-week bills to be issued
June 6, 1991 and to mature September 5, 1991 were
accepted today (CUSIP: 912794XE9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.57%
5.60%
5.59%
Investment
Rate_____ Price
5.74%
98.592
5.78%
98.584
5.76%
98.587
$1,270,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 10%.
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
35,655
27,770,280
24,115
38,590
42,330
20,650
1,637,760
54,585
8,870
34,515
24,420
601,740
853.325
$31,146,835
Accented
35,655
8,686,780
24,115
38,590
40,330
19,750
160,260
15,585
8,870
34,515
24,420
82,730
853.325
$10,024,925
Type
Competitive
Noncompetitive
Subtotal, Public
$27,275,135
1.567.110
$28,842,245
$6,153,225
1.567.110
$7,720,335
2,253,530
2,253,530
51.060
$31,146,835
51.060
$10,024,925
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $91,940 thousand of bills will be
issued to foreign official institutions for new cash.
^PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
June 3, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,001 million of 26-week bills to be issued
June 6, 1991 and to mature December 5, 1991 were
accepted today (CUSIP: 912794XQ2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 68%
5. 72%
5. 71%
Investment
Rate
5.95%
5.99%
5.98%
Price
97.128
97.108
97.113
Tenders at the high discount rate were allotted 28
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
31,995
24,772,100
16,295
36,005
37,105
26,525
1,737,455
39,515
6,705
41,245
17,480
606,865
597.655
$27,966,945
Accepted
31,995
8,563,730
16,295
36,005
37,105
25,525
367,455
20,915
6,705
41,245
17,480
238,865
597.655
$10,000,975
Type
Competitive
Noncompetitive
Subtotal, Public
$24,183,625
1.143.980
$25,327,605
$6,217,655
1.143.980
$7,361,635
2,350,000
2,350,000
289.340
$27,966,945
289.340
$10,000,975
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $511,360 thousand of bills will be
issued to foreign official institutions for new cash.
FOR IMMEDIATE RELEASE
JUNE 4, 1991
CONTACT:
Barbara Clay
202-566-5252
REVIEW OF CLARKE'S FINANCES COMPLETED
At the specific request of Robert L. Clarke, the Comptroller of
the Currency, Treasury Department ethics officers and lawyers
have reviewed his activities and holdings reflected in his
financial disclosure statements, focusing on several specific
issues, and have concluded that the circumstances of his
financial investments and activities did not give rise to any
conflicts of interest.
We urge the Senate to act expeditiously and hold a confirmation
hearing on the renomination of Robert Clarke for the position of
Comptroller of the Currency.
oOo
NB-1305
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 2:30 P.M.
June 4, 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 $20,000 million, to be issued June 13, 1991.
This offering will provide about $1,300 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $18,699 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, June 10, 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
$10,000 million, representing an additional amount of bills
dated
March 14, 1991
and to mature September 12, 1991
(CUSIP No. 912794 XF 6), currently outstanding in the amount
of $8,748
million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 10,000 million, to be
dated
June 13, 1991
and to mature December 12, 1991 (CUSIP
No. 912794 XR 0).
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
June 13, 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 $ 764
million as agents for foreign and international
monetary authorities, and $ 4,341 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-13Q6
TREASURY'S 13-, 26-, AMD 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, m
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
Department of the Treasury • Washington, D.c. • Telephone 566-204
(Corrected
Version)
FOR IMMEDIATE RELEASE
June 5, 1991
CONTACT:
ROBERT LEVINE
(202) 566^2041
STATUS OF NEGOTIATIONS OF TAX TREATIES AND TAX
INFORMATION EXCHANGE AGREEMENTS
The Treasury Department announced today the countries with which
it is currently engaged in tax treaty and tax information
exchange agreement (TIEA) negotiations and invited comments from
interested persons.
Comments should be submitted in writing to
Philip D. Morrison, International Tax Counsel, Room 3064,
Treasury Department, Washington, DC 20220.
This release updates
Treasury News Release NB-935 of August 30, 1990.
m
INCOME AND ESTATE TAX TREATIES
A.
Treaties entering into force since August 1990:
Finland
India
Indonesia
Spain
Tunisia
B.
force:
Treaties ratified by the United States but not yet in
Germany
Multilateral Convention on Mutual Administrative Assistance
in Tax Matters
C.
Active Negotiations? Meetings Scheduled
Canada - negotiation of a protocol to existing treaty to
continue in Washington in late summer.
The Netherlands - discussions June 26-27 in the Hague to be
followed by another round of negotiations November 18-22 in
Washington.
Portugal - second round scheduled July 8-12 in Lisbon.
Venezuela - second round anticipated August or October 1991,
Caracas.
Mexico - fourth round August 26-30 in Washington.
Czechoslovakia - second round September 23-27, Prague.
Denmark - renegotiation tentatively scheduled for November,
Copenhagen.
NB-1307
-
D.
2-
Other Active Negotiations? No Meetings Scheduled
Bangladesh - correspondence on open issues.
Barbados - protocol to income tax treaty almost completed.
Belgium - correspondence on open issues.
Bulgaria - negotiations held May, 1990 and March, 1991?
correspondence on a few open issues.
France - further meeting expected in fall, 1991 to discuss
protocols to income and estate tax treaties.
Germany - protocol to estate tax treaty under discussion.
Israel - protocol to pending treaty nearing completion.
Italy - protocols to income and estate tax treaties, meeting
possible fall, 1991.
Pakistan - negotiation of a new treaty likely to be completed
by correspondence.
Sweden - text of new treaty undergoing final review.
Sri Lanka - correspondence on open issues.
Switzerland - new treaty under negotiation; nothing
scheduled.
Taiwan - second round possible late 1991.
Thailand - correspondence on open issues; another round of
negotiations likely this year.
Trinidad & Tobago - correspondence on open issues.
Turkey - correspondence on open issues.
USSR - correspondence on open issues.
Zambia - correspondence on open issues.
E.
Negotiations Initiated? No Meetings Scheduled
Austria
Brazil
Ireland
Kuwait
Malaysia
Singapore
Yugoslavia
II.
TAX INFORMATION EXCHANGE AGREEMENTS
A.
In Effect
Barbados (effective November 1984)
Bermuda (effective December 1988)
Costa Rica (effective February 1991)
Dominica (effective May 1988)
Dominican Republic (effective October 1989)
Grenada (effective July 1987)
Jamaica (effective December 1986)
Marshall Islands (effective March 1991)
Mexico (effective January 1990)
St. Lucia (effective April 1991)
Trinidad & Tobago (effective February 1990)
Department of the Treasury • Washington, D.c. • Telephone 566-2041
June 3 ,
1991
STATEMENT BY
THE HONORABLE DAVID C. MULFORD
UNDER SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON DEFICITS, DEBT MANAGEMENT
AND INTERNATIONAL DEBT
COMMITTEE ON FINANCE
UNITED STATES SENATE
It is a pleasure to provide you with a written statement on
the critical interactions between debt restructuring and
environmental conservation in developing countries.
Environmental considerations play an increasing role in economic
policy decisions, since sustainable growth depends upon
appropriate use of scarce environmental resources.
The U.S. Government has moved to provide potentially
significant resources for the environment in Latin America and
the Caribbean.
On June 27, 1990, President Bush announced the
Enterprise for the Americas Initiative, which aims to support
economic growth in Latin America and the Caribbean through
increased trade, investment flows, and official debt reduction.
The Initiative will be a major force for environmental action.
Increased trade, investment, and growth will ease the pressure on
scarce resources and permit more attention to pressing
environmental problems.
The Initiative also contains specific
programs aimed at promoting environmental conservation in the
region with the participation of non-governmental organizations.
Debt Reduction under the Enterprise for the Americas Initiative
Under the Enterprise for the Americas Initiative (EAI), the
United States will reduce substantially the bilateral official
debt obligations of Latin American and Caribbean countries that
have strong economic and investment reform programs.
In last
year's farm bill, the Administration gained authorization to
reduce PL-480 debt for qualifying countries.
Under the
2
legislation, countries qualify for debt reduction if they: (1)
have in effect, or in exceptional circumstances are making
significant progress toward, International Monetary Fund reform
programs and, as appropriate, World Bank adjustment loans; (2)
have in place major investment reforms in conjunction with an
investment sector loan from the Inter-American Development Bank
(IDB) or are making significant progress toward open investment
regimes; and (3) where commercial bank debt is a large share of
outstanding debt, have negotiated agreements to reduce debt and
debt service, as appropriate.
The Administration is currently
seeking authorization to reduce AID debt based on the same
criteria.
Many countries currently can make only minimal or no
principal payments and are also forced to reschedule through the
Paris Club a significant portion of interest payments.
The
rescheduled interest is capitalized — added to the stock of debt
— thereby increasing debt service obligations.
Over time,
reschedulings can significantly increase the stock of debt,
aggravating the disincentives to trade and investment.
Debt reduction under the Initiative will change this
dramatically.
The stock of concessional PL-480 and AID debt will
be substantially reduced at the outset.
New dollar payments
will be at or below the level of payments currently expected from
these countries based on their past payment levels and economic
circumstances.
The extent of debt reduction will be determined
on a case-by-case basis through the National Advisory Council
(NAC). Moreover, new dollar payments on this reduced debt will
go directly to retire principal. As a result, a country's
concessional debt to the United States could be eliminated within
a period ranging from 5 to 20 years.
This mechanism will
significantly benefit debtor countries by making debt burdens
more manageable, eliminating the debt overhang, and improving
investor confidence. As a creditor, the U.S. government would be
assured of repayment of a realistic sum.
This approach is a significant improvement over the
rescheduling process in other ways as well.
The relief from
scheduled payments through EAI debt reduction is permanent, while
the Paris Club ordinarily provides cash relief only on an annual
basis. Reschedulings cannot be relied upon as routine methods of
relief far into the future.
The certainty of sharply reduced
payment obligations under the EAI can provide a major benefit for
debtor countries weary of continual renegotiations, permitting
them to focus on the priority needs of domestic growth and
development.
Environmental Aspects of EAI
The debt reduction aspect of the Initiative includes
specific provisions to support environmental activities in the
3
Americas.
Interest on the new, reduced debt will be paid in
local currency if a qualifying country has entered into an
Environmental Framework Agreement establishing an Enterprise for
the Americas Environmental Fund into which these interest
payments would be deposited.
This encourages a commitment to
allocate domestic resources to the environment in exchange for
significant debt reduction.
The Environmental Funds will be
administered by local committees — composed of one or more host
country and U.S. government representatives, and representatives
of local non-governmental organizations, who will be in the
majority.
A public/private Environment for the Americas Board is
being established in Washington to review the implementation of
this element of the Initiative.
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.
With a limited amount of resources, we believe that
this program can make a significant contribution 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 the local committees, we can
promote a partnership that will help these countries devote
greater attention to the protection and preservation of their
invaluable environmental resources.
Although the local currency payment will be in addition to a
country's expected hard currency payment, it would not be a major
burden for participating countries in the context of a
significant reduction of their debt stock.
Furthermore, we are
prepared to consider alternative payment structures, as
appropriate, to meet individual countries' financing
capabilities.
In addition, the Administration has taken the lead in
promoting debt-for-nature swaps with official debt.
Debt-fornature swaps are an effective way to transform limited hard
currency resources into substantial environmental/conservation
commitments by debtor governments.
In a traditional debt-fornature swap, an environmental organization purchases a country's
debt paper at a discount and relinquishes it to the country's
Central Bank in exchange for an environmental commitment.
Such
commitments can include the creation of a nature preserve or
natural park, specific policy actions, or provisions of local
currency — often in the form of bonds — to local non-profit
groups to carry out environmental projects.
In order to facilitate debt-for-nature, debt-fordevelopment, or debt-for-equity swaps in qualifying countries,
the Administration is seeking authority to sell or cancel a
portion of Export-Import Bank loans and Commodity Credit
4
Corporation (CCC) assets acquired through CCC's export credit
guarantee programs.
Qualification for sale of Eximbank and CCC
debt would depend on a country's progress in implementing the
market-oriented reforms needed for debt reduction under the EAI.
In addition, countries would need to have a national debt swap
program in place.
The NAC would determine whether the necessary reforms were
in place and the portion of eligible debt, which would normally
be up to 20 percent of a country's outstanding obligations.
To
ensure that the official debt swaps do not compete with
commercial swaps, the United States would inform the debtor
nation of the amount of potentially eligible debt and secure a
commitment that the country would expand its existing swap
program.
The debt reduction provisions of the Enterprise for the
Americas Initiative were designed to help increase the incentives
for countries to undergo the reforms necessary to attract the
investment they need to grow.
By encouraging a commitment of
local currency to support the environment and promoting official
debt swaps, we can help ensure that the growth they achieve will
be sustainable.
Environmental and Social Impact of IMF and World Bank Programs
The Administration recognizes that it is crucial to
incorporate, as appropriate, environmental and poverty concerns
into reform programs supported by the IMF and the World Bank.
Increased attention to environmental and social issues in lending
by the international financial institutions will reinforce our
efforts to promote environmentally sound and broad-based
development.
We are committed to working with the Fund and Bank
to address adverse environmental and social effects of necessary
economic reforms.
Treasury has been working hard to ensure that IMF and World
Bank adjustment programs incorporate environmental and social
concerns.
In speeches at the annual meetings of the World Bank
and the IMF last September, President Bush and Secretary Brady
emphasized the importance of environmental issues.
U.S.
representatives at the spring and fall meetings of the
Development Committee of the World Bank also stressed these
points, including the need for environmental impact assessments.
We have also strongly supported IMF and World Bank steps to
address the social impact of adjustment lending.
IMF policy advice and financial support offer countries a
more orderly path toward the economic reforms needed to achieve
sustained growth and the alleviation of poverty.
There are,
however, inevitable short-term costs associated with
macroeconomic structural reforms.
The Fund has devoted much
5
attention and considerable resources to protecting the poorest
and most vulnerable segments of populations from these costs.
These efforts are showing positive results.
Virtually every Fund
program includes support for social safety-nets such as targeted
subsidies and unemployment compensation.
For the poorest
countries, IMF Policy Framework Papers (PFPs) include an
assessment of the adjustment program's effects on the poor and
steps to reduce potential negative side-effects.
The U.S.
Executive Director at the Fund continues to promote increased
attention to poverty issues in IMF programs.
IMF adjustment measures at times can have indirect effects
on environmental concerns.
At the urging of the United States,
the Fund has established a group of economists to serve as a
liaison with other organizations on environmental research and
advise the Fund on addressing environmental concerns.
With World
Bank assistance, the Fund has begun incorporating measures
consistent with environmental protection into PFPs and some
stand-by and extended arrangements.
IMF Article IV consultations
have included discussions of environmental issues.
These steps
are a significant move in the right direction, and the
Administration will continue to advocate expanded consideration
of IMF programs' environmental impact, consistent with the Fund's
mandate.
The World Bank is also making strong progress on social and
environmental issues.
In designing structural adjustment
programs, the Bank has pinpointed labor intensive growth policies
as the way to assure equitable economic development.
Job
creation is an essential ingredient in achieving broad-based
growth in developing countries.
The Bank recognizes that
structural adjustment can adversely affect the poor in the short
term through tighter government budgets and economic austerity.
To forestall this result, the Bank emphasizes the improvement and
expansion of basic social services to the poor, such as women's
health care and potable water and sanitation projects.
In
addition, to ease the effects of poverty, the Bank engages in
specifically targeted measures, such as direct transfers for food
security for households headed by elderly or handicapped people.
The Bank has increasingly integrated environmental
protection into its structural adjustment lending.
Environmental
objectives are often built into adjustment lending; four
structural adjustment loans in FY 1989 explicitly addressed
environmental issues, and there were nine such loans in FY 1990.
These programs encourage reforms to improve the management of
individual countries' natural resources.
Even where there is no
explicit environmental component, structural adjustment lending
often has positive effects on the environment.
For instance,
reduced government subsidies for pesticides will improve water
quality.
Furthermore, the Bank has recognized the need to
anticipate potential adverse environmental consequences in
6
designing adjustment programs, and to avoid undesirable
consequences through compensatory mechanisms when appropriate.
We believe that the World Bank and the IMF have been making
significant progress on environmental and social impact
assessment over the past year.
We will continue to push hard in
these institutions for rapid progress on specific issues.
Environmental Linkages and the Bradv Plan
Some NGOs have proposed broader linkages between
environmental concerns and the international debt strategy in
order to require both debtor governments and commercial banks to
facilitate debt-for-nature swaps.
In our judgment, there are two
major constraints on incorporating environmental concerns into
commercial bank debt and debt service reduction under the Brady
Plan.
First, an environmental linkage must not impede the
negotiation of commercial bank debt/debt service reduction, which
is vital to debtor countries' efforts to reform their economies
and achieve sustainable growth.
Adding independent environmental
criteria to the determination of countries' eligibility for
debt/debt service reduction could block progress in negotiating
such accords.
Debtor countries already must secure an IMF/World
Bank program, implement necessary economic reforms while
negotiating with commercial banks, and finalize financing
packages by coordinating various forms of official support.
Requirements outside IMF/World Bank programs would complicate the
process further, reducing the incentive for countries to
undertake essential economic policy reforms.
Second, it must be recognized that the United States has a
limited ability to influence negotiations carried out directly
between debtor countries and commercial banks.
The U.S.
Government is not in a position to advocate particular options or
to impose unilaterally additional conditions on the negotiations.
With these constraints in mind, Treasury has encouraged both
debtor nations and commercial banks to consider debt—for—nature
swaps as an item on the menu of options negotiated by debtor
countries and their commercial banks. While such an option might
not be appropriate for all countries, it could provide a means of
attracting participation by banks willing to contribute a portion
of their portfolio for environmental purposes.
Nonetheless,
commercial banks may consider such donations financially less
advantageous than other options under consideration.
Conclusion
The environment has been an extremely important element in
the United States' approach to economic issues in recent years.
International debt policy offers a promising opportunity for the
- 7 United States to promote far-reaching environmental protection
and preservation in debtor countries.
The Administration has worked actively toward this end by
putting forth a creative and feasible program to convert official
debt into funding for environmental programs in Latin America and
the Caribbean.
We look forward to working with Congress to
implement this program and lay the foundation for sustainable
economic growth in our hemisphere.
[TREASURY-NEWS
epartment of the Treasury • Washington, D.C. • Telephone
Contact:
Cheryl ^rispen
(202) 566-2C41
Statement by the H o n o r a b l e John E. Robson
Deputy S e c r e t a r y
The Department of the Treasury
on the A n n o u n c e m e n t of
EPA's Proposed Rule on Len d e r Liability
June 5,
1991
The EPA proposed rule a n nounced today will provide
greater certainty to bankers and o t h e r lenders, both private and
governmental, that they will not.be s u bject to Superfund liability
or to the effects of costly litigation wh e n they work with troubled
borrowers, take necessary steps to p r o t e c t the value of collateral,
provide credit to borrowers with a k n own environmental clean—up
requirement, and foreclose on d e f a u l t e d loans.
Furthermore,
this
rule
protects
the
interests
of
taxpayers in that it provides g r e a t e r certainty to governmental
entities such the Resolution T r u s t Corporation and the Federal
Deposit Insurance Corporation.
The proposal clarifies that these
agencies do not assume strict l iability under Superfund for the
imprudent acts of borrowers when they act as conservator or
receivers of insolvent financial institutions.
We are pleased that EPA, with assistance from the Office
of the Vice President and the J u s t i c e Department, has crafted a
rule that offers lenders and other security holders this improved
clarity. I believe that this proposal will significantly improve
the
lending climate
and
is a p o s itive contribution to the
Administration's efforts to fight the "credit crunch" that hinders
the economy's return to growth.
NB-1308
■2041
j4 V
.F *
!°i^i
FINANCIAL ACTION TASK FORCE
ON MONEY LAUNDERING
— 0O0—
REPORT
1990
-
1991
Paris, May 13, 1991
SUMMARY
ACCOMPLISHMENTS OF FATF-2
p.3
INTRODUCTION
p.5
I - ASSESSMENT OF THE IMPLEMENTATION,
AND ENHANCEMENTS TO THE EXISTING RECOMMENDATIONS
p.6
A - LEGAL MATTERS
p.6
B - ROLE OF THE FINANCIAL SYSTEM,
A N D INTERNATIONAL COOPERATION
p.10
II - GEOGRAPHICAL EXTENSION OF THE FATF PR O G R A M
AGAINST MONEY LAUNDERING
P.15
A - GEOGRAPHICAL EXTENSION
p.16
B - MEASURES DIRECTED AT N O N COOPERATIVE
COUNTRIES
p.20
III - FOLLOW-UP TO THE FATF
p.22
A - FUTURE ROLE OF THE TASK FORCE
p.23
B - INSTITUTIONAL A R R A N G E M E N T S
p.25
CONCLUSION
p.26
3.
ACCOMPLISHMENTS OF FATF-2
The delegations agreed to continue FATF for a period of five years, with a decision
to review progress after three years, and to reconsider the continuing need, mission, and work
program for this specialized group.
The group agreed to four ongoing tasks for FATF-3 and its successors : (1) selfreporting and mutual assessment (monitoring and surveillance) on the adoption and implementation
of FATF recommendations by all members ; (2) coordination and oversight of efforts to encourage
non-members to adopt and implement the recommendations ; (3) making further recommendations
and evaluations of counter-measures while serving as a forum for considering developments in
money laundering techniques domestically and worldwide, and for the exchange of information on
enforcement techniques to combat money laundering ; and (4) standing ready to facilitate
cooperation between organizations concerned with combatting money laundering and between
individual countries or territories.
The decision to continue was taken as part of a critical political commitment to
implementation of the recommendations each member government has endorsed. Members agreed
to continue the self-evaluation process begun in FATF-2 to measure their progress in
implementing the 40 recommendations, and, in a decision that underscores the great importance
attached to this process, the members agreed to initiate a process of mutual evaluation. The
decision was that each member would normally be subject to being evaluated on progress measures
three years after endorsing the FATF-1 recommendations.
These decisions, perhaps unique to bodies of this kind, assure the global community
that the major financial center countries are truly determined to adopt and implement effective
countermeasures against money laundering.
The self-evaluation process begun in 1991 utilized a compliance grid which
produced comprehensive evaluation of progress on legal and financial matters, although this was to
some extent subjective, given the current lack of harmonization of laws and therefore of responses.
It was encouraging that the majority of members have substantially implemented the FA TF-1
recommendations on legal matters. Substantial progress has also been made on complying with the
recommendations relative to the role of the financial system, and strengthening international
cooperation, but some countries need to make a greater effort in these matters.
FATF-3 will see a refinement and extension of the self-evaluation process, with an
emphasis that goes beyond ratification of international conventions such as the Vienna an
Strassburg convention and adoption of laws, to implementation and practice.
FATF-2 proved a useful forum for discussing the wide range of issues not yet
concluded as action recommendations, issues which will be further explored by FATF-3. The legal
issues group discussed possible refinements of existing recommendations, including those involving
predicate crimes, corporate criminal liability, mutual legal assistance, and asset sharing. Similarly,
the financial cooperation group, which included special presentations by financial enforcement
officials of money laundering typologies and investigative practices, took note of the increasing use
of non-bank and non-traditiorial financial institutions and other businesses and professions to
convert the proceeds of drug and other crime. The group noted the need to continue monitoring
new money laundering practices, and called for further work on developing a common action plan
with respect to non-bank financial institutions and other businesses and professions.
A third working group charged with planning the future of FATF, which proposed
an extension of the mutual evaluation process, also developed the plan of succession to the FATF
Presidency, and outlined procedures for establishing a Secretariat within an existing international
organization. The recommendation was that FATF Presidency be supported in the future by a
steering group, and would work with and through this Secretariat. The members agreed to
negotiate the creation of a specialized Secretariat with the Organization for Economic Cooperation
and Development (OECD).
Finally, FATF-2 proposed that the organization, acting through its Secretariat, and
drawing upon the expertise of its members, should attempt to help guide the provision of technical
assistance between members or to non-members, upon request by either, subject to the availability
of fesources among the members who agree to provide such assistance.
5.
INTRODUCTION
In July 1989, in Paris, the Heads of State or Government of the seven major
industrialized countries, and the president of the Commission of the European Communities,
convened a Financial Action Task Force, the FATF, under French presidency, with the aim of
fighting money laundering. In addition to summit participants (United States, Japan, Germany,
France, United Kingdom, Italy, Canada, and the Commission of the European Communities), eight
countries (Sweden, Netherlands, Belgium, Luxembourg, Switzerland, Austria, Spain and Australia),
joined the Task Force in order to enlarge its expertise and also to reflect the views of other
countries particularly concerned by, or having particular experience in the fight against money
laundering, at the national or international level.
In April 1990, the Task force issued a report with a comprehensive progam of forty
recommendations to fight money laundering. This report was endorsed by the Finance ministers or
other competent ministers of all FATF members in May 1990.
At the Houston Summit of the Heads of State or Government of the seven major
industrialized countries, in July 1990, the Task Force was, as agreed at the May meeting of Task
Force Finance Ministers, reconvened for a second year, still under the chairmanship of France, to
assess and facilitate the implementation of the forty recommendations, and to complement them
where appropriate. It was agreed that all OECD and financial center countries that would subscribe
to the recommendations of the Task Force should be invited to participate in this exercise. All
other countries were invited to participate in the fight against money laundering and to implement
the recommendations of the FATF. It was agreed that the report of the second FATF should be
completed before the next meeting of the Heads of State or Government of the Seven.
In addition to the initial members, experts of Denmark, Finland, Greece, Ireland,
New Zealand, Norway, Portugal, Turkey, Hong Kong and the Gulf Cooperation Council
participated in some or all the meetings, together with law enforcement specialists of Interpol and
the Customs Cooperation Council. Almost all these participants^*) subsequently endorsed the report,
and thus qualified for membership of the FATF.
Five series of meetings were held in Paris. More than 160 experts from various
ministries, law enforcement authorities, and bank supervisory and regulatory agencies, met and
worked together during six months. To facilitate the work of the Task Force, and to take
advantage of the expertise of its participants, three working groups were created, which focused
respectively on the implementation of recommendations relating to legal matters (working-group 1,
presidency : United States), on the implementation of recommendations pertaining to the role of
financial systems and international cooperation (working-group 2, presidency : Belgium), and on
external mobilization and follow-up (working-group 3, presidency : United Kingdom). Their
comprehensive reports constitute the key background material of this report.
Building upon this work, this report gives an assessment of the implementation of
existing recommendations (part I), provides an overview of the geographical extension of the
FATF program against money laundering (part II), and proposes guidelines as regards the follow
up to the second FATF (part III).
(*) The designations employed in this report do not imply the expression of any opinion
whatsoever on the part of the group concerning the legal status of any country, territory, city or
area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.
6.
I - ASSESSMENT OF THE IMPLEMENTATION,
AND ENHANCEMENTS TO THE EXISTING RECOMMENDATIONS
A - LEGAL MATTERS
On the mutual legal assistance matters, the group assessed the implementation of
FATF recommendations 4 through 8 and 32 through 40 and discussed possible enhancements to
existing recommendations.
Of particular concern to the group was that the recommendations be implemented in
a way that would maximize cooperation in international money laundering cases.
I - Global overview of the implementation
A legal issues surveillance grid was established, on the basis of answers by
participants to a standardized questionnaire. Participants also provided a narrative explanation of
the status of implementation. The participants were also requested to indicate how the differences
in the scope and application of money laundering offences might affect mutual legal assistance.
All the FATF-1 participants have responded to the compliance grid and
questionnaire.
All new participating countries and territories also responded.
However, the Task Force noted that, to some extent, the compliance grid format
resulted in a subjective measure of progress of uncertain reliability, because there has been no
harmonization of the national answers.
Nevertheless, it is encouraging that the vast majority of the answers to the
surveillance grid are positive, (A : measure already implemented, or B : measure soon to be
implemented) and that very few answers "C" (measure whose implementation is not foreseen) were
obtained.
The majority of FATF-1 members have substantially implemented the full range of
FATF recommendations within the scope of legal questions. Most of these countries have added
legislation or taken other steps in 1990 which places them in the substantial implementation
category. It is encouraging to note that several new participants are in a similar situation.
A limited number of nations are still evaluating how best to effect implementation
and have not introduced legislation or taken other steps towards implementation.
2 - Wavs to facilitate the implementation of some recommendations
The Task Force discussed how to solve the difficulties that are still obstacles to a
fully efficient international cooperation to combat money laundering. It has examined how to
improve domestic legislation, as required by recommendations 4 to 8, in order to facilitate the
mutual legal assistance (recommendations 32 through 40).
7.
The FATF is based or the premise that meaningful progress against money
laundering can only be made through international cooperation, by minimizing both the barriers
that remain in domestic laws and their effects on mutual assistance. It is clear that progress still
needs to be made in these directions.
It was agreed that countries should periodically review their legislation and make
whatever modifications that may be required to respond to changes in money laundering methods.
The Task Force determined to put forward refinements or extensions of existing
recommendations, as discussed below.
a) Recommendation 4 (Working definition of money laundering)
This definition, based on the relevant provision of the Vienna Convention, is an
important step to the harmonisation of legislation. All the participants who answered the
surveillance grid are, or should be very soon, in compliance with recommendation 4.
b) Recommendation 5 (Predicate crimes)
Recommendation 5 provides in part that "...each country should consider extending
the offense of drug money laundering to any other crimes for which there is a link to narcotics..."
while recommendations 5 also sets forth the alternative possibility of criminalizing based on all or
specified serious crimes.
Very few countries have in fact enacted specific money laundering legislation in
which all or most serious proceeds- generating offenses were included as predicate crimes.
Nonetheless, two international documents have been or are about to be completed which intersect
with recommendation 5. Specifically, the Council of Europe convention on laundering, tracing,
seizure and confiscation of proceeds of crime, and the European Communities proposed directive
on the prevention of use of the financial system for the purpose of money laundering, on which a
common position was reached on 14 February, 1991, and which will be finalized in the near
future.
The Council of Europe convention requires parties to adopt measures to enable
confiscation of the proceeds of any criminal offense. With respect to money laundering, it allows
parties to declare that the offense of money laundering is limited to specified predicate offenses.
The common position on the EEC directive provides for money laundering to cover
drug offenses and any other serious criminal activities designated as such for the purposes of this
Directive by each member state.
Given the pervasiveness of money laundering in many fields of criminal activity,
few countries expressed the sentiment that was expressed in FATF-1 that money laundering should
be limited to drug crimes. Hence, important progress towards consensus was made in FATF-2 on
this issue, although no agreement was reached on the scope of the predicates.
c) Recommendation 7 (Corporate criminal liability)
Recommendation 7 provides in pertinent p a r t"... where possible, corporations
themselves - not only their employees - should be subject to criminal liability". There was
extensive discussion on this point. There was general agreement that the concept of corporate
criminal liability, or at least, the availability of stringent civil or administrative actions is an
important part of an effective anti-money laundering program. Yet, almost half of the FATF
member countries do not have corporate criminal liability law and a number of these countries
have only limited authority to respond with civil or administrative actions with respect to criminal
offenses by corporations. It was observed that constitutional or fundamental legal principles
precluded a country from enacting corporate criminal sanctions. In other instances, it was simply a
matter of no legislation having been enacted to criminalize corporate conduct. The intention to
continue to study the issue with a positive mind was generally expressed.
8.
d) Recommendations 33 to 40 (Muti al legal assistance and other forms of
cooperation)
Most participants soon should be able to provide mutual legal assistance to each
other in international money laundering cases. But the improvement of this cooperation depends in
furtherhand also on the adaptation of the domestic legislation
Most FATF members have developed a network of bilateral and multilateral
conventions to facilitate mutual legal assistance, as required by recommendation 34. Austria
generally prefers multilateral agreements. Japan does not plan at this stage to develop bilateral or
multilateral agreements, but notes that, in its case, the conclusion of such bilateral or multilateral
agreements are not prerequisite in rendering legal assistance.
Recommendations 37 and 38 (compulsory measures to be ordered by the way of
mutual assistance, such as identifying the proceeds from a narcotic offence forfeiture, seizure...),
will be applied very largely by all the states in the near future, as well as recommendation 40
dealing with extradition.
However, the issue of corporate criminal liability and differences in criminal
offenses led to a lengthy discussion on the concern about how the manner in which countries
implement the FATF recommendations could actually inhibit mutual legal assistance in money
laundering cases and cooperation in related extradition and confiscation matters.
Differences in criminal offenses of money laundering very often create difficulties
in implementing recommendations 32 through 38, which reinforce the need for a comprehensive
mutual legal assistance system for money laundering and asset confiscation.
In a significant number of countries, the application of the principle of dual
criminality would in all likelihood preclude extradition and mutual legal assistance if the request
relates to a predicate not covered by the money laundering offense in the requested country. In the
view of several countries, this result indicates another reason to enact money laundering offenses
that cover a wide range of predicate offenses or all serious crimes.
It also was noted that in many countries the perpetrator of a crime cannot be
prosecuted for laundering the proceeds of his crime. As far as possible, differences in approach to
the liability of the perpetrator of the underlying offense should not inhibit the provision of
assistance.
On the other hand, differences in corporate liability would affect mutual legal
assistance in only a few countries. It was felt that a country that does not have corporate criminal
liability should strive to honor a request for assistance in a case in which the requesting country is
prosecuting a corporation for money laundering, e.g., by resorting to civil or administrative actions
available under its laws.
Finally, it was pointed out that with respect to the different forms of international
cooperation in criminal matters (mutual legal assistance, extradition, asset confiscation, etc.),
different standards of dual criminality might evolve in national or international legislation or
practice commensurate with the object and purpose of each specific type of cooperation.
For the purposes of mutual legal assistance, it was felt that participants should have
an attitude of some flexibility in relation to the issue of dual criminality. Difficulties in practice,
should not affect their readiness to provide one another with mutual legal assistance (apart from
extradition).
To the extent that dual criminality remains a problem in progress towards
facilitating mutual legal assistance and cooperation, the harmonization of domestic legislations
may be the surest way in the longer run. In the shorter term, bilateral and multilateral
agreements in these areas are probably more achievable.
9.
e) Recommendation 39 and international asset shaiing
Recommendation 39 encourages arrangements for coordinating seizure and
confiscation proceedings which may include the sharing of confiscated assets. Actually, very few
cases of sharing of assets confiscated in international money laundering operations have occurred.
This may result, among other reasons, from the difficulty in determining the "fair" share to be
given to other countries. Public accounting rules may also discourage this.
Ways to further facilitate the implementation of recommendation 39, with regard
to international asset sharing, remains a matter for further discussion in the FATF.
10.
B - ENHANCEMENT OF THE ROLE OF THE FINANCIAL SYSTEM,
AND STRENGTHENING OF INTERNATIONAL COOPERATION
The group has assessed the implementation of recommendations 9 to 32. Substantial
progress has been made to implement most of them, but some participating countries, should still
devote great efforts on the furtherance and the completion of this process in the months and years
to come (section 1).
Money launderers have increasingly turned to non-traditional financial institutions
or other businesses or professions to convert the proceeds of their illegal activities into legitimate
funds - as countries have tightened their control on traditional financial institutions or professions.
Action should be undertaken to address this situation along the lines sketched out in section 2 a),
and new money laundering practices should be updated regularly, with great care.
Relations with countries which do not or insufficiently apply the FATF
recommendations require periodic exchange of information among law enforcement authorities
(section 2 b).
The administrative systems to detect money laundering receive more support when
they apply to cash movements at the border than when they consist in reporting all currency
movements (section 2 c).
In general, more comprehensive cooperation is needed among all authorities involved
in the fight against money laundering. Considerable progress has still to be made to exchange
information at all levels (section 2 d).
1 - Global overview of the implementation.
As with legal matters, a "surveillance’' grid has been established on the basis of
voluntary answers by countries to a questionnaire. It is a useful gauge, but only a first attempt to
get a global view of the implementation, since all the answers were not harmonized. A more
thorough surveillance will result from a detailed examination of each country, as proposed in
section III. At this time, the uncertain reliability of the answers led the group to the opinion that
any publication of the grid would be premature.
When assessing the implementation status of recommendations 9 to 32 (enhancement
of the role of financial system, and strengthening of international administrative cooperation), one
has to give special attention to the answers of the 16 members of FATF-1, and to notice that only
18 recommendations (out of 24) are relevant for analysis, the remaining six calling for further
study (n°s 11, 23, 24, 30, 31) or for an alternative aproach (rec. n* 19).
It is very encouraging that, one year after the recommendations of FATF-1 have
been drafted, the vast majority of the answers to the surveillance grid by the FATF-1 members
are positive of which roughly half are measures "already implemented" (A) and close to half
"measures soon to be implemented"(B), no later than Jan 1, 1993 in most cases.
Another interesting feature of the answers is that most of the negative ones apply
to three recommendations (n*s 21, 23 and 24) which are considered difficult to implement by most
countries, and are discussed below in this report.
It should also be noted that the EC Directive, which will be approved by mid 1991
and implemented before January 1, 1993, enforces 15 of the recommendations among its member
countries, the remaining ones (21 to 25, 30 to 32) being either outside the objectives of the
directive or unnecessary in the case of EC members (Rec. 19).
11.
In summary, the implementation of most of the recommendations 9 to 32 appears
already fairly good among members of FATF-1, and few cases of non compliance should remain
by year-end 1992.
As regards these juridictions which participated in FATF-2 before being formal
"members", it proved difficult for some to provide a detailed report, although the majority did so
and the majority of these respondants reported substantial implementation of the recommentations.
2 - Wavs of facilitating the implementation of certain recommendations
Law enforcement authorities of participating countries as well as representatives of
Interpol and of the Customs Cooperation Council were invited to share, during a full-day meeting
on March 15, their technical experience regarding the new money laundering practices they
encounter, which countries or areas do not or insufficiently apply FATF recommendations, and the
cooperation between them.
Their discussions helped to determine some ways of facilitating the implementation
of recommendations 11, 21/22, 23/24, and 31/32.
a) New money laundering practices and implementation of recommendation 11.
As countries have significantly tightened their control on deposit taking financial
institutions, money launderers have increasingly turned to other financial institutions, and other
professions and businesses which handle significant amonts of cash, to convert the proceeds of
illegal activities into legitimate funds. It was noted that, as regards other financial institutions and
professions, first steps have been taken.
Today, non-traditional financial institutions or other businesses or professions are
involved in a growing number, possibly a majority, of money laundering cases, estimated from the
number of seizures in the cases unveiled in some countries^).
Non-traditional financial institutions or professions provide "bank-like" services,
thus running the risk that they can be used by money launderers in ways similar to traditional
financial institutions or professions, while not being subject to the same regulations and controls.
In order to facilitate a wider implementation of regulations against money
laundering, a report was prepared on a typology of money laundering practices for non-traditional
financial institutions or professions, by the US Customs Service on the basis of the information on
actual cases made available by the United States, the United Kingdom and the Hong Kong
competent authorities.
(*) Countries participating in the FATF process reported numerous incidents in which money
launderers were utilizing the non-traditional systems within their respective countries. Examples of
these incidents include : (a) cash from cocaine crack sales deposited into a bureaux de change,
funds transferred abroad for collection in US dollars, funds collected abroad in US dollars ; (b)
cash from drug sales used to purchases gambling chips in a casino, proceeds returned in the form
of "winnings” through a casino check, casino check deposited into bank account represented as
"winning"; (c) drug cash used to purchase antique firearms and art from auction houses and
private individuals abroad, property returned and sold through domestic auction houses, fund
transferred abroad and then returned to purchase real estate ; and, (d) a solicitor accepting drug
cash from drug trafficking client, placing the funds into the solicitor's trust account, the solicitor
utilizing the funds in the trust account to purchase real estate in the solicitor's name on behalf of
the drug trafficking client. Variants of these schemes abound.
12.
The group, reflecting the opinion of law enforcement specialists, made it clear that
the FATF should not try to make an exhaustive, single list of all non-traditional financial
institutions or professions that might be involved in money laundering practices, but should rather
seek to address them as a whole, and mention, as an example, some "high risk" professions or
institutions that could possibly be used in the cash-placement stage of the money laundering
process.
These professions or institutions can be classified under four broad headings:
1 - organizations whose prime function is to provide a form of financial service but
which, at least in some FATF member countries, fall outside the scope of the
regulated financial sector. For example, bureaux de change, cheque cashers and
money transmission services, including those provided through correspondent
^relationships outside the formal banking sector.
2 - Organizations whose primary purpose is to offer some form of gambling
activity. For example : casinos, lotteries and various games of chance.
3 - Organizations whose primary function is to buy and sell high value items. For
example : precious metal and gem dealers, auction houses, real estate agents ;
automobile, aeroplane and boat dealers.
4 - Professionals who, in the course of providing their professional services, offer,
in some countries, client account facilities. For example : lawyers, accountants,
notaries and certain travel agents.
This typology ought to facilitate the implementation of recommendation 11 with the
degree of flexibility that is necessary from one country to another, given the differences in the use
of cash and in the effective role of each profession.
Outside the formal financial sector, professions which provide any of the financial
services listed in the annex of the Second Banking Coordination Directive of the European
Community, as well as life-insurance coverage, should be subject as far as possible to
recommendations 12-22 and 26-29. However, recommendation 27 is not intended to oblige
member countries to establish one supervisory institution for each and any of these professions :
the nature of regulations and the means to ensure compliance are to be decided by each country.
The group considered that the organisations cited under heading n° 1 of the typology, and the
professionals cited under heading n* 4 of the typology, belonged to this category. However, with
respect to the professionals, law and practices relating to professional confidentiality restrict in
many countries the possibility of implementing some recommendations.
Some other types of business or professions can also be used in the cash placement
stage of money laundering, for instance those cited under headings n* 2 and 3 of the typology,
although their effective role is different from one country to another. For such activities, it would
be extremely difficult for governments to ensure across the board compliance with the relevant
FATF recommendations. But there are steps that governments couid take to raise awareness
among those businesses most at risk and to combat their being used by launderers : dialogue with
professional organizations which represent them, issuance of guidance notes - especially on how
to recognize suspicious transactions - and, for some of these professions as designated by each
government, implementation of the customer identification and record keeping requirements above
a specific size of transaction, and, where possible, implementation of a suspicious transaction
reporting scheme.
13.
While offering such guidance to facilitate the implementation of recommen Jaticn 11
by governments, the group felt it wise not to add anything to the existing recommendations 9 to
11, considering that money laundering is an evolving process and that discrepancies in the actual
field of activity for the same business exist between countries. With this in mind, the importance
was stressed of identifying and regularly updating "vulnerable businesses/professions", i.e.
businesses or professions with a potential for misuse by money launderers, and to exchange
information about them. To this end, It was suggested that, in the future, the FATF keep itself
informed about the evolution of money laundering practices and exchange information about
actual cases of money laundering.
b) Implementation of recommendations 21/22.
The Group has thoroughly examined how useful it would be to refine
recommendations 21 (relation with countries which do not or insufficiently apply these
recommendations) and 22 (application of the recommendations to branches and majority owned
subsidiaries located abroad).
The Group observed that one way to facilitate the implementation of
recommendation 21 would be to establish an internationally agreed "black list" of countries which
do not or insufficiently apply the FATF recommendations. But the group felt, and law
enforcement authorities confirmed, that the FATF should not attempt to produce, for the time
being, a public common minimal list. Each country will be in a position to decide which
jurisdictions must receive special attention, based on the answers given by its own financial
institutions in accordance with recommendation 22. The absence of any list of "regulatory havens"
makes it difficult however for financial institutions to focus their special attention in the sense
required by recommendations 21 and 22.
Geographical zones where money laundering schemes develop, or might develop,
are, in some cases, well-known and, in any case, can be characterised by some criteria. Such
criteria include the lack of any legal requirement for institutions or professions to maintain
records for the identification of their clients or the transactions performed, the absence of a legal
permission for law enforcement authorities to have access to these records, and the impossibility
for them of communicating these records to law enforcement authorities of others countries.
c) Administrative Systems to detect money laundering (recommendations 23. 24).
Recommendation 23
Some countries strongly support the implementation of measures to detect or
monitor important cash movements at the border to address the problem of cross border shipments
of illegal source currency, either through a system of mandatory reporting of these movements, or
through the possibility of freezing suspected assetsO or through any other means that does not
restrict the freedom of capital movements. Other countries emphasize that the information gathered
in such a fashion should only be used to fight money laundering practices. This issue should be
addressed again in the future.
(*) This way of implementing recommendation 23 would consist in measures whereby cash,
monetary instruments, precious metal/stones, and other valuable movable property, which are to be
imported to or exported from their jurisdiction, may be seized/detained by the competent law
enforcement/judicial authorities pending investigation and/or proceedings to freeze such property
where there are reasonable grounds to believe that such property directly or indirectly represents
the proceeds of a criminal activity.
14.
Recommendation 24
A large majority of the participating countries continue to consider that the
implementation of a system to report all important currency transactions is difficult to envisage.
They feel that at least similar results can be attained through the less burdensome system of a
properly implemented suspicious transactions reporting scheme. Countries which have a currency
transactions reporting scheme believe that it is an essential complement to suspicious transactions
reporting.
d)
Cooperation between law enforcement authorities, outside mutual legal assistance
and wavs to improve bilateral exchanges (rec 31 and 32).
Law enforcement authorities reported that they are sometimes faced with legal or
technical difficulties when cooperating - such as the right to privacy, confidentiality privileges or
the sensitivity of some countries to tax-related issues. It was pointed out that a number of
international agreements already provide an adequate basis for cooperation, but that, even in cases
where such agreements exist, satisfactory cooperation does not always exist in practice.
The reasons for these shortcomings range from differences in the definition of the
predicate offense (underlying crime), sometimes the absence of personal relations with their
counterparts, to refusals to answer the questions from another country. All these elements hamper
the efficiency of bilateral cooperation among administrative authorities.
Strong efforts should therefore be made to improve the cooperation among law
enforcement authorities, enabling a more efficient implementation of recommendations 31 and 32.
"Contact lists" should be made available for instance through the UNIDCP (United
Nations International Drug Control Program). Countries should also communicate to each other
intelligence information, either in the framework of a legally organized cooperation, or informally
- in which case the information should be used according to guidelines to be specified^).
If was felt that law enforcement authorities and other relevant experts should
regularly meet to exchange their views about money laundering practices and geographical
networks. Their findings should be reported to the FATF.
Interpol and the Customs Cooperation Council could have a special responsability
for gathering and disseminating this information. In addition, to help identifying geographical
networks involved in money laundering, the FOPAC (Fonds provenant des activités criminelles), a
division of Interpol which collects data about proceeds of criminal activities, could provide a good
basis for such exchanges, in cooperation with the CCC.
Furthermore, exchanges of information on suspicious transactions, persons or
corporations, should take place between Interpol and the Customs Cooperation Council. This
information should then be disclosed to their members at their request, with the appropriate level
of confidentiality.
(*) The information passed on to authorities of other participating countries should be used only
for anti-money laundering purposes, and for the investigation of the underlying offenses, and
could be submitted to restrictions. In practice, informal exchanges could reveal themselves very
useful for implementation of recommendations 31 and 32.
15.
II - GEOGRAPHICAL EXTENSION OF THE FATF PROGRAM
AGAINST MONEY LAUNDERING
Money laundering channels, at least those on a broad scale, generally involve
international operations. This enables money launderers to use differences in national laws,
regulations and enforcement practices.
For instance, a money laundering operation could involve the following stages :
money from illegal activities e.g. drugs cash proceeds would be exported from regulated countries
to unregulated ones ; then the cash can be placed through the domestic formal financial system of
these” regulatory havens” ; the subsequent stage could then be a return of these funds to regulated
countries with safe layering and integration opportunities, particularly through wire transfers. Of
course, informal financial systems in ”regulatory havens” are also a cause of concern
This type of money laundering operation, based on cash shipments abroad, probably
plays an important role. However, once drug cash has been introduced into the formal financial
institution, other techniques may be used by launderers to transfer funds abroad, using offshore
companies. For instance, using the technique of "double invoicing", goods may be purchased at
inflated prices by domestic companies owned by money launderers, from offshore corporation
which they also own. The difference between the price and true value can be deposited offshore
and paid to the offshore company. It then can be repatriated at will. Variations of the "double
invoicing” technique bound . Some regulatory havens make it easy to set up shell companies, and
to keep company ownership anonymous in the hope of attracting both license revenue and business
for their own firms.
When the funds are repatriated after laundering abroad, the detection of their
criminal origin is extremely difficult. Even if detected, differences in national laws, regulations
and enforcement practices seriously impair the efficiency of enquiries and law enforcement
measures.
This has been the rationale behind the effort to extend worldwide the FATF
program against money laundering, and to give special attention to relations with countries which
have a significant financial system, but do not or insufficiently apply this program.
16.
A - GEOGRAPHICAL EXTENSION
The Houston Summit recommended that "all OECD and financial center countries
that subscribe to the recommendations of the Task Force should be invited to participate in the
FA T F, and appealed to "all other countries to participate in the fight against money laundering
and to implement the recommendations of the FA TF.
The first step to broaden the geographical coverage is an effort throughout the
world to present and explain the FATF recommendations, with a view towards obtaining formal
endorsements, and, as far as possible, universal effective implementation to these
recommendations. This worldwide mobilization against money laundering was launched in three
directions.
1 - OECD countries and other major financial centers
a)
The nine OECD countries which had not participated in the FATF-1 (Denmark,
Finland, Greece, Iceland, Ireland, New-Zealand, Norway, Portugal, Turkey), were invited to
participate in the FATF-2, provided they accepted the existing recommendations. All these
countries, except Iceland, took part to the meetings of FATF-2, in order to help them clarify what
would be at stake if they endorsed the recommendations, and to share with them experiences in
the field of fighting money laundering. A meeting, on December 17, was specially devoted to
briefing them.
At this stage, Denmark, Finland, Ireland, New-Zealand, Norway, Portugal and
Turkey have endorsed the FATF recommendations, and thus qualified for membership.
b)
In addition, the FATF decided that the three most important off-shore banking
centers and areas, Hong-Kong. Singapore and the Gulf, would be invited, under the same
conditions, to participate.
Hong-Kong attended FATF meetings and participated actively. It endorsed the
recommendations, thus qualifying for membership. It has already taken major steps to implement
the recommendations.
In order to reach a number of financial center countries in the Gulf, it was decided
to invite the Gulf Cooperation Council (composed of Saudi Arabia, Bahrain, the United Arab
Emirates, Oman, Qatar and Kuwait) to participate, rather than invite the individual countries in
the area at this time. A representative of the GCC did participate in one of the meetings, but
because of the situation in area, has not been able to coordinate a decision on endorsement of the
recommendations among the GCC member countries as yet. The GCC will continue to be invited
to future sessions.
Singapore has yet to endorse the FATF-1 recommendations, and formally accept
the invitation. However, discussions have commenced and hopefully, they will lead to Singapore
endorsing the recommendations and joining the group. It is, of course, appropriate that a country
which has such eminence as a financial centre should join in the international effort against money
laundering which membership of the Task Force provides. Singapore representatives have recently
informally indicated their intention to participate, on the same basis as others.
17.
2 - Other finrncial centers
Specific countries or territories were identified as being particularly exposed to
money laundering, due to the importance of their international financial activities, to their
geographical location -territories close to important drug producing, transit or consuming
countries-, or, in some cases, to the low degree of regulation of their financial system, or to the
involvement of one or several of their financial institutions in past money laundering operations.
Contacts with these financial centers were undertaken by FATF members having close ties with
them, or being geographically close to them.
Some of these centres are related to FATF members. The Netherlands confirmed
that their endorsement of the FATF recommendations also covered the Netherlands Antilles and
Aruba and that the Kingdom had full responsibility for the territories. Jersey, Guernsey and the
Isle of Man are Crown Dependencies of the United Kingdom. They have all introduced legislation
to trace, freeze and confiscate the proceeds of drug trafficking, including the criminalisation of
drugs money laundering. Guernsey and the Isle of Man have endorsed the recommendations of the
Task Force and Jersey has confirmed that it is fully committed to preventing the use of the Island
by those engaged in drug money laundering.
The contacts with other financial centres led to the following results.
a)
Cayman Islands, Montserrat, Anguilla, British Virgin Islands, Turks and Caicos
Islands and Bermuda, which are all British Dependent Territories, have been sent the Task Force
recommendations and encouraged to endorse them. They have been asked to provide details of
legislative and other measures which they have taken or are intending to take to combat money
laundering. They have all introduced legislation to trace, freeze and confiscate the proceeds of
drug trafficking, including the criminalisation of drugs money laundering. The legislation is very
similar to that in the UK. They have confirmed, in general terms, that they support the FATF
recommendations. They are currently working on detailed responses to the recommendations and
considering the need for administrative measures in the context of local budgets and resource
constraints.
b) Gibraltar - The authorities in Gibraltar, which is also a British Dependent
Territory, have been sent the FATF report and encouraged to endorse its recommendations. They,
also, are working on a detailed response which will describe the legislative and administrative
measures that they have already taken, and are intending to take, to combat money laundering.
c) Liechtenstein - Liechtenstein is an independent state with special relationship to
Switzerland mainly due to treaties on customs and monetary policy. Switzerland assumes however
no responsibilities for Liechtenstein in regard to almost all of the issues in the scope of the FATF.
According to its own assessment, Liechtenstein already applies a large number of the FATF
recommendations. The majority of the rest will be implemented by or in connection with the
planned bill criminalizing money laundering inspired by the Swiss legislation and entering the
parliamentary process this year.
d) Monaco - Monaco is an independent state with a special relationship with France.
It is preparing for the near future a complete set of texts, very close to the French ones, to fight
money laundering.
The government of Monaco has officially expressed its intention to implement the
FATF recommendations.
18.
c)
Andorra - Andorra is a territory under co-principality of the President of the
French Republic and the bishop of Seo d’Urgell, Spain. The Bishop co-prince has been officially
informed by the Spanish authorities of the 40 recommendations and has received an offer to get
the necessary explanatory background. Following a request by the French co-prince, the Bishop of
Seo d’Urgell has officially agreed to incorporate the FATF recommendations into local regulations.
The implementation will have to take into account the specificities of the status of Andorra.
Andorra has taken steps to give effect to provisions of the Vienna Convention. At this stage, bank
regulations in Andorra are incomplete, and there is no banking supervisory authority. However,
Andorran banks have established a code of conduct. The implementation of the FATF
recommendations in Andorra will be conducted in cooperation with the relevant Andorran bodies,
with a close involvement of the French authorities, and of the Spanish competent authorities upon
request
These contacts with financial centers will have to be continued, in order to obtain
from those who have not done so a formal endorsement of the recommendations, to help the
implementation if necessary, and to ensure that this implementation is effective. Furthermore,
other financial centers might be identified in the future as requiring the same approach.
3 - Regional mobilization
In order to provide for the widest coverage of the FATF program, other countries
or territories were or will be contacted through a process of mobilization on a regional basis. This
process, launched by the FATF and undertaken by various countries or regional organisations, is
only a first step. As with the financial centers, the aim is to assess where the countries or
territories of the regional area stand in the fight against money laundering, to obtain as soon as
possible full endorsement of the recommendations by most of them, to help implement these
recommendations if necessary, and to ensure that this implementation is effective.
This first step takes the form of meetings associating some FATF members, and
most or all countries or territories of the region concerned. In these meetings, the FATF report is
presented in detail (it had been already transmitted in June 1990 to all countries having an
embassy in Paris by the FATF secretariat) and the regional countries and territories express their
views on the report.
The meeting for Asia was organised by Japan, together with the Economic and
Social Commission of the United Nations for Asia and the Pacific (ESCAP). It was held in Tokyo
on February 13 to 13, 1991. Forty five countries or territories (see list in Annex) sent delegates to
this meeting. The general feeling was that the success of the fight against money laundering
depends crucially on the harmonization of national programs. The participants called for an early
endorsement of the FATF report by the countries and areas concerned.
The meeting for countries of central and eastern Europe was organised by the
Commission of the European Communities, in Brussels, on March 4, 1991. Poland, Czechoslovakia,
Hungary, Bulgaria, Romania and Yugoslavia sent delegates, together with several FATF members.
These countries expressed their readiness to fight money laundering, and shared the view that the
design of their new financial systems should include from the beginning regulations in this regard.
However, some countries expressed reservations regarding the declarations of suspicious
transactions : it was underlined that strong bank secrecy was essential to obtain the confidence of
the population in the new financial system, because in the old system, a general obligation existed
to report any suspicion of any illegal activity. The delegates will encourage their governments to
endorse as soon as possible the FATF recommendations.
A meeting of the Carrlbbean Islands and Central American States (see list in
Annex), was organised in Aruba as early as June 1990. The experts welcomed the FATF report,
added some recommendations to address specific regional issues, and urged their governments to
endorse and implement the FATF program. A second meeting should take place in Kingston,
Jamaica, in June 1991, with a view to formally endorsing the FATF report.
19.
A meeting for Africa (see in annex list of participating countries) has taken place
in Abidjan, Ivory Coast, on May 9, 1991, just after the annual meeting of the African
Development Bank. During this meeting, it appeared clearly that it was in the interest of all
african countries to participate in the fight against money laundering. Participants welcomed the
FATF recommendations, and will submit them to their governments for endorsement.
A meeting with countries of Latin America , organized at the initiative of the
United States under the auspices of the Organization of American States, will take place in
Washington on May 21 to 24.
This process of regional mobilization will have to be pursued in the future, In a
flexible way, with a view to ensuring, as far as possible, world-wide implementation of the FATF
program. This will require formal endorsements of the report, as well as follow-up procedures to
ensure that the implementation is effective. For many countries, technical assistance might also
be necessary.
20.
B - MEASURES DIRECTED AT NON COOPERATIVE COUNTRIES
1 - The problem of "regulatory havens" and non cooperative countries or territories and existing
measures to address it
The issue of how to cope with the problem of countries with no or insufficient
anti* money laundering measures, was adressed in last year's report of FATF, through
recommendations 21 (special attention by financial institutions to transactions and business
relations with persons located in "regulatory havens"), 22 (extension of the vigilance principles
applicable to financial institutions, to their branches and subsidiaries located abroad) and 23
(detection or monitoring of cash at the border).
There was also general agreement that the wider the geographical extension of the
FATF program, the easier the measures to deal with non cooperative countries or territories
could be implemented. For instance, to be able to implement satisfactorily recommendation 21,
financial institutions would need to know which countries or territories are to be considered as
"regulatory havens", in order to focus their vigilance on a small number of transactions and
business relations.
In the process of geographical extension of the recommendations, it appeared clearly
that some countries or territories could remain reluctant to join in the international effort against
money laundering. The motivations for this reluctance are generally easy to understand. Some
jurisdictions who wish to establish a financial services industry as a supplementary source of
income for the national finances - through the sale of authorization for shell companies and
banking licenses - and to create employment for the population, use their lack of regulations as a
competitive advantage. In addition, there are administrative costs in applying anti-money
laundering sanctions. "Regulatory havens" may therefore be motivated by a wish to supplement
their budgetary receipts, gain a marketing advantage for their financial services industry, or avoid
imposing a cost on their financial services industry, or any combinatuion of all three. Finally,
extreme cases, where governments cooperate with their financial institutions in large scale money
laundering operations, cannot be excluded.
These kinds of motivations to avoid taking measures against money laundering,
reflect clearly a short term view : a money laundering operation, once detected, can put at risk
the whole financial system in these countries or territories, through the loss of credibility and
confidence.
However, the problem of "regulatory havens" and non cooperative countries or
territories in the fight against money laundering remains crucial, and deserves special attention.
2 - Additional measures
Some non cooperative countries or territories can already be identified, in
particular those having denied assistance, in enquiries about international money laundering
operations. The FATF devoted a special meeting to an exchange of views on this matter (see par.
I-B 2b) : it was agreed that no "black list" of non cooperative countries or jurisdictions would be
established, and that the results of this exchange of views would principally serve, at this stage, to
help national efforts against money laundering. In order to lead these countries to more cooperative
behaviour, it was felt that, for the time being, public and peer pressure could be sufficient,
although FATF members could of course decide to go further on an individual basis, provided the
Task Force was kept informed.
21.
Public pressure could be exercised, in a "soft" way, through the publication of a
"white list" of countries or territories which have implemented FAYF recommendations and can
thus be considered as fully participating to the international effort against money laundering. This
publication would also facilitate national efforts to detect suspicious transactions. However, it was
felt that it was too early to make a definitive assessment of which countries have satisfactorily
implemented the FATF. This procedure cannot be envisaged before all countries have been given
time to implement the FATF program, as a consequence of the geographical mobilization program
described above, and before a thorough review of the degree and quality of this implementation
has been conducted, through the assessment process descibed under part III-A. Furthermore,
although a narrow majority of task force members would favor this course, there is at this stage no
consensus on it.
Should this peer and public pressure prove Insufficient, additional measures might
be envisaged in the future.
Several types of measures were mentioned. For instance, an upgrading of the
implementation of recommendation 21 might be considered, in order to submit all
transfers/payments with these jurisdictions to a specific examination, which would at least increase
the cost of transactions with them and thus compensate for the competitive advantage of the
financial institutions located in the non cooperative country or territory. A systematic declaration
to competent authorities of these transfers/payments might also be considered. The efficiency of
these measures would of course be greater, if they were decided and implemented in a coordinated
way, within the FATF.
22.
Ill - FOLLOW-UP TO THE SECOND FATF
The group discussed arrangements which could ensure a full implementation of its
program. The consensus was to maintain the group for the time being, to conduct four tasks :
1 - self-reporting and mutual assessment (monitoring and surveillance) on the
adoption and implementation of FATF recommendations by all members ;
2 - co-ordination and oversight of efforts to encourage non-members to adopt and
implement the recommendations ;
3 - making further recommendations and evaluations of counter-measures while
serving as a forum for considering developments in money laundering techniques domestically and
worlwide and for the exchange of information on enforcement techniques to combat money
laundering ;
4 - standing ready to facilitate co-operation between organisations concerned with
combating money laundering and between individual countries or territories.
23.
A - FUTURE ROLE OF THE FATF
] - Process of future assessments
a) Assessment among FATF members
The procedures adopted this year to assess the implementation among task force
members, helped to determine guidelines for future assessments.
In the future, the essential objective should be to maintain the informality which
the FATF has adopted and to avoid a rigid bureaucratic approach. The procedure could be for
FATF members to complete answers to a standard questionnaire each year concerning the status of
their implementation of the FATF recommendations. Surveillance grids could be used -provided
they would be filled in a harmonized way, that is two countries in the same situation would give
the same answer-, but FATF members would have to supply information supporting their
responses on implementation status and the effect of their measures as well as explain their co
ordinated strategy against money laundering against the background of their particular
characteristics. Consideration might also be given to more detailed surveillance grids, focusing on
the key elements of the core recommendations.
The responses to the questionnaires would be circulated to all members by a
Secretariat. The Secretariat would simultaneously circulate a summary of the various responses.
This would form the self-reporting stage of the procedure.
There would then be a yearly meeting of the FATF members to consider the
responses and discuss any problems arising out of them. Individual members would be chosen for
examination by the FATF with the examination carried out by selected other members of the
FATF, according to an agreed protocol for examination and agreed selection criteria. The objective
would be to examine every FATF member by the end of 1996. Each year the FATF would select
the members to be examined in the following year. Unless they wished to be examined earlier,
members would not be subject to being examined until three years after their endorsement of the
FATF-1 recommendations, except if the group decides otherwise, in exceptional circumstances.
Each year a final assessment report would be prepared by the Secretariat under the supervision of
the FATF. This would complete the mutual assessment process.
Assessment reports concerning individual countries would in principle not be
published, but executives summaries would be.
During FATF meetings, particular questions related to FATF tasks might be
discussed. Regular yearly meetings could be augmented by special meetings by agreement of the
FATF. Working groups could also be established by the FATF if required.
b) Mobilisation and assessment in non member countries or territories
The contacts with "other financial centers" and "regional areas", as described above
(part II-B : "geographical coverage”) could be continued, for the time being, along the following
lines: they would be pursued by individual FATF members, or in appropriate cases by steering
groups of FATF members with the support of the Presidency/secretariat. Relevant FATF members
would remain responsible for their associated or dependant territories as appropriate. Individual
FATF members, or regional steering groups in appropriate cases, would also maintain contact with
non-member financial centers and regionals areas. Reports would be made on developments in the
relevant countries or territories. The annual meetings of the FATF would provide the opportunity
to review progress and consider solutions to any problems.
24.
An important part of this assessment process would be, upon reques':, the provision
of technical assistance, in particular in drafting laws and regulations, and adapting bank
supervisory and law enforcement authorities* structures. This could be provided by individual task
force members, or by the secretariat, within the limits of its ressources.
Non-FATF members which subscribed to the FATF-1 recommendations, might join
in the self-reporting process and complete the questionnaire on their adoption fend implementation
of the FATF recommendations. Such jurisdictions would be invited to attend the meetings at
which their reports are discussed.
2 - Other tasks
In addition to the ongoing self-reporting/mutual assessment and coordination/oversight work, the FATF should also keep under review developments in money
laundering trends and techniques and share information on legal, financial and enforcement
counter-measures. Issues with regional or global implications could be discussed at the annual
FATF meetings and consideration might be given to the development of further recommendations
where appropriate.
FATF meetings will also provide the opportunity for informal exchange of
information between members.
In this regard, the FATF would not be used as a formal intermediary for exchanges
of information relating to suspicious transactions, or persons and corporations involved in these
transactions ("hot information") : the exchange of "hot information" should take place, either
bilaterally or through multilateral existing institutions, according to FATF recommendations.
However, should difficulties arise in this matter, either between FATF participants, or between
participants and non-participants, there should be a possibility for task force members to raise this
issue in the FATF, in order to enable it to find a solution acceptable for all parties.
25.
B - INSTITUTIONAL ARRANGEMENTS
The FATF could continue to function as an ad hoc group for the time being,
reporting to finance Ministers or other competent Ministers and authorities. It should remain as
flexible and informal as it is now. The question of the continuation of the FATF, and of its statute
and future works should be addressed again in three years.
1 - Presidency
The FATF would continue to meet under the Presidency of an individual member.
The Presidency would rotate on a yearly basis. The Presidency might run from 1 September to 31
August with the FATF making an annual report to Ministers or other competent authorities,
enabling the FATF to report to suitable Ministerial and international fora in May-July. The
President would be chosen by the FATF, taking into account as much as possible geographical
locations and membership of various international groupings. A steering group would be set up
including representatives of the Presidency, the Presidency for the last year and the next year, plus
the chairmen of working groups, if any.
2 - Secretariat
The OECD could be invited to act as a secretariat for the FATF. The criteria used
for this choice were : experience in areas related to those covered by the FATF ; multi
disciplinary nature ; and compatibility with the aims of the FATF. The OECD has confirmed that
it has no difficulty in acting as a secretariat for a body which contains non-OECD members. The
group is also grateful to UNIDCP for its offer to provide secretariat facilities.
The OECD would limit itself to secretariat functions, collating, co-ordinating and
summarising responses from FATF members and supporting the FATF presidency. It could
conduct studies by further decision of the FATF. It would not become involved in any
enforcement activity.
The size and cost of this secretariat should be extremely limited, probably in the
range of 2 to 4 millions francs each year. The burden sharing between FATF participants might be
based on the standard OECD contribution formula. Countries, which are in a position to do so,
might consider paying their contribution with a part of the funds stemming from assets seized in
money laundering operations involving international cooperation.
3 - Future membership of the FATF
The FATF membership should not be further widened, in order to preserve the
efficiency of the Task Force. However, countries who were invited to participate in this year, but
who did not endorse the recommendations, would still be able to join.
Competent international organisations could be invited to participate as observers, at
the discretion of the Presidency. They include the UNIDCP, the IMF, Interpol and the Customs
Cooperation Council, the Bank of International Settlements and related committees, and the
Council of Europe. Regional organisations wishing to play a role in the fight against money
laundering could also be invited.
26.
CONCLUSION
Relevant Ministers or other competent authorities of member jurisdictions will
circulate this report to their Heads of State or Government. Their decisions, as well as further
guidance from the Summit of the Heads of State or Government of the seven major industrial
nations, will be crucial as regards the follow-up to the task force.
In order to ensure the success of the FATF program against money laundering, a
high degree of mobilization in industrial and other financial center countries or territories is
essential. This implies that those countries or territories which have not done so already, fully
implement without delay the recommendations. This implies also the pursuit of the external
mobilization effort which has been launched by the FATF-2, and a reinforcement of joint actions
to deal with non cooperative countries or territories, in order to ensure that no financial center
can put at risk the effectiveness of the fight against drug trafficking and other serious crimes.
The political commitment to fight money laundering, which enabled the
establishment of an internationally agreed far-reaching program against money laundering in a
record time, does not permit any abatement in the efforts of the Task Force, until the success of
this program has been ensured. This success will provide a decisive contribution to the fight
against criminal activities and above all against drug trafficking, and will improve the soundness
of the international financial system.
•sEPj' QC j.
STATEMENT O F ^ 4 ? R E N C H HILL
DEPUTY ASSISTANT SECRETARY tCORPORATE FINANCE)
DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON POLICY RESEARCH AND INSURANCE
JUNE 6, 1991
Mr. Chairman,
I am pleased to come before you today on behalf
of the Department of the Treasury and the Administration to
discuss what has commonly become known as "lender liability"
under the Comprehensive Environmental Response, Compensation and
Liability Act
(CERCLA).
Legislation has been introduced in the Congress that seeks to
resolve the lender liability issue,
duced by Mr. LaFalce, and S. 651,
including H.R.
1450, intro
introduced by Senator Garn.
These bills have been instrumental in focusing the debate on the
lender liability problem.
The Administration supports the
objectives of these bills, and believes that the rule released by
EPA yesterday achieves those objectives with precision and
clarity.
We support EPA's rule because it provides a much needed
measure of certainty for lenders seeking to avoid liability when
extending credit.
exemption,
With respect to the security interest
if the Congress believes that the rule should be
codified, the Administration will support legislation that only
enacts the security interest provisions contained in the proposed
EPA rule.
NB-1309
2
It is important to emphasize at the outset that the issues
involved in "lender liability" that are addressed by EPA's rule
affect more than private lenders, such as banks and other
financial institutions, although they are certainly the most
obviously affected.
The same issues are of critical concern to —
o
the Federal Deposit Insurance Corporation (FDIC) and
the Resolution Trust Corporation (RTC) when they
become conservators or receivers of troubled or
failed depository institutions
o
all Federal agencies that lend funds, guarantee or
insure loans, or guarantee mortgage-backed securities,
such as the Farmers Home Administration (FmHA), the
Small Business Administration (SBA), the Department of
Energy, the Department of Veterans Affairs, the
Department of Housing and Urban Development, and the
Government National Mortgage Association
o
all Federal agencies that acquire security interests
in the course of carrying out their statutory func
tions, such as through the seizure and forfeiture of
assets of drug traffickers
o
non-lending Federal agencies such as the Internal
Revenue Service, which can acquire property through a
lien for delinquent taxes, and the U.S. Customs
Service which can acquire liens on vessels by
operation of law.
In general, CERCLA imposes strict liability on owners and
operators of property for the release or threatened release of
hazardous substances.
When it enacted CERCLA in 1980, the
Congress made special provisions to exempt from this strict
liability persons who, without participating in the management of
a borrower's business, hold indicia of ownership, such as a deed
of trust or mortgage, to protect a security interest.
The
intention of the exemption is that a lender who holds title to
property (a mortgage is the typical example)
is protected from
3
strict liability, even if the lender is forced to acquire the
property to protect the security interest.
The Administration
strongly supports this rational and commercially necessary
exemption from liability.
Underlying the lender liability issue is the extent to which
CERCLA contemplates that bankers and other lenders are to assume
the role in our society of insuring or guaranteeing the environ
mental purity of borrowers.
such a contention.
We find nothing in CERCLA to support
CERCLA does not impose any requirement that
lenders conduct environmental audits or inspections prior to
lending funds.
Instead, the security interest exemption only
demands that lenders refrain from participating in the management
of a borrower's enterprise when holding indicia of ownership to
protect a security interest.
However, as a result of a few recent court decisions, there
is now uncertainty regarding the scope the security interest
exemption.
Banks and other lenders do not know when,
in the
course of ordinary dealings with a borrower, they may be deemed
to participate in the management of a borrower's business and
therefore incur strict liability.
This uncertainty places an
invisible barrier between lender and borrower and is generally
destabilizing to the banking system because it discourages the
conduct of normal business relationships, particularly when a
borrower is having financial troubles.
Similarly,
lenders do not
know what actions taken to protect a security interest will void
the exemption.
4
Because there are instances where lenders have been held
strictly liable under CERCLA, we believe there has been an
overall chilling effect on both commercial and industrial and
real estate lending.
Many lenders are simply not making loans to
borrowers whose businesses involve hazardous substances or whose
properties may have been associated with hazardous substances
under a prior ownership.
Moreover, many lenders are writing off
bad loans for fear of environmental liability, thereby incurring
losses that weaken the banking system.
Lenders are also refusing
to extend additional credit to troubled borrowers, which can
result in bankruptcy and layoffs.
If we allow this situation to continue, we believe there are
potentially serious consequences for our economy, the Federal
deposit insurance funds, and our efforts to clean up the
environment.
We believe that lender uncertainty over CERCLA liability is
exacerbating the "credit crunch” and may well jeopardize our
economic recovery and growth.
To the extent Federally insured
depository institutions incur strict liability under CERCLA, that
liability poses a serious threat to the Federal deposit insurance
funds and all taxpayers.
The cost of a CERCLA cleanup and
attendant liability could erode minimum capital levels and force
an institution into Federal conservatorship or receivership at a
significant cost to the Federal deposit insurance funds.
5
To the extent that Federal lending agencies continue to be
exposed to strict liability under CERCLA merely because they are
carrying out their statutory mandates, those programs will be
curtailed as funds intended for loans are diverted to pay CERCLA
liability, and as agencies limit program operations for fear of
incurring liability.
If Federal law enforcement agencies continue to be exposed to
strict liability under CERCLA merely because they seize and
forfeit property of persons who violate the law, critical tools
will be eliminated from our law enforcement arsenal.
Finally, exposing lenders to the risk of strict CERCLA
liability merely because they extend credit simply is not
consistent with sound environmental policy.
Instead of fostering
a climate in which the lending community is a willing partner in
our national efforts to clean up the environment by loaning the
necessary funds, the uncertainty of lender liability is denying
financial resources to those businesses that need them the most.
The Administration is committed to providing private and
governmental lenders and holders of security interests with clear
and unambiguous certainty concerning their potential liability
under CERCLA.
Resolving the lender liability issue will benefit
lenders, Federal agencies, the economy and the environment.
6
Since last fall, the Departments of Treasury and Justice,
many other Federal agencies, and the President's Council on
Competitiveness, have been working with EPA to develop a rule
that would resolve the lender liability problem.
This has been
difficult task in view of the legitimate competing policy
interests involved, and we are pleased that EPA has been able to
develop a rule that provides the certainty needed by lenders,
properly protects Federal agencies, and maintains effective
protection of the environment.
The EPA proposed rule released yesterday embodies the
following principles:
PRIVATE AND GOVERNMENTAL LENDERS
AND HOLDERS OF SECURITY INTERESTS
o
PRE-LOAN ACTIVITIES.
Strict liability under CERCLA
cannot result from any action taken prior to the
creation of a security interest.
O
PARTICIPATION IN MANAGEMENT WHILE BORROWER IN
POSSESSION OF COLLATERAL.
Strict liability under
CERCLA cannot result wnile the borrower is in posses
sion of the collateral unless the holder of the
security interest participates in the management of
the borrower's affairs by either —
o
exercising actual decisionmaking control over
the borrower's environmental compliance, such
that the holder has undertaken responsibility
for the borrower's waste disposal or
hazardous substance handling practices which
results in a release or threatened release,
or
o
exercising control at a management level
encompassing the borrower's environmental
compliance responsibilities comparable to
that of a manager of the borrower's enter
prise, such that the security holder has
assumed or manifested responsibility for the
7
management of the enterprise by establishing,
implementing or maintaining the policies and
procedures encompassing the day-to-day
environmental decisionmaking of the borrower's
enterprise.
This principle (1) encourages the maximum amount of
cooperation between lenders and borrowers, (2) ensures
that ordinary and customary dealings between lenders
and borrowers do not result in strict liability under
CERCLA, and (3) clarifies that CERCLA strict liability
does not arise if a lender provides financial advice
and other services in areas totally unrelated to
environmental compliance.
o
POST-FORECLOSURE PROTECTION OF THE SECURITY INTEREST.
A foreclosing security holder is deemed to be acting
to protect the security interest and therefore not
subject to CERCLA strict liability unless it is shown
that the security holder has held the property for any
other purposes as evidenced by —
o
a failure to offer the property for sale or
to otherwise seek to divest his interest in
the property, or
o
a rejection a bona fide written offer of fair
consideration from a qualified purchaser.
This principle recognizes that lenders are ordinarily
not in the business of investing in foreclosed
collateral — they are in the business of making
loans.
In fact, the law prohibits national banks
from holding real property for investment purposes,
and provides that they may hold foreclosed property
for up to 10 years if that is necessary to recover on
a bad loan (see 12 U.S.C. 29).
For this reason, the
rule provides that a foreclosing lender will be pro
tected from CERCLA liability as long as it continues
to protect the security by making a good faith effort
to sell or otherwise divest foreclosed collateral for
fair consideration.
This principle also furthers two legitimate policy
objectives.
o
It protects the real estate market by ensuring
that lenders are not forced to "dump" foreclosed
properties in times of weak markets thereby
further depressing real estate values.
8
o
o
It avoids forcing lenders to wind down an ongoing
enterprise — a shopping center or a factory for
example ~ to avoid CERCLA liability.
Not only
may winding down operations reduce the value of
the collateral and make it more difficult to
sell, but it also eliminates jobs, reduces the
tax base of State and local governments, and
increases government unemployment compensation
costs.
BURDEN OF PROOF.
The burden shguld be on the plaintiff seeking to impose strict liability on a security
holder to prove —
o
that a holder participated in management (as
defined above) while the borrower was in
possession of the collateral, or
o
that a foreclosing holder has not acted to
protect the security interest (as defined
above).
GOVERNMENT-APPOINTED CONSERVATORS AND RECEIVERS
o
Government-appointed conservators and receivers
(including the FDIC and the RTC) are entitled to
assert the security interest exemption with respect
to the loan portfolios (including already foreclosed
upon properties) of troubled or failed depository
institutions.
o
Government-appointed conservators and receivers are
deemed to involuntarily acquire the assets of
troubled or failed depository institutions and
therefore have a defense to CERCLA liability under
section 101(35).
o
To the extent liability attaches to property in a
Government conservatorship or receivership, liability
of the Government-appointed conservator or receiver
shall not exceed the market value of the property
less the amount of the security interest.
These principles protect the Federal deposit insurance
funds from becoming a deep—pocket, either directly or
indirectly, for CERCLA liability.
Finally, the Administration also is seriously concerned about
a CERCLA liability problem unrelated to the question of lender
liability.
This concerns the potential CERCLA liability
attaching to acquisitions of property of Federal agencies that
1
9
are "involuntary” in nature.
Many Federal agencies, particularly
the law enforcement agencies of the Departments of Justice and
Treasury that seize and compel forfeiture of property need
assurances that such actions will not subject them to CERCLA
liability.
The EPA rule proposes language that would implement
such a provision and the Administration strongly supports it to
provide the necessary protection to Federal agencies that acquire
property involuntarily.
This concludes my formal remarks, and I would be pleased to
answer any questions you and the Committee may have.
[TREASURY NEWS _
Kapartment of tho Treasury • Washington, D.c. a Telephone see-204 1
For Release Upon Delivery
Expected at 9:30 AM
May 31, 1991
STATEMENT OF
GERALD MURPHY
FISCAL ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the
Committee:
I welcome this opportunity to
provide an overview of the Minority
Bank Deposit Program (Program)
with emphasis on elements relevant
to United National Bank of
Washington (UNB). I will also
provide what information I can
concerning UNB and then answer
the questions posed in your May 28
letter to Secretary Brady.
Minority Bank Deposit Program
The Program is an Executive
Branch initiative, authorized by
Executive Order, to foster minority
banking enterprise. The Program is
a voluntary effort to encourage
Federal agencies to establish
depositary/financial agent
relationships with Program financial
institutions. The Treasury
Department administers the
Program; the Treasury Financial
Management Service (FMS) (which I
monitor) has operational
responsibilities for the Program.
Eligible participants include
commercial banks which are
minority-owned or minoritycontrolled. These terms and their
meanings have been used since the
mid-1970's and are well- publicized
in all Program materials, applications
and self- certification forms, etc.
The term "minority ownership"
means that more than 50 percent of
an institution's outstanding stock is
owned by members of minority
groups. The term "minority control"
(relevant with respect to UNB)
applies when minority persons hold
by voting trust and/or proxy
agreements enough shares so that
when added to the shares owned by
minority persons there is minority
control over more than 50 percent of
the outstanding voting stock. The
voting trust and/or proxy agreements
must have a life of at least three
years and be irrevocable, and the
trustee (a member of a minority
group) must have unfettered
discretion in voting the stock.
Minority control does not refer to the
number of minority directors and
officers.
Additional Program information
relevant with respect to UNB is that
an eligible financial institution
applies, and self- certifies its
minority status, to FMS and
thereafter becomes a participant in
the MBDP. (There are 187 financial
institutions in the MBDP). A
Program participant is expected to
notify FMS of any change in status
that could affect MBDP eligibility.
Qualified Program participants are
included on a Program roster
maintained, updated and distributed
by FMS to Federal agencies,
contractors and other public and
private sector organizations.
United National Bank of Washington
United National Bank (UNB) was
organized as a minority bank in
1964 and became a participant in
the Minority Bank Deposit Program
in the early 1970's on the basis of
minority ownership.
In November
1989, FMS requested all participants
to self-certify their minority status.
UNB President Joseph Aston replied
on December 29, 1989, advising
that he believed that UNB was
operated and controlled by
minorities, but that UNB was no
longer under minority ownership due
to a merger between UNB
Bancshares, Inc., and James
Madison, Limited. This was the first
notice to FMS that UNB no longer
claimed minority ownership.
The documentation submitted by
UNB to support minority control did
not meet the criteria I mentioned
earlier and accordingly UNB was not
included in the roster of Program
participants issued in January 1990.
UNB appealed the decision to senior
Treasury levels and agreed to submit
additional information to the
Treasury Office of General Counsel.
In August 1990, after considerable
review, the UNB appeal was denied.
Questions Answered
1. The opening of my Statement
provides the overview you
requested of the Minority Bank
Deposit Program.
2.
UNB was deleted from the roster
of Program participants as of
January 1990.
3. UNB was deleted from the roster
after it was discovered that the
bank had been purchased by non
minority interests and it was
determined not to be under
effective minority control.
4. The MBDP is voluntary for both
participants and Executive Branch
agencies. Therefore, Treasury's
FMS has relied on participants to
advise us of any change that
might affect their status as
minority-owned or controlled.
UNB did not notify Treasury when
the change occurred. Treasury
discovered the change in status
during a general request to
all Program banks in November of
1989. At that point, UNB
acknowledged that it was no
longer minority owned. UNB,
however, believed it met the
criteria for minority control.
Treasury disagreed and dropped
UNB from the Program in January
of 1990. The bank appealed the
decision; it was reviewed and a
final decision to deny the appeal
was made in August of 1990.
5. There is no record that Madison
or UNB notified Treasury that
UNB was no longer minority
controlled before December
1989.
6. There is no record that the Office
of the Comptroller of the
Currency or the Federal Reserve
Board notified Treasury that UNB
was no longer minority-owned.
During the Spring and early
Summer of 1990, after UNB
appealed, there were telephone
conversations among my Office,
the Office of the Comptroller of
the Currency and the Federal
Reserve Board to discuss possible
methods proposed by UNB by
which it might qualify as minoritycontrolled. Nothing came of
these discussions that could
justify restoring UNB's eligibility.
Mr. Chairman, that concludes my
prepared testimony. I'll be happy to
answer any questions that you may
have.
TREASURY NEWS
«partment of the Treasury • Washington, D.C. • Telephone 566*2041
CONTACT:
FOR IMMEDIATE RELEASE
June 6, 1991
Barbara Clay
202-566-5252
BRADY ANNOUNCES NEW EBRD FIRST VICE PRESIDENT
Secretary Nicholas Brady today announced that Ronald
Freeman has been chosen by the Board of Directors of the newly
formed European Bank for Reconstruction and Development to fill
the position of First Vice President, Merchant Banking.
"Ron Freeman's background and experience will be particularly
valuable in shaping the bank's support for the emerging private
sector needs of Eastern Europe," Brady said.
In his new position, Freeman will be responsible for overseeing
the new bank's private sector development activities, the largest
part of its portfolio.
Freeman, aged 51, a lawyer and a banker, joined Salomon Brothers
in 1973.
He was admitted to the firm's general partnership in
1979.
He most recently served as Head of European Investment
Banking, located in London.
Prior to that, he served as Managing
Director and Co-Head of Salomon Brothers' Strategic Services
Group and was also Head of International Mergers and Acquisitions
based in New York.
Prior to joining Salomon Brothers, he was employed by McKinsey &
Co., 1967-73, and by Baker and McKenzie, 1965-67.
0O0
NB-1310
[PUBLIC DEBT NEWS
D epartm ent of the T reasu ry
•
B ureau of the Public D ebt • W a sttn g io n , D C 20239
J V
FO R RELEASE AT 3 :0 0 PM
June 6, 1991
uJ 0o
Contact: Peter Hollenbach
(202) 376-4302
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MAY 1991
Treasury’s Bureau of the Public Debt announced activity figures for the month of May 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
1520,322,741
Held in Unstripped Form
$394,659,506
Held in Stripped Form
$125,663,235
Reconstituted in May
$2,978,540
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 D ebt, 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 7
TA BLE VI—HOLDINGS OF TREASURY SECU RITIES IN STRIPPED FORM, MAY 31, 1991
(In thousands)
Loan Description
11*5/8%Note C-1994 .....................
11-1/4%Note A-1995 .....................
11*1/4%Note B-1995 .....................
10*1/2%Note C-1995 .....................
9*1/2%Note D-1995 ......................
6*7/8% Note A-1996 ......................
7*3/8%Note C-1996 ......................
7*1/4%Note 01996 ......................
6*1/2%Note A-1997 .......................
6*5/8%Note 01997 .......................
$.7/8%Net* 01997 ............. .......
8-1/8% Note4*1998 .......................
9% Note 01998 ...........................
9*1/4%Note 01996 .......................
6*7/8%Note 01998 .......................
6*7/8%Note A-1999 .......................
9-1/8%Note 01999 .......................
6% Note01999 ...........................
7-7/8%Note 01999 .......................
6*1/2%Note A-2000 .......................
8-7/8%Note 02000 .......................
64/4% Note 02000 .......................
6*1/2%Note 02000 .......................
7*3/4%NoteA-2001 .......................
8% Note 02001 ...........................
11*5/8%Bond 2004........................
12% Bond 2005............................
103/4% Bond 2005........................
93/8% Bond 2006.........................
113/4% Bond 2009-14 ....................
11*1/4%Bond 2015..................
10*5/8%Bond 2015...... ................
9*7/8%Bond 2015.........................
9*1/4%Bond 2016..........................
7-1/4%Bond 2016.........................
7-1/2% Bond 2016.........................
63/4% Bond 2017.........................
8-7/8% Bond 2017..........................
9*1/8%Bond 2018.........................
9% Bond 2018..............................
6*7/8%Bond 2019.........................
6*1/8%Bond 2019..........................
8*1/2%Bond 2020..........................
63/4% Bond 2020..........................
63/4% Bond 2020..........................
7*7/8%Bond 2021..........................
6*1/8%Bond 2021..........................
Total......................................
Maturity Date
......11/15/94......
......2/15/95 ......
......5/15/95 .....
......6/15/95 ......
......11/15/95......
......2/15/96 ......
......5/15/96 ......
......11/15/96......
......5/15/97 ......
......6/15/97 ......
......11/15/97
......2/15/98
......5/15/98 ......
......6/15/98 ......
......11/15/98......
......2/15/99 ......
......5/15/99 ......
......6/15/99 ......
......11/15/99......
......2/15/00 ......
......5/15/00 ......
......6/15/00 ......
......11/15/00......
......2/15/01 ......
......5/15/01 ......
......11/15/04......
......5/15/05 ......
......8/15/05 ......
......2/15/06 ......
......11/15/14......
......2/15/15 ......
......8/15/15 ......
......11/15/15......
......2/15/16 ......
......5/15/16 ......
......11/15/16......
......5/15/17 ......
__ 8/15/17 ......
......5/15/18 ......
......11/15/18......
......2/15/19 ......
......8/15/19 ......
......2/15/20 ......
......5/15/20 ......
......8/15/20 ......
......2/15/21 ......
......5/15/21 ......
Total
Principal Amount Outstanding
Portion Held in
Unstripped Form
Portion Held in
Stripped Form
$6,658,554
6,933,861
7.127.086
7,955,901
7,318,550
8,575,199
20,065,643
20.258,810
9,921,237
9,362,836
9,808,379
9,159,068
9,165,387
11,342,646
9,902,875
9,719,623
10.047.103
10,163,644
10.773.960
10,673,033
10,496,230
11,080,626
11,519,682
11,312,802
12,398,063
8,301,806
4,260,758
9.269,713
4,755,916
6.005,584
12,667,799
7,149.916
6,699,859
7,266,854
18.823,551
18,864.448
16,194,169
14,016,658
8,708,639
9,032,870
19.250,798
20,213,832
10,228,868
10,156,883
21,418,606
11,113,378
11,958,888
$5,613,754
6,499,141
5,871,406
7,391,901
6,137,350
8,343,199
19,871,243
19,967,610
9.640.037
9,330,836
9792,329
9,149788
9,135,387
11,213,646
9,896,475
9,716,423
9,176,703
10,081,619
10.765,960
10,673,033
10,414,630
11,080,626
11,519,682
11,312,802
12,398,063
3,666,206
1,667,708
8,304,113
4,755,916
1,316,784
2,102,199
1,736,156
2,229,459
6,710,854
17,140.351
15.206,848
6.726,649
9,479,258
2.368.639
1.574.470
4,993,196
10.559,752
3.696,868
2,806,163
9.256.686
11,004.578
11.936,608
$1,044,800
434,720
1,255,680
564,000
1,181,200
232,000
214,400
291,200
81,200
32,000
16,000
9.280
30.000
126,800
6,400
3,200
870,400
82,025
8,000
-0 81 600
-0 -0 -0 -0 4,633,600
2,593,050
965,600
-0 4,688,800
10,565,600
5,413,760
4,670,400
556,000
1,683,200
3,657,600
11,467,520
4,537,600
6,320,000
7,458,400
14,257,600
9,654,060
6,330,000
7,350,720
12,161,920
106,800
22.060
520,322,741
394,659,506
125,663,235
’EffectiveMay 1, 1967, securities held in stripped formwere eligible for reconstitutiontotheir unstnpped form.
Mote: On the 4thworkday of each month a recording of Table VI wilt be available after 3:00 pm. The telephone number is (202) 447*9873.
The balance« Inthis table are subject toaudit and subsequent adjustments
Reconstituted
This Month1
$11,20(
22,4a
1,921
-0 3,60
-0-0-0-0*
-0*
>0.0*
-0-0
-0
-0
-0
-0
-0
-0
-0
>0
>0
-0
-0
16,0
66,3
136.0
-C
90.4
129,6
137,2
140,8
48.8
140,C
315,8
226,C
64,C
174,«
170,8
289,1
380,‘
366.C
15,(
24.1
-•
4.1
2.978.!
A
B I L L
To amend the Securities Exchange Act of 1934 to extend the regulatory
authority of the Secretary of the Treasury under the Government
Securities Act of 1986, and for other purposes.
Be it enacted bv the Senate and House of Representatives of the
United States of America in Congress assembled.
SECTION 1.
SHORT TITLE.
This act may be cited as the ’’Government Securities Act Amend
ments of 1991".
SEC. 2.
GOVERNMENT SECURITIES REGULATORY AUTHORITY.
(a) Extension of Rulemaking Authority.—
Securities Exchange Act of 1934
Section 15C of the
(15 U.S.C. 78o-5)
is amended by
repealing subsection (g).
(b) Additional Rulemaking Authority.—
Securities Exchange Act of 1934
(15 U.S.C. 78o-5)
subsection (b), by redesignating paragraphs
paragraphs
(5),
(6),
Section 15C of the
(3),
is amended in
(4),
(5), and (6) as
(7), and (8) and inserting after paragraph
(2)
the following new paragraphs:
"(3) The Secretary may propose and adopt rules —
” (A) which define, and prescribe means reasonably
designed to prevent, such acts and practices as are
fraudulent, deceptive, or manipulative with respect to
transactions in government securities effected by government
securities brokers and government securities dealers; and
"(B) designed to promote just and equitable principles of
trade with respect to transactions in government securities
2
effected by government securities brokers or government
securities dealers that are financial institutions."
"(4) In furtherance of the objective of assuring adequate
dissemination of government securities price and volume
information:
"(A)
(i) The Secretary may propose and adopt rules and
regulations designed to:
"(I) assure the prompt, accurate, reliable, and
fair reporting, collection, processing, distribution,
and publication of information with respect to
quotations for and transactions in government securities
and the fairness and usefulness of the form and content
of such information;
"(II) assure that all government securities
information processors may,
for purposes of distribution
and publication, obtain on fair and reasonable terms
such information with respect to quotations for and
transactions in government securities as is reported,
collected, processed, or prepared for distribution or
publication by any processor of such information
(including self-regulatory organizations)
acting in an
exclusive capacity; and
"(III) assure that all government securities
brokers, government securities dealers, government
securities information processors, and, subject to such
limitations as the Secretary, by rule, may impose as
3
necessary or appropriate for the protection of investors
or maintenance of fair and orderly markets,
all other
persons may obtain on terms which are not unreasonably
discriminatory such information with respect to
quotations for and transactions in government securities
as is published or distributed.
"(ii) No self-regulatory organization, government
securities information processor, government securities
broker, or government securities dealer shall make use of the
mails or any means or instrumentality of interstate commerce
to report, collect, process, distribute, publish,
or prepare
for distribution or publication any information with respect
to quotations for or transactions in any government security,
to assist, participate in, or coordinate the distribution or
publication of such information, or to effect any transaction
in, or to induce or attempt to induce the purchase or sale
of, any government security in contravention of any rules or
regulations promulgated under this paragraph.
»•(B) The Secretary may, by rule, as the Secretary
deems necessary or appropriate in the public interest or
for the protection of investors, after due consideration
of any effects on the liquidity or efficiency of the
government securities market, require any government
securities broker or government securities dealer who
has induced, attempted to induce, or effected the
purchase or sale of any government security by use of
4
the mails or any means or instrumentality of interstate
commerce to report purchases, sales or quotations for
any government security to a government securities
information processor, national securities exchange, or
registered securities association and require such a
processor, exchange, or association to make appropriate
distribution and publication of information with respect
to such purchases, sales or quotations.” .
(c)
Technical Amendment.—
Act of 1934
(15 U.S.C. 78o-5)
Section 15C of the Securities Exchange
is amended in subsection
(d) by revising
paragraph (2) to read as follows:
” (2) Information received by any appropriate regulatory
agency, any Federal Reserve Bank, or the Secretary from or with
respect to any government securities broker or government
securities dealer or with respect to any person associated
therewith may be made available by the Secretary, the recipient
agency or the Federal Reserve Bank to the Commission, the
Secretary, any appropriate regulatory agency, any self-regulatory
organization, or any Federal Reserve Bank.”
SEC. 3.
RULES BY REGISTERED SECURITIES ASSOCIATIONS.
Section 1 5 A (f)(2) of the Securities Exchange Act of 1934
U.S.C. 78o-3(f)(2))
(15
is amended —
(1) in clause (E), by striking the word "and” at the end
thereof ;
(2) in clause (F), by striking the period at the end thereof
and inserting instead ", and"; and
(3) by adding at the end thereof the following new clause:
"(G) with respect to transactions in government securi
ties, to prevent fraudulent and manipulative acts and prac
tices and to promote just and equitable principles of trade,
provided such rules are consistent with any rule adopted by
the Secretary of the Treasury pursuant to section
15C(b)(3)(A) of this title.".
SEC. 4.
OVERSIGHT OF REGISTERED SECURITIES ASSOCIATIONS.
Section 19 of the Securities Exchange Act of 1934
(15 U.S.C. 78s)
is amended —
(1)
in subsection (b), by adding at the end thereof the
following new paragraph:
"(5) The Commission shall consult with and consider the
views of the Secretary of the Treasury
(Secretary) prior to
approving a proposed rule change filed by a registered
securities association pursuant to section 15A(f)(2)(G) of
this title, except where the Commission determines that an
emergency exists requiring expeditious or summary action and
publishes its reasons therefor.
If the Secretary comments in
writing to the Commission on such proposed rule change that
has been published for comment, the Commission shall respond
in writing to such written comment before approving the
proposed rule change."
6
(2)
in subsection (c), by adding at the end thereof the
following new paragraph:
"(5) With respect to rules adopted pursuant to section
15A(f)(2)(G) of this title, the Commission shall consult with
and consider the views of the Secretary before abrogating,
adding to, and deleting from such rules, except where the
Commission determines that an emergency exists requiring
expeditious or summary action and publishes its reasons
therefor.1
SEC. 5.
AMENDMENTS TO DEFINITIONS.
Section 3(a) of the Securities Exchange Act of 1934
78c(a))
(15 U.S.C.
is amended —
(1) in paragraph 34(G)
(relating to the definition of appro
priate regulatory agency), by amending clauses
(ii), (iii), and
(iv) to read as follows:
" (ii) the Board of Governors of the Federal Reserve
System,
in the case of a State member bank of the Federal
Reserve System, a foreign bank, an uninsured State branch or
State agency of a foreign bank, a commercial lending company
owned or controlled by a foreign bank (as such terms are used
in the International Banking Act of 1978), or a corporation
organized or having an agreement with the Board of Governors
of the Federal Reserve System pursuant to section 25 or sec
tion 25(a) of the Federal Reserve Act?
7
••(iii) the Federal Deposit Insurance Corporation,
in the
case of a bank insured by the Federal Deposit Insurance Corp
oration (other than a member of the Federal Reserve System or
a Federal savings bank) or an insured State branch of a
foreign bank (as such terms are used in the International
Banking Act of 1978);
" (iv) the Director of the Office of Thrift Supervision,
in the case of a savings association (as defined in section
3 (b) of the Federal Deposit Insurance Act) the deposits of
which are insured by the Federal Deposit Insurance
Corporation ?";
(2) by amending paragraph (46)
(relating to the definition of
financial institution) to read as follows:
” (46) The term 'financial institution' means —
"(A) a bank (as defined in paragraph
(6) of this
subsection);
"(B) a foreign bank (as such term is used in the
International Banking Act of 1978)? and
"(C) a savings association (as defined in section
3(b) of the Federal Deposit Insurance Act) the deposits
of which are insured by the Federal Deposit Insurance
Corporation.” ; and
(3)
by adding at the end thereof the following new paragraph
(relating to the definition of government securities information
processor):
8
” (53) The term ‘government securities information pro
cessor* means any person engaged in the business of (i) col
lecting, processing, or preparing for distribution or publi
cation, or assisting, participating in, or coordinating the
distribution or publication of, information with respect to
transactions in or quotations for any government security; or
(ii) distributing or publishing (whether by means of a ticker
tape, a communications network, a terminal display device, or
otherwise) on a current and continuing basis,
information
with respect to such transactions or quotations.
The term
'government securities information processor' does not in
clude any bona fide newspaper, news magazine,
or business or
financial publication of general and regular circulation, any
self-regulatory organization, any bank, government securities
broker, government securities dealer, or savings association
(as defined in section 3(b) of the Federal Deposit Insurance
A c t ) , if such bank, government securities broker, government
securities dealer, or association would be deemed to be a
government securities information processor solely by reason
of functions performed by such institutions as part of cus
tomary banking, brokerage, dealing, or association activi
ties, or any common carrier, as defined in section 3(h) of
the Communications Act of 1934, subject to the jurisdiction
of the Federal Communications Commission or a State commis
sion, as defined in section 3(t) of that Act, unless the
Commission determines that such carrier is engaged in the
business of collecting, processing, or preparing for dis
tribution or publication,
information with respect to
transactions in or quotations for any government security.
GOVERNMENT SECURITIES ACT AMENDMENTS OF 1991
ANALYSIS
SECTION 1 .
Short title.
SECTION 2.
GOVERNMENT SECURITIES REGULATORY AUTHORITY.
Subsection fa) would repeal section 15C(g) of the Securities
Exchange Act of 1934 (1934 Act).
Section 15C(g), as added by section
101 of the Government Securities Act of 1986 (GSA) (Pub. L. 99-571),
provides that the authority of the Secretary of the Treasury to pro
mulgate regulations and issue orders under the GSA governing trans
actions in government securities by government securities brokers and
dealers expires on October 1, 1991.
The repeal of subsection (g)
would permanently extend the regulatory authority of the Secretary.
This amendment is necessary to preserve the current regulatory
structure of the government securities market and to ensure continuity
of regulatory policy.
Subsection (b) would amend section 15C(b) of the 1934 Act, as
added by GSA section 101(b), which concerns rules adopted and imple
mented by the Secretary of the Treasury.
This amendment would grant
the Secretary of the Treasury discretionary authority to prescribe
sales practice rules that are reasonably designed to prevent
fraudulent, deceptive, or manipulative acts and practices for all
government securities brokers and dealers, including financial
institutions.
Vesting Treasury with this authority would ensure that
such rules provide comparable protection to customers of both bank and
non-bank brokers and dealers.
This amendment would also grant the
Secretary discretionary authority to prescribe sales practice rules to
promote just and equitable principles of trade applicable to
government securities brokers and dealers that are financial
institutions.
These authorities, together with the granting of
authority to registered securities associations (i.e., the National
Association of Securities Dealers (NASD)) to prescribe just and
equitable principles of trade for their members pursuant to section
15A(f)(2)(G) of the 1934 Act (as proposed herein), are intended to
provide government securities investors with sales practice
protections (e.g., prohibitions against excessive mark-ups,
suitability guidelines, and customer authorization requirements) that
are comparable to those available in other securities markets.
This subsection would also grant the Secretary discretionary
authority, similar to the existing authority of the Securities and
Exchange Commission (SEC) with respect to non-exempt securities trans
action information, to regulate disclosure of and access to government
securities price and volume information.
The Secretary would be
authorized:
2
o
To assure the prompt, accurate, reliable, and fair reporting,
collection, processing, distribution, and publication of
government securities transaction information and the
fairness and usefulness of the form and content of such
information;
o
To propose and adopt rules designed to assure that all gov
ernment securities information processors have access, for
purposes of distributing or publishing on reasonable and
nondiscriminatory terms, to government securities quotation
and transaction information reported, collected, processed or
prepared for distribution or publication by any processor
acting in an exclusive capacity regarding such information.
o
To assure that all persons, including government securities
brokers and dealers, and government securities information
processors, as the Secretary deems appropriate, have access
on reasonable and nondiscriminatory terms to quotations and
transaction reports published.
This subsection also would make it unlawful for any selfregulatory organization, government securities information processor,
or government securities broker or dealer to perform the functions of
a government securities information processor or to purchase or sell
any government security in contravention of any rules prescribed by
the Secretary.
This subsection would also permit the Secretary to determine that
it would be in the public interest to require the reporting of
government securities quotation, purchase, or sale information by any
government securities broker or government securities dealer to a
government securities information processor, national securities
exchange, or registered securities association, and to require
recipients to make appropriate distribution and publication of the
information.
Subsection (c) clarifies that information concerning any
government securities broker or government securities dealer may be
received from or provided to the Federal Reserve Banks as well as the
Board of Governors of the Federal Reserve System.
SECTION 3.
REGISTERED SECURITIES ASSOCIATIONS.
This section would amend section 15A(f)(2) of the 1934 Act, which
concerns rules that registered securities associations may adopt and
implement with respect to members of such associations.
The amendment
would grant registered securities associations (i.e., the NASD)
discretionary authority to prescribe government securities sales
practice rules for their members, provided such rules are consistent
with sales practice rules adopted by the Secretary, of the Treasury
under section 15C(b)(3)(A) of the 1934 Act.
In adopting sales
practice rules, registered securities associations should take care
not to unnecessarily impair the liquidity or efficiency of the
- 3 government securities market.
The provision requiring consistency
parallels a provision in section 19(b)(2) of the 1934 Act which
requires proposed rules of self-regulatory organizations to be
consistent with the requirements of the 1934 Act and the regulations
thereunder.
The consistency requirement is thus intended to prevent
the promulgation of any rules that would require or appear to permit
government securities brokers and dealers to engage in conduct that is
inconsistent with the requirements of applicable Treasury rules.
When enacted, the GSA did not rescind the restriction placed on
registered securities associations that prohibits them from adopting
or applying sales practice rules to government securities transac
tions.
This amendment would rescind this restriction, and is intended
to enhance customer protection by facilitating the ability of reg
istered securities associations, specifically the NASD, to enforce
compliance with sales practice rules applicable to members that are
government securities brokers or dealers.
SECTION 4.
OVERSIGHT OF REGISTERED SECURITIES ASSOCIATIONS.
This section would amend section 19 of the 1934 Act, which
concerns registration, responsibilities, and oversight of
self-regulatory organizations.
This amendment would require the SEC
to consult with and consider the views of the Secretary of the
Treasury prior to approving government securities sales practice rules
proposed by registered securities associations, specifically the NASD.
The amendment would grant the SEC authority to approve such rules
without consulting with Treasury if an emergency arose requiring
expeditious or summary action.
The amendment would also require the
SEC to respond in writing to any written comment submitted by the
Secretary relating to such proposed rules before it approves the
rules.
Further, the amendment would require the SEC to consult with and
consider the views of the Secretary before abrogating, adding to, and
deleting any government securities sales practice rules developed by
registered securities associations.
The SEC would be able to
abrogate, add to, and delete such sales practice rules without
consulting with Treasury if an emergency warranted such action.
SECTION 5.
AMENDMENTS TO DEFINITIONS.
Paragraph ( 1) would conform section 3(a)(34)(G) of the 1934 Act,
as added by GSA section 102(b) (concerning the definition of "appro
priate regulatory agency” ) , with existing bank regulatory agency
supervisory authorities.
First, the Board of Governors of the Federal Reserve System (FRB)
would be designated as the appropriate regulatory agency for financial
institutions that are Edge or Agreement corporations.
Without this
modification, supervisory responsibility for the government securities
activities of these entities would continue to rest with the SEC.
4
Since the FRB already exercises bank regulatory and supervisory
responsibilities for these entities pursuant to the Federal Reserve
Act, this amendment would eliminate inefficiencies and reduce costs
resulting from duplicative examinations.
In addition, the transfer of
supervision from the SEC to the FRB is appropriate since the FRB
routinely examines financial institutions, while the SEC supervises
the broker and dealer activities of institutions that are not gen
erally financial institutions.
Second, the Federal Deposit Insurance Corporation (FDIC) would be
designated as the appropriate regulatory agency for insured State
branches of foreign banks (the FRB would retain jurisdiction for un
insured State branches and State agencies of foreign bank s ) . This
amendment will ensure that the FDIC, which currently examines insured
State branches of foreign banks pursuant to the International Banking
Act, would be responsible for the examination of government securities
activities conducted by such institutions.
The amendment would
eliminate the costs associated with duplicative examinations.
Finally, as a technical amendment, this provision would insert a
parenthetical reference to the definition of "savings association"
contained in the Federal Deposit Insurance Act.
The Financial Insti
tutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) amended
clause (iv) to designate the Director of the Office of Thrift Super
vision (OTS) as the appropriate regulator for savings associations.
The term "savings association," however, is not defined in the Act.
Paragraph (2) would technically amend the definition of "finan
cial institution" contained in section 3 ( a ) (46) of the 1934 Act.
Prior to FIRREA, section 3 ( a ) (46) referenced the definition of
"insured institutions" (including insured thrifts) contained in the
National Housing Act (NHA). FIRREA, however, repealed the referenced
NHA definition.
The amendment would clarify the definition of
"financial institution" by reincluding entities that were formerly
insured by the Federal Savings and Loan Insurance Corporation.
Consistent with FIRREA section 7 4 4 (u), this provision would include
savings associations insured by the FDIC and subject to supervision by
the OTS within the definition of "financial institution."
Paragraph (3) would add to section 3(a) of the 1934 Act a def
inition of the term "government securities information processor."
The term is based on the definition of a "securities information
processor" found at section 3(a)(22)(A) of the 1934 Act and is defined
as any person engaged in the business of collecting, processing, or
preparing for distribution or publication information with respect to
transactions in or quotations for any government security and also any
person engaged in distributing or publishing such information on a
current and continuing basis.
The press and common carriers subject
to the jurisdiction of the Federal Communications Commission or a
State commission, would be exempted from the definition unless such
carrier is engaged in the business of preparing for or coordinating
the distribution or publication of such information.
Self-regulatory
- 5 organizations would also be exempt from the definition, as would
banks, government securities brokers, government securities dealers,
or savings associations if the latter four organization types would be
government securities information processors merely because they
engage in functions customary for such institutions.
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
)EPT. OF THE TREASURY
Tenders for $10,049 million of 13-week bills to be issued
June 13, 1991 and to mature September 12, 1991 were
accepted today (CUSIP: 912794XF6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.58%
5.60%
5.60%
Investment
Rate
5.75%
5.78%
5.78%
Price
98.590
98.584
98.584
Tenders at the high discount rate were allotted 85%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,305
27,683,280
19,295
62,645
50,185
35,555
1,436,915
58,880
8,485
48,985
22,105
602,505
918.675
$30,974,815
Accented
27,305
8,341,020
19,295
62,615
50,185
33,555
420,665
18,880
8,485
48,985
22,105
77,280
918.675
$10,049,050
Type
Competitive
Noncompetitive
Subtotal, Public
$27,039,845
1.669.640
$28,709,485
$6,114,080
1.669.640
$7,783,720
2,141,155
2,141,155
124.175
$30,974,815
124.175
$10,049,050
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $47,325 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1311
JB RARY ROOM 5 3 1 0
UBLIC DEBT
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
LXH O B £ ÂS URY
CONTACT r rafrfcë*bf Financing
202-376-4350
FOR IMMEDIATE RELEASE
June 10, 1991
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,059 million of 26-week bills to be issued
June 13, 1991 and to mature December 12, 1991 were
accepted today (CUSIP: 912794XR0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.76%
5.78%
5.78%
Investment
Rate_____ Price
6.03%
97.088
6.05%
97.078
6.05%
97.078
$5,000,000 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
25,805
22,491,240
18,720
28,805
135,285
25,075
1,399,460
38,550
7,240
52,300
15,640
608,395
597.225
$25,443,740
Accented
25,805
8,682,540
18,720
28,805
84,285
24,055
294,260
23,450
7,240
51,280
15,640
205,345
597.225
$10,058,650
Type
Competitive
Noncompetitive
Subtotal, Public
$21,645,170
1.131.445
$22,776,615
$6,260,080
1.131.445
$7,391,525
2 ,200,000
2 ,200,000
467.125
$25,443,740
467.125
$10,058,650
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $189,975 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1312
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 11, 1991
)EPT. OF THE TREASURY
Contact:
Barbara Clay
(202) 566-5252
Bank of America Forest Conservation Donation
Press Conference
June 11, 1991
Remarks bv Secretary Bradv
Thank you, Dick.
I am happy to be here and to recognize the
leadership of the Bank of America in making the largest donation
of LDC debt to date in support of environmental objectives.
The
project embarked upon today by the Bank of America and its
partners (the Smithsonian, World Wildlife Fund, and Conservation
International) is a vital contribution to the protection of Latin
American rainforests.
Furthermore, this donation is an important development in
the history of debt-for-nature swaps.
Through the work of a
range of environmental organizations over the last five years,
debt—for—nature swaps have made an important contribution to
conservation and environmental protection efforts.
In the past,
these swaps have been undertaken primarily through the p u r c h a s e '
of commercial bank debt by environmental organizations.
Bank of
America's donation of debt illustrates a new way to accomplish
swaps.
This action is complementary to President Bush's Enterprise
for the Americas Initiative (EAI). The EAI calls for interest
payments on reduced PL-480 and AID debt to be made in local
currency to fund grass roots environmental projects.
We expect
to enter into the first PL-480 debt reduction and environmental
framework agreements this summer as countries become eligible.
In addition, we are working to g a m the authority and funding
from Congress to reduce AID debt, which is the largest share of
the debt owed to the United States by Latin American and
Caribbean countries.
NB-1313
Providing resources for environmental projects is an^
important part of the Enterprise for the Americas Initiative, but
there is much more.
The initiative is a comprehensive effort to
address the major economic problems facing Latin America and the
Caribbean — trade, investment, and debt.
Through their
courageous actions to open their economies, leaders in the region
are creating new opportunities for economic growth.
This m turn
provides the foundation for the protection of their environment
in a comprehensive way.
This important action by the Bank of America should
encourage other banks to take steps to help protect the world's
valuable natural resources.
In addition, it is hoped that
Congress will act to authorize and fund the Enterprise for the
Americas Initiative, which would provide important additional
support for the environment in Latin America.
Thank you.
apartment of the Treasury • Washington, D.C. • Telephone 566*2041
)EPT. OF THE TREASURY
FOR RELEASE AT 2:30 P.M.
June 11, 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 $20,000 million, to be issued June 20, 1991. This offer
ing will result in a paydown for the Treasury of about $6,075
million, as the maturing bills total $26,063 million (including
the 17-day cash management bills issued June 3, 1991, in the
amount of $7,068 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, June 17, 1991, prior to
1 2 :0 0 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
$10,000 million, representing an additional amount of bills dated
March 21, 1991, and to mature September 19, 1991 (CUSIP No. 912794
XG 4), currently outstanding in the amount of $8,474 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately
$10,000 million, representing an additional amount of bills
dated December 20, 1990, and to mature December 19, 1991 (CUSIP
No. 912794 WX 8), currently outstanding in the amount of $11,799
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 June 20, 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 $1,070 million
as agents for foreign and international monetary authorities, and
$4,240 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-1314
TREASURY'S 1 3 - ,
2 6 - , AND 52-WEEK B ILL OFFERINGS, P a g e 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
Department of the Treasury • washlngtpp^
I
PREPARED FOR DELIVERY
EMBARGOED UNTIL 4:00 a.m.
June 8, 1991
f
(telephone 566-2041
Barbara Clay
202-566-5252
(EDT)
THE HONORABLE JOHN ROBSON
DEPUTY SECRETARY OF THE TREASURY
1 9 9 1 IEWSS INTERNATIONAL CONFERENCE
JUNE 8 , 1 9 9 1
BARDEJOV, CZECHOSLOVAKIA
Thank you.
It is a great pleasure to join all of you for
this important and timely conference — and to share in the
celebration of Bardejov*s 750th anniversary.
This anniversary
not only reminds us of the long and rich history of your people,
but it stands in sharp contrast to the brief time that the truly
revolutionary political and economic reforms in this part of the
world have been underway — reforms that have captured the
profound admiration of all those who love free politics and free
markets.
Even in this brief time, the Czech and Slovak Federal
Republic — and much of Central and Eastern Europe — have made
substantial progress along the way to becoming durable
democracies and free market economies.
And we have learned some
important lessons about the techniques, the problems, the
effects, the expectations and the respective responsibilities of
the reforming nations and the industrialized democracies in this
difficult process of economic reform.
We have learned just how hard it is to make the transition
from an economic system where almost everything is owned and
decided by government, to a system where ownership and economic
decisions are in the hands of private citizens in a competitive
marketplace.
We have learned that the transition to free markets is not
for the faint-hearted — that the ropes of government command
must be cleanly severed.
Reforming countries cannot succeed by
controlling from the center and trying to gently and painlessly
phase in the forces of the marketplace over a lengthy period.
Success is likely to come soonest to countries that convert to
the free market quickly — with no turning back.
We have learned the importance of firm
and solid public support for the success of
we have seen some splendid examples of such
President Havel, Minister Klaus, and others
N B-1315
political leadership
economic reform.
And
leadership by
in this Republic.
2
We have learned that becoming a free market is a complex,
multi-faceted process where many actions must be synchronized —
currency convertability, price liberalization, tax reform,
financial sector development, private property rights, removal of
trade barriers, privatization of state enterprises, and the
establishment of "safety nets" to help cope with unemployment —
to name a few. Also, national budgets must be controlled by
reducing subsidies.
Perhaps the most fundamental lesson is that the design and
implementation of economic reform is the responsibility of the
reforming nations. While the industrialized democracies have a
large stake in your success and can help you along the way, this
is principally your challenge.
You do not undertake these difficult and frequently painful
economic reforms for us, but because you understand they offer
the only path to prosperity and a higher standard of living for
your people.
Economic reform has its own rewards, and they will
come to you as they have to other countries — through hard work,
prudent saving and wise investment.
Lip service only to economic
reform will not suffice.
In the end, you will be rewarded and
measured by what you do, not by what you say.
These are some of the lessons that have become apparent
during the short period of economic transformation.
I believe
they have helped to clarify our respective responsibilities and
expectations.
And what are those responsibilities and expectations? What
assistance can you expect from the industrialized democracies,
and what can we expect from you in justifying and facilitating
such assistance?
To begin, the industrialized nations have a responsibility
to pursue economic policies that foster global growth without
inflation.
And reforming nations should have reasonable
opportunities to trade with these developed markets.
Such
policies offer the greatest long-term prospect for widespread
economic opportunity and the flows of needed capital.
In addition, East and Central European nations can expect,
and in fact are receiving, substantial technical assistance from
the West.
Our expertise in building the legal and institutional
foundations for a market economy may not yield immediate and
visible benefits, but it can greatly accelerate the pace of
reform and help you avoid some pitfalls.
Certainly, this is
where the U.S. has focused its assistance efforts — to help with
privatization, banking, capital markets, commercial law,
management training and to spur entrepreneurial activity.
3
On their part, recipient nations must organize themselves to
be efficient donees — and be candid in indicating where
assistance is failing.
They must analyze and identify the
specific ways in which assistance can be improved.
Remember,
we*re new at this, too, and we don't want to waste our time and
money any more than the reforming nations do.
As to large, long-term direct bilateral assistance from the
industrialized community for structural reforms and balance of
payments support, I have more modest expectations.
While
reforming countries are currently receiving substantial balance
of payments assistance, budget considerations and competing
demands at home will limit the capacity of industrialized nations
for large resource commitments in the future.
In the near and mid-term, I believe that economically
reforming countries will have to rely principally on the
international financial institutions — the IMF, the World Bank,
and the new European Bank for Reconstruction and Development.
We
expect the IMF's resources will increase by 50 percent by the end
of the year, and the EBRD will become a major source of financing
for East Europe during the next year.
What about private investment? Often we hear complaints
that private sector businesses are too slow and too stingy in
making investments in East and Central European countries.
But
there is little we in government can do about it.
We can and do
encourage our private businesses to come here and examine the
opportunities, and we convey our personal optimism about the
future of your companies.
But it is their money.
Experience tells us that the private sector will invest
first in those countries that are the most open, the least
burdened by government regulation and interference, and the most
able to demonstrate that a free market is reliably in place.
Those countries will be winners in the increasingly intense
global competition for capital.
And success in that competition
depends on their own leadership and their own people.
So, we have come full circle — back to the basic
responsibility of individual nations.
Many of you have made
impressive progress in your reforms.
And I can assure you that
decisions by governments for assistance and the private sector
for trade and investment will be predominantly influenced by how
much progress you continue to make.
As President Bush stated:
"The surest way to long term economic growth and development
is through the entrepreneur.
And entrepreneurship is not a
function of massive foreign aid transfers, but rather free
and open societies."
D<
We urge you to stay on the course of economic reform,
recognizing that it will require courage, determination,
political skill and some luck to succeed.
As economic reforms
take hold, the path to successful market economies may become
temporarily more difficult.
Be patient.
Do no let unrealistic
expectations about how quickly you can create a prosperous free
market — or about what other nations will do to assist you —
defeat your historic efforts.
Your situation is not so dissimilar to that facing the
United States when our nation was born 200 years ago.
Our new
democratic government was fragile.
We had exorbitant debts to
foreign and domestic creditors, our monetary system was in
disarray, and inflation was rampant.
And things got worse before
they got better.
But strong leadership and faith among the
American people carried us through.
I
believe that your leadership and your people will do the
same. Thank y o u .
###
Department of the Treasury • Washington, D.e. • Telephone 566-2041
JumI 231 0 0 I I 8 8
PREPARED FOR DELIVERY
EMBARGOED UNTIL 7:00 a.m.
June 10, 1991
(EDT)
Contact:
Barbara Clay
„
202-566-5252
DEPT. OF THE TREASURY
REMARKS BY
THE HONORABLE JOHN ROBSON
DEPUTY SECRETARY OF THE TREASURY
ON THE SIGNING OF A
MEMORANDUM OF UNDERSTANDING WITH THE
STATE BANK OF CZECHOSLOVAKIA
TO ESTABLISH AN IN STITU TE OF BANKING AND FINANCE
JUNE 1 0 , 1 9 9 1
PRAGUE, CZECHOSLOVAKIA
I am pleased to join my friends from the State Bank of
Czechoslovakia in signing a Memorandum of Understanding to
establish an Institute of Banking and Finance for this reforming
nation.
This joint initiative for education and training of
future employees of banks and other financial institutions will
be a crucial step to improve the banking system that is vital to
Czechoslovakia's economic reform efforts and, indeed, to the very
functioning of the country's economy.
In today's tough global marketplace, private business cannot
exist without a modern, dependable and efficient banking system.
Banks function as the allocators of credit for businesses —
large and small — and as the fundamental facilitators of
commerce through the payment system.
Banks also create
incentives for savings among individuals, families, entrepreneurs
and large corporations.
In turn, those savings provide the
capital that fuels the economy and helps businesses take
advantage of new opportunities for growth in competitive m a rkets.
Yet, we have found that for many countries trying to shift
from a planned economy to a free market, one of the most ignored
links in the reform chain is the banking system.
Under the old
regimes in these countries, including Czechoslovakia, banks had
become the instruments of central planning, serving the narrow
interests of the government rather than the broad interests of
the population.
It is clear that these countries now need fullservice banking systems that help consumers purchase washing
machines and cars, that safeguard the savings of couples who want
to buy a house, that help businesses export to the United States
or raise capital to expand their capacity.
Today, the United States and Czechoslovakia are entering
into a pledge to work together in establishing a better banking
NB-1316
2
system for this nation.
Since a banking system is only as
effective as the people who operate it, our agreement focuses on
developing the human resources necessary to integrate
Czechoslovakia's banks and capital markets into the broader
international economy.
Specifically, the United States Treasury Department intends
to work with existing and to be formed commercial banks, and the
State Bank of Czechoslovakia, to provide comprehensive training
in banking and finance.
We plan to help Czechoslovakia establish
an Institute of Banking and Finance with a practical curriculum
geared toward both entry-level technicians and mid-level
managers.
And, we also plan to initiate programs to train
instructors from your country, enabling the Institute to become
self-sustaining as soon as possible.
But while the United States is helping the Czech and Slovak
people in the rebirth of your commercial banking industry, the
real work will be done by the Institute itself.
With critically
needed help from the Czech and Slovak Bankers Association and the
State Bank of Czechoslovakia, I hope we can work together to have
the Institute up and running in the next few months.
I.am confident the spirit of cooperation will continue to
ensure the success of this agreement.
The establishment of this
Institute for Banking and Finance will be a strong move in the
continued development of a sound banking system for
Czechoslovakia.
It will be a solid foundation for economic
stability, sustained growth, and all of the fruits of free
enterprise and market economics.
Thank you.
###
Dei
TREASURY NEWS
D epartm ent o f th e T re a su ry • W ashing ton, Dic. # Telephone 566-2041
TEXT AS PREPARED
NOT FOR RELEASE UNTIL DELIVERY
Expected at 10:00 a.m.
Tuesday, June 11, 1991
TESTIMONY OF THE HONORABLE
DAVID C . MULFORD
UNDER SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS
BEFORE THE HOUSE COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS
Ju n e 11,
1991
I
am pleased to be here today to testify on the treatment of
foreign banks under the Administration’s financial modernization
legislation, Section 231 of H.R. 1505, the Financial Institutions
Safety and Consumer Choice Act of 1991 (FISCCA).
I
would like to thank you, Mr. Chairman and Members of the
Committee, for working with the Administration to complete a
comprehensive reform package to strengthen the U.S. banking
system this year.
In proposing a long-term financial services
framework for the coming decades, the Treasury Department has
sought to be fair and consistent, offering the same opportunities
to U.S. and foreign banks.
As of December 31, 1990, there were 727 foreign bank
establishments operating in the United States.
These entities
represented 294 foreign bank families from 60 countries and held
21 percent of U.S. banking assets.
As their substantial presence
in the U.S. economy demonstrates, foreign banks have benefitted
in competition with U.S. banks from the openness of our market
and the privileges accorded to them in it.
U.S. consumers and
the U.S. economy have also benefitted from the financial services
and increased competition in our market provided by foreign
banks.
ADMINISTRATION PROPOSAL
The Administration's proposal would replace treatment for
foreign banks, which in some cases is preferential, with national
treatment, according foreign banks the same treatment as U.S.
banks.
FISCCA would liberalize the U.S. banking system by
offering U.S. and foreign banking organizations the opportunity
to branch across state borders and, if the bank is wellcapitalized, to engage in new securities and insurance activities
through a financial services holding company structure.
2
TREATMENT OF FOREIGN BANKS
The Administration’s bill would allow foreign banks that are
engaged only in commercial banking to maintain their existing
branches and agencies.
They would also be allowed to branch in
most states and, after three years, in all states on a full
national treatment basis.
The proposal would introduce important changes in the
treatment of foreign banking organizations that are engaged in
securities activities through affiliates in the United States.
Prior to 1978, foreign banks could establish direct branches in
more than one state and could own full-service investment banks
in the United States.
These activities were denied U.S. banks,
which were prohibited from branching across state borders by the
McFadden Act and from engaging in securities activities by the
Glass-Steagall Act.
The International Banking Act of 1978 (IBA) adopted the
general principle of national treatment for foreign banks by
applying the McFadden Act and the general prohibitions of the
Glass-Steagall Act to foreign banks in the United States.
In
fact, the IBA stopped short of full national treatment by
grandfathering securities affiliates and interstate branches that
existed in 1978.
These grandfather provisions have permitted
some foreign banks to retain their preferential treatment,
thereby conferring a competitive advantage over domestic banks in
the U.S. market.
Under FISCCA, foreign banks that wish to engage in new
securities and insurance activities are required to adopt the
U.S. organizational structure.
This would entail establishing a
financial services holding company and rolling up existing branch
and agency operations into one or more well-capitalized U.S. bank
subsidiaries of the holding company.
Both U.S. and foreign banking organizations with "Section
2 0 " securities affiliates, which can derive up to 10 percent of
their annual revenues from securities underwriting and dealing in
bank ineligible securities, would need to choose between
discontinuing those specific securities activities or
restructuring for full securities powers.
Foreign banks with
IBA-grandfathered securities affiliates would face a similar
decision.
Twenty-four of the 294 foreign bank families
represented in the United States at the end of 1990 have IBAgrandfathered or Section 20 securities affiliates.
Requiring foreign banks to form U.S. subsidiaries to take
advantage of far greater liberalization and expanded activities
is consistent with national treatment by eliminating the betterthan-national-treatment preferences retained in 1978.
3
Concerns that have been raised about the proposal include
the segmentation of capital and its impact on foreign bank
lending in the United States, the lack of grandfathering and the
impact on the deposit insurance system.
CAPITAL REQUIREMENTS AND FINANCIAL EFFECTS
Concerns have been raised that the structure proposed in
Section 231 of FISCCA would cause foreign banks to segregate
their capital.
In fact, under Federal and State law foreign
banks already maintain funds in the United States in the form of
capital equivalency deposits and similar asset maintenance
requirements at many of their U.S. branches.
Under the Administration's proposal, U.S. financial services
holding companies must have well-capitalized banks to engage in
these new activities.
They must meet standards above minimum
Basle risk-based capital requirements as well as leverage ratios.
This is not in contravention of the standards of the Basle
Committee on Banking Regulations and Supervisory Practices.
In
fact, the Basle Committee stated that the agreed capital adequacy
framework was designed to "establish minimum levels of capital
for internationally active banks.
National authorities will be
free to adopt arrangements that set higher levels." And if a
bank's capital falls below specified levels, the holding company
could be required to divest the securities or insurance
operations.
This would be true whether the holding company and
bank were owned by U.S. interests or foreign interests.
Under present tax law, foreign banks restructuring branches
into subsidiaries will lose their deductions of net operating
losses accumulated while operating in branch form.
This may have
potentially significant effects.
Assistant Secretary of the
Treasury for Tax Policy Kenneth Gideon will be testifying on the
tax implications of FISCCA for foreign banks next week before the
House Committee on Ways and Means and will address this issue
more fully.
A major objective of FISCCA is to improve the safety and
soundness of the U.S. banking system by, among other things,
creating incentives to increase the capital of U.S. banks.
We
believe it is important to impose the same requirements on
foreign and U.S. banks engaged in the same activities.
Some of
the alternative approaches that have been discussed could
possibly result in extraterritorial application of U.S. law or
might be judged to imply that foreign banks deserve different
safety and soundness standards than U.S. banks.
FOREIGN BANK LENDING
Foreign banks have indicated that their preferred form of
operation in the United States is through branches of the parent.
Branching gives a bank maximum flexibility in deploying its
resources.
4
Most of the 294 foreign bank families in the United States
are likely to choose to continue to concentrate on commercial
banking.
These banks will not need to convert branches to
subsidiaries.
Foreign banking organizations that seek expanded activities
will no longer be able to branch directly into the United States.
These banks will need to establish a financial services holding
company with a U.S. bank subsidiary and transfer capital to the
United States.
They would be lending from a smaller capital base
than a branch since legal lending limits would be based on
capital held in the U.S. subsidiary.
In drafting the proposed legislation, we considered the
possibility that, as a result of the legislation's requirements,
some foreign banks might reduce their lending in the United
States.
However, some of the potential constraints can be
alleviated.
For example, the subsidiary can transfer loans that
exceed lending limits back to its parent.
Additional capital can
be transferred into the United States to support larger loans.
Loans that exceed lending limits of the subsidiary also could be
provided cross-border from the parent.
Most potential tax
problems arising directly from such cross-border loans could be
resolved through bilateral tax treaties.
GRANDFATHER ISSUE
Foreign banks have argued that their present operations
should be grandfathered under the proposed legislation.
Their
arguments were accepted in 1978, when the International Banking
Act subjected foreign banks to the same restrictions on their
operations as U.S. banks.
In 1978, there were only two
alternatives for the foreign securities affiliates — to be
grandfathered or divested.
Now the Administration is offering a
full range of expanded activities to well-capitalized foreign
banks.
Foreign banks are a much more important segment of the U.S.
banking market than they were in 1978.
As of the end of 1990,
foreign banks operated 370 branches, 224 agencies and 101
subsidiaries in the United States and controlled 21 percent of
U.S. banking assets.
Leaving nearly a quarter of the U.S.
banking market outside the requirements of FISCCA would weaken
the effectiveness of the proposal.
Grandfathering foreign bank
operations today could confer upon them new competitive
advantages over U.S. banks that will be required to establish
holding companies and meet higher capital standards.
DEPOSIT INSURANCE FUND
The majority of foreign banks in the U.S. now operate
through branches not insured by the FDIC.
Those foreign banks
engaged exclusively in wholesale commercial banking which do not
seek new powers could continue these operations and would
5
continue to maintain a competitive advantage over U.S. banks by
avoiding deposit insurance assessments.
Domestic banks must
participate in the deposit insurance system, regardless of
whether they conduct retail deposit—taking activities or not.
Under the Administration's proposal, foreign banks expanding
into new activities would be required to establish ^insured bank
subsidiaries.
But rather than weaken the deposit insurance fund,
the contributions of foreign bank subsidiaries would strengthen
the fund.
By meeting the Zone 1 capital requirements, these bank
subsidiaries would be among the strongest banks, and much less
likely to draw on the fund.
TRENDS IN FOREIGN MARKETS
The Administration's proposal is consistent with recent
trends in foreign markets:
o
In the last decade, Australia, Canada, Finland, New
Zealand, Norway and Sweden liberalized commercial
banking activities, to allow foreign banks to operate
in their markets — but only through a subsidiary
structure.
(In the Nordic countries, there are plans
that would eventually allow foreign commercial banks to
branch.)
o
Germany allows foreign banks to branch, but limits
loans to one borrower to a percentage of the capital
that the branch maintains in Germany rather than the
bank's worldwide capital.
In effect, U.S. bank
branches in Germany must bring capital into the country
to support their operations and they cannot lend
locally based on their parent's capital.
o
The European Community's Second Banking Directive
requires foreign banks to establish a subsidiary to
take advantage of the single European passport.
The
single passport will allow a bank subsidiary
established in the EC to establish branches throughout
the Community.
Direct branches of non-EC banks will
still be allowed, although they will be subject to the
laws of each individual country and will not
necessarily be entitled to engage in the same
securities activities that the EC passport will allow.
We seek national treatment and liberalization in foreign
markets.
In our market, we will be offering national treatment,
liberalization and expanded activities.
Under these
circumstances, we do not believe it is appropriate to provide^
foreign banks with preferential treatment through grandfathering.
We believe foreign governments will come to recognize that the
long-term benefits of our liberalization will outweigh the costs.
6
FEDERAL RESERVE BOARD'S FOREIGN BANK SUPERVISION ENHANCEMENT ACT
I
would like for a moment to turn to H.R. 2432, the Federal
Reserve Board's proposed "Foreign Bank Supervision Enhancement
Act of 1991."
The Treasury supports several important portions
of the Federal Reserve's bill and shares the objective of
establishing enhanced federal supervision of diverse foreign
banking operations in the United States.
We would also point out
that in several respects, the Board's bill is inconsistent with
portions of FISCCA.
I
must stress that the Treasury does not consider the
Board's proposal a substitute for FISCCA.
The bill is a specific
proposal that must be considered in its own right in relation to
the broader need for enhanced supervision of foreign banks in the
United States and in light of recent cases of foreign bank
violations of U.S. law.
The Administration's proposal includes a
major revision of foreign bank regulation in the United States,
while the Board's bill makes improvements in the present
structure.
Any changes to foreign bank supervision should be
consistent with the overall approach of the Administration's
proposal for regulatory restructuring.
First, the Treasury Department supports federal licensing
and supervision of representative offices of foreign banks.
Under present law Treasury registers but cannot supervise foreign
bank representative offices in the United States.
We believe
these offices should be supervised by a federal banking
regulator.
Second, the Treasury supports, and has itself proposed in
Section 265 of FISCCA, Board approval of state-supervised foreign
bank offices in the United States.
This process in many cases
will allow greater Federal-level scrutiny of state branches,
agencies, and commercial lending companies before they are
established in the United States without undue harm to the dual
banking system.
The approval provision in the Board's bill is
consistent with the division of regulatory responsibility in the
Administration's proposal.
Third, we support the provisions that enhance federal
jurisdiction and supervision over foreign banks through
additional criteria for approval, regulation, and termination of
foreign bank offices in the United States.
In addition, we
support the bill's objectives of encouraging the sharing of
information between U.S. and foreign bank supervisors and
assuring greater attention of foreign bank supervisors to their
banks' operations in the United States.
One suggestion we would
make to improve the Board's bill would be to enhance the
authority of the Comptroller of the Currency to close federal
branches and agencies by legislating criteria consistent with the
criteria proposed by the Board for itself in connection with
closing state branches and agencies.
7
Despite our general support, the Treasury Department does
have some specific concerns with the Federal Reserve's proposal,
resulting chiefly from the differences in regulatory approach
between the two bills.
Treasury has proposed a functional and
streamlined regulatory regime in FISCCA that provides for
effective regulation of foreign and domestic banks and their
affiliates.
The Board's proposal would eliminate the requirement under
Federal law that the Board use the examinations conducted by
other Federal bank regulators.
This provision differs from the
regulatory scheme in FISCCA and present law, both of which
provide for efficient use of Federal examination resources and
protect against conflicting regulation at the Federal level.
The Board's legislation proposes new authority for the Board
to supervise and examine any affiliate or office of a foreign
bank in the United States, including Federal branches and
agencies.
This proposal would circumvent the "functional" regulation
proposed in FISCCA that would require the Board to consult with
regulators of securities and insurance affiliates before
examining these affiliates.
Clearly the Board's proposal for foreign banks would have to
be modified in these respects if the Treasury approach to
functional regulation were adopted.
CONCLUSION
Let me reiterate that we are offering foreign banks national
treatment, including expanded market opportunities on the same
terms as U.S. banks.
We are seeking to be fair and consistent
and we welcome the participation of foreign banks in our market.
We hope that those foreign banks which find it in their strategic
interest will participate in the liberalization offered by
FISCCA.
FOR RELEASE ON DELIVERY
Expected at 9:30 A.M.
June 11, 1991
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE
SUBCOMMITTEE ON CONSERVATION, CREDIT, AND RURAL DEVELOPMENT
OF THE HOUSE AGRICULTURE COMMITTEE
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here today to discuss the results of
the Treasury's second study of Government-sponsored enterprises
and the Administrations legislation that will provide for more
effective financial oversight of these important institutions.
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 has been submitted.
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-1318
2
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.
Based on the S&P analysis of the financial safety and
soundness of the GSEs, we have concluded, as we 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.
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:
I.
Financial safety and soundness regulation of GSEs must be
given primacy over other public policy goals*
Regulation of GSEs involves multiple public policy goals.
Without a clear statutory preference, a current GSE regulator
need not give primary consideration to safety and soundness
3
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.
IV.
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.
The basic, but essential, authorities that a GSE regulator
should have include:
4
(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 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
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 deficiencies in the existing
regulatory structure for some GSEs. However, the Farm Credit
Administration has as its primary goal the safety and soundness
regulation of the Farm Credit System, and it has the regulatory
powers and stature to be an effective safety and soundness
regulator for the Farm Credit System.
Both the analysis that we did for our 1990 study and the
analysis that S&P did for our study this year indicate that the
Farm Credit System has made significant progress since the
Agricultural Credit Act of 1987 was passed. However, the fact
remains that S&P's rating for the System, "BB", is below
investment grade, and is the lowest rating received by a GSE.
Indeed, since last year's study, and at a time when the
agricultural economy has enjoyed a sustained rebound, another
Farm Credit Bank (Spokane) required assistance in 1990. We
believe that there are a number of changes that can and should be
made to ensure a more financially sound Farm Credit System.
f\
5
Funding Corporation Authority Should Bo Clarified
A major concern of ours involves the extent to which the
System banks lack consistent standards for managing the
substantial risks with which they are confronted.
In the 1990
study, we supported the Funding Corporation's efforts to address
these problems with its Market Access and Risk Alert Program, and
we recommended that the Funding Corporation continue to develop
the program.
In order to facilitate these efforts, the Administration's
bill would clarify the Funding Corporation's current authority,
which includes the requirement to determine "the conditions of
participation by the several banks in each issue of joint,
consolidated or System-wide obligations." Our bill would simply
clarify that this authority specifically includes the ability to
obtain information from System banks and associations to monitor
their financial performance, to establish financial condition and
performance standards, and to institute economic incentives
designed to encourage compliance with these standards.
System Consolidation
Our 1990 study and the President's Budget for Fiscal Year
1992 recommended the consolidation of System institutions.
This
would have a number of benefits, including increased geographical
diversification as well as the reduction of overhead expenses.
While there have been discussions among numerous System banks
along these lines during the last year, no definitive steps have
been taken.
The Administration's bill would require the Farm
Credit Banks (and the Jackson FICB) to consolidate in order to
ensure geographic and crop-based diversity and to reduce
overhead; if the banks were unable to submit a merger plan to the
FCA within two years, the FCA would be required to prescribe a
merger plan.
Changes for the Insurance Corporation
The Administration's bill also includes a number of reforms
to the Farm Credit System Insurance Corporation which we believe
will enhance the Insurance Corporation's ability to perform its
important duties when it becomes fully operational in 1993.
First, our bill would create a separate board of directors
for the Insurance Corporation, consisting of three Presidential
appointees, one of whom will be the Chairman.
This separate
board would also include an FCA board member (other than the
Chairman) and the Secretary of Agriculture as non-voting members.
This proposal is consistent with the lesson learned from the
debacle in the thrift industry:
if financial institutions are to
be insured, that insurer must be concerned only with safety and
soundness and the integrity of the fund. A separate board for
6
the Insurance Corporation translates into more protection for the
taxpayer.
Second, our bill would give the Insurance Corporation the
authority to access the capital of a System bank's associations
if that bank is assisted by the Insurance Corporation.
Because
the associations which own a bank would directly benefit from any
assistance to that bank, they should be required to support the
bank.
From a safety and soundness perspective, this would create
the incentive for associations to impose more financial
discipline on the other associations in their district, as well
as on their bank.
Finally, our bill would require the Insurance Corporation to
develop a system of risk-based premiums for System institutions.
The current, statutory premium formula charges higher premiums
for non-accruing loans, but it does not give the Insurance
Corporation the authority to set premiums based upon the entire
risk profile of a System institution. As a result, there may not
be adequate disincentives to cause risky, poorly run institutions
to change their ways.
This proposal is consistent with the
recommendations contained in the Administration's banking bill.
More Outside Directors on Boards of System Institutions
The analysis in both this year's and last year's studies
discussed the potential conflicts inherent in a cooperatively
owned structure with borrowers as equity holders and board
members.
Our bill would address this concern by increasing the
number of outside directors on the boards of System institutions
to one-third of all directors.
Repayment of FAC Debt
The Agricultural Credit Act of 1987 contained several
unclear passages regarding the repayment of the assistance given
to System banks.
This uncertainty is a source of concern both to
the Administration, and to System institutions, which have been
making considerable efforts to implement a mechanism for setting
aside funds for repayment.
The Administration's bill contains
several technical changes which we believe would facilitate this
process.
The FCA Needs Additional Authority Over Farmer Mao
Finally, while we believe that the FCA generally has the
regulatory authorities necessary for it to be an effective safety
and soundness regulator of the System, it does not have a full
complement of regulatory authorities over Farmer Mac.
Our bill
would give the FCA these additional authorities, which include
general rulemaking authority.
7
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. We believe that the passage of the
Administration's proposed 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
EXPECTED AT 9:30 A.M.
JUNE 12, 19 91
STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I
am pleased to be here today to present the views of the
Administration on a number of revenue measures.
We are generally
concerned about the revenue costs of these proposals in view of
the pay—as—you—go system adopted as part of the Omnibus Budget
Reconciliation Act of 1990 (the ”1990 OBRA”) .
1.
Repeal the Luxury Tax on Boats
Current Law
The Omnibus Budget Reconciliation Act of 1990 added various
luxury taxes to the Internal Revenue Code ("Code”) . Under new
section 4002, if the actual retail sales price of a new boat
exceeds $100,000, a 10 percent tax is imposed on the excess.
The
tax is also imposed on parts and accessories that are installed
on a new boat within 6 months of the purchase and on the use of a
boat before there has been a retail sale.
The tax does not apply
to boats sold for export, but does apply to new and used boats
that are imported into the United States.
The tax applies to
sales between January 1, 1991 and December 31, 1999.
Proposal
The proposal would repeal the luxury tax on boats.
Administration Position
We do not support repeal of the luxury boat excise tax at
this time.
The tax has been in effect for less than 6 months, a
period which coincided with the economic downturn.
It is simply
NB-1319
2
too early to assess what its actual impact will be in terms of
effect on the industry, revenues realized, or difficulty of
administration.
On the last point, I might note that excises
generally have been among the simplest taxes for the Internal
Revenue Service to administer.
Proposed regulations issued at
the end of last year should be made final in the relatively near
future.
2.
Amend the Tax Treatment of Payments Under Life Insurance
Contracts for Terminally 111 Patients
Current Law
Undistributed investment income ("inside buildup”) credited
under a contract that is a life insurance contract for tax
purposes is not taxed currently to the contractholder. Section
101(a) of the Code provides further that proceeds of life
insurance contracts that are payable by reason of the death of
the insured are excluded from gross income. As a result, inside
buildup amounts that are paid out as death benefits escape tax
completely.
If an insurance contract is not a modified endowment
contract (”MEC”) , amounts not exceeding the cash value of the
policy may be borrowed tax free, and any pre-death distribution
of the contract's cash value is tax free to the extent of the
policyholder's basis in the contract. If a policy is a MEC, loans
or pre-dehth distributions are treated as coming first out of
income and only thereafter as recovery of basis.
Consideration
received from the sale or assignment of a life insurance contract
is includable in gross income.
Under section 7702, a policy that is a life insurance
contract under the applicable state or foreign law qualifies for
the tax benefits available to life insurance if it satisfies one
of two alternative tests:
(1) the cash value accumulation test
or (2) the guideline premium/cash value corridor test.
The cash
value accumulation test is satisfied if the contract's cash
surrender value does not at any time exceed the net single
premium that would be required at that time to fund future
benefits under the contract.
The guideline premium/cash value
corridor test is satisfied if the premiums paid under the
contract do not at any time exceed the greater of the guideline
single premium or the sum of the guideline level premiums, and
the death benefit under the contract is not less than a
prescribed statutory percentage (which decreases with the
increasing age of the insured) of the cash surrender value of the
contract.
The net single premium used in applying the cash value
accumulation test and the guideline single premium or guideline
level premiums used in applying the guideline premium/cash value
corridor test are the amounts necessary to fund future benefits
3
under the contract.
Future benefits include the death or
endowment benefit under the contract as well as the charges
stated in the contract for providing certain "qualified
additional benefits".
Currently such benefits are limited to (1)
guaranteed insurability, (2) accidental death or disability
benefit, (3) family term coverage, and (4) disability waiver
benefits.
The treatment of a benefit as a qualified additional
benefit therefore increases the section 7702 limitation to the
extent of the discounted value of the stated charge for the
benefit.
Section 7702 applies to contracts issued after December 31,
1984.
For this purpose, contracts that are issued in exchange
for existing contracts after December 31, 1984 are treated as new
contracts issued after that date.
Section 7702A, which provides
a test for determining when a life insurance contract is a MEC,
has a similar grandfather rule.
Proposal
The proposed legislation would amend section 101 to provide
that amounts paid under the life insurance contract of a
terminally ill insured would be treated as an amount paid by
reason of the death of the insured and therefore excludable from
gross income.
A terminally ill insured is defined as an
individual who has been certified by a licensed physician as
having an- illness or physical condition that can reasonably be
expected to result in death in 12 months or less.
The proposed legislation would provide further that a
"terminal illness rider," which permits the payment of benefits
to an insured upon his becoming terminally ill, would be treated
as a qualified additional benefit for purposes of applying the
tests of section 7702 and that the addition of such a rider to an
existing life insurance contract would not constitute an exchange
of contracts for purposes of applying the effective date rules
under sections 7702 and 7702A.
The bill also provides that applicants for or recipients of
certain public assistance benefits may not be required to
exercise any right to receive an accelerated death benefit as a
condition of eligibility for such public assistance benefits.
Administration Position
We oppose the expansion of section 101 as proposed.
Section
101 currently provides for the exclusion from income of amounts
paid under a life insurance contract by reason of the death of
the insured.
We believe the fundamental family security^
rationale for the tax-favored treatment of the inside build-up in
life insurance would be undermined if broadened in the manner
proposed.
4
As we understand the proposal, there is no restriction on
the use to which tax-free proceeds could be put.
While the
circumstances under which the withdrawal could be made compel our
sympathy, we should recognize that any such expansion of section
101 will bring forward proponents of further expansions for
similar needs — such as long-term care — or other worthy goals,
such as education or housing.
Such expansions and the potential
adverse revenue consequences they entail would undoubtedly place
section 101 under severe pressure.
It is a journey we should not
begin.
The goal of endeavoring to assist the terminally ill is a
sympathetic one.
Under the bill, however, assistance would not
be equally available to all terminally ill persons.
Only those
terminally ill persons holding life insurance contracts at the
time of their illness could avail themselves of the benefits, and
the benefits would be greatest for those able to afford large
life insurance policies.
Finally, the trigger proposed for early payment — a
physician's certification that the individual has less than one
year to live — raises serious problems of administration.
"Audit” of such a certification would be difficult, to say the
least.
Yet if the standard is effectively unauditable,
compliance concerns are certain to arise.
3•
Increase the Amount of Bonds Eligible for Certain Small
Governmental Issuer Exceptions and Modify Other Tax Rules
With Respect to Bonds Issued bv State And Local Governments
Current Law
The Internal Revenue Code contains restrictions on the
issuance of tax-exempt bonds by State and local governments
designed to prevent inappropriate arbitrage profits by issuers of
such bonds and to prevent the benefits of tax exemption from
inuring to other than intended beneficiaries as described in the
Code.
A requirement to rebate arbitrage was imposed on virtually
all tax-exempt bonds by the Tax Reform Act of 1986. Among these
restrictions are the following:
(i)
Small governmental issuers with general taxing powers
are exempt from the arbitrage rebate requirement only if they
issue less than $5 million of governmental bonds during a
calendar year.
This is commonly referred to as the "small issuer
exception" to arbitrage rebate.
(ii) A 2-year spend-down exception to the requirement to
rebate arbitrage was enacted as part of the 1989 OBRA.
This
exception generally provides that bond issues used to finance
construction projects are not subject to the rebate requirement
5
if the proceeds are expended within 2 years of the date of issue
of the bonds at rates specified in the statute (at least 10
percent within 6 months, 45 percent within 12 months, 75 percent
within 18 months). The 2-year spend-down exception to arbitrage
rebate is generally effective for bonds issued after December 19,
1989.
(iii)
Section 265(b)(3) currently permits an issuer that
reasonably anticipates issuing $10 million or less of
governmental and qualified 501(c)(3) bonds during a calendar year
to elect to exclude such issues (sometimes referred to as "bank
qualified bonds") from the interest disallowance provisions of
section 265(b)(3).
Section 265(b)(3) provides generally that
banks may not deduct interest expenses attributed to tax-exempt
bonds under a formula provided in the statute.
(iv)
Section 141(b)(3) of the Code currently prohibits more
than 5 percent of proceeds of a governmental bond issue from
being used for a private business use that is unrelated to the
governmental use of the facility or that is disproportionate to
the governmental use of the facility.
This provision effectively
reduces the 10 percent private business use threshold to 5
percent when the private business use is not related to the
governmental use of the facility or the private use is
disproportionate in multi—facility projects.
(v) Failure to restrict the yield on the investment of bond
proceeds to the bond yield as required by section 148 may not be
remedied by rebating the arbitrage to the Federal Government.
(vi) Under section 149 of the Code an issuer must generally
rebate 100 percent of the arbitrage it earns to the Federal
Government.
(vii)
Certain advance refunding bonds the proceeds of which
are invested in substantially higher yielding investments
currently are not described as a device in income tax regulations
under section 149(d).
Proposals
The proposal would remove or liberalize certain existing^
restrictions on tax-exempt bonds.
The bill contains 7 specific
proposals which may be summarized as follows:
(i)
The $5 million small issuer exception from rebate in
section 148(f)(4) would be increased to $25 million.
The
requirement in section 148(f)(4) that governmental units must
have general taxing powers to be eligible for the exception would
be eliminated.
This would permit governmental units such as
special service districts, authorities and similar entities with
limited or no taxing powers to be eligible for the exception.
6
However, subordinate entities would still be required to be
aggregated for purposes of the exception.
(ii)
The 2-year spend-down exception to rebate in section
148(f)(4)(iv) would be made retroactive to the effective date of
the Tax Reform Act of 1986 (generally August 15, 1986).
The
2-year spend-down exception was substantially amended in the 1990
OBRA.
The provision would not permit refunds of rebate paid
prior to the date of enactment of the bill.
(iii)
The small issuer exception (or "bank qualified bond”
exception) from the interest expense disallowance provision of
section 265(b)(3) relating to financial institutions would be
increased from $10 million to $25 million.
(iv)
The 5 percent test for private business use not
related or disproportionate to government use financed by the
issue in section 141(b)(3) would be repealed.
(v) Section 148 would be amended to permit the payment of
rebate in lieu of restricting yield on investment of bond
proceeds.
Currently section 148 requires yield restriction as
well as rebate, and a failure to yield restrict when required
cannot be cured by rebating the improperly earned arbitrage.
This provision would not apply to advance refundings.
Treasury
would be given authority to require yield restriction in
circumstances in which the yield restriction requirement applies
for purposes other than preventing the earning of arbitrage.
(vi)
Section 148 would be amended to reduce the amount of
rebate from 100 percent to 90 percent of arbitrage earned.
(vii)
Define certain advance refunding bonds the proceeds
of which are invested in substantially higher yielding
investments as a device under section 149(d).
Administration Position
(i) We oppose increasing the $5 million small issuer
exception from rebate to $25 million.
The proposal would be
expensive and would defeat in part the policy of discouraging
arbitrage motivated transactions.
We recognize that an argument
can be made for increasing the small issuer exception to $10
million to conform it to the $10 million small issuer "bank
qualified bond" exception under section 265(b)(3).
However,
absent an acceptable offset, we do not support even such a
limited expansion.
(ii) We oppose the proposal to make the 2-year spend-down
exception to rebate retroactive.
Our opposition is based both on
our general policy of opposing retroactive tax legislation and
the fact that the proposal would provide a windfall to many
7
issuers.
Bonds issued after 1986 and before the effective date
of the 2-year rule were structured and sized to take into account
the rebate requirement.
(iii) We oppose the proposal to increase the $10 million
bank qualified bond exception to $25 million.
There is no
justification for granting financial institutions additional
relief under section 265.
(iv) We do not oppose the proposal to repeal the 5 percent
private business use test provided there is an acceptable revenue
offset.
This part of section 141 is often misunderstood by
issuers and not easily administrable by the Internal Revenue
Service.
Repeal would accomplish significant simplification
without sacrificing significant policy objectives.
(v) We are in general agreement with the notion that it
should not be necessary to apply both yield restriction and the
arbitrage rebate requirement to the same bond issue.
There may,
however, be circumstances in which arbitrage rebate alone may not
be sufficient to prevent issuances with a significant purpose of
earning arbitrage.
Accordingly, were the proposal revised to
include residual, prospective Treasury regulatory authority to
impose yield restriction (without a rebate alternative) where
necessary to prevent abuse, we would support the change.
We
believe that the provision if so revised would not lose revenue.
(vi) We believe this proposal merits serious consideration.
However, we have not completed our own analysis to determine what
the optimal percentage division might be and whether the proposal
involves significant revenue consequences.
Currently, there is
no economic motivation for an issuer to maximize or even achieve
efficient investment yields on bond proceeds subject to the
rebate requirement.
This is so because once the investment yield
equals the bond yield, the issuer has no motivation to earn a
higher yield because earnings attributable to the yield in excess
of the bond yield must be paid to the Federal Government in the
form of rebate. While the income tax regulations require that
bond proceeds be invested at arm's length, in practice this
requirement is extremely difficult if not impossible to enforce.
A relaxation of the arbitrage rebate requirement of the sort
contemplated by the rule raises significant policy issues as well
since it would in effect permit — and even encourage — issuers
to achieve some, though quite limited, arbitrage.
We therefore
recommend that this issue be formally studied to determine:
(i)
whether such "permitted arbitrage" would undermine the objectives
of the arbitrage rebate provision, and (ii) what division of
arbitrage profits would provide an incentive for issuers to
maximize investment yield without encouraging them to issue bonds
for the purpose of realizing an arbitrage profit.
8
(vii)
We support the proposal to define certain advance
refunding bonds as a device under section 149(d).
Investment of
"released revenues” in forward purchase contracts at an
unrestricted yield in the manner proscribed by this provision
results in the earning of arbitrage.
4.
Modify the Tax-Exempt Bond and Depreciation Rules With
Respect to Infrastructure Facilities
Current Law
Infrastructure facilities, such as sewage, solid waste
disposal, hazardous waste disposal, and facilities for the
furnishing of water may be financed as exempt facility private
activity bonds.
As private activity bonds, these obligations are
subject to restrictions which include aggregate dollar
limitations of issues by state volume caps, treatment of interest
thereon as a preference item for purposes of the alternative
minimum tax, and the limitations contained in section 147
including — limitations on substantial users, 120 percent of
economic life requirement, limitations on land and existing
property acquisitions, limitations on skyboxes, airplanes and
gambling establishments, public approval requirements and the 2
percent cap on costs of issuance.
In addition, private activity
bonds are not eligible for the 2-year spend-down exception from
arbitrage rebate, generally cannot be advance refunded, and are
subject to "change in use" restrictions under section 150(b) of
the Code.
Proposal
The bill would accord bonds issued to finance
"infrastructure facilities” the same treatment that non-private
activity governmental bonds currently receive under the Code.
Accordingly, infrastructure bonds would generally not be subject
to the volume cap and other restrictions described above.
(Governmentally owned solid waste disposal facilities are exempt
from the volume cap under present law.)
Accordingly such
infrastructure bonds would also be eligible to be advance
refunded.
(i)
Infrastructure bonds would be defined as bonds issued
to provide infrastructure facilities "which are available for the
ultimate use of the general public (including electric utility,
industrial, agricultural, commercial, nonprofit, or governmental
users)” . Infrastructure facilities would include: sewage
facilities, solid waste disposal facilities, hazardous waste
disposal facilities, facilities for the furnishing of water and
facilities which are constructed, reconstructed, rehabilitated,
or acquired for the purpose of achieving compliance by a state or
local government with Federal statutes administered by the EPA.
9
Sewage, solid waste disposal, hazardous waste disposal, and water
furnishing facilities are currently permitted to be financed as
exempt facility private activity bonds under section 142.
These
categories of exempt facility bonds are repealed under the bill.
The bill would liberalize the definition of hazardous waste
disposal facilities by deleting the limitation that disposal be
only by incineration or entombment and by requiring that the
facility be "ultimately” used by persons other than the owner,
operator or related persons.
(ii) The bill would also liberalize the 2—year exception to
the arbitrage rebate requirement by providing a 3-year spend-down
exception to the rebate requirement in addition to the 2-year
exception.
The 3-year exception would apply to any bonds other
than private activity bonds and tax and revenue anticipation
bonds and; unlike the 2-year exception, would not be limited to
construction issues.
The 3-year exception would require
expenditure of bond proceeds as follows: 20 percent in the first
year, 50 percent in the second year, and 95 percent in the third
year.
"Soft costs" such as costs of issuance would be included
in the spend-down requirement if not made more than 1 year after
the date of issue of the bonds.
(iii) The bill would also amend section 168(e) (relating to
depreciation) and would classify infrastructure facilities as
7-year ACRS property with a 10-year ADR midpoint to the extent
such facilities do not already have a shorter recovery period.
Also, infrastructure facilities financed with tax-exempt bonds
would not be treated as "tax-exempt" use property for purposes of
section 168(h).
Administration Position
(i) We oppose treating infrastructure bonds as governmental
bonds.
This provision would result in a significant increase in
the amount of tax-exempt bonds issued.
(ii) We oppose the proposed 3-year exception to arbitrage
rebate.
The proposal was considered and rejected when Congress
reached an agreement with respect to the 2-year spend-down
exception to arbitrage rebate.
(iii) We oppose treating infrastructure facilities as
7-year ACRS property which is exempt from treatment as tax-exempt
use property.
There is no
for allowing accelerated
depreciation on such facilities in addition to the ^implicit
Federal subsidy arising from tax exemption on the indebtedness.
All three items would result in significant revenue loss.
10
5.
Treat Bonds Issued for Section 501(c)(3) Organizations in a
Manner Similar to Governmental Bonds
Current Law
If proceeds of a bond are used in the trade or business of a
501(c)(3) organization, the bond is treated as a private activity
bond.
Under section 145, qualified 501(c)(3) bonds may be issued
as tax-exempt private activity bonds subject to a number of
limitations.
The most significant limitations with respect to
qualified 501(c)(3) bonds are:
(1) the amount of qualified
501(c)(3) bonds outstanding for non-hospital uses cannot exceed
$150 million per 501(c)(3) organization, (2) if proceeds of
qualified 501(c)(3) bonds are used to provide certain residential
rental housing for family units, the housing units must meet the
low- and middle-income targeting requirements of section 142(d),
(3) under section 147, the maturity of the bonds cannot exceed
120 percent of the economic life of the property, (4) no portion
of the bond proceeds may be used for skyboxes, airplanes or
gambling establishments, (5) the bonds must be approved by the
public, (6) costs of issuance financed with bond proceeds may not
exceed 2 percent of the amount of the bonds, and (7) "change in
use" restrictions with respect to facilities required to be owned
by a governmental unit or a 501(c)(3) organization under section
150(b).
Proposal
The proposed legislation would generally treat bonds the
proceeds of which are loaned to or used by 501(c)(3)
organizations for their exempt 501(c)(3) purposes in the same
manner as governmental bonds, effectively repealing the
limitation on such bonds added in the Tax Reform Act of 1986.
The provision does not apply to bonds the proceeds of which are
used by 501(c)(3) organizations in unrelated trades or
businesses.
All of the restrictions under section 147 of the
Code currently applicable to qualified 501(c)(3) bonds would no
longer apply to such bonds other than the restriction under
section 1 4 7 (b) that the bonds not have an average maturity in
excess of 120 percent of the average economic life of the bondfinanced property and the requirement under section 147(f) that
the bonds be approved by the issuing governmental unit after a
public hearing or referendum.
Also, the restrictions under
section 150(b)(5) of the Code with respect to "change in use” of
facilities required to be owned by governmental units or
501(c)(3) organizations would be retained.
Additionally, bond
proceeds used by a 501(c)(3) organization to provide certain
residential rental housing for family units would remain private
activity bonds and would be subject to the low— and middle—income
targeting requirements of section 14 2 (d).
11
Administration Position
We oppose this proposal.
It would significantly expand a
large class of tax-exempt obligations and would result in
significant revenue loss to the Federal Government.
*
*
*
Mr. Chairman, I would be pleased to answer any questions
which you and other Members of the Committee may have.
JBRARYROOM 5310
TREASURY NEWS
Department of the Treasury • w ashington, D:C. *^telephone 566*2041
For release on delivery
expected at 10:00 an
June 13, 1991
STATEMENT OF
WILLIAM E. BARREDA
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TRADE AND INVESTMENT POLICY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL FINANCE AND MONETARY POLICY
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
JUNE 13, 1991
Mr. Chairman and Members of the Subcommittee:
I
am pleased to discuss with you today the Administration's
policies
and
recent
developments
concerning
international
negotiations to increase discipline over tied aid credits.
Directions
for
these
negotiations
were
developed
by
the
Administration in light of Eximbank's 1989 report to Congress on
the tied aid practices of other countries, a similar Commerce
Department report to Congress last year, and concerns in the
business community, Congress and the Administration itself.
As Assistant Secretary Dallara indicated to this Subcommittee
in September, 1989, we began efforts to launch further negotiations
in late 1989. A considerable portion of last year was devoted to
gaining international agreement on the negotiating mandate and
securing needed support at the political level for meaningful
negotiations.
Most
notable was
the
support
for
renewed
negotiations that evolved from the Organization for Economic
Cooperation and Development (OECD) Ministerial and the Houston
Summit last year.
The groundwork for negotiations had been fairly well laid for
concentrated negotiations by mid 1990.
Five separate negotiating
sessions have been held since.
We came very close to agreement
prior to last week's OECD Ministerial, but final agreement escaped
us at that moment.
I
would now like to expand somewhat on the nature of the tied
aid problem, the course of the negotiations, the current package of
proposals, and on the prospects for a successful conclusion.
I
will also touch on Eximbank's role in the President's Enterprise
for the Americas Initiative.
Tied Aid Credit Problem
Tied aid is defined as concessional financing linked to
procurement of goods and services in the donor country. Its stated
purpose is to assist developing economies through softer financing
terms while promoting or maintaining an adequate constituency in
N B-1320
2
support of aid budget allocations in donor legislatures. Difficult
problems arise when commercial motivation overrides development
assistance objectives, particularly when donors' aid programs
differ substantially with respect to their support for capital
projects.
The trade issue created by tied aid is primarily related to
its use for capital projects.
Tied aid financing for capital
projects can be used for commercial reasons, to promote exports
from the donor, rather than to promote development of the
recipient.
But aid financing of capital projects can have a
legitimate place in promoting economic development, and tying aid
can make it easier for donors to get aid appropriations from
legislatures.
The negative impact of commercially motivated tied aid
programs on U.S. exporters is obvious.
The U.S. aid program is
heavily targeted toward promoting U.S. foreign policy goals,
particularly the pursuit of Middle East peace, and is heavily
weighted toward Israel and Egypt. A large part of the remainder of
U.S. aid is utilized for financing basic human needs and economic
policy reform rather than infrastructure and capital projects.
U.S. exporters, utilizing commercial or Eximbank financing, often
cannot compete effectively with foreign firms that offer financing
that includes a significant concessional financing component.
Eximbank estimated in 1989 that U.S. capital goods exporters lost
annual sales of between $400-800 million as the result of the tied
aid practices of others.
It should be acknowledged that U.S. procurement policies also
seek to ensure that many foreign assistance funds are spent on U.S.
goods and services. AID estimates that in 1989 about 35 percent of
all U.S. bilateral loans and grants resulted in direct procurement
from the United States.
International Negotiations
The Administration initiated the new round of negotiations in
1989 because of concerns that the phased increase in minimum tied
aid credit concessionality levels negotiated in 1987 had, to that
point, not reduced the trade distortions resulting from tied aid
credits as quickly as hoped.
While some improvement may yet
emerge, a high percentage of aid continues to go to middle income
countries, and a high percentage of aid remains relatively "hard"
or less concessional.
The objectives of the negotiations launched in the OECD toward
the end of 1989 are to further discipline tied aid credits and to
reduce remaining subsidies in the extension of standard export
credits.
We viewed a vigorous new negotiating effort as the most
promising response to the trade distorting tied aid practices of
other countries.
We sought to reduce substantially —
not
3
eliminate, which we consider impractical — the trade distortions
arising from the use of tied aid credits. The Administration also
undertook a parallel effort in the Development Assistance Committee
(DAC) to reduce the aid distortions that also arise when tied aid
is used to promote commercial interests.
The continued popularity of tied aid credits despite the
increases in the minimum concessionality level agreed in 1987 to
reduce their use signals to us that there is little chance that
these practices will be eliminated completely.
Indeed, the
Administration does not wish to prohibit the use of tied aid for
projects that meet the legitimate development needs of recipient
countries without creating distortions.
In support of these negotiations, the Administration sought,
and Congress approved, renewal of the War Chest program with
revised aims. Following the 1987 tied aid agreement, it had seemed
appropriate to use the War Chest only defensively to police the
agreement.
With the restart of negotiations, the War Chest was
used by Eximbank in cooperation with AID to aggressively initiate
tied aid offers in LDC markets where our competitors were using
tied
aid
credits
extensively
for
commercially
motivated
transactions. This has, we believe, increased U.S. leverage in the
negotiations process.
We successfully sought a negotiating mandate from Ministers at
the 1990 OECD Ministerial and then were able to get a further
endorsement for negotiations from the Houston Summit.
At the
Summit, other G-7 government leaders and the President of the
Commission of the European Communities joined President Bush in
expressing strong support for further progress in increasing
multilateral discipline over the use of tied aid credits, and urged
that the OECD begin work as soon as possible.
Over the course of the negotiations, numerous approaches have
been suggested.
We initially focused on key sectors and markets
where tied aid is used extensively, in the belief that this would
provide the maximum relief for our exporters with the least pain
for others.
Others suggested greater reliance on international
competitive bidding, global untying, and improvements in the prior
notification and consultation process for tied aid offers.
This year, working with the DAC on a methodology that would
reduce both trade and aid distortions of commercially motivated
tied aid practices,
negotiations turned to the concept of
disciplining tied aid for projects that should normally be
commercially viable in a market economy and for which financing on
market or Arrangement terms is available. This concept was widely
accepted, at least at the intellectual level, and ultimately became
the focus of the negotiations.
Limiting tied aid for projects that are commercially viable in
4
a market economy is an attempt to replicate the efficient financing
patterns of market economies. Projects that are productive enough
to service debt on market terms should be allocated capital on
market terms, thereby saving scarce concessional assistance for
projects that cannot attract and support such financing.
With
strict adherence, this strategy should maximize total flows of
capital available for development and allocate it more efficiently.
The Current Package of Proposals
The intensive negotiations over the past year produced what we
believe to be a balanced package of disciplines.
It would
establish
the
principle
that
tied
aid
credits
with
a
concessionality level of less than 80% should not be given for
projects that should be commercially viable in a market economy and
for which financing on commercial or OECD Export Credit Arrangement
terms is available.
The goal of this discipline is to delineate projects that
should normally be financed with export credits and those that
legitimately require aid financing, whether tied or not.
The
commercially viable rule is a good starting point, but it will be
in the consultations process that, over time, a body of "case law"
will develop that will better define, for both export credit and
aid agencies' ex ante guidance, the line between the two categories
of projects.
The EC made it clear from the outset of these negotiations
that, given the important role played by tied aid credits in their
aid programs and their relations with key developing countries, any
discipline would need to have an exception procedure. The current
proposal for increased discipline depends heavily on strengthened
notification and consultation procedures.
However, such exceptions must be prior notified, which means
giving 30 days notice before making the formal offer/commitment.
This provides ample time for other countries to offer matching
financing.
This package also would eliminate remaining interest rate
subsidies in standard export credit to middle income developing
countries and reduce them for the poorest countries.
The formula for calculating market related interest rates for
standard export credits denominated in dollars would also be
revised to better track movements in market interest rates along
the yield curve.
Prospects for Success
The prospects for agreement now depend primarily on the
ability of the EC to reconcile remaining differences among its
5
members.
After a hesitant start, the EC has approached the OECD
negotiations positively, I believe out of recognition of our common
need to limit subsidies and avoid trade and aid distortions. It is
clear that efforts will be pushed forward within the Community to
resolve remaining problems as promptly as possible.
OECD Ministers set a target last week for completion of these
negotiations by the end of this year if not sooner. The Ministers
committed themselves to overcoming existing obstacles so as to be
able to finalize such an agreement on this schedule.
I am hopeful
that the EC will be able to accept a package that all others have
found acceptable despite the compromises required.
But, as we stated at the outset of these negotiations, the
negotiating road was bound to be long and difficult. The end seems
to be in sight, but we are not there yet.
Tied Aid Ban in Eastern Europe
Separately, we have been seeking agreement within the OECD to
ban the introduction of tied aid credits into Central and Eastern
Europe.
The investment needs of these economies as they emerge
from decades of economic stagnation are tremendous, and the
potential cost of a tied aid credit race is staggering.
We also
believe that providing subsidies and introducing trade distortions
into the region through the use of tied aid credits would not only
run contrary to our advocacy of reliance on free and open markets,
but also inhibit development through misallocation of scarce
resources.
Last week OECD Ministers endorsed an agreement reached by the
Export Credit Group Participants to try to avoid using tied aid
credits in this region. In line with the U.S. proposal, exceptions
to this agreement are to be made for stand alone grants and food
and humanitarian aid.
A more binding commitment was not considered desirable given
the highly uncertain economic and political situation in the
region. We believe that this agreement will deter the use of tied
aid except in the most unusual circumstances. We will continue to
monitor developments closely to ensure that Central and Eastern
Europe continues to be essentially a tied aid free zone.
EAI Initiative
Eximbank plays an important role in the President's Enterprise
for the Americas Initiative (EAI). The EAI is conceived to deepen
and expand for our mutual benefit the wide array of trade and
investment ties that link the United States and its neighbors in
Latin America and the Caribbean.
This initiative rests on three
pillars: trade; investment; and debt reduction.
Each area
represents a major priority for action.
The principal Eximbank
6
contribution is in the debt area.
As part of the debt pillar, the Administration is seeking
authority and appropriations to sell or cancel a portion of
Eximbank loans to facilitate debt-for-equity, debt-for-development
and debt-for-nature swaps and to ease the burden of the region's
non-concessional debt.
We believe this will also promote private
investment,
encourage
broad-based
development,
and
fund
environmental projects in qualifying countries.
There are strict criteria that a country must meet to qualify.
Specifically, this would mean IMF and World Bank programs,
implementation of investment reforms with the Inter-American
Development Bank, and an agreement with the country's commercial
banks, as appropriate.
The methods for selecting the debt (or
portions of debt) to be canceled are to be worked out between
Treasury and Eximbank.
Under credit reform, the sale of Eximbank debt will require a
budget appropriation and outlay in FY 1992 and thereafter. This is
based on the subsidy cost of the debt swaps, and represents the
difference between the actual sale price and the net present value
of the expected stream of receipts.
For this purpose, the
Administration has requested an appropriation in FY 1992 of $19.2
million for Eximbank. We expect that the requested amount would be
leveraged through debt swaps to permit debt reduction of up to $300
million, depending on country eligibility.
The proposed swap of Eximbank loans can make a contribution to
economic growth in the region.
We urge a quick enactment of the
EAI legislation.
Conclusion
Mr. Chairman, this concludes my prepared remarks.
Eximbank
plays an important role in the areas I have discussed today in
supporting the Administration's international economic goals.
I
will be happy to answer any questions.
1•
TREASURY-NEWS
Department off the Treasury j|| Washington, o.c. • Telephone 566-2041
EPT. o f t u c
¿■/ .JL* V«
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Statement of
William E. Barreda
Deputy Assistant Secretary of the Treasury
for Trade and Investment
Before the Subcommittee on
Commerce, Consumer Protection, and Competitiveness
of the
Committee on Energy and Commerce
U.S. House of Representatives
Wednesday
June 12, 1991
Madam Chair and Members of the Subcommittee:
I
appreciate the opportunity to appear before the
Subcommittee to present the Administration's position on the
draft you provided of the "Technology Preservation Act of 1991"
(the draft Act). The draft Act would amend Section 721 of the
Defense Production Act of 1950, known as the Exon-Florio
provision.
My testimony will describe U.S. Government policy concerning
foreign direct investment, international efforts to further that
policy, the operations of the Committee on Foreign Investment in
the United States (CFIUS), and will comment on the draft Act.
Foreign direct investment policy
The two elements of U.S. policy towards foreign direct
investment are that:
1) the United States welcomes foreign
direct investment and 2) the United States seeks to liberalize
investment regimes abroad. At the same time, it is important
that we ensure that our open investment policy does not
compromise our national security.
We have adopted and maintained this policy for the simple
reason that it serves U.S. national interests.
It advances
economic efficiency, promotes economic growth, and makes us more
NB-1321
page 2
competitive internationally, while contributing to higher living
standards in this country.
A strong economy, of course, is
essential to national security.
This international investment
policy reflects the reliance on market forces which underlies all
of the Administration's economic policies.
The Administration
has pursued the policy consistently.
The 1991 "Economic Report
of the President" said:
The Administration strongly opposes the erection of
barriers to foreign investment in the United States and
is continuing to work to reduce formal and informal
barriers to investment throughout the world.
The complement to our open investment policy at home is
liberalizing the investment regimes of our trading and investment
partners.
Freedom to invest in other countries' markets is a
vital contribution to the viability of U.S. companies.
As these
companies gain greater access to markets abroad, exports from
U.S. parents to their foreign subsidiaries translate into more
jobs in the United States.
Data and trends
As of the end of 1990, the book value of foreign direct
investment in the United States was $427 billion.
(Revised 1990
data will be released by Commerce in late June.)
The United
Kingdom was the largest investing nation, with investments of
$125 billion, followed by Japan with investments of $78 billion.
During 1990, the U.S. foreign direct investment position
abroad increased by $36 billion, to $410 billion.
Because U.S.
foreign direct investment abroad in 1990 increased faster than
foreign direct investment here, the gap in the book value between
foreign direct investment here and abroad is narrowing.
This week the Commerce Department released a revaluation
using market values for foreign direct investment in the United
States and U.S. direct investment abroad at the end of 1989.
This is the first time that Commerce has published other than
historical book values for direct investment.
It did so to
address widely held views that book value understates
significantly the value of U.S. investment abroad much of which
is considerably older than foreign direct investment here.
The
new figures confirm the extent of that undervaluation.
According to the new figures, the 1989 market value of the
U.S. direct investment position abroad was $805 billion (over
twice the book value of $373 billion). The 1989 figure for the
foreign direct investment position in the United States was $544
billion (book value, $401 billion). Based on market value, the
U.S. direct investment abroad exceeded foreign direct investment
here by over $260 billion, while, as I mentioned, based on book
page 3
value foreign direct investment here exceeded U.S. investment
abroad by $28 billion.
The presence of foreign direct investment in the U.S. is not
large relative to the size of the overall economy.
In 1990, the
current cost value of foreign direct investment in the United
States accounted for less than 3% of U.S. domestic net worth.
Foreign direct investment has a significantly lesser role in the
U.S. economy than in the economies of our major trading partners,
with the exception of Japan.
Based on preliminary data, foreign direct investment inflows
in 1990 fell sharply from previous levels.
Inflows were down 64
percent compared to 1989, for example.
By major countries the
decline was 65 percent for the United Kingdom, 53 percent for
Japan, and 82 percent for the Netherlands.
Although I would not wish to draw firm conclusions at this
point, the reasons for the drop would include the increased use
of borrowing in the United States, recession in the United
States, tighter money abroad, and investment opportunities in
other countries.
It may also be that investors have been
influenced by the debate over foreign direct investment.
It
cannot be comforting to foreign investors that legislation such
as the draft Technology Preservation Act is under serious
consideration.
To illustrate the benefits of foreign investment in the
United States, at the end of 1988 non-bank U.S. affiliates of
foreign firms:
—
employed 3.7 million Americans;
—
had payrolls of $112 billion;
—
paid $11 billion in Federal income tax;
—
spent $7 billion in research and development.
What is important are the jobs and job skills resulting from
investment that accrue to American workers regardless of the
nationality of- the investor.
In terms of employment, California
ranked first, New York second, Illinois fourth, Pennsylvania
sixth, Ohio seventh, North Carolina eighth, and Georgia tenth
among the States.
In terms of the value of fixed capital
investment, California ranked first, New York third, Illinois
fifth, Ohio sixth, Pennsylvania ninth, and North Carolina tenth.
Charts in the appendix provide additional data.
Concerns over policy
page 4
The growth of foreign investment in recent years has
prompted new doubts in some quarters about the desirability of
our open investment policy.
Because of the surge of Japanese
investment here, concentrated in certain sectors and geographic
areas, special concern has been expressed over investment from
J apan.
One concern, reflected in the title of this bill, is fear
that the United States is being drained of technology through
foreign direct investment. In particular, some observers believe
Japan's investments here are motivated by designs to capture the
fruits of American technology for Japan's home industries rather
than by a desire to pursue profits in the United States and in so
doing contribute to the U.S. economy.
Another impetus for a change in our investment policy
focuses on the absence of a level playing field.
I share this
concern, and we are working actively to gain greater access to
foreign markets, particularly Japan's.
But I believe that it
makes little sense for the United States to restrict foreign
investment in our market because policies abroad deny U.S.
business equivalent access.
To do so would harm our own economic
interest by denying ourselves the benefits of foreign direct
investment while incurring the costs of a restricted capital
market.
Instead, our response has been to attack restrictive
investment regimes and to do all we can to move our investors to
a position where they have the same rights and opportunities
abroad as do domestic investors.
I
will touch on the technology issue later in this
testimony.
Let me now briefly describe our efforts to level the
playing field.
Efforts to liberalize foreign restrictive investment practices
o In the General Agreement on Tariffs and Trade (GATT), we
are seeking a binding, enforceable, legal obligation to
prohibit certain government measures imposed on foreign
investors.
For example, we are seeking to prohibit measures
that require the use of local parts to the detriment of
imported parts.
Such foreign requirements reduce American
exports and harm U.S. workers.
Disciplining these
Trade-Related Investment Measures (TRIMs) is a high priority
for us in the Uruguay Round.
o Bilaterally, we have negotiated 13 investment treaties
which provide a framework of agreed principles.
These
complement the 48 Treaties of Friendship, Commerce, and
Navigation currently in effect. A basic objective of these
treaties is to obtain the right for U.S. firms to establish
businesses and to compete in the territory of our treaty
page 5
partners on equal terms with domestic firms.
For example,
last year we concluded negotiation with Poland of a Business
and Economic Relations Treaty.
One of the benefits of that
agreement is that it enables U.S. firms to compete on a
non-discriminatory basis with Polish and other foreign
firms. We are negotiating similar agreements with other
Eastern European countries and the Soviet Union.
We also
have entered into negotiations with a number of Latin
American countries.
o Through the Structural Impediments Initiative (SII) with
Japan, we have made some progress in our attempts to remove
barriers to foreign direct investment in that country.
Japan
I
am pleased to report that Japan has recently revised the
laws governing its foreign investment regime.
These changes
represent an important step towards establishing a more open
investment environment. The Government of Japan is now preparing
the Ministerial Ordinances (regulations) to implement these
revisions.
Prior notification of investments will be required only in
sectors relating to national security and those covered by
Japan's reservations under the Organization of Economic
Cooperation and Development's Capital Movements Code.
Previously, all incoming direct investment required prior
approval.
A broad positive list of sectors exempt from prior
notification will be established in which restrictions on foreign
investment could occur only in situations involving national
emergencies.
In the implementing regulations, we expect that the positive
list will be drawn by Japan as broadly as possible with provision
made for periodic additions of new sectors, and the reservations
under the OECD Code will be reduced and more narrowly and
specifically defined.
Liberalizing the business practices needed to open up the
Japanese economy is a far more difficult challenge than changing
the legal regime for foreign investment.
It requires that
significant action be taken to open up the Keiretsu system.
Since the Keiretsu system has significance control over the
trade in and distribution of goods in Japan, the system is a
formidable barrier to entry into the Japanese market through
direct investment or exports.
In the SII effort to open up the Keiretsu system, the
Government of Japan has recognized the importance of enhanced
disclosure requirements in revealing anti-competitive or
exclusionary business behavior and has taken steps to improve its
page 6
disclosure regime.
Unfortunately, beyond these measures, Japan has not shown a
clear recognition that the exclusionary aspects of Keiretsu are a
problem.
Furthermore, we regret the lack of willingness by Japan
to address the problem of cross-shareholding.
We will continue
to press for a more open and transparent system in Japan.
Exon-Florio provision
The Exon-Florio provision authorized the President, or his
designee, to investigate foreign acquisitions to determine their
effects on national security.
It also authorized the President
to take such action as he deems appropriate to prohibit or
suspend such acquisitions if he found that:
There is credible evidence to believe that the foreign
investor might take action that threatens to impair the
national security; and
Existing laws, other than the International Emergency
Economic Powers Act and the Exon-Florio provision, do not
provide adequate and appropriate authority to
protect the national security.
If these criteria are satisfied, the President was
authorized to direct the Attorney General to seek appropriate
judicial relief — including divestment.
The President's
findings were not subject to judicial review.
By Executive Order 12662 of December 27, 1988, the President
designated the Committee on Foreign Investment in the United
States (CFIUS) to receive notices from parties involved in
foreign acquisition of U.S. companies, to determine whether
investigations of those transactions should be undertaken, and to
prepare a report and recommendation to the President with respect
to transactions that have been investigated.
Summary of Exon-Florio Operations
We have received over 575 notices since the enactment of
Exon-Florio. Of that total, twelve transactions have been
subject to a 45-day investigation.
Four of those transactions
were withdrawn.
Of the remaining eight, the President chose not
to intervene in seven. The President chose to prohibit one
transaction.
Beginning last fall, there has been a noticeable reduction
in the number of notifications to CFIUS of transactions.
This
reduction has continued into 1991. Through May of this year
CFIUS received 60 notifications, while during the same period
last year CFIUS received 148 notifications. This decline in
page 7
notifications probably reflects the decline in the inflow of
direct investment as well, as perhaps greater selectivity on the
part of investors in choosing which transactions to notify.
Lapse of Exon-Florio authority
As you know, Exon-Florio authority lapsed with the
expiration of the Defense Production Act on October 20, 1990.
After consultations with Congressional staff, the business
and legal communities, and other CFIUS agencies, Treasury
announced on November 6, 1990, that CFIUS would continue to
operate on an informal basis in accordance with the Exon-Florio
criteria and calendar.
Although the President's authority under Exon-Florio is not
currently available, parties to transactions have continued to
cooperate with CFIUS in the expectation that Exon-Florio
authority would be renewed retroactively.
During the period since the Exon-Florio provision lapsed,
CFIUS has received over 100 notifications and undertaken one
investigation.
Our advice to prospective notifiers has been to
proceed as though Exon-Florio had not lapsed, in expectation that
the authority would be renewed retroactively, as has happened
each time before.
Under such a renewal, any transactions
consummated in the interim would be automatically covered.
However, the Exon-Florio authority lapsed over seven months
ago. The longer the period of lapse extends, the more difficult
it becomes to continue to operate under interim arrangements.
Consistent with the Administration position on the Defense
Production Act, Treasury supports a short-term extension of
Exon-Florio in its current form.
Criticism of CFIUS
Recent criticism of CFIUS has centered on the statistics,
owing to the fact that in over 575 notifications, there have been
only twelve 45-day investigations, and only one block.
CFIUS, it
is argued, cannot possibly be doing its job if the President has
only blocked one deal, and CFIUS has only investigated twelve
transactions.
I
take a different view. As the Deputy Assistant Secretary
with oversight responsibility for Treasury's CFIUS operations, I
can assure you that CFIUS examines very closely notices of
transactions during the initial 30-day period.
At the same time,
we take seriously the report of the Conferees that they did not
intend, through Exon-Florio, to impose barriers to foreign
investment.
CFIUS has evolved an efficient analytic process,
spurred by the tight deadlines under which CFIUS operates, to
page 8
examine thoroughly the national security concerns of every
transaction.
These concerns are measured against Exon-Florio
standards of whether credible evidence exists that the foreign
investor might take action to harm the national security, and
whether other laws are adequate to protect the national security.
During the 30-day review period CFIUS is able to amass a
great deal of information with regard to a particular
transaction. As necessary, following the receipt of the
notification, we begin with an initial exchange of written
questions and answers, followed by other rounds of questions and
answers, and, as needed, one or more meetings with the parties to
the transactions.
I believe that those businessmen and attorneys
who have been through the process will attest to its
thoroughness.
This intensive process allows us to meet the requirements of
Exon-Florio while sustaining our open investment policy.
If at
the end of the initial 30-day review, CFIUS staff does not have
sufficient information to make a determination or a
recommendation to policy officials, we extend the review into a
45-day formal investigation.
Alternatively, parties to the transaction may withdraw
notice in cases where information is lacking; notice is
resubmitted later when the information is made available to
CFIUS. Withdrawals of notification have typically been used in
instances in which CFIUS was not prepared to end its
consideration of a transaction, but in which problems and
possible solutions were clearly identified, and did not in and of
themselves constitute a reason to contemplate prohibiting the
transaction.
Examples are the need to establish a procedure for
assuring that access to sensitive technology is limited, giving
additional time to meet Department of Defense concerns about
safeguarding confidential information and contracts; and allowing
time to verify the reliability of alternate suppliers, etc. Once
these problems are overcome, parties to the transactions then are
free to resubmit the transaction to CFIUS.
Thus far, about a dozen transactions have used this
withdrawal procedure.
It allows us to insure that existing laws
are adequate and appropriate to protect national security,
thereby enabling us to meet our responsibility without, however,
unduly burdening the process or the President.
Beyond the strict implementation of Exon-Florio, CFIUS's
impact has been significant.
It includes a greater awareness in
the business and legal communities of national security aspects
of transactions. Moreover, CFIUS serves as a mechanism for
case-by-case review of transactions designed to confirm that laws
to protect security are appropriate and adequate to the task for
the transaction under consideration. And CFIUS has produced a
page 9
marked improvement in co-ordination and information sharing
within the Executive Branch on national security implications of
foreign purchases of U.S. businesses.
Technology
Madam Chair, the draft Act reflects the increased concern
many have with the effect of foreign investment on our
technological competitiveness.
The principal concerns are:
—
Foreigners are increasingly targeting U.S. high
technology sectors for takeover.
As a result, it is said, the United States loses more
technology than it gains through foreign investment in
the United States.
Let me address these concerns.
First, if foreigners are in fact targeting high-tech
sectors, we would expect to see foreign direct investment
increasing disproportionately in those sectors.
However,
available data (through 1988) do not provide evidence that this
is occurring. According to Commerce Department data, the share
of foreign direct investment inflows going to high-tech sectors
decreased from 11.5% in 1980 to 9% in 1985 and then increased to
11.1% in 1988. Of course, foreign investment in all sectors
increased during this time, so that actual investment in hightech sectors has increased.
But there is no clear trend of
foreigners increasingly focusing on buying high-tech firms.
Second, foreign investment in the United States is not
bleeding our technological base.
In fact, the United States
obtains more technology than it contributes through foreign
investment here.
Payments of royalties and license fees
generally reflect the value companies place on technology.
We
looked at these intracompany payments as a measure of technology
transfer.
Transfers to the United States through U.S. affiliates
of foreign companies have been more than five times larger than
technology transfers out by them in the 1980-1989 period.
While, overall, U.S. firms do transfer more technology
overseas than foreign firms transfer to the United States, 76% of
U.S. technology transfers are from U.S. parents to their foreign
affiliates, and 22% are from U.S. firms to unaffiliated
companies.
Only 2% of technology outflows are from U.S.
affiliates to their foreign parents.
Given that the market value
of U.S. direct investment abroad is much greater than foreign
investment in the United States, as the new Commerce data
confirms, it should not be surprising that technology transfers
abroad exceed inflows.
In addition, technology flows to the United States have been
growing much faster than flows out of the United States. While
transfers of technology out of the United States more than
doubled from 1980-88, transfers into the United States more than
tripled.
I
believe that it is counterproductive to erect barriers to
the free flow of technology when the United States has more than
ever to gain from foreign research and technology. A recent
study of worldwide patents and scientific citations found that,
as other countries have developed their own research and
technological capabilities, an increasing share of key
technological developments are occurring outside the United
States.
Finally, any attempt to restrict foreign ownership in
certain "critical" high-tech sectors for other than national
security reasons would at best be ineffective and at worst
counterproductive.
Restrictions would be ineffective because our
export control laws rightly restrict the transfer of technology
and know-how which could threaten our national security.
It
makes little sense to try to stop foreigners from getting
technology through investment which they can easily get through
trade or licensing agreements.
Restrictions would discourage
both foreign and domestic infusions of capital.
Domestic
investors would have less incentive to invest in a U.S. company
whose value has been adversely affected because of restrictions
on sale of the company to the highest bidder.
We would end up
starving for capital precisely those sectors we most hope to see
flourish.
As Assistant Secretary of Commerce for Technology Policy
Deborah Wince-Smith recently stated before the House Science,
Space and Technology Committee:
Rather than reducing the flexibility and freedom our
firms have in forming business and financial alliances,
the real issue we must address is creating an economic
and cultural environment in the United States that is
conducive to long-term investment in innovation and the
rapid commercialization of new technology.
The President has made several proposals to boost our
technological competitiveness.
These include decreasing
government dissaving by adhering to the budget agreement,
increasing R&D funding, cutting the capital gains tax, improving
our financial system, and removing regulatory impediments.
This
is what is ultimately needed to improve our technological
competitiveness, not erecting barriers to foreign capital and
know-how.
The Draft Technology Preservation Act
page 11
I
would like to turn now to comment on the draft Technology
Preservation Act. The Administration strongly opposes enactment
of the draft Act.
It would have a serious adverse effect on the
U.S. economy, could have harmful consequences for U.S. business
abroad, and would seriously erode global support for more open
investment regimes.
For these reasons, Treasury and the other agencies of the
Committee on Foreign Investment in the United States oppose the
draft Technology Preservation Act.
If it were presented to the
President for signature in its current form, his senior advisors
would recommend he veto it.
Our objections to the draft Act are based on the broad
implications of the bill as well as on the bill's particular
provisions.
First, the draft Act is not necessary, since the Exon-Florio
provision, once renewed, together with other laws is adequate to
protect national security.
Second, the draft Act would make fundamental changes in our
existing investment policy.
It compromises our policy of
welcoming foreign direct investment and is contrary to our policy
of providing foreign investors national treatment once
established in the United States. Moreover, denial of national
treatment could raise questions with regard to U.S. treaties and
other international agreements.
Third, the draft Act would certainly discourage foreign
direct investment and thereby harm our economy, which in recent
years has depended on foreign savings to help sustain a level of
investment necessary to maintain U.S. competitiveness.
Fourth, the draft Act would have à deleterious effect on the
worldwide movement towards more liberal investment regimes.
The
United States has been at the forefront of this movement because
it is beneficial to the U.S. and world economies.
Fifth, the draft Act would establish a system and a mandate
for truly extensive government interference in the market place,
on the implicit assumption that government officials can make
better economic and technology decisions than the market can.
Sixth, the draft Act would require federal agencies to share
information on acquisitions with the proposed interagency
committee. Much of the information collected by the agencies is
confidential and is collected for statistical purposes only.
Giving the committee access to such information would set a
precedent of nonstatistical use that would erode the integrity of
our statistical system.
page 12
Finally, the draft Act would subject U.S. investment abroad
to possible retaliatory action, with attendant adverse economic
consequences here at home, as, for example lost income and jobs.
These effects result from particular provisions of the draft
Act to which we have specific objection.
Presidential finding.
The draft Act would amend the ExonFlorio provision to alter significantly one of the findings that
the President must make if he is to take action to suspend or to
prohibit a foreign investment.
Under the bill, an investment
could be blocked on the basis of foreign ownership alone rather
than on action that the foreign owner might take.
This change is not minor; it would represent a major shift
in U.S. direct investment policy.
The draft Act would change the
presumption we make with regard to foreign investment from one
that considers such investment beneficial to one that considers
foreign investment as potentially pernicious.
The consequence of
this presumption is embodied in the requirement in the bill that
foreign investors must, under certain circumstances, accept
performance requirements that will be policed by the U.S.
government.
In addition to expanding the scope of the factors that the
President or CFIUS must consider in reaching decisions, another
effect of the change would be to broaden the focus from national
security to »'the industrial and technological base." The
introduction of the term ''industrial and technological base"
into the Presidential finding brings into play a broad and vague
concept.
The proposed interagency committee would be called upon
to make subjective judgments without clearly defined standards
and could become subject to special interest lobbying. As you
know, the Administration has consistently and strongly opposed
industrial policy of the sort which would be required under the
draft Act.
It is ironic that at a time when other countries,
including Japan as a result of the Structural Impediments
Initiative, are moving away from applying such broad concepts to
foreign direct investment, the draft Act proposes to move the
United States in the opposite direction.
Screening. The draft Act would require that foreign investments
involving "critical technologies" be investigated by the proposed
interagency committee and that assurances be solicited with
regard to the investment.
These assurances would have to be
published in the Federal Register, be reviewed at least annually,
and constitute the subject of an annual report to Congress.
This process — screening, obtaining assurances, and
monitoring ~ would substitute the judgment of government
officials for decisions of the market.
page 13
Assurances. Although no specific penalties are provided for in
the bill, failure by foreign direct investors to provide
acceptable assurances would implicitly be grounds for blocking
certain transactions, or divesting investments which failed to
implement assurances given.
Foreign direct investments under
such a regime would be subject to a level of government scrutiny
not imposed on other investments.
Such scrutiny is open-ended.
How long would assurances be policed? Under what standards?
What if technology and the market change, as they assuredly will?
These are troublesome questions that lead into uncharted waters
for the United States.
As a matter of policy, the Administration opposes the
imposition of performance requirements on domestic investors or
on foreign investors here.
They are an unnecessary intrusion
and, when applied only to foreign investors, conflict with our
policy and international obligations to provide "national
treatment” to foreign investors operating in our economy.
Attempts of other countries which have actively employed
interventionist policies in investment have demonstrated the
folly of those policies. We should learn from these experiences,
not repeat their mistakes.
Recent history provides strong
support for the view that market participants make better
decisions than governments in these matters.
All direct investors look well down the road when making an
investment at home or abroad.
They must believe that they will
be free to make the market decisions necessary to the success of
their venture. Markets change in unpredictable ways.
Businesses, whether foreign or American, must be able to change
with them.
If businesses are restrained in reacting to the
market place by assurances given to the government, efficiency
suffers and the economy is harmed.
This holds true for foreign
investment here and U.S. investment abroad.
That is why a
principal U.S. goal internationally has been to eliminate such
performance requirements in other countries, so that government
interference in markets will be minimized.
Conclusion
Our objections to the bill do not involve only one or a few
of its provisions.
The bill is fundamentally flawed.
It
contradicts basic Administration positions on investment
screening, performance requirements, and economic efficiency.
It
contravenes the national treatment policy of the United States
and compromises our ability to promote more liberal investment
regulations in other countries.
Finally, it is not necessary as
existing laws provide adequate authority to ensure that foreign
investment does not compromise our national security.
page 14
Foreign investment benefits the United States. We know that
the market is the best allocator of resources. We risk
significant economic damage by discouraging foreign investment
and requiring government interference in the market.
There is
little question that enactment of the draft Technology
Preservation Act would have these results.
Foreign direct investors pay close attention to the
investment climate in the host country.
The United States is not
immune from scrutiny.
In a global economy that is changing
rapidly, the United States is not the only destination for
investment capital. We should not knowingly place the U.S.
economy at a disadvantage in international economic competition.
We must continue to maintain policies that welcome foreign
investment and attract capital.
In closing, I would like to reiterate two points:
1) An open investment policy is crucial to our international
competitiveness;
2) An investment climate is fragile; the economic costs of
unwise tampering are high.
Thank you.
you may have.
I will be happy to try to answer any questions
APPENDIX
CHARTS ON
FOREIGN DIRECT INVESTMENT
IN 1988 FOREIGN-OWNED FIRMS ACCOUN TED
FO R O VER 3.6 MILLION JO B S
State & U.S. Ranking
1. California
2. New York
4. Illinois
6. Pennsylvania
8.
Ohio
7. North Carolina
9. Florida
10. Georgia
11.
Michigan
13. Tennessee
14. Virginia
19. Maryland
29. Colorado
0
100
200
300
400
Employees (Thousands)
Employment in nonbank US affiliates
Source: Bureau of Economic Analysis
500
IN 1988 FOREIGN-OWNED FIRMS ACCOUNTED FOR
IMPORTANT PORTION OF MANUFACTURING JOBS
Sources: Bureau of Economic Analysis,
Bureau of Labor Statistics
A FTER INCREASING DURING THE 1980s, IN 1990
CAPITAL INFLOWS OF FOREIGN INVESTMENT
TO THE U.S. D ECREASED SIGNIFICANTLY
FDI Capital Inflows ($Billions)
Foreign Investment U.S. Investment
in the U.S.
Abroad
Source: Survey of Current Business
UK, JAPAN, & NETHERLANDS LARGEST
FOREIGN INVESTORS IN THE US
1990 FDI Position ($ Billions)
UK $125 29.7%
Japan $78 18.5%
Netherlands $62 14.7%
¥
Canada $33 7.8%
Germany $25 5.9%
Position e stim a te d using 1 9 9 0 capital inflows
S o u rce: B u reau of Econom ic Analysis
France $21 5.0%
Other Countries $77 18.3%
FOREIGN-OWNED FIRMS ACCOUNT FOR
ONLY A SMALL PART OF US ECONOMY
1988
Data, Except for Gross Product (1987)
All Industries
Employment (1)
85.3%
Manufacturing
Firms - Assets (2)
Foreign-Owned Firms
(1) Nonbank US Affiliates/Nonbank US Businesses
(2) US Affiliates/AII US Firms (Manufacturing)
Source: Survey of Current Business
All Industries
Gross Product (1)
87.8%
Manufacturing
Firms - Sales (2)
US-Owned Firms
E X C E P T FOR JAPAN, OTHER MAJOR TRADING PARTN ERS
A C C E P T HIGHER L E V E L S O F FOREIGN INVESTMENT
1986 Data (asset data not available for France)
I
us
3 10
Japan
France
Germany
14
UK
9
20
SP 14
10
0
15
20
25
Percent
A
Sales
Mfg Employment
Source: Julius & Thomsen, "Foreign-Owned Firms,
Trade & Economic Integration", Tokyo Club Papers
2, Royal Institute for International Affrs, 1988
Assets
30
35
FO REIG N INVESTM ENT H ELP ED US MAINTAIN DOM ESTIC
INVESTM ENT D ES P IT E DECLINING SA V IN G S R A T E
Gross Domestic
Saving
Gross Private
Domestic Investment
Part of difference between Gross Savings &
Investment due to statistical discrepancy
Source: 1991 Economic Report of the President
US N EED S FOREIGN INVESTMENT B EC A U SE US SAVINGS
RATE SIGNIFICANTLY BELOW MAJOR TRADING PARTNERS
Average Gross Savings Rates 1981-88
Japan
W. Germany
Canada
France
U.K.
U.S.
Italy
0
10
20
% of GNP
Source: OECD
30
40
B E C A U S E MUCH U.S. FDI A B R O A D IS O L D E R W H ILE
MUCH FDI IN U S IS NEW, WHEN R E V A L U E D A T M A R K ET
V A L U E S , U.S. REM AINS L A R G E N ET C R E D IT O R
1982
1983
1984
1985
1986
Book Value Market Value
Net FDI Postion = US FDI Position Abroad Foreign FDI Position in US
Source: Commerce Department 6/9/91 Press Release
1987
1988
1989
USING PAYMENTS OF ROYALTIES & LICENSE FEES
TO MEASURE TECHNOLOGY FLOWS, FDI IN THE US
PROVIDES LARGE NET INFLOW OF TECHNOLOGY
Royalties & License Fees ($ Millions)
Payments to Foreign Parents Receipts from Foreign Parents
(Technology Inflows)
(Technology Outflows)
Source: Survey of Current Business
USING PAYMENTS OF ROYALTIES & LIC EN SE F E E S TO
M EASURE TECHNOLOGY FLOWS, FDI IN THE US PROVIDED
NET INFLOW OF TECHNOLOGY FROM MOST COUNTRIES
Payments to Foreign Parents
(Technology Inflows)
Receipts from Foreign Parents
(Technology Outflows)
0
200
400
600
800
1989 Royalties & License Fees ($ Millions)
Source: Survey of Current Business
1,000
‘ «63
WL or-,
S T A 'it k E W - O F J. FRENCH HILL
DEPUTY ASSISTANT S&dR^iEIARY (CORPORATE FINANCE)
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
JUNE 12, 1991
Mr. Chairman, I am pleased to appear before you today on
behalf of the Department of the Treasury and the Administration
to discuss what has commonly become known as "lender liability"
under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
Legislation has been introduced in the Congress that seeks to
resolve the lender liability issue, including S. 651, introduced
by Senator Garn, and H.R. 1450, introduced by Mr. LaFalce.
These
bills have been instrumental in focusing the debate on the lender
liability problem.
The Administration supports the lender
liability objectives of these bills, and believes that the rule
released by EPA last week achieves all of those objectives with
precision and clarity.
We support EPA's rule because it provides
bright-line certainty for lenders seeking to avoid liability when
extending credit.
With respect to the CERCLA security interest
exemption, if the Congress believes that legislative action is
appropriate, the Administration will support legislation to the
extent it enacts the provisions contained in the proposed EPA
rule.
NB-1322
2
We are aware that the Committee is concerned that the EPA
rule may not effectively bind third-party plaintiffs who may
bring suit under CERCLA.
and H.R. 1450.
This issue is addressed in both S. 651
It is the position of the Administration that the
EPA rule, which is a legislative rule, has the force and effect
of law and will bind third-party actions.
Both bills also would clarify the security interest exemption
with respect to both CERCLA and the Resource Conservation and
Recovery Act of 1976 (RCRA).
Although the EPA rule only
clarifies lender liability in the context of CERCLA, the
Administration is aware that there may be a similar issue with
respect to liability of lenders under the underground storage
tank provisions of RCRA.
The Administration believes that the
secured creditor provisions of RCRA should be similarly
interpreted and applied.
We also are aware that there are a number of other issues of
concern to the Committee that could not be addressed by the EPA
rulemaking because they involve matters outside the statutory
scope of CERCLA.
For example, S. 651 contains two provisions
intended to make it easier for the Federal Deposit Insurance
Corporation (FDIC) and the Resolution Trust Corporation (RTC) to
dispose of property they acquire when acting as conservators or
receivers of failed depository institutions.
The first would
provide that the initial purchaser of contaminated property from
the FDIC or RTC would be immune from strict liability under
CERCLA as an owner or operator.
The Administration would support
such a provision because it would save taxpayer money by
facilitating the disposition of property held by the FDIC and
RTC, provided that it also is consistent with our environmental
objectives.
We believe such a provision would be consistent with
our environmental objectives if it conditions initial purchaser
immunity on a commitment by the purchaser to clean up the
property consistent with the national contingency plan and makes
it clear that the purchaser would remain fully liable for any
action it takes that threatens or causes the release of hazardous
substances.
The second would exempt Federal banking and lending agencies
from the CERCLA section 120(h) covenant requirements when they
dispose of property acquired in connection with a conservatorship or receivership, through foreclosure on a loan or guarantee,
or in civil or criminal law enforcement actions.
This issue is
not new to the Administration, and has been the subject of an EPA
regulation.
The Administration firmly believes that all Federal
agencies should be fully subject to the covenant requirements
with respect to property owned in a proprietary capacity.
We
also believe that such requirements should not apply to property
acquired in the manner described in S. 651 or to property
acquired by any agency and held in a temporary custodial capacity
for subsequent sale or other disposition.
4
The EPA rule achieves this result in the context of the
security interest exemption because a security holder who
satisfies the exemption is not an "owner” for purposes of CERCLA
and would therefore not be subject to the requirements of section
120(h).
The Administration believes that further clarification
of the section 120(h) obligations for Government entities that
are innocent landowners under CERCLA can be accomplished
administratively, but would not object to appropriate legislative
clarification.
Similarly, both S. 651 and H.R. 1450 seek to provide some
degree of protection from liability for persons who acquire
property in a fiduciary capacity.
We believe that such persons
are similarly situated to holders of security interests, and that
they should be treated accordingly.
For example, we do not
believe that a trustee in bankruptcy or an executor or adminis
trator of a decedent's estate should be personally subject to
strict liability under CERCLA and that any environmental
liability of the estate should be limited to the assets of the
estate.
However, we are concerned that an otherwise culpable
person might be able to invoke the guise of a fiduciary to escape
liability.
For this reason, any legislative provision to protect
fiduciaries must be carefully crafted.
Finally, consistent with
our environmental objectives, the provision must make it clear
that a fiduciary is liable for any action it takes that threatens
or causes the release of hazardous substances.
5
Similarly, S. 651 would provide equal treatment of Federal
entities and States under CERCLA.
Again, to the extent that such
provisions are consistent with our environmental objectives, the
Administration would support equal treatment of States and
Federal entities.
Turning back to lender liability, which is the subject of
last week's EPA proposed rule, it is important to emphasize at
the outset that the issues involved in "lender liability" affect
more than private lenders, such as banks and other financial
institutions, although they are certainly the most obviously
affected.
The same issues are of critical concern to —
o
the Federal Deposit Insurance Corporation (FDIC) and
the Resolution Trust Corporation (RTC) when they
become conservators or receivers of troubled or
failed depository institutions;
o
all Federal agencies that lend funds, guarantee or
insure loans, or guarantee mortgage-backed
securities, such as the Farmers Home Administration
(FmHA), the Small Business Administration (SBA), the
Department of Energy, the Department of Veterans
Affairs, the Department of Housing and Urban
Development, and the Government National Mortgage
Association (GNMA);
o
all Federal agencies that acquire security interests
in the course of carrying out their statutory func
tions, such as through the seizure and forfeiture of
assets of drug traffickers; and
o
non-lending Federal agencies such as the Internal
Revenue Service, which can acquire property through
a lien for delinquent taxes, and the U.S. Customs
Service which can acquire liens on vessels by
operation of law.
6
In general, CERCLA imposes strict liability on owners and
operators of property for the release or threatened release of
hazardous substances.
When it enacted CERCLA in 1980, the
Congress made special provisions to exempt from this strict
liability persons who, without participating in the management of
a borrower's business, hold indicia of ownership, such as a deed
of trust or mortgage, to protect a security interest.
The
intention of the exemption is that a lender who holds title to
property primarily to protect a security interest (a mortgage is
the typical example) is exempt from strict liability, even if the
lender is forced to acquire the property by foreclosure.
The
Administration strongly supports this rational and commercially
necessary exemption from liability.
Underlying the lender liability issue is the extent to which
CERCLA contemplates that bankers and other lenders are to assume
the role in our society of insuring or guaranteeing the environ
mental purity of borrowers.
such a contention.
We find nothing in CERCLA to support
Neither CERCLA nor EPA's rule imposes any
requirement that lenders conduct environmental audits or
inspections prior to lending funds, or any requirement that they
ensure that their borrowers act consistent with environmental
laws or regulations.
Instead, the security interest exemption
only demands that lenders refrain from participating in the
management of a borrower's enterprise when holding indicia of
ownership to protect a security interest.
7
However, as a result of a few recent court decisions, there
is now uncertainty regarding the scope of the security interest
exemption.
Banks and other lenders do not know when, in the
course of ordinary dealings with a borrower, they may be deemed
to participate in the management of a borrower's business and
therefore incur strict liability under CERCLA.
This uncertainty
places an invisible barrier between lender and borrower and is
generally destabilizing to the banking system because it
discourages the conduct of normal business relationships,
particularly when a borrower is having financial troubles.
Similarly, lenders do not know what actions taken to protect a
security interest —
such as foreclosure —
will void the
exemption.
Because there are instances where lenders have been held
strictly liable under CERCLA, we believe there has been an
overall chilling effect on both commercial and industrial and
real estate lending.
Many lenders are simply not making loans to
borrowers whose businesses involve hazardous substances or whose
properties may have been associated with hazardous substances
under a prior ownership.
Moreover, many lenders are walking away
from their secured collateral and not foreclosing on bad loans
for fear of environmental liability, thereby incurring losses
that weaken the banking system.
Lenders are also refusing to
extend additional credit to troubled borrowers, which can result
in bankruptcy and layoffs.
8
If we allow this situation to continue, we believe there are
potentially serious consequences for our economy, the Federal
deposit insurance funds, and our efforts to clean up the
environment.
We believe that lender uncertainty over CERCLA liability is
exacerbating the "credit crunch" and may well jeopardize our
economic recovery and growth.
To the extent Federally insured
depository institutions incur strict liability under CERCLA, that
liability poses a serious threat to the Federal deposit insurance
funds and all taxpayers.
The cost of a CERCLA cleanup and
attendant liability could erode minimum capital levels and force
an institution into Federal conservatorship or receivership at a
significant cost to the Federal deposit insurance funds.
the extent that Federal lending agencies continue to be
exposed to strict liability under CERCLA merely because they are
out their statutory mandates, those programs will be
curtailed as funds intended for loans are diverted to pay CERCLA
liability, and as agencies limit program operations for fear of
incurring liability.
If Federal law enforcement agencies continue to be exposed to
strict liability under CERCLA merely because they seize and
forfeit property of persons who violate the law, critical tools
will be eliminated from our law enforcement arsenal.
9
Finally, exposing lenders to the risk of strict CERCLA
liability merely because they extend credit simply is not
consistent with sound environmental policy.
Instead of fostering
a climate in which the lending community is a willing partner in
our national efforts to clean up the environment by loaning the
necessary funds, the uncertainty of lender liability is denying
financial resources to those businesses and geographic areas that
need them the most.
The Administration is committed to providing private and
governmental lenders, other holders of security interests, and
the FDIC and RTC with clear and unambiguous certainty concerning
their potential liability under CERCLA.
Resolving the lender
liability issue will benefit lenders, Federal agencies, the
economy and the environment.
Since last fall, the Departments of Treasury and Justice,
many other Federal agencies, and the President's Council on
Competitiveness, have been working with EPA to develop a rule
that would resolve the lender liability problem.
This has been
difficult task in view of the legitimate competing policy
interests involved.
We are pleased that EPA has been able to
develop a rule that provides the certainty needed by lenders,
properly protects Federal agencies, and maintains effective
protection of the environment.
10
The rule provides unambiguous guidance to private and
Governmental lenders and holders of security interests as to how
they may avoid strict liability under CERCLA.
However, because
clarification of the CERCLA security interest exemption alone was
insufficient to protect the FDIC, RTC and other Governmentappointed conservators and receivers of failed depository
institutions from unwarranted CERCLA liability, the EPA rule also
provides that the acquisition of conservatorship and receivership
assets constitutes an involuntary transfer under CERCLA.
The
effect of the rule is to address the three classes of assets of a
failed depository institution that can be acquired by Governmentappointed conservators and receivers:
o
Loan Portfolio. With respect to performing and
problem loanswhere the collateral is in the
possession of the borrower, Government-appointed
conservator or receiver is a successor-in-interest
entitled to fully assert the protections accorded
holders in the rule.
o
Property Previously Foreclosed. With respect to
property foreclosed upon by a depository institution
prior to the appointment of a conservator or
receiver, if the depository institution is entitled
to the security interest exemption, the Governmentappointed conservator or receiver is again a
successor-in-interest security holder fully protected
by the exemption.
Even if the depository institution may not be
entitled to the security interest exemption (e.g.,
it impermissibly participated in its management), the
EPA rule deems the Government-appointed conservator
or receiver to have acquired the property through an
involuntary transfer for purposes of the defense to
liability available under CERCLA section 101(35).
o
Investment and Other Proprietary Property. With
respect to such property, the rule deems the
Government-appointed conservator or receiver to have
acquired the property through an involuntary transfer
under section 101(35).
11
The EPA proposed rule released last week embodies the
following principles:
PRIVATE AND GOVERNMENTAL LENDERS
AND HOLDERS OF SECURITY INTERESTS
o
PRE-LOAN ACTIVITIES. Strict liability under CERCLA
cannot result from any action taken prior to the
creation of a security interest.
This principle is critical to lender liability
because it permits lenders, without fear of CERCLA
liability, to conduct environmental inspections and
audits, and to condition a loan upon necessary
corrective action by a borrower.
o
PARTICIPATION IN MANAGEMENT WHILE BORROWER IN
POSSESSION OF COLLATERAL i Strict liability under
CERCLA cannot result while the borrower is in posses
sion of the collateral unless the holder of the
security interest participates in the management of
the borrower's affairs by either —
o
exercising actual decisionmaking control over the
borrower's environmental compliance, such that
the holder has undertaken responsibility for the
borrower's waste disposal or hazardous substance
handling practices which results in a release or
threatened release, or
o
exercising control at a management level
encompassing the borrower's environmental
compliance responsibilities comparable to that of
a manager of the borrower's enterprise, such that
the security holder has assumed or manifested
responsibility for the management of the
enterprise by establishing, implementing and
maintaining the policies and procedures
encompassing the day-to-day environmental
decisionmaking of the borrower's enterprise.
This principle (1) encourages the maximum amount of
cooperation between lenders and borrowers, (2) ensures
that ordinary and customary dealings between lenders
and borrowers do not result in strict liability under
CERCLA, and (3) clarifies that CERCLA strict liability
does not arise if a lender provides financial advice
and other services in areas totally unrelated to
environmental compliance.
12
O
POST-FORECLOSURE PROTECTION OF THE SECURITY INTEREST.
A foreclosing security holder is deemed to be acting
to protect the security interest and therefore not
subject to CERCLA strict liability unless it is shown
that the security holder has held the property for any
other purposes as evidenced by —
o
a failure to offer the property for sale or to
otherwise seek to divest his interest in the
property, or
o
a rejection of a bona fide written offer of fair
consideration from a qualified purchaser.
This principle recognizes that lenders are ordinarily
not in the business of investing in foreclosed
collateral — they are in the business of making
loans.
In fact, the law prohibits national banks
from holding real property for investment purposes,
and provides that they may hold foreclosed property
for up to 10 years if that is necessary to recover on
a bad loan (see 12 U.S.C. 29).
For this reason, the
rule provides that a foreclosing lender will be pro
tected from CERCLA liability as long as it continues
to protect the security by making a good faith effort
to sell or otherwise divest foreclosed collateral for
fair consideration.
This principle also furthers two legitimate policy
obj ectives:
o
o
It protects the real estate market by ensuring
that lenders are not forced to "dump" foreclosed
properties in times of weak markets thereby
further depressing real estate values.
o
It avoids forcing lenders to wind down an ongoing
enterprise — a shopping center or a factory for
example — to avoid CERCLA liability.
Not only
may winding down operations reduce the value of
the collateral and make it more difficult to
sell, but it also eliminates jobs, reduces the
tax base of State and local governments, and
increases government unemployment compensation
costs.
BURDEN OF PROOF. The burden should be on the plaintiff seeking to impose strict liability on a security
holder to prove —
o
that a holder participated in management (as
defined above) while the borrower was in
possession of the collateral, or
13
o
that a foreclosing holder has not acted to
protect the security interest (as defined above).
GOVERNMENT-APPOINTED CONSERVATORS AND RECEIVERS
o
Government-appointed conservators and receivers
(including the FDIC and the RTC) are entitled to
assert the security interest exemption with respect
to the loan portfolios (including already foreclosed
upon properties) of troubled or failed depository
institutions.
o
Government-appointed conservators and receivers are
deemed to involuntarily acquire the assets of
troubled or failed depository institutions and
therefore have a defense to CERCLA liability under
section 101(35).
o
To the extent liability attaches to property in a
Government conservatorship or receivership, liability
of the Government-appointed conservator or receiver
shall not exceed the market value of the property
less the amount of the security interest.
These principles protect the Federal deposit insurance
funds from becoming a deep-pocket, either directly or
indirectly, for CERCLA liability.
Finally, the Administration also is seriously concerned about
another problem unrelated to the question of lender liability,
which is addressed partially by S. 651 and not addressed by H.R.
1450.
This concerns the potential CERCLA liability attaching to
acquisitions of property of Federal agencies that are
"involuntary" in nature but not in the context of Governmentappointed conservatorship or receivership.
Many Federal agencies, particularly the law enforcement
agencies of the Departments of Justice and Treasury that seize
and compel forfeiture of property need assurances that such
actions will not subject them to CERCLA liability.
The same is
true with respect to specific property the acquisition of which
is required by an Act of Congress, or is incidental to the
enforcement of a civil, administrative or criminal fine or
penalty.
The Administration strongly supports the proposed
language in the EPA rule that would provide protection in the
context of seizures and forfeitures, and is prepared to extend
this principle to other involuntary acquisitions of property by
Federal entities where appropriate.
This concludes my formal remarks, and I would be pleased to
answer any questions you and the Committee may have.
1
I
®
Department of the Tretfiti^gjl JMashington, D.c. • Telephone 566 2041
For Release Upon Delivery
Expected at 2:00
-OFT/
June 12, 1991
STATEMENT OF THE HONORABLE
ROBERT R. GLAUBER
UNDER SECRETARY OF THE TREASURY
FOR FINANCE
BEFORE THE
SUBCOMMITTEE ON SECURITIES
COMMITTEE ON BANKING,
. HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
JUNE 12, 1991
Mr. Chairman and Members of the Subcommittee:
I
am pleased to appear before this Subcommittee to discuss
the reauthorization of Treasury's rulemaking authority under the
Government Securities Act of 1986 ("GSA" or "Act”) as reflected
in the legislation we have recently transmitted to the Congress
entitled, "The Government Securities Act Amendments of 1991."
First, I will summarize Treasury's role in developing and
implementing rules for the government securities market and the
effectiveness of those rules in meeting the objectives set forth
by Congress in enacting the GSA. Then I will discuss the
legislation we have proposed that would:
(1) extend Treasury's
existing rulemaking authority? (2) grant Treasury additional
rulemaking powers in the area of sales practices; (3) lift the
restriction that currently precludes the National Association of
Securities Dealers (NASD) from adopting government securities
sales practice rules for its members? (4) grant Treasury
discretionary authority to prescribe rules to ensure disclosure
of and access to government securities price and volume
information? and (5) make technical and conforming changes to the
Securities Exchange Act of 1934.
DEVELOPING RULES TO ENSURE FAIR AND EFFICIENT MARKETS
The GSA established, for the first time, a federal system
for the regulation of the entire government securities market,
including previously unregulated brokers and dealers, in order to
protect investors and to ensure the maintenance of a fair,
honest, and liquid market. The GSA also assigned Treasury
authority for developing and implementing rules pertaining to
financial responsibility, protection of customer securities and
funds, recordkeeping, reporting and auditing with respect to
transactions in government securities conducted by government
NB-1323
2
securities brokers and dealers (i.e., securities firms as well as
financial institutions). The Act also called for Treasury to
issue regulations relating to the custody of government
securities held by depository institutions that are not
government securities brokers or dealers.
It was the expectation
of Congress that Treasury would design rules to prevent
fraudulent and manipulative acts and practices, to protect the
integrity, liquidity, and efficiency of the government securities
market, and to protect the public interest. At the same time,
the rules were expected to preclude unfair discrimination between
brokers, dealers, and customers, and avoid imposing any
unnecessary burden on competition.
Treasury issued the final implementing regulations on
July 24, 1987, in compliance with the requirements of the Act.
In developing the regulations, Treasury consulted extensively
with the Securities and Exchange Commission (SEC), the Board of
Governors of the Federal Reserve System (Federal Reserve Board),
the other regulatory agencies, and government securities market
participants. This consultation and coordination throughout the
rulemaking process provided an effective means for the affected
entities to raise issues and to express their views concerning
various provisions of the regulations.
In order to prevent excessive and duplicative regulation and
to minimize compliance burdens, the GSA rules, for the most part,
incorporated existing rules of the SEC and bank regulatory
agencies.
Treasury did, however, adopt a different capital rule
for specialized government securities brokers and dealers (which
were not registered prior to the GSA) and new rules for hold-incustody repurchase transactions. As a result, the regulations
imposed as few new requirements as possible on those government
securities brokers and dealers that were already registered with
the SEC as generalist firms or on financial institution brokerdealers that were subject to bank regulatory agency rules. Thus,
the GSA regulations had the most significant effect on those
entities that, prior to the enactment of the GSA, were not
subject to any program of federal registration and regulation.
We believe the final GSA rules reflected a deliberate and
responsive approach to regulating the government securities
market, with due regard to striking the proper balance between
strengthening customer protection (e.g., hold-in-custody
repurchase transaction rules and financial responsibility
standards) and ensuring the continued liquidity and efficiency of
the market. The regulatory agencies, the General Accounting
Office , market participants, and industry representatives all
agree that Treasury has done a good job of regulating the
government securities market.
In part, the GSA was a response to abusive practices by
several firms in the repurchase transaction market.
These abuses
3
resulted in large customer losses when the firms failed. As a
result, one specific area that Congress targeted was the
strengthening of customer protection in hold-in-custody
repurchase transactions.
Due to the several requirements imposed
by Treasury's rules — written repurchase agreements must be in
place, certain risks of the transaction must be disclosed to the
customer, specific securities must be allocated to and segregated
for the customer, and confirmations must be issued — we believe,
as do many market participants, the various regulatory agencies
and the GAO, that there now exists a greater degree of customer
protection in the repurchase agreement market.
Enforcement of the GSA regulations and supervision of the
government securities brokers and dealers by the federal
regulatory agencies and self-regulatory organizations has varied.
We believe that regular and frequent examinations and timely
dissemination of information by the regulatory agencies to the
institutions they supervise are essential to ensure that the
goals of the GSA are being met. Overall, based on examinations
of the government securities brokers and dealers conducted by the
regulatory agencies and self-regulatory organizations, the level
of compliance with the GSA regulations is satisfactory.
Although
the agencies have reported violations of the regulations by some
institutions, most of the instances of noncompliance were easily
correctable and stemmed from misunderstandings of the new rules.
We believe that the actions taken by Treasury, the federal
regulatory agencies and the self-regulatory organizations in
implementing the GSA regulations have successfully met the
objectives established by Congress in enacting the GSA. The
rules have been timely and fairly implemented and have improved
and strengthened investor safety in the market. At the same
time, the rules have not imposed excessive and overly burdensome
requirements and have not impaired the liquidity, efficiency and
integrity of the government securities market. Most importantly,
no customers have lost any funds or securities in those instances
where government securities brokers or dealers have failed or
discontinued business since the inception of the GSA regulations.
EXTENSION OF TREASURY’S RULEMAKING AUTHORITY
In enacting the GSA, Congress imposed an October 1, 1991,
sunset on Treasury*s rulemaking authority over the government
securities market. Without an extension, Treasury's prospective
rulemaking and exemptive authority will cease. We believe that
Treasury's continued regulatory presence in the market is
required.
In its deliberations on the GSA, Congress recognized the
importance of maintaining the liquidity and efficiency of the
government securities market.
In addition, any regulatory
activity must be balanced with its impact on both the market and
4
the cost of Treasury borrowings. As I have just recounted,
Treasury*s rulemaking has been effective in achieving the
purposes of the GSA.
The implementation and administration of the GSA has
strengthened investor protection and heightened investor
confidence without significant adverse impact on the government
securities market and its participants. Much of this result can
be attributed to the on-going and effective consultation and
coordination among Treasury, the SEC, the Federal Reserve Board,
and the various other enforcement and self-regulatory entities.
Continued effectiveness in regulating the government securities
market requires a continuation of these relationships.
Because the government securities market encompasses the
activities of both registered brokers and dealers and financial
institutions, a single rulemaker must be empowered to ensure that
appropriate government securities regulations are in place for
all market participants.
Treasury is in the best position to act as the federal
agency overseeing the government securities market because
Treasury has a comprehensive understanding of the market and, as
issuer, is concerned with maintaining market integrity and
efficiency. Market efficiency and integrity benefit the public
by minimizing the cost of government borrowing.
In addition,
Treasury as the single rulemaker can assure that appropriate
regulations are in place for all market participants.
These
factors enhance Treasury’s ability to coordinate the views of the
various entities and to ensure that the interests of all parties
are considered.
Treasury's role as rulemaker provides balanced
regulatory treatment among the various market participants, and
provides the necessary knowledge and expertise to address
possible changes in the structure of the dynamic government
securities market.
Accordingly, we recommend that Congress extend Treasury's
rulemaking authority by enacting the legislation we have proposed
that would delete the sunset provision contained in the GSA. The
extension of Treasury's authority is supported by the SEC and the
Federal Reserve Board — as recommended in the joint report with
Treasury that was submitted to Congress in October 1990 — and
the GAO in its September 1990 report to Congress.
In addition,
the NASD, the New York Stock Exchange, the Public Securities
Association, the American Bankers Association, and all of the
bank regulatory agencies support the extension of Treasury's
authority.
SALES PRACTICE RULES
Sales practice rules govern a broker-dealer's business
relationship with its customers. Such rules are generally
5
intended to ensure, among other things, that broker-dealers
conduct fair dealings with customers, that the securities
purchased are suitable investments, and that transactions are
priced fairly and reasonably. The scope of the GSA and the
regulatory authority granted thereunder were limited to those
areas of documented abuse and weakness in the government
securities market (e.g., unregistered firms, hold-in-custody
repurchase transactions), because of the concern that excessive
regulation would impair the efficient operation of the market.
Consequently, the GSA did not grant Treasury the authority
to prescribe sales practice rules pertaining to transactions in
government securities. Additionally, the GSA continued the
restriction placed on the NASD that prohibits it from applying
its sales practice rules to the government securities
transactions conducted by its members. The GSA did, however,
authorize the NASD to write rules prohibiting fraudulent,
misleading, deceptive or false advertising in connection with the
sale of government securities.
It should be noted that the
registered securities exchanges are permitted to apply their
sales practice rules to their members* government securities
transactions.
Need for Sales Practice Rules
It is difficult to assess the magnitude and severity of the
problem given the lack of specific evidence of widespread sales
practice abuses.
Indeed, some of the well publicized cases
involving customer losses in government securities transactions
may not have stemmed solely from abusive sales practices.
Nevertheless, the fact is that the government securities market
is the only regulated securities market in the United States that
does not have broadly applicable sales practice rules.
Such
rules have become a fixture in all of the securities markets in
the United States but, currently, such rules are not imposed for
the vast majority of transactions in government securities.
The
same kinds of abuses that made sales practice rules necessary in
the corporate, municipal and penny stock markets may well occur
in the government securities market.
By applying sales practice
rules to the government securities market, investors would
benefit from protection similar to those afforded them in other
markets.
The Treasury clearly wants to prevent unscrupulous
brokers and dealers, who may have operated in these other markets
until the advent of sales practice rules in those arenas, from
gravitating to the government securities market.
The government securities market remains principally a
wholesale market in which brokers, dealers, large commercial
banks and experienced institutional investors have sufficient
knowledge and bargaining power to reduce or eliminate the need
for protection afforded by sales practice rules.
It is also true
that a significant number of smaller and less experienced
6
investors also participate in this market. Our area of concern
is not the large, institutional investors, who should be expected
to have the knowledge to judge the suitability of particular
securities, but the smaller, less sophisticated customers who are
attracted to participating in the government market because of
their desire for safe and secure investments. Additionally, the
government securities market increasingly encompasses instruments
that can pose greater risk of adverse price movements than
traditional investments in Treasury or agency securities. These
instruments include mortgage-backed securities, including
collateralized mortgage obligations issued or guaranteed by
Government agencies; zero-coupon securities such as STRIPS and
agency IOs and POs; and over-the-counter options.
Some of these
products are quite similar to registered securities that are
already subject to sales practice rules or that trade in
combination strategies with instruments that are covered by such
rules.
Even though many of these securities are backed by a U.S.
government guarantee and are attractive due to their higher
returns, unsophisticated investors may not fully understand their
complexity, risks and speculative nature.
Further, some of these
securities do not have readily available pricing information to
enable customers to independently determine their market value.
The SEC has authority under section 10(b) of the Securities
Exchange Act of 1934 (Exchange Act) to promulgate and enforce
rules prohibiting fraudulent, manipulative, and deceptive acts
and practices. However, the adoption of sales practice rules for
the government market would enable the regulatory agencies to
take disciplinary actions without having to prove intent by the
broker-dealer to defraud a customer.
Currently, sales practice
abuses in most of the government market must be so egregious as
to rise to the level of fraud before any action can be taken.
Treasury Legislative Proposal for Sales Practice Rules
For these reasons, we urge Congress to adopt Treasury*s
regulatory proposal for government securities sales practice
rules. The proposal would:
1.
Grant Treasury the authority to prescribe government
securities sales practice rules reasonably designed to
prevent fraudulent, deceptive, or manipulative acts and
practices for all government securities brokers and dealers;
2.
Grant Treasury the authority to adopt sales practice rules
reasonably designed to promote just and equitable principles
of trade for financial institutions that have filed notice
as government securities brokers or dealers; and
3.
Authorize the NASD to adopt government securities sales
practice rules for its members, subject to approval by the
7
SEC in consultation with Treasury. Any NASD rules must be
consistent with Treasury sales practice rules.
Granting Treasury rulemaking authority for sales practices
pertaining to transactions in government securities would be
consistent with the regulatory structure set out in the GSA.
Treasury was selected as the sole rulemaker due to its expertise
in the market, its interest in balancing customer protection with
the need to preserve the efficiency and liquidity of the market,
and its ability to provide balanced regulatory treatment among
the various market participants. This regulatory approach would
continue to recognize Treasury's knowledge of the market and its
responsibility, as the largest issuer, to ensure that any sales
practice rules, while strengthening customer protection, would
not impair the liquidity or efficiency of the market or increase
the cost of financing the public debt.
Regarding any potential concern that granting Treasury
rulemaking authority over sales practices would raise a conflict
of interest given our role as issuer, this issue was addressed by
the Senate Banking Committee during its deliberations on the GSA
in 1986. The Committee satisfied itself that there would be no
conflict of interest and expressed its confidence that Treasury
would "... fully and faithfully pursue the rulemaking authority
granted ..." Further, we believe our actions as GSA rulemaker
over the past four years should resolve any such concerns.
Treasury has demonstrated its commitment to effective regulation
of the government securities market by issuing balanced and fair
rules that do not unfairly discriminate among market participants
and, more importantly, that do not advantage Treasury securities
over other government securities.
We believe sales practice rules must apply to all government
securities broker-dealers — both bank and non-bank brokerdealers — to ensure a level playing field for all market
participants. This is consistent with the GSA mandate that any
rules should be designed in such a manner that does not permit
unfair discrimination between government securities brokers and
dealers or customers. Accordingly, vesting rulemaking authority
with Treasury would ensure that sales practice rules would
provide comparable protection to customers of both bank and non
bank broker-dealers.
We also urge that Congress rescind the current restriction
on the NASD's authority regarding sales practice rules.
Such
action would be consistent with the Congress' prior decision to
use the expertise of self-regulatory organizations.
The
legislative history preceding the Securities Acts Amendments of
1975, in reaffirming the system of self-regulation, cited as an
advantage of self-regulation, "the expertise and intimate
familiarity with complex securities operations which members of
8
the industry can bring to bear on regulatory problems, and the
informality and flexibility of self-regulatory procedures.”
Lifting the NASD restriction would put to use its expertise
and experience in implementing sales practice rules it has
developed for other markets.
It would also capitalize on the
NASD's knowledge of the business practices of its members, its
ability to provide for inter-market comparability, its
flexibility in updating its rules to stay abreast of market
developments, and its role as a member of the securities
industry.
Approach to Sales Practice Rules
Although it is too early to know the precise parameters of
any sales practices rules, three areas that may require attention
are excessive mark-ups, suitability of recommendations to
customers, and unauthorized trading.
In developing sales
practice rules, we will consider whether different standards are
needed based on the complexity and risks of the various
securities and whether distinctions need to be made based on the
type of customer (i.e., institutional or sophisticated versus
retail or individual) involved in the transaction. As has been
our practice, we will attempt to model our rules upon existing
rules of the SEC, NASD, New York Stock Exchange and Municipal
Securities Rulemaking Board (MSRB), where appropriate.
Finally,
Treasury will consult with the industry, the regulatory agencies
and the self-regulatory organizations during the development of
the rules.
Strengthening Market Integrity and Investor Confidence
We believe that the extension of sales practice rules to the
government securities market will strengthen investor confidence
and integrity in the market and will significantly enhance
customer protection.
Sales practice rules should not result in
excessive burdens or significantly increase costs because
diversified firms already must comply with sales practice rules
for their corporate and municipal securities activities and banks
that conduct a business in municipal securities must comply with
MSRB sales practice rules. Any rules proposed by Treasury would
be designed so that the benefits in terms of customer protection
will outweigh any increased regulatory costs or burdens, which we
believe would be minimal, in any event.
ACCESS TO GOVERNMENT SECURITIES PRICE AND VOLUME INFORMATION
Public Interest Benefits
Treasury supports expanded disclosure of and access to
government securities price and volume information.
Expanded
information access would serve to enhance customer protection,
9
since customers would be in a better position to determine actual
or potential transaction prices for securities, especially for
inactively traded issues, and to evaluate the fairness of trades
being proposed by a broker or dealer. Moreover, we believe the
expanded availability of such information would serve the public
interest because it would ensure that a broad spectrum of market
participants could obtain current, accurate facts related to
market conditions, and thus, the competitiveness, liquidity and
efficiency of the government securities market would improve.
Greater access to price and volume information will also
foster increased competition between dealers since market quotes
will be more widely disseminated.
Improvements in the derivative
markets are also likely to accrue due to the availability of more
timely and accurate information on the underlying securities used
for pricing and hedging strategies.
Further, access to more
accurate price information will enhance the ability of regulatory
examiners and independent auditors to carry our their respective
responsibilities to ensure that securities transactions and
positions are valued appropriately.
Industry Efforts
The need for increased access to government securities price
and volume information has been a topic of discussion for a
number of years.
In its 1987 report, the GAO recommended that
market participants be provided increased access to government
securities pricing information. At that time, the GAO did not
support a federal regulatory structure to achieve expanded access
because it believed private sector initiatives, which could
obviate the need for such action, should be allowed time to
develop price disclosure systems.
In its follow-up report issued in September 1990, the GAO
recommended that Congress legislatively mandate that government
securities transaction information be made available on a real
time basis to anyone willing to pay the appropriate fees. GAO
further recommended that regulatory authority be assigned to
Treasury to prescribe regulations as needed to ensure that such
transaction information is available. We fully support the
recommendation to grant Treasury this rulemaking authority.
We believe the need for federal regulation is appropriate
given that there has been no significant increase in the
dissemination of government securities price information over the
last four years. This is highlighted by the number of
unsuccessful attempts by various market participants to develop
price disclosure systems. However, two private sector
initiatives, that have been in development for several months and
are nearing implementation, hold promise for expanded access.
10
One initiative, an industry-wide joint venture known as
GOVPX, Inc., will disseminate real-time price and quotation
information on all Treasury bills, notes and bonds on a 24-hour,
global basis. This information will be provided to on-line
vendors for redistribution to the public. GOVPX is scheduled to
be operational on June 16. A second initiative involves
Electronic Joint Venture Partners (EJV) which plans to introduce
a new computerized trading system where broker-dealers will
arrange their purchases and sales electronically.
EJV will also
deliver real-time market information to the financial services
industry.
Federal Regulatory Structure Still Needed
Treasury fully supports the efforts undertaken by private
sector initiatives such as GOVPX and EJV in developing systems to
disseminate government securities price and volume information.
However, we believe that the development of these two systems was
significantly influenced by regulatory demands for improved
public access and the growing pressure for a federal regulatory
presence in this area. We also believe federal rulemaking
authority should be granted, as a backstop, to ensure that any
private sector information dissemination systems are adequate,
fair and reasonable, although it may not be necessary to use this
authority.
An example of the potential use of rulemaking authority
would be to ensure that information disclosure systems, such as
GOVPX, collect and distribute price and volume information on
mortgage-backed securities and zero-coupon securities, in
addition to Treasury bills, notes and bonds. Another example
would be to ensure that such systems provide the best offer for a
security rather than the offer accompanying the best bid (as
provided by GOVPX) since the best offer affords market
participants a more accurate reflection of market prices.
Treasury Legislative Proposal
To provide the public with the benefits of expanded access,
we urge Congress to grant Treasury discretionary authority,
similar to the existing authority of the SEC with respect to non
exempt securities transaction information, to regulate disclosure
of and access to government securities price and volume
information. We believe it is in the best interest of the market
if private sector initiatives develop systems to disseminate
government securities price information. However, given their
past record, discretionary rulemaking authority vested at
Treasury is necessary in the event these efforts are not
successful or do not provide adequate information.
The GAO has
also recommended that Treasury be the rulemaker for information
access.
11
Given our expertise in the government securities market,
Treasury is in the best position to evaluate the reasonableness
and sufficiency of information disclosure systems and their
effect on competition and safety of the market, and to prescribe
rules, if necessary, to ensure that price dissemination
arrangements are fair and beneficial to the operation of the
government securities market and its participants.
TECHNICAL AND CONFORMING AMENDMENTS
Treasury*s proposed legislation also contains several
technical and conforming amendments to the Exchange Act which we
urge the Congress to adopt. Two amendments revise the definition
of the term "appropriate regulatory agency." These changes are
intended to make supervisory responsibilities under the GSA
consistent with existing bank regulatory agency supervisory
responsibilities regarding certain financial institutions that
are government securities brokers or dealers.
Two conforming
amendments respond to changes in nomenclature under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.
Another amendment involves adding to the Exchange Act a new
definition for the term "government securities information
processor." The final technical amendment clarifies an
information sharing provision in the GSA.
CONCLUSION
Among the reasons Treasury was designated as the rulemaker
in 1986 was the need for effective coordination among the
interested federal agencies. This coordination is becoming ever
more critical in light of the accelerating pace of innovation and
growth in the government securities market.
The Treasury has used this unique position to assure that
regulations governing the market were written and applied in an
even-handed way to both bank and non-bank broker-dealers.
The
need to rely on Treasury's position, perspective and broad
expertise in the market has not diminished. Rather,
strengthening Treasury's regulatory role will become increasingly
vital as the legal and operational barriers separating the
businesses of the different government securities market players
become less significant, highlighting the need for balanced
treatment for all market participants.
The legislation we have proposed will strengthen Treasury's
ability to ensure that any regulations will not impair the
safety, integrity, liquidity, and efficiency of the market while
also being responsive to the need of strengthening customer
protection.
Finally, in addition to these factors, Treasury is
in the best position to act as the principal agency overseeing
the government securities market due to its interest in ensuring
that any rules do not inadvertently damage the market, thus
increasing the government's cost of borrowing or reducing
investor confidence.
TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 2 P.M .
JUNE 12, 1991
STATEM ENT BY
THE HONORABLE DAVID C . M ULFORD
UNDER SECRETARY FOR INTERNATIO NAL AFFAIRS
DEPARTM ENT OF THE TREASURY
BEFORE THE SUBCOM M ITTEE ON
D EFIC ITS, DEBT M ANAGEM ENT AND INTERNATIO NAL DEBT
FINANCE COM M ITTEE
UNITED STATES SENATE
I
welcom e this opportunity to discuss today two financial issues which are o f
continuing concern in this Hemisphere: capital flight and debt. The Administration is
addressing these problems through both the Strengthened Debt Strategy and the Enterprise
for the Americas Initiative (EAI).
The prospects for future econom ic development in Latin America and the
Caribbean w ill be largely dependent on policies which attract new capital investm ent. In
many instances these policies are now being implemented and represent a significant reversal
o f past, failed policies o f statism and protectionism that have contributed to capital flight and
to a dependence on debt financing from abroad. We have been impressed by policies
implemented by a number o f new Latin leaders, but more must be done. The EAI can make
a significant contribution in realizing these objectives.
W hile Latin America requires capital for growth, com petition for international
capital has intensified with the opening o f Eastern European econom ies and demands in the
M iddle East. At the same time, commercial bank lending to developing countries has
diminished and budget limitations constrain flows from official bilateral sources. As a
result, private capital, including repatriated capital, is increasingly the engine for econom ic
growth for the 1990s.
NB-1324
2
There are no reliable measurements o f capital flight, and econom ists’ estimation
procedures produce both variable and dubious results. Som e estim ates have placed the level
o f capital flight from Latin America at greater than the level o f foreign borrowing, but these
estimates probably have minimum credibility. Whatever the magnitude o f capital flight in
the past, w e believe that the pace o f outflows may be easing for several countries, and that
som e are experiencing inflow s, but outflows continue to be a major problem for other less
developed countries.
CAUSES AND CONSEQUENCES O F CAPITAL FLIGH T
What are the causes o f capital outflows? Private capital leaves one country for
another to seek a higher return on investment or a safer haven with reduced risks. Important
factors therefore include the direction o f macro-economic policies and the relative stability o f
the political clim ate. High inflation rates erode purchasing power, increase uncertainty and
exacerbate risks. Investors anticipating sudden currency devaluations as a result o f
inflationary policies w ill m ove their money abroad to preserve their capital.
Political uncertainty, and the threat o f nationalization and populist hostility
capital may also discourage both foreign and dom estic investors. Drug production,
trafficking and money laundering threaten political stability in som e countries, and also
contribute to instability in domestic financial markets. The Administration is vigorously
pursuing policies to combat drug-trafficking in Latin America.
Many countries pursue unfavorable and short-sighted investment policies, which
stimulate capital outflow . Investment opportunities can be lim ited by restrictions or
prohibitions on investment in "sensitive" sectors. These often include areas such as
telecommunications or transportation, which are reserved for the state or for a statesanctioned m onopoly. Onerous regulatory regim es, together with a reliance on price controls
and subsidies, further erode the profitability o f investment.
These problems are often compounded by market-distorting credit policies.
Interest rate p olicies, including ceilings on interest paid to depositors, and credit allocation
p olicies, undermine capital markets. Tax avoidance may be another stimulus to capital
outflow s, reflecting discriminatory tax policies that erode the return to investors.
Restrictions on transfering funds out o f a country also encourage investors, where possible,
to keep and invest their capital abroad.
The negative consequences o f m assive capital outflow s from less developed
countries are clear. Capital which is invested abroad is capital that is not available for
investm ent in the developing country. Investment and econom ic growth w ill tend to be
low er. M oreover, profits on capital held abroad are seldom fully repatriated. Capital
outflows also erode the national tax base, due to unreported and unrecorded incom e which
escapes the tax authorities. Foreign exchange receipts may also be under-reported and held
abroad.
3
The political leaders in less developed countries must address the need to reform
the investm ent regim es, to make them more hospitable to investm ent by both nationals and
foreigners. In the past few years w e have witnessed a growing awareness o f the importance
o f an attractive investm ent regim e that offers com petitive returns and a w ide range o f
investm ent opportunities.
Such reform is at the heart o f both the Strengthened Debt Strategy, known as the
Brady Plan, and the EAI.
TH E STRENG THENED DEBT STRATEGY
The major objective o f the Brady Plan has been to encourage highly indebted
countries to successfully implement market-oriented m acroeconomic and structural policy
reforms in order to achieve sustained growth and ultim ately resolve their debt servicing
problem s. IMF or World Bank supported adjustment programs are prerequisites for debt
reduction under the new strategy.
In advancing this strategy, w e have encouraged com m ercial banks to consider
debt and debt service reduction as w ell as to m obilize additional financial resources in
support o f debtor reforms. W e have also redirected IMF and World Bank resources to back
debt and debt service reduction for commercial banks w hile creditor governments continue to
provide needed support.
A s w e begin our third year under the strengthened debt strategy, w e can survey
som e key successes and progress made to date. In assessing progress within the strategy, w e
should consider first the magnitude o f debt covered through debt reduction agreements and
the number o f countries involved.
Agreements have now been reached with eight countries, including five in Latin
America --C hile, Costa Rica, M exico, Venezuela, and Uruguay. The eight agreements
account for som e $125 billion in commercial bank debt, or nearly half o f the com m ercial
bank debt o f all o f the major debtor nations.
The benefits to these debtor nations have been substantial: M exico’s stock o f
medium and long term commercial bank debt was reduced by 34% , Costa R ica’s by 62%
and Uruguay’s by 40% , in addition to significant annual debt service savings and innovative
collateralization have reduced the burden o f principal payments. The IMF and W orld Bank
have provided som e $5 billion in resources to support debt and debt service reduction by
commercial banks.
The strong reform efforts by such countries as M exico, C hile and Venezuela
have been rewarded by their successful reentry into the capital markets and increased cash
flow s into their econom ies. A ll have liberalized their trade and investm ent regim es. C hile
has one o f the most open investment regim es in Latin America and has m oved to privatize
key public enterprises. Venezuela is also beginning a privatization program. M exico has
privatized its airline, copper, and trucking industries in the past 18 months, and has
4
announced som e $20-25 billion o f future privatizations o f government-owned enterprises in
the banking, steel, telecom m unications, fertilizer, and insurance sectors.
Investor confidence is increased when a country maintains sound relations with
its international creditors, including commercial banks and the international financial
institutions. Both M exico and Chile experienced inflow s o f repatriated funds and foreign
capital follow ing reduction o f their debt with commercial bank creditors under the Brady
Plan. W e also believe that Venezuela, which reached agreement with commercial bank
creditors in March, 1990, has begun to see a reversal o f capital outflow s.
E A I - CO NTINUING SUPPORT FO R REFORM
To enhance growth and prosperity throughout the hemisphere, last June President
Bush announced the Enterprise for the Americas Initiative — an ambitious agenda for
strengthening our ties with Latin America and the Caribbean. The Initiative proposes
specific action on three econom ic issues o f greatest importance to the region — trade,
investm ent, and debt. A key focus is to help countries in the region attract the capital
essential for growth and development.
Trade
Our long-term goal is to establish a system o f hemispheric free trade. As our
first step toward our objective, the President has announced our intention to negotiate a
North American Free Trade Agreement. W e have recently gained from Congress an
extension o f fast-track negotiating authority, which w ill allow us to enter into negotiations
with M exico and Canada to elim inate barriers to trade and investment.
The Administration is also proceeding to conclude EAI Trade and Investment
framework agreements with eight countries - Colombia, Ecuador, Chile, Honduras, Costa
Rica, V enezuela, El Salvador and Peru. W e are also discussing such agreements with
Panama, Nicaragua, the CARICOM group o f countries, and a group o f countries composed
o f Argentina, Brazil, Uruguay and Paraguay. Framework agreements constitute a declaration
o f trade and investm ent principles and set up Councils to consult on these issues and to work
towards liberalization.
Investment
To encourage countries to liberalize their investment regim es and help improve
their ability to attract capital, the Initiative proposed creation o f a new investm ent sector loan
program in the Inter-American Developm ent Bank (IDB), and the creation o f a Multilateral
Investment Fund. The IDB has sent diagnostic teams to several countries to negotiate
investm ent sector loans. The first loan, for Chile, w ill be discussed by the IDB Executive
Board on June 19th, and w e expect programs for Jamaica and Bolivia to follow this summer.
W e are also seeking contributions from other governments to a $1.5 billion
M ultilateral Investment Fund to be administered by the IDB, which would provide additional
5
support for investm ent reforms. The US has proposed to contribute $100 m illion a year, for
5 years. The Japanese have already announced their commitment to provide $100 m illion a
year, for five years, in grant resources to the Fund. Last w eek, several other governments
indicated support for the M IF, and we hope to be able to achieve firm commitments in the
near future.
W e are confident that investment reforms negotiated with the ID B, together with
the creation o f a new Multilateral Investment Fund, can make an im m ense difference in the
clim ate for investm ent in the region, and to its future growth.
Debt
The debt reduction element o f the EAI establishes a coherent approach to
bilateral debt reduction which reinforces ongoing econom ic reforms in Latin American and
Caribbean countries. It complements the strengthened debt strategy by addressing the debt
problems o f countries whose debt portfolio is primarily owed to official creditors rather than
to com m ercial banks.
W e propose to reduce existing debts to the USG o f countries which are
undertaking macroeconomic and structural reforms, are liberalizing their investm ent regim es,
and have negotiated agreements with their commercial banks, as appropriate. W e have
gained authority from Congress to take such action on PL-480 debt.
Several countries — including Chile, Jamaica, and Bolivia — are w ell positioned
to qualify for PL-480 debt reduction in the next few months. Other countries could also
m ove to qualify in the near future.
The potential for bilateral official debt reduction has been welcom ed throughout
the region. To provide the full extent o f debt reduction proposed under the Initiative, w e
must gain additional authority from Congress. In particular, w e are seeking authority to
reduce AID debt — which represents $5.2 o f $7 billion in concessional debt owed by the
regional countries to the US -- and to sell, cancel or reduce a portion o f Eximbank loans and
Commodity Credit Corporation (CCC) assets acquired through its export credit guarantee
program for debt-for-equity, debt-for-nature, and debt-for-development swaps.
By reducing bilateral official debt, w e 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 w ill be made in local currency into an Environmental Fund in
the debtor country.
The burden o f external debt has constrained the resources available for growth
and tested the resolve o f nearly every government in Latin America and the Caribbean. By
easing the burden o f official debt for countries committed to necessary econom ic reform s, w e
can reinforce the rewards o f sound econom ic policies ~ helping them to restore confidence in
their econom y and attract both domestic and foreign investment.
6
COUNTRY CASES
I
have explained the policy initiatives undertaken by the Administration to
encourage econom ic reform and to address the debt burden in countries in Latin America and
the Caribbean. Let me now turn to developments in several countries.
M exico
M exican econom ic policy reforms since the m id-1980s have substantially
increased confidence in the M exican econom y, bringing a dramatic reversal in the direction
o f private capital flow s. Trade and investment liberalization, tax reform, and measures to
reduce the burden o f the public sector have provided a backdrop for econom ic recovery and
for repatriation o f flight capital.
W e estimate that capital repatriated into M exico ranged from $ 1 .5 -2 .0 billion in
1988 and from $2.0-3.5 billion in 1989. A ll told, since the announcement o f the commercial
bank deal in June, 1989, M exico has received an estimated $ 5 .5 -6 .0 billion in capital
repatriation and an additional $5.0-5.5 billion in foreign direct investment. This represents a
dramatic turnaround from the early 1980s, when capital flight averaged an estimated $7
billion per annum.
Increased confidence in the M exican econom y is also reflected in M exico’s
return to the international capital markets. Mexican firms raised over $5.5 billion in debt
and equity financing during 1990, and nearly $3.5 billion so far in 1991.
M exico’s success is due to several factors, in addition to the reforms already
mentioned. Investor confidence has improved significantly since the announcement o f the
commercial bank debt and debt service reduction agreement. This renewed confidence was
reflected in a dramatic decline in M exican interest rates from nearly 50% per annum before
the announcement o f the commercial bank agreement, to under 20% today. Lower interest
costs have been a key elem ent in the fall in M exico’s fiscal deficit, from 13% o f GDP in
1988 to 3.5% in 1990. This improved fiscal position has enabled M exico to reduce inflation
from 160% in 1987 to under 30% in 1990, w hile at the same time achieving GDP growth o f
3.9% last year.
Recent measures have further enhanced M exico’s attractiveness to investors.
These include a constitutional amendment in June, 1990, that allows privatization o f
nationalized commercial banks. The announcement o f plans to negotiate a Free Trade
Agreement with the US was another positive factor, as was the introduction o f a w elldesigned tax amnesty program for repatriation o f flight capital. Under this program,
M exican nationals pay a flat 1 % tax on all repatriated funds.
Venezuela
Venezuela appears to have reversed capital flight beginning in 1988, when over
$1.5 billion in capital was repatriated. Poor econom ic performance caused capital outflows
7
to resume briefly in 1989, but at modest levels. Falling real GDP (-8.3% ) and rising
inflation (81% ) were the principal causes that year.
In 1989, Venezuela successfully adopted a series o f strong adjustment measures
which spurred renewed growth and cut inflation. The Government o f V enezuela continues to
implement an ambitious program o f econom ic reform in a number o f sectors and has
undertaken trade and fiscal reforms, financial sector reforms, and privatization. These
initiatives have been reinforced by the 1990 debt package with com m ercial bank creditors
under the Brady Plan, and together have contributed to attracting capital back into the
country. Investor confidence is growing, a fact reflected in the decision o f one-third o f
com m ercial bank creditors to participate in the new money option in the 1990 debt package.
Chile
Chile has not had difficulty with capital flight since the severe, world-wide
recession o f 1982 that produced significant econom ic uncertainty. C hile’s successful debtconversion program has reduced C hile’s stock o f debt by about $10 billion since 1985,
equivalent to about 70% o f medium and long-term debt to com m ercial banks outstanding at
end-1985, and has provided a vehicle for investment including repatriated capital. In 1985
the Government put in place a structural adjustment program which has been very successful
in fostering both dom estic and foreign confidence in the Chilean econom y.
A key result o f the program is that Chile has one o f the more open investm ent
regim es in Latin America. Increased investor confidence in C hile is apparent from C hile’s
return to voluntary commercial bank lending in 1990 and from the $320 m illion international
bond issue in early 1991. Private foreign investment inflow s o f direct investm ent and loan
disbursements have increased dramatically from about $400 m illion in 1986 to $ 1 .6 billion in
1990. In addition, foreign portfolio investment has increased substantially in the past two
years. Chile continues to work to improve its investment clim ate and is very close to
reaching an agreement with the Inter-American Developm ent Bank on an investm ent sector
loan.
Argentina
Capital outflows have long been a problem in Argentina. R ecognizing that the
only way to bring capital back to Argentina is through sound and sustained econom ic policy,
Argentine policy makers have sought to stabilize the econom y and rebuild confidence.
In the past 2-3 years, Argentina has undertaken a number o f steps to make the
country more attractive for investment and to promote econom ic growth. The trade and
investm ent regim es have been opened, an ambitious privatization program has begun, and the
Administration has persisted in its efforts to rein in public spending and cut inflation. In
April o f this year, the Government o f Argentina established a new exchange rate regim e and
continued a tight monetary policy in order to control inflation and further stabilize the
econom y.
8
In 1990, under its privatization program, the Government sold two parastatals,
the telephone company ENTEL and the airline Aerolineas Argentinas. Although these
transactions were difficult to arrange, Argentina ultimately attracted both foreign and
dom estic capital: Morgan Guaranty and Citibank participated as agents; the European firms
STET, Radio France and Iberia Air participated as buyers. Today, Argentina is pursuing
privatizations, through sale or concession, o f other state entities including o il fields, steel,
electricity, gas, shipping and railroads.
Besides addressing its structural problems, Argentina is also taking specific tax
measures to address the problem o f capital flight. Legislation proposed last month would tax
capital held abroad this year at 2%, but would tax it at 1% if it is repatriated. Capital
returning through the end o f this month (June 1991) would be exempt from any legal or
administrative penalty and from any past tax obligations. This legislation awaits passage by
Argentina’s Congress. Argentina is seeking an IMF program as a precursor to discussions
with commercial bank creditors.
D espite the many positive developm ents, investors - both foreign and dom estic continue to be cautious with respect to Argentina. Major reflows o f capital w ill depend on a
sustained period o f econom ic performance and completion o f additional elem ents o f the
structural reform process.
Brazil
Brazil appears to have experienced relatively little capital flight in the 1980s, in
part due to prevailing high dom estic interest rates. Rough estimates place capital flight at
about $15 billion cum ulatively from 1980 to 1987.
In testimony to the Brazilian Senate’s Commission for Econom ic Affairs in early
June 1991, a Central Bank official estimated that, since 1980, Brazil had incurred a
cumulative $35 billion in capital flight, equivalent to 10% o f GDP. A large part o f the
recent capital flight, he claim ed, was attributable to the Government’s m ove to block deposits
in March, 1990.
Capital flight in Brazil since March, 1990 appears to be driven primarily by
econom ic policy m iscalculations and the accompanying plunge in investors’ confidence. A
key event propelling capital flight has been the failure o f the m assive freeze on dom estic
deposits in March 1990 to curb the high inflation rate. This event has not only intensified
capital flight, but investors appear to have fled depository accounts in the dom estic banking
system in fear o f another confiscation o f their deposits. Numerous investors have thus
transferred their funds into other assets such as real estate and the dom estic stock markets.
In fact, there have recently been strong upturns in Brazil’s two major stock markets,
attributable to inflow s from both dom estic and global institutional investors. The inflow s
from international investors have been spurred by new regulations permitting foreign
investors to directly buy and sell shares on Brazil’s stock exchange.
9
Substantial repatriation o f capital probably w ill not occur until Brazil has
convinced investors that it can successfully implement adjustment and reform policies needed
to stabilize the econom y and foster non-inflationary growth.
Colombia
In the past few years, increased drug trafficking and violence has promoted
capital flight from Colombia. This has been partially offset by repatriation o f som e o f the
drug profits. Colombia has recently implemented a number o f market-oriented reforms and
has liberalized trade and investment regim es. In February, 1990, Colom bia launched its
"Apertura" policy o f gradual trade liberalization. Colombia has also taken steps to improve
the investm ent clim ate, including launching a privatization program and announcing a policy
o f granting equal treatment to foreign and dom estic investors.
CONCLUSION
Private investment plays an increasingly important role in growth and
developm ent. Repatriated capital and increased flow s o f foreign investm ent are critical
motors o f econom ic growth. For this reason, it is important for developing nations work to
im prove their macro-economic and investment clim ates in order to attract investm ent. W e
are supporting these efforts by Latin American countries with initiatives which are aimed at
supporting reform: the Brady Plan, and the EAI.
As the examples o f M exico, Chile and Venezuela demonstrate, strong reform
efforts generate a pay-off in terms o f inflow s o f foreign investm ent. These exam ples have
confirmed the potential for econom ies in the region to make the transition from crisis to
performance.
D epartm ent of the Treasury • Washington, o x . • Telephone 566-204
FOR IMMEDIATE RELEASE
}FPT
n r ?-«■
^ont^aC-tr
Cheryl Crispen
202-566-2041
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
COMMITTEE FOR THE PRESERVATION OF THE
TREASURY BUILDING
JUNE 11, 1991
CASH ROOM
Thank you, John (Rogers), and welcome to the Cash Room.
It
is a pleasure to share an evening in this great room with a group
of people who appreciate the historic treasures in Washington.
Looking around, I see a number of familiar faces in the
audience — both current employees and people who have worked
here over the years.
All of us with the experience of walking
these halls share a common bond.
And I believe we share a
genuine respect for the institution and the sense of history,
tradition, purpose and future embodied in this building.
As you will see from the slide show, the private effort to
restore and preserve the Treasury Department has been extremely
successful, and I am pleased that a new generation is joining us
here this evening.
As the years go by, your appreciation for the
institution will undoubtably increase — and we thank you for
having played a part in preserving this building for future
generations.
This is the third Treasury building to stand on this site.
The first two were burned down — once by the British in 1814 and
once in 1833 by some ex-Treasury employees who were trying to
cover up a crime by burning the evidence.
But the arsonists were
caught, and the Treasury was rebuilt over a 33-year period ending
in 1869.
In that same year, this Cash Room was finished as a grand
room — exuding confidence in the nation's new currency.
It was
the beginning of a room that is now rich with history.
In fact, President Ulysses S. Grant decided to hold his
first inaugural reception in the Treasury Building, using the
Cash Room as the main ballroom.
Two thousand men were given
tickets to that event, and each man could bring two women — a
total of 6,000 guests.
NB-1325
2
It was a tight squeeze.
The band was jammed in the catwalk
above us? women were fainting in the crush around the food table?
and, at the end of the evening, the faulty coat-check system led
to a mad scramble for overcoats — that's one thing that hasn't
changed at inaugurals for over 120 years.
But at Grant's party,
some guests had to wait until 4 a.m. to get their wraps, and
others were so desperate they reached the cloak room by climbing
through a transom above the door of an adjacent room.
Today, the Cash Room and the North Lobby have been restored,
just as they were for Grant's reception.
But this is only one of
the many historic gems in the Treasury Building.
Through
research and hard work, the restoration projects are preserving
much of the building's rich heritage.
We are restoring antique
furniture dating back to the 1860s, matching paint designs, and
gilding ornamental fixtures — all by researching photographs and
written descriptions.
The Committee for the Preservation of the Treasury Building
is doing a top-flight job of restoring this National Historic
Landmark and preserving this important piece of history for
future generations.
The Committee's efforts have made impressive
changes already, and there is much more to be done.
This year,
our priority restoration projects are the Andrew Johnson and
Salmon P. Chase Suites — both historically significant.
After President Lincoln was assassinated, Mary Todd Lincoln
stayed on at the White House for a while.
So newly-appointed
President Johnson used an office here in the Treasury Building as
the Executive Office — working side-by-side with Treasury
Secretary Hugh McCulloch.
It was an historic time for our nation.
For two months,
President Johnson worked out of an office on the third floor of
the Treasury, facing the White House.
Here, he signed the
Amnesty Proclamation for Confederate Soldiers, and he issued the
warrant for the arrest of Jefferson Davis — offering a $100,000
reward for his capture.
This is American History in the unfolding, and the Treasury
Department is proud of its part. We've managed to recapture part
of that historic period by restoring the Johnson Suite with
period furniture and original paintings.
We've even located the
teapot President Johnson kept there.
The pot is shaped like a
locomotive, and the whistle blows when the water boils.
And on
the side is the name "Jefferson Davis" — it was confiscated from
him after his arrest.
3
Also, history has been discovered in the Salmon P. Chase
cnite __ the third floor corner office that looks down
Pennsylvania avenue to the Capitol.
In 1973, a painter was about
to put another coat of white on the ceiling, but then he ioc***
up and saw a patch of red underneath the chipping
* fter
chipping away some more of the old paint, he discovered the
reason behind the discoloring:
there were two a ?;le^ 0^ c^?;
ceiling paintings that were painted over at the turn of the
century.
The ceilings were painted in that office while Secretary
Chase worked to finance the Civil War for the UnloJ}* _
1®6^/ahe
implemented President Lincoln's War tax, and he established the
nation's first currency — the Greenback.
And to promote the new
money, two songs were written: the Salmon Chase March and the
Greenback Quick Step.
Secretary Chase also met often in that office with one of
America's prominent financiers — Jay Cooke -- to negotiate
private loans to finance the war.
Soon — when its renovation is
complete — a 19th century portrait of Jay Cooke by William
Merritt Chase will hang in the Suite as a reminder of Cooke s
importance during that critical time.
So you can see, there is something all Americans can learn
from historic places like the Treasury Building — something that
can never be learned in a textbook.
And throughout our nation
history, the Treasury Department has been linked to some of
America's most important events, even in bizarre ways.
When John Wilkes Booth jumped onto the Ford Theater stage
after shooting President Lincoln, he caught the spur of his boot
on a blue Treasury flag.
That mishap caused Booth to break hls
lea _ eventually slowing down his escape and leading to his
capture.
One week later, the flag was displayed in the corridor
outside President Johnson's office — in the Treasury building
as a reminder of the tragedy.
That flag is now exhibited in the museum at Ford|s Theater,
and a replica — including the tear — will soon be displayed
outside the Johnson Suite.
It is a small piece of history, but a significant one.
Because, as we continue to restore this historic building, we
will understand even more about the people and events that have
made our nation what it is today.
This restoration is an important project for all of us at
Treasury, and we appreciate your interest in helping us preserve
for our children and grandchildren this rich heritage. Thank you.
###
Department of the Treasury • W ashington, D.C. • Telephone 566-2041
Jun1*131 00'M B9
I *
l£PT. OF THE TREA^ h r y
STATEMENT OF THE HONORABLE
DAVID C. MULFORD
UNDER SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT, FINANCE, TRADE
AND MONETARY POLICY
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
JUNE 12, 1991
Introduction
Madam Chair and Members of the Subcommittee, I am pleased to
testify today on the proposed legislation to authorize U.S.
participation in the quota increase of the International Monetary
Fund (IMF) and the proposed Capital Increase for the International
Finance Corporation.
The IMF quota increase, agreed to in May of last year, would
raise the basic resources of the IMF by 50 percent from $130 to
$195 billion, and the U.S. quota in the Fund by some $12 billion
from $26 to 38 billion.
This legislation represents a key foreign economic policy
initiative of the Administration.
Its passage is critical if the
IMF is to help shape the world economy and respond to the
challenges of the 1990s.
The IMF is the cornerstone of the world economy.
Established
in the wake of the Great Depression and the immediate aftermath of
World War II, the Fund was charged with the critical mission of
promoting the smooth functioning of the international monetary
system and restoring international monetary cooperation.
Throughout its history, the IMF has promoted an open and
dynamic world economy — consistent with U.S. principles and
foreign economic policy interests — that has contributed to U.S.
job expansion and economic growth.
It has helped support countries
of vital interest to U.S. national security.
The United States has
been the leading force behind the Fund over the years, reflecting a
strong tradition of bipartisan support for the institution during
Democratic and Republican administrations.
2
The I M F 1s Role in the Current Global Economic Setting
The world economy now stands at a critical juncture.
Throughout the world, centrally-planned, state-run models of
economic development and one-party governance are being rejected.
In Eastern Europe, Latin America, Africa, and Asia, the focus of
economic reforms is on developing free markets and private
enterprise.
These developments point to the emergence of a new
international order of multilateral cooperation and have increased
prospects for enhanced international economic stability and
prosperity.
In pursuing their paths to political and economic freedom,
these countries across-the-board are turning to the IMF for policy
guidance and adjustment assistance.
They recognize that Fund
programs act as an international "seal of approval” and a catalyst
for other sources of financing.
Both Czechoslovakia and Bulgaria,
for example, began their reform efforts by applying for membership
in the IMF.
The United States has encouraged the Fund to take a
leadership role in responding to these challenges and the Fund is
doing just that.
The IMF took quick and decisive action in the Gulf crisis,
responding to the increased oil import bills faced by developing
countries throughout the world and the severe costs of the U.N.
sanctions on Iraq.
Following the lead of President Bush, who
addressed *the World Bank and IMF at their Annual Meetings in
September 1990, the IMF implemented changes in its policies*to
ensure it was well-positioned to help adversely-affected countries.
A key measure was the introduction of compensatory financing, on a
temporary basis, to assist countries in coping with higher oil
import costs.
The Fund has already committed over $3 billion to
countries adjusting to the disruptions brought about by Iraq's
invasion of Kuwait.
The IMF also provided crucial analytical
support to U.S.-led efforts by the Gulf Crisis Financial
Coordination Group (GCFCG) to help the front line states (Turkey,
Egypt, and Jordan) during the crisis.
In Eastern Europe, the Fund is at the forefront of
international efforts to assist countries in restructuring their
economies away from central planning and making the transition to
free markets and private enterprise.
The Fund led the way in
Poland and Hungary and is building a strong framework elsewhere for
market-oriented adjustment.
This year alone, the Fund has already
committed $8 billion to the region.
These monies are supporting
three-year financing arrangements in Poland and Hungary and stand
by arrangements in Czechoslovakia, Bulgaria, and Romania.
In
addition to program financing, the Fund has disbursed substantial
compensatory financing to all five countries to help address
increased oil import costs arising from the Gulf crisis and the
switch to hard currency trade relations with the Soviet Union.
3
The Fund's support has unlocked substantial additional
financing for Eastern Europe.
In Poland, the Fund's program has
formed the basis for the recent agreement by official creditors to
reduce the country's debt and debt service obligations by 50
percent.
Throughout the region, Fund arrangements are a critical
element in catalyzing new resources from donor governments through
the G-24 process, from private capital markets and through the
Paris Club.
The Fund is also continuing to play a pivotal role in the
U.S.-led international debt strategy, the "Brady Plan."
Eight
countries — Chile, Mexico, the Philippines, Costa Rica, Morocco,
Venezuela, Uruguay, and Nigeria — have reached agreements with
commercial banks on packages including debt and debt service
reduction.
These countries account for nearly half of the total
commercial debt held by the major debtors.
Fund adjustment assistance and support for debt and debt
service reduction agreements have been particularly important in
Latin America, one of the largest export markets of the United
States.
Sound, free-market policies and the reduction in debt and
debt service obligations have dramatically improved growth
prospects in many of these countries.
In Mexico, for example,
inflation and interest rates have dropped sharply, growth rates are
up, substantial new foreign investment has flowed into the country,
and flight capital is returning.
A similar turn-around in economic
conditions is occurring in Venezuela.
Chile's economic success is
confirmed by its return to private credit markets.
With Fund
support, Costa Rica in 1989 reduced its commercial bank debt by 62
percent.
Elsewhere in Central America, Fund programs are
supporting adjustment in Honduras and El Salvador.
The Fund is an integral part of international efforts to
encourage comprehensive economic reforms and to provide
concessional financing to the poorest countries of the world,
particularly those of Sub-Saharan Africa.
Over 20 African
countries currently have Fund programs.
Most of the Fund programs
are three-year arrangements under IMF concessional facilities and
involve extensive collaboration between the Fund, World Bank, and
the borrowing country.
These programs are addressing the
widespread need in Africa for structural reforms that are essential
for achieving sustained growth and alleviating poverty.
On the strength of these programs, two countries, Nigeria and
Niger, have recently reached debt and debt service reduction
agreements with commercial banks.
Niger is the first to benefit
from International Development Association (IDA) support for such
agreements•
4
Pressures on IMF Liquidity:
The Case for a Quota Increase
If the Fund is to meet the challenges of the world economy, it
must have adequate resources to fulfill its systemic
responsibilities.
For this purpose, the IMF regularly reviews the
adequacy of its quotas.
The current quota review was to be
completed in 1988.
However, the conclusion of these negotiations
was delayed by two years as the United States insisted that there
be a strong case for additional resources on the basis of a careful
analysis of prospective demands, available resources, and agreement
on the future role of the IMF as a monetary institution.
Thus,
this is the first quota increase in eight years.
The Fund's role in responding to the challenges of the Gulf
war and reform efforts in Latin America and Eastern Europe is
resulting in substantial current and projected demands on Fund
resources.
Although aggregate Fund quotas presently total around
$130 billion, only about one-half of these quota resources are
considered usable (i.e., resources from countries which are not
borrowing from the Fund and which have strong financial positions).
From this pool, substantial amounts have already been lent.
Thus,
the Fund currently estimates that it has about $30-35 billion
remaining for lending over the five-year period normally covered by
the quota review.
Fund resources will be significantly depleted in the period
ahead.
The Fund currently estimates that disbursements this year
will total $16 billion — more than double last year's lending.
Disbursements are expected to remain high in follow-on years.
As a
result of heavy financing demands and loans, measures of Fund
liquidity are expected to drop by almost 40 percent this year and
decline further next year.
Furthermore, a substantial portion of
the loanable resource base could be removed if a major creditor's
balance of payments position were to weaken.
For these reasons, the proposed quota increase is timely.
The Fund's resource base is being depleted.
The quota increase is
forward-looking.
These resources must serve the Fund over the
medium term.
Effectiveness of U.S. Support for the IMF
Support for the IMF is an extremely effective means for
advancing U.S. interests•
Use of the U.S. quota by the IMF involves no net budgetary
outlays. This is because any transfer of dollars to the Fund is
immediately offset by the receipt of an equivalent, interestbearing and liquid monetary reserve asset.
Thus, the transfer of
dollars to the Fund is analogous to putting money into a checking
account which is interest bearing and can be drawn down at any
time.
This accounting treatment is used internationally.
Over the
5
years, the United States has drawn 24 times on its reserve position
for a total amount of $6.5 billion.
It last drew on its reserve
position in 1978 for some $3 billion.
Indeed, during the 1980s, U.S. participation in the IMF has
resulted in a net financial gain of $628 million annually.
This
9^in reflects interest earnings and valuation gains on our reserve
position in the IMF, which sharply exceeded the borrowing costs to
the Treasury associated with financing transactions with the Fund.
The budget agreement makes specific provision for the unique
budgetary treatment of the IMF quota increase.
The approximately
$12 billion increase in the U.S. quota will not result in any net
budgetary outlays.
Also, this appropriation is only available for
the quota increase; it could not be applied, for example, to other
discretionary spending programs.
IMF financing also leverages our scarce resources, which is
critical at this time of budget constraint.
For every dollar the
United States contributes to the Fund, other countries contribute
four.
The United States is also well positioned to influence IMF
policies.
Our voting share in the IMF of some 19 percent gives us
veto power over key IMF decisions, such as quota increases and
amendments to the Fund's charter, which require an 85 percent
special majority vote.
In addition, our voting share positions us
to build majorities on other major issues, requiring supermajorities of 70 percent for approval.
This veto power has often
proven essential to ensure that the Fund operated in a manner
consistent with overall U.S. interests.
The Strengthened Arrears Strategy
During the quota negotiations, a number of steps were taken to
ensure that IMF resources, including U.S. contributions to the
quota increase, would be used more effectively.
During the 1980s, arrears to the Fund grew sharply, reaching
their current level of $4.5 billion from nine countries, an amount
twice the level of the Fund's reserves.
Arrears undermine the
financial integrity of the IMF and its ability to fulfill its
systemic responsibilities.
Over time, Fund efforts to address the
growth in arrears bolstered Fund reserves but failed to reverse the
problem and promote a normalization of relations between the Fund
and arrears countries.
Thus, in order to ensure that any increased U.S. quota
contributions were wisely and productively spent, a major U.S.
priority in the quota negotiations was the adoption of a
strengthened arrears strategy.
Our basic approach emphasized the
need for a comprehensive set of incentives and disincentives
6
designed to reward sound performance and to discourage new arrears.
The plan eventually adopted by the Fund closely mirrors the U.S.
approach and includes two main elements.
First, the key to addressing current arrears cases is sound
economic performance to restore creditworthiness.
Thus, to
create an incentive for sound performance, countries which
cooperate with the Fund and demonstrate sustained performance
under a 2-3 year Fund-monitored arrangement can now earn
"rights" to special financing to clear their arrears.
-
Second, countries that over time do not fulfill their
responsibilities cannot be expected to enjoy the benefits of
membership.
Thus, if any country does not cooperate in
clearing its arrears and continues to fail to fulfill its
obligations, the strengthened arrears strategy provides for an
amendment to the IMF Articles that would permit the Fund to
suspend that country's voting rights and representation
privileges.
The rights approach is only available for the 9 remaining
arrears cases that were in arrears at the time of the quota
agreement.
At the successful conclusion of the program, a country
would gain access to special financing to help clear its arrears.
To receive the financing, however, a country must establish a
follow-on program so as to ensure that sound policies continue to
be pursued.
Financing for the rights program will come from two main
sources:
For lower-income arrears countries, the Enhanced
Structural Adjustment Facility (ESAF) will be used
primarily to finance the "rights" programs.
The two middle-income arrears cases, Peru and Panama,
will be eligible for financing from a special account
financed from increased charges on IMF loans and reduced
remuneration.
In both cases, "rights" financing is to come from special Fund
monies separate from the Fund's regular resources.
In this way,
the Fund will avoid establishing undesirable precedents which could
undermine its monetary character.
In this context, since financing for the "rights" program for
lower income countries through use of the ESAF increases the
potential risk to ESAF creditors, it was agreed that the IMF would
sell, if needed, up to 3 million ounces of IMF gold to back up the
ESAF's already substantial reserves.
This limited amount of gold
reflects the gold subscriptions of the countries with arrears.
7
Progress is being made under the strengthened arrears
strategy.
The IMF recently approved a three-year "rights” program
for Zambia and is working with official creditors and donbrs to
establish a rights program for Peru.
These two countries alone
account for nearly half of the total arrears owed the IMF.
Also,
Honduras and Guyana have eliminated their arrears, while Peru,
Panama, and Zambia are meeting maturing obligations to the Fund.
Under U.S. law, U.S. consent to any sale of IMF gold for the
special benefit of a single member or of a particular segment of
the membership must be approved by Congress.
Thus, the quota
legislation also seeks Congressional approval to allow the
Secretary of the Treasury to instruct the U.S. Executive Director
of the IMF to vote to approve the IMF's pledge to sell this limited
amount of gold.
Also under U.S. law, U.S. agreement to an amendment to the IMF
Articles of Agreement requires Congressional approval.
Thus, we
are seeking legislation that would authorize the U.S. Governor to
the Fund to accept the proposed suspension amendment to the IMF
Articles.
This is a tough remedial measure which encountered
resistance from developing countries and was adopted only at U.S.
insistence and as a precondition of the suspension amendment, the
quota increase cannot go into effect.
The goal of the suspension
amendment is positive, however:
normalization of relations and the
deterrence of future arrears.
Impact of IMF Activities on Poverty and the Environment
During the past year, concerns have been raised regarding the
IMF's role in environmental protection and alleviating poverty.
The Administration is committed to environmental protection.
Towards that end, it has given high priority to promoting Fund
actions aimed at protecting the environment, consistent with Fund's
basic mandate.
We have achieved some important successes:
At U.S. initiative, the Fund is establishing a group of
economists that will serve as liaison with other organizations
on environmental research and advise the Fund on addressing
environmental concerns.
The Fund is currently seeking
environmental economists from outside the Fund to work, for a
transitional period, with Fund economists.
-
With World Bank assistance, the Fund is incorporating measures
consistent with environmental protection into Policy Framework
Papers (used for concessional programs) and some stand-by and
extended arrangements.
These can include measures to remove
government subsidies on fertilizer, energy, and pesticides.
-
IMF Article IV consultations include discussion of
environmental concerns.
8
The IMF is working with the U.N. to develop national income
accounting statistics to reflect use of natural resources.
These achievements have required much hard work on the part of
the U.S. Executive Director to the IMF and senior Treasury
officials.
We faced considerable opposition from developing and
developed countries alike in securing these gains.
Many countries
argue that the impact of Fund macroeconomic policies on the
environment is indirect and ambiguous.
They are also concerned
about overburdening the Fund and detracting from its primary
responsibilities as a monetary institution in promoting sustained
growth.
Developing countries in particular are sensitive to the
appearance of the Fund intruding on national sovereignty.
Moreover, there is broad recognition that the World Bank is bettersuited to addressing environmental concerns in an effective and
lasting manner.
The U.S. is the primary force behind increased Fund attention
to environmental concerns.
By virtue of our leadership position in
the institution, we have been able to overcome some of the
reservations of others, and we plan to build on the progress that
has been made.
We look forward to continuing our work with
Congress and the environmental community in this important area.
Turning to poverty issues, IMF conditionality is sometimes
criticized as imposing austerity on countries and hurting the
poorest segments of the population.
This view, however, represents
a misconception of the IMF's role in the adjustment process.
Countries generally come to the Fund facing severe economic
imbalances.
Usually, they have lived beyond their means, consuming
more than they produce, and are facing a curtailment in foreign
financing flows.
In these circumstances, they face the prospect of
"forced" adjustment — deep and inefficient cuts in investment,
imports, and growth.
In contrast, IMF policy advice and financial support offer
countries "breathing room" and the prospect for a more orderly
adjustment path.
Experience shows that the sound market-oriented
reforms the IMF supports are essential to achieve sustained growth,
reduce poverty and catalyze additional external resource flows.
There are, to be sure, inevitable costs associated with the
adjustment process.
The Fund is sensitive, however, to these
costs.
Virtually every Fund program includes support for social
safety nets, such as the maintenance of expenditures for such basic
human needs as health, education, and nutrition.
Fund programs
also allow for targeted assistance to protect the most vulnerable
groups from the effects of such necessary reforms as the removal of
subsidies for basic consumer items.
Costa Rica, Ghana, Venezuela,
9
Niger, Bangladesh, and Egypt all have Fund programs which
incorporate targeted government assistance for the poor.
Furthermore, in recent years, under the debt strategy, the
Fund has given increased attention to growth-oriented structural
reforms.
This has acted in many cases to help the poor.
Fund
programs increasingly emphasize comprehensive structural reforms in
order to free up workers, producers, and farmers to respond to
market f o r c e s - - not government regulations and bureaucrats.
These
measures are intended to stimulate supply responses and reduce
adjustment programs' reliance on fiscal belt-tightening and
monetary restraint.
Also, as noted previously, in the poorest countries of the
world, substantial concessional financing is being provided.
As
part of ESAF programs, the Fund is devoting extensive attention to
cushioning the poor from the side-effects of adjustment.
These measures have been adopted with strong U.S. support and
encouragement.
Moreover, countries undertaking Fund-supported
adjustment reforms have themselves recognized that the
incorporation of social safety nets substantially enhances popular
support for the program.
The United States will continue to
encourage the IMF to show increased sensitivity to the effects of
adjustment on poverty.
Conclusion on IMF Quota Increase
Since its establishment some 45 years ago, the IMF has played
a central role in strengthening growth at home and in promoting a
sound market-oriented world economy consistent with basic U.S.
foreign economic policy interests.
^support for a sound and stable world economy is crucial to
maintaining conditions in which U.S. jobs and exports can thrive.
U.S. economic interests are increasingly tied to international
economic developments.
In 1990, virtually all of U.S. economic
growth was accounted for by the increase in exports.
The fastest
growing U.S. export markets are in the developing world.
Many of
our developing country trading partners have received IMF
assistance in support of market-opening measures and increased
growth.
The foreign policy interests of the United States have been
well-served by the Fund.
The quick and effective Fund response to
the Gulf crisis sent a strong message of continued international
support for efforts to gain Iraq's withdrawal from Kuwait.
In
Eastern Europe and elsewhere, economic reforms are inextricably
linked to the movement toward democracy.
In Latin America
especially, the Fund is supporting sound economic policies and debt
and debt service reduction under the Brady Plan.
IMF support is
10
essential if countries throughout the world are to achieve peace
and prosperity on the basis of democratic and market principles.
The IMF also serves our interests in an extremely effective
manner.
Use of the U.S. quota in the Fund involves no budgetary
outlays and leverages our scare resources.
We are the largest
member and most influential voice in the Fund, and our large voting
power gives us veto power over certain key decisions and positions
us to build majorities on other major issues.
The strengthened
arrears strategy will ensure that increased U.S. resources are used
wisely.
u
.
economy stands at a historic juncture in which U.S
will be deeply affected.
It is critical that we support
tne IMF now if we are to continue our strong leadership in this
global institution as it helps shape the world economy of
the 1990s.
Thus, on behalf of the Administration, I strongly urge
you to support passage of the IMF quota legislation.
International Finance Corporation
I am also pleased to testify today on the proposed Capital
increase for the International Finance Corporation (IFC). IFC
management and member countries have been negotiating a Capital
Increase for over a year.
All documents pertaining to the Capital
In" f a?e,h?ve *?een cir°ulated, and a joint World Bank/IFC Board is
scheduled to discuss the Increase on June 20.
As you know, the IFC is the component of the World Bank Group
which most directly serves our key policy goal of promoting private
sector development.
The IFC was established in 1956 to support
private sector led economic growth in its developing member
countries by making direct equity and debt investments in private
companies, mobilizing funds from other sources, and providing
important advisory services to developing country governments and
corporations.
Unlike the World Bank and IDA, the IFC lends
directly to the private sector.
The IFC is in strong financial
shape, and enjoys an "AAA” credit rating.
The U.S. is the largest
single shareholder, owning about one quarter of the IFC' s capital.
Recent IFC Projects
I would like to mention briefly some current IFC projects, as
they help illustrate how the IFC pursues its private sector
development mandate.
In Czechoslovakia, IFC has been retained by that nation's
largest heavy industrial group to provide advice on its
privatization strategy.
11
In Poland, IFC has recently established the Polish Business
Advisory Service, in cooperation with the European Bank for
Reconstruction and Development (EBRD). PBAS will provide
technical assistance and support for Polish entrepreneurs and
small businesses.
The IFC is actively discussing privatization opportunities
with Mexico, Argentina, Bolivia, Brazil, Ecuador, and Uruguay.
Currently, the IFC is assisting in the privatization of the
Chilean telephone company.
IFC s strategy in Asia focuses on assisting companies to
access international capital markets, as well as developing
internal capital markets.
In Africa, in addition to individual investment projects, the
IFC finances small enterprises directly through its African
Enterprise Fund, provides technical assistance through the
Project Development Facility, and is addressing
management needs by increasing training activities of the
African Management Services Company.
U.S. Goals
has changed significantly in recent years, as shown
by the momentous events in Eastern Europe and the sweeping reforms
now underway in many nations in Latin America.
It is now
understood in most of the world that real economic, social, and
even political progress requires the development of strong local
?w1V?^e sec^ors* Accordingly, we are seeking to strengthen both
the IFC and the World Bank so that these institutions will take the
lead in assisting this historic transformation.
The U.S. believes that for an IFC Capital Increase to be
effective it must be part of an accelerated effort by the entire
World Bank Group to support private sector development.
We believe
that the Bank Group can increase its support for the private sector
while maintaining the Bank Group's emphasis on growth and
development, poverty alleviation, and the environment.
To accomplish this objective there is a very important
cal problem which must be resolved successfully.
The IFC
needs to implement a stronger and more active policy to promote
privatization in countries moving towards market economies.
However, this effort will not be successful if the World Bank does
not actively support the same objective.
A large state enterprise
m a developing country or in Eastern Europe which can borrow from
the World Bank with the support of a government guarantee will not
easily give up that important source of capital by privatizing and
cutting itself off from future World Bank loans.
How both
institutions face and resolve this transitional problem will be an
important determinant of the speed and success of privatization.
12
As Secretary Brady told the Joint World Bank/IMF Development
Committee on April 30, 1991, actions in three broad areas are
needed as a part of an IFC Capital Increase:
—
First, measures to strengthen IFC's project selection and
overall operations.
Second, measures to strengthen communications and
collaboration between the IFC and the rest of the World Bank
Group.
—
Finally, measures to strengthen the private sector focus of
the World Bank, so that the IFC is not operating in isolation,
but is part of a comprehensive World Bank effort in support of
private sector development.
Although the IFC Capital Increase will not be finalized until
the Bank and IFC Boards and then IFC Governors approve the
Increase, the U.S. has been pursuing a number of major objectives
in the negotiations and expects that all our policy objectives will
be met.
With respect to the IFC, we believe that the IFC should make
privatization a top priority and become a strong advocate for
privatization with developing countries.
There is clearly a great
need for expanded work in this area.
We also believe that the IFC
should collaborate more closely with the rest of the Bank Group in
promoting- needed policy reforms in borrowing countries and pay more
attention to the Bank's policy reform goals when selecting its own
projects.
This means that IFC project selection should reinforce
economic reforms supported by the World Bank and the IFC should
avoid projects in countries where overall macroeconomic policies
are clearly unsound.
The IFC also should avoid lending into highly
protected sectors when there is little prospect for liberalizing
trade in those sectors.
In connection with the efforts to improve communication and
collaboration between the Bank and the IFC, we believe that there
should be a clearer definition of the respective roles of both
institutions, especially in such areas as privatization and lending
to financial intermediaries.
A World Bank Group Private Sector
Development (PSD) Committee under the Chairmanship of the Bank's
President has been set up to coordinate the implementation of
private sector development work within the Bank and between the
IFC, MIGA and the Bank.
To be successful, this new effort will
require the constant close cooperation of key policy, operational,
research, and personnel offices within each of the institutions.
The Bank and IFC will collaborate in carrying out Private Sector
Assessments (PSAs), which will be used to formulate country
assistance strategies and will incorporate private sector
development priorities.
We understand that the Bank is in the
process of identifying the first 20 countries for assessments.
13
We believe that the Bank should increase its own support for
private sector development, in addition to what the IFC is doing.
This would include developing country policy reforms — legal,
regulatory and institutional — in support of an efficient private
more support for privatizations, and implementation of more
projects through private rather than public channels.
We also believe that Bank management and the Executive Board
should study the issue of amending the IBRD's charter.
The IBRD's
charter requires a government guarantee for any Bank loan to a
private entity.
Although no policy decisions have been made, there
could be cases where it would be useful if the IBRD could lend
directly to the private sector without government guarantees.
Unless the charter is changed, current practice could be a
disincentive to privatization.
As I mentioned earlier, former
state-owned enterprises which have been privatized are no longer
eligible for IBRD loans unless the government extends guarantees.
Some countries have constitutional prohibitions against such
guarantees.
Status of Negotiations
We believe the negotiations for an IFC Capital Increase are
moving towards a successful conclusion, with what we hope will be
agreement on a Capital Increase and related IFC and World Bank
policy reforms.
We, along with most other major shareholders
generally favor the proposal for an IFC Capital Increase.
The IFC Capital Increase and Strengthening the World Bank Group
Effort on Private Sector Development will be discussed by the World
Bank and IFC Executive Boards on Thursday, June 20.
It is our hope
that the Boards will agree at that session to send the Capital
Increase proposal to member governments for their approval.
Approval of a Capital Increase will require an affirmative vote of
the IFC's Board of Governors by a three-fourths majority of the
total voting power.
The U.S. would be prepared to support a Capital Increase,
provided that our major policy reform goals for both the IFC and
World Bank are achieved.
The U.S. currently holds about 25 percent
of IFC capital.
It has been our objective to maintain our current
share in an agreed Capital Increase.
However, the actual amount of
the U.S. share will be dependent on the ultimate size of the
Increase.
Conclusion on the IFC Capital Increase
We expect the IFC within a coordinated World Bank Group effort
to play an especially important role in the 1990s, due to its
expertise in privatization, capital markets development, and
foreign investment.
The IFC will place special emphasis on
Eastern Europe (in cooperation with the EBRD), expand its
14
activities in Latin America, and seek to maximize its activities in
Sub-Saharan Africa and Asia.
Madam Chair, in the final analysis, the justification for our
supporting an IFC Capital Increase bears repeating: that it is
essential for the IFC and World Bank to work together to ensure the
success of the difficult transition away from state controlled
economies to free markets.
This will require strong and
coordinated support from both the IFC and the World Bank.
We look
forward to the IFC and the Bank stepping forward to meet this
challenge.
Thank you.
i
lüN 1 7 31 0 0 I 5 5 4
Department off the Treasury • Washington, D.C. • Telephone
566-2041
For Release Upon Delivery
Expected at 2:30 p .m .
June 13, 1991
STATEMENT OF MICHAEL J. GRAETZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AGRICULTURAL TAXATION
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
It is a pleasure to be here this afternoon to address
various tax proposals relating to energy conservation, the
development of renewable energy source technology, and the
Nation*s dependence on foreign oil.
As you know, Mr. Chairman, a few months ago the President
presented the National Energy Strategy to Congress.
This compre
hensive report presented the findings of an extensive Administra
tion study of various policy options designed to increase energy
security, to increase the availability of electricity and trans
portation fuels produced from renewable sources, and to improve
energy conservation.
The National Energy Strategy resulted from
18 months of study, hearings and analysis under the leadership of
Secretary of Energy James D. Watkins.
The Department of Energy
is also here today and will address the broader aspects of the
President's National Energy Strategy.
My comments will be
limited to the Committee's request for the Administration's
position on specific tax proposals.
In the course of the development of the National Energy
Strategy, literally hundreds of alternative policies were exam
ined — including many tax proposals similar to those before the
Committee today.
The Administration evaluated each proposal
taking into account the important energy objectives and the need
to maintain a healthy economy and to adhere to the 1990 Budget
Act.
Relatively few tax proposals were included in the National
Energy Strategy.
In particular, only two options in the Strategy
— a i-year extension of the renewable energy tax credit and the
permanent extension of the research and experimentation tax
NB-1327
2
credit — call for a statutory change in the tax laws.
Two other
tax policy options — a clarification of the current-law treat
ment of certain utility rebates and an expansion of the allowable
nontaxable limitation for transit passes — are being implemented
through administrative action.
The limited number of tax policy aspects of the National
Energy Strategy should not be surprising.
The Administration
believes that the tax laws should continue generally to provide
neutral treatment of investments and to maintain the lowest
possible tax rates. We have also become concerned about the
frequency and scope of changes in the tax law. While the decades
of the 1950s, 1960s and 1970s experienced at most two or three
major tax bills, there were nine major tax bills in the 1980s and
one in the first year of the 1990s.
Constant revision of the tax
law makes compliance more burdensome and costly for the populace
and tax enforcement more difficult for the IRS. These are genu
ine economic costs.
The Administration prefers to rely on market
prices, rather than the tax laws, to promote changes in the types
of energy supplied by producers or demanded by customers.
The Administration believes that the mix of measures
advanced in the National Energy Strategy, together with the Clean
Air Act Amendments of 1990 and other significant legislation
already passed by the Congress, will promote the objectives
sought with minimum interference with energy markets and maximum
adherence to our budgetary objectives.
In the remainder of my testimony, I will provide more
detailed comments on provisions listed by the Committee in the
hearing announcement.
For convenience, I have grouped together
portions of a number of different bills under their common
objectives.
I shall discuss each of these groupings, rather than
focus sequentially on each of the bills.
I.
ENCOURAGE DEVELOPMENT OF RENEWABLE ENERGY SOURCES
Proposals to provide incentives for electricity production
from renewable sources generally fall into two categories:
extension or modification of current-law investment tax credits
for solar and geothermal property, and new tax credits for the
production of electricity from renewable sources.
The intent of
these proposals is to accelerate the development of such renew
able energy sources.
Energy Tax Credit
Current law provides a 10-percent tax credit for investment
in solar or geothermal energy property.
Solar property is equip
ment that uses solar energy to generate electricity or steam or
ii
3
to provide heating, cooling, or hot water in a structure.
Geothermal property consists of equipment, such as a turbine or
generator, that converts the internal heat of the earth into
electrical or other useful forms of energy.
This credit is
currently scheduled to expire on December 31, 1991.
The Adminis
tration has proposed extending the energy tax credit for one
additional year.
S. 731 provides a 1-year extension of the energy tax credit,
as favored by the Administration.
In contrast, S. 141, S. 466,
S. 661, S. 741 and S. 743 call for a 5-year extension (to Decem
ber 31, 1996).
S. 1157 would allow the credit to be used against
a corporate taxpayer*s alternative minimum tax liability.
Administration position. The Administration at this time
does not support more than a 1-year extension of the energy
credit.
While we recognize that a more prolonged period of
benefits might provide more certainty and thus a greater incen
tive, we are not convinced that the incremental speed-up in the
development of renewable energy technology that would result from
extending the energy credit for four additional years justifies
the $200 million in additional revenue losses that such an
extension would cost.
The Administration also opposes the
proposal to create a special exception by allowing the energy tax
credit to offset corporate alternative minimum tax liability.
Production Credit
Current law does not contain any production incentives for
electricity produced from renewable energy sources.
S. 466,
S. 661, S. 741, and S. 743 contain proposals for production tax
credits.
These bills would provide a tax credit of up to 2 cents
per kilowatt hour (adjusted for inflation) for the production of
electricity generated from a renewable energy source.
Renewable
energy sources would include new facilities that generate elec
tricity from wind, solar thermal, photovoltaic, and certain
geothermal and biomass sources.
The credit rate for electricity
produced from geothermal sources would be one-half of the regular
rate.
The proposed legislation would grant the Secretary of the
Treasury authority to expand the list of eligible sources.
The
credit rate for production from a facility placed in service
after 1996 would be less than the rate for a facility placed in
service between 1991 and 1996, and the program would be entirely
phased out for property placed in service after 2001, although
credits would be allowed for electricity sold before 2009.
Administration position. The Administration opposes these
proposals for a number of reasons.
First, because only about 5
percent of the nation's electricity is generated from fuel oil,
this proposal will not significantly reduce the level of our oil
imports; it is more likely to reduce the future use of coal-fired
plants. While this may produce environmental benefits, the cost
4
of the proposed program may be quite high.
While we do not have
precise estimates of the proposals in these bills, related
proposals that we have examined would produce a revenue loss in
the range of $500 million to $2.0 billion over the 5-year budget
period. Variations in the estimates are associated both with the
amount of the credit and the extent that it may be available for
projects using existing mature technology.
The revenue loss of
such proposals per barrel of oil saved would be very high — in
the range of $10 to $30 per barrel.
Utilities may use current
mature technology and still qualify for the credits.
The accelerated development of renewable energy technology
can produce benefits to the nation.
However, the National Energy
Strategy concludes that growth in renewable energy supplies can
be accelerated over the coming decades without resorting to per
manent subsidies or legislative mandates.
Rather, the National
Energy Strategy proposes intensified investment in research and
development to reduce the costs and enhance the competitiveness
of renewable energy options.
Investment in R&D to improve energy
technology and reduce costs is a more appropriate role for the
Federal Government than using taxes or regulations to subsidize
or mandate the use of particular technologies.
II. IMPROVEMENTS IN TRANSPORTATION
Proposals to reduce the use of conventional motor fuels take
several forms:
(1) tax subsidies to encourage the purchase of
vehicles that can operate on alternative fuels, (2) taxes and tax
subsidies that encourage the purchase of fuel-efficient vehicles,
(3) expansion of tax benefits for employer-provided transit
passes and the use of commuter vehicles, or (4) reduction of tax
benefits for employer-provided parking.
Increased Use of Alternative Fuels
Under current law, no special tax subsidy is provided for
vehicles that use alternative fuels or for delivery systems for
alternative fuels.
Some proponents of such subsidies contend
that consumers will refrain from purchasing motor vehicles that
can run on alcohol fuels (such as methanol or ethanol) or other
clean-burning fuels because of an inadequate number of service
stations from which such fuels can be purchased, and that service
station owners are reluctant to install the necessary equipment
because of the low demand for such fuels.
S. 1178 would provide tax benefits designed to encourage
both the purchase of clean-burning vehicles and the installation
of the required infrastructure.
In particular, S. 1178 would
allow expensing of a limited portion of the purchase price:
up
to $2,000 for each passenger car or light truck, $5,000 for each
<
5
medium truck, and $50,000 for each heavy truck or bus.
Up to
$75,000 of the cost of refueling equipment could also be
expensed, although this limitation would be an overall cap per
location, rather than a per-pump or annual limitation.
In
addition, S. 1178 would require the Federal Government to pay
state and local governments a portion of their costs of clean
burning vehicles and refueling equipment.
Administration position. The Administration opposes the use
of additional tax incentives to encourage the use of alternative
fuels.
The tax laws currently provide substantial subsidies to
alcohol fuels. An income tax credit (or an equivalent excise tax
reduction) of 54 cents per gallon of alcohol is allowed to
producers and blenders of alcohol fuels.
An additional alcohol
fuels credit of 10 cents per gallon is available to small produc
ers (those with an annual production capacity of less than 30
million barrels).
In addition, the Clean Air Act Amendments of
1990 and various state programs are expected to accelerate sig
nificantly the use of alcohol and other clean-burning fuels in
areas of low air quality.
These provisions, together with the
actions suggested in the National Energy Strategy — including
greater federal purchases of alternative fuel vehicles and
enhanced R&D of new feedstocks and conversion technologies — are
expected to result in a substantial increase in the use of
alternative-fueled vehicles.
Encourage Purchase of Fuel-Efficient Vehicles
The current tax law imposes a so-called "gas guzzler tax" —
an excise tax on the manufacturer or importer of vehicles that
have a fuel economy of less than 22.5 miles per gallon.
This tax
ranges from $1,000 (for a vehicle with fuel economy between 21.5
and 22.5 miles per gallon) to $7,700 (for a vehicle with fuel
economy less than 12.5 miles per gallon).
S. 201 would increase
the fuel economy standard below which the tax applies by one mile
per gallon for each model year from 1992 to 2000.
In addition,
the bill would increase the amount of the tax between 1992 and
2000 and would adjust the tax for inflation.
It also would
provide a limited investment tax credit for the purchase of fuelefficient vehicles; the credit would increase by reference to the
percentage by which the fuel economy of the vehicle exceeds the
average for the model type.
S. 741 and S. 743 would retain the
gas-guzzler tax and in addition establish a system of taxes and
rebates to encourage the purchase of safer and more fuel-effi
cient vehicles.
A tax-exempt rebate would be allowed to a
purchaser of any vehicle more fuel efficient than the average for
its class, and a tax would be imposed on the purchase of any
vehicle less efficient than the average for its class.
A
similar system would operate with respect to the vehicle’s safety
rating.
)
6
Administration position. The Administration opposes an
increase in the gas guzzler tax at this time.
This tax was
doubled and the motor fuels tax was increased in the Omnibus
Budget Reconciliation Act of 1990. It is too soon to know the
effects of these increases on fuel efficiency. That same Act also
imposed a luxury excise tax on automobiles costing more than
$30,000.
Sales of many of the less fuel-efficient cars are also
subject to this tax. A further increase in the gas-guzzler tax
at this time does not seem appropriate.
The Administration also
opposes the new tax and rebate systems of S. 741 and S. 743. We
do not believe any new federal excise tax on the purchase of
motor vehicles is appropriate even if that tax is dependent upon
the vehicle's relative fuel economy and safety rating and its
proceeds are to be rebated to purchasers of more fuel-efficient
or safer vehicles.
The impact of such a tax on auto manufacturers will be
uneven in the near term, depending principally on the fuel
economy and safety characteristics of their existing product mix.
Moreover, the application of the proposed tax and rebate system
for relative fuel economy to model classes could lead to puzzling
results.
For example, the purchaser of a car with fuel economy
of 35 miles per gallon in a model class with average economy of
40 miles per gallon would be subject to a tax of $357.1 On the
other hand, the purchaser of a car with fuel economy of 30 miles
per gallon in a model class with average fuel economy of 25 miles
per gallon would obtain a $667 rebate.2 Thus, the purchaser of
the latter car with a fuel economy of 30 miles per gallon would
enjoy a $1,024 advantage over the purchaser of the former car
with a fuel economy of 35 miles per gallon.
Similar results
would arise from the proposed application of the tax and rebate
system for relative auto safety to model classes.
*Under S. 741 and S. 743, the tax is calculated as $10 times
the difference between the vehicle's annual fuel consumption and
the sales-weighted annual fuel consumption for all vehicles in
its class, where for this purpose annual fuel consumption is
equal to 10,000 divided by the vehicle's miles-per-gallon rating.
Thus, for the example noted, the tax is $10 x (10,000/35 10,000/40) = $357.
2Under S. 741 and S. 743, the rebate is calculated as $10
times the difference between the sales-weighted average fuel
consumption for the vehicle's class and the vehicle's fuel
consumption.
Thus, for the example noted, the rebate is $10 x
(10,000/25 - 10,000/30) = $667.
7
Increase Reliance on Mass Transit
Under current law, the Internal Revenue Code explicitly
excludes the value of employer-provided parking at or near the
employer's business premises from an employee's gross income as a
working condition fringe benefit.
Employer reimbursements of an
employee's parking expenses are similarly excluded, but only if
the payment is a reimbursement of parking expenses actually
incurred.
Thus, a general transportation allowance paid to an
employee whether or not the employee has parking expenses is not
excluded under this rule.
The tax code also excludes de minimis fringe benefits of
such small value that accounting for them would be unreasonable
or administratively impracticable.
Pursuant to the legislative
history of this rule, regulations allow an employer to provide a
tax-free subsidy to employees that commute by public transporta
tion.
If the subsidy is provided in the form of discounts on
transit passes, tokens, fare cards or similar instruments and
does not exceed $15 in any month, the subsidy is excluded from
the employee's income; if the value of the subsidy exceeds $15
per month, the benefit no longer qualifies as de minimis and the
entire value of the subsidy must be included in the employee's
taxable income.
Some contend that this disparity in treatment
encourages the use of private transportation over the use of mass
transit facilities.
In addition to other measures to encourage increased use of
carpools and mass transit, the National Energy Strategy indicated
that the limitation on the value of tax-exempt transit passes
would be increased.
The Internal Revenue Service has recently
proposed regulations that would increase this limitation to $21
per month, effective July 1, 1991, to reflect the inflation
experienced since this exclusion was adopted in 1984.
A number
of bills have been introduced that would increase the tax-exemp
tion limitation on the value of the transit passes to much higher
levels and would allow the tax-exempt level of benefits for all
employees even if the employer-provided amount exceeds the
threshold.
Thus, under S. 129, up to $30 per month of an employ
ee's mass transit commuting expenses would be treated as an
excludable fringe benefit; this amount would be raised to $60 per
month under S. 26, and $75 per month under S. 741 and S. 743.
From 1979 through 1986, the value of commuting in employerprovided vans, buses, or similar highway vehicles was excluded by
statute from an employee's gross income if provided under a
nondiscriminatory plan of the employer.
Several bills (S. 26,
S. 129, S. 741, and S. 743) would provide an exclusion from the
employee's gross income of the value of commuting in employerprovided commuting vehicles, which are vehicles that satisfy
>
8
statutory requirements similar to those in effect during 19791986.
S. 26 and S. 129 would not limit the amount of such
exclusion; S. 741 and S. 743 would limit the exclusion to $75 per
month.
Administration position. Although the Administration
supports improvement and increased use of mass transit facili
ties, it opposes these major expansions in the amount of
employer-provided commuting costs that may be excluded from
income.
The proposed expansion in tax benefits would be an
inefficient means for encouraging safety or modernization of
public transportation facilities.
Other proposals seek to discourage the use of private
transportation by limiting or eliminating the current-law exclu
sion from income of the value of employer-provided parking.
Thus, under S. 326, an employer would be denied a deduction for
expenses of furnishing parking to an employee unless the employee
may elect to receive cash or a transportation subsidy in an
amount equal to the value of the parking subsidy.
S. 26, S. 129,
S. 741, and S. 743 would treat parking as a working condition
fringe benefit only for an on-site, employer-operated parking
facility used primarily by the taxpayer's employees.
Administration position. The Administration opposes these
measures.
The exclusion of parking expenses was a part of a
comprehensive reexamination of the treatment of fringe benefits
during the 1980s, and notwithstanding the potential advantages in
the current-law treatment of employer-provided transportation
assistance in favor of private passenger car transportation over
public transportation, we do not favor reopening this debate.
When it previously addressed this question, Congress carefully
balanced two conflicting objectives:
the need for clear and
administrable rules and the need to limit the erosion of the
income and social security tax bases due to the increased impor
tance of noncash fringe benefits.
Treasury recognizes that the
current favorable treatment of employer-provided parking is not
fully consistent with the general rules limiting tax-exempt
fringe benefits.
However, making employer-provided parking
taxable would produce serious administrative difficulty, because
the valuation of employer-provided parking benefits can be
extremely difficult.
S. 741 and S. 743 attempt to avoid the valuation difficulty
by requiring that only the value of rented parking facilities,
presumably the rent paid, be included in the employee's income.
The avoidance of the valuation difficulty, however, produces
inequities by excluding from taxation benefits provided by
employers able to offer their own parking facilities while taxing
employees for similar benefits provided by employers not able to
provide parking on their own facilities.
S. 326 takes a differ
ent approach to the issue by denying employers deductions for
9
certain employer-provided parking, a violation of the general
norm that employers should be entitled to deduct all expenses of
compensation.
In addition, this approach also produces adminis
trative difficulties and inequities, for example, by requiring
allocations of depreciation or rent deductions between parking
and other building facilities and by having no impact on employ
ers who provide parking in nondeductible or fully depreciated
facilities.
Moreover, adequate local public transportation facilities do
not exist in all cities.
In many areas of the country, taxation
of the value of employer-provided parking therefore might have at
most a very modest effect on the use of private transportation.
The effect may also be modest in cities where public transporta
tion is available if employees strongly value the reduced transit
time and greater flexibility possible with private transporta
tion.
III.
INCREASE ENERGY CONSERVATION
Two types of tax proposals have been suggested in an effort
to encourage energy conservation:
the exclusion from income of
certain utility rebates and a tax credit for the cost of retro
fitting older home furnaces with more fuel-efficient oil burners.
Utility Rebates
A number of utilities offer rebates to customers acquiring
certain conservation equipment.
Under current law, these rebates
may be included in the taxable income of the customer receiving
the rebate.
The National Energy Strategy calls for the Adminis
tration to clarify the nontaxability of rebates provided by
utilities in the form of reduced service charges, and the Inter
nal Revenue Service has recently released guidance on this issue
in the form of a revenue ruling.
This ruling makes it clear that
rebates provided by electric utilities to customers as a reduc
tion in the cost of the electricity they provide may be excluded
from the income of the customers.
However, a cash payment
remains fully taxable.
A number of bills (S. 83, S. 326, S. 679, S. 741, S. 743,
and S. 922) would provide an exclusion from gross income for
subsidies that a utility provides to a customer for the purchase
or installation of conservation measures.
Each bill also
provides that no deduction or credit would be allowed for the
expenditure of amounts provided or reimbursed by an excluded
subsidy and that the adjusted basis of property would be reduced
by the amount of any excluded subsidy for the property.
10
The bills differ in the scope of the exclusions provided.
In general, they apply to subsidies provided by electric or gas
utilities for residential or business energy conservation
measures.
S. 679 and S. 922 are more limited, however; S. 679
applies only to residential energy conservation measures and
S. 922 applies only to subsidies provided by electric utilities.
On the other hand, S. 83, S. 741, and S. 743, which apply to both
energy and water conservation measures are broader than the other
bills.
Finally, S. 83 and S. 326 apply to payments to qualified
cogeneration facilities or qualifying small power production
facilities; the other bills except those payments either
specifically or by limiting the exclusion to residential energy
conservation expenditures.
Administration position. The Administration opposes these
proposals.
Each proposal deviates from existing tax policy by
creating a new category of tax-exempt income, and no doubt would
lead to demands by other groups to make other types of income
tax-exempt.
It would be difficult to police the proposals'
prohibitions of double benefits by denying business customers
deductions or depreciation for the expenditures financed by the
rebate.
Moreover, under the recently promulgated revenue ruling,
objectives similar to those of these bills can be accomplished
through programs that allow discounts on monthly utility bills to
customers who participate in conservation programs without
departing from general tax principles or opening up the potential
for double tax benefits.
Finally, the proposed legislative
changes would lose significant revenue over the 5-year budget
period.
Tax Credit For Retrofitting Home Oil Burners
From 1978 through 1985, the Internal Revenue Code provided a
residential energy credit to individuals installing insulation or
other energy-saving components in their principal residence.
The
credit allowed was equal to 15 percent of the first $2,000 of
qualifying energy conservation expenditures (a taxpayer's maximum
credit per residence was $300) and the credit was nonrefundable.
Several bills (S. 326, S. 741, and S. 743) would provide a
nonrefundable credit to individuals for retrofitting residential
oil-burning furnaces with flame-retention replacement burners or
similar components that use comparable conservation technologies.
S. 741 and S. 743 would also allow the credit for expenditures
that increase a residence's insulation value (including expendi
tures that increase the insulation value of a water heater or a
window) and expenditures for an automatic thermostat control.
The credits would be allowed only for the installation of new
equipment with an expected useful life of at least three years.
11
In general, the credits would be allowed for the full amount
of qualifying retrofit expenditures up to a lifetime maximum of
$100; joint occupants of a residence would be required to allo
cate the $100 maximum credit in proportion to their qualifying
retrofit expenditures.
No credit would be allowed for expendi
tures made from subsidized (whether in the form of a grant or a
low-interest loan) financing provided by a governmental energy
conservation program, and expenditures for which a credit is
allowed could not be taken into account in determining the basis
of the property with respect to which the expenditures are made.
The credit would be allowed for expenditures made after Decem
ber 31, 1990. Under S. 326, the credit would be allowed only for
expenditures made before December 31, 1994; S. 741 and S. 743
would also allow a credit for expenditures during 1995.
Administration position. The Administration opposes these
proposals because these are inefficient mechanisms for encourag
ing conservation.
Experience with the prior-law residential
energy credit, which also provided a modest tax credit for
certain residential conservation expenditures, suggests that most
taxpayers claiming the credit would have purchased the conserva
tion equipment even in the absence of the credit.
These propos
als also would complicate the tax forms for all Americans and
would be difficult for the IRS to administer.
Mr. Chairman, that concludes my formal statement.
I will be
pleased to answer questions that you and the Members of the
Committee may wish to ask.
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42-96-05-89
REMARKS BY
THE U.S. SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
AT THE OECD MINISTERIAL MEETING
PARIS. FRANCE
JUNE 4. 1991
Mr. Chairman, Secretary General Paye, distinguished
delegates.
We meet today at a time of unique challenge and opportunity
for the world economy.
The new democracies of Eastern Europe are pushing ahead with
courageous reforms, and making real progress toward economic
revival and self-sustaining growth.
In Czechoslovakia, Hungary
and Poland, great strides have been made in privatization and
market-oriented legal and regulatory reforms, the cornerstones of
a successful shift to free enterprise.
Far-reaching reforms are
also taking hold elsewhere, particularly in Latin America.
Nevertheless, the path has not been an easy one.
In many
cases the dislocations have been larger than we had hoped and
some of the economic benefits more elusive.
The historic transition now underway cannot succeed without
the effective support of the OECD community.
It is more
important than ever that we do what we must to meet the
challenges arising from changes we ourselves worked so hard to
promote.
The single greatest contribution we can make, both
individually and collectively, is to ensure a favorable global
economic environment.
Solid, sustained growth in the industrial
countries is the most effective way to create the market
opportunities needed to support economic development and reform
in Eastern Europe.
After all, that is the opportunity we held
open to the emerging democracies.
And solid growth is no less
important for meeting our own domestic challenges.
NB-1328
Yet we see real grounds for concern on this score.
At last
year's meeting we expected OECD economic growth in the 3 percent
range in 1991.
Now it seems more likely to be only about 1-1/2
percent.
While the general expectation is that a broad recovery
will get underway this year, particularly in the United States,
uncertainties nevertheless remain about its strength and timing.
During last year's meeting there was particular concern
about the risk of higher inflation.
But with prolonged monetary
restraint and slower growth, inflation rates are now receding on
a broad front.
In the United States, for example, consumer
prices have risen at an annual rate of only about 2 percent since
January.
This is a welcome trend, and offers support for the
OECD's latest forecast of average G-7 inflation falling to under
4 percent by the end of this year.
The current circumstances therefore argue for a balanced
approach, one that recognizes the need for continued vigilance on
the inflation front but emphasizes a dynamic forward-looking
strategy that gives emerging democracies the hope that, if they
stay the course, they will create the solid and durable market
based economies they promised to their peoples.
A broad-based approach can respect the different
circumstances in our countries.
Such a strategy could combine
several elements.
First, we must understand that the dynamism and hope we
seek, require macroeconomic policies to encourage growth along a
steady and sustainable path.
In the United States, for example,
interest rates have been reduced without contributing to
inflation expectations.
Against the background of slowing
growth, declining inflation, and shifting exchange rate
considerations in Europe, some countries have seized the
opportunity to reduce interest rates as well.
We also need to ensure that adequate, reasonable priced
capital is available to meet the new investment needs emerging
around the world.
For most of us, this means continued progress
in reducing government budget deficits, the major cause of the
declining national saving rates we have observed over the past
decade.
The United States recognizes its particular responsibilities
on this score.
The Administration is implementing a broad
package of measures that will reduce the federal budget deficit
$500 billion over the medium-term.
Moreover, we expect the
substantial reforms that have been made in the budget process
itself will provide savings for years to come.
We need to persevere in opening up markets for trade in
goods and services, investment and other capital flows.
The
2
quick and successful conclusion of the Uruguay Round deserves top
priority.
And it is time to reach agreement on the National
Treatment Instrument.
Over the past forty years, our expanding
global trading system has shown itself to be a powerful stimulus
to both growth and efficiency in the industrial countries.
We
need to ensure that the system provides the same opportunities to
Eastern Europe and the developing countries.
We also need to look for ways to provide Eastern Europe with
the fullest possible access to our markets and to avoid
undercutting them in third markets through credit arrangements.
The collapse of the Soviet market and the shift to hard-currency
pricing makes the need for action especially compelling at this
time.
If this means rethinking long-standing protection for
sheltered sectors, and I believe it does, then now is the time to
do it.
If it means practical marketing assistance to help them
become competitors, and I believe it will, then we should not
hesitate.
Finally, we are urging reforming countries to build private
markets because we know they provide the foundation for long-term
growth.
Yet at the same time our own economies are rife with
impediments to efficient operation of markets and prices.
Last year I suggested a number of areas where policy
improvements could reduce structural impediments in our economies
that stifle growth and job creation, distort investment flows and
impede trade.
Some progress has been made, but there is ample
room for additional steps to strengthen our own private markets,
and a strong case for moving much more aggressively.
We are all grateful to the OECD for the excellent work it
has done in identifying costly structural rigidities in all of
our economies.
And we are confident that the recent decision to
integrate these issues more systematically into the work of the
Economic Policy Committee will provide additional impetus.
But
in the end it is up to us to make the changes, for our own
benefit and for the benefit of those whose boldness and
determination has been so inspiring.
With its broad membership, responsibilities, and expertise,
the OECD has always provided a useful forum for candid discussion
of key international economic issues.
This Ministerial offers a golden opportunity to reaffirm our
commitment to the success of the great transition now underway,
and to assume concrete responsibility for helping it come about.
Now is the time to translate our shared aspirations for the
future into a dynamic, hopeful forward-looking strategy for
sustained economic growth, development and integration.
####
TREASURY MEWS
Department of the Treasury • Washington, D.C. • Telephone 566*204'
Tun 1 7 3 1 0 0 I 5 5 8
FOR IMMEDIATE RELEASE.
PREPARED FOR DELIVERY
JUNE 5, 1991
.
.
,1
'
CONTACTWfflfeR-SORINI
42-96-05-89
STATEMENT OP RELATIONS WITH NON-MEMBERS
The OECD and its member countries should be pleased by the
growing movement in the world toward our shared belief in
democracy and market economies.
The past decade has seen these
values triumph in the global competition of ideas.
They have
triumphed, not by force, but by the simple accumulation of the
evidence that they provide the most effective organizing
principles for meeting human aspirations for personal liberty and
material wellbeing.
We in the OECD have contributed to this remarkable
transformation by our own success in adopting policies consistent
with these objectives.
The main credit, however, goes to the
individual countries, facing widely different circumstances,
which have independently determined to seek a new path to
economic and political development.
What is now required of us is that we and our Organization
respond effectively to the changes taking place around us.
To do
this the United States believes that the OECD should continue its
flexible approach to links with countries committed to OECD
values and prepared to make a meaningful contribution to the
OECD's work, in particular countries which are likely to be
candidates for membership in the near future.
Of course, we need
to preserve the essential character of the Organization as a
forum for consultation and cooperation among industrial countries
and as a locus for liberalization efforts.
We have been joined at this meeting by representatives of
Poland, Czechoslovakia and Hungary.
Their presence is a dramatic
affirmation of the power of the ideas that the OECD embodies.
The United States is pleased to join in welcoming these "Partners
in Transition".
We hope that the Partners in Transition program
will make easier these countries' economic transformation and
adoption of OECD obligations so that they can become full members
of the OECD.
In particular, we look for early progress and the
involvement of the Partners in OECD work aimed at eliminating
barriers to trade and investment.
MB-132.9.
2
The Dynamic Asian Economies have used the open international
trading system over the past thirty years to make a dramatic
advance in economic terms.
They, too, now face a transition as 31
their societies and economies mature.
An expanded role for
market forces will facilitate that transition.
Here, we hope the
OECD's ongoing dialogue with these economies will help lead them
to implement policies consistent with OECD obligations, and to
assist the transition of others.
In particular, we welcome indications that Korea may seek to
develop closer ties with the OECD and urge that Korea implement
policies consistent with the principles of the OECD and its
growing role and responsibilities in the World economy.
The recent changes in Mexico are leading to a major economic
transition.
Consistent with Mexico's effort to reverse half a
century of statist, interventionist economic policies, Mexico has
expressed an interest in closer links with certain OECD bodies.
Its effort to be associated with those activities involving the
Organization's trade and investment liberalization principles
will help foster Mexico's own efforts.
We hope that other Latin
American countries will succeed in implementing similarly
thorough going economic reform programs.
Now I would like to turn to Ambassador Hills for a brief
additional comment.
THE SECRETARY OF THE T R E A S U R Y
V H v^ K I N G T O N
June 7, 1991
The Honorable Dan Quayle
President of the Senate
Washington, D.C. 20510-0010
Dear Mr. President:
I am pleased to transmit the Treasury Department's 1991
report on intermarket coordination, as required by section 8(a)
of the Market Reform Act of 1990.
As the report indicates, much has been accomplished
through the efforts of the Working Group on Financial Markets,
the individual agencies, and private market participants to
address the issues most critical to intermarket stability.
The absence of federal oversight of margins on stock
index futures remains the most crucial issue affecting systemic
stability.
Title III of the Senate-approved bill to reauthorize
the Commodity Futures Trading Commission (H. R. 707) would assign
broad authority for setting margin levels for stock index futures
to the Federal Reserve Board to preserve the financial integrity
of futures markets and to prevent systemic risk.
The Federal
Reserve would have the authority to harmonize margins across
equity-related markets because it already has ultimate margin
authority over stocks and stock options.
This provision
represents a critical step towards promoting intermarket
stability, and I strongly urge that it be supported in the
upcoming House-Senate conference.
I look forward to continued progress on intermarket
issues.
Sincerely,
Acting Secretary
Enclosure
THE SECRETARY OF THE TREA S U R Y
WASHINGTON
June 7, 1991
The Honorable Thomas S. Foley
Speaker of the House of
Representatives
U.S. House of Representatives
Washington, D.C. 20515-6501
Dear Mr. Speaker:
I
am pleased to transmit the Treasury Department's 1991
report on intermarket coordination, as required by section 8(a)
of the Market Reform Act of 1990.
As the report indicates, much has been accomplished
through the efforts of the Working Group on Financial Markets,
the individual agencies, and private market participants to
address the issues most critical to intermarket stability.
The absence of federal oversight of margins on stock
index futures remains the most crucial issue affecting systemic
stability.
Title III of the Senate-approved bill to reauthorize
the Commodity Futures Trading Commission (H. R. 707) would assign
broad authority for setting margin levels for stock index futures
to the Federal Reserve Board to preserve the financial integrity
of futures markets and to prevent systemic risk.
The Federal
Reserve would have the authority to harmonize margins across
equity-related markets because it already has ultimate margin
authority over stocks and stock options.
This provision
represents a critical step towards promoting intermarket
stability, and I strongly urge that it be supported in the
upcoming House-Senate conference.
I look forward to continued progress on intermarket
issues.
Sincerely,
Acting Secretary
Enclosure
1991 Treasury Department Report on Intermarket Coordination
INTRODUCTION
A.
The Problem of Major Market Disruptions
Four times in the past four years the stock market has
plunged dramatically for no apparent reason:
October 19, 1987 —
22.6 percent, October 26, 1987 — 8.0 percent, January 8, 1988 —
6.9 percent, and October 13, 1989 — 6.9 percent.
In October
1987 the Dow Jones Industrial Average (DJIA) lost almost a third
of its value — $1.0 trillion — in just four days.
This
included the one-day drop of 508 points on October 19 — the
largest recorded amount since the DJIA began computing index
numbers in 1885.
The very real prospect of clearinghouse
failures in the wake of this crash led to a crisis of confidence
that brought the system to the brink of breakdown.
On Friday, October 13, 1989, the DJIA fell 191 points.
Almost 90 percent of the drop occurred in the last 90 minutes of
trading, supposedly triggered by news of a failed takeover
attempt for a single company.
The following Monday, October 16,
the market lost 63 points in the first 40 minutes of trading,
then sharply rebounded to close 88 points up on the day.
In each of these episodes, minor, even untraceable, events
appear to have triggered precipitous, violent market declines.
Each episode occurred in the last four years, when stock index
futures have been actively trading in large volumes.
Each
episode shared the characteristic of enormous selling pressure
from stock index futures markets flowing over to the stock
market.
And each episode constituted a major market disruption,
a period when the markets for stocks and stock index futures
disconnect with prices spiralling down.
There now is general agreement that stocks, stock options,
^nd stock index futures are "one market", linked together by
electronics.
Movements in the price of stock index futures are
translated almost immediately to stock prices through index
arbitrage, and vice versa.
This was the conclusion of the 1987
Task Force on Market Mechanisms (Task Force), chaired by
Secretary Brady, and essentially no one has disputed it.
The
Task Force also concluded that the interaction of trading in
stock and stock index futures in the "one market" is a major
cause of market disruptions.
Unfortunately, the disjointed
regulation of stocks and stock derivative instruments has not
kept pace with this reality, failing to develop the "one market"
tools that are needed to deal with these market disruptions.
Until intermarket mechanisms are harmonized to conform to the
reality of the "one market", U.S. financial markets will continue
to be at risk of disruption and instability.
B.
Role of the Treasury Department
For the most part the Treasury Department does not have
direct rulemaking or oversight authority with respect to
intermarket issues.
The Treasury's role with regard to
intermarket coordination has been essentially twofold:
(1) to
closely monitor financial market developments, promote better
communication and coordination among agencies, and strive through
the Working Group on Financial Markets to correct market
weaknesses; and (2) to develop legislation as needed to address
these issues.
Accordingly, this report focuses on Treasury's
roles in coordinating the Working Group and developing
legislative policy.
Specific agency actions are not discussed in
detail, but instead are incorporated by reference from the other
agency reports.
In 1989 the Treasury was assigned leadership of the Working
Group on Financial Markets with Senator Brady as chairman.
The
Working Group has created a process for dialogue, coordination,
and cooperation that has continued during this Administration.
We are generally pleased with the progress the Working Group has
made.
Indeed, through the constructive actions of market
participants, regulators/ and self-regulatory organizations, the
Working Group has accomplished much of what was advocated by the
Task Force.
The Working Group initially focused on the
significant suggestions of the Task Force and others that could
be accomplished immediately to substantially lessen possible
systemic dangers to the U.S. financial system if we were again to
encounter a severe market decline.
Most importantly, the Working Group has endorsed the Task
Force's fundamental premise — that the markets for stocks, stock
options, and stock index futures are linked as one market.
Recognition of the "one market" is the foundation upon which
intermarket coordination, and interagency cooperation, ultimately
depend.
Within the past year, the Working Group process was largely
subsumed by the Administration's ambitious legislative program
for intermarket issues.
Although there were no formal meetings
of the Working Group, the Working Group was in close
communication at both the principal and staff levels.
C.
"The Capital Markets Competition. Stability and
Fairness Act of 1990"
In June 1990, the Administration and the Securities and
Exchange Commission (SEC), having concluded that regulatory
fragmentation was the fundamental problem underlying market
instability, proposed S. 2814, "The Capital Markets Competition,
Stability and Fairness Act of 1990".
Based partly on
3
recommendations developed by the Task Force in its report, this
proposal was Treasury’s primary legislative initiative relating
to those issues.
The bill contained three key provisions designed to address
the regulatory structure for stocks and stock index futures.
First, it would have transferred authority to regulate stock
index futures from the Commodity Futures Trading Commission
(CFTC) to the SEC, but in a manner specifically designed to
create the least disruption to market participants.
Second, it
would have provided federal oversight authority over the ability
of futures markets to set margins on stock index futures — not
to prevent volatility, but to safeguard-the financial system.
Third, the bill would have modified the ’’exclusivity clause" of
the Commodity Exchange Act to end costly and anticompetitive
legal disputes over what constitutes a "futures contract."
Unfortunately, opponents of these far-reaching changes
managed to block consideration of the bill in the last Congress,
and the stalemate appeared likely to continue in the 102nd
Congress.
As a result, S. 2814 was superseded by new Title III
of the CFTC reauthorization bill, discussed below.
D.
Title III of the Senate-Approved CFTC Reauthorization
Bill
As a result of the stalemate over S. 2814, the
Administration decided that a separate initiative was needed to
break the logjam, especially given the crucial need for
harmonized federal oversight of margins to avoid financial market
disruptions.
Accordingly, in March 1991 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.
On April 18, 1991, the Senate adopted the
compromise with one amendment as Title III of S. 207 (now H.R.
707) .
As discussed more fully in the following section of this
report, Title III would grant the Federal Reserve 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 from
the Commodity Exchange Act in the public interest, and it would
be directed to exempt certain swaps if not contrary to the public
interest.
Unlike the Administration's original 1990 proposal,
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.
Under the Senate-approved bill, certain deposit- and loan-based
hybrid instruments would be excluded from the Commodity Exchange
Act, rather than the mandatory exemption for certain deposits the
4
Treasury had proposed and the Senate Agriculture Committee
adopted.
While 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.
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 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 Title III.
I.
VIEWS ON THE ADEQUACY OP MARGIN LEVELS AND THE USE OF
LEVERAGE BY MARKET PARTICIPANTS
A.
The Problem of Unharmonized Margins
Four years have passed since the 1987 market break, and
critical intermarket legislation has yet to be enacted,
particularly in the crucial area of margins.
Meanwhile, as
previously discussed, 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.
Both the October 1987 market beak and the October 1989 mini
break demonstrated the need to harmonize margin requirements.
Both times the collapse of futures prices led to a steep decline
of stock prices — and in each case futures margins were much
lower than stock margins.
When a pattern repeats itself, it is
likely to be more than just coincidence.
While there is federal oversight of margins on stocks, there
is virtually none over margins on stock index futures.
The
futures exchanges and their clearinghouses set these futures
margins themselves.
The result is a tremendous disparity in
margin levels on stocks and stock index futures, even though they
are part of one market where margin levels on one instrument can
have a direct impact on the trading and price of the other.
The result has been that futures margins have often dipped
to dangerously low levels.
Indeed, Chairman Greenspan of the
Federal Reserve — the guardian against excessive risk to the
financial system — has expressed strong concerns about the low
level of stock index futures margins prior to the mini-crash in
October 1989.
In 1987, the Task Force recommended harmonized margin
requirements, and after October 1987 the futures exchanges
substantially increased them.
As a result, the Working Group
concluded that increased margins in 1988 were sufficient for
5
prudential purposes.
But by the October 13, 1989 mini-break, the
futures markets had reduced margins to levels even lower than
before the 1987 collapse, and far lower than margins in the stock
market.
This continuing lack of consistency raises fundamental
questions.
Even though the futures exchanges set margins that
may well be adequate to protect their own markets, there are
broader issues to be considered.
Futures margins obviously affect futures trading and,
because the futures market and stock market are linked as one
market, futures margins have a direct and material impact on
trading in the stock market.
Low futures margins indirectly
permit high leveraging in stocks.
This leverage creates the
potential for extreme volatility, starting in the futures market
and washing back to the stock market.
The resulting financial
exposure cannot be confined to a single market, and can spread
quickly to affect the entire financial system.
Because margin requirements affect intermarket risk, there
is a public interest involved beyond the private interest of the
exchanges.
Over 50 years ago the government made a determination
to establish minimum margins in the stock market.
Now that it
has been established that futures trading affects the stock
market, futures margins should bear the same public scrutiny.
It
makes no sense to allow participants in what is one market to
control far more stock with a low down payment in the futures
market than they could purchase directly in the stock market.
It
is not good public policy to allow the private exchange of one
market to set margins affecting the whole system.
A consequence of low futures margins is that during market
downdrafts, when the system is most in need of liquidity, futures
exchanges are forced to restrict liquidity through increased
margin requirements.
This is precisely the opposite of what
should occur:
during emergencies it is critical to pump
liquidity into the system.
Those who try to dismiss the need for federal oversight of
margins on stock index futures by claiming that margins are
unrelated to volatility simply miss the point.
The relevant
concern is major market disruptions and how to slow them down
when the tidal wave starts to form — not volatility.
The Federal Reserve Board agrees with the need for federal
oversight of margins on stock index futures to limit systemic
risks.
Indeed no persuasive argument has been advanced against
federal oversight — we must have it where the actions of private
market participants in a narrow segment of the market create
risks for the financial system as a whole.
It is a dangerous
practice that is not in the public interest.
Congress ought to
6
address this unjustified anomaly, and we believe T i t i 2 III of the
Senate-approved CFTC reauthorization bill is a timely and
appropriate approach to doing so.
B.
Title III of the Senate-Approved CFTC Reauthorization
Bill
The provision in Title III of the Senate-approved CFTC
reauthorization bill assigning broad margin authority over stock
index futures to the Federal Reserve represents a critical step
toward promoting intermarket stability.
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 Federal Reserve in its judgement 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 Federal Reserve 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
already has ultimate margin authority over stocks and stock
options.
Congress now has an opportunity to make a significant
contribution to the stability and competitiveness of U.S.
financial markets.
We believe this is a crucial time to move
forward with legislation that will lessen the likelihood and
consequences of another market break like October 1987.
7
II.
EFFORTS RELATING TO THE COORDINATION OP REGULATORY
A C T IV IT IE S TO ENSURE THE INTEGRITY AND COMPETITIVENESS OF
U .S . MARKETS
A.
Market Integrity Initiatives
1.
Circuit Breakers
Background
One of the primary recommendations of the Task Force report
was the adoption of circuit breaker mechanisms, such as price
limits and coordinated trading halts, to protect to market
system.
The Working Group's 1988 Interim Report recommended a
one-hour trading halt for equity and equity-related products if
the DJIA declines 250 points from the previous day's closing
level and a two-hour closing if the DJIA declines 400 points
below its previous day's close.
The Working Group also
recommended that the New York Stock Exchange (NYSE) use reopening
procedures, similar to those used on so-called Expiration
Fridays, designed to enhance the information made public about
market conditions.
Following the Working Group's recommendations, the
securities and futures industries adopted several types of
circuit breakers, including one- and two-hour trading halts.
In
addition, the NYSE and Chicago Mercantile Exchange (CME)
developed "side car" procedures whereby, if the S&P 500 future
traded on the CME falls by a certain amount (currently 12
points), the futures contract price is not permitted to fall
further for 30 minutes and program trading orders on the NYSE are
automatically routed into a separate file for delayed matching
and execution.
In June 1990, the NYSE released the results of a six month
study by a broad-based, blue-ribbon advisory committee — the
Panel on Market Volatility and Investor Confidence.
The panel
recommended new and stronger circuit breakers to halt equityrelated trading in all domestic markets when the market is under
pressure.
Specifically, the panel proposed a one-hour halt when
the DJIA moves 100 points from the previous day's close, a 90
minute halt at 200 points, and a two-hour halt at 300 points.
The CME and Chicago Board of Trade (CBOT) later proposed to
revised their circuit breakers to conform to the NYSE panel's
recommendation, but they withdrew their proposals when it became
apparent that the NYSE was not moving toward adoption of the
p a n e l 's recommendation.
In July 1990 the SEC approved an amendment to NYSE rule 80A
requiring that index arbitrage sell orders for any component
stock of the S&P 500 index be entered only on a plus or zero plus
tick and, conversely, that buy orders be entered only on a minus
8
or zero minus tick, when the DJIA moves down 50 points or more
from the previous day's close.
When the one—year pilot program
expires in July 1991, the NYSE intends to seek reapproval from
the SEC.
The Market Reform Act of 1990, which the President signed
into law on October 16, 1990, clarified and broadened the
authority of the SEC to suspend trading and take certain other
temporary action during market emergencies.* The Act clarifies
the SEC's ability to halt trading, market-wide, during a major
market disturbance, provided the President does not object to the
action.
In addition, it provides the SEC with authority to take
other temporary emergency action if there is a "major market
disturbance".
Finally, the SEC's rule 10a-l, adopted in 1938, prohibits
traders from selling stock short when the price is falling.
From
time to time the SEC has been urged to reconsider the rule, but
the Commission is not expected to abolish it in the immediate
future.
Discussion
To be effective, circuit breakers must be preestablished,
coordinated, and triggered infrequently.
By establishing them in
advance of the time they are needed, we minimize the panic that
can occur from ad hoc circuit breakers.
By coordinating them
between markets, we avoid the risk that a trading halt in one
market might disconnect prices from a related market and thereby
exacerbate volatility rather than dampen it.
By having them
apply only in real emergencies, we ensure that the markets stay
open to the maximum extent possible.
In short, circuit breakers
should be considered catastrophe insurance, not a prepaid medical
plan.
Some progress has been made to coordinate circuit breakers
in stock and stock index futures markets, and discussions are
continuing within the Working Group.
Nevertheless, more can be
done, and fundamental disagreements continue to exist between
markets and their regulators over the appropriate kinds of
circuit breakers.
The Working Group has formed a staff subgroup on circuit
breakers which is reviewing the timing of release of important
government economic data on days when contracts for equities,
options, and futures expire -- the so-called triple—and doublewitching days.
The subgroup also analyzed the regulators' review
of the performance of circuit breakers during the October 1989
mini—break, and an ongoing objective is whether circuit breakers
need to be simplified and whether triggers should be adjusted and
better coordinated.
9
Circuit breakers appeared to work reasonably well on
October 13, 1989, when the DJIA fell 191 points.
As in 1987, the
futures market led the other markets down, but this time circuit
breakers were triggered twice.
(The intervening weekend between
October 13th and 16th also proved to be a fortuitous form of
circuit beaker.)
The preestablished circuit breakers seemed to
perform as designed: to allow the human mind to catch up with the
speed of technology and to give markets some time-out to help
them adjust to massive demands concentrated in short periods of
time.
The markets' performance on October 13th raised some
questions about the need for better coordination, particularly
with regard to the 12-point price limit on the Chicago Mercantile
Exchange.
The Merc's 12-point "shock absorber" is designed to
slow down a market decline before trading halts in the stock and
futures markets are triggered at roughly 250 Dow points.
Unfortunately, when the 12-point shock absorber,is triggered in
the futures market, selling pressure can be transferred to the
stock markets, which are still open.
Day limits on the futures exchanges also provide a mechanism
to allow the markets to adjust in the case of an extraordinary
market freefall.
The futures markets provide instant liquidity,
but not infinite liquidity.
Day limits institutionalize this
fact.
We applaud the recent progress that the futures exchanges
have made in this area.
Regarding NYSE rule 80A, we have had some concerns about the
uncoordinated nature of the buy-minus, sell-plus rule and the
possible need to set the triggers at higher levels.
Nevertheless, the rule seems to have worked reasonably well so
far (it has been triggered at least 27 times).
We have no
objection to extending it when it expires this July.
With respect to the short selling restrictions under SEC
rule I0a-1, we have concerns about the possible evasion of these
restrictions due to the absence of an intermarket perspective.
The purpose of these restrictions is to prevent "gunning" the
market, an attempt to drive down prices through short selling in
the hope of panicking small investors.
However, a concerted
effort in the futures market could undermine the short selling
restriction and potentially be used to accelerate a stock market
downdraft.
Obviously, the rule could not apply directly to sales
in the stock index futures market.
But with futures and stocks
linked through index arbitrage and other mechanisms, the effect
of the rule may have been substantially undermined.
We believe
it is important to harmonize these intermarket rules to prevent
manipulators from using one market to evade restrictions in
another market.
2
.
Intermarket Frontrunninc Agreements and Financial
Surveillance
Vigorous action against problems of intermarket frontrunning
and market manipulation is essential.
Along with the benefits of
new products, technologies, and trading strategies have come
increased opportunities for abuse by market professionals and
insiders.
These abuses have hidden economic costs in addition to
their more obvious effect on smaller individual and institutional
investors who come to believe that the rules are rigged against
them.
It is in the best interest of all investors concerned that
the problems of frontrunning and market manipulation be resolved
quickly and effectively by the agencies and self-regulatory
organizations.
Such action is crucial if we are to take
seriously the charge that markets are rigged to the disadvantage
of small investors.
Some progress has been made.
The NYSE and CME have
developed a definition of intermarket frontrunning, which
involves executing an order in one market based on prior
knowledge of an order in another market.
In 1988 the CFTC
approved the CME's circular, and in 1989 the SEC approved a NYSE
rule aimed at banning intermarket in frontrunning.
Coordinated surveillance and information sharing also is
helping.
In 1981 the self-regulatory organizations formed an
Intermarket Surveillance Group (ISG) to facilitate information
sharing and coordination of intermarket surveillance activities.
One of the ISG's major purposes is to provide a check against
intermarket frontrunning.
The Market Reform Act contains a large trader reporting
requirement to facilitate SEC surveillance and enforcement,
including curbing intermarket front-running and market
manipulation.
This provision made the SEC's authority in this
area more comparable to the CFTC's.
As explained in the Task
Force report, the 1987 market break illustrated the need for a
trading information system incorporating the trade, time of
trade, and name of the ultimate customer, in every major market
segment.
This is critical, the Task Force believed, to assess
the nature and cause of a market crisis to determine who bought
and sold.
This information can be used to diagnose developing
problems as well as to uncover potentially damaging abuses.
The pending CFTC reauthorization legislation contains
important reforms that will enhance detection and prevention of
intermarket trading abuses.
Enhanced audit trail procedures,
restrictions on dual trading and other abuses, and strengthened
enforcement authority and civil and criminal penalties should
significantly improve the government's ability to prevent
11
frontrunning and manipulation abuses.
these provisions.
We support the thrust of
B.
Domestic Coordination and Information Sharing
1.
Intermarket Coordination and Information Sharing
In addition to regulatory coordination through the Working
Group, one of Treasury's primary roles has been to coordinate
with other agencies during potential market difficulties.
Examples include the recent collapse of Drexel Burnham Lambert,
Inc. and the Persian Gulf crisis.
In each instance, Treasury
officials monitored developments closely, were in frequent
communication with other financial agencies, and helped to
coordinate governmental action and contingency responses in the
event of market turmoil.
2.
Government Securities Act of 19.86
An important result of the regulations implementing the
Government Securities Act of 1986 (GSA) has been the extensive
cooperation and coordination that has been fostered among the
Treasury, SEC, Federal Reserve Board, other financial institution
regulatory agencies, and the self-regulatory organizations (SROs)
such as the National Association of Securities Dealers (NASD).
While the GSA requires that Treasury consult with the SEC and the
Federal Reserve during the regulatory process, Treasury has taken
the view that consultation is beneficial during more than just
rulemaking periods and should not be limited to the SEC and the
Federal Reserve, but should include all appropriate regulatory
agencies and market participants when relevant.
In developing proposed regulatory initiatives, in providing
clarifications of the regulations, and in responding to requests
for interpretation of and exemptions from the GSA rules, Treasury
is extremely sensitive to the need for effective coordination
with the SEC and other regulatory agencies.
In particular,
Treasury, through consultation, is able to obtain the benefit of
expertise developed by these agencies, which is helpful in
developing appropriate responses to inquiries and requests,
determining the impact of proposed actions on the government
securities market and its participants, and avoiding duplicative
or conflicting requirements.
This coordination and consultation
is not limited to the appropriate regulatory agencies but also
includes the SROs such as the NASD.
To enhance coordination,
Treasury has established a quarterly meeting cycle with staff of
the SEC and the NASD to address market developments, to discuss
current topics, and to update each other on their respective
regulatory initiatives.
Additionally, Treasury periodically
solicits feedback from the various financial institution
regulators, although the volume and variety of issues involving
12
each of them do not lend themselves to a regular quarterly
meeting.
Treasury believes it is especially important in the
continuing implementation and fine-tuning of the regulations to
gather information on the current status of market practices and
the types of regulatory violations that have occurred.
In order
to facilitate this data collection process, the GSA provides
express authorization for the sharing of information between the
various regulatory agencies and Treasury.
This statutory
authority is important because each of the regulatory agencies is
subject to certain restrictions on the release of information,
especially relating to examinations, and this provision
eliminates uncertainty regarding the legality of sharing
information.
The exchanges of information have been useful in
identifying needed clarifications of or changes to the
regulations, since Treasury does not conduct compliance
examinations and is removed from first-hand knowledge of the
internal practices of government securities market participants.
To aid in the collection of this information, Treasury is
continually working with the appropriate regulatory agencies to
develop and improve a regular reporting structure for them to
provide summary information of regulatory violations and
enforcement actions to Treasury.
Because SROs perform the examinations of brokers and dealers
subject to the SEC's jurisdiction, they also are an important
source of information.
The NASD is the SRO for all of the
government securities brokers and dealers that registered
pursuant to the GSA.
Accordingly, Treasury and the SEC have
included representatives of the NASD at their quarterly meetings
to take advantage of the NASD's knowledge about the state of the
government securities market.
The NASD has also been
instrumental in soliciting the comments and reactions of its
membership on new regulatory initiatives and the impact of new
market practices.
This type of feedback has been useful in
identifying areas that warrant attention and the proper focus of
any regulatory action.
Members of the Treasury and SEC staffs
have participated in NASD educational seminars, which have helped
all registered government securities brokers and dealers to
become equally familiar with the regulations.
The need for coordination is even more significant with
respect to the financial institution regulators.
Although the
rules that each is enforcing are similar, the possibility exists
for different levels of understanding of those rules and varied
enforcement activity by each agency.
To date, these problems
have been avoided by the active involvement of all regulators on
major issues.
Typically, either Treasury or a regulator raises
an issue to the attention of the other.
Treasury, in turn,
submits it for the consideration of the other regulators.
After
the issue is thoroughly discussed, including the possible
13
outcomes and impacts, Treasury will issue either formal or
informal guidance to the agencies as to the appropriate way to
view the regulatory requirement.
The frequently informal nature of the consultation and
coordination between Treasury and the other agencies, combined
with the vast pool of expertise at each institution, has provided
market participants with the comfort that all participants will
be treated in an equitable manner.
The need for equal treatment,
to avoid the creation of competitive disadvantages, will become
increasingly critical as the legal and operational barriers
separating the businesses of the different government securities
market players become less significant.
Balanced treatment of
all market participants provides investors in the government
securities market with a wide choice of market professionals with
which to conduct business without any trade-offs involving
customer protection.
C.
International Coordination
The Task Force concluded that our domestic securities and
derivative markets are so* closely linked as to constitute one
market requiring coordinated policies and procedures.
Although
the world's securities and derivative markets are unified in only
some respects, the evidence of their close linkages and
interdependence has grown dramatically.
The rapid expansion of global securities markets suggests
that we should consider the interrelationship among markets on a
global scale.
To that end, the Working Group has established a
subgroup to identify particular issues where an international and
intermarket approach would be useful.
Issues where an international policy coordination might be
useful include clearance and settlement operations, coordination
in emergencies, enforcement, and capital adequacy standards.
The purpose should not be to impose burdensome new
regulations around the world.
Instead, we should move towards
harmonized regulation that will make markets more competitive and
efficient.
Another area where more progress could be made is in
establishing electronic links with foreign markets.
Progress in
new technologies is important to the competitiveness of U.S.
markets.
We need to clarify the kinds of electronic links we are
going to use domestically and make them operational in a more
unified manner.
The CME's development of Globex is an important
step in this direction.
In addition, the CFTC reauthorization
legislation contains provisions promoting the development of
electronic futures trading.
Section IV of this report describes in more detail the
Treasury's efforts to promote global coordination.
III. EFFORTS HADE TO FORMULATE COORDINATION MECHANISMS ACROSS
MARKETPLACES TO PROTECT THE PAYMENTS AND CLEARANCE AND
SETTLEMENT SYSTEMS DURING MARKET EMERGENCIES
A.
Coordination of Clearance and Settlement Systems Across
Markets
1.
Background
The most disturbing consequence of major market disruptions
is the risk they pose to the entire financial system, especially
through the clearance and settlement process.
For example, after
the October 1987 break, the clearance and settlement system fell
over six hours behind its normal payment times, with over $1.5
billion owed to investment houses.
Had these funds been missing
for any significantly longer time, it could have unleashed a
chain reaction of events spreading losses through the payments
system.
The Task Force concluded that the prospect of clearinghouse
failures reduced the willingness of lenders to finance market
participants, leading to "a crisis of confidence [that] raised
the specter of a full-scale financial system breakdown."
To
reduce the possibility of financial gridlock and the attendant
risk to the financial system, the Task Force recommended that
clearing for stocks, stock options, and stock index futures be
unified through a single mechanism.
This was later clarified to
mean not necessarily a single centralized clearinghouse, but
rather coordinated mechanisms to facilitate safe and efficient
clearance and settlement.
The Working Group reviewed existing clearing, payment and
settlement systems to identify and set priorities for measures to
reduce uncertainty, increase coordination, assure confidence in
the integrity of such systems, and facilitate their smooth
operation in volatile markets.
In the Working Group's
Interim Report it proposed an agenda of specific actions in the
following areas, among others:
o
Facilitation of timely payments. Several features of
existing clearance and settlement systems relevant to
payment capacity can be enhanced to facilitate the
timely satisfaction of payment obligations, including
increased Fedwire availability in highly volatile
markets, and coordination of timely information
concerning payment obligations and cash flows.
o
Exploration of methods to simplify settlement systems.
This would include a cross-margining pilot program for
15
non-customer accounts in options and futures, and
consideration of specific initiatives to reduce cash
transfers, simplify settlements systems, and unify
clearing.
o
Refinement of relevant legal frameworks. It is
important to harmonize transfer, delivery and pledge
requirements for options and uncertificated securities
and to better coordinate bankruptcy protection for
securities and commodity brokers.
In an April 1990 report, Clearance and Settlement Reform;
The Stock. Options, and Futures Markets are Still at Risk, the
General Accounting Office recommended that the Treasury, through
the Working Group, make the following improvements in the
clearance and settlement process:
(1)
Ensure that a routine intermarket information sharing
system is developed and used to assess the intermarket
risks posed by joint members.
(2)
Ensure that studies exploring ways to lessen
intermarket cash flow pressures and to simplify
intermarket clearing without diminishing safeguards
against financial risk are completed and acted on
appropriately (as also proposed in the Working Group's
Interim Report) .
The Secretary, working with other members of the Working Group as
well as the exchanges and their clearing organizations, should
identify responsibilities, assign tasks, and set time frames for
accomplishing these recommendations.
As previously noted, most of the Working Group's efforts
during the past year have focused on the legislative agenda.
This is also true of the Treasury Department, which has sought
legislation unifying regulation of the "one market" to address
intermarket concerns.
In addition, Treasury helped to develop
and strongly supported the Market Reform Act of 1990, which we
expect will be of far-reaching importance for coordinated
clearance and settlement.
In addition to legislative efforts, considerable progress on
clearance and settlement issues, including the two
recommendations made by the GAO, has been made through the
Working Group.
Progress on these issues is discussed in detail
in the separate reports of the SEC, the CFTC, and the Federal
Reserve.
Efforts to improve clearance and settlement are an
ongoing responsibility of the Working Group and its constituent
agencies.
Although much has been accomplished, the job is far
from complete.
16
2.
The Market Reform Act of 1990
The Market Reform Act should expedite further improvements
in the clearance and settlement process.
The Act directs the SEC
to facilitate the establishment of linked or coordinated
facilities for clearance and settlement of transactions in
securities, securities options, futures contracts, and commodity
options.
The Act does not mandate any particular clearance or
settlement system structure, but leaves it to the discretion of
the SEC to promulgate rules, having due regard for the public
interest, the protection of investors, the safeguarding of
securities and funds, and the maintenance of fair competition.
The issues raised by clearance and settlement procedures cross
regulatory boundaries, and the legislation therefore directs the
SEC to consult with the CFTC and the Federal Reserve.
The October 1987 market crash demonstrated that the lack of
uniformity and clarity among state laws governing the transfer
and pledging of securities also adversely affects liquidity in
clearance and settlement systems.
The Act establishes a
framework through which the SEC could promulgate rules applicable
to the transfer and pledging of securities, notwithstanding state
laws.
The Commission must consult with the Secretary of the
Treasury and the Federal Reserve, and it must consider the
recommendations of a 15—member advisory committee appointed by
the SEC, Federal Reserve, and the Treasury.
The Advisory
Committee has been formally established, the selection of its
members is proceeding, and we anticipate that the Advisory
Committee will issue its report to the SEC, Treasury and Federal
Reserve within six months of its designation, as required by the
Act.
The Market Reform Act also contains provisions intended to
provide the SEC with information necessary to assess the overall
financial exposure of broker-dealer holding company systems.
The
Act provides the SEC with specific authority to obtain
information regarding certain activities of broker-dealer holding
company affiliates that are reasonably likely to have a material
impact on the financial and operational condition of brokerdealers under the SEC's jurisdiction.
This authority is designed
to provide the SEC with "early warning" of potential problems and
thus will assist the SEC in its efforts to protect the stability
of broker-dealer participants in the marketplace, as well as the
investing public.
3.
Group of Thirty
Improvement of global clearing and settlement also is being
addressed by the Group of Thirty, an independent, non-profit
organization representing business and financial organizations of
30 developed countries.
In 1989 the Group of Thirty issued a
report — Clearance and Settlement Systems in the World's
17
Securities Markets — that made a number of recommendations
designed to maximize the efficiency and reduce the cost of
clearance and settlement, and thereby reduce risk.
Three of these recommendations are particularly noteworthy:
to adopt a universal book entry system, to move toward a T+3
trade settlement, and to adopt a same-day funds convention.
Progress is being made, and the Group of Thirty recently released
a status report for individual countries as of year-end 1990.
These improvements will help to harmonize the world's
securities markets, reduce risks, and lower costs.
On balance,
we believe they will benefit investors, the securities industry,
and the financial system as a whole.
We commend the U.S. Working
Group of the Group of Thirty for its efforts to evaluate and now
implement these recommendations.
The proposals are an example of the private sector
responding to a perceived need by taking corrective action
itself.
We believe this is the best approach.
To the extent
governmental approvals are needed, we hope regulatory and
political obstacles can be minimized.
B.
Reducing Cash Flows and Simplifying Settlement Systems
1.
Cross-Margining
Cross-margining is another area where more progress needs to
be made.
Cross-margining reduces the gross amount of payments
due, and payments owed, by market participants and clearing
houses, thereby reducing the possibility that a counterparty to
the trade may default and relieving some stress to the payments
system.
In addition, cross-margining reduces differences between
pay and collect schedules, and increases the sharing of credit
information between clearinghouses.
Several of the reports on the 1987 market break, including
that of the Task Force and the Working Group's Interim R e p o r t ,
recommended some form of cross-margining. Since that time, two
cross-margining programs have been set up — between the Options
Clearing Corporation/CME and the Options Clearing
Corporation/Board of Trade Clearing Corporation.
IV .
OTHER ISSU ES RELATING TO THE SOUNDNESS, STA BILITY AND
INTEGRITY OF DOMESTIC AND INTERNATIONAL CAPITAL MARKETS
Following the October 1987 market break, the Organization of
Economic Cooperation and Development (OECD) Committee on
Financial Markets in May 1988 held a Special Session of
Securities Markets Experts, who suggested that the OECD could
usefully review systemic risks in securities markets and related
activities and questions.
This meeting brought together
18
representatives of the world* s leading exchanges as well as
regulators, central bankers and finance ministry officials.
Representatives of the U.S. Securities Industry Association,
Investment Company Institute, NYSE, NASD, Chicago Board Options
Exchange and the CME attended for the U.S.
The Chairman of the
Experts' Session was the Director of the Treasury's Office of
International Banking and Portfolio Investment, who also serves
as Vice Chairman of the Committee on Financial Markets.
The OECD Council of Ministers in its communique of May 19,
1988 indicated:
"The Organization will intensify its efforts
to analyze the nature and functioning of the
emerging global financial system and to
identify gaps and inadequacies in the
coverage and co-ordination of prudential
arrangements, especially in the case of
securities markets."
At a meeting in November 1988, the Committee on Financial
Markets set up an Ad Hoc Group of Experts on Securities Markets
under the chairmanship of*a Bank of England official to deal with
this Ministerial mandate and focus in particular on issues
pertaining to systemic risks in securities markets.
The Experts
Group prepared a draft report on Systemic Risk in Securities
Markets.
The Committee on Financial Markets vetted and approved
the report in October 1990.
The OECD Council agreed to the
publication of the report in December 1990.
During the 1989-1990
period when the Report was being prepared, representatives of the
Treasury, SEC and Federal Reserve were involved in the work.
In May 1990, the Committee on Financial Markets published
(in Financial Market Trends) a special article, "Recent Trends in
the Organization and Regulation of Securities Markets."
The
substance of the article was based on the Committee's
discussions; it dealt with, among other matters, maintaining the
stability, safety and soundness of securities markets and the
financial system as a whole.
The OECD is not an operational
body, but it is attempting to serve as a center for international
information exchange on these issues.
In September 1990, the Committee on Financial Markets held
an Experts Meeting on Banking Structure and Regulation, to review
and discuss recent trends in banking activities and regulation
and to assess, as far as possible, future developments.
Representatives of the Office of the Comptroller of the Currency
and Federal Reserve attended.
Treasury's Director of
International Banking and Portfolio Investment served as the Vice
Chairman of the meeting.
Topics included the impact on financial
firms and markets of financial deregulation and trends toward
concentration and formation of financial conglomerates.
- 19 Discussion focused on main issues end trends in banking
regulation.
Finally, the preparation of the Treasury's National
Treatment Study, presented to Congress in December 1990, provided
an opportunity to review the treatment of U.S. banks and
securities firms in foreign markets.
It also included a lengthy
description of the regulatory structure covering foreign
financial firms in the United States and the manner in which they
receive national treatment in the U.S. market.
Where foreign
regulatory practices overseas discriminate against U.S. firms,
these practices were identified.
Æ PUBLIC
DEBT NEWS
Department of the Treasury • Bureau of j
iblic Debt • Washington, DC 20239
tV
ROOM 5 3 1 0
CONTACT: Office of Financing
FOR IMMEDIATE RELEASE
June 17, 1991
liI33100 I9 J2
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
EPT Qp yup
»ASüSi bills to be issued
Tenders for $10,004 million or
June 20, 1991 and to mature September 19, 1991 were
accepted today (CUSIP: 912794XG4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.59%
5.62%
5.61%
Investment
Rate_____
5.76%
5.80%
5.79%
Price
98.587
98.579
98.582
Tenders at the high discount rate were allotted 24%.
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
37,690
26,538,345
28,260
45,900
49,435
26,955
1,903,390
54,475
11,110
39,135
26,750
993,985
634.020
$30,389,450
Accented
37,690
8,179,385
28,260
45,900
49,435
26,955
362,390
14,475
11,110
39,135
26,750
548,985
634.020
$10,004,490
Type
Competitive
Noncompetitive
Subtotal, Public
$26,924,310
1.403.860
$28,328,170
$6,539,350
1.403.860
$7,943,210
1,940,180
1,940,180
121.100
$30,389,450
121.100
$10,004,490
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-133Q
Ÿ
u n , J J/
uu I 3 I g
P U B L IC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-376-4350
FOR IMMEDIATE RELEASE
June 17, 1991
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,020 million of 26-week bills to be issued
June 20, 1991 and to mature December 19, 1991 were
accepted today (CUSIP: 912794WX8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.76%
5.80%
5.79%
Investment
Rate
6.03%
6.07%
6.06%
Price
97.088
97.068
97.073
Tenders at the high discount rate were allotted 17%.
The investment rate is the equivalent coupon-issue yield
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
32,195
21,588,665
18,930
29,005
64,240
34,710
2,331,745
31,505
6,845
39,065
14,475
746,260
482.035
$25,419,675
Accepted
32,195
8,588,465
18,930
29,005
43,490
34,515
400,745
16,505
6,845
39,065
14,475
313,260
482.035
$10,019,530
Type
Competitive
Noncompetitive
Subtotal, Public
$21,199,490
1.127.685
$22,327,175
$5,799,345
1.127.685
$6,927,030
2,300,000
2,300,000
792.500
$25,419,675
792.500
$10,019,530
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1331
EMBARGOED UNTIL GIVEN
EXPECTED 10:00 A.M.
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
June 18, 1991
Chairman Gonzalez, Congressman Wylie, and Members of the
Committee:
It is a pleasure to have the opportunity to comment today on
the companion concepts of the “core bank” and the "wholesale
bank," two proposals suggested for incorporation into the
comprehensive banking legislation your Committee is now
considering.
If adopted, these proposals would fundamentally
alter the traditional business of banking in the United States in
ways that are difficult to forecast but that are potentially
destabilizing.
We are particularly concerned that the core bank
structure could create or aggravate future credit crunches and
otherwise disrupt routine commercial lending activities.
Nevertheless, we recognize that these proposals, despite
their potentially serious problems, are intended to achieve the
same result as the Administration's legislative proposal
safer, more competitive banks.
Indeed, some aspects of the
proposals are merely more extreme versions of proposals included
in the Administration's bill.
As discussed in more detail below,
there may be elements of the core bank proposal that could be
modified in a way that the Administration could support as
improvements to the Committee Print.
Let me say at the outset that we have seen a preliminary
draft of two alternative core bank amendments.
The first would
create core banks only, without providing for wholesale banks;
the second would establish core banks and wholesale banks as
complementary elements of a single banking system.
We understand
we- 133 2.
the text of these drafts is not final, and our observations on
these proposals might change depending on later changes.
In my comments today I will review what we see as the aims
of these proposals? describe the basic structure of the "core
bank" and the "wholesale bank" as we now understand them; and set
out the concerns we believe should be given consideration in any
further examination of this approach.
I should add that our
concerns are somewhat different depending on whether the core
bank amendment is offered alone — which raises serious concerns
about the availability of credit — or in combination with the
wholesale bank, which raises different concerns about spreading
the safety net to new institutions and new activities.
It would
also allow large banks to avoid paying insurance premiums despite
continued access to the federal safety net.
Aims of the Proposals
The basic aims of the core bank and wholesale bank proposals
are the same as those of the Administration's proposal for
banking reform:
to limit the taxpayer's exposure to losses
through the overextended federal "safety net," and to bolster the
safety, soundness, and competitiveness of the U.S. banking
system.
The Administration's banking reform package addresses these
objectives in seven different ways.
These are (1) a reduction in
the overextended scope of deposit insurance, which directly
reduces the taxpayer's exposure and directly increases market
discipline on bank risk? (2) a strengthened role for capital? (3)
direct restrictions on risky bank activities? (4) risk-based
deposit insurance? (5) improved supervision of bank risk,
especially through a new system of prompt corrective action? (6)
nationwide banking and branching, which diversifies geographic
risk and reduces unnecessary costs? and (7) new financial
activities for organizations with well-capitalized banks, which
will improve the overall profitability and competitiveness of the
banking franchise.
This integrated package works straightforwardly to achieve
its goals, and its consequences are well understood.
As you
know, legislation reflecting this proposal is now well-advanced
in the legislative process and has received careful consideration
by the Administration, by regulators, and by a number of
Congressional Committees.
2
The core bank and wholesale bank proposals, however, seek to
achieve the same objectives through a much more radical approach.
They are intended to reduce risk in the system both by using
deposit interest rate controls to significantly limit the amount
of insured funds available to banks, and by severely constraining
the types of activities in which banks will find it practical to
engage.
This extreme approach, described in detail below, is
considerably more speculative and experimental than the
legislation reported out of the Subcommittee on Financial
Institutions.
Core B&nk/Wholes&le Bank Structure
Both of the draft amendments we have reviewed begin by
requiring all insured depository institutions to become "core
banks,” which are described in three simple provisions.
First,
interest rate regulation:
no institution that accepts insured
deposits would be permitted to pay a return on anv of its
deposits, insured or uninsured, greater than 105% of the
effective interest rate paid by Treasury securities of comparable
maturity.
Second, restrictive lending limits:
all insured
institutions would become subject to greatly reduced limits on
the amounts they could lend any one borrower.
These limits are
calculated on a sliding scale:
15 percent of a bank's first
$100,000,000 of tier 1 capital, 4 percent of the next
$100,000,000 and 3 percent of any capital over that amount.
Third, trading exposure limits:
no insured institution could
incur an exposure in connection with any trading activity greater
than 5% of the institution's tier 1 capital.
These provisions are designed to eliminate excessive risk
taking by banks.
By restricting the interest payable on
deposits, the proposal would at times reduce the supply of
government-insured funds to banks — an attempt to address the
perception that deposit insurance allows too much money to chase
too few good lending opportunities.
By restricting each loan to
such a small amount of capital, the proposal ensures that insured
banks will abandon "big-ticket” loans, such as HLTs, real estate
finance, and other large-scale commercial lending.
By
restricting trading exposure, the proposal would require the
transfer of most foreign exchange and swap activities out of
insured banks.
As a stand-alone amendment, the core bank represents a
fundamental change in our financial system.
It assumes that all
of the activities transferred out of insured core banks — large
commercial and industrial loans, commercial real estate loans,
foreign exchange and swaps trading, and other types of
intermediation — will be adequately provided for by financial
firms that are completely outside the banking system.
This is a
very large assumption, especially in view of the fact that all
major industrialized countries generally carry out these
3
functions within banks.
If the assumption is incorrect, the
consequences for credit availability and economic growth could be
profound, as set forth in more detail below.
On the other hand, the second amendment would pair the core
bank with the wholesale bank, a new creature in our financial
markets.
This combination amendment creates a somewhat different
set of concerns than does the core bank by itself.
Specifically,
the wholesale bank provision would permit large institutions to
avoid paying a substantial amount of insurance premiums despite
continued coverage by the federal safety net? it could spread the
safety net to new kinds of financial institutions? and in the
end, it could defeat the very purpose of the core bank by
allowing institutions merely to shift Mrisky" activities from one
part of the safety net to another part.
A wholesale bank, as described in the draft amendment we
have reviewed, is essentially a MuniversalM bank — based on
European models — which pays no deposit insurance premiums while
engaging in securities activities and the ”big ticket” bank
lending and trading activities prohibited to the core bank.
Its
status as a wholesale bank is dependent on one condition:
that
it accept no deposits of less than $100,000 from the general
public.
A wholesale bank would be free of the core bank interest
rate cap, lending limit, and trading exposure restrictions and
exempt from much substantive regulation of its nonbanking
activities.
It would remain, however, a bank:
it could be a
member of the Federal Reserve System, and would have access to
the full safety net support mechanisms and subsidy represented by
the Federal Reserve*s discount window and access to the payments
system.
As a result, the federal safety net would be explicitly
expanded to cover securities activities for the first time.
It is our understanding that a core bank and a wholesale
bank could be affiliated in a single corporate group, though they
need not be.
Nevertheless, under this alternative the core bank
and the wholesale bank would be intended to work together,
whether under one roof or not. The core banks would receive all
retail, insured deposits and confine themselves to a small-scale
lending business, making few or no commercial or real estate
loans? the wholesale banks would receive only uninsured deposits
of $100,000 or more and conduct all large-scale lending and
trading activities.
The proponents of core and wholesale banking have given
careful thought to these approaches and their ideas deserve —
and have received — serious attention from the Treasury and
other policy makers.
These are, however, untried theories and
put into practice they would launch our financial system into
uncharted waters.
No major nation has organized its banking
industry under the core bank/wholesale bank model.
4
The experience we have had with certain elements of the
proposals — such as deposit rate regulation — raises serious
concern about the effect these provisions would have on the
availability of credit, the savings of small investors, the
competitiveness of U.S. banks, and the safety and soundness of
the banking system generally.
The risk of error and the
uncertainty of benefit inherent in these proposals argue for
caution.
The existence of a safer alternative means to the same
end — the integrated approach in the Committee print that
addresses bank risk in a number of different ways — should
reinforce this caution.
Our general concern is the result of several specific
questions raised by each major element of the proposals, which I
will now discuss in more detail.
Since we have been presented
with two alternative proposals — one limited to the core bank
and the other paired with the wholesale bank — I will first
consider the core bank in isolation and then examine the
implications of adding the wholesale bank provisions.
Deposit Interest Regulation
The U.S. has had experience with deposit rate regulation in
the past, and that experience was dismal.
The core bank's
interest cap differs, however, from earlier caps in that it would
"float” with the Treasury rate rather than remain a fixed
ceiling.
While this innovation should eliminate the worst
effects of prior attempts at rate regulation, we think the
following concerns remain:
o
The principal aim of deposit interest regulation
is already dealt with by existing law
o
Even a floating cap must "bind the market" at some
point, especially since deposit rates and Treasury
rates do not move in tandem
o
Whenever a cap binds, funds will leave the banking
system, producing credit crunches
o
Since this is a national cap with no allowance for
regional differences, those credit crunches may
hit hardest in the regions that need credit most
o
To avoid these effects, rate controls are likely
to require management, which means bureaucracy
and, ultimately, an "interest rate czar".
5
o
Small banks and small savers, particularly the elderly,
are likely to object that the economic costs of the
measure weigh disproportionately heavily on them
Let me expand on each of these points.
Rate Regulation is Unnecessary. The "core bank" proposal's
réintroduction of interest rate caps appears unnecessary since
current law already addresses the major reason for deposit rate
regulation:
restriction of aggressive, troubled institutions
from setting their own rates at an unsound level, thus bidding up
deposit rates generally.
FIRREA added a new section 29 to the
Federal Deposit Insurance Act that prohibits the acceptance,
renewal or rollover by any "troubled" — i.e.. undercapitalized - bank or thrift of deposits bearing a "significantly" higher
interest rate than that predominating in its normal market area.
The FDIC has adopted regulations stating that 50 basis points
will be considered "significant" for this purpose.
This approach of existing law is explicitly embraced in the
Committee Print and would be significantly enhanced by restoring
the Administration's proposal to remove insurance from brokered
deposits.
This approach avoids the most significant problems of
the "core bank" concept:
it recognizes that the appropriate
benchmark is the prevailing rate for deposits, not other
financial instruments such as Treasuries? it recognizes that
prevailing rates will differ from region to region, and thus ties
its limit to "normal market areas"? and it recognizes that a
measure intended to prevent unsound behavior by a troubled
institution should not be transformed into a statutory ceiling
applicable to healthy competition among well-capitalized banks.
In short, we believe that the approach adopted in current
law and the Committee Print addresses the same interest rate
problem that the core bank proposal is intended to address, but
in a much more workable manner.
Nevertheless, there may be ways
to tighten up the current approach which would help accomplish
even more of the objectives of the core bank approach.
As noted
at the outset, this is an area where we would welcome
constructive suggestions to accomplish this goal that do not
raise the significant problems set forth below.
Floating Rate No Cure. A floating deposit rate cap tied to
an appropriate benchmark is far preferable to the fixed-rate caps
formerly imposed under the now-infamous Regulation Q.
Yet, like
all interest rate limits, even a floating cap has only two
alternatives:
at any given time, it will either be above the
rate the market would otherwise require on deposits and similar
financial instruments, or it will not.
Whenever the cap is above
the market rate, it will have no effect, but will also serve no
purpose.
Whenever the cap is below the market rate, depositors
6
will — quite naturally — seek alternative investments that will
pay what the market demands.
Deposit Rates Do Not Always Track Treasuries. It would be
tempting to believe that the core bank cap could never fall below
the market rate, since a government-guaranteed deposit should be
largely equivalent to the short-term Treasury securities to which
its rate would be tied.
Experience, however, shows that deposit
rates are often higher than Treasury rates.
Attached to this testimony are several charts showing
relationships between Treasury and CD rates for varying
maturities, at varying times, in various parts of the country.
The implications of this information are clear.
While deposit
rates are often below 105 percent of the Treasury rate, Chart A
shows that the market interest rate for bank deposits has been
significantly above the 105 percent mark for long periods in the
past? there is no reason to think that this cannot happen in the
future.
Indeed, Charts B through E show that current market
rates for deposits generally exceed the rate on similar
Treasuries for maturities up to one year — a result that
reflects the problem, discussed below, that such rates are most
likely to exceed Treasuries during recessions, at the very time
when it is most important to avoid constraints on new bank
lending.
Disintermediation and Credit Crunch. It thus appears likely
that the interest rate caps will indeed "bind the market" from
time to time.
When they do, deposits will be withdrawn from the
core banks, and, in all probability, from the banking system as a
whole.
One of the foremost proponents of the core bank concept
has himself estimated that over 1.5 trillion dollars would move
out of core depository institutions after the floating interest
cap was imposed.
The lending capacity of the banking system is directly
proportional to its available sources of funds.
When deposits
move elsewhere, banks depending on them must reduce their lending
activity.
Credit crunches of this classic kind occurred
frequently during the period of Regulation Q's effectiveness.
We
wonder whether enough is yet known about the effect such a
massive shift of financial assets would have on banks or on the
economy generally to ensure such credit crunches do not repeat
themselves.
Moreover, the historical data we have reviewed show that
deposit rates are most likely to exceed Treasury yields when
Treasury rates are low or declining, as they have been over the
past year, and declining Treasury rates are often the sign of a
soft economy.
Thus, under the core bank proposal, banks might
have to cut the rates they pay on deposits, reducing their
available resources for credit extensions, just when the economy
7
is weakening and public policy calls for expanded bank credit.
We would risk a credit crunch at precisely the time we could
least afford it — during a recession.
Regional Economic Differences. Equally important, we are
concerned that a uniform national interest rate cap, even if it
floats daily, will ignore important regional economic
dislocations that could at times require institutions in
particular market areas to pay deposit interest well above the
Treasury rate.
If the core bank provisions are in effect, funds
may well be drained from banks just when they are most needed to
provide liquidity for economic recovery.
Distortion of the Market for Financial Services. We know
only too well the result when the government tinkers with markets
by limiting prices:
during periods when core banks would be
prevented from offering competitive interest rates on their
insured deposit products, they will be forced to develop
inefficient and costly methods of nonprice competition for retail
deposits.
In the days of Regulation Q this took the form of
increasingly elaborate gift premiums, inefficiently extensive
branch networks and complex legal dodges.
Given the strong
pressures to evade the cap that would develop, it seems likely
that such nonprice competition could once again appear.
Even if
the notorious free toasters of our recent past are prohibited, it
is difficult to police all forms of indirect return.
Such
policies would reduce the efficiency of resource allocation as
banks strove for ways to avoid rate ceilings.
Administrative Burden. As a result of the tendencies
identified above, we believe it may be optimistic to suppose that
the cap could be self-executing.
Given the complicated and
interdependent economic factors affected by the interest rate
cap, we think it almost inevitable that this proposal will need
to be flexible in its application, which would lead to the
establishment of a bureaucratic authority — an "interest rate
czar" — to adjust the restrictions.
This czar might need to
determine what spread over the Treasury rate was appropriate
given particular economic conditions, calculate the level of
credit required by the economy in general and perhaps by
particular industries, assign interest values to bank services,
make the necessary regional adjustments, evaluate competing
financial and political interests, and generally supervise this
complex program.
We think many will hesitate before subjecting
such an important market to the bureaucratization and
politicization that could result.
Discrimination Against Small Savers. In the past, opponents
of interest rate regulation — particularly representatives of
the elderly — have argued that the economic costs of such
regulation are disproportionately borne by the nation's smallest
savers.
The interest rate cap would apply only to deposits of
8
core banks; sophisticated institutional or individual investors
familiar with alternative investments and able to meet the
minimum investment standards often required would be able to
transfer their funds to receive a market rate.
Whenever the cap
is below the market rate, then, only the smallest and least
financially aware depositors will remain with the bank.
Many
policy makers and their constituents believe this an unfair
penalization of such investors.
Disadvantaging of Smaller Banks. Moreover, precisely
because the proposed interest rate caps would apply only to
deposits of the core bank, but not to other liabilities,
institutions with adequate funding sources outside the deposit
market would find themselves able to work around the caps;
smaller banks, which rely heavily on retail deposits, would not.
In times of economic strain, larger banking organizations would
buy their funds free of rate restrictions in the federal funds,
Eurodollar or commercial paper markets; smaller banks would find
themselves drained of funds.
It is upon the community
enterprises and local businesses that community banks service
that an unnecessary and exaggerated credit crunch is likely to
fall most severely.
Limits on Loans to One Borrower
Drastic Reduction. The "core bank" proposal would also
drastically reduce the current statutory lending limit for all
insured institutions.
Under existing law, a national bank may
lend up to 15% of its total capital to any one borrower (plus an
additional 10%, if secured).
Limits applicable to state banks
vary, and some are much higher than the national bank
restrictions, but most fall within the general range of the
federal standard.
The draft core bank amendments would replace
these loans-to-one-borrower limits with one calculated on a
sliding scale:
15 percent of the first $100,000,000 of a bank's
Tier 1 capital, 4 percent of the next $100,000,000, and 3 percent
of all remaining Tier 1 capital.
Thus, for smaller banks —
those with capital under $100,000,000 — the new 15 percent of
Tier 1 limit would represent a reduction of their unsecured
lending limit of as much as 50 percent, or a reduction of up to
70 percent including secured loans.
For a large national bank
contemplating a secured loan, the result is as much as a 94
percent reduction in the applicable lending limit.
Lending Limit Unworkablv Small. It may be that existing
lending limits, particularly for certain state banks, are too
high.
Louisiana, for example, permits 50 percent of capital to
be lent to a single borrower, and some states have no lending
limits whatever.
Most banks already have internal policy
guidelines on loans-to-one borrower that are far lower than their
current governing law would permit.
These guidelines, however,
are often around 10 percent of total capital, which — since they
9
are calculated from the entire capital base, and not merely tier
1 — are as much as six times the proposed "core bank” limit.
This suggests that the "core bank" lending limits are unworkably
small, even if phased in, and would consequently tend to be
disruptive.
This is especially true for smaller banks, servicing primary
market areas with one or two particularly large industries.
Such
banks will, on occasion, lend up to the maximum legal limit to
their very best borrowers.
Yet while the draft amendment we
have seen seems to grant smaller banks greater latitude, it still
effectively cuts their limits more than in half, by requiring
they be calculated from tier 1 capital.
Commercial and Real Estate Credit Crunch. Commercial and
real estate borrowers, rather than individual consumers, are the
types of customers most likely to require credit in amounts over
the core bank limits.
The intended result of the "core bank"
loans-to-one-borrower restrictions, then, will be to drive much
C&I and real estate lending out of the core bank, effectively
prohibiting consumer deposits from funding such activities and
thus restricting the credit available to them.
Since we are now considering the alternative in which there
would be no wholesale banks, it is not clear what types of
financial institutions would have both the capacity and the
desire to assume such lending functions.
One possibility would
be the large foreign banks, thus underscoring the global weakness
of the American system.
The other possibility is that such
large-scale commercial lending — which is an important engine of
our economy — will simply contract substantially and
permanently, leading to unknown and unknowable ripple effects
throughout the economy.
While there has perhaps been an excess
of such lending in the past, especially by federally insured
institutions, there may be too little in the future if federally
insured institutions are simply prohibited from participating.
Syndication Will Not Necessarily Ease Compliance. While
some might argue that banks can always syndicate larger credits
so that their remaining liability remains below the applicable
loan-to-one-borrower limit, this overestimates the capacity of
the loan syndication market.
Even after syndicating a portion of
a loan, many banks retain liabilities that exceed the "core bank"
limit.
A bank may also purchase an "over-core" liability from a
syndicating institution.
Further, market conditions or
competitive concerns not infrequently lead banks to act as sole
lender for a moderately large loan with the intent of syndicating
it in the near future.
The core bank lending limits would
effectively prohibit that option to an insured institution.
In
addition, syndication of any kind would be a less available
option for smaller institutions.
10
Trading Exposure Limits
The core bank 5 percent limit on exposure to any trading
activity appears intended substantially to restrict the amount of
foreign exchange trading and swap business that a core bank can
conduct.
We feel that such policy decisions should be made
directly — through an explicit consideration of the types of
activities to be limited and the concerns such activities have
raised — rather than indirectly through a general exposure
limit.
When looked at in this light, we think the weight of
evidence strongly supports banks' conduct of foreign exchange and
swap trading.
The Traditional Business of Banking. Foreign exchange
operations are a traditional banking activity, integrally related
to bank payment services, financial management, and capital
markets transactions.
The largest participants in the foreign
currency markets historically have been banks, and the great
majority of foreign currency trades involve interbank
transactions.
While swaps are a more recent innovation in the
financial markets, the credit risks involved are substantially
similar to those of other traditional banking activities, and
banks are significant participants in the swaps markets.
Forex and Swaps Businesses Are Profitable. Both foreign
exchange and swap operations are profitable, and banks have
demonstrated their capacity to manage related risks.
The goal of
banking reform should be to encourage expansion of profitable,
well-managed banking businesses, not eliminate two of the few
currently reliable bank profit centers.
Global Competitiveness. U.S. banks would be at a
competitive disadvantage if foreign exchange and swap operations
were transferred outside the bank.
Organizations that wished to
continue their conduct of these activities would be required to
set up separate affiliates.
This will fragment the capital base
available to support such activities; a hinderance not applicable
to foreign banks and nonbank competitors.
Moreover, any attempt
to preserve the capital base by keeping as many forex and swap
activities in the bank as possible — moving only those
absolutely required by the 5% trading limit — will impose
unnecessary costs in the form of duplicate personnel, support
systems, information and communications systems, and compliance
programs.
Regulation and Supervision. By keeping foreign exchange and
swap operations in the bank, they are subject to much closer
supervision from bank regulators than they would be if
transferred to affiliates — or out of banking organizations
altogether.
Nonbank swap dealers, for example, are subject to
virtually no capital standards, regulatory structure, of routine
supervision.
The Federal Reserve and other bank regulators, by
11
contrast, have particular expertise in exercising oversight over
the types of credit exposures and monetary issues raised by forex
and swap trading.
No Demonstrated Danger. While these arguments weigh in
favor of continuing to permit banks to conduct forex and swap
operations, we are aware of no major problems or concerns that
have been identified to justify transfer of such operations
outside the banking system.
Wholesale Bank
So far, I have been discussing the conceptual problems
raised by a proposal to enact the core bank concept without also
providing a companion wholesale banking system.
Establishing an
alternative form of banking institution to "pick up" the lending
and trading activities prohibited to a core bank could soften the
"credit crunch" problems of the stand-alone core bank proposal.
On the other hand, to the extent that such activities are merely
shifted from one part of the safety net to another (deposit
insurance to the discount window), the very purpose of the core
bank is undermined, while the costs of balkanizing capital in
this manner may be considerable.
In addition, we believe that
the wholesale bank approach raises serious questions of equity
and that it runs the risk of greatly weakening the deposit
insurance fund.
Adverse Effect on Deposit Insurance Fund. The wholesale
bank structure exempts an institution from deposit insurance
premiums and from certain limitations on its activities if the
bank does not accept deposits of less than $100,000 from the
general public.
We believe the only banks that will be able to
take full advantage of the wholesale bank provisions will be the
handful of money center institutions with their principal sources
of funding outside the retail deposit market.
At a time when the
liabilities of the Bank Insurance Fund have expanded dramatically
and deposit insurance assessments have tripled in two years, it
is surprising — to say the least — that it would now be
proposed to exempt some of the largest and most significant U.S.
banks from deposit insurance assessments entirely.
We would also expect that, in allocating activities between
the core and wholesale banks, institutions would tend to leave
the worst assets in the core bank (where losses would be covered
by insurance) and transfer the best to the wholesale bank.
If
splitting banks into insured and uninsured entities were to
result in weaker core banks drawing on a fund with reduced
income, this would put us in a worse position than simply doing
nothing.
Of course, as core banks became smaller with the outflow of
deposits to wholesale institutions, the aggregate safety net
12
subsidy to the system would arguably be reduced (except that we
believe the wholesale bank would still be inside the safety net,
as set forth below). We believe, however, that the prompt
corrective action provisions of H.R. 1505 — together with
existing provisions of law — would tend to accomplish that
result without the side effects of the core bank and the
wholesale bank.
Higher capital and the more prompt response of
supervisors is a preferable way of reducing the misuse of the
safety net.
Wholesale Banks Remain Protected bv the Safety N e t . The
wholesale bank structure, however, is not only surprising from a
purely fiscal standpoint.
It would appear fundamentally
inequitable as well.
A wholesale bank would be free of many
restrictions on its activities — most particularly it could
conduct securities activities directly, rather than through an
affiliate.
Yet it would clearly remain a bank, not a mere
finance company or investment affiliate.
It could remain a
member of the Federal Reserve System.
It would have access to
the Fed's discount window and to Fedwire.
Of all the
institutions in this country, the large money center wholesale
banks could be the ones most likely to present systemic risk
problems in the event of failure, triggering efforts to fully
protect their uninsured depositors.
Indeed, if depositors would be fully protected in wholesale
bank failures as a result of systemic risk concerns, these banks
would reap virtually all of the benefits of the federal safety
net while paying no deposit insurance assessment and submitting
to little regulation of many nonbanking activities.
Wholesale Banks of Limited Practical U s e . It might be
appealing to think that every banking organization would have its
own "wholesale bank” and "core bank” working together in a single
corporate group:
the core bank would take retail deposits and
handle consumer loans, none of which would be likely to exceed
the restrictive core bank lending limit; the wholesale bank would
pay what the market demanded for large-denomination uninsured
deposits and make large scale commercial and real estate loans
free of the core bank restrictions.
This assumes funding sources
that do not exist for most U.S. banks.
Even for some of the very
largest and best-managed regional institutions, for example,
retail deposits remain such a substantial source of their funding
that any wholesale bank they established would be relatively
weak, while their core bank would be hobbled by the proposed
loan-to-one-borrower limitations.
Conclusion
The goals that the core bank/wholesale bank proposal seeks
to achieve are laudable:
restraint of the federal "safety net” ?
diversification of bank activities? control of excessive bank
13
risk.
They are, in fact, among the goals addressed by the
Treasury's earlier study on deposit insurance and by H.R. 1505,
the comprehensive banking legislation soon to be considered by
this Committee.
Moreover, the proponents of the core bank plan
deserve credit for helping crystallize the issues surrounding
banking reform with an interesting package of ideas.
We believe,
however, that the core bank's goals are already met by the
Treasury proposals embodied in H.R. 1505, and that the core bank
structure — as currently articulated — may carry with it
significant adverse side effects for the banking industry and the
economy as a whole.
This concludes my prepared statement.
answer any questions that you may have.
14
I will be happy to
FEDERAL RESERVE BANK OF ST. LOUIS
Interest Rates and the Ceiling Rates on Time and Savings Deposits
1917 21 2« 30 31 32 33 34 35 34 37 33 34 40 41 42 43 44 45 44 47 41 44 50 51 52 531454
NOTE: All data ora quarterly except the average rate paid on limn and savings deposits which is an annual sarias.
(_l Before 1934, the T r e a s u r y bill ra te i n c l u d e s 3- to
6 month notes a n d ce rt ifica tes
Chart B
Spreads of Bank Deposits over Treasuries *
January 1989,1990,1991
Spread (BPs)
Deposit Instrument
Jan-89
Jan-90
Jan-91
Office of Market Finance
* NOW account spreads use overnight RP rate a s proxy for Treasury rate.
Chart C
Spreads of Consumer-Type CDs over Treasuries
January 1989 - Present, Month-End Data
Spread (BPs)
Office of Market Finance
Chart D
Spreads of Large Primary CDs over Treasuries
January 1989 - Present, Month-End Data
Date
Office of Market Finance
Chart E
Spreads of MMDAs over 1-Month Treasuries
and NOW Accounts over O/N RPs
January 1989 - Present, Month-End Data
Spread (BPs)
Office of Market Finance
Department of the Treasury • Washington, o .c . • Telephone 566-2041
FOR RELEASE AT
June 18, 1991
2:30 P.M.
UM
Ool^ice of Financing
202/376-4350
EPT. O f THE TREASURY
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $20,400 million, to be issued June 27, 1991.
This offering will provide about $2,325 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $18,064 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, June 24, 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
$10,200 million, representing an additional amount of bills
dated September 27, 1990, and to mature September 26, 1991
(CUSIP No. 912794 wu 4), currently outstanding in the amount
of $18,646 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 10,200 million, to be
dated
June 27, 1991,
and to mature December 26, 1991 (CUSIP
No. 912794 XS 8).
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 June 27, 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 $1,492
million as agents for foreign and international
monetary authorities, and $3,645
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).
N B-1333
TREASURY'S 1 3 - ,
2 6 - , AND 52-WEEK BILL OFFERINGS, P a g e 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 reportada le 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
Department
of the Treaeury •uWailifngtoif, o.C. • Telephone 566-2041
FOR RELEASE ON DELIVERY
Expected at 9:30 a.m.
June 19 r 1991
>EPI. OF THE TREASURY
STATEMENT OF MICHAEL E. BASHAM
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR FEDERAL FINANCE
BEFORE THE SUBCOMMITTEE ON POSTSECONDARY EDUCATION OF THE
HOUSE COMMITTEE ON EDUCATION AND LABOR
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here today to discuss the results of
the Treasury’s second study of Government-sponsored enterprises
and the Administration's legislation that will provide for more
effective financial oversight of these important institutions.
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.
these studies was submitted to Congress in May 1990.
NB-1334
The first of
2
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 has been submitted.
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.
The immense size and concentration of GSE activities serve
to underscore the need for effective financial safety and
soundness regulation of GSEs.
GSEs,
The outstanding obligations of the
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.
3
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.
4
Based on the S&P analysis of the financial safety and
soundness of the GSEs, we have concluded, as we 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.
Given the need for effective financial oversight of the
GSEs, the Treasury has developed four principles of effective
safety and soundness regulation.
I.
These principles are:
Financial safety and soundness regulation of GSEs must be
given primacy over other public policy goals.
Regulation of GSEs involves multiple public policy 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.
5
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 gualified 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.
not happen.
No regulatory structure can ensure that it will
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.
6
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.
IV.
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.
The basic, but essential, authorities that a GSE regulator
should include:
7
(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 GSEs'
relative risk to the taxpayer.
Weaker GSEs should be subjected
to much closer scrutiny, while financially sound GSEs should be
subjected to less intensive oversight.
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,
8
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.
One of the deficiencies in the existing regulatory
structure for GSEs is that no Federal agency has the
responsibility to oversee the financial safety and soundness of
the Student Loan Marketing Association (Sallie M a e ) .
While
Treasury has some nominal authority over Sallie Mae, the
authority is not parallel with that already in place or being
proposed for other GSEs.
Treasury Regulatory Authority Should be Expanded
The Administration’s proposed legislation would expand
Treasury's current oversight responsibilities over Sallie Mae in
to make them consistent with the safety and soundness authorities
of the other regulators.
Under existing law, 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 with access to all of Sallie Mae's books and
9
records.
The Secretary,
in turn, is required to report to the
President and Congress on the financial condition of Sallie Mae,
including a report on any impairment of capital or lack of
sufficient capital noted in the audit.
The Administration
proposes that Treasury's regulatory authority over Sallie Mae be
expanded to include the authority to determine capital standards,
to require information disclosure, to prescribe standards for
books and records, and to take prompt corrective and
administrative enforcement actions.
The Administration proposal also establishes a safe harbor
for any GSE that receives the highest investment grade credit
rating from two nationally recognized statistical rating
organizations (NRSROs).
If the Secretary determines, after
receiving ratings from two NRSROs, that Sallie Mae merits the
highest investment grade rating, Sallie Mae would be deemed to
meet the proposed minimum risk-based capital requirement for one
year following the date of the Secretary's determination.
This
would result in a significantly reduced regulatory burden for
Sallie Mae, which is appropriate for a financially strong GSE.
Sallie Mae received a triple-A rating from S&P, an NRSRO,
when it was rated for the purpose of the April 1991 Treasury
report on GSEs.
Sallie Mae would, in all likelihood, be eligible
for this safe harbor, assuming its financial condition had not
10
deteriorated significantly from the time S&P conducted its
analysis.
Conclusion
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 form the
basis for the GSE legislation the Administration has proposed.
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 NEWS
Dspartmant of the Treasury • Washington,
FOR RELEASE AT 2:30 P.M.
June 19, 1991
CONTACT:
D .c .
• Telephone 566-2041
Office of Financing
202/376-4350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $21,750 MILLION
The Treasury will auction $12,500 million of 2-year notes
and $9,250 million of 5-year notes to refund $17,291 million of
securities maturing June 30, 1991, and to raise about $4,450
million new cash.
The $17,291 million of maturing„securities are
those held by che public, including $1,896 m i l l i o n ^ u r r g n t l y Jaeld
by Federal Reserve Banks as agents for foreign a n d ^ intemati^ial
monetary authorities.
-n
IP
•
The $21,750 million is being offered to the jjllbli6p ancgany
amounts tendered by Federal Reserve Banks as agenti fo£~ foreign
and international monetary authorities will be ad£hd tp^thafP^
amount.
Tenders for such accounts will be accept®! at^jthe éjerage prices of accepted competitive tenders.
^
Cjd
S
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $1,814 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-1335
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED JULY 1, 1991
June 19, 1991
Amount: Offered to the Public ... $12,500 million
$9,250 million
Description of Security:
Term and type of security ..... 2-year notes
Series and CUSIP designation ... Series AC-1993
(CUSIP No. 912827 B3 5)
Maturity date ................... June 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 ......... December 31 and June 30
Minimum denomination available . $5,000
5-year notes
Series Q-1996
(CUSIP No. 912827 B4 3)
June 30, 1996
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
December 31 and June 30
$ 1,000
Terms of Sale:
Method of sale ....
Competitive tenders
Noncompetitive tenders .
Accrued interest payable
by investor ............
Payment Terms:
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 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
Acceptable
Tuesday, June 25, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Wednesday, June 26, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Monday, July 1, 1991
Thursday, June 27, 1991
Monday, July 1, 1991
Thursday, June 27, 1991
TREASURY NEWS
Department of the Treasury • Washlnoton, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m.
June 20, 1991
•
0t the trfa
URY
TESTIMONY OF KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I
appreciate the opportunity to discuss with you today the
general subject of international competitiveness.
I commend the
Committee for undertaking this broad overview without a specific
legislative agenda.
The issues discussed in these hearings will
be with us for a long time to come. They will not be resolved by
"quick fixes” but rather by steady, stable policy executed
consistently to achieve well-defined goals.
We should begin now
to develop a national consensus on what those goals should be.
Such assessments are particularly timely in a world which has
embraced freedom and free markets to an extent we could not
possibly have imagined even two years ago.
Given the broad scope of this inquiry, I will not attempt to
comment on all the issues raised by the Committee's hearing
notice or to deal with all the material covered in the Joint
Committee's extensive pamphlet.
My focus will be on those
international comparisons that the Treasury finds particularly
instructive in evaluating American competitiveness and the long
term tax policy options that might potentially address the issues
raised by competitiveness concerns.
Comparing International Results and Tax Structures
There are inevitably economic costs associated with taxes —
a tax on labor inhibits work effort, a tax on capital inhibits
savings and investment — yet governments must raise revenue to
finance their operations.1 Other industrial countries face
problems similar to our own in structuring their tax systems to
1
Raising revenue can be deferred by borrowing, but only at the
cost of diminished government expenditures or increased taxes in
the future.
Deficits can thus be viewed as a transfer of tax
payments from current to future generations.
NB-1336
-
2-
minimize the adverse impact of such levies on economic activity
while raising needed revenue in a manner which is fair and
administrable.
The most prominent difference between our tax structure and
those of other developed countries is their greater use of
consumption taxes, such as value-added taxes (VAT) and gasoline
taxes and conversely, our greater use of taxes on income and
profits.
On average, members of the Organisation for Economic
Co-operation and Development (OECD) raised over 28 percent of
total tax receipts in 1988 from consumption taxes on goods and
services.
For the United States, the corresponding figure was
less than 15 percent (including Federal, state and local taxes).
Of the 23 other OECD members, only Japan relied less heavily on
consumption taxes than we did in 1988 (see Table 1), and Japan
instituted a broad-based retail sales tax in 1989.
These percentages describe the mix of taxes levied — but
relative levels of taxation are also important.2 The most recent
OECD statistics (see Table 2) show that in 1988 only Turkey of
the 24 OECD nations had a lower ratio of taxes to gross domestic
product (GDP) than the combined Federal, state, and local burden
imposed in the United States (29.8 percent of GDP).
Neither the tax mix nor the tax burden statistics correlate
particularly well with statistics on economic growth or
investment.
For example, Japan has relied even more heavily than
the United States on income taxes as a percentage of total taxes
(47.3 percent in 1988 as compared to 43.1 percent in the U.S.)
and has imposed a greater overall tax burden (31.3 percent of GDP
vs. 29.8 percent in the U.S.).
Nevertheless, Japan has achieved
a higher real growth rate and a higher rate of net investment.
There is, however, a group of international statistics which
correlates more strongly with economic performance.
Many of
those economies that demonstrate high rates of national savings
have achieved higher rates of investment than those economies
which have not. Japan's national savings rate over the period
1960-89 is almost triple the United States rate; West Germany's
rate for the same period is almost double our rate.
Both of
2
Some commentators question international comparisons of tax
burdens because of differing levels of government services
provided. They would distinguish taxes which are directly related
to the provision of government services to the economy from taxes
levied to fund transfer payments and related expenditures.
-3these major U.S. competitors have achieved much higher rates of
investment than the United States.3
Improving National Savinas
National savings consist of two components — private
savings and government savings.
Both are low in the United
States; indeed, the Federal Government by running a large deficit
is engaging in wholesale dis-saving.
Savings are important
because domestic investment — which directly stimulates
employment and productivity — must be financed from national
savings and net foreign borrowing. While high rates of foreign
borrowing have cushioned the United States from the negative
impact we would otherwise face as a result of our low national
savings rate, increased foreign debt means increased foreign
claims on our resources in the future.
High deficits damage our nation's competitive strength by
lowering national savings.
High levels of deficit spending
absorb private savings and increase our dependence on foreign
lenders.
The most important step we can take to promote long-run
American competitiveness is to reduce government dis-saving by
reducing the deficit.
The short-run requirement for implementing
that goal is clear. We must fulfill the budget agreement
achieved last year.
The 1990 budget agreement targets a $492
billion reduction in Federal borrowing over the next five years
and makes pay-as-you-go the law of the land.
Since these reforms, the Federal funds rate has fallen from
8 percent in October 1990 to 5.75 percent today; other short-term
rates have correspondingly fallen.
For American business, lower
interest rates mean lower capital costs and increased new
investment. Maintaining these achievements requires budget
discipline on the part of Congress and the Administration.
While the rate of personal savings (measured as a percentage
of disposable personal income) in the United States has increased
recently (4.6 percent in both 1988 and 1989, as compared to 2.9
percent in 1987), savings rates are still below historical U.S.
levels (6.7 percent) and well below current levels in Japan (15.0
percent) and Germany (12.5 percent).
Comparisons of U.S. total
national savings rates with those of other countries show similar
disparities.
3
A recent econometric study of growth rates in 98 countries
over the period 1960 to 1985 found a statistically significant
correlation between the growth rate of real per capita GDP and the
ratio of real private domestic investment to real GDP. See Barro,
Robert J . , "Economic Growth in a Cross Section of Countries,"
Quarterly Journal of Economics CVI, May 1991, pp. 407-443.
-4The connection between tax incentives and improved private
savings is far less direct than the impact of deficit reduction
on government savings.
The reason is that revenues foregone to
finance tax provisions to stimulate private savings act as an
offset to the economic benefits produced by the new savings
induced.
The Administration continues to believe, however, that a
targeted savings incentive in the tax code could improve personal
savings.
The Family Savings Account program described in the
budget4 would provide such an incentive at an acceptable revenue
cost.
Impact of Tax Policy on Competitiveness
Over the long term, there is a stronger correlation between
national savings rates and economic performance than between the
structure of taxation and economic performance in developed
countries.
Nonetheless, the tax system may be a powerful
allocator of investments and savings and in this way may
contribute or detract from the overall competitive strength of
the system.
Corporate Taxes Generally
Efforts to provide direct tax comparisons across countries
are difficult because the effective tax rate on capital income
depends on a number of attributes of a tax system, including the
tax rate on capital gains, the individual level of taxation on
dividends and interest, and whether the individual and corporate
systems are integrated.
The "total tax wedge" is a single
measure used by economists that summarizes all of these
attributes.
Table A in the Appendix compares the total tax wedge
in the United States and in several other industrialized
countries.
Analyzed on a comparative basis, the United States tax
system presents a mixed picture.
United States tax rates and
overall tax burden remain among the lowest in the developed
4
Under the President's budget (which meets the pay-as-you-go
requirements) an individual could contribute up to $2,500 per year
to a Family Savings Account (spouses could also make contributions
to their own accounts).
While contributions would not be
deductible, funds left in the account and the earnings on such
funds could be withdrawn tax-free after seven years.
Single
taxpayers with adjusted gross income (AGI) of less than $60,000 and
couples filing jointly with AGI of less than $120,000 would be
eligible. The Office of Tax Analysis estimates that the provision
would reduce revenues by $6.5 billion over the budget period.
-5countries.
On the other hand, most developed countries provide
some form of relief (often quite generous5) to capital gains and
virtually all now provide some form of relief from double
taxation of corporate profits.
Such relief — often called
integration — is present in the U.S. system only for small
business corporations which can elect Subchapter S status or
businesses which can be operated in other pass-through forms such
as partnerships.
The current classical corporate tax system of
the United States subjects corporate profits to two levels of
tax — explicitly in the case of profits distributed as a
dividend, and implicitly if inexactly through capital gains
taxation of stock sales.6
These structural characteristics of the U.S. system
encourage greater use of debt financing since returns on debt
capital in the form of interest are deductible by the corporation
and thus bear only a single level of tax.
Greater reliance on
debt financing may reduce the corporate sector's capacity to ride
out economic downturns and increase tendencies to focus on short
term profitability and cash flow.
These problems could be addressed in several ways.
The
first and simplest would be a reduction in the capital gains rate
as the Administration has long favored.
Second, the corporate
and individual tax systems could be integrated to reduce or
eliminate double taxation of corporate profits.
Corporate
integration would be a major change in our tax system with farreaching effects.
Because the change is so fundamental, the
Treasury plans to release a study of several different approaches
to achieving integration later this year.
Each of these
approaches will be specified in sufficient detail to allow a
broad base of public comment on the advisability of making such a
change.
The third approach, which I will discuss in more detail
later, would be to substitute some form of consumption taxation
for other forms of taxation.
5 For example, Japan taxes capital gains at the lesser of 1
percent of sale proceeds or 20 percent of gain, thereby providing
even greater relief to highly successful investments than to those
which achieve only modest success.
(See Table 3.)
6 The maximum capital gains rate of 28 percent is less than the
31 percent maximum rate on dividends, and the ability to defer
realization may further reduce the effective rate on capital gains.
However, these effects are offset by the fact that inflationary
gains are subject to tax.
Capital gains may also be attributable
to anticipated but unrealized profits.
-
6-
Research and Experimentation
The Administration believes that a long-term commitment to
productivity-enhancing innovation is vital to the future
competitive success of the American economy.
For this reason,
the President's budget contains proposals to make the credit for
research and experimentation currently provided in the Code
permanent, and to extend for an additional year the current
domestic/foreign allocation rules for such expenditures.
Since
we have so frequently discussed our support for these proposals,
I will not elaborate further today other than to observe that
programs to encourage research and experimentation should be a
central focus of efforts to maintain and improve the long-term
competitive capabilities of the American economy.
Foreign Investment bv U.S. Firms
The Code provides a basic structure of worldwide taxation of
United States residents with relief from double taxation in the
form of a foreign tax credit. An unlimited foreign tax credit,
however, would result in a U.S. subsidy of foreign taxes when
foreign rates exceed the U.S. rate — hence the credit is limited
to the U.S. rate on foreign income.
Lowering the U.S. corporate rate to 34 percent in 1986 was
expected to result in more corporations having excess foreign tax
credits than prior to the 1986 Act. The limited evidence
currently available suggests that such is the case.
(In 1984,
the proportion of U.S. corporations' income from foreign
activities that was in an excess credit position was estimated at
50 percent.)
To the extent such companies pay taxes which are
not creditable by reason of the limitation of the credit rate to
34 percent, the goal of neutrality between foreign and domestic
investment is not achieved.
This result occurs, however, because
of high foreign taxes.
By definition, firms with excess foreign
tax credits are paying little or no U.S. tax on that foreign
income, provided that foreign income is properly identified.7
The fact that many firms have excess foreign tax credits,
however, has caused some companies to challenge certain aspects
of the Code that they contend affect adversely the ability of
U.S. multinationals to compete abroad.
In general, these
proposals would attack the perceived problem by reducing expenses
allocated to foreign source income (thereby increasing foreign
income, increasing foreign tax credit utilization, and reducing
7
The alternative minimum tax may prevent total elimination of
U.S. tax on such foreign earnings.
-7U.S. taxable income and tax).8 It is clear that these proposals
will reduce Federal revenues.
By reducing the U.S. tax burden on
the affected firms, the proposals will benefit them.
However,
the net advantage for the United States is less clear since the
loss of Federal revenues will increase the deficit unless offset
with other revenues.
A more appropriate course may be to simplify the admittedly
complex provisions of the Code which govern outbound investment.
To the extent such simplification can be achieved without overall
revenue loss, it may reduce the cost of tax compliance and
thereby aid American companies doing business abroad to compete
more effectively.
Inbound Investment
Foreign direct investment in the United States continues to
grow and amounted to about $540 billion in 1989 on a market price
basis.
Our goal with respect to foreign direct investment in the
United States has been to provide a level playing field —
neither to encourage nor to discourage such investment through
tax policy. We attempt to treat foreign business and investors
as we treat domestic business and investors.
We believe that
this is not merely good policy in the abstract sense — but
judicious practical policy as well.
The level of United States
direct investment abroad (currently about $800 billion in market
prices) is higher than foreign direct investment in the United
States.
Since foreign governments might retaliate against U.S.
tax rules perceived to be unfair to their nationals, we believe
that U.S. rules should be fashioned in such a way that we would
not be troubled by their reciprocal application by a foreign
government.
A level playing field implies, however, that foreign-owned
companies doing business in the United States are subjected to
the same enforcement of our tax laws as U.S.-owned corporations.
In this connection, I am pleased to report that final regulations
have been published under section 6038A of the Code.
This
provision, enacted with the support of the Administration in
1989, is intended to ensure that the Internal Revenue Service can
obtain the same data in a transfer pricing case involving
foreign-owned businesses operating in the U.S. as it can with
respect to U.S.-owned businesses operating abroad.
We have
assured foreign governments that we will implement these new
rules with full consideration for our obligations under our
bilateral tax treaties — and, in particular, where treaty
8
The proposals range from requiring that all state taxes be
sourced to domestic source income (even when the state is clearly
taxing income treated as foreign source by the Code) to revision of
the interest allocation rules adopted in 1986.
-
8-
information exchange provisions are effective, the Internal
Revenue Service will utilize those procedures first.
In addition, we have recently issued proposed regulations to
implement section 163(j) of the Code — the so-called "earnings
stripping" rule. While the Administration did not favor
enactment of this provision in 1989, we have attempted to execute
the will of Congress faithfully in the proposed regulations.
The
problems inherent in utilizing mostly mechanical rules for
excessive interest disallowance remain, and we have not yet
proposed a rule for guarantees. We expect that we will receive
numerous comments on the rule.
Finally, we are actively engaged in the preparation of new
regulations under section 482 regarding intangible property
transfers.
As part of our international compliance efforts, we
have entered into consultations with several of our treaty
partners to determine how transfer pricing enforcement can be
improved through cooperative international efforts.
Broad-Based Consumption Taxes
As already noted, other countries rely more heavily on
consumption taxes as a major source of governmental revenue than
the United States does (see Table 1). While value-added taxes
are the most prevalent (see Table 4), other countries tend to tax
other consumption items such as gasoline, alcohol, and tobacco
quite heavily as well (see Table 5). Although the Administration
does not believe that a new tax of any kind is needed at this
time, we recognize the need for this Committee to investigate
whether replacement of a portion of our current system with such
taxes would promote economic efficiency and international
competitiveness.
Advocates of consumption taxes stress that such taxes do not
adversely impact savings during accumulation or investments when
made but rather defer the tax burden until the time of
consumption.
In addition, some have questioned the general
assumption that such taxes are regressive.9 These critics
acknowledge that such taxes will show a regressive pattern of
incidence in any given year.
However, they point out that on a
lifetime basis such taxes are more likely to be proportional due
to lifetime saving and consumption patterns. Moreover, people
benefit from such a tax only to the degree that they invest
rather than consume — if they consume more they will be taxed
more.
9
See "Federal Taxation of Tobacco, Alcoholic Beverages, and
Motor Fuels," Congressional Budget Office (June 1990), p. 2-4, 30.
-9While a complete evaluation of a VAT or other consumption
taxes is beyond the scope of my testimony today, I would note
that the Treasury study prepared such a review of a VAT at the
time of the 1984 tax reform study.10 We continue to agree with
most of the basic analysis contained in that report; however, we
recognize that the prevalence of consumption taxation abroad may
well lead Congress toward serious consideration of such taxes in
the decade ahead.
Implementation of consumption taxes will not be simple.
Indeed, broad-base consumption taxes often replicate many of the
difficult questions of timing and accounting which have bedeviled
the income tax since its inception.
Nor will the revenues come
quickly. While estimates vary, start-up is generally estimated
to require 18 to 24 months after enactment.
If properly structured, the GATT permits a VAT to be imposed
on imports and rebated for exports.
This process does not favor
exports or penalize imports.
Instead it simply assures that all
goods sold in the taxing jurisdiction face an equivalent tax
rate.
Imposition of a VAT would not have a favorable impact on
exports unless it replaced taxes which are not border adjustable
and which increase product prices.
Even in such circumstances,
most analysts doubt that a trade improvement would occur since
currency adjustments would likely offset any tax advantage
gained.
For the efficiency gains of consumption taxes to be as fully
realized as possible, it is vital that they be kept as simple in
structure as possible on as broad base as is feasible.
In
particular, exemptions and zero-rated or differentially rated
goods and services should be avoided to the maximum extent
feasible.
To the extent that relief from the tax for low-income
groups is desired, various forms of direct rebating are likely to
be more effective.
This occurs because all taxpayers regardless
of income share in exemptions or rate relief; indeed, to the
extent wealthy taxpayers consume more lower-rated goods than lowincome taxpayers, the benefit of reduced rates is shifted to the
wealthy.
The uniform business tax (UBT) proposed by Congressman
Schulze of this Committee would fundamentally change business
taxation in the United States by substituting a broad-based,
single-rate consumption tax for the existing corporate income tax
and the employer's portion of the payroll tax.
To ensure the
integrity of the social security trust fund, UBT liability could
not be less than a business's payroll tax liability had this
10
Tax Reform for Fairness. Simplicity, and Economic Growth.
U.S. Treasury Department (November 1984), Vol. 3, Value-Added T a x .
-
10 -
portion of the tax not been replaced.
The payroll tax minimum
requirement could be expected to be the effective levy in certain
start-up businesses and in years of very heavy capital
expenditures for some businesses.
Under the UBT, a business (including sole proprietorships,
partnerships and S corporations)11 would determine its taxable
receipts by subtracting the cost of goods and services purchased
from other businesses from its total receipts from the sale of
goods and services in the United States. Amounts paid for
machinery and equipment as well as inventory purchases would be
deducted from gross receipts (although UBT would be paid by the
business selling such items). The effect — as with other
consumption taxes — is to defer taxation of new capital
investment until proceeds are realized from such investment.
Adoption of a UBT would raise difficult issues of transition and
design.
For example, it is not clear how financial services
income would be taxed.
In addition, differences in treatment of
savings by individuals and by entities subject to UBT would have
to be addressed because savings by corporations would not face
immediate income taxation while direct individual savings would
be subject to current taxation.
Consumption taxes can clearly raise substantial revenues.
While we have not estimated the revenue yield of a UBT, the 1984
Treasury study did estimate the yield of a broad-based VAT.
For
1989, utilizing the tax base described in the 1984 study, we
estimate that each 1 percent rate of VAT would raise
approximately $25 billion annually.
(See Table 6.)
Conclusion
We commend the Committee for undertaking a long-term review
of competitiveness issues in this hearing. While the
Administration does not favor major tax changes at present, we
believe that efforts to compare our current tax structure with
feasible alternatives, such as integration of the corporate and
individual income tax and increased reliance on consumption taxes
are worthwhile.
Such analyses provide the foundation for
evaluating future proposals to improve the efficiency of our tax
system.
Given the importance of stability of the tax system for
business planning, changes of the magnitude discussed today
should be undertaken only after full public debate on their
relative merits.
Mr. Chairman, I would be pleased to answer any questions
which you and other Members of the Committee may have.
11
However, an exemption would be provided for non-corporate
businesses with $50,000 or less in gross receipts.
TABLE 1
Revenues From Various Taxes as a Percentage
of Total Tax Collections in 1988
Taxes on
Social
Income
Security and
and Profits Pavroll Taxes
countrv
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Luxembourg
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
56.5
25.7
38.9
46.1
58.6
50.4
17.4
34.2
17.9
N/A
38.6
35.7
47.3
41.7
27.9
59.8
33.5
22.2
29.6
43.9
40.8
34.2
37.5
43.1
Consumption
Taxes
Other
Taxes
5.7
38.4
33.8
13.2
2.5
8.2
45.1
37.4
33.6
N/A
15.4
33.8
29.0
25.4
42.5
2.2
25.5
27.0
35.7
28.5
32.0
15.1
18.5
29.7
24.0
30.8
23.1
26.3
31.7
37.3
28.6
24.2
43.6
N/A
40.4
25.7
10.8
24.6
23.7
30.8
35.9
47.0
29.4
23.3
17.5
31.1
29.6
14.7
13.8
5.1
4.2
14.4
7.2
4.1
8.9
4.2
4.9
N/A
5.6
4.8
12.9
8.3
5.9
7.2
5.1
3.8
5.3
4.3
9.7
19.6
14.4
12.5
25.2
27.7
29.2
28.4
30.4
31.0
8.1
7.0
6.5
Unweighted Averages:
OECD Total
OECD Europe
EEC
Source:
38.3
34.9
33.3
OECD, Revenue Statistics of OECD Member
1965- 1989. d • 73 . (OECD: Paris), 1990.
N/A = Not Available
Countries
TABLE 2
Ratio of Total Taxes to Gross Domestic Product (GDP)
in 1988
Total taxes as
a Percentaae of GDP
Countrv
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Luxembourg
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Source:
30.8
41.9
45.1
34.0
52.1
37.9
44.4
37.4
35.9
31.7
41.5
37.1
31.3
42.8
48.2
37.9
46.9
34.6
32.8
55.3
32.5
22.9
37.3
29.8
OECD, Revenue Statistics of OECD Member
Countries. 1965 -1989, p. 71. (OECD: Paris),
1990.
TABLE 3
TAXATION OF LONG-TERM CAPITAL GAINS ON SECURITIES IN G-7 COUNTRIES
G-7 Country
M aximum Individual
Tax R ate on LongTerm Capital Gains
on Securities*
SDecial Tax Rules for CaDital Gains
United States
28%
None.
Italy
15%
Applied to notional gain between 2-7% on certain indices. Alternative tax o f 25% net
realized gain, indexed for inflation.
France
16%
Only applies to gains on major transactions (proceeds more than F. 307,600
($ 6l,748)) or if the seller holds a "substantial interest" (25% or more o f the corporate
shares).
United Kingdom
40%
Only applies to gains in excess o f inflation. The first 5,000 pounds ($9,878) are
excluded; the 40% rate applies to any excess.
Canada
22%
Lifetime exemption o f C. $100,000 ($86,210). Rate reflects exclusion o f 25% o f
gain.
Germany
Japan
0%
20%
Gain on securities held more than 6 months is exempt, unless on the sale o f a
"substantial participation" (ownership o f 25% and sale o f at least 1% o f the
corporation’s shares).
Alternative tax o f 1% o f the sales price (at taxpayer’s option).
Department o f the Treasury
Office o f Tax Analysis
*
National tax only. Subnational taxes are relevant in the United States, Canada, and Japan. In Canada (non-deductible)
provincial taxes amount to roughly 50 percent o f the Federal tax. In Japan the (non-deductible) local tax adds 6 percentage
points to the national tax. The taxation o f gains on other assets, e.g. business assets, land, houses, may differ from those
shown.
TABLE 4
Value<-Added Taxes in Other Countries in 1988
Statutory Rate
Countrv
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Japan*
Luxembourg
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Turkey
United Kingdom
Source:
20.0
19.0
7.0
22.0
19.0
18.6
14.0
18.0
18.0
25.0
3.0
12.0
20.0
10.0
20.0
17.0
12.0
23.5
12.0
15.0
VAT as a % of
Total Tax
Collections
VAT as a% of
all Consumption
Taxes
20.1
16.2
NA
18.2
23.3**
19.4
15.6
22.4
20.7
15.2
NA
14.2
16.5
9.9
20.1
20.2
16.4
13.3
22.1
16.5
65.3
70.1
NA
57.4
62.5
67.8
64.4
51.4
51.2
59.1
NA
57.7
69.6
32.1
56.0
43.0
55.8
57.1
71.1
55.7
Alan A. Tait, Value Added Tax: International Practice and
Washington,
D.C.)
1988;
and OECD Revenue
(IMF:
Problems
Statistics of OECD Member Countries 1965-1989 p. 73. (OECD:
Paris) 1990.
*
Broad-based retail sales tax instituted.
**
VAT revenue as a percentage of total revenue in 1987.
TABLE 5
Percentage o f Taxes in Retail Price o f Alcohol, Gasoline
and Cigarettes in OECD Countries
Country
Distilled
Spirits
Beer
Wine
Gasoline
Cigarettes
Australia
17
35
15
49.4
51.3
Austria
40
36
31
62.5
71.1
Belgium
56
27
27
64.7
70.0
Canada
82
53
69
40.5
N .A .
Denmark
83
50
48
75.3
87.2
Finland
66
41
66
52.0
N .A .
France
45
18
18
76.9
74.8
Germany
64
20
12
64.0
72.0
Greece
N .A .
N .A .
N .A .
66.4
63.2
Iceland
N .A .
N .A .
N .A .
N .A .
N .A .
Ireland
66
64
51
70.7
73.8
Italy
27
20
8
78.3
72.0
Japan
23
47
22
47.0
N .A .
Luxembourg
44
14
6
56.4
66.9
Netherlands
72
34
25
70.4
71.5
N ew Zealand
53
30
20
51.0
N .A .
Norway
91
54
59
66.6
N .A .
Portugal
8
14
8
66.0
71.8
Spain
47
15
11
65.2
44.7
Sweden
92
34
69
62.2
N .A .
Switzerland
31
14
5
64.7
N .A .
N .A .
N .A .
N .A .
N .A .
N .A .
United Kingdom
51
31
29
67.8
74.3
United States
45
15
12
31.5
34.2
Turkey
Source:
Congressional Budget Office, Federal Taxation o f Tobacco. Alcoholic Beverages and
Motor Fuels. June 1990 (Tables A16-A18).
Note:
N .A . = not available
TABLE 6
Estimate of Value-Added Tax Base in 1989
($ Billions)
$3 450
Total Personal Consumption Expenditures
Less:
Rental value of owner- and tenantoccupied housing (including farms)
462
Medical care (including health insurance)
349
Insurance and finance (other than health
insurance)
136
Education
64
Religious and welfare
83
Foreign travel
0
Local transportation
9
Other: Food produced and consumed on
farms, military-issued clothing,
domestic services.
*
11.
(1 115)
Sales of new housing
204
Broad Value-Added Tax Base
£2. 539
Plus:
Less:
Food consumed at home
Prescription drugs
Household energy expenditures
Narrow Value-Added Tax Base
356
18
139
£2
026
APPENDIX
Tax Wedges
Standard finance theory suggests that a business will
continue to invest as long as the expected real after-tax return
from the investment exceeds the firm's real after-tax cost of
funds.
If investment opportunities and the real cost of funds
are the same for all countries, then more corporate investment
would be expected in countries with the lowest spread between the
pre-tax return on investment and the cost of funds.
This spread,
or corporate "tax wedge", generally depends upon the type of
asset acquired, the corporate tax rate, the capital recovery
allowances, the rate of inflation, and various other countryspecific factors.
Table A presents a listing of preliminary OECD
calculations of the 1991 corporate tax wedge based on a
standardized mix of assets and sources of funding for a
manufacturer located in several OECD member countries.
The
results, which assume the same 5.6 percent inflation rate and 5
percent real after-tax cost of funds in each country, indicate
that the corporate tax wedge in Japan is much higher than in the
United States.
A more complete picture of how a country's tax system
affects savings and investment may be obtained from a comparison
of the total tax wedge.
The total tax wedge includes effects of
both the individual and corporate tax system, and is the spread
between the real pre-tax return and the after-tax return
ultimately received by investors. Table A also shows the total
tax wedge for the same set of OECD member countries.
These
preliminary calculations allow for the actual rate of inflation
in each country, rather than using a fixed rate (5.6 percent) for
all countries, as was done for the calculations of corporate tax
wedge.
The total tax wedge for Japan is somewhat smaller than that
for the United States, although the disparity is very modest.
It
is possible that, had the mix of assets, sources of finance, and
real interest rates actually observed in each country (rather
than standardized values) been used, the disparity between the
total tax wedge for Japan and the United States would be smaller,
or even reverse.
Nevertheless, the data of Table A do not
suggest that the Japanese tax system is more favorable to
investment than the U.S. system. This lower investment rate for
the United States may thus be more indicative of the higher cost
of funds in the United States or the higher target rates of
return sought by the managers of U.S. corporations, perhaps
indicating greater investment risk (or greater risk aversion).
Table A
Corporate and Total Personal Income Tax Wedges
for New Investments in Manufacturing in 1991
Corporate
Tax Wedae 1/
Country
Total
Tax Wedae
United States
0.8
3.0
Canada
1.2
3.8
France
0.4
2.1
Germany
0.6
1.0
Japan
1.4
2.8
United Kingdom
0.9
2.0
Source:
OECD, preliminary unpublished estimates.
1/
The difference between the pre-corporate tax rate of return
and 5 percent (the real interest rate). Assumes no personal
taxes and an inflation rate of 4.5 percent for all countries.
The weights for the proportion of investment in each type of
asset and the proportion of finance from each source of funds
are assumed to be the same for each country:
50 percent for
machinery,
27
percent
for
buildings,
23
percent
for
inventories; and 35 percent for debt, 10 percent for new
equity, and 55 percent for retentions.
2/
The difference between the pre-corporate tax rate of return
necessary when real interest rates are 5 percent and the
after-personal tax rate of return. Assumes the top marginal
rate of personal taxes and the OECD's projection for inflation
for each country.
The weights for the proportion of
investment in each type of asset and finance from each source
of funds are described in footnote 1.
TREASURY NEWS _
Department of the Treasury • Washington,
FOR IMMEDIATE RELEASE iiW ¿
June 20, 1991
$¡ Q Q ? 0 n .1
fEPT- ° F THE
TRJt A S U R )
d .C.
Contact:
e Telephone 566-204
Cheryl Crispen
202-566-2041
Barbara Clay
202-566-5252
TREASURY AMENDS LIST OF IRAQI AGENTS
The Treasury Department today added seven persons to its list
identifying front companies and agents of Iraq.
The action is
part of an ongoing Treasury investigation to uncover and
neutralize Iraq's worldwide procurement and financial network.
The amendment to the list of Specially Designated Nationals (SDN)
of the Government of Iraq adds the names of seven individuals
closely associated with the regime of Iraqi dictator Saddam
Hussein.
All assets of these seven individuals within U.S.
jurisdiction are blocked.
In announcing the action R. Richard Newcomb, Director of
Treasury’s Office of Foreign Assets Control (OFAC), stated,
"These close associates and family members of Saddam Hussein hold
key positions within the Iraqi Government and have been rewarded
financially for their loyalty to his regime.”
The seven names include Ali Hassan Al-Majid, Saddam's paternal
first cousin and Iraq's Minister of the Interior; Hussein Kamel
Al-Majid, Saddam's son-in-law who heads Iraq's Ministry of
Industry and Military Industrialization? Barzan Ibrahim Hassan
Al-Takriti, Saddam's half-brother who acts as the Permanent
Representative of Iraq to the United Nations in Geneva? Sabawi
Ibrahim Al-Takriti, Saddam's half-brother and Director of the
Iraqi Intelligence Service? Watban Al-Takriti, Saddam's halfbrother who serves as an official in Iraq's Presidential Palace?
Udai Saddam Hussein, Saddam's eldest son? and Latif Nusayyif
Jasim, a member of the Revolutionary Command Council and former
Minister of Culture and Information of the Government of Iraq.
Today's additions to the Iraqi SDN list were accompanied by the
removal of two British commercial entities — PMK/Qudos
(Liverpool Polytechnic) and Sollatek — from the list.
These
entities had previously been licensed by OFAC to conduct
business.
Doing business with an SDN of Iraq 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.
NB 1337
Information on persons who hold Iraqi Government assets, or
information on assets which are owned or controlled by persons
acting on behalf of the Government of Iraq may be reported to
OFAC through the Iraqi assets telephone hotline at 202-566-6045.
All calls will be kept confidential.
TREASURY NEWS _
Department of t h a Treasury • washitipton, '(Kto • Telephone see-2041
A#2*13100239jflune 21 1991
FOR IMMEDIATE RELEASE
'
>e p t .
of the treasury
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets
data for the month of May 1991.
As Indicated in this table, U.S. reserve assets amounted to
$78,263 million at the end of May 1991, down from $78,297 million
in April 1991.
U.S. Reserve Assets
(in millions of dollars)
Special
Drawing
Rights 2/3/
Reserve
Position
in IMF 2/
Total
Reserve
Assets
Gold
Stock 1/
April
78,297
11,058
10,325
48,108
8,806
May
78,263
11,057
10,515
47,837
8,854
End
of
Month
Foreign
Currencies ± /
1991
1/
Valued at $42.2222 per fine troy ounce.
2/
Beginning July 1974, the IMF adopted a technique for valuing the
SDR based on a weighted average of exchange rates for the
currencies of selected member countries.
The U.S. SDR holdings
and reverse position in the IMF also are valued on this basis
beginning July 1974.
2/
Includes allocations of SDRs by the IMF plus transactions in SDRs.
£/
Valued at current market exchange rates.
NB-1338
t £ P T Qp tv
FOR RELEASE AT
June 21, 1991
2:30 P.M.
CON T A C T : fn
Financing
202/376-4350
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $ 12,500 million of 363-day
Treasury bills to be dated
July 5, 1991
and to mature
July 2, 1992
(CUSIP No. 912794 YV 0). This issue will
provide about $ 1,950 million of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$ 10,553 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,
Thursday, June 27, 1991,
prior to
12:00 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.
The bills will be issued for cash and in exchange for
Treasury bills maturing
July 5, 1991.
In addition to the
maturing 52-week bills, there are $17,903 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 $1,361 million as
agents for foreign and international monetary authorities, and
$ 7,425 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 mone
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 $ 265
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.
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
SECRETARY OF THE TREASURY NICHOLAS
rooi * 5510
Pre*s Conference
June 7.3, 1991
London n i
klii*u u
4 6 1
^
OF FT. OF THE TREASOHlf
Secretary Brady:
Thank you, [Assistant Secretary^dfcsignate for Public Affaire]
Desiree [Tuoker-sorini].
I am cure you have talked to other participants in the
meeting, so 1 will lust give you a brief review of m y impressions
of the most significant parts of it.
First of all, ve did review economic conditions in each of our
constituent countries and noted with satisfaction that the
economies in many of the countries are imxiaroving, and that*3 good
news, particularly in the United States whers the rate of inflation
is now under ^ percent and the early indications of a recovery seem
to be more evident.
There was also continued agreement that as w p . approach the
Economic Summit, and the rest of this year, and looking forward
into the nineties, that a growth scenario was the. bast wa y to meet
all of the challenges before us.
We had a useful discussion of the economic conditions in the
Soviet Union and with general agreement that the idea that had been
suggested by President bush, the associate status for the Soviet
Union, was a good one.
1 think it was import aunt that these kinds
of discussions took place going forward to the summit, and I think
that it was extremely useful that WO got the kind of agreement that
we did have.
I will be glad to answer any questions:
Q[Daily Telegraph in London] [inaudible]...! think I heard you
emphasize that the growth scenario was escalating— . Is this what
you had intended to say, to emphasise the growth aspect of the
world economy?
Q-
[repeat question]
A. The question was, if I got it correctly, that X emphasised that
the growth scenario w a s the right way to approach the problems that
axe before us and th* opportunities before us in the nineties as wo
approach the Economic Summit. The answer to that question is yes,
that is what was said, it. was agreed to by the participants in the
meeting and
fi Took forward to the nineties as the heads, the
heads of state meeting at the summit, look forward to the nineties,
a look backwards at the developments of the eighties indicates that
the kind of growth scenarios ve had during that period of time
produced enormously significant changes in the world and t h a t ’s a
good basis for going forward.
Q. Mr. secretary apart from the offer of associate status from the
IMT to the soviet union was there agreement on anything else that
would be offered to Mr. Corbachev after the G-7 summit in the.
nature of aid, the kind of aid, and the level of it to the Soviet
union?
A. nothing in terms of specifics and obviously part of our job is
to present options for the heads of state to consider a t the
Summit.
There was a review of some of the differing plans that
have been offered.
The fact that we had seen in thp. Uni Led States
many of these plans, and that some of them
to have taken on a
life of their own, which all the participants felt wa* in a sense
a Confusing development, and that they would all be reviewed «and
looked at, the number of new ideas coming forward were, a great many
and they all had to be reviewed and distilled before any kind of a
reaction could be given.
Q.
Mr. Secretary, did you in the meeting today discuss the recent
strengthening of the dollar and can you tell us what was said about
that and also What discussion there was of recent, moves in interest
rates?
Have you seen interest rates c-ome down in some countries
[inaudible]?
A.
Well let me start with the second part of your question.
We
did discuss the lowering of interest rates in various countries in
the world and that w«-s noted with satisfaction. We did discuss the
fact that exchange markets in the last several weeks had shown an
increase in thfi level of the dollar but at the same time we also
discussed the fact that over a period of three or four years no w we
have had orderly markets and that these recent movements fit within
those, orderly markets, but I d o n ’t want to amplify too much on
that. Paragraph five I believe is the operative paragraph and that
tells you what the conclusions really were.
I
Q.
A similar question.
What is the United States*, view of the
strengthening of the dollar which is obviously concerning the
Europeans? Are you happy to have a strong dollar o r . .. [inaudible]?
A. Well, as you know we nover comment on levels at these meetings
and I just refer you back to paragraph five.
Q.
[Inaudible]
Was the agreement...[inaudible]... and w h a t ’s the
next step to be taken...[inaudibleJ?
3 -
A.
Well, we didn't take a vote but I detected nothing hut
indications for the other participants in the group that the
associate status was something that should be put forward, and T
would assume that, more work will be done between now and the Summit
to flesh out exactly what that means, but aside from that I can't
tell you anymore.
Q.
Going back to the Soviet Union, was it the feeling at the
meeting that the Soviet. Union could not realistically expect larg*
sumo
of
money
in
the
near
future,
the
tens
of
billions...[inaudible]...talking about.. , [inaudible]?
A. Well, I think all of the countries who participated in the G-7
meeting have indicated that that's the case. In other words, large
sums of money ar* not what we are talking about here, but obviously
those are things that will have to be discussed between now Arid the
summit.
But there's no change in the position that Prime Minister
Major and President Bush and Chancellor Kohl and President
Mitterand have made on that particular subject.
Q. Was there, disagreement among the G-7 over changing the lending
system -For the EBRD regarding the Soviet Union?
A. I wouldn't say disagreement.
The suggestion has bp.e.n made, as
you know, tTu*t. the lending limits which are now part of the EBRD
rules and regulations, there have been suggestions that those be
changed.
As I think we've made clear already, the United States
is not in favor of that, making any changes, and that other
countries this morning indicated that they war* willing to look at
it, but I would suggest you ought to ask them vh&t their feelings
are.
Q.
I have a consumer question for your constituency back home.
Does» this meeting today and indeed any cooperation with the other
members of the G-7 help 3ave money on interest rates and interest
payments every month? Are we -moving in that direction?
A. Well, I ’m not sure that what we discussed today oan be said to
help save money on interest rates, but I am pleased to note that in'
the united States the federal Tunds rate has fallen from 8 percent
to 5-y/i percent since last. October. Long term interest rates are
slightly better although not as good as we would hope for but the
key thing that's important, to regard at this time in m y opinion is
that the rate of inflation which had been resistant at the 5 to 6
percent level now seems to be under 3 percent and that is very good
news. Hopefully, in terms oC long term markets, that will have an
effect.
Q.
Do you anticipate...[inaudible]... Central Bank intervention
against the dollar if it remains at the level it is currently?
- A
fc. Well, I hate to answer this question the same way every single
time but the last finance minister who answered that question got
relieved of his duty and I like what I'm doing.
Q.
Are you happy or unhappy if the dollar appreciates more?
A.
I refer you to the incredibly explicit language in paragraph
rive on that subject.
ThanK you very much.
— 30 —
23 JUNE 1991
STATEMENT OF THE GROUP OF SEVEN
(1) The Finance Ministers and Central Bank Governors of Canada,
France, Germany,
Italy, Japan, the United States of America and
the United Kingdom met on 23 June 1991 in London for an exchange
of views on current international economic and financial issues.
(2) The Ministers and Governors reviewed the global economic
situation and prospects, including developments in their economies
since their meeting in April. They noted with satisfaction the
increasing signs for global economic recovery. They agreed that
sustained global economic growth with price stability is essential
to address the historic challenges and opportunities which are
facing the world economy. They further agreed that pursuing such
a strategy in a medium term context was the best way of meeting
these challenges and accordingly they reaffirmed their support for
economic policy coordination.
(3) The Ministers and Governors emphasised the importance of
fiscal and monetary policies which provide the basis for lower
real interest rates and a sustained global economic recovery with
price stability.
They recognised that the approach taken would
need to reflect the differing situations in each country.
They
noted the signs of prospective economic recovery and lower
inflation in those countries which are in recession;
some other
countries
are
experiencing slower growth while in others,
particular Germany and Japan, economic activity is continuing to
make a positive contribution. The Ministers and Governors also
welcomed the reductions in interest rates that have taken place in
a number of their countries and elsewhere. They believed that
monetary policy should provide the conditions for sustainable
growth
with
price
stability
in line with the differing
circumstances of each country.
(4) The Ministers and Governors stressed the importance of
policies aimed at increasing savings. The Ministers and Governors
noted the important budgetary measures taken in some of their
countries to reduce significantly high budget deficits and improve
the conditions for lower interest rates.
Continued progress in
reducing budget deficits is essential to strengthen national
savings. These efforts should be complemented by measures to
reduce impediments to private saving, particularly where saving
rates are low.
(5) The Ministers and Governors also reviewed recent developments
in international financial markets and reaffirmed their commitment
to cooperate closely, taking account of the need for orderly
markets,
if necessary through appropriately concerted action in
exchange markets.
(6) The Ministers and Governors noted that sustained expansion in
global trade is an important engine of growth, including for
countries throughout the world that are restructuring their
economies.
In this regard, they accorded the highest priority to
a swift and successful conclusion to the Uruguay Round.
In light
of
the
particularly difficult circumstances facing Eastern
European countries and the Soviet Union, consideration should be
given to measures which would enhance the trade prospects of these
countries.
(7) The Ministers and Governors welcomed the reform efforts
underway in the Eastern European countries.
They noted the
economic situation in the Soviet Union and the need for sustained
economic reform.
Success of these countries in their process of
transition and fundamental reform is in the interest both of these
countries and global economic growth.
(8) The
Ministers and Governors also underscored that the
adoption of measures in their countries to promote economic
efficiency could provide an important spur to global economic
recovery and price stability. Such measures could also send a
strong and positive signal to reforming countries, implementing
their own reforms. They agreed on the need to review regulations
and structural policies with a view to improving the functioning
of their economies.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of thejgij^ijj?pe^Q|| Washington, DC 20239
FOR IMMEDIATE RELEASE
June 24, 1991
CONTACT: Office of Financing
(UN 2 6 31 0 0 2 7 I I
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
EFT. OF 1 HE TREASURY
Tenders for $10,206 million of 13-week bills to be issued
June 27, 1991 and to mature September 26, 1991 were
accepted today (CUSIP: 912794WU4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.56%
5.58%
5.58%
Investment
Rate_____ Price
5.73%
98.595
5.75%
98.590
5.75%
98.590
Tenders at the high discount rate were allotted 58%.
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
32,785
38,515,650
24,765
47,220
145,095
36,475
1,342,865
57,135
9,910
43,620
24,390
364,640
794.745
$41,439,295
Accepted
32,785
9,016,985
24,765
47,180
45,095
32,695
56,615
13,135
9,910
43,620
24,390
63,640
794.745
$10,205,560
Type
Competitive
Noncompetitive
Subtotal, Public
$38,066,700
1.586.685
$39,653,385
$6,832,965
1.586.685
$8,419,650
1,645,010
1,645,010
140.900
$41,439,295
140.900
$10,205,560
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $17,600 thousand of bills will be
issued to foreign official institutions for new cash.
NB-134Q
1ÉrPUBLIC
DEBT NEWS
Department of the Treasury • Bureau of the FulMVïÎfeÎ)/' ^^Waißäi^ton, DC 20239
immmwìT] i?ffiice
FOR IMMEDIATE RELEASE
June 24, 1991
of Financing
202-376-4350
RESULTS OF TREASURY'Sp AUCTION OF 26-WEEK BILLS
rrt.W T T IE T R E A S U R Y
Tenders for $10,222 million of 26-week bills to be issued
June 27, 1991 and to mature December 26, 1991 were
accepted today (CUSIP: 912794XS8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 75%
5. 77%
5. 76%
Investment
Rate
6.02%
6.04%
6.03%
Price
97.093
97.083
97.088
Tenders at the high. discount rate were allotte
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
26,710
27,188,560
17,120
34,685
87,075
43,535
1,712,775
34,005
7,395
40,950
14,570
485,945
491.890
$30,185,215
Accented
26,710
9,042,420
17,120
34,685
59,575
36,180
239,025
14,005
7,395
40,950
14,570
197,195
491.890
$10,221,720
Type
Competitive
Noncompetitive
Subtotal, Public
$25,888,120
1.028.995
$26,917,115
$5,924,625
1.028.995
$6,953,620
2,000,000
2,000,000
1.268.100
$30,185,215
1.268.100
$10,221,720
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $214, 900 thousand of bills will ]
issued to foreign official institutions for new cash.
NB-1341
STATEMENT OF
STEVEN W. BROADBENT
DEPUTY ASSISTANT SECRETARY
(INFORMATION SYSTEMS)
DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS
OF THE UNITED STATES SENATE
ON THE INTERNAL REVENUE SERVICE'S (1RS)
COMPUTER SYSTEM MODERNIZATION AND PROCUREMENT
JUNE 25, 1991
Mr. Chairman and Members of the Committee:
I am pleased to appear before the Committee to testify on
Treasury's role in IRS procurements and on the applicability of
existing government-wide procurement laws and regulations to such
procurement.
I have with me Mr. Thomas P. O'Malley, Director of
Treasury's Management Programs Directorate, which contains the
procurement policy and program function.
Before discussing the specific issues raised in your letter of
March 13, I would like to provide you with some background on
Treasury's structure and functions and the ways in which we carry
out our management responsibilities in the information technology
area.
Treasury is the third largest government department, after
Defense and the Department of Veterans Affairs.
The functions of
the Department and our 13 bureaus range from managing federal
finances, collecting taxes and duties, and paying all bills of
the government, to investigating and prosecuting counterfeiters,
smugglers, narcotics traffickers, and gun violators.
Our
enforcement mission extends to protecting the President and Vice
President and their families, and visiting dignitaries.
With
over 150,000 employees and 1800 field offices in the U.S. and in
many countries abroad, information technology plays a vital role
in our support of Treasury's missions.
ROLE OF THE OFFICE OF MANAGEMENT
The Office of Management at Treasury is responsible for:
managing the budget and financial matters for the Department;
presiding over Department-wide administrative management affairs
such as procurement, human resources, security, and information
processing activities;
and providing administrative support
services to the Departmental Offices.
Included in these
NB-1342
1
responsibilities is the management of the Office of the Deputy
Assistant Secretary for Information Systems and the Office of the
Deputy Assistant Secretary for Departmental Finance and
Management, which includes the Department's procurement policy
and oversight function.
In FY 1992, it is estimated that Treasury will spend over $1.6
billion for the procurement of information technology alone.
Given this significant investment, effective management of the
procurement process is critical to our ability to implement
technology in a timely and cost effective manner.
Treasury has a
long-established procurement oversight and control program:
one
that encompasses all stages in the life cycle of information
processing resources, from initial planning and development of
requirements, to obtaining a Delegation of Procurement Authority
(DPA), through solicitation for competitive bids/proposals and
contract award, contract administration, and through post
implementation reviews of system effectiveness and management.
ROLE OF THE DEPUTY ASSISTANT SECRETARY
FOR INFORMATION SYSTEMS
In my role as Deputy Assistant Secretary for Information Systems,
I serve as the Department's Senior Official under the provisions
of the Paperwork Reduction Act and have Departmental
responsibility, for policy, oversight, management and improvement
o f all categories of Federal Information Processing (FIP)
Resources, including the broad range of information resources
management functions specified in the Brooks Act.
These
responsibilities include planning, budgeting, policy and
standards development and issuance, and oversight and control of
ADP and telecommunications acquisitions and systems management.
My office reviews and approves major acquisitions of information
systems resources throughout Treasury.
I perform these functions
as Treasury's Designated Senior Official (DSO) for IRM and, as
such, have responsibility for the conduct of, and accountability
for, acquisitions of FIP resources made under a DPA from the
General Services Administration (GSA). I have further delegated
to the Director of the Office of Information Resources Management
(OIRM) signature authority for all matters pertaining to DPA
approvals and related actions.
My office also establishes total acquisition cost limits up to
which bureaus may approve their own information systems resources
acquisitions.
For 1RS, this threshold is set at one million
dollars per competitively procured contract.
All acquisitions
above this threshold are subject to Treasury and, depending on
the dollar amount, GSA review prior to receiving the appropriate
DPA to proceed with the solicitation.
2
Treasury has issued detailed guidelines to our bureaus that
adhere to the GSA's Federal Information Resources Management
Regulation (FIRMR). For major procurements that require either
Departmental or GSA DPAs, the Department becomes extensively
involved in reviewing detailed requirements analyses and
specifications to ensure that government-wide and Treasury
requirements and policies are followed.
In those instances
involving mission-critical and/or high cost systems, such as the
Internal Revenue Service's multi—billion dollar Tax System
Modernization project, the Department plays a more active role in
monitoring early planning and development activities of the
bureaus.
Our bureaus must submit carefully thought-out long range plans
for the proposed development or acquisition of major systems
through annual information systems plans (ISPs).
These plans are
the forerunners of the Departmental budget process, and are
integral to the analysis leading to the formulation and approval
of the budget which is submitted to the Department, OMB, and
eventually Congress.
Our information systems oversight activities continue with the
Information Resources Management Review program, which was
established under the authority of the Paperwork Reduction Act of
1980.
It supports improvements in information resources
management to better achieve agency missions and compliance with
government—wide IRM standards, policies, procedures and
regulations.
The Department operates on a three year plan/review
cycle that encompasses established government-wide and
Departmental IRM priorities.
The on-going IRM Review Program tracks bureau and Departmental
review plans and results, and allows us to assess whether we are
conducting information resources management activities in such a
way that program missions and objectives are being met
economically and effectively.
In accordance with guidance from
GSA, Treasury has focused on the reviews of major systems and the
validation of system benefits.
The Treasury Department's oversight reviews of information
systems development, acquisition, management, and effectiveness
are within the scope of the IRM Review Program, with reviews
including the Computer Security Act implementation, disaster
recovery and contingency planning, information systems planning,
paperwork management, and records management included.
ROLE OF THE OFFICE OF PROCUREMENT
The Deputy Assistant Secretary for Departmental Finance and
Management, through his Office of Procurement, is responsible
for:
providing policy and contractual guidance for the
3
Department's procurement and contracting programs;
reviewing and
evaluating bureau procurement operations;
promoting
consolidation of procurement where feasible;
overseeing the
activities of the Small Business Program Manager and the
Departmental Advocate for Competition;
and implementing
Treasury-wide career management programs for all procurement
personnel in accordance with the law (Section 16 (4) of P.L. 98191, Office of Federal Procurement Policy Act Amendments of
1983) .
The Department's Office of Procurement has taken a very active
role in developing policies, guidelines, and handbooks that
assist our bureaus in understanding their responsibilities in the
procurement arena.
A number of publications have been issued to
Treasury bureaus by the Department on such subjects as
competition in contracting, small business procedures, and
Contracting Officer and Contracting Officer's Technical
Representative responsibilities.
In addition, the office has an
ongoing oversight system that involves the review and approval of
individual high dollar value solicitations (prior to release to
industry) and contract actions (prior to award) and a program of
on-site reviews of bureau procurement activities.
These reviews
ensure compliance with procurement laws and regulations and sound
business strategies.
PROCUREMENT AUTHORITIES AND CONTRACT
ADMINISTRATION/OVERSIGHT
The Department's Office of Information Resources Management
(OIRM) and Office of Procurement work closely together throughout
the procurement process to ensure bureau compliance with all
applicable regulations.
A description of the process involved in
granting a Delegation of Procurement Authority (DPA) provides an
example of how the offices at the Departmental level must
coordinate their oversight and management functions in this area.
The process normally starts with a planning session between a
bureau technical representative and the cognizant OIRM desk
officer to review the procedures and strategy for the projected
acquisition of FIP resources.
The planning session is followed
by the bureau preparing draft statements of mission needs and
requirements analyses comparing costs with benefits and assessing
alternatives.
The desk officer reviews the draft documents to
assess conformance with Treasury directives and GSA regulations
and guidelines.
The bureau then prepares an Agency Procurement Request (APR) that
includes estimated contract costs for the life of the contract
and procurement strategy.
The APR is submitted to the Department
along with the required documentation.
The OIRM Desk Officer
4
coordinates the Departmental review through the Office of
Procurement and any or all of the following:
an Office of
Security review of security provisions;
an Office of
Telecommunications Management review of voice and data
communications requirements;
an Office of Finance review of
budget considerations; and an overall review by OIRM of the FIP
resources requirements including a comparison with prior
information systems planning documents.
If a "Justification for
Other than Full and Open Competition" is required, a full review
of the requirement is conducted by the Departmental Advocate for
Competition.
Depending on the outcome of these reviews, comments are prepared
for the bureau, and follow-up working sessions are held to
resolve deficiencies, errors, or omissions contained in the APR.
The APR is revised and resubmitted, as necessary.
Based on the
total estimated contract cost and the FIRMR thresholds, it is
then determined whether a Departmental DPA will be issued or a
GSA DPA is needed.
In the case of a Departmental DPA, the Director, OIRM, after
consultation with me, and obtaining the above-mentioned
concurrences, approves the APR and delegates the procurement
authority to the appropriate Bureau Contracting Officer, subject
to any conditions that may be imposed on the DPA.
For a GSA DPA,
the APR is submitted under signature of the Director, OIRM, to
the GSA Authorizations Branch for approval.
Normally, GSA
requires 20 working days for a reply.
During this process, OIRM
may have to prepare responses to GSA requests for additional
information or to answer questions.
Briefings for GSA may also
be held.
Once GSA grants the DPA to the Director, OIRM, the Director,
OIRM, redelegates the DPA to the appropriate Bureau Contracting
Officer, subject to any conditions imposed by GSA or by the
Department as a result of the Departmental review.
Compliance
with these conditions is monitored by the OIRM Desk Officer.
Associated solicitation documents are subsequently reviewed to
assure that they are in conformance with the issued DPA.
As part
of its review of solicitation documents, OIRM coordinates
comments with the Office of Procurement.
OIRM also coordinates
GSA briefings during the acquisition cycle.
Prior to contract award, the proposed contract and the complete
contract file documentation are reviewed by the Office of
Procurement and OIRM to assure the procurement transaction is in
full compliance with FAR, FIRMR, and Departmental requirements,
including any DPA conditions established by Treasury or GSA.
5
BROADER OVERSIGHT
As part of Treasury's larger scale oversight responsibilities,
the Department has developed an Early Warning System that is used
as a tool to apprise senior management of potential financial
management issues before they become problems that require
substantial corrective actions.
The system includes procurement
criteria covering Office of Procurement reviews of bureau
procurement operations through the program management evaluation
visits to bureaus, and findings related to procurement planning.
Treasury constantly strives to improve its procurements to make
them more responsive and to better serve the American taxpayer.
In fact, Treasury has strengthened its contract administration
practices by increasing the attention and resources devoted to
properly administering contracts after they are awarded.
Many of
our bureaus now have separate, specialized, contract
administration units that rigorously make sure we obtain what the
contract requires.
We have also implemented a program of
required training for our Contracting Officer's Technical
Representatives, and have issued a revised handbook to assist
them in successfully discharging their duties.
Contracting
Officer's Technical Representatives are responsible for
monitoring a contractor's performance and are often the key to
the success of a contract.
In your March 13th letter of invitation to this hearing, you
requested that our testimony specifically address Treasury's role
in IRS procurements and the applicability of existing government
wide procurement laws and regulations to such procurements.
I
will now speak to specific subject matters about which the
Committee has inquired.
TREASURY'S ROLE IN THE TAX SYSTEM MODERNIZATION
DESIGN MASTER PLAN
The first area is Treasury's role in the creation of IRS' Design
Master Plan for Tax System Modernization (TSM), and in its
implementation.
I should first mention that the Administration considers TSM to
be of such importance to IRS' ability to deliver service and
fulfill its revenue collection responsibilities that the program
has been designated as a Program for Priority Systems (formerly
referred to as a "Presidential Priority System”) and, thus,
constitutes one of Treasury's priority Management by Objectives.
The successful design, development, acquisition, and
implementation of TSM is, therefore, of utmost importance to us.
6
The IRS Design Master Plan has evolved from a basic conceptual
document to a blueprint for the actual design.
Throughout the
design's evolution, the Department has participated with the IRS
at all levels in the phases of TSM.
Treasury met with IRS
executives during various phases of the initial system
architecture design and the development of the Design Master
Plan.
During initial formulation of the Plan, key executives
from both the Department and IRS went out on numerous corporate
visits to see and discuss first-hand the application of proven
technology.
With Treasury support and approval, the IRS sought independent,
objective, and unbiased advisory services on its information
systems development program.
They asked the National Academy of
Sciences (NAS) to assess whether the IRS' development program was
structured and operating in a manner to guarantee the success of
the TSM effort and whether the goals and methodologies employed
were realistic and achievable.
The NAS was selected because it
is an unbiased and highly regarded review organization that
brings a high degree of expertise and experience to this effort.
An Academy-formed committee of high level executives from the
business and academic communities will evaluate research done to
date and suggest steps to assure that the IRS sets and meets
realistic and achievable program goals.
The study will provide
confidence that the TSM initiatives can be carried out and will
progress toward a modern tax administration system.
It will also
help minimize risks of disruption of the nation's tax
administration system by reason of technological misjudgments or
failures.*
Treasury works with the IRS and all other bureaus to ensure that
the plans, budgets and acquisitions are achievable, cost
effective, in the best interest of the taxpayer, and compliant
with all applicable standards and regulations.
Each year,
Treasury issues a planning call for the IRS 5-year Information
System Plan (ISP). The Department reviews and analyzes the ISP
for budget impact, as well as overall program effectiveness.
Through the budget review, Treasury evaluates major information
technology programs of its bureaus to ensure that:
1) the
approach will effectively meet user needs;
2) adequate resources
are provided to achieve sound technical solutions;
3) estimates
of costs and benefits are realistic;
4) schedules are realistic;
and 5) the approach is consistent with strategic direction.
Throughout the budget process, Treasury represents the IRS and
all bureaus in negotiations and discussions of budget issues.
The Department's information systems officials articulate
Treasury policy and mission needs to budget officials both within
Treasury and at OMB.
Bureau technology needs are interpreted for
non-technical officials and the Department acts as the bureau's
7
advocate when a bureau budget request leaves Treasury and makes
its way to OMB and Congress.
During the Treasury budget review cycle, frequent Departmental
hearings are held with project offices to determine the^rate of
progress according to the schedule outlined in the previous
plans, whether project benefits are being achieved, and the
adherence of the initiative to Treasury's overall strategy.
Treasury supports the IRS and other bureaus in hearings that are
held to deal with issues surfaced by OMB in their analysis of the
budget request.
Both the Treasury Office of Finance and OXRM
work on these OMB issues as they relate to the budget.
Given the multi-billion dollar nature of IRS' TSM program, many
procurement initiatives have been selected by GSA for their
*•Comprehensive Review Program” . Under this program GSA
participates with the agency in the review of the various phases
of the procurement and system implementation.
To date, the
following major IRS procurements have been selected for the GSA
Comprehensive Review Program:
o
o
o
o
o
o
Document Processing System,
Service Center Support System,
Check Enhancement and Expert Systems,
Service Center Recognition/Image Processing System,
Department of Treasury Telecommunications System, and
Disabled Employee Support Acquisition Contract.
In addition, it is anticipated that other procurements exceeding
$100 million will be added to GSA's list when they are submitted
for delegation authority.
TREASURY OVERSIGHT OF IRS PROCUREMENTS
The second area I will discuss is the role that the Treasury
Department has had or will have in managing or otherwise
establishing the terms of procurements which will take place
under IRS' TSM program.
As Treasury's Senior IRM Official, I advise, review, approve, and
guide IRS in the acquisition of all FIP Resources to be utilized
in TSM.
Treasury takes a proactive role in developing effective
procurement strategies in the use of full and open competition.
We establish overall goals for information systems acquisitions,
while the IRS must adopt supporting goals that will enable them
to fulfill their mission needs in manners that are consistent
with Treasury's basic strategies and policies.
8
The GSA delegation of procurement authority is redelegated by the
Department to the appropriate bureau contracting official.
Even
with such a redelegation, Treasury reviews the solicitation prior
to issuance and the proposed contract document and its background
file prior to award to ensure that the procurement is in keeping
with the delegation granted.
In addition, Treasury keeps
constantly informed on the status of these procurements through
meetings, reports, and day-to-day dealings with bureau staff.
Also, Departmental procurement regulations require a legal review
of solicitations and contracts over $100,000, to assure
compliance with statutory and regulatory requirements.
As TSM is being implemented, Treasury will continually conduct
reviews in accordance with its mandate to ensure that the systems
are, in fact, achieving the expected results.
In 1990, the Department participated with the IRS in a review of
the IRS' contracts and acquisitions function to determine if
procurement services were provided in an efficient, effective,
and timely manner and if the IRS procurement organization was
prepared for successful processing of the various TSM projects.
The study resulted in the issuance of 34 recommendations, all of
which were accepted by the IRS.
Significant recommendations
included:
1) placement of the procurement function at the
Assistant Commissioner level in the IRS organization to ensure
greater independence and visibility;
2) hiring a procurement
professional for the Assistant Commissioner position;
3)
structuring the function to enable focusing on information
systems procurement;
and 4) developing a staffing model and a
procurement career management program to ensure that there are
sufficient numbers of procurement personnel with sufficient
professional training to meet the needs of the agency.
ROLES IN TAX SYSTEM MODERNIZATION PROCUREMENTS
The third area for discussion regards the specific roles of
Treasury's Assistant Secretary (Management) and Deputy Assistant
Secretary for Information Systems (DAS-IS) in 1RS' ADP
procurements:
As the DAS-IS, I advise and guide 1RS in the planning, budgeting
and acquisition of FIP Resources to be utilized in Tax System
Modernization.
Let me describe to you some specific functions that I perform
that have significant impact on major 1RS procurements.
I am a standing member of a group of Senior 1RS/Departmental
Offices Officials who meet once a month to discuss major
procurements, critical problems, and any impending key decision
9
points.
Obviously, TSM is a significant topic of these
discussions.
I have also served a key role in the selection of high level IRM
officials that have recently filled positions in IRS.
Specifically:
o
I participated as a voting member of the Executive Resources
Board that interviewed candidates and recommended the
selection of the Chief Information Officer (CIO), namely,
Mr. Henry Philcox, for the IRS.
This selection represents
the establishment of the first CIO position in Treasury, and
can serve as a model for other agencies with large
procurements.
0
I participated, again as a voting member, on the Executive
Resources Board that interviewed candidates and recommended
the selection of the IRS Assistant Commissioner for
Procurement.
This position will be instrumental in focusing
management attention on the importance of TSM's large
contracting efforts.
1 also make the key recommendations on IRS's information systems
budgetary matters when the Departmental budget is being developed
and recommend priority ranking of major initiatives.
As far as the Assistant Secretary for Management's specific
involvement in IRS's ADP procurements, the Assistant Secretary
primarily interfaces with Commissioner Goldberg on budgetary and
policy matters in the management and administrative areas.
The
Deputy Secretary, Mr. Goldberg, and the Assistant Secretary meet
quarterly to evaluate IRS progress in meeting the tasks outlined
for the TSM endeavor.
Questions concerning procurement activity,
issues related to coordination with other interested parties, and
progress in meeting deadlines are surfaced by the Office of the
Assistant Secretary for Management.
These reviews ensure
periodic oversight of the TSM program at the most senior policy
level in the Department.
The Assistant Secretary receives regular briefings from me on the
status of major procurements, and in particular on the status of
TSM, since it is an effort of utmost interest and importance to
Treasury.
While participating in the meetings we have regarding
TSM, the Assistant Secretary relies on me to maintain full
awareness of the status of the initiative at any given time and
fully supports me in the exercise of my Senior IRM Official
duties.
The Assistant Secretary also served on the Executive Resources
Board that interviewed candidates and recommended the official to
fill IRS's first CIO position, and I mention that, Mr. Chairman,
10
because I believe this shows Treasury's commitment to actively
participate in the management and oversight of key Departmental
initiatives.
I should add that the final approving official for
the CIO position was Deputy Treasury Secretary John Robson:
a
fact that is further indicative of the high level of involvement
of the Department in key IRS decisions.
TREASURY DEPARTMENT PROCUREMENT POLICY ISSUES
Your letter asked if Treasury seeks to remove TSM or any other
Treasury or IRS program from application of existing government
wide procurement laws and regulations, such as GSA authority
under the Brooks Act, and GSBCA and GAO procurement protest
resolution authority.
Your final question also asked if Treasury
was engaged in any meetings or discussions with OMB and/or the
Office of Federal Procurement Policy (OFPP) to discuss removal of
TSM or other Treasury or IRS programs from the current statutory
and regulatory procurement framework.
We want to emphasize that the Department is not pursuing the
elimination of, or special exemption from, GSA oversight of TSM
or any other bureau initiatives.
We have held discussions with
various Treasury and non-Treasury officials on appropriate
actions that the Department might pursue in support of the IRS
Tax System Modernization program.
Our position is always to look
at ways to do things better to benefit the American citizen.
In
that regard, the Department is working with GSA to facilitate the
GSA review of TSM and other initiatives in the following three
ways:
o
GSA conducts periodic major IRM
every 3 years. The Department,
other bureaus, is preparing for
successful review may result in
threshold for Treasury;
reviews of each agency
including the IRS and
this review, and a
GSA raising the DPA
o
Prior to granting a DPA, GSA typically selects high
dollar, visible acquisitions for case reviews.
The
Department is working closely with GSA on these reviews
and is hopeful that GSA will soon assign a permanent
desk officer or liaison for the Treasury Department;
o
The Department is supporting a FIRMR Council initiative
to raise the basic DPA threshold above $2.5 million.
The Internal Revenue Service was granted, through its FY 1991
appropriations bill, a very narrow exemption from the competition
requirements of the Competition in Contracting Act. The
legislation permits the use of non-competitive procedures to
acquire the services of experts for the examination of taxpayers'
returns or litigating actions in the Tax Court only.
The
11
legislation does not apply to the acquisition of expert services
generally and has no application to acquisitions of other
services or goods.
Treasury and the IRS had raised with appropriate officials the
feasibility of supporting regulatory changes in the Federal
Acquisition Regulation and statutory changes which would have
exempted small prototype system contracts from certain
competition requirements.
This action, however, is no longer
being explored. In our discussions with OMB, we are instead
actively pursuing the competitive process to establish an IRSsponsored Federally Funded Research and Development Center
(FFRDC) for TSM.
Congressional support for this has resulted in
supportive language and the designation of some funding in the FY
1991 IRS Appropriation.
Procedures prescribed in FAR Part 35 and
OFPP Policy Letter 84-1 are being followed in the establishment
of an FFRDC including full and open competition.
The proposed
FFRDC will be tasked to conduct research on new and emerging
technologies which will include prototypes.
Proposals regarding the General Services Board of Contract
Appeals' (GSBCA) rules changes were contained in a memorandum
signed by OMB officials on December 27, 1990.
These proposals
were developed in a joint effort involving OMB, the Internal
Revenue Service and Treasury officials, with the knowledge of GSA
officials.
The proposed amendments are not directed toward
Treasury procurements.
These are changes which, if adopted by
the Board, would strengthen GSBCA procedures, in general, for the
federal government and the vendor community as a whole.
OMB's
intent in distributing these proposed rule changes was to solicit
widespread federal agency comment and, thereby, develop a
constructive dialogue with GSBCA to hopefully increase the
efficiency of this procurement protest resolution mechanism.
Out
of 19 agency responses, 18 supported the proposed changes, while
one recommended that no changes be made.
The following
statements are representative of the responses:
o
"The proposed amendments would help GSBCA resolve protests
faster and protect the integrity of the protest resolution
process."
o
"...the proposed amendments ... will reduce delays in awards
of major procurements caused by the filing of unfounded
protests."
Based on the overall positive and enthusiastic responses from the
agencies to the proposed changes, we feel there is a definite
need for a continuing dialogue on the subject.
In the spirit of
establishing and maintaining a constructive dialogue aimed at
increasing the effectiveness of the GSBCA, we have encouraged the
Board to consider these proposed changes.
12
i
Treasury officials have publicly stated numerous times that we
support GSBCA in its efforts to protect the taxpayer's investment
in information technology.
The Department of the Treasury will
be the first to agree that both bidders on Government information
technology projects and the Federal Government have interests in
the existence of a forum to prevent abuses of the ADP procurement
process.
And to this end, the GSBCA performs a laudable job.
If
the procurement is being conducted by the Government in a manner
contrary to the interests of the American taxpayer, the aggrieved
firm should then make full use of the opportunities presented by
the GSBCA.
It is not the intent of the proposed rule changes to
diminish the opportunity to file a protest for a firm truly
aggrieved by the Government, but to further improve the protest
process.
Specifically answering your written question on this matter, Mr.
Chairman, the scope of any Departmental recommendation for
amending the rules of procedure is limited to our participation
in drafting the December 27, 1990, 0MB memorandum entitled
"Proposed Amendments to the GSBCA Rules of Procedure".
No other
actions are currently underway or planned.
Treasury strongly advocates streamlining the ADP procurement
process.
Decreasing the length of the procurement cycle to take
advantage of the rapid evolution of technology will reduce the
costs of the process for both the vendors and taxpayers, while
maintaining full and open competition.
We earnestly believe that
the efforts to refine the ADP procurement process represent the
beginning of an important dialogue on improving efficiency in the
acquisition of technology, with the ultimate goal to benefit the
American taxpayer.
I would like to emphasize to members of the Committee that the
subject of ADP procurement process modification is not an issue
just of interest and concern to the Department of the Treasury;
it is one of significant interest and importance throughout the
Government.
Calls for procedural changes in the ADP procurement
process have gained significant support throughout the Executive
Branch and the vendor community.
In order to bring about
procedural changes that will benefit the American taxpayer, it is
important that staff members from your Committee, 0MB, GSA, the
executive branch agencies, and representatives of the private
sector all work together in the development of a more efficient
ADP procurement process.
I encourage the members of this
Committee to involve their staff in the future discussions that
will take place on this important issue.
CONCLUSION
Mr. Chairman, I want to end my testimony by reaffirming
Treasury's strong commitment to the Competition in Contracting
13
Act, and to full compliance with existing legal and regulatory
measures governing the Federal procurement process.
We share
your desire for the efficient and economical procurement of goods
and services in accordance with full and open competition.
We fully appreciate the importance, indeed the necessity, to
obtain quality products at the lowest cost to the American
taxpayer.
It is the competitive process that results in^the^best
product at the best price.
According to agency Competition in
Contracting Act reports, 95% of Treasury's procurement dollars in
FY 1989 were competed, a percentage that I understand was
exceeded only by the Environmental Protection Agency and the
Departments of Agriculture and Labor among the larger Federal
agencies.
In FY 1990, we achieved a 92% competition rate.
I
think these figures reflect our commitment to conduct our
procurement program in accordance with existing policies and
regulations.
To the extent that existing regulations can be
improved and strengthened to the benefit of the American
taxpayer, I also state Treasury's commitment to that end.
That concludes my prepared testimony Mr. Chairman.
We will be
pleased to address questions that you and the Committee may have.
14
Department off the Treasury vijtfajihingtqfi, D.e. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 A.M. D.S.T.
„ ^ . „ UnV
EFT. OF JHET h EA^ uht
STATEMENT OF THE HONORABLE
DAVID C. MULFORD
UNDER SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL FINANCE AND MONETARY POLICY
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
JUNE 25, 1991
Introduction
Mr. Chairman and Members of the Subcommittee, I am pleased to
testify today on the proposed legislation to authorize U.S.
participation in the quota increase of the International Monetary
Fund (IMF).
The IMF quota increase, agreed to in May of last year, would
raise the basic resources of the IMF by 50 percent from $130 to
$195 billion, and the U.S. quota in the Fund by some $12 billion
from $26 to 38 billion.
This legislation represents a key foreign economic policy
initiative of the Administration.
Its passage is critical if the
IMF is to help shape the world economy and respond to the
challenges of the 1990s.
The IMF is the cornerstone of the world economy.
Established
in the wake of the Great Depression and the immediate aftermath of
World War II, the Fund was charged with the critical mission of
promoting the smooth functioning of the international monetary
system and restoring international monetary cooperation.
Throughout its history, the IMF has promoted an open and
dynamic world economy — consistent with U.S. principles and
foreign economic policy interests — that has contributed to U.S.
job expansion and economic growth.
It has helped support countries
of vital interest to U.S. national security.
The United States has
been the leading force behind the Fund over the years, reflecting a
strong tradition of bipartisan support for the institution during
Democratic and Republican administrations.
NB-1343
2
The IMF's Role in the Current Global Economic Setting
The world economy now stands at a critical juncture.
Throughout the world, centrally-planned, state-run models of
economic development and one-party governance are being rejected.
In Eastern Europe, Latin America, Africa, and Asia, the focus of
economic reforms is on developing free markets and private
enterprise.
These developments point to the emergence of a new
international order of multilateral cooperation and have increased
prospects for enhanced international economic stability and
prosperity.
In pursuing their paths to political and economic freedom,
these countries across-the-board are turning to the IMF for policy
guidance and adjustment assistance.
They recognize that Fund
programs act as an international "seal of approval" and a catalyst
for other sources of financing.
Both Czechoslovakia and Bulgaria,
for example, began their reform efforts by applying for membership
in the IMF.
The United States has encouraged the Fund to take a
leadership role in responding to these challenges and the Fund is
doing just that.
The IMF took quick and decisive action in the Gulf crisis,
responding to the increased oil import bills faced by developing
countries throughout the world and the severe costs of the U.N.
sanctions on Iraq.
Following the lead of President Bush, who
addressed the World Bank and IMF at their Annual Meetings in
September 1990, the IMF implemented changes in its policies to
ensure it was well-positioned to help adversely-affected countries.
A key measure was the introduction of compensatory financing, on a
temporary basis, to assist countries in coping with higher oil
import costs.
The Fund has already committed over $3 billion to
countries adjusting to the disruptions brought about by Iraq's
invasion of Kuwait.
The IMF also provided crucial analytical
support to U.S.-led efforts by the Gulf Crisis Financial
Coordination Group (GCFCG) to help the front line states (Turkey,
Egypt, and Jordan) during the crisis.
In Eastern Europe, the Fund is at the forefront of
international efforts to assist countries in' restructuring their
economies away from central planning and making the transition to
free markets and private enterprise.
The Fund led the way in
Poland and Hungary and is building a strong framework elsewhere for
market-oriented adjustment.
This year alone, the Fund has already
committed $8 billion to the region.
These monies are supporting
three-year financing arrangements in Poland and Hungary and stand
by arrangements in Czechoslovakia, Bulgaria, and Romania.
In
addition to program financing, the Fund has disbursed substantial
compensatory financing to all five countries to help address
increased oil import costs arising from the Gulf crisis and the
switch to hard currency trade relations with the Soviet Union.
3
The Fund's support has unlocked substantial additional
financing for Eastern Europe.
In Poland, the Fund's program has
formed the basis for the recent agreement by official creditors to
reduce the country's debt and debt service obligations by 50
percent.
Throughout the region, Fund arrangements are a critical
element in catalyzing new resources from donor governments through
the G-24 process, from private capital markets and through the
Paris Club.
The Fund is also continuing to play a pivotal role in the
U.S.-led international debt strategy, the "Brady Plan."
Eight
countries — Chile, Mexico, the Philippines, Costa Rica, Morocco,
Venezuela, Uruguay, and Nigeria — have reached agreements with
commercial banks on packages including debt and debt service
reduction.
These countries account for nearly half of the total
commercial debt held by the major debtors.
Fund adjustment assistance and support for debt and debt
service reduction agreements have been particularly important in
Latin America, one of the largest export markets of the United
States.
Sound, free-market policies and the reduction in debt and
debt service obligations have dramatically improved growth
prospects in many of these countries.
In Mexico, for example,
inflation and interest rates have dropped sharply, growth rates are
up, substantial new foreign investment has flowed into the country,
and flight capital is returning.
A similar turn-around in economic
conditions is occurring in Venezuela.
Chile's economic success is
confirmed by its return to private credit markets.
With Fund
support, Costa Rica in 1989 reduced its commercial bank debt by 62
percent.
Elsewhere in Central America, Fund programs are
supporting adjustment in Honduras and El Salvador.
The Fund is an integral part of international efforts to
encourage comprehensive economic reforms and to provide
concessional financing to the poorest countries of the world,
particularly those of Sub-Saharan Africa.
Over 20 African
countries currently have Fund programs.
Most of the Fund programs
are three-year arrangements under IMF concessional facilities and
involve extensive collaboration between the Fund, World Bank, and
the borrowing country.
These programs are addressing the
widespread need in Africa for structural reforms that are essential
for achieving sustained growth and alleviating poverty.
On the strength of these programs, two countries, Nigeria and
Niger, have recently reached debt and debt service reduction
agreements with commercial banks.
Niger is the first to benefit
from International Development Association (IDA) support for such
agreements.
4
Pressures on IMF Liquidity:
The Case for a Quota Increase
If the Fund is to meet the challenges of the world economy, it
must have adequate resources to fulfill its systemic
responsibilities.
For this purpose, the IMF regularly reviews the
adequacy of its quotas.
The current quota review was to be
completed in 1988.
However, the conclusion of these negotiations
was delayed by two years as the United States insisted that there
be a strong case for additional resources on the basis of a careful
analysis of prospective demands, available resources, and agreement
on the future role of the IMF as.a monetary institution.
Thus,
this is the first quota increase in eight years.
The Fund's role in responding to the challenges of the Gulf
war and reform efforts in Latin America and Eastern Europe is
resulting in substantial current and projected demands on Fund
resources.
Although aggregate Fund quotas presently total around
$130 billion, only about one-half of these quota resources are
considered usable (i.e., resources from countries which are not
borrowing from the Fund and which have strong financial positions).
From this pool, substantial amounts have already been lent.
Thus,
the Fund currently estimates that it has about $30-35 billion
remaining for lending over the five-year period normally covered by
the quota review.
Fund resources will be significantly depleted in the period
ahead.
The Fund currently estimates that disbursements this year
will total $16 billion — more than double last year's lending.
Disbursements are expected to remain high in follow-on years.
As a
result of heavy financing demands and loans, measures of Fund
liquidity are expected to drop by almost 40 percent this year and
decline further next year.
Furthermore, a substantial portion of
the loanable resource base could be removed if a major creditor's
balance of payments position were to weaken.
For these reasons, the proposed quota increase is timely.
The Fund's resource base is being depleted.
The quota increase is
forward-looking.
These resources must serve the Fund over the
medium term.
Effectiveness of U.S. Support for the IMF
Support for the IMF is an extremely effective means for
advancing U.S. interests.
Use of the U.S. quota by the IMF involves no net budgetary
outlays.
This is because any transfer of dollars to the Fund is
immediately offset by the receipt of an equivalent, interestbearing and liquid monetary reserve asset.
This accounting
treatment is used internationally.
Over the years, the United
States has drawn 24 times on its reserve position for a total
5
amount of $6.5 billion.
It last drew on its reserve position in
1978 for some $3 billion.
Indeed, during the 1980s, U.S. participation in the IMF has
resulted in a net financial gain of $628 million annually.
This
gain reflects interest earnings and valuation gains on our reserve
position in the IMF, which sharply exceeded the borrowing costs to
the Treasury associated with financing transactions with the Fund.
The budget agreement makes specific provision for the unique
budgetary treatment of the IMF quota increase.
The approximately
$12 billion increase in the U.S. quota will not result in any net
budgetary outlays.
Also, this appropriation is only available for
the quota increase; it could not be applied, for example, to other
discretionary spending programs.
IMF financing also leverages our scarce resources, which is
critical at this time of budget constraint.
For every dollar the
United States contributes to the Fund, other countries contribute
four.
The United States is also well positioned to influence IMF
policies.
Our voting share in the IMF of some 19 percent gives us
veto power over key IMF decisions, such as quota increases and
amendments to the Fund's charter, which require an 85 percent
special majority vote.
In addition, our voting share positions us
to build majorities on other major issues, requiring supermajorities of 70 percent for approval.
This veto power has often
proven essential to ensure that the Fund operated in a manner
consistent with overall U.S. interests.
The strengthened Arrears Strategy
During the quota negotiations, a number of steps were taken to
ensure that IMF resources, including U.S. contributions to the
quota increase, would be used more effectively.
During the 1980s, arrears to the Fund grew sharply, reaching
their current level of $4.5 billion from nine countries, an amount
twice the level of the Fund's reserves. Arrears undermine the
financial integrity of the IMF and its ability to fulfill its
systemic responsibilities.
Over time, Fund efforts to address the
growth in arrears bolstered Fund reserves but failed to reverse the
problem and promote a normalization of relations between the Fund
and arrears countries.
Thus, in order to ensure that any increased U.S. quota
contributions were wisely and productively spent, a major U.S.
priority in the quota negotiations was the adoption of a
strengthened arrears strategy.
Our basic approach emphasized the
need for a comprehensive set of incentives and disincentives
designed to reward sound performance and to discourage new arrears.
6
The plan eventually adopted by the Fund closely mirrors the U.S.
approach and includes two main elements.
First, the key to addressing current arrears cases is sound
economic performance to restore creditworthiness.
Thus, to
create an incentive for sound performance, countries which
cooperate with the Fund and demonstrate sustained performance
under a 2-3 year Fund-monitored arrangement can now earn
"rights” to special financing to clear their arrears.
Second, countries that over time do not fulfill their
responsibilities cannot be expected to enjoy the benefits of
membership.
Thus, if any country does not cooperate in
clearing its arrears and continues to fail to fulfill its
obligations, the strengthened arrears strategy provides for an
amendment to the IMF Articles that would permit the Fund to
suspend that country's voting rights and representation
privileges.
The rights approach is only available for the 9 remaining
arrears cases that were in arrears at the time of the quota
agreement.
At the successful conclusion of the program, a country
would gain access to special financing to help clear its arrears.
To receive the financing, however, a country must establish a
follow-on program so as to ensure that sound policies continue to
be pursued.
Financing for the rights program will come from two main
sources:
-
For lower-income arrears countries, the Enhanced
Structural Adjustment Facility (ESAF) will be used
primarily to finance the "rights" programs.
The two middle-income arrears cases, Peru and Panama,
will be eligible for financing from a special account
financed from increased charges on IMF loans and reduced
remuneration•
In both cases, "rights" financing is to come from special Fund
monies separate from the Fund's regular resources.
In „this way,
the Fund will avoid establishing undesirable precedents which could
undermine its monetary character.
In this context, since financing for the "rights" program for
lower income countries through use of the ESAF increases the
potential risk to ESAF creditors, it was agreed that the IMF would
sell, if needed, up to 3 million ounces of IMF gold to back up the
ESAF's already substantial reserves.
This limited amount of gold
reflects the gold subscriptions of the countries with arrears.
¥
- 7 Progress is being made under the strengthened arrears
strategy.
The IMF recently approved a three-year "rights" program
for Zambia and is working with official creditors and donors to
establish a rights program for Peru.
These two countries alone
account for nearly half of the total arrears owed the IMF.
Also,
Honduras and Guyana have eliminated their arrears, while Peru,
Panama, and Zambia are meeting maturing obligations to the Fund.
Under U.S. law, U.S. consent to any sale of IMF gold for the
special benefit of a single member or of a particular segment of
the membership must be approved by Congress.
Thus, the quota
legislation also seeks Congressional approval to allow the
Secretary of the Treasury to instruct the U.S. Executive Director
of the IMF to vote to approve the I M F ’s pledge to sell this limited
amount of gold.
Also under U.S. law, U.S. agreement to an amendment to the IMF
Articles of Agreement requires Congressional approval.
Thus, we
are seeking legislation that would authorize the U.S. Governor to
the Fund to accept the proposed suspension amendment to the IMF
Articles.
This is a tough remedial measure which encountered
resistance from developing countries and was adopted only at U.S.
insistence and as a precondition of the suspension amendment, the
quota increase cannot go into effect.
The goal of the suspension
amendment is positive, however:
normalization of relations and the
deterrence of future arrears.
Impact of IMF Activities on Poverty and the Environment
During the past year, concerns have been raised regarding the
I M F ’s role in environmental protection and alleviating poverty.
The Administration is committed to environmental protection.
Towards that end, it has given high priority to promoting Fund
actions aimed at protecting the environment, consistent with Fund's
basic mandate.
We have achieved some important successes:
At U.S. initiative, the Fund is establishing a group of
economists that will serve as liaison with other organizations
on environmental research and advise the Fund on addressing
environmental concerns.
The Fund is currently seeking
environmental economists from outside the Fund to work, for a
transitional period, with Fund economists.
With World Bank assistance, the Fund is incorporating measures
consistent with environmental protection into Policy Framework
Papers (used for concessional programs) and some stand-by and
extended arrangements.
These can include measures to remove
government subsidies on fertilizer, energy, and pesticides.
IMF Article IV consultations include discussion of
environmental concerns.
8
The IMF is working with the U.N. to develop national income
accounting statistics to reflect use of natural resources.
These achievements have required much hard work on the part of
the U.S. Executive Director to the IMF and senior Treasury
officials.
We faced considerable opposition from developing and
developed countries alike in securing these gains.
Many countries
argue that the impact of Fund macroeconomic policies on the
environment is indirect and ambiguous.
They are also concerned
about overburdening the Fund and detracting from its primary
responsibilities as a monetary institution in promoting sustained
growth.
Developing countries in particular are sensitive to the
appearance of the Fund intruding on national sovereignty.
Moreover, there is broad recognition that the World Bank is bettersuited to addressing environmental concerns in an effective and
lasting manner.
The U.S. is the primary force behind increased Fund attention
to environmental concerns.
By virtue of our leadership position in
the institution, we have been able to overcome some of the
reservations of others, and we plan to build on the progress that
has been made.
We look forward to continuing our work with
Congress and the environmental community in this important area.
Turning to poverty issues, IMF conditionality is sometimes
criticized as imposing austerity on countries and hurting the
poorest segments of the population.
This view, however, represents
a misconception of the IMF's role in the adjustment process.
Countries generally come to the Fund facing severe economic
imbalances.
Usually, they have lived beyond their means, consuming
more than they produce, and are facing a curtailment in foreign
financing flows.
In these circumstances, they face the prospect of
"forced" adjustment — deep and inefficient cuts in investment,
imports, and growth.
In contrast, IMF policy advice and financial support offer
countries "breathing room" and the prospect for a more orderly
adjustment path.
Experience shows that the sound market-oriented
reforms the IMF supports are essential to achieve sustained growth,
reduce poverty and catalyze additional external resource flows.
There are, to be sure, inevitable costs associated with the
adjustment process.
The Fund is sensitive, however, to these
costs.
Virtually every Fund program includes support for social
safety nets, such as the maintenance of expenditures for such basic
human needs as health, education, and nutrition.
Fund programs
also allow for targeted assistance to protect the most vulnerable
groups from the effects of such necessary reforms as the removal of
subsidies for basic consumer items.
Costa Rica, Ghana, Venezuela,
Niger, Bangladesh, and Egypt all have Fund programs which
incorporate targeted government assistance for the poor.
Furthermore, in recent years, under the debt strategy, the
Fund has given increased attention to growth-oriented structural
reforms.
This has acted in many cases to help the poor.
Fund
programs increasingly emphasize comprehensive structural reforms in
order to free up workers, producers, and farmers to respond to
market forces — not government regulations and bureaucrats.
These
measures are intended to stimulate supply responses and reduce
adjustment programs' reliance on fiscal belt-tightening and
monetary restraint.
Also, as noted previously, in the poorest countries of the
world, substantial concessional financing is being provided.
As
part of ESAF programs, the Fund is devoting extensive attention to
cushioning the poor from the side-effects of adjustment.
These measures have been adopted with strong U.S. support and
encouragement.
Moreover, countries undertaking Fund-supported
adjustment reforms have themselves recognized that the
incorporation of social safety nets substantially enhances popular
support for the program.
The United States will continue to
encourage the IMF to show increased sensitivity to the effects of
adjustment on poverty.
Conclusion on IMF Quota Increase
Since its establishment some 45 years ago, the IMF has played
a central role in strengthening growth at home and in promoting a
sound market-oriented world economy consistent with basic U.S.
foreign economic policy interests.
IMF support for a sound and stable world economy is crucial to
maintaining conditions in which U.S. jobs and exports can thrive.
U.S. economic interests are increasingly tied to international
economic developments.
In 1990, virtually all of U.S. economic
growth was accounted for by the increase in exports.
Estimates
suggest that roughly one out of every four new jobs in the United
States is related to merchandise exports.
The fastest growing U.S.
export markets are in the developing world.
Many of our developing
country trading partners have received IMF assistance in support of
market-opening measures and increased growth.
Moreover, IMF
support for an open and smoothly functioning international system
of payments is essential to fostering growth in trade.
The foreign policy interests of the United States have been
well-served by the Fund.
The quick and effective Fund response to
the Gulf crisis sent a strong message of continued international
support for efforts to gain Iraq's withdrawal from Kuwait.
In
Eastern Europe and elsewhere, economic reforms are inextricably
-
10
-
linked to the movement toward democracy.
In Latin America
especially, the Fund is supporting sound economic policies and debt
and debt service reduction under the Brady Plan.
IMF support is
essential if countries throughout the world are to achieve peace
and prosperity on the basis of democratic and market principles.
The IMF also serves our interests in an extremely effective
manner.
Use of the U.S. quota in the Fund involves no budgetary
outlays and leverages our scare resources.
We are the largest
member and most influential voice in the Fund, and our large voting
power gives us veto power over certain key decisions and positions
us to build majorities on other major issues.
The strengthened
arrears strategy will ensure that increased U.S. resources are used
wisely.
The world economy stands at a historic juncture in which U.S.
interests will be deeply affected.
It is critical that we support
the IMF now if we are to continue our strong leadership in this
central global institution as it helps shape the world economy of
the 1990s.
Thus, on behalf of the Administration, I strongly urge
you to support passage of the IMF quota legislation.
.p.( pOOH 8»^®
¥A70
UBLIC DEBT
»60
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
! ! r ■ to f Pib 5
X
CONTACT:^Office of Financing
202-376-4350
FOR IMMEDIATE RELEASE
June 25, 1991
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $12,529 million of 2-year notes, Series AC-1993,
to be issued July 1, 1991 and to mature June 30, 1993
were accepted today (CUSIP: 912827B35).
The interest rate on the notes will be 7 %. The range
of accepted bids and corresponding prices are as follows:
Yield
7.03%
7.06%
7.06%
Low
High
Average
Price
99.945
99.890
99.890
$50,000 was accepted at lower yields.
Tenders at the high yield were allotted 64%.
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
56,270
34,298,110
30,480
54,540
92,925
53,530
1,642,020
78,970
25,845
79,770
21,605
524,615
239.835
$37,198,515
Accepted
55,270
11,444,710
30,480
54,540
67,925
51,730
325,370
67,250
25,845
79,770
21,605
64,615
239.835
$12,528,945
The $12,529 million of accepted tenders includes
million of noncompetitive tenders and $11,449 million
competitive tenders from the public.
j
In addition, $1,228 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $1,514 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1344
TREASURY NEWS
Deportment off the Treasury • W ashington, D .c . • Telephone 566-2041
I 'FOR RELEASE AT 2:30 P.M.
June 25, 1991
CONTACT^ nO^^Ljge^of Financing
m L1 U l)vv*
TREASURY'S WEEKLY BILI*
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approxi
mately $20,800 million, to be issued
July 5, 1991.
This
offering will provide about $ 2,900 million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $17,903 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, July 1, 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:
90-day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated April 4, 1991
and to mature
October 3, 1991
(CUSIP No. 912794 XH 2), currently outstanding in the amount
of $7,820
million, the additional and original bills to be
freely interchangeable.
181-day bills for approximately $ 10,400 million, to be
dated
July 5, 1991
and to mature January 2, 1992
(CUSIP
No. 912794 XT 6).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest.
Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
July 5, 1991.
In addition to the
maturing 13-week and 26-week bills, there are $ 10,553 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 $ 950
million of the original
13-week and 26-week issues.
Federal Reserve Banks currently hold
j$ 1,215 million as agents for foreign and international monetary
authorities, and $ 7,425 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-1345
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
ìBH M V ì
V
EMBARGOED u n t i l g i v e n
e x p e c t e d A T 10:00 A.M.
JUNE 26# 1991
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STATEMENT OP HONORABLE NICHOLAS F. BEADY
Chairman# Oversight Board of the
Resolution Trust Corporation
before the
Senate Committee on Banking# Housing and Urban Affairs
Cune 26# 1991# 10:00 a.m.
538 Dirksen Senate Office Building
Washington# D.C.
Hr. Chairman# members of the Committee# w e are pleased to be
mavlng our semiannual appearance before your Committee today.
We
look forward to bringing yo u up to date on activities of the
Resolution Trust Corporation (ETC) and the Oversight Board as
required by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FXKREA) §
w
I appear as Chairman of the Oversight Board of the ETC.
Accompanying me are the four other members of the Board: Alan
Greenspan# Chairman of the Federal Reserve Board; Philip Jackson,
jr.# former member of the Federal Reserve Board and currently
adjunct professor at Birmingham Southern College; Jack Kemp,
Secretary of the Department of Housing and Urban Development; and
Robert Larson, Vice Chwlraan of the Taubman Company and Chairman
of the Taubman Realty Group. Also accompanying us is Peter Monroe,
who is President of the Oversight Board.
we are here to discuss progress under provisions of the 1991
Funding Act# RTC asset disposition program, RTC funding needs to
complete this unprecedented task. Oversight Board activities since
our appearance before your Committee in January# and other matters
required by FIKREA.
FUNDING NEEDS
W
Hr. Chairman# your Committee and the Oversight Board share the
objective of getting t**«* savings and loan problem b ehind us
as
quickly as possible within the terms of f x e r e a and at the least
possible coBt. Our common goal is to protect the depositors of the
nation's failed thrifts:
to date some 14 million depositors with
NB-1346
2
accounts averaging $10,000.
in doing so we honor our depositinsurance commitments and keep faith w i t h our citizens.
net me review what has been done and how far w e have to go.
Size of the Task
hs we have said before, the ultimate cost of the cleanup is
driven by real estate markets, interest rates,
the state of the
economy. The number of thrifts that must be closed
the value
of the assets seized, and thus the total amount of ^
loss depends
on these larger economic forces.
The cost will also reflect our
effort to save taxpayer dollars wherever possible.
a s Chairman Seidman told the Committee last week, the RTC
estimates that it will complete the resolution of 557 thrifts by
the end of the fiscal year, and at that time also will have about
185 thrifts in conservatorship or in the Accelerated Resolution
Program (ARP). When these 742 institutions are resolved, all those
no w in Group IV will have been closed, and the lion/s share of the
job of closing insolvent thrifts will be finished.
^
what remains to be done?
On June 12 the Office of Thrift Supervision (OTS) announced
that Group III, defined as thrifts that are troubled but that are
unlikely to require government assistance and that have reasonable
prospects of meeting capital requirements,
consists of 378
institutions.
it is likely that some of the thrifts in Group III will fail
and that the RTC caseload will grow beyond the 742 institutions.
We do not believe, however, that sufficient Group III thrifts will
be transferred to RTC so as to exceed the upper end of our
previously estimated loss range.
Though the exact number of thrifts still to be resolved with
Federal assistance cannot be known, we can estimate that virtually
all nonviable thrifts will be transferred to the RTC for resolution
during the next two years.
If this estimate is correct, the
orderly downsizing of the industry will then have been completed.
^
Current law provides that OTS may transfer thrifts to RTC for
closing until August 9, 1992, when they would be transferred to the
Savings Association Insurance Fund (SAIF) • Therefore, as proposed
in the President's budget, w e request legislation to extend the
period in which OTS m a y transfer thrifts to RTC from August 9/
1992, to September 30, 1993.
3
W'
This extension should permit the OTS to transfer insolvent
thrifts to the RTC in an orderly w a y to avoid extended waiting
periods in conservatorship. Here OTS to transfer nonviable thrifts
to RTC in such quantity that they must remain in conservatorship
for long periods, the taxpayers' cost would rise because the
thrifts would lose franchise value.
The extension should ensure that the cleanup of the backlog
of failed savings and loans is completed b y September 30, 1993.
FXRRRA sets up a schedule for contributions to the SAIF, beginning
in fiscal year 1992 if Congress and the Administration take further
appropriations action. However# if Congress acts o n our request,
SAIF will not take insolvent institutions until October 1, 1993.
The President's budget estimates that at that date, SAIF should
have about $1.6 billion in its reserves from premium income.
At
this time, it is too soon to tell whether and h o w m u ch of a
contribution Treasury will need to make to SAIF.
Loss Funds Needed
Earlier this year, in our January 1991 semiannual appearance,
we estimated that the cost of the savings and loan cleanup would
he in the range of $90 to $130 billion measured in 1989 present
value dollars.
He stated that# because of general economic
conditions, deterioration in real estate marketB and real estate
related assets, the most likely cost scenario had probably moved
to the higher end of our original range, but that it nevertheless
remained within that range.
L
He still believe this to be true,
in other words, w e still
believe that the higher end of the range estimate of $130 billion
in 1989 dollars remains valid.
Presenting estimates in constant
dollars allows us to compare the estimates better.
It is the
conventional wa y for the private sector and the CBO to state the
cost of major programs that last for more than one o r two years,
but it is different from the same amount expressed in current year
budget dollars.
Our estimate of $90 to $130 billion in 1989 dollars converts
to a range of about $100 to $160 billion in budget dollars.
Chairman Seidman gave the same estimate in his testimony last week.
j
The Oversight Board
the RTC estimate that the additional
amount of loss funds necessary to complete the task of closing
defunct savings and loans and protecting depositors could be as
high as $50 billion in 1989 dollars, or $80 billion in budget
dollars.
To date, $80 billion has been provided:
$50 billion by
FIRREA and $30 billion b y the RTC Funding Act of 1991. With the
4
additional amount, the total would be brought to $130 billion in
1989 dollars, or $160 billion in budget dollars*
zt is our recommendation that congress provide sufficient
funding to complete the job, w hich w e estimate to be $80 billion.
This would permit the RTC to complete its work as quickly as
possible without costly delay.
Funding delays simply add to
taxpayer costs because they slow the FTC's resolution activity.
Just as we are trying to save taxpayer dollars b y improving the
cleanup, so w e should avoid costly stop and start funding.
Chairman Seidman estimated that the amount necessary for RTC to
carry out its work in fiscal year 1992 will be $50 to $55 billion.
W e know that these decisions are difficult because the public
in general does not understand the need for these funds. I'd like
to give you some examples of resolutions that have resulted in
prompt payments to depositors.
Southmost Savings and Loan
Association in Brownsville, Texas was closed in October, 1990 and
its 9,800 deposit accounts, averaging $9,000, paid off.
Alpine
Savings in steamboat Springs, Colorado was closed in June, 1990 and
its 5,300 deposit accounts, averaging $6,400, paid. North American
Federal Savings and Loan in San Antonio, Texas was closed in Hay,
1990 and its 11,500 deposit accounts were paid an average of $6,000
each.
z hope these examples underscore the point that the money is
going to people - 14 million accounts to date * and that w e have
no choice but to provide it.
we all want to fulfill our
Government's commitment to depositors. We do not want the system
to be destabilized b y TV coverage of lines in front of thrifts,
just as we should not permit households and businesses to be
impoverished b y frozen accounts.
The U.S. Government must provide the money, and we should
remind people that it isn't going to crooked or incompetent
executives, or to keep ba d institutions afloat. The money is used
to protect individual Americans who deposited their savings in s&Ls
because they believed our government's promise that it would be
safe there.
Working Capital Needs
Loss funds, which w e have just discussed, are the monies that
are needed to fill the ■hole” between an institution's deposits and
the value of its assets. They will never be recovered.
5
Y
Working capital, o n the other hand, is used to finance the
acquisition of the assets of failed thrifts h y e t c until they are
sold.
Xt is borrowed b y the ETC from the Federal Financing Bank
(FFB) • working capital borrowings are backed b y seised assets.
BTC expects to repay its worsting capital borrowings from the
proceeds of the sales of these assets.
B y the end of this fiscal year, ETC expects to have $70
billion in working capital borrowings outstanding, a n amount well
within the “note cap" limitations set b y FXBRS&. However, during
fiscal year 1992, ETC could exceed the $125 billion permitted by
the note cap.
Therefore w e are approaching the time w h e n additional
borrowing authority will be needed.
We estimate that working
capital needs could peak at $160 billion b y mid-1993. At that time
the ETC will start the process of repaying working capital
borrowings from the FFB. We estimate that outstanding borrowings
will decline rapidly to $65 billion in 1995 and will b e virtually
retired b y 1996 when the ETC goes out of business.
Because both loss funds and working capital are needed to fund
resolutions, it is imperative that loss fund authorizations be
matched with adequate working capital borrowings.
Therefore, w e
request that Congress raise the ETC's borrowing limit to $160
billion.
Not to do so might create a situation in which ETC is
pressured to dump assets at fire-sale prices simply to stay under
the limit.
Failure to raise the borrowing limit could just as
surely prevent the ETC from resolving thrifts and protecting
depositors as delays in funding do.
The working capital concept has caused confusion.
For
example, some have suggested that asset sales should be used to
fund losses.
But to do so would violate the principle that asset
sales must be used to repay working capital borrowings. Others
have suggested that working capital borrowings be used to fund
losses directly - but this sort of "backdoor” spending would
violate the principle that the E T C should have sufficient assets
to repay its FFB borrowings.
The Comptroller General has indicated his concern that ETC m a y
not be able to repay some of its borrowings from asset sales. The
ETC has recently completed a review of its assets to determine
whether there is sufficient value to p a y back borrowings. The GAO
and the ETC's Inspector General (XG), at the Oversight Board's
request, are both auditing the methodology to verify its accuracy.
6
In past appearances we have stressed that w e cannot predict
ultimate costs and borrowing needs with certainty#
w e must do
so again. As the General Accounting Office (GAO) noted in its 1989
Financial Audit of the RTC, "the actual cost..«will depend on t^A
outcome of various uncertainties, ” including the number of
institutions transferred to the RTC, the extent of their operating
losses, the quality and salability of their assets, end the
conditions of the economy# especially in certain geographic areas.
In ¿January# z told this committee that the economic downturn,
and the Middle East crisis, had worsened the already w e a k market
for real estate assets and made already cautious investors more
reluctant to make investment decisions. The climate is still
uncertain, and in a n uncertain climate, estimates are always
subject to change.
But w e have in the past and have today given
you our best estimates of projected loss end working capital needs#
and we will continue to do so.
GBTTXHG THE JOB DONE
j
When President Bush announced his proposed solution to the
savings and loan crisis soon after taking office, he established
four objectives against which we measure our progress.
First, protect insured depositors: the millions of Americans
who acted in trust when they deposited their savings in federally
insured accounts, x said earlier that nearly 14 million depositors
with accounts averaging $10,000 have been protected; they have had
access to their insured funds almost immediately.
Second, restore the safety and soundness of the industry so
that another crisis will not occur. In compliance with FXRREA# new
capital standards are being phased in.
Even with these higher
standards, three -quarters of the savings institutions, with more
than $600 billion in assets, today meet or exceed current capital
requirements.
Third, clean u p the Sail overhang so we can get the problem
behind us, and do it at the least cost to the taxpayer.
when
FXRREA created the RTC on August 9, 1989, RTC immediately became
responsible for closing 262 insolvent thrifts. B y October 1, 1991
it will have closed 55? insolvent thrifts# one about every 33
hours.
7
Fourth# aggressively pursue and prosecute the crooks
fraudulent operators who helped create the problem.
There have
been 550 convictions for thrift crimes, about 80 percent of those
sentenced have received prison terms.
FTC Funding Act of 1991
The FT C Funding Act that became lav on Mar** 23 provided
necessary loss funds for this fiscal year and helped advance the
objectives of the cleanup.
K e are grateful for this committee's w o r k on this m e a s u r e .
You acted
quickly to
report
the bill
and
obtain
Senate
cons iderat i o n .
The A c t also addressed other concerns:
FTC management
reforms, affordable housing# and minority and women owned business
(MWOB) contracting,
it included valuable n e w financial reporting
requirements. And it established that FTC personnel would not be
personally liable for certain securities transactions undertaken
in RTC asset dispositions.
Affordable Housing
The Oversight Board is strongly committed to affordable
housing and has made the following improvements in the program.
o
At Oversight Board insistence# $250 million of the FTC's
$7 billion seller-financing ceiling has been set aside
exclusively for single family affordable housing.
o
$190 million of mortgage revenue bonds has been set aside
b y state housing finance agencies to be used to assist
lowand moderate-income
first-time homebuyers
to
purchase FTC single family homes.
o
Sa m o a contractors are offered a special bonus fee to sell
affordable single family properties to eligible lowmoderate-income households.
o
The Oversight Board approved a policy allowing the FTC
to sell affordable single family properties to eligible
low- and moderate-income households at 80 percent of
market value.
This policy was further expanded in the
Funding Act to a "no minimum reserve price" policy.
To
8
date, the RTC has scheduled 99 sales events
9,000 properties at no «Hn-timrm reserve price.
o
to offer
Recently, the Oversight Board allotted up to $150 million
of
seller-financing for low* downpayment
sales
of
mu It if ami ly properties to nonprofit organisations.
She Funding Act provided that, through September 30, single
family properties
in conservatorship are eligible for the
affordable housing program.
O n April 30, 18,249 properties were
eligible
for
the
affordable
housing
program:
6# 429
in
conservatorship and 11,820 in receivership. of these, 12,203 have
been listed with clearinghouses.
Offers have been accepted on
5,718
properties
173
in
conservatorship
and
5,545
in
receivership. About 2500 have closed.
Single family homes represent the majority of the sales in
terms of the numbers of properties. As of April 30, 5,679 single
family properties had been sold.
^
Multifamily properties are also being sold through the
affordable housing program.
The availability of seller-financing
on these properties is expected to accelerate sales significantly.
B y the end of May, 471 multifamily properties, representing about
50,000 units, had been listed with clearinghouses,
negotiations
on 28 of these properties - w i t h a total of 4500 units - are under
way.
RTC has accepted offers on 77 properties which have not
dosed.
In addition, 13 properties have closed.
The average sales price for single-family properties sold
through the affordable housing program through the end of April is
$30,215. The average income of purchasers is $22,718, which is 60
percent of median household income.
Minority Outreach
Farticipat ion through outreach b y minorities and women in the
business generated b y the RTC is a goal of FIRREA.
Sustained
Congressional
interest was
reflected in the Funding Act's
requirement that the Oversight Board and RTC report o n actions
taken b y the RTC to engage additional HffOB contractors in its work.
This report was filed on April 30 as part of the Board's Semiannual
R e port.
*
Some background m a y be useful. FIRREA requires that the RTC
prescribe regulations for a vigorous outreach program to see that
minorities and women are given the opportunity to participate in
all aspects of RTC contracting activities.
FIR k e a also requires
that the RTC Strategic Flan provide procedures for the active
9
K
solicitation of offers from minorities and women./ and that it
ensure that discrimination on the hasis of race/ sex, or ethnic
group is prohibited in RTC's solicitation and consideration of
offerB.
RTC has conducted outreach efforts.
Its staff has appeared
at more than 100 professional and trade conferences to discuss
contracting opportunities.
In addition,
it has held two
conferences to explain its programs to minorities and has scheduled
several more.
But more oan be done.
According to the RTC, m w o b 's b y June 11 had w o n 4,690 - or 22
percent - of RTC prime contracts, wo r t h $203 million - or 23
percent of the value of all such contracts. Minority and minoritywomen owned contractors were 6 percent of the total awarded, and
non-minority women contractors were 15 percent of the total
awarded.
y
The FDXC/RTC employs 1143 attorneys, of w h o m 136 or 12
percent, are minority and 459 or 40 percent are non-minority women.
The RTC employs 496 attorneys, of w h o m 68 - or 14 percent - are
minority and 156 - or 31 percent - are non-minority women.
With,
respect to the utilization of outside counsel in legal work for
receiverships, the RTC awarded $586,547 - or 1.3 percent - to all
MWOB law firms in 1990 and $1,364,764 - or 1.9 percent - as of M a y
1991.
The Oversight Board firmly believes that the outreach
requirement of FXRRSA must be implemented vigorously and recently
has taken steps to enhance RTC's MWOB outreach program on two
fronts•
First, the Oversight Board urged the RTC to expand its
outreach efforts
to formalize its outreach commitment by
adopting comprehensive outreach regulations. The Board emphasized
that the RTC have a well-staffed, well-administered, and vigorous
outreach program embodied in regulations. RTC iB preparing these
regulations for public comment.
Second, the Oversight Board urged RTC to make aggressive use
of agreements with the Small Business Administration so as to
channel RTC business to small and disadvantaged firms.
The Board
approved a pilot program in April, and in a letter to RTC on June
3 urged RTC to expand the pilot program to include all appropriate
areas of RTC contracting.
At the sene tine the Oversight Board returned to the RTC for
further consideration a draft policy proposed to it b y the RTC
staff, under this policy additional preferences would be given to
minorities and women b y according them price and technical
competence adjustments. The Oversight Board has ashed the RTC for
clarification of its proposal.
The Oversight Board President and staff have met wi t h Reverend
Jesse Jackson and representatives of the minority business
community at the request of Chairman Riegle.
One result of those
meetings is that the Oversight Board President wrote to the RTC
suggesting that RTC should strengthen its administration of the
outreach program b y hiring a high-level manager with authority to
ensure vigorous implementation of the program throughout RTC's
operations. He also asked the RTC to build opportunities for small
ana k w o b firms into all the RTC's programs.
this is an important and little-appreciated concept about
which the Oversight Board feels strongly.
It means that RTC
contracts must be made accessible to a much broader range of
bidders by segmenting them b y geographic region, b y making them
smaller, and b y breaking them down b y type of service. The RTC has
begun to implement this approach.
A problem deserving attention is that RTC data show that while
there are many h w o b firms on RTC's rolls as qualified contractors,
smd though all of them receive the RTC's solicitations, a
relatively small number respond, when they do respond, they tend
to do well in obtaining contracts. This underscores the need for
RTC to design its contract solicitations so as to be more
accessible to these businesses.
The Oversight Board's goal is to achieve a far more extensive
participation of minorities and women in the business generated by
the RTC.
Significant properties
f z r r b a contains language authored b y senator Wirth w h ich
requires RTC to identify properties with natural, cultural,
recreational or scientific significance. In addition, the Coastal
Barrier Improvement Act of 1990 imposed waiting periods of up to
six months on RTC sales of environmentally sensitive property in
coastal areas.
11
J
O n January 17 of this year, the Oversight Board directed the
RTC to exp and its program to identify significant properties by
taking the following steps s
o
strengthening
properties;
its
internal
capacity to
identify
such
o
procuring the best available expertise from both public
and private sectors to assist in identification; and
o
publicizing the availability of significant properties
to the widest possible audience of interested persons and
agencies,
The Oversight Board further directed the RTC to immediately
design a plan to implement these three initiatives; the RTC
responded with its plan on February 15.
The oversight Board has monitored the implementation of the
RTC's efforts and their status is described in letters from the
RTC's Executive Director o n June 10 and 20.
I ask that copies of
this correspondence be included in the hearing record.
**
ASSET DISPOSITION
Just as the need to resolve hundreds of insolvent thrifts
quickly was the most critical task of the RTC when it was created
almost two years ago, asset disposition is its most important job
today.
I said earlier that because of the pace at which thrifts
are being closed we no w can estimate that virtually all insolvent
thrifts will be closed b y September, 1993.
But the corollary is
that RTC is rapidly accumulating very large amounts of assets.
O n April 30, 1991, the RTC held $164 billion in assets. This
compares to the year-end assets of the two largest commercial
banks, Citicorp and BankAmerica, at $217 billion and $111 billion,
respectively.
RTC had passed to acquirers or sold $154.3 billion or 49
percent of its assets by April 30, leaving it wi t h $164 billion at
that date.
In its nine-month financial operating plan filed in January,
RTC projected book value reductions of $75 billion through the end
of the fiscal year - $65 billion after putbacks of assets
previously sold to acquirers of closed thrifts.
During the
12
**
January-April period# book value asset reductions totalled
billion. Actual receipts from sales are $33 billion.
$35
The Oversight Board believes there is no more important task
before the RTC than organizing the programs necessary to dispose
of RTC assets quickly and at best possible prices.
I emphasize
this because it is our goal to save taxpayer dollars.
Shis is a
complex and difficult task# as Senator Dixon's hearings in the
Subcommittee on Consumer and Regulatory Affairs
last week
demons t rated.
The Oversight Board has helped provide the policies to
expedite and increase the return from asset sales. it directed the
RTC to use securitization to the widest extent possible# and it
authorized the use of seller financing* The Oversight Board acted
in both cases in order to maximize the taxpayers' recovery against
book value.
RTC's
categories:
asset
disposition
efforts
fall
into
readily marketable# and haxd-to-sell♦
two
broad
Readily Marketable Assets
As of April 30, 1991, the book value of RTC's inventory of
readily marketable
financial
assets
totalled
$61
billion,
consisting of $25 billion in investment grade securities, and $36
billion in performing one* to four* family mortgages.
19
Securities
With regard to securities, the primary disposition strategies
are to centralize sales in the Washington, PC headquarters and
execute sales in a manner that gets the best possible returns and
does not disrupt financial markets.
Results to date have been
relatively successful as 75 percent of securities held more than
90 days have been sold or collected,
with the introduction of
RTC's portfolio securities management system# RTC will be better
able to pool like securities to achieve price advantages resulting
from larger offerings.
13
One- to Four-Family Mortgages
Numerous initiatives have been implemented to increase the
pace of and returns from the disposition of performing one- to
four-family mortgages ♦ to date# about 56 percent of these assets
held more than 90 days have been sold or collected. Among the most
important initiatives was RTC's adoption in April of standardized
due diligence procedures# permitting the R T C to stratify its
inventory# identify which loans conform to Fannie Mae and Freddie
Mac standards# which are eligible for RTC's mortgage-backed
securities program# and which should be sold o n a whole-loan b a s i s .
has embarked upon an aggressive program of swapping
performing, conforming loans with Fannie Mae and Freddie Mac in
exchange for highly liquid securities. Through M a y 31# RTC had
swapped more than $1.4 billion in loans.
rtc
However# it is estimated that only about 15 percent ($6
billion) of RTC's current inventory of performing one-to fourfamily mortgages conform to the secondary agencies' criteria for
swap.
Therefore the balance mast be securitized or sold on a
whole-loan basis.
The oversight Board has strongly encouraged the widest
possible use of securitization.
Xt offers a much broader market
of purchasers than does the outright sale of whole loans and,
because of such benefits as reduced risk and more predictable cash
flows, results in a higher return on these assets for the taxpayer.
Further# securitization will enable the RTC to increase the pace
of asset disposition.
Using conservative assumptions# the savings over the next
three years from RTC's securitisation of single family mortgages
alone could exceed $1 billion (not including savings resulting from
reduced FFB borrowings ). Very significant additional savings could
result if other financial assets are securitized.
immediately following enactment of immunity protection for RTC
Board members
employees in connection wi t h their disposition
activities# r t c filed a $4 billion shelf registration wi t h the
Securities
Exchange Commission to issue its own mortgagebacked securities.
The goal of securitizing $1 billion in loans
per month has been set and the first issuance of $450 million in
securities ***« been priced and should close within days.
14
Hard-to-Sell Assets
Tbe most difficult task facing the RTC is the management#
marketing and disposition of illiquid assets inherited from
insolvent thrifts# principally real estate owned and non-performing
loans*
She RTC as of April 30 holds other performing loans wi t h
a book value of $36 billion# real estate with a book value of about
$31 billion, and non-performing loans with a book value of about
$25 billion.
To date it does not appear that ETC real estate sales have had
an adverse effect on local markets* To the contrary# the extensive
soundings of local market conditions taken b y all six of the RTC's
Regional Advisory Boards in 24 meetings in all sections of the
country indicate that in some areas the overhang of RTC properties
is depressing real estate markets. This finding simply reinforces
the need to dispose of real estate owned.
Other Performing Loans
✓
r t c has used a series of strategies to dispose of other
performing loans# including# among others, auctions, bulk sales
through the national sales center, and passing loans to thrift
acquirers at resolutions. The results of these efforts have been
the sale or collection of roughly 35 percent of mortgages other
thar one- to four- family, and 53 percent of other loans held more
9 0 days.
Due diligence on many of these loans, such as
commercial loans, is time consuming. Also, poor documentation of
these instruments hampers RTC disposition efforts.
SAHDA
The RTC'* effort to dispose of hard-to-sell assets has been
focused o n the BARDA program, that places real estate owned and
non-performing assets wi t h the private sector for management and
disposition under Standard Asset Management and Disposition
Agreements (SAHDAs ).
ù.
under a SAHDA, a contractor serves as RTC's agent in the
management anB sale of RTC assets •
The contractor designs a
management and disposition program for assets, hires subcontractors
to implement the program, end negotiates the sale of assets.
The
compensation structure gives contractors incentives to sell assets
quickly and at the best possible price. A recent revision to the
SAHDA standard contract has enhanced these incentives.
15
A 8 of May 31, 128 SAMDAs with assets of over $24 billion book
value have been placed with contractors. A n additional $10 billion
of assets is currently being bid.
At March 31, 6AMn& contractors h a d sold assets wi t h a book
value of $359 million, yielding $218 million in proceeds. Results
have been slow to come because 75 percent of the assets no w under
SAMDA were contracted for within the last six months, and because
there is a lag of three to four months after the award of a SAMBA,
before the contractor can implement a marketing program for the
properties under its management.
The SAMDA program has been criticized because the pools of
assets RTC created and bid out for management average $195 million
and thus make it very difficult for smaller businesses, including
M W O B 's , to w i n SAMDA contracts.
At the Oversight Board's urging
the RTC has begun to create smaller pools of assets. This should
make the SAMDA program more accessible to smaller firms and
especially to those owned b y minorities and women.
Seller Financing
The Oversight Board adopted last Dec ember a policy providing
for a $7 billion seller financing program to expedite the pace of
sales of illiquid assets and to maximize the value recovered b y the
RTC from such dispositions • A minimum of $250 million was reserved
to assist the sale of affordable single family housing to qualified
buyers•
The RTC has a strong cash preference. But the RTC owns assets
for which there is no cash market except at distress prices.
The
RTC reports that there were seven alternative cash offers for the
approximately 117 seller financed transactions that have occurred
since March, 1991 when the RTC began keeping records of alternative
cash offers. In such cases, seller financing gives the RTC a potent
means b y which to expedite the sale of assets,
it gets some cash
up front,
«.voids the
costs,
liabilities and physical
deterioration that occurs when property is held in inventory.
Nonetheless we recognize that financed transactions ultimately
rely o n the credit and performance of the buyer.
So they are not
without risk.
Accordingly the Oversight Board included risklimiting safeguards in its seller financing policies and directed
the RTC IG to conduct a front-end risk assessment of the program
and to conduct periodic audits.
16
Portfolio Sales
she RTC, through its sales centers, has been actively engaged
in marketing large portfolios of haxd-to-sell assets, including
apartment buildings, office buildings and shopping centers.
O n may 21 the r t c Board adopted a policy to authorise the RTC
to negotiate sales of very large portfolios of properties with
necessarily very large buyers, given the size of the portfolios.
The Oversight Board considers this a n important issue. Given
the very large amount of RTC assets, innovative sales methods must
be explored.
There are elements of the RTC policy that are
consistent with existing Board policy, such as cash flow mortgages,
if done on a competitive basis. Other elements of the program must
be reviewed by the Board.
We have just received the information
from the RTC that w e need to proceed with our consideration of the
matter.
The Oversight Board is also considering the effect of this
proposal on the SAMOA program.
Very substantial effort has been
given to making s a m d a work. The Board wants to encourage continued
RTC efforts to sell assets. However, we also want to ensure that
the portfolio sales policy does not undercut Sa h d a just as it is
getting started.
I ask your consent that the RTC policy statement, and the
Oversight Board's communications with the RTC about it, be included
in the record of the hearing.
OTHER BOARD ACTIVITIES
Management initiatives
strengthening the RTC's management practices end internal
controls have been key objectives of the Oversight Board because
they are essential to sound decision-making and ultimately to
saving taxpayer dollars.
Improving r t c management practices was mandated b y the
Congress in the Funding Act.
A number of needed improvements
identified b y the GAO were written into the Act and required to be
completed b y September 30. These and a number of other management
improvements requested b y the GAO and the RTC IG are summarized in
the Management Initiatives Report contained in Appendix I.
17
Encouraging the BTC to develop operating plans lias been a
major objective of the Oversight Board, The first nine-month plan
was submitted b y the BTC in January. Producing such plans requires
setting goals, developing internal plans to achieve the goals,
measuring progress against goals, analyzing variances and revising
strategies.
This process has been given strong stimulus b y the
Funding Act's requirement that the BTC and Oversight Board submit
quarterly projections through the end of each calendar year. This
is a he a lthy discipline that the Board strongly supports.
Operating Plan Management information system
Beginning in October, 1990, under the leadership of Director
Philip Jackson, the Oversight Board has initiated the development
with the BTC of a n Operating Plan Management Information System.
This is an important undertaking, as the Comptroller General
told the Committee in his appearance two weeks ago.
When in
operation, it will provide the Oversight Board with the consistent,
structured information needed to fulfill its role, and form the
basis for a n executive information system for senior BTC managers.
It will help in developing a n integrated operating pl a n process,
assessing the reasonableness of operating plan goals and measuring
operating results.
Its implementation will address the GAO's
concern that the BTC have a n integrated system that supports
decision making in policy as well as operational matters.
This information provides the basis for an ongoing Oversight
Board "scorecard" program which visually displays BTC's activities.
Oversight Board working Group on Audit Beviews
As the Comptroller General indicated, the thrift cleanup
requires oversight because it is so big, and costs so m a n y billions
of public funds.
The Comptroller General's testimony about BTC
operational shortcomings raised concerns that have been the subject
of ongoing action b y the oversight Board.
Some background m a y be helpful. Early in 1991 the Oversight
Board staff began studying the BTC's internal control systems.
This work was given impetus b y Comptroller Bowsher's criticisms of
the BTC's internal controls provided to the Oversight Board at its
April 17 meeting.
18
Oversight Board staff immediately began to meet wi t h the GAO,
with the r t c XG, and with R TC to understand and act on the GAO's
concerns.
At its next meeting, o n M a y 15, the Oversight Board
authorized m e as Chairman to write the GAO and the XG to request
explicit additional information as the basis for possible further
action.
The Oversight Board also created a working group headed b y
John Robson,
Deputy Secretary of the Treasury, a m S Alfred
DelliBovi, Deputy Secretary of s o d to help eddress concerns raised
in the area of internal controls.
g working group
three
tasks:
o
ensuring that RTC puts adequate systems in piece to
coordinate activities among r t c 's three auditors - the
GAO, the RTC's XG, e n d RTC's own in-house auditors;
o
ensuring that RTC puts an "early warning” system in place
so that problems are identified early; and
o
ensuring
that
RTC
has
a
system
to
track
the
implementation of corrective actions, *** to verify that
expected improvements were achieved.
On June 10, when the Comptroller General responded to m y
request, X wrote and asked h i m to meet with the working group.
X
would like to request, Hr. Chairman, that this correspondence be
included in the record of this hearing.
The working group has begun with a series of meetings with
representatives of the Comptroller General, the RTC XG, and RTC'e
recently formed Internal Controls Task Force.
Their first recommendation to me is that RTC be required to
comply with the Federal Managers Financial Integrity Act of 1982
(FHFXA). Under the Chief Financial Officers Act of 1990 (CFO), RTC
is now required to submit an assurance letter to the President »»a
Congress that RTC'e systems of internal controls comply with
standards prescribed b y the Comptroller General and are consistent
w i t h FHFXA.
In addition, while r t c is subject to certain financial audit
and management reporting requirements of the CFO Act, X believe RTC
would benefit from following all provisions of that act, which
include:
19
i
o
requirement to designate a CFO «bo will report to the
head of the RTC o n all financial natters;
o
institute a m o d e m federal financial management structure
and associated systems; and
o
produce consistent financial information.
As the chairman of the Oversight Board# X fully endorse these
working group recommendations.
While x will ask the Oversight
Board to approve these recommendations thereby requiring RTC to
follow the spirit of FUFXA and the CFO Act, x would welcome
legislation b y this Committee which would officially bring the RTC
under f h f x a and all provisions of the CFO Act*
xn either case,
good government dictates that w e follow this course.
The Role of the RTC Inspector General
y
The Oversight Board sees the Job of the r t c x g as critical.
Timely and comprehensive financial and program audits
are
absolutely essential to the success of the RTC. The Oversight Board
has worked closely with the RTC XG to be sure that his audit plan
is focused on areas within RTC that have the greatest relative risk
exposure and vulnerability.
We have taken a number of steps to ensure that audits of RTC
operations yield substantial change.
wh e n the XG's audit plan was in the initial stages of
development, x urged him to use a scientific methodology to
identify audit targets. The Oversight Board was pleased that the
XG responded to this request and employed a fact-based approach in
devising the audit plan.
Xn our review of the plan we noted several areas including
accounting standards, the 1988 Deals, and assat pricing, wh i c h in
our estimation warranted formal audits. we requested, and the x g
did modify his plan accordingly.
w e also encouraged h i m to
emphasise and speed up audits in the areas of asset management,
asset valuation, internal controls, and cash control, ks you know,
these areas were identified b y the g a o as weaknesses in RTC's
overall financial management system.
X ask that relevant correspondence with ,the XG be included
in the record of the hearing.
V
20
'88 DEALS
FXE e e a requires that the oversight Board establish strategies,
policies and goals for restructuring the 1988 Deals.
She Board's
policy calls o n the ETC to renegotiate and prepay the 1988 FSLXC
deals to save taxpayer dollars. ETC authorised the expenditure of
a total of $925.5 million for the prepayment of 7SLZC notes at six
investor-owned institutions and Sunbelt.
This brings the total
amount expended to $6.8 billion, or 31 percent of the $22 billion
appropriation for F791.
Estimated savings resulting from expenditures ranged from a
minimum of $70.9 million to a maximum of $133.7 million, or from
7«7 percent to 14.4 percent of cash expended during the month. For
the fiscal year to date, savings estimates range from $402.5
million to $738.4 million, equal to 5.9 percent to 10.8 percent of
the total $6.8 billion expended.
The range of savings reflects
the uncertainties about the tax treatment of these deals.
ORGANIZATIONAL ISSUES
,/
FXRRZA made the FDXC the exclusive manager of the ETC to
perform all responsibilities of ETC under the statute, and made the
FDIC Board the Board of Directors for the e t c . At the same time,
FXEEE& gave the Oversight Board authority over the ETC's
strategies, policies, and funding, and gave it responsibility for
oversight and evaluation of the ETC*
Given the immensity and
complexity of the cleanup, and the need for continuing objective
oversight, this separation of management and operations from
oversight makes sense.
it was prudent to assign the management and operational
responsibility to FDXC, because at the time of FXRHEA's enactment
it was the only organization with the experience and personnel
equipped to handle what was then, and throughout the initial phase
of the thrift cleanup has been, the ETC's principal task, i.e.,
seizing
and
resolving
a
massive
collection
of
bankrupt
institutions • The alternative would have been to create and staff
from scratch an organization to handle this problem, a job which
inevitably would have delayed the start of the cleanup and added
to the costs for taxpayers,
properly, neither Congress nor the
Administration was prepared to accept such delay or costs.
21
we have functioned under this structure for nearly two years •
Admittedly, there have been some problems i n addressing the giant,
unprecedented cleanup task. it would have been unrealistic not to
expect them,
indeed, w e do not believe that any individual or
group of individuals, working under any organizational structure,
could perform this huge, difficult task free of problems or er r o r s .
And one must also consider the array of other important f x r r e a
requirements--affordable housing, UWOB contracting and significant
properties— that require time and management resources.
So,
problems have occurred.
But in our analysis they have not been
problems caused by the structure.
Becently this Committee has heard testimony about some of the
problems. For example, the Comptroller General identified the need
to develops
/
o
a methodology for valuing assets in receivership;
o
systems for tracking BTC's asset inventory and its value;
o
a better system of internal controls; and
o
improved procedures to facilitate
potential buyers of BTC assets.
transactions
with
Some have suggested that these problems are caused by the
dual-board structure because that structure, in their view,
diffuses responsibility
prevents the BTC management from having
clear direction.
We do not agree. Neither does the Comptroller General nor the
Chairman of the BTC National Advisory Board, both of w h o m stated
to this Committee that the structure is not the cause of
operational problems an* that the cleanup does require oversight.
Such as that provided b y the oversight Board.
However, our mutual objective should not b e to debate about
problems, but to solve them.
An d we would like n o w to turn our
attention to that, recognizing that the nature of the cleanup has
changed and that solutions must be appropriate •
j
First, whan the BTC was created it had immediately to seize
and resolve hundreds of failed thrifts. W e w i s h to commend BTC's
management for the fine job they have done under the most
challenging circumstances. Bill Seidman, David Cooke, Bill Boelle,
Kelly,
others have built a country-wide organization from
the groun d up. we should remember that in less than two years the
22
*TC has been built to a n organization of 7,000 people, has taken
oyer more than €00 institutions, and seized assets worth $318
billion.
This is a tremendous accomplishment of which they all
should be proud.
Ke should recognize that the nature of the cleanup task has
fundame n tally changed. She work of the RTC is no longer dominated
b y the need to seize and resolve hundreds of bankrupt thrifts. Its
main task n o w is to sell to private owners the massive aggregation
of assets which the resolution of these thrifts has left in r t c 'b
possession.
This is a formidable undertaking— the biggest w o r k
out in history.
Second, w e do not believe it is wise or necessary to burden
FDIC or its chairman w i t h the direct responsibility for managing
both the RTC and the increasingly difficult problems of the banking
industry• The Chairman of the FDXC has more
enough on his
plate with FPlC's regular responsibilities.
S
So we believe the most important action that can be taken to
move the thrift cleanup forward effectively is to establish at the
head of the RTC a CEO w i t h the credentials
tb e operating
latitude to get this job finished. Chairman Seidman
expressed
a similar view and agrees with us that the search for a CEO should
get underway immediately.
As chairman Rlegle
said, “this is
the biggest financial enterprise there is right now, ■ and we ought
to "hire the best management” team to run it.
In our view a major and potentially disruptive restructuring
is not the first priority. Such a reorganization would require
legislation and thus could take months to a c c o w l i s h .
it would
create confusion and demoralization in
management ranks of the
RTC and thus as the Comptroller General has warned, would impede
progress.
Time and delay are our enemies. They only
higher
costs.
Immediately up o n appointment of the ne w CEO, the RTC Board
should delegate whatever authority m a y be needed to carry out his
or her formidable operating responsibilities. The RTC Board can
then focus on broader operating issues.
She CEO should immediately be asked to participate in all
meetings of the RTC and Oversight Boards to improve communication
and interaction among RTC management, *** operational RTC Board,
and the Oversight Board. Full membership could be provided under
subsequent legislation if necessary.
23
These actions can be taken immediately/ without legislation,
which as we know could entail considerable delay.
So w e need not
delay action.
The Oversight Board has discussed these matters
fully with the f d x c chairman.
The Oversight Board is aware that there are several proposals
to restructure the Oversight and ETC Boards# and that some members
of this Committee believe that such restructuring is necessary.
as z have said today and previously, w e do not believe
restructuring is necessary becanse the problems are not problems
of structure.
nonetheless,
if the Committee is convinced that it is
imperative to redraw the organizational chart, w e strongly believe
that any such plan should meet the following criteria.
W
First, a n e w e t c should not be a w h olly independent entity.
To entrust the expenditure of up to $160 billion taxpayer dollars
to an independent agency is not sound public policy.
The ETC is
not like a private corporation that does not receive public funds.
The ETC is a government corporation responsible for spending
possibly as much as $160 billion.
Certainly our experience w i t h
the Pederal Asset Disposition Agency suggests that strong oversight
is essential to protect the taxpayers' interest.
Second# as the Coopt roller General has stated, an oversight
function is important and necessary and should be retained.
Congress has previously recognized the need for such oversight,
zt created the Chrysler Loan Guarantee Board in 1980, and that
Board had five members, all of them public officials who served
part-time.
The point has been made that the Chrysler LoanGuarantee is dwarfed b y the thrift cleanup, and in dollar terms
that is true. The size of the thrift cleanup is even more reason
for oversight. But the principle is the same and is valid, it was
applied even earlier, in 1970/ when Congress created the Emergency
Loan Guarantee Board to oversee the government's interest in the
Lockheed Loan Guarantee.
Third, the oversight and budget approving entity should not
have direct operating responsibility over the ETC. These functions
should continue to be separated.
A body charged with oversight
cannot impartially perform that duty if it is also charged w i t h
operations.
U
24
Fourth,
any
restructuring
should not
disrupt
ongoing
operations, prolong the cleanup or result in costly delay.
Finally , a restructuring must address the real problems, not
just the perceptual ones. We see no useful purpose in just moving
the bores around.
Perhaps a n e w structure can be fashioned that meets these
criteria. Certainly, w e will work wi t h the Committee to that end.
Chairman Saidman suggested two possible organisational models last
week.
We are discussing these and other possibilities wi t h him.
But w e are concerned that a major restructure in mid-stream
threatens to disrupt the effort to get this enormous problem off
the public agenda.
CONCLUSION
This concludes our statement,
it is supplemented b y a more
detailed response, contained in appendix II, to several of the
specific information requirements set forth in FXRREA for this
semiannual appearance.
The great majority of insolvent thrifts will have been seized
b y the end of the fiscal year, we request additional loss funds,
working capital, and an extension of the period in which thrifts
may be transferred to the RTC for closing. These authorities will
permit the job of protecting depositors and closing insolvent
thrifts to be completed in an orderly, efficient way.
The task n o w before the RTC is to dispose of assets as
quickly as it can and with the greatest possible return.
This is
a Herculean job. Policies and programs put in place months ago are
n o w becoming operational. But much remains to be done, and we look
forward to working with you to finish this job.
m
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
'JBRARY ROOM 5 3 1 0
FOR IMMEDIATE RELEASE
June 26, 1991
CONTACT: Office of Financing
. nn. _ ^
202-376-4350
« « 2 83 1 00 2 9 7 I
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $9,301 million of
Hfi$t^&,{jR$eries Q-1996,
to be issued July 1, 1991 and to mature June 30, 1996
were accepted today (CUSIP: 912827B43).
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
7.95%
7.97%
7.96%
Price
99.696
99.615
99.655
$138,000 was accepted at lower yields.
Tenders at the high yield were allotted 37%.
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
46,244
23,885,948
15,783
48,779
47,531
30,442
1,342,193
36,010
23,821
52,275
15,993
319,081
43.331
$25,907,431
Accented
46,244
8,380,903
15,783
48,779
43,271
30,427
467,803
32,010
23,821
52,270
15,993
100,246
43.296
$9,300,846
The $9,301 million of accepted tenders includes $888
million of noncompetitive tenders and $8,413 million of
competitive tenders from the public.
In addition, $100 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $300 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1347
Department of the Treasury • Washington, D.c. • Telephone S66-2041
oh 283T0 0 ou 8 d
EMBARGOED UNTIL GIVEN
EXPECTED AT 9:30 A.M.
\
I'
F °T Of THE
TREASURY
*
w *
m
STATEMENT OF THE HONORABLE ROBERT R. GLAUBER
UNDER SECRETARY OF THE TREASURY FOR FINANCE
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES HOUSE OF REPRESENTATIVES
June 27, 1991
Chairman Panetta, and members of the Committee, thank you
for the opportunity to discuss the budget implications of
financial institutions legislation and other issues now or soon
expected to be before Congress.
As you requested, my testimony
discusses the condition of the Bank Insurance Fund (BIF), the
Administration's efforts to address the "credit crunch," and the
funding requirements of the thrift cleanup.
At the end of my
testimony, I will be glad to answer your questions about the
Administration's proposed deposit insurance and banking reform
legislation.
Bank Reform Legislation
I would like to preface my comments on the BIF's funding
needs by pointing out that the current problem with BIF is the
manifestation of a much larger problem.
Outdated legal
restrictions prevent our banking organizations from responding to
changing financial markets and technology; the scope of deposit
insurance has expanded dramatically, increasing taxpayer exposure
as market discipline has been weakened? and, a fragmented
regulatory system has created duplicative rules and often failed
to produce decisive remedial action.
We believe that a comprehensive approach to banking reform
is the only way to truly resolve the underlying problems in the
banking system — merely recapitalizing BIF would 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 the
following fundamental objectives:
—
NB-1348
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.
—
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.
—
Fourth, we need a better capitalized BIF.
■>
If these four objectives are met, we believe that the
deposit insurance funds will once again become little more than
an asterisk in the federal budget.
This is in contrast to today,
when they can cause swings of billions of dollars.
With a return
to international competitiveness as well as enhanced safety and
soundness, our banking system would also return to its crucial
role as an important engine for economic growth.
Bank Insurance Fund
Let me now turn to the condition of the Bank Insurance Fund.
As the Committee is well aware, BIF reserves are at their lowest
level in history as a percentage of insured deposits, and are
projected to decline still further over the next two years.
Without an infusion of funds, the Federal Deposit Insurance
Corporation (FDIC) could find itself with too little cash to pay
for losses, resulting in possible exposure for the taxpayer.
Indeed, the FDIC has recently revised its expectations for
1991 and 1992 to the more pessimistic end of its previously
released forecast range.
While the FDIC estimates that BIF will
have sufficient funds to last through the fiscal year, BIF will
likely need recapitalization funds in FY92.
The Administration's projections are that the BIF will
decline substantially over the next five years, reaching a
negative net worth of over $22 billion by the end of 1996.
These
projections are based on a computer model that applies historical
failure and loss rates to banks according to their capital
levels.
In addition to the Administration's projections, there are a
number of other projections for BIF which reach widely disparate
conclusions.
This only proves what Chairman Seidman of the FDIC
often says — there can be little certainty in projecting BIF
losses, particularly more than two years out. Attached as
Exhibit A to my testimony, you will find summarized the results
of BIF projections made earlier this year by the Congressional
2
Budget Office, the FDIC, and the Administration.
I would point
out that the plan included in our banking legislation is adequate
to deal with each of these scenarios.
That is also true for the
new, higher loss estimates that I understand the FDIC is about to
report.
Our plan would fulfill four objectives that we believe a BIF
recapitalization should meet.
First, the plan would provide
sufficient resources for the FDIC to do its job.
Second, the
plan would be financed by the industry.
Third, the plan would be
structured to avoid further impairing the health of the banking
industry.
And fourth, the plan would rely on generally accepted
accounting principles.
The plan would give the FDIC authority to borrow up to $25
billion from the Federal Reserve Banks for use as loss funds.
These borrowings would bear interest at Treasury rates.
The FDIC
would be required to increase premiums and dedicate them — that
is, to set them aside — in amounts sufficient to assure the
payment of interest and principal on any such borrowings.
In
other words, the industry would pay for recapitalizing the funds.
The plan would also modify the FDIC's current borrowing
limitation to permit the FDIC to use the Federal Reserve
borrowing authority to pay for losses and to have sufficient
working capital.
Finally, our proposed legislation would impose an aggregate
ceiling on insurance premiums for BIF-insured institutions of 30
basis points.
Since the new risk-based premium authority
included in our legislation would allow the FDIC to vary premiums
depending on the riskiness of the institution, the FDIC would
retain the authority to assess individual institutions more than
30 basis points.
The ceiling would apply in the aggregate to all
BIF-insured institutions.
The Financial Institutions Subcommittee of the House Banking
Committee, during its mark-up of the Financial Institutions
Safety and Consumer Choice Act of 1991, preserved the key
elements of our plan and the House Banking Committee has let the
changes stand.
That is, BIF would borrow from the government;
and banks' deposit insurance premiums would be increased to repay
the amount borrowed.
The Administration's Efforts to Address the "Credit Crunch"
Now, I would like to give you some background on the causes
of the credit crunch, then discuss steps taken by the
Administration and the bank and thrift regulatory agencies to
address these causes, and finally to outline continued actions
3
that the Administration and the agencies will be pursuing in the
coming weeks.
It is important to note that the credit crunch facing
business in the United States has multiple causes.
For the last
several months, our nation has experienced a declining economy.
This has reduced consumer confidence, which has discouraged
people from borrowing to buy homes and automobiles and
discouraged businesses from committing to capital expenditure
plans.
In response, the demand for credit has fallen.
Likewise,
increasing vacancy rates and falling rents.
This has been
compounded by several years of over building in certain
commercial real estate markets.
Commercial banks, as in all
downturns, have seen a rise in non-performing assets and the need
for greater loan loss reserves — at the very same time they are
working diligently to raise capital to meet international
standards.
Recognizing these trends, the Federal Reserve has responded
by moving to lower short-term interest rates and reduce the
reserves that banks are required to hold on deposit at the
Federal Reserve.
However, businesses and banks have perceived a more
stringent regulatory approach to bank lending.
It must be said
that this approach was in substantial measure due to the
application of prudent regulation in more severe economic
conditions.
Praise should be given to the regulators for their
vigilance in difficult economic times.
However, as Secretary Brady has pointed out on numerous
occasions, the application of prudent regulation also requires
balance, common sense and a recognition that certain sectors of
the economy are experiencing difficult times and may need some
additional flexibility to work through temporary problems.
The
regulators have made clear that they do not want the availability
of credit to sound borrowers to be adversely affected by
supervisory policies or banks' misunderstandings about them.
It is for these reasons that Secretary Brady has worked with
the federal bank and thrift regulators (the Federal Reserve, the
Federal Deposit Insurance Corporation, the Comptroller of the
Currency and the Office of Thrift Supervision) to address this
regulatory aspect of the credit crunch.
A package of proposals
and guidelines, which were issued on March 1, 1991, by the
regulators, is aimed at clarifying current regulatory practices
so that any perceptions — right or wrong — of overly harsh,
inflexible regulation are avoided.
4
These proposals are a result of hard work between the
regulatory agencies to determine what existing supervisory and
examination policies and guidelines should be reassessed and
clarified.
The proposals address a number of areas of concern
raised by both the regulatory community and the private sector
during numerous meetings with Secretary Brady and Deputy
Secretary Robson and other Treasury officials over the past
several months.
These include:
guidance on the use by examiners and
bankers of appraisals and other valuation issues — especially in
troubled real estate markets; broader disclosure requirements on
non-performing loans? a clarification that institutions operating
under a capital plan or with loan concentration should continue
to work with troubled borrowers and make new, sound loans?
clarification on the necessary disclosure of highly leveraged
transactions? and, the need for clear and effective communication
between regulators, examiners and bankers.
The regulators are carrying out a communications effort to
ensure that these guidelines and clarifications are implemented
by the more than 7,000 examiners and the thousands of bank
officers and directors across the country.
In addition to the March proposals, the Administration
continues to seek the application of supervisory policies and
guidelines based on common sense and judgment.
The regulatory
agencies have committed to review other suggestions that could
facilitate credit to sound borrowers and to assist in maintaining
a balanced regulatory environment.
The Administration has also acted, where appropriate, to
remove regulatory impediments to the prudent extension of credit
that may exist outside of the bank examination process.
On
May 29, 1991, the Internal Revenue Service issued proposed
regulations that would allow banks and thrift institutions to
write off for tax purposes loans which are classified as losses
for regulatory purposes.
Institutions that elect to follow this
procedure will attain greater certainty as to the timing and
amount of tax deductions for bad debts.
On June 5, 1991, the Environment Protection Agency released
its proposed rule clarifying a lender's liability under the
Superfund.
This rule will provide certainty for lenders to
prudently work with the business community in making responsible
and needed loans without fear of spurious environmental
litigation.
In addition to protecting security interest holders,
such as banks and other financial institutions, this proposed
rule also protects taxpayers by providing greater certainty that
government institutions, such as the RTC and FDIC that obtain
property as receivers of failed banks, will not be the "deep
pockets" for Superfund.
5
While there are some indications that the credit crunch
has eased somewhat, there are still serious credit availability
problems in certain sectors, such as real estate, and in certain
hard hit regions, such as New England.
You may be assured that
the Department of the Treasury will continue to listen to the
concerns of bankers, business people and the regulatory agencies
in seeking additional measures that facilitate credit for sound
borrowers.
The regulatory agencies stand ready to work with
members of Congress in participating in regional meetings to
discuss the application and implementation of' the March 1st
policy guidelines.
This is a critical stage of the economic recovery, a time
when credit to produce goods and new homes as demand increases is
fundamental for economic growth.
We want sound banks to lend to
solid businesses and to work with borrowers facing temporary
problems, and we continue to urge the bank and thrift regulators
to carry out their responsibilities with balance and good sense.
Finally, your letter of invitation asked that I address the
cost of the savings and loan cleanup.
As the Secretary has said
many times, the ultimate cost of the cleanup is driven by real
estate markets, interest rates, and the state of the economy.
The number of thrifts that must be closed and thus the total
amount of the loss depends on these larger economic forces.
The
cost will also reflect our efforts to save taxpayer dollars
wherever possible.
Loss Funds
On June 21, 1991, Chairman Seidman said in testimony before
the Senate Banking Committee that the RTC estimates it will
complete the resolution of 557 thrifts by the end of the fiscal
year, and at that time will have used $75 billion to $80 billion
in loss funds — all or almost all of the loss funds that have
been provided to it by Congress. (The RTC's most recent operating
plan, dated June 17, shows that by the end of the fiscal year it
will have spent $79 billion to cover losses in the industry.)
In January of this year, the Oversight Board estimated that
the cost of the savings and loan cleanup would be in the range of
$90 to $130 billion in 1989 dollars.
The Secretary stated that,
because of general economic conditions and deterioration in real
estate markets the most likely cost scenario had probably moved
to the higher end of our range, but that it nevertheless remained
within that range.
We still believe this to be true.
In other words, we still
believe that the higher end of the range estimate of $130 billion
6
in 1989 dollars remains valid.
Presenting estimates in constant
dollars allows us to compare the estimates better.
It is the
conventional way for the private sector and the Congressional
Budget Office to state the cost of major programs that last for
more than one or two years, but it is different from the same
amount expressed in budget dollars.
Thus, our estimate of $90 to $130 billion in 1989 dollars
converts to a range of $110 to $160 billion in budget dollars. .
This range estimate was corroborated by Chairman Seidman in his
testimony last week.
To date, $80 billion has been authorized:
$50 billion by
FIRREA and $30 billion by the RTC Funding Act of 1991.
The
Oversight Board and the RTC estimate that the additional amount
of loss funds necessary to complete the task of closing defunct
savings and loans and protecting depositors could be as high as
$80 billion in budget dollars.
We have recommended that Congress provide the RTC with
sufficient funding to complete the job, which we estimate will be
up to $80 billion.
This would permit the RTC to complete its
work as quickly as possible without costly delay.
Funding
delays, resulting .from start and stop funding, simply add to
taxpayer costs because they slow the RTC's resolution activity.
However, if Congress wishes to provide only interim funding,
Chairman Seidman estimates that the amount necessary for RTC to
carry out its work in fiscal year 1992 will be $50 billion to $55
billion.
It should be remembered that the RTC uses the money to
protect individual Americans who deposited their savings in S&Ls
because they believed our government's promise that it would be
safe there.
Working Capital
Loss funds, which we have just discussed, are the monies
that are needed to fill the "hole" between an institution's
deposits and the value of its assets.
These funds will never be
recovered.
Working capital, on the other hand, is used to finance the
acquisition of the assets of failed thrifts by RTC until they are
sold.
It is borrowed by the RTC from the Federal Financing Bank
(FFB). Working capital borrowings are backed by seized assets.
The RTC expects to repay its working capital borrowings from the
proceeds of the sales of these assets.
By the end of this fiscal year, RTC expects to have $70
billion in working capital borrowings outstanding, an amount well
7
within the borrowing limitations set by FIRREA.
However, during
1992, RTC could exceed the $125 billion permitted by the note
cap.
Therefore, we are approaching the time when additional
borrowing authority will be needed.
We estimate that working
capital needs could peak at $160 billion by mid-1993.
At that
time the RTC will start the process of repaying working capital
borrowings from the FFB.
Because both loss funds and working capital fund are
required to complete resolutions, it is imperative that loss fund
authorizations be matched with adequate working capital
borrowings.
Therefore, we have requested that Congress raise the
RTC's borrowing limit to $160 billion.
Not to do so might create
a situation in which RTC is pressured to dump assets at fire-sale
prices simply to stay under the limit.
Failure to raise the
borrowing limit could just as surely prevent the RTC from
resolving thrifts and protecting depositors as delays in funding
do.
In the past, we have stressed that we cannot predict
ultimate costs and borrowing needs with certainty.
We must do so
again.
As the General Accounting Office noted in its 1989
Financial Audit of the RTC, "the actual cost...will depend on the
outcome of various uncertainties," including the number of
institutions transferred to the RTC, the extent of their
operating losses, the quality and salability of their assets, and
the conditions of the economy, especially in certain geographic
areas.
In January 1991, the Secretary told the Senate Banking
Committee that the economic downturn had worsened the already
weak market for real estate assets and made already cautious
investors more reluctant to make investment decisions.
The
investment climate is still uncertain, and in an uncertain
climate, estimates are always subject to change.
But we have in
the past and have today given you our best estimates of projected
loss and working capital needs, and we will continue to do so.
Conclusion
I will, of course, be happy to answer any questions the
Committee might have.
8
EXHIBIT A
C O M PA R ISO N O F B IF E S T IM A TE S
($ in billions)
1991
1992
1993
1994
1995
1996
(2.2)
(2.8) : 1 |
3.61
(4.6) i f
(9.1)
(15.5)
(1.0)
n/a ¡JjJ
n/a I l i
(19.3)
0.9
n/a
(22.2)
4.2
n/a
n/a
Fund Net Worth
OMB
CBO
FDIC - base \1
FDIC - pessimistic
4.4
lllill
; n/a
n/a
Assets of Failed Banks
OMB
CBO \2
FDIC - base
FDIC - pessimistic
62.4
96.6
65.0
90.0
62.4
66.9
30.0
70.0
62.4
44.6
n/a
n/a
56.1
37.2
n/a
n/a
40.6
37.2
n/a
n/a
40.6
29.7
n/a
n/a
12.0
13.0
10.0
139
12.0
9.0
6.5
10.8
12.0
6.0
n/a
n/a
11.5
5.0
n/a
n/a
8.8
5.0
n/a
n/a
8.5
4.0
n/a
n/a
6.7
(2.7)
n/a
5.0
(39)
n/a
(1.3)
(4.0)
n/a
(1.5)
(5.7)
n/a
23 [jS ¡ É M 1
30
27
23 K g
23
30
23
30
23
30
23
7.0%
4.5%
4.5%
6.1%
4.5%
4.5%
6.5%
4.5%
4.5%
Losses on Failed Banks
OMB
CBO
FDIC - base
FDIC - pessimistic
Net Outlays (excl. FFB interest)
OMB
CBO
FDIC
159
12.4
h/a
9.2
39 Ü
n/a
Premium Assessments
OMB
CBO
FDIC
21.25
21.25
23
Derosit Base Growth
OMB
CBO
FDIC
3.9%
4.5%
|4 .5 %
6.6%
4.5%
4.5 %fiff
7.3%
4.5%
4.5%
\1 FDIC numbers are for calendar, not fiscal years.
12 Estimate based upon data supplied in CBO testim ony o f January 29, 1991.
Tenders for $12,661 million of 52-week bills to be issued
July 5, 1991 and to mature July 2, 1992 were
accepted today (CUSIP: 912794YV0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
6 .00 %
6 .00 %
6 .00 %
Investment
Rate_____
6.39%
6.39%
6.39%
Price
93.950
93.950
93.950
Tenders at the high discount rate were allotted 40%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
22,790
44,339,515
14,585
19,355
34,995
19,475
1,554,710
22,155
7,950
30,240
8,985
526,900
311.405
$46,913,060
Accented
22,790
12,013,215
14,585
19,355
34,995
16,475
29,710
14,155
7,940
30,240
8,985
136,900
311.405
$12,660,750
Type
Competitive
Noncompetitive
Subtotal, Public
$43,047,525
734.335
$43,781,860
$8,795,215
734.335
$9,529,550
2,900,000
2,900,000
231.200
$46,913,060
231.200
$12,660,750
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1349
Department of the Treasury • Washington, Dìtó Is Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m.
June 27, 1991
STATEMENT OF
THOMAS D. TERRY
BENEFITS TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to present the views of the
Department of the Treasury on certain federal tax issues relating
to the impact of the conservatorship of the Executive Life
Insurance Company on certain tax-qualified retirement plans
holding Executive Life insurance products.
Background
First Executive Corporation ("First Executive") is the
holding company for two life insurance companies, Executive Life
Insurance Company and Executive Life Insurance Company of New
York (collectively "Executive Life"). Executive Life Insurance
Company is domiciled in California and Executive Life Insurance
Company of New York is domiciled in New York.
Executive Life has sold a significant number of products,
such as annuity contracts, to tax-qualified retirement plans.
These products include annuity contracts purchased by retirement
plans to satisfy plan liabilities to participants who have
retired or otherwise separated from service under an ongoing plan
and to participants in plans that are terminated.
Retirement
plans have also purchased Executive Life annuity contracts and
guaranteed investment contracts ("GICs") as general plan
investments.
GICs are investment contracts offered by insurance
companies under which the insurance company promises to pay a
minimum rate of return reflective of the yields currently
available on the type and quality of assets acquired by the
insurance company.
NB
1350
Executive Life began reporting losses in 1989, reportedly
due to defaults on several high-yield bonds held by the company.
In early April, 1991, the Departments of Insurance in both
California and New York took action to limit the insurance
activities of Executive Life.
Among other actions, the insurance
regulators in California have obtained court orders that limit
the payout on retirement annuities issued under qualified
retirement plans to 70 percent of the amount otherwise payable.
The California court order also precludes any payments out of
certain GICs, including those held by qualified plans.
This situation raises a number of federal tax issues that
affect retirement plan sponsors and fiduciaries, as well as plan
participants and beneficiaries.
My testimony will focus on the
issues that arise under the Internal Revenue Code.
The
Department of Labor and the Pension Benefit Guaranty Corporation
("PBGC”) are also present today to address the issues raised
under the provisions of the Employee Retirement Income Security
Act ("ERISA”) that are within their jurisdiction.
Overview of tax-crualified plans
A retirement plan that meets the qualification requirements
specified in the Internal Revenue Code is entitled to special tax
treatment.
Most significantly for purposes of today's hearing,
employers are entitled to a current deduction (within specified
limits) for contributions to the trust established under the
plan, the trust is accorded tax-exempt status and participants
and beneficiaries are not taxed on plan income or benefits until
the benefits are distributed to them.
Tax-qualified retirement
plans fall into two broad categories, defined benefit plans and
defined contribution plans.
Under a defined benefit pension plan, the benefit provided
to a participant upon retirement is generally expressed as a
definite formula (e.g., a specified percentage of compensation
multiplied by years of service). The plan's obligation to pay
the benefit is generally funded through assets held in a trust
fund established under the plan, or through insurance or annuity
contracts issued by a state-licensed life insurance company and
owned by the plan.
Employer contributions are made to the trust
or insurance company to fund the promised benefits.
These
contributions are subject to the minimum funding standards of the
Code and ERISA — standards that are designed to ensure that
sufficient assets will be accumulated to provide the promised
benefits when they become due.
Thus, if there is a decline in
the value of the assets held in the trust, the minimum funding
standards may require additional employer contributions.
Benefits under defined benefit plans are also guaranteed by the
PBGC up to specified limits upon plan termination during the
financial distress of the plan sponsor.
Thus, under defined
2
benefit plans, the participants generally do not bear the risks
of a decline in the value of the assets held by the plan.
There are a variety of defined contribution plans, such as
profit-sharing plans (including cash or deferred ,,40l(k)" plans),
money purchase plans, target benefit plans, stock bonus plans and
employee stock ownership plans ("ESOPs"). Under a defined
contribution plan, the employer makes regular contributions to
the plan which are allocated to the individual accounts of plan
participants.
The allocation of the contribution is generally
based upon the relative compensation of the participants.i Thus,
the retirement benefit provided to each individual participant is
based solely on contributions made to an account established on
his or her behalf, plus investment earnings (or less investment
losses) on those contributions.
Unlike defined benefit plans,
defined contribution plans generally are not subject to the
minimum funding standards of ERISA1 and the benefits under the
plan are not guaranteed by the PBGC.
Thus, the participant
generally bears the risks of a decline in the value of the assets
held in his or her account.
Many defined contribution plans
offer several investment fund options and permit participants to
direct the investment of their accounts among the options.
The
options frequently include a fund devoted to GICs and other time
sensitive investment products.
As indicated above, one of the inherent distinctions between
defined benefit plans and defined contribution plans is the
placement of the investment risk.
The risk of loss in the value
of assets funding a defined benefit plan promise lies principally
with the employer.
By contrast, the risk of loss in the value of
the assets under a defined contribution plan lies with the
individual participant..
Impact of the Executive Life proceedings on qualified plans
The Executive Life conservatorship raises a number of tax
issues with respect to qualified plans that have purchased
Executive Life products.
As discussed below, these issues differ
fundamentally depending on whether the plan in question is a
defined benefit plan or a defined contribution plan.
Defined benefit plans.
Defined benefit plans may purchase insurance company
products for a number of different reasons.
For example, annuity
contracts may be purchased by an ongoing plan and distributed to
a participant to provide for the payment of benefits upon
retirement or separation from service.
Annuity contracts may
1 Money purchase defined contribution plans are subject to the
minimum funding standards.
See Code § 4 1 2 (h).
3
r
also be purchased to satisfy plan liabilities when a defined
benefit plan is terminated.
In addition, a plan may purchase
annuity contracts or GICs as general investments of the plan.
Where annuity contracts or GICs that are held as general
investments under a defined benefit plan decline in value, the
employer will generally be required in accordance with the
minimum funding requirements of the Code and ERISA to make
additional contributions to the plan to make up for the loss.
Generally, the funding of a defined benefit plan's investment
losses must be amortized over a five-year period and will be
deductible over this period in accordance with section 404 of the
Code.
In some circumstances payments to make up for these losses
can be contributed and deducted over a shorter period.
Different issues arise, however, where annuity contracts
represent an irrevocable commitment, that is, they have been
purchased to satisfy specific plan liabilities, such as when a
plan participant retires or separates from service or when the
plan is terminated.
Where the annuity contracts are not yet in
pay status there would appear to be no major tax issues.
The principal tax-related questions are raised for defined
benefit plans where irrevocable Executive Life annuity contracts
are held by participants who are currently receiving payments
under the contracts.
In such cases, we understand that pursuant
to the pending California court proceedings only 70 percent of
each monthly payment is permitted to be paid by Executive Life.
A number of concerned employers are exploring ways to ensure that
their retirees continue to receive their full pension benefits at
least until the Executive Life conservatorship proceedings
clarify the value of the Executive Life annuities.
Because a
number of plan qualification issues may arise if "make-up"
payments are made through the qualified plan, we understand that
most employers are structuring the make-up either through direct
cash payments or payments through a nonqualified plan.
One of the plan qualification issues which arises as a
result of make-up payments outside the qualified plan involves
section 401(a)(9) of the Code.
This section requires that
minimum distributions from qualified plans (and from annuity
contracts distributed under such plans) be made to participants
beginning at age 70%.
Since payments made outside a qualified
plan cannot be counted to satisfy these requirements, the
inability to distribute amounts from the qualified plan due to
the court order may result in violations of the qualification
requirements and trigger a penalty excise tax of 50 percent of
the shortfall on the participant.
Similar issues were raised
when another insurer, Baldwin-United Corporation, was engaged in
a rehabilitation proceeding under applicable state insurance law
in the early 1980s.
In that case, a statutory amendment was
enacted to provide relief for policyholders who were subject to
4
the minimum distribution requirements.
See Deficit Reduction Act
of 1984, Pub. Law No. 98-369, §553.
We have no policy objection
to providing similar relief here, providing an appropriate offset
is provided for any revenue lost.
Congressman Archer has
recently introduced such legislation, H.R. 2708, providing
similar relief where a portion of a qualified plan benefit is
unavailable for distribution due to the fact the insurance
company is in receivership.
We are currently reviewing H.R. 2708
for technical issues.
Defined contribution plans.
Insurance products purchased by defined contribution plans
fall into two primary categories.
First, some defined
contribution plans may offer annuities as an option for funding
benefits to retirees in which case the plan will use the
participant's account balance to purchase an irrevocable annuity
contract and distribute the contract to the participant.
The tax
issues relating to benefits paid from these contracts are the
same as mentioned above with respect to annuity payments from
defined benefit plans.
The second primary category of insurance products purchased
by defined contribution plans are GICs which are held for the
investment of plan assets.
Frequently, a GIC fund will be one of
the investment fund options offered under those defined
contribution plans that permit participants to direct investment
of their accounts among several investment funds.
In the context
of the Executive Life proceedings, there may have been a decline
in the value of a participant's account to the extent the account
was invested in a GIC fund, all or a part of which is invested in
Executive Life GICs.
As discussed above, in the defined
contribution plan context, the participant and not the employer
is generally at risk for investment losses.
From this
perspective, the Executive Life situation may have consequences
similar to other events causing a decline in the value of
investment assets, such as the stock market decline on October
19, 1987, where defined contribution plan assets invested in
equities suffered a significant decline in value.
While plan provisions generally do not require employers to
make up for investment losses in defined contribution plans, some
employers are exploring ways of doing so for a variety of
reasons.
For example, they may be concerned that their employees
viewed the GIC fund investment option as a "guaranteed11 fund and
believed, albeit erroneously, that the plan or the employer was
ultimately the guarantor.
Employers may also want to protect
their employees against significant losses for employee relations
reasons.
Finally, employers may believe that unless these
payments are made, they may be subject to suit by participants or
the Department of Labor charging a breach of fiduciary
responsibilities in the acquisition of the Executive Life GICs.
5
r
Employers have been exploring various options for offsetting
these investment losses.
These include purchasing the Executive
Life GICs back from the plan for their book value, exchanging
Executive Life GICs held under the plan for GICs issued by other
insurance companies, or making loans to the plan to permit the
plan to continue to make distributions to participants or to
permit transfers from the GIC funds to another investment fund
under the plan on the same basis as if the GICs were still worth
100 percent of their book value.2 These transactions raise a
number of federal tax issues, including whether they will give
rise to "contributions1' to the plan by the employer for plan
qualification and employer deduction purposes, in which case the
limits on plan benefits and contributions and the limits on
employer deductions may be exceeded.
As noted, some employers and plan fiduciaries may be
concerned that suits will be brought against them for breach of
fiduciary liability for investing plan assets in Executive Life
GICs.
In fact, several such suits have already been brought.
Accordingly, some employers and plan fiduciaries are exploring
ways of bearing losses caused by investments in Executive Life
GICs in an attempt to avoid similar suits.
One potential avenue
is a payment to the plan in settlement of a potential lawsuit for
breach of fiduciary liability.
Applying general tax principles,
payments made in settlement of lawsuits may be treated for
federal income tax purposes as ordinary and necessary business
expenses, rather than as contributions to the plan, if the acts
that gave rise to the litigation were performed in the ordinary
conduct of the taxpayer's business.
A payment with respect to a
claim generally is sufficient to give rise to an ordinary and
necessary business expense as long as it is a bona-fide claim.
It is not necessary that litigation be actually instigated, nor
that final adjudication of the claims occur.
Although a legallybinding document in which claimants waive their rights to sue for
breach of fiduciary liability in return for such payments will
generally be required to establish the motive for these payments,
an admission by the payor that a breach of fiduciary liability
occurred would not be necessary in order for the settlement
agreement to be valid.
The fact that several suits involving
plan investments in Executive Life GICs have already been brought
by plan participants suggests that some taxpayers may
legitimately characterize payments as made in settlement of
potential lawsuits.
The particular facts and circumstances will
determine whether the payments meet these standards.
2
These alternatives may raise prohibited'transaction issues
under the Code and ERISA.
With respect to the buy-back
transaction, the Department of Labor, which has the authority to
grant prohibited transaction exemptions, has indicated that it will
entertain requests for such exemptions on an expedited basis.
6
*
If plan participants who have an interest in Executive Life
GICs are permitted to make withdrawals on the basis of the full
par value of the GICs, and an amount less than par is eventually
realized on the GICs by the plan, the burden of the loss will be
borne by those participants who do not withdraw and remain
invested in the GICs.
In order to prevent such shifting of the
burden of potential losses from Executive Life GICs, some
employers are amending their qualified defined contribution plans
to "freeze" the portion of the participant accounts which are
invested in the Executive Life GICs.
This is usually
accomplished by creating a new separate fund in the plan to hold
Executive Life GICs and, under the applicable plan valuation
procedures, revaluing that GIC fund on an interim basis.
Assuming the Executive Life GIC fund is revalued at zero, this
procedure is intended to leave "open" all the transactions
occurring with the GIC fund and thereby permit a fair
distribution of the ultimate GIC loss, if any, among the present,
past and future participants in the plan.
Freezing of the portion of a participant's account
attributable to Executive Life GICs presents a number of
qualification and income tax questions for plan sponsors and plan
participants.
The Internal Revenue Service has published
authoritative guidance on some of these questions.
For example,
the IRS published a ruling in 1980 holding that a provision in a
qualified, plan allowing interim valuations of investments held by
the trust, i . e . , valuations more frequently than annually at the
plan trustee's discretion, is permissible provided that the use
of interim valuations does not result in discrimination in favor
of higher income employees prohibited by section 401(a)(4) of the
Code.
See Rev. Rul. 80-155, 1980-1 C.B. 84.
If the solvency of
the issuer of a GIC is in considerable doubt, as evidenced by the
pendency of state receivership proceedings, and there is no
prohibited discrimination, the Internal Revenue Service will
follow the 1980 Revenue Ruling in these circumstances.3
3
In invoking the plan's interim valuation procedure
fiduciary must act responsibly to fairly protect the interest of
all participants in the plan.
Fiduciaries should be aware,
however, that some courts have refused to apply plan amendments to
permit interim valuations to participants who have separated prior
to the amendment date (regardless of its effective d a t e ) . Compare
P r a t t v. P e t r o l e u m P r o d u c t i o n M a n a g em en t, I n c . E m p lo y e e S a v i n g s
P l a n a n d T r u s t , 920 F.2d 651 (10th Cir. 1990) (amendment after
retirement) to C a t o r v. H e r r g o t t & W i l s o n , I n c . , 609 F.Supp. 12
(N.D. Cal. 1984) (amendment one month before retirement) . See also
B r u g v. P e n s i o n P l a n o f C a r p e n t e r s P e n s i o n T r u s t F u n d f o r N o r t h e r n
C a lifo rn ia ,
669 F.2d 570 (9th Cir.), c e r t , d e n i e d 459 U.S. 861
(1982) (eligibility amendment after established disability)•
7
a
In addition to the plan qualification issues which arise
when a GIC fund is frozen, the income tax consequences of
distributions from the plan to plan participants and former
participants may be complicated because of the freeze.
In order
for distributees to qualify for the special averaging treatment
accorded to lump sum payments from qualified plans under the
Code, the entire "balance to the credit" of the participant under
the plan must be distributed within one taxable year.
Also, in
order to roll over the distribution to an IRA or another
qualified plan, at least 50 percent of the balance to the credit
(or 100 percent in the case of a rollover to a qualified plan) of
the participant must be distributed.
If a participant receives a distribution from a qualified
plan at a time when his or her account balance includes an
interest in a frozen GIC or a frozen GIC fund, the special
averaging treatment will not be available unless the portion of
the participant's account balance attributable to the frozen GICs
can be ignored because only then will the participant be
considered to have received the entire balance in the
distribution.
Similarly, some participants may not even be able
to satisfy the 50 percent partial distribution requirement to
qualify for IRA rollover treatment unless the frozen GICs are
ignored.
The Internal Revenue Service has issued revenue rulings
which supports ignoring the frozen GICs for these purposes.
In the principal ruling, the IRS held that an employee's
qualified plan account balance did not include certain courtimpounded funds which would otherwise have been credited to the
employee's account.
See Rev. Rul. 83—57, 1983— 1 C.B. 92; see
also Rev. Rul. 69-190, 69-1 C.B. 131 (holding similarly that a
later distribution of an amount attributable to a revaluation of
the value of an annuity did not cause the initial distribution to
be disqualified for lump sum distribution treatment).
Conclusion
In offering specific commentary on employee benefit plan
qualification and income tax issues which arise when employers
volunteer to assist their employees and former employees, our
objective is to aid those employers and their advisers by
providing general guidance under current la w . Further, the
Internal Revenue Service is willing to address issues relating to
the Executive Life situation on a case by case basis.
Because of
the varying circumstances that may be controlling in any given
case, the determination letter program (for plan qualification
issues) and the private letter ruling process (for income tax and
deduction issues) generally is the best way for employers to
present the specific issues to the Service.
I should point out,
4
H.R. 2708, introduced by Congressman Archer, would achieve
a similar result by statute.
8
however, that the Internal Revenue Service generally does not
issue rulings on questions that are inherently factual and some
of the Executive Life issues may be in that category.
In
addressing the Executive Life case, however, we must be mindful
that many of the same questions might occur with other plan
losses.
To date, the Internal Revenue Service has received very
few requests for private letter rulings on Executive Life issues.
Mr. Chairman, Members of the Subcommittee, that concludes my
formal statement.
I will be pleased to answer any questions that
you may wish to ask.
-
0
9
-
Department
asury
€
FOR IMMEDIATE RELEASE
June 28, 1991
$
Washington, d .c . • Telephone 566*2041
0U0224
Contact: Cheryl Crispen
(202) 566-2041
Statement by
Nicholas F. Brady
Secretary of the Treasury
Today, the House Banking Committee voted in favor of the
most sweeping bank reform since the 1930s.
I applaud Chairman
Gonzalez, Ranking Republican Member Wylie, Chairman Annunzio and
the members of the House Banking Committee for their leadership
in moving this bill expeditiously through Committee.
We look
forward to final action in the House and I hope the Senate will
promptly begin debate on comprehensive banking reform.
The most recent estimate by FDIC Chairman Seidman is that
the Bank Insurance Fund (BIF) has sufficient funds to last
through the end of 1991, but will need to be recapitalized in
1992.
This highlights the need for Congress to enact
comprehensive bank reform legislation this year.
Comprehensive
legislation is needed to assure a safe, competitive banking
industry that is ready to face the 21st century.
We must revitalize our outdated banking system.
Our goal
should be to draw private sector capital back into the system and
not risk the chance of calling on the taxpayer.
Departm ent of the Treasury • Bureau of the PublifcSJfefeft’î* ffyy^^irggojr^ DC 20239
FOR IMMEDIATE RELEASE
July 1, 1991
UL
CONTACT: Office of Financing
202-376-4350
Z31 0 0 0 3 0 6
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
EFT. OF THE TREASURY
Tenders for $10,468 million of 13-week bills to be issued
July 5, 1991 and to mature October 3, 1991 were
accepted today (CUSIP: 912794XH2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.57%
5.59%
5.59%
Investment
Rate_____ Price
5.74%
98.608
5.76%
98.603
5.76%
98.603
$1,000,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 89%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
37,560
25,961,970
22,280
49,755
54,630
36,025
2,161,535
16,980
9,565
47,190
29,835
495,795
833.605
$29,756,725
Accented
37,560
8,963,630
22,280
48,325
54,630
34,915
283,485
16,980
9,565
47,190
29,835
85,795
833.605
$10,467,795
Type
Competitive
Noncompetitive
Subtotal, Public
$25,840,150
1.687.290
$27,527,440
$6,551,220
1.687.290
$8,238,510
2,124,935
2,124,935
104.350
$29,756,725
104.350
$10,467,795
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $31,150 thousand of bills will be
issued to foreign official institutions for new cash.
Tenders for $10,437 million of 26-week bills to be issued
July 5, 1991 and to mature January 2, 1992 were
accepted today (CUSIP: 912794XT6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.70%
5.72%
5.71%
Investment
Rate_____ Price
5.97%
97.134
5.99%
97.124
5.98%
97.129
Tenders at the high discount rate were allotted 13%.
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
34,720
28,716,400
17,045
40,340
39,750
35,640
1,586,890
21,275
12,825
49,045
20,610
851,300
665.925
$32,091,765
Accepted
34,720
9,197,945
17,045
40,340
39,750
35,640
109,640
17,535
12,825
48,175
20,610
196,800
665.925
$10,436,950
Type
Competitive
Noncompetitive
Subtotal, Public
$27,543,590
1.382.925
$28,926,515
$5,888,775
1.382.925
$7,271,700
2,400,000
2,400,000
765.250
$32,091,765
765.250
$10,436,950
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $263,050 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1353
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 20,800 million, to be issued July 11, 1991.
This offering will provide about $3,0 5 0 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 17,753 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, July 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:
9 1 -day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated April 11, 1991,
and to mature
October 10, 19 91
(CUSIP No. 912794 XJ 8), currently outstanding in the amount
of $ 7,237
million, the additional and original bills to be
freely interchangeable.
1 8 2 -day bills for approximately $ 10,400 million, to be
dated
July 11, 1991,
and to mature January 9 , 1992
(CUSIP
No. 912794 XU 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
July 11, 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 $ 897
million as agents for foreign and international
monetary authorities, and $ 4 , 7 9 4 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 5175-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-1354
TREASURY'S 1 3 - ,
26
-,
AND 5 2 -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
Department off the Treasury • Washington, D .c . • Telephone 566-2041
FOR RELEASE AT 2:30 P.M.
July 3, 1991
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION $9,000 MILLION OF 7-YEAR NOTES
The Department of the Treasury will auction $9,000 million
of 7-year notes to refund $4,927 million of 7-year notes maturing
July 15, 1991, and to raise about $4,075 million of new cash.
The public holds $4,927 million of the maturing 7-year notes,
including $16 million currently held by Federal Reserve Banks
as agents for foreign and international monetary authorities.
The $9,000 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount.
Tenders for such accounts will be accepted at
the average price of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
for their own accounts hold $534 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-1355
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
TO BE ISSUED JULY 15, 1991
July 3, 1991
Amount Offered:
To the public ....................
$9,000 million
D e s cript i o n of S e c u r i t y :
Term and type of security ....... 7-year notes
Series and CUSIP designation .... G-1998
(CUSIP No. 912827 B5 0)
Maturity date .................... July 15, 1998
Interest rate .................... To be determined based on
the average of accepted bids
To be determined at auction
Investment yield . . ...........
Premium or discount ............. To be determined after auction
Interest payment dates .......... January 15 and July 15
Minimum d e n o m i n a t i o n available .. $ 1, 000
Terms of Sa l e :
Method of s a l e .... ..............
Competitive tenders .............
Noncompetitive tenders ..........
Accrued interest
payable by investor .............
Payment Te r m s :
Payment by noninstitutional investors .........
Deposit guarantee by
designated institutions .........
Key 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 ..
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
Full payment to be
submitted wit h tender
Acceptable
Wednesday, July 10, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Monday, July 15, 1991
Thursday, July 11, 1991
TREASURY NEWS
Department off the Treasury # Washington, D .c . • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 3, 1991
Desiree Tucker-Sorini
Appointed Assistant Secretary
For Public Affairs and Public Liaison
Desiree Tucker-Sorini was sworn in today as Assistant Secretary of
the Treasury for Public Affairs and Public Liaison.
She was
confirmed for her position by the United States Senate on
June 28, 1991, and appointed to the position by President Bush on
July 2, 1991.
As Assistant Secretary for Public Affairs and Public Liaison,
Ms. Tucker-Sorini will serve as the lead representative of the
Treasury Department in media, business, and intergovernmental
affairs.
Since 1989, Ms. Tucker-Sorini has served as the Deputy Assistant
Secretary for Public Affairs with the Treasury Department.
Prior
to joining Treasury, she was the Director of Public Affairs at the
International Trade Administration in the Department of Commerce,
since 1986.
From 1984 to 1986 Ms. Tucker-Sorini served as Press
Secretary to Ambassador Clayton Yeutter during his tenure as United
States Trade Representative.
Previously, Ms. Tucker-Sorini was the Special Assistant to the
Director of Women in Development at the Agency for International
Development? Director of Fundraising for Tucker and Associates; and
a marketing representative with the Xerox Corporation.
Ms. Tucker-Sorini graduated in 1980 from Colorado State University
with a bachelor of arts degree in Communications.
She and her
husband, Ambassador Ronald Sorini, reside in McLean, Virginia.
NB-1356
PUBLIC DEBT NEWS
Department of the Treasury
•
Bureau of the PublicnDebj
W ashington, D C 20239
Contact: Peter Hollenbach
(202) 376-4302
FOR RELEASE AT 3 : 0 0 PM
July 5, 1991
PUBLIC DEBT ANNOUNCES ACTIVITY F O R
SECURITIES IN THE STRIPS P R O G R A M F O R JUNE 1991
Treasury’s Bureau of the Public Debt announced activity figures for the month of May 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$520,322,781
Held in Unstripped Form
$393,482,066
Held in Stripped Form
$126,840,715
Reconstituted in June
$3,275,440
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
PA-61
27
T A B L E VI— H O L D IN G S O F T R E A S U R Y S E C U R IT IE S IN S TR IP P E D FO R M , J U N E 30, 1991
(In thousands)
Principal Amount Outstanding
Maturity Date
Loan Description
Portion Held in
Unstripped Form
Total
Portion Held in
Stripped Form
This Month'
)
11-5/8% Note C-1994 ..........................
........11/15/94.........
$6.658,554
$5,632,954
$1,025,600
j
11-1/4% Note A-1995 ........
........ 2/15/95 .........
6.933,861
6,509,061
424,800
j
11-1/4% Note B-1995 ..............................
........ 5/15/95 .........
7,127.086
5,984,046
1,143,040
___8/15/95 .........
$19,200
9,920
159,520
7,955.901
7,382,301
573,600
j
12,400
........ 11/15/95.........
7
3.550
6,143,750
1,174,800
j
6,400
8-7/8% Note A-1996 ............
........ 2/15/96 .........
8,575,199
8,351,199
224,000
I
8,000
7-3/8% Note C-1996..................................
........5/15/96 .........
20.085,643
19,871,243
214,400
|
-0 -
7-1/4% Note D-1996 ........................
. . . : .11/15/96.1. ..
20,258,810
19,967,610
291,200
j
-0 -
10-1/2% Note C-1995 ...................
9-1/2% Note D-1995 .................... ............
. 5/15/97 ........
9.921.237
9,840,037
81,200
j
-0 -
8-5/8% Nòte B-1997 ................................
........ 8/15/97 .........
9,362,836
9,330,836
32,000
j
-0 -
8-7/8% Note C-1997
j
6,400
8-1/2% Note A-1997 . .................
____ 11/15/97 . . . . .
9.808,329
9,798.729
9,600
8-1/8% Note A-1998 ................................
........2/15/98 .........
9,159,068
9,149,788
9,280
9% Note 8-1998 .......................................
........ 5/15/98 .........
9.165,387
9,124,387
41,000
9-1/4% Note C-1998 ................................
........8/15/98 . . . . .
11,342,646
11,213,846
128,800
8-7/8% Note D-1998 ................................
........ 11/15/98.........
9,902,875
9,896,475
6,400
-0 -
8-7/8% Note A-1999 . . .........
................
........ 2/15/99 .........
9,719,623
9,716,423
3,200
-0 -
9-1/8% Note B-1999 ................................
........ 5/15/99 .........
10,047,103
9,176,703
870.400
8% Note C-1999 ..........................
......
........8/15/99 .........
10,163,644
10,081,619
82,025
7-7/8% Note D-1999 ................................
........ 11/15/99.........
10,773,960
10,765,960
8-1/2% Note A-2000 . . ............................
........ 2/15/00 .........
10,673,033
8-7/8% Note 8-2000 ................................
........ 5/15/00 .........
10,496,230
.
-0 -0 I
-0 -
-0 S
-0 -
8,000
I
-0 -
10,673,033
-0 -
I
-0 -
10,414,630
81,600
I
-0 -
8-3/4% Note C-2000 ................................
........ 8/15/00 . . . . .
11.080,646
11,080,646
-0 -
j
-0 -
8-1/2% Note D-2000 ................................
........ 11/15/00.........
11,519,682
11,519,682
-0 -
i
-0 -
7-3/4% Note A-2001 .................................
........ 2/15/01 .........
11,312,802
11,312,802
-0 -
8% Note 8-2001 .......................................
........ 5/15/01 .........
12,398,083
12,398,083
-0 -
11-5/8% Bond 2004..................................
........ 11/15/04.........
8,301,806
3,788,206
4,513,600
12% Bond 2005........................................
.....5 /1 5 /0 5 ........
4,260,758
1,631,708
2,629,050
10-3/4% Bond 2005..................................
........ 8/15/05 .........
9,269,713
8,316,113
953,600
9-3/8% Bond 2006....................................
........ 2/15/06 .........
4,755,916
4,755,916
11-3/4% Bond 2009-14 ............................
........ 11/15/14.........
6,005,584
1,343,184
4,662,400
-0 -
-0 I
|
-0 120,000
-0 12,000
-0 132,800
11-1/4% Bond 2015..........
........ 2/15/15 .........
12,667,799
2,121,079
10,546,720
52,000
10-5/8% Bond 2015........
___,8/15/15 ..........
7,149,916
1,616,476
5,533,440
92,480
9-7/8% Bond 2015....................
........ 11/15/15.........
6.899,859
2.203,859
4,696,000
20,800
9-1/4% Bond 2016........
........ 2/15/16 .........
7,266,854
6,640,454
626,400
. . . . . 5/ 15/ 16 ........
18,823,551...
16,904,351
1,919,200
7-1/4% Bond 2016 . .
-0 -0 -
........ 11/15/16.........
18,864,448
15,119,488
3,744,960
345,040
8-3/4% Bond 2017 .. .
___5/15/17 ____
18,194,169
6.412,729
11,781,440
181,440
8-7/8% Bond 2017___
........ 8/15/17 .........
14,016,858
9,524,058
4,492,800
68,800
9-1/8% Bond 2018. .
........ 5/15/18 .........
8,708,639
2,446,239
6,262.400
89,600
9% Bond 2018 . .
........ 11/15/18.........
9,032,870
1,556,870
7,476,000
148,000
8-7/8% Bond 2019........
........ 2/15/19 .........
19,250,798
4,951,598
14,299,200
17,600
8-1/8% Bond 2019.. ..
........ 8/15/19 .........
20,213,832
10,843,272
9,370,560
310.400
114,000
7-1/2% Bond 2016..
8-1/2% Bond 2020___
........ 2/15/20 .........
10,228,868
3,936,868
6,292,000
8-3/4% Bond 2020........
........ 5/15/20 .........
10,158,883
2,863,523
7,295,360
186,880
1,092,960
8-3/4% Bond 2020
........ 8/15/20 .........
21.418.606
9,743,726
11,674,880
7-7/8% Bond 2021..
. . . . .2/15/21
........
11,113,378
9,542,178
1,571,200
8-1/8% Bond 2021 .
........ 5/15/21 .........
11,958,888
11,884.328
74,560
68,800
520,322.781
393,482,066
126,840,715
3,275,440
T otal___
Effective May 1, 1987, securities held in stripped form were eligible for reconstitution to their unstripped form.
Note: On the 4th workday of each month a recording of Table VI will be available after 3:00 pm. The telephone number is (202) 447-9873.
The balances in this table are subject to audit and subsequent adjustments.
-0 -
UBLIC DEBT NEWS
Department of the Treasury • Bureail%^Ae PuLYic Debt
FOR IMMEDIATE RELEASE
July 8, 1991
UL
SI o o
RESULTS OF TREASURE/ § p
Washington, D C 20239
Office of Financing
202-376-4350
13-WEEK BILLS
Tenders for $10,463 million of 13-week bills to be issued
July 11, 1991 and to mature October 10, 1991 were
accepted today (CUSIP: 912794XJ8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5. 55%
5. 58%
5. 58%
Investment
Rate
5.72%
5.75%
5.75%
Price
98.597
98.590
98.590
Tenders at the high discount rate were allottee
The investment ratej is the equivalent coupon-is
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
33,400
28,002,115
41,730
58,080
51,385
42,035
1,780,070
61,975
7,825
47,065
27,810
677,260
1.014.270
$31,845,020
Accented
33,400
8,523,920
41,730
58,080
51,385
39,795
492,070
27,095
7,825
47,065
27,810
98,760
1.014.270
$10,463,205
Type
Competitive
N oncompet it ive
Subtotal, Public
$27,615,280
1.824.985
$29,440,265
$6,233,465
1.824.985
$8,058,450
2,296,830
2,296,830
107.925
$31,845,020
107.925
$10,463,205
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $43,875 thousand of bills will b<
NB-1357
P u b l ic d e b t n e w s
Department of the Treasury • Bureau of the Public DpJ?t • Washington, DC 20239
E P T .0 F T ^ Rt
FOR IMMEDIATE RELEASE
July 8, 1991
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,459 million of 26-week bills to be issued
July 11, 1991 and to mature January 9, 1992 were
accepted today (CUSIP: 912794XU3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.70%
5.72%
5.71%
Investment
Rate_____ Price
5.97%
97.118
5.99%
97.108
5.98%
97.113
$30,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 5%.
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
29,470
33,260,775
29,480
38,155
48,465
31,450
1,351,710
45,315
5,170
52,255
18,035
598,095
795.915
$36,304,290
Accented
29,470
9,226,195
29,480
38,155
48,465
30,450
85,460
21,415
5,170
50,355
18,035
80,595
795.915
$10,459,160
Type
Competitive
Noncompetitive
Subtotal, Public
$31,698,230
1.494.485
$33,192,715
$5,853,100
1.494.485
$7,347,585
2,500,000
2,500,000
611.575
$36,304,290
611.575
$10,459,160
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $228, 525 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1358
FOR IMMEDIATE RELEASE
July 8, 1991
Contact: Cheryl Crispen (202) 566-2041
Mary Catherine Sophos
Appointed Assistant Secretary
For Legislative Affairs
Mary Catherine Sophos was sworn in today as Assistant Secretary
of the Treasury for Legislative Affairs.
She was confirmed for
her position by the United States Senate on June 26, 1991, and
appointed to the position by President Bush on June 28, 1991.
As Assistant Secretary for Legislative Affairs, Ms. Sophos will
serve as the primary liaison between the Treasury Department and
the United States Congress.
Since 1989, Ms. Sophos has served as the Deputy Assistant
Secretary for Legislative Affairs.
Prior to joining Treasury,
she was the Director of Government Relations with McCamish,
Martin, Brown & Loeffler, a Texas based law firm.
Prior to that
she was the Assistant Minority Counsel and Budget Analyst for the
Ways and Means Committee of the U.S. House of Representatives.
Previously, Ms. Sophos was Budget Associate Staff and Legislative
Director to Congressman Tom Loeffler? Legislative Assistant to
the Director of the Office of Management and Budget? and a
Legislative Representative at the National Food Processors
Association.
Ms. Sophos received a B.S. in Political Studies (1976) from
Pitzer College, The Claremont Colleges, Claremont, California.
She resides in Washington D.C.
oOo
NB-1359
Department or tne Treasury # Washington, D.C. # Telephone 566-2041
*1 13jGQj0 42
FOR RELEASE AT 2:30 P.M.
July 9, 1991
CONTACT:
Office of Financing
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 20,800 million, to be issued July 18, 1991
This offering will provide about $ 3,500 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 17,290 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, July 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
$ 10,400 million, representing an additional amount of bills
dated April 18, 1991,
and to mature October 17, 1991
(CUSIP No. 912794 XK 5 ), currently outstanding in the amount
of $ 7,220
million, the additional and original bills to be
freely interchangeable.
182-day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated January 17, 1991
and to mature January 16, 1992
(CUSIP No. 912794 XV 1), currently outstanding in the amount
of $ 11,803 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
July 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 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 $ 682
million as agents for foreign and international
monetary authorities, and $4,918 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-1360
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
T R E A S U R Y ’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
TREASURY NEWS
Department
of
the Treasury • Washington, o.C. • Telephone 5S6-2041
For Release Upon Delivery
Expected at 10 a.m.
July 10, 1991
STATEMENT OF MICHAEL J. GRAETZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
It is a pleasure to be here today to address issues and
certain legislative proposals relating to the tax-exempt status
of nonprofit hospitals.
My testimony will discuss generally the basic requirements
for tax-exempt status of hospitals, including whether new
standards of charity care are needed in light of the policy
reasons for providing tax exemption to hospitals, and will
comment specifically on two bills that would impose new
requirements on tax-exempt hospitals:
H.R. 1374, introduced by
Congressman Donnelly, and H.R. 790, introduced by Congressman
Roybal.
John E. Burke, Assistant Commissioner of Internal
Revenue, will address in his testimony issues that were raised in
the hearing announcement and more specifically in correspondence
from the Committee regarding the Service *s administration of the
Federal tax exemption for hospitals.
Before discussing the
legislative proposals, I shall first review the role of taxexempt hospitals in providing health care, the benefits to
hospitals of tax-exempt status and the legal requirements and
economic rationale for their tax exemption.
THE ROLE OF TAX-EXEMPT HOSPITALS IN PROVIDING HEALTH CARE
Categories of Health E x p e n d i t u r e s .^ Health care ranges from
routine checkups and treatment of relatively m i l d illnesses to
hospital stays of various durations and intensity of care.
Health care expenditures include, for example, expenditures for
services of physicians and other health care professionals,
NB-1361
2
drugs, vision products, and other medical supplies, in addition
to expenditures on hospital care.
Estimates of national health
expenditures in 1989, the most recent data available, show that
about $233 billion — 38.5 percent of national health
expenditures — was spent on hospital care.
As Table 1
illustrates, about one-half of U.S. hospitals are private,
nonprofit tax-exempt institutions, and they account for nearly 65
percent of hospital expenses.
About one-third of U.S. hospitals
are government owned and about 17 percent operate for profit.
Any changes to the requirements for tax exemption of nonprofit
hospitals would therefore affect only a portion — but a
significant portion — of the health care industry.
Sources of Health Care Payments. Most Americans have some
form of health insurance.
Medicare, which covers most persons
over 65, and Medicaid, which provides medical assistance to many
low— income persons, are the two largest public insurance
programs, accounting for over 60 percent of government
expenditures for health care.
As Table 2 illustrates, Federal,
state and local funds account for more than 40 percent of total
health expenditures.
About 20 percent of health expenditures are
paid out-of-pocket by health-care recipients and 33 percent by
private insurance.
Access to Care. Although most Americans have some form of
health insurance, over 30 million Americans are uninsured.
About
70 percent of the uninsured have incomes above the poverty level.
Only 20 percent of the uninsured are adults out of work for a
full year (or their children). More than half of uninsured
Americans are between the ages of 25 and 64. Uninsured people
are not necessarily without access to health care.
They pay for
about one-half of the care they receive from their own funds.
The remainder is provided by public facilities or provided as
"uncompensated care" by hospitals and other institutions.
The
uninsured are more likely to use emergency room care and less
likely to use office, clinic, or regular inpatient care than
those who have insurance.
Effects of Tax-Exempt Status on Hospitals1 Sources of
Capital. Under the Federal tax law, as well as under state
nonprofit law, a tax-exempt hospital is not permitted to
distribute its net earnings to members, shareholders or other
private persons.
A nonprofit hospital cannot raise funds by
selling equity interests. Charitable contributions constitute a
very small portion — approximately 5 percent — of nonprofit
hospitals' net income.
Accordingly, tax-exempt hospitals raise
most of their capital either through borrowing or through
retained earnings, and borrowing must be financed and retired
through retained earnings.
3
BENEFITS OF TAX EXEMPTION
Three significant Federal income tax benefits are granted to
hospitals that are tax-exempt under section 501(c)(3):
•
The net earnings of tax-exempt hospitals, if any, are
exempt from income tax.
The value of this exemption
obviously depends upon the profitability of the
particular hospital.
In the aggregate, the value of
the income tax exemption for hospitals is estimated to
be about $1.5 billion in 1992.
•
Charitable contributions to these hospitals are
generally deductible by donors.
The value of this tax
benefit is estimated to be about $0.6 billion in 1992.
•
Tax-exempt hospitals are permitted to issue tax-exempt
bonds.1 For tax-exempt hospitals, it is estimated that
the value of the exclusion of interest income from
bondholders' income will be about $3.3 billion in 1992.
In addition, tax-exempt hospitals may enjoy state and local
tax benefits, such as property tax exemption, and are entitled to
certain nontax benefits.
Similar tax and nontax benefits are
generally accorded to hospitals operated by the Federal and state
and local governments.
TAX-EXEMPT STATUS OF NONPROFIT HOSPITALS
The Statute and Regulations Require Public Benefit. Section
501(c)(3) of the Internal Revenue Code generally confers tax
exemption on any organization "organized and operated exclusively
for religious, charitable, scientific, . . . or educational
purposes" but only if "no part of [the organization's] net
earnings [inure] to the benefit of any private shareholder or
individual." The regulations under section 501(c)(3) provide
that —
[t]he term "charitable" is used in section 501(c)(3) in
its generally accepted legal sense and is, therefore,
not to be construed as limited by the separate
enumeration in section 501(c)(3) of other tax-exempt
Generally, under section 145, a section 501(c)(3)
organization is limited to an aggregate outstanding amount of
$150 million in tax-exempt bonds, but hospitals are not subject
to any dollar limit.
4
purposes which may fall within the broad outlines of
"charity” as developed by judicial decisions.2
The regulations also provide that an organization is not
organized and operated exclusively for exempt purposes if it
serves a private rather than a public interest:
Thus, . . . it is necessary for an organization to
establish that it is not organized or operated for the
benefit of private interests such as designated
individuals, the creator or his family, shareholders of
the organization, or persons controlled, directly or
indirectly, by such private interests.3
These regulations were adopted in 1959.
A short review of
the interpretation of the term "charitable" prior to the adoption
of the regulations may be useful, however.
Congress enacted the first statute providing tax exemption
for charities in 1894.
The Supreme Court has determined that, at
the time of enactment, the term "charity" meant, among other
things, trusts for the benefit of the community, and the Court
concluded that Congress conferred tax-exemption on charities
"because they provide a benefit to society."4 In 1938, Congress
indicated that the term charity requires public benefit:
"the
benefits resulting from the promotion of general welfare."5 The
Supreme Court found in the Bob Jones case "unmistakable evidence
that, underlying all relevant parts of the Code, is the intent
that entitlement to tax exemption depends on meeting certain
common-law standards of charity — namely, that an institution
seeking tax-exempt status must serve a public policy and not be
contrary to established public policy."
This broad public policy standard, however, was not
reflected in early Treasury regulations, and, in 1956, Treasury
proposed regulations under section 501(c)(3) that would have
limited organizations qualifying as "charitable" to
"organizations for the relief of poverty, distress, or other
2Treas. Reg. § 1.501(c)(3)-1(d)(2).
3Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).
4Bob Jones University v. United States. 461 U.S. 574, 589
(1983).
5H.R. Rep. No. 1860, 75th Cong. 3d Sess. 19 (1938).
5
conditions of similar public concern." Even this proposed
regulation, however, provided that "a hospital may require
payments for services from those able to pay, and this will not
necessarily preclude exemption."
Also in 1956, the Service published Revenue Ruling 56-185,6
specifically illustrating the requirements for a hospital to
qualify for exemption.
The ruling provided, among other things,
that a hospital "must be operated to the extent of its financial
ability for those not able to pay for the services rendered and
not exclusively for those who are able and expected to pay."
This requirement came to be known as the "financial ability"
standard.
Three years later, in 1959, the Service issued final
regulations under section 501(c)(3).
These regulations redefined
"charitable" in its "generally accepted legal sense" as developed
in the common law. However, the Service did not specifically
issue further published guidelines on the treatment of hospitals
as charitable organizations until 1969.
In that year, it
published Revenue Ruling 69-545,7 revoking the financial ability
standard established by Revenue Ruling 56-185, and acknowledging
that the promotion of health is charitable in the generally
accepted legal sense of the term.
Revenue Ruling 69-545 held
that a hospital may qualify for exemption under section 501(c)(3)
even though it does not provide free or below-cost care to
patients who are unable to pay.
Citing the Restatement (Second)
of Trusts and the well-known treatise Scott on Trusts, the ruling
concluded that the promotion of health is charitable because —
like the relief of poverty and the advancement of
education and religion, [it] is one of the purposes in
the general law of charity that is deemed beneficial to
the community as a whole even though the class of
beneficiaries eligible to receive a direct benefit from
its activities does not include all members of the
community, such as indigent members of the community,
provided that the class is not so small that its relief
is not of benefit to the community.
61956-1 C.B. 202.
71969-2 C.B. 117.
6
The standard articulated by Revenue Ruling 69-545 is known as the
community benefit standard, and this ruling has been upheld in
litigation.8
Revenue Ruling 69-545 concluded that a hospital satisfies
the community benefit standard by providing health care to all
persons in the community able to pay, either directly or by
third-party reimbursements, and by operating an emergency room
open to all members of the community regardless of their ability
to pay.
In 1983, the Service ruled that a hospital that does not
operate an emergency room may nonetheless satisfy the community
benefit standard where a state agency has determined that
operation of an emergency room is unnecessary because it would
duplicate emergency facilities and services that are adequately
provided by another institution in the community, or where the
hospital specializes in forms of medical care limited to special
conditions unlikely to necessitate emergency care.9
The Community Benefit Standard of Current Law Reflects
the Economic Rationale for Tax Exemption. The current-law
community benefit standard for hospitals, drawn from earlier
common law, reflects the basic economic rationale for the public
policy underlying tax exemption for nonprofit hospitals.
Although the nature of hospitals and their role in the health
care system have undergone several fundamental shifts since the
adoption of the income tax, nonprofit hospitals' economic
activities provide a continuing rationale for their tax exemption
under the Code.
Research and Innovation. An economic rationale for tax
exemption is that nonprofit hospitals are able to provide
services that are not provided or are inadequately provided by
for-profit hospitals because the market prices charged by
hospitals do not reflect the benefit the hospitals' services
8 Eastern Kentucky Welfare Rights Organizations v. Simon.
506 F.2d 1278 (D.C. Cir. 1974), rev'q Eastern Kentucky Welfare
Rights Organization v. Schultz. 370 F. Supp. 325 (D.D.C. 1973),
vacated on other grounds. 426 U.S. 26 (1976).
R e venue Ruling 83-157, 1983-2 C.B. 94. Additional factors
that would indicate community benefit in cases where a hospital
was not required to have an emergency room were that the hospital
had a board of directors drawn from the community, an open
medical staff policy, treated persons paying their bills with the
aid of public programs like Medicare and Medicaid, and applied
any surplus to improving facilities, equipment, patient care, and
medical training, education and research.
7
confer on the community as a whole.10 For example, medical
research benefits everyone, not just the patients in the hospital
where the research is conducted.
Because it is impossible for a
hospital to obtain payment from all of the beneficiaries of its
research, too little hospital research would be conducted if we
relied solely upon private markets to provide such research.
As
a result, government subsidies in some form are appropriate to
achieve a proper level of medical research.
Such research is
typically conducted in the tax-exempt sector — at universityaffiliated hospitals and at specialized medical institutes.
Medical Teaching. Teaching medical practitioners benefits
the community at large and hence may also merit government
subsidization.
This activity also is typically conducted in the
tax-exempt hospital sector.
Care for Low-Income Patients. Nonprofit hospitals may be
more willing to care for low-income patients because they have no
profit motive.
This is a complex matter to evaluate because
available data may not be reliable.
Hospitals may provide care
to low-income patients in a variety of ways, and nonprofit
hospitals have not yet developed uniform standards for reporting
the amount of such care they provide. As a result, data on the
provision of uncompensated care is incomplete, sometimes
conflicting, and difficult to interpret. Many hospitals, for
example, do not include shortfalls from state Medicaid payments
relative to their costs in accounting for "uncompensated care."
Some hospitals may, for example, offer free health screening,
nutritional services, preventive health clinics, patient
counseling, or other services to the poor without billing them —
services that may not appear in any hospital statistics.
Although controversial, the data that are available suggest
that nonprofit hospitals provide more services to low-income
persons than their for-profit counterparts.
For example, a 1981
Office of Civil Rights study found that nonprofit hospitals were
somewhat less likely than for-profit hospitals to have fewer than
5 percent uninsured admissions, and somewhat more likely to have
disproportionately higher shares of uninsured patients. 1 A
study based on data from the 1979—1984 National Hospital
Discharge survey found that for-profit hospitals serve
10In the economics literature, such benefits are labelled
"external benefits" or "externalities."
nReported in, "Access to Care and Investor-Owned Providers"
in Bradford H. Gray, ed., F o r - P r o f i t E n t e r p r i s e i n H e a l t h C a r e ,
Institute of Medicine, National Academy Press, 1986.
8
significantly lower percentages of both uninsured and Medicaid
patients than do nonprofit and public hospitals.12 A 1990 GAO
study similarly found that nonprofit hospitals as a group provide
more uncompensated care than do for-profit hospitals.13 Another
study, conducted by Lewin and Associates, critiqued several
earlier studies that had found little significant difference
between nonprofit and for-profit hospitals in their level of
charity care and suggested that nonprofit hospitals provide
significantly more uncompensated care than for-profit
hospitals.14
All of these studies found substantial variations among
hospitals and that government hospitals provide more
uncompensated care than nonprofit hospitals.
There are also
variations from state to state and among differing communities
within states.
Some additional evidence also suggests that forprofit hospitals tend to locate in areas with higher income,
broader insurance coverage, and fewer Medicaid patients, thereby
limiting the number of low-income patients that they are asked to
treat.
For-profit hospitals also seem to be more likely to
discourage admissions of low-income patients and to offer
services that are used disproportionately by high-income
patients, and apparently are less likely to offer services that
might benefit low-income patients, or to offer care at reduced
rates.15
Community Services. Hospitals may also engage in many other
activities that benefit the community.
These community services
include, for example, health screening and education, temporary
housing for patients and their families, immunization, and
transportation.
The GAO nationwide survey of hospital
12Frank, R.G., D.S. Salkever and F. Mullann, "Hospital
Ownership and the Care of Uninsured and Medicaid Patients:
Findings from the National Hospital Discharge Survey 1979-1984,"
H e a l t h P o l i c y , 14/1, 1990.
13 U.S. General Accounting Office, N o n p r o f i t H o s p i t a l s :
B e t t e r S t a n d a r d s N e e d e d f o r T a x E x e m p t i o n , GAO/HRD-90-84, May
1990.
14Lewin, Lawrence S., Timothy J. Eckels, and Dale Roenigk,
•• S e ttin g th e R e c o rd S t r a i g h t :
T h e P r o v i s i o n o f U n c o m p e n s a te d
C a r e B y N o t - F o r - P r o f i t H o s p i t a l s Lewin and Associates, Inc.,
April 1988.
15Marmor, Theodore M . , Mark Schlesinger and Richard W.
Smithey, "Nonprofit Organizations and Health Care," in Walter W.
Powell, ed., T h e N o n p r o f i t S e c t o r : A R e s e a r c h H a n d b o o k . New
Haven: Yale University Press, 1987, 231-32.
9
administrators found that a high proportion of hospitals provide
community services.
However, nonprofit hospitals were more
likely than for-profit hospitals to provide these services and
provided them to more people.
Nonprofit hospitals were also more
likely to target services to low-income individuals.16
Quality of Care. Because of the complex nature of the
services provided by hospitals, patients generally are not able
to evaluate the quality of care they are receiving; they must
rely upon the hospital and physicians to monitor the quality of
the hospital's services.17 Hospitals that maximize profits to
shareholders may have an incentive to provide lower quality care
to patients unable to know whether they have received the best or
even appropriate treatment.18
*
*
*
Lack of reliable data, coupled with wide variations in
hospitals' accounting practices, locations, the populations they
serve and the services they offer, make it impossible to know
whether the present combination of tax and other government
subsidies is the best practical mechanism for giving nonprofit
hospitals the necessary incentives and resources to provide an
economically more efficient level of services that benefit the
community.
On the other hand, standing alone, a nonprofit
hospital's loss of tax exemption can be expected to reduce the
level of the hospital's activities that benefit its community.
PROPOSED LEGISLATION
H.R. 790. H.R. 790, introduced by Congressman Roybal on
February 4, 1991, provides that a hospital will not be exempt
from tax under section 501 unless it has an open-door policy
toward Medicare and Medicaid patients, serves in a
nondiscriminatory manner a reasonable number of such patients and
provides in a nondiscriminatory manner specified amounts of
qualified charity care and qualified community benefits.
The
bill would require that the hospital's unreimbursed qualified
16GAO, pp. 38-43.
17In the economics literature, this circumstance is referred
to as a case of "asymmetric information."
18Marmor, et.al., 23 0.
10
charity care costs19 be at least 50 percent of the value of its
tax-exempt status for the year and that its unreimbursed
qualified community benefits20 costs be at least 35 percent of
the value of its tax-exempt status for the year.
The bill would value a hospital's tax exemption for a
taxable year as a national average percentage of its gross
receipts — the percentage that, when applied to the estimated
average gross receipts of tax-exempt hospitals in the United
States for the taxable year, will yield an amount equal to the
average Federal, state, and local tax revenues that are foregone
by reason of hospitals' exempt status.
This percentage is to be
lowered if necessary to ensure that at least 75 percent of
nonprofit hospitals will meet these requirements for exemption.21
The bill would revoke a hospital's tax-exempt status only in
the most egregious cases; instead, it would impose a 100 percent
excise tax on a hospital that has a charity-care or community
benefit shortfall in a year (that is, the tax would be equal to
the shortfall). This tax would be waived for the first year of a
shortfall, but the existence of the shortfall would be published
in the Federal Register. The Secretary would have the discretion
to increase the tax (up to 1 percent of the hospital's gross
receipts). Receipts from this excise tax would be dedicated to
providing additional Federal Medicaid matching funds to the state
19"Qualified charity costs" are the hospital's costs in
providing free or discounted health care to those with limited or
no ability to pay, bad debts, excess Medicaid costs over
reimbursements, and, if the community has too few charity—care
patients needing hospital care, the direct or indirect costs of
providing health care or services to the medically underserved
and disadvantaged in the community.
“ "Qualified community benefits" are the hospital's
"unreimbursed costs in providing those community benefits not
customarily provided by hospitals that are not exempt from tax,"
and the excess of the unreimbursed qualified charity-care costs
over 50 percent of the value of tax exemption.
21The Secretary is required to adjust this percentage (up or
down) where appropriate in the case of a particular hospital,
taking into account the hospital's financial and other factors.
Within two years of enactment, Treasury must implement, if
feasible, a methodology for measuring the Federal, state, and
local tax revenues foregone by reason of the tax-exempt status of
a hospital, and shall report to Congress any recommendations for
modifying these charity care/community benefit standards.
11
in which the hospital is located, to be used only to pay for
hospital charity care.
H.R. 790 would be effective for taxable years beginning
after December 31, 1993, except that new reporting requirements
would apply to taxable years beginning after December 31, 1991.
H.R. 1374. H.R. 1374, introduced by Congressman Donnelly on
March 12, 1991, would impose three requirements on hospitals as a
condition of income tax exemption under section 501:
(1)
The hospital, in general, would be required to operate an
emergency room open to all members of the community.
This
requirement would be waived in the case of specialty
hospitals and in any case where operating an emergency room
is duplicative in the community.
Hospitals violating the
patient-dumping statute under the Medicare program would be
conclusively presumed to have violated this requirement.
(2)
The hospital would be prohibited from discriminating against
Medicaid beneficiaries and would be required to have a
Medicaid provider agreement.
(3)
The hospital would be required to fulfill at least one of
the following five criteria:
(a)
(b)
(c)
(d)
(e)
It is a sole community hospital;
It is receiving the Medicare or Medicaid
disproportionate share adjustment;
Its disproportionate patient percentage (as defined for
purposes of the Medicare program) is statistically
similar to other hospitals in the community;
It devotes 5 percent of its gross revenues to providing
charity care (defined not to include bad debts or
contractual allowances); or
It devotes 10 percent of its gross revenues to
qualified services to the community (such as health
clinics in medically underserved areas).
A hospital that becomes a nonqualified hospital by
to meet either of the first two requirements would lose
income-tax exemption for a minimum of two years.
If it
only the third requirement, the hospital could preserve
failing
its
fails
its tax
“Generally, section 1867 of the Social Security Act requires
hospitals that have emergency rooms to screen all individuals
seeking medical attention (whether or not eligible for Medicare
and regardless of ability to pay) to determine whether an
emergency medical condition exists and, if so, to stabilize the
medical condition before the patient may be transferred.
12
exemption by electing instead to pay a 10 percent penalty (100
percent in the second year) on the excess of 10 percent of gross
revenues over the cost of charity care it actually provides in
the year of failure.
A hospital would be considered to be a
nonqualified hospital even if it elects to pay the excise tax.
Becoming nonqualified would not affect the exclusion from income
for interest earned on the hospital*s outstanding bonds, but a
nonqualified hospital would not be permitted to issue additional
tax-exempt bonds, nor would a nonqualified hospital be eligible
to receive tax-deductible charitable contributions or bequests.
The tax exemption requirements of the bill generally would
be effective on the earlier of January 1, 1993, or the date on
which the hospital is in compliance with those requirements.
The
reporting requirements would be effective for taxable years
beginning after December 31, 1991.
ADMINISTRATION POSITION
In General. The Administration continues to believe that
community benefit is a more appropriate standard for evaluating
the tax-exempt status of hospitals than the proposed charity-care
standards.
A community-benefit standard reflects the long
standing proposition that the promotion of health is a charitable
purpose and recognizes the potential for a variety of means for
fulfilling that purpose in this nation's diverse communities.
By
treating private nonprofit and government hospitals the same
under Federal tax law, a community-benefit standard encourages
pluralistic alternatives to government activity — the raison
d 'être for tax exemption.23
Under a specific charity-care standard, hospitals will have
an incentive to divert their free or reduced cost services to the
form of care that best protects their tax-exempt status.
Thus, a
specific charity-care requirement may bias the health care system
toward providing services to low-income persons in the form of
hospital care rather than preventive and other less costly forms
of medical care.
It also might decrease nonprofit hospitals'
expenditures for other activities, such as research and^teaching,
that contribute to the well-being of the community.
Neither tax
nor health policy would be advanced if nonprofit hospitals were
^Both H.R. 790 and H.R. 1374 might in some cases result in
differential Federal tax treatment of nonprofit and government
hospitals.
Both bills would impose their charity-care standards
and Federal tax sanctions only on nonprofit hospitals.
As a
result, a nonprofit hospital would be subject to Federal taxation
and lose other Federal tax benefits, even though it might provide
a higher level of "charity care" than some government-operated
hospitals.
13
simply to substitute one set of activities for another with no
net increase in their overall provision of community benefits.
In addition, hospitals may fund any new charity-care
requirement by diverting capital that they otherwise would have
used to finance expanded or improved plant and equipment.
This
diversion of capital may simply shift the benefits of tax
exemption from future to current patients by reducing the
quantity and quality of hospital care available to the community
in the future and thereby cause an increase in the burden on the
public hospital system in the long run.
The charitable purpose required for tax exemption is served
whenever hospitals provide uncompensated care to uninsured or
inadequately insured patients, whether or not the recipient is at
or below the poverty level.
We do not regard it as appropriate
in determining whether a hospital merits tax exemption to
disregard the provision of below-cost care to a middle-income
family that might be financially devastated by a costly illness.
Moreover, hospitals should not be disadvantaged simply because
they direct services to other populations with medical needs,
including the elderly, the homeless, people with AIDs or other
diseases, or sufferers from drug, spousal or child abuse.
Because hospitals typically obtain a small portion of their
funds from investment income and charitable contributions,
increasing charity care would likely be financed, at least in
part, by increased charges to insured patients, perhaps including
those insured by governmental programs such as Medicare and
Medicaid.
If increased charitable care were financed by
increased charges to insured patients, insurance and out-ofpocket costs to patients will increase commensurately.
To the
extent these increased charity-care costs are reflected in
increased insurance costs to employers, they may respond by
decreasing coverage and, even if they maintain existing levels of
coverage, the tax expenditure for their health insurance
deductions will increase.
Since any additional costs of a
charity-care requirement may well be borne by Federal, state and
local governments, fundamental changes in the requirements for
tax exemption, such as those before the Committee today, should
be undertaken, if at all, only in the context of a broader
reexamination of government policies regarding health care.
H.R. 790. The Administration opposes H.R. 790. We have two
principal concerns with this bill.
The first is that it would
replace the community-benefit standard of existing law with a
charity-care standard to evaluate the tax-exempt status of
hospitals.
For the reasons advanced above, we do not regard such
a change as appropriate as a matter of tax policy.
Second, the
bill requires a hospital to spend an amount on "qualified charity
care" measured by a national average value of tax exemption for
hospitals, taking into account the Federal, state and local tax
14
revenues foregone by reason of their tax-exempt status.
By
definition, this would require all hospitals for which the value
of exemption is less than the national average to spend an amount
greater than their tax benefits on charity care.
In an effort to
remedy this difficulty the bill requires the Secretary to make
case-by-case modifications for individual hospitals if the number
derived on a national basis is "inappropriately high or low.”
This would seem to require an annual evaluation for each taxexempt hospital to determine whether the national number is
appropriate as applied to that hospital.
We would also expect
challenges to Treasury's determination of the national average
value of hospitals' tax exemptions.
H.R. 1374. As described above, H.R. 1374 incorporates
elements of both a community-benefit standard and a charity-care
standard.
We have the following specific comments concerning the
bill:
Emergency Room Requirement. The bill requires that a
hospital operate an emergency room open to all members of the
community except in the case of specialty hospitals and where it
is duplicative of emergency facilities in the community.
This
provision represents a codification of the Service's existing
interpretation of the community-benefit standard, and generally,
under that standard, a hospital must operate an emergency room to
qualify for tax-exempt status.
Although the Service has not
published guidance concerning the relationship between Medicare's
patient-dumping provisions and the emergency room requirement, we
believe that compliance with the anti-dumping statute is implicit
in the requirement of an emergency room open to all without
regard to ability to pay.
Accordingly, the Administration does
not oppose these provisions of the bill, although we do have some
suggestions for clarification.
For example, to avoid problems
under the statute of limitations, the bill should be clarified to
provide that any tax penalty that flows from a violation of the
anti-dumping provisions will be imposed in the year the
determination by the Department of Health and Human Services
occurs, not in the year of the violation.
Nondiscrimination Against Medicaid Patients. We believe
that the community-benefit standard of current law prohibits
discrimination against Medicaid patients.
Therefore, the
Administration does not oppose this requirement of H.R. 1374. We
are concerned, however, that the requirement that a hospital have
a Medicaid provider agreement may not be appropriate in all
cases.
For example, at least one state, California, contracts
for nonemergency Medicaid services with only a limited number of
hospitals through a negotiation process.
It does not seem
appropriate to disadvantage hospitals in states that are
unwilling to enter into Medicaid provider agreements.
15
The bill also seems to require the Internal Revenue Service
to determine independently whether a hospital that has entered
into a Medicaid provider agreement consistently engages in the
systematic practice of refusing services to Medicaid patients.
Such a determination seems more appropriately delegated to the
Department of Health and Human Services, so that the Service
would not be required to duplicate the personnel and expenditures
that Department already dedicates to this type of determination.
Expenditures for Community Benefit and Charity Ca r e . In
addition to meeting the emergency room and nondiscrimination
requirements, the bill requires that hospitals satisfy at least
one of five additional alternative tests to maintain their taxexempt status.
The Administration opposes these requirements,
although hospitals that meet the emergency room and
nondiscrimination requirements plus any of these requirements
presumably would qualify for tax exemption under the communitybenefit standard of present law. Two of the alternatives —
devotion of 5 percent of gross revenues to charity care or
devotion of 10 percent of gross revenues to qualified community
services — would impose an undesirable rigidity in determining
which hospitals qualify for tax exemption for the reasons
articulated above.
In addition, defining what constitutes
"charity care” or "qualified services" would be difficult.
It is
unclear, for example, whether charity care should be measured by
the amount of charges foregone by a hospital or by the costs the
hospital incurs in providing the care.
If charity care were
measured on the basis of foregone charges, a hospital with higher
charges will appear to be providing more charity care than a
hospital with lower charges even if the services it delivers are
the same; on the other hand, if charity care were measured by
costs, hospitals with greater overhead costs might more easily
meet the requirements.
Measurement of the amount of charity care is also
complicated by the presence of Medicaid and other state and local
programs that provide medical care for low-income persons.
Because Medicaid and other programs may reimburse hospitals at
lower rates than paying patients, patients covered by these
programs may represent some element of charity care even though
the hospital receives at least partial payment.
Bad debts, which
hospitals traditionally have included in their accounting for
"uncompensated care," may also present problems of measurement
because some are incurred by patients who cannot afford to pay
and others are incurred by patients who can afford but do not
choose to pay.
Many hospitals make no distinction for accounting
purposes between the two types of bad debt.
Sanctions. Both H.R. 790 and H.R. 1374 impose new sanctions
on hospitals that become nonqualified for tax exemption.
For
example, under H.R. 1374, a hospital that becomes nonqualified by
failing to maintain an open emergency room or a nondiscrimination
16
policy would lose its exemption from Federal income tax for a
minimum two-year period.
If a hospital satisfies these
requirements but fails to satisfy the additional requirements of
the bill, as an alternative to losing its exemption, it may pay
an amount equal to 10 percent (100 percent in the second year) of
the excess of 10 percent of gross revenues over the cost of
charity care actually provided by the hospital during the year.
Under H.R. 790, a nonqualifying hospital would have to pay an
excise tax equal to its charity-care or community-benefit
shortfall for the year.
The sole sanction for noncompliance under current law —
loss of tax-exempt status — may merit reexamination.
However,
the issue whether the tax law might be improved by imposing
sanctions other than loss of tax exemption and the possibility of
permitting institutions to correct disqualifying behavior is not
limited to hospitals but rather applies to tax-exempt
institutions generally.
Making revocation of tax exemption the
only sanction seems particularly inappropriate when, as under
this proposed legislation, a hospital might be disqualified due
to small and perhaps inadvertent failures to meet specified
requirements.
We do not, however, believe that a temporary loss of taxexempt status is a viable alternative sanction in any
circumstance.
Many complex tax issues would arise in connection
with the transition from tax-exempt to taxable status, and the
transition from taxable back to tax-exempt status.
One major
issue involves the appropriate treatment of assets held by the
hospital at the time of revocation and the treatment of
contributions by donors.
For example, when Congress denied taxexemption to Blue Cross and Blue Shield organizations, it
provided a transitional rule that marked to market the basis of
their assets for purposes of determining gain or loss as of the
date they became taxable.
If a similar rule were extended to
hospitals that temporarily lose tax-exempt status, it would
impose substantial administrative and compliance burdens on both
the Service and the hospitals.
Any intermediate sanction for tax-exempt organizations
should be modeled on the private foundation excise tax provisions
and impose a monetary penalty on the organization (or perhaps its
responsible officers) in the year it becomes nonqualified.
The
amount of the excise tax should be imposed only in response to
conduct by the organization that is readily determinable on
audit.
In particular, we are concerned that an excise tax based
on the amount of charity care provided by a hospital would prove
very difficult to administer.
* * *
17
Mr. Chairman, this concludes my prepared remarks.
I would
be pleased to answer any questions the Committee might have.
Table 1
Number of Hospitals, Number of Hospital Beds, and Hospital Expenses by Type of Hospital, 1989
Hospitals
Percent
of Total
Number
dumber
(000)
Beds________
Percent
of Total
6,720
100.0
1,226
100.0
214.2
100.0
Nonprofits
3,424
51.0
683
55.7
139.4
65.1
For-P rofits
1,145
17.0
136
11.1
20.6
9.6
2,151
340
1,811
32.0
5.1
26.9
407
101
306
33.2
8.2
25.0
54.2
14.4
39.8
25.3
6.7
18.6
Total
Government
Federal
State and local
Department of the Treasury
Office of Tax Analysis
Source: American Hospital Association, "AHA Hospital Statistics 1 9 9 0 -1 9 9 1 1 Tables 2A and 2B.
________ Expenses
Amount
Percent
($ billions)
of Total
July 3, 1991
Table 2
National Health Expenditures by Source of Funds in 1989
Am ount
($ billion)
Percent
of Total
604.1
100.0
Private funds, total
O u t-o f-p o c k e t
Private insurance
O ther
350.9
124.8
199.7
26.3
58.1
20.7
33.1
4.4
Governm ent, total
Federal
State and local
253.3
174.4
78.8
41.9
28.9
13.0
99.8
59.3
16.5
9.8
Total
Exhibit
M edicare
Medicaid
Departm ent of the Treasury
Office of Tax Analysis
July 1, 1991
Source: Departm ent of Health and Hum an Services, Health C are Financing
Administration, Health C are Financing Review, W inter 1990, Vol. 12, No. 2,
Tables 12 and 13.
Department of the Treasury • W ashington, D.c. • Telephone S66-2041
ilit■ i. |\ i f
fI i{ I
»-ilL i J »1 U U
a
I v
f) Q
(J w
For Release Upon Delivery
Expected at 1:30 p.m.
July 10, 1991
STATEMENT OF
THOMAS D. TERRY
BENEFITS TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON RETIREMENT INCOME AND EMPLOYMENT
SELECT COMMITTEE ON AGING
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to present the views of the
Department of the Treasury on certain issues relating to private
pension plan coverage. My testimony will address issues relating
to the Administration's proposals for pension simplification,
coverage and portability raised in the Subcommittee's letter of
invitation to testify.
On April 30, 1991, Secretary of Labor Martin announced
Administration proposals to simplify the law governing retirement
plans, to expand pension coverage and to increase pension
portability.
These proposals were developed through the joint
efforts of the Department of the Treasury and the Department of
Labor.
Last month, Chairman Rostenkowski introduced H.R. 2730, the
"Pension Access and Simplification Act of 1991," which includes
pension coverage and simplification proposals along the lines of
many of the Administration's proposals.
Several other pension
bills have been introduced in Congress in the last few weeks.
The Administration intends to continue to work with Congress in
an effort to enact legislation that addresses our common
concerns.
Pension portability and related pension coverage issues have
long been a public policy concern.
Simplifying the taxation of
pension distributions, expanding pension coverage and enhancing
pension portability will serve to strengthen the role of private
NB-1362
pension plans in providing retirement income security for
employees.
The Internal Revenue Code provisions relating to retirement
plans have become increasingly complex in recent years.
This
complexity reflects the sophistication and wide variety of plans.
Given the complexities of the underlying business arrangements,
the tax laws relating to employee benefits in general and the tax
qualification requirements for retirement plans in particular
will never be "simple.” But they can be less complex than they
are now. Reducing complexity would benefit employers and
employees as well as the tax administrator, and also offers the
prospect of improved compliance.
The Administration's proposals include a number of
amendments to the Internal Revenue Code which would contribute
substantially to our goals of simplifying the pension tax law,
expanding pension coverage and enhancing pension portability.
These proposals would:
o
Simplify and encourage tax-free "rollovers" of pension
distributions into IRAs by allowing all plan
distributions to be rolled over, except distributions
which are made in the form of a life annuity or in
installment payments over 10 years or more.
The
current law restrictions on rollovers of after-tax
employee contributions and minimum required
distributions would be retained. The favorable income
tax treatment for pension distributions which are not
rolled over — the special averaging rules and the
deferral of tax on the appreciation on employer
securities — would be repealed.
o
Establish a new simplified employee pension program for
employers with 100 employees or less. The Small
Business Administration estimates that these programs
would be available to 98 percent of America's
businesses.
o
Simplify the administration of 401(k) plans while
continuing to require them to provide proportionate
benefits to lower paid employees.
o
Make 401(k) plans generally available to employees of
tax exempt organizations and state and local
governments.
The Department of Labor estimates that
this would extend the availability of 40 1 (k) plans to
about 12 million employees — 3.1 million of whom
currently have no pension coverage.
o
Simplify the definition of "highly compensated
employee" for purposes of the employee benefit
-
2-
/
provisions of the Code and repeal the complex family
aggregation rules.
o
Conform the vesting requirements for multiemployer
plans to the existing requirements for single employer
plans.
The remainder of my testimony will discuss the specific
questions the Subcommittee has asked that I address.
Simplified employee pensions ("SEPs”)
Much of the complexity of the pension tax rules is due to
the flexibility in plan design available for qualified plans
under the Internal Revenue Code. This flexibility is desirable
in a voluntary private pension system and should be given
substantial weight in evaluating proposals for pension
simplification. At the same time, plan sponsors, particularly
small business employers, should have a straight forward program
available to them so they can avoid the complexity that comes
with sophisticated plan designs.
The Administration's proposal would replace the existing
salary reduction SEP with a new simplified program.
Under the
proposal, employers with 100 or fewer employees and no other
retirement plan would be relieved from testing for
nondiscrimination if they make a base contribution for each
eligible employee of 2 percent of pay (up to a maximum base
contribution of $2,000).
Employees could elect to contribute
additional amounts to the plan through salary deferral up to
$4,238 (one-half the limit on elective deferrals under 40 1 (k)
plans). In addition, the employer could make matching
contributions of up to 50 percent of the employees'
contributions. We believe that making these simpler plans —
with their promise of reduced administrative and compliance costs
for the sponsor — available and informing employers about their
availability will encourage many employers to adopt the simpler
plans.
You have asked what the experience has been regarding the
adoption and use of SEPs by small employers and whether the
adoption and utilization of salary reduction SEPs since this
option was enacted in 1986 enables us to predict the expansion of
coverage in the private sector.
One of the primary advantages of
SEPs from the standpoint of the employers who sponsor these
programs — the absence of Internal Revenue Service and
Department of Labor reporting requirements — unfortunately also
limits the historical data on SEP utilization.
For example, SEPs
are not required to file annual reports (Form 5500) with the IRS.
Such annual reports have been one of the most important sources
of pension statistical data for researchers. Many of the other
usual sources for collecting data with respect to pension
-3-
coverage are also unavailable for SEPs. Last month, the Bureau
of Labor Statistics released preliminary data from a survey of
small establishments (with less than 100 employees). However,
the data are limited to 1990 and do not reveal how the 1986
addition of the salary reduction option affected utilization.
Even if more data were available with respect to current
utilization of salary reduction SEPs, they might not reveal the
potential for expanded coverage under the Administration's
proposal.
The current salary reduction SEP may only be adopted
by employers with 25 or fewer employees. As indicated above, in
addition to simplifying the administration and testing of these
plans, the Administration's proposal would permit employers with
as many as 100 employees to adopt the program. Accordingly, we
expect a greater response than under current law.
Revenue related issues
You have asked questions relating to the revenue losses for
both individual retirement accounts ("IRAs") and 40 1 (k) plans.
The Treasury estimates that in 1990 there was a revenue loss of
$6.6 billion associated with the provisions of current law
providing for the deducibility of IRA contributions and the
exclusion of IRA earnings from taxation. Although we have
estimates of the revenue loss associated with all employer
pension plans, we have not made specific estimates of the revenue
loss associated with 401(k) plans.
You have also asked for utilization figures by income level
for both IRAs and 401(k) plans. Because the Tax Reform Act of
1986 limited the availability of deductible IRAs to individuals
without pension plans and individuals with gross income below a
specified threshold (e.g., $50,000 for married taxpayers filing
joint returns), participation in IRAs has fallen dramatically
since 1986.
For 1988, the most recent year for which we have tax
return data on this point, the IRA participation rate is highest
for the $30,000-$50,000 income group and second highest for the
over $100,000 income group (based on adjusted gross income).1 We
do not have similar tax return data with respect to 40 1 (k)
participation. However, the May 1988 Census Population Survey,
Employee Benefit Supplement (1988 CPS-EBS) did include questions
and responses on 401(k) plan participation.
The results of that
survey indicate broad-based coverage of nonhighly compensated
employees in businesses that maintain 401(k) plans.
You also inquire about the revenue effects of the
Administration's proposal and ask which principal revenue raising
provisions contribute to the revenue neutrality of the proposal.
1
Internal Revenue Service,
Individual Income Tax Returns.
Statistics
of Income - 1988,
Some of the specific provisions contained in the Administration's
proposal raise revenue, while others lose revenue.
In total, the
Administration's proposal does not lose revenue. Most of the
revenue is raised by the proposals simplifying the distribution
rules (e.gr., the repeal of 5- and 10-year forward averaging
treatment for lump sum distributions and the special tax
treatment for net unrealized appreciation on employer
securities).
Preretirement distributions of retirement savings
You have asked for the Treasury's view on the
appropriateness of using pre-retirement lump sum distributions
from IRAs and qualified plans for major purchases and other uses
unrelated to retirement savings.
The Administration believes
that the special tax benefits accorded IRAs and employersponsored retirement plans are properly directed toward
encouraging retirement savings. Accordingly, we have not
supported various proposals that would expand penalty-free
premature withdrawals from these tax-favored retirement vehicles
for specified nonretirement purposes.
The President's FY 1992
Budget proposal which would permit penalty-free IRA withdrawals
for certain first-time home purchases is fully consistent with
this policy as homeownership constitutes a principal source of
retirement savings. Recognizing that individuals need to save
for nonretirement reasons as well as retirement reasons, the
President's FY 1992 Budget advances a proposal for a new savings
vehicle, the Family Savings Account.
The Family Savings Account
Program would expand savings incentives to income that is saved
for other than retirement purposes, while not eroding incentives
for retirement savings.
You also asked whether we have statistics regarding the use
of pension plan rollovers which were cashed out of the retirement
income system over the last year. The most recent information
which we have available is survey results from the 1988 CPS-EBS
Survey covering the year 1987.
In that year, of the individuals
receiving lump sum distributions:
—
20% rolled over all or a portion of the distribution
into an IRA or another qualified plan.
37% used all or a portion of the distribution for
immediate consumption.
—
26% put some or all of the distribution into a savings
account or other financial instrument.
26% used some or all of the distribution to buy a
house, pay off a mortgage or pay off loans or other
debts.
These percentages add to more than 100% because some of the
individuals receiving distributions used them for more than one
of the purposes listed.
Distributions which are neither rolled over nor used for
current consumption may still be used for retirement purposes
immediately or in the future. Thus, the after-tax proceeds of a
distribution from a qualified plan may be used to buy a house or
pay off a mortgage. As indicated above, the investment in a home
often provides another means of saving for retirement. Also, the
after-tax proceeds of a distribution may be held in a savings
account or other financial investment and later be used to
provide income in retirement.
Treasury has not advocated a prohibition of nonretirement
withdrawals to better ensure retirement income security. An
outright ban on nonretirement withdrawals from those retirement
plans that provide for employee contributions or salary deferrals
would likely lead to lower participation and contribution rates.
Employees might not contribute to the plans if amounts would in
no circumstances be available before retirement, even to meet
unforeseen emergencies.
Thus, we are concerned that such a ban
might result in a decrease in the rate of retirement savings in
401(k) plans and IRAs by individuals.
On the other hand, unlimited free access to retirement
savings would almost certainly result in premature consumption of
retirement savings for other purposes.
The current statutory
scheme strikes a balance between an outright ban on withdrawals
and unlimited free access by providing a disincentive in the form
of an additional 10 percent "penalty" tax on premature
withdrawals.
You have also asked whether, in the Treasury's
view, the present penalties on premature withdrawals are
inadequate to enforce private savings in IRAs and 401(k) plans.
We regard the present penalties as adequate and we do not have
any data that would indicate otherwise. The 1988 EBS-CPS Survey
data for the first year the additional tax was in effect suggests
that the tax encourages individuals to keep their retirement
savings in the retirement income system. We also believe that
the Administration's proposal to repeal the special income tax
treatment currently available with respect to lump sum
distributions from retirement plans, coupled with the proposal to
make most non-annuity retirement distributions eligible to be
rolled over into an IRA or other qualified plan, will further
encourage individuals to keep their retirement savings in the
retirement income system.
Mr. Chairman, Members of the Subcommittee, that concludes my
formal statement.
I will be pleased to answer any questions that
you may wish to ask.
-
6-
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
I Çpiÿl|ACT:
FOR IMMEDIATE RELEASE
July 10, 1991
Office of Financing
202-376-4350
RESULTS OF TREASURY 'S; RUCTION?. OF 7-YEAR NOTES
Tenders for $9,003 million of 7-year notes, Series G-1998,
to be issued July 15, 1991 and to mature July 15, 1998
were accepted today (CUSIP: 912827B50).
The interest rate on the notes will be 8 1/4%.
The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
8.25%
8.26%
8.26%
Price
100.000
99.948
99.948
$1,105,000 was accepted at lower yields.
Tenders at the high yield were allotted 91%.
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
21,121
19,662,572
13,767
25,388
35,448
23,561
934,062
18,983
12,548
22,756
9,143
259,147
9.549
$21,048,045
Accented
21,121
8,552,872
13,767
25,388
34,358
18,381
232,112
18,983
12,003
22,756
9,143
32,147
9.549
$9,002,580
The $9,003 million of accepted tenders includes $553
million of noncompetitive tenders and $8,450 million of
competitive tenders from the public.
In addition, $118 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $534 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1363
TREASURYNEWS
D epartm ent of the Treasury • Washington, o.C. • Telephone 566-2041
EMBARGOED UNTIL GIVEN
EXPECTED AT 11:00 A.M.
TESTIMONY OF
THE HONORABLE JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE SUBCOMMITTEE ON
COMMERCE, CONSUMER PROTECTION, AND COMPETITIVENESS
OF THE
HOUSE COMMITTEE ON ENERGY AND COMMERCE
July 11, 1991
Chairwoman Collins, Mr. McMillan, and members of the
Subcommittee, thank you for this opportunity to discuss the
insurance aspects of the Administration's comprehensive banking
reform legislation, H.R. 1505, as well as recent modifications by
the House Committee on Banking, Finance and Urban Affairs. We
are convinced that modernization of current banking laws is the
only permanent solution to the ills now affecting commercial
banks, which are draining the bank insurance fund and threatening
the taxpayer.
Creating a sound structure for profitable
affiliations between insurance companies and well-capitalized
banks is a key aspect of this reform that will bring substantial
benefits to consumers.
Before addressing specific insurance provisions, let me make
several broader points about the comprehensive nature of this
legislation.
The Administration's proposal addresses the
fundamental problems of the banking system — rather than simply
funding them.
It would do so by decreasing the exposure of the
federal safety net, providing prompt corrective action for
troubled banks, modernizing and rationalizing the activities
conducted by commercial banking organizations, and attracting
critically needed new capital to the industry.
We believe this represents a carefully balanced, integrated
approach, which is critical to fundamental reform.
By contrast,
a piecemeal approach is likely to push our most pressing problems
into the future and could well defeat the very purpose of the
legislation — to strengthen the banking system.
For example,
merely recapitalizing the bank insurance fund would only delay
the day of reckoning, while piling on endless restrictions in the
name of safety and soundness would make banks even less
competitive and weaker than they are today• We therefore applaud
NB 1364
2
the bipartisan decision of the House Banking Committee to
preserve core elements of the Administration's comprehensive
proposal, although there was some needless scaling back of the
insurance provisions that are the subject of today's hearing.
My testimony today discusses (1) the reasons for the
Administration's banking and insurance recommendations, (2) the
similarities between banking and insurance activities, (3) the
empirical evidence supporting the combination of these
activities, (4) the "firewalls" required to protect insured
institutions and consumers, and (5) the differences between the
Administration's proposal and the legislation passed by the House
Banking Committee.
Reasons for the Administration's Recommendations
Banks are no longer the protected and steadily profitable
businesses they once were.
Old laws designed to "protect" banks
from competition have become barriers that impede banks from
adapting to changed market conditions.
The result has been
financial fragility and losses and a clear need for change.
Antiquated laws must be adapted to permit banks to reclaim the
profit opportunities they have lost to changing markets.
Where banking organizations have natural expertise in other
lines of business, they should be allowed to provide it for the
benefit of consumers.
Likewise, where other financial companies
have natural synergies with banking, they should be allowed to
invest in banks.
New sources of capital must be tapped.
The Administration's proposal, H.R. 1505, would allow banks
to affiliate with a broad range of financial firms through the
formation of financial services holding companies (FSHCs).
Commercial companies would in turn be permitted to own these new
FSHCs by forming diversified holding companies (DHCs). This
proposed structure would create a level playing field that
permits banking, financial, and commercial companies to affiliate
with each other on fair terms. Moreover, H.R. 1505 includes
ample safeguards to prevent an expansion of deposit insurance and
the federal safety net to cover new activities (as well as
safeguards to protect consumers from abusive practices).
H.R. 1505 would benefit not just banking organizations, but
a broad range of financial companies, including insurance
companies.
It would enable these companies to capture the
synergies of providing bundled financial products to retail and
corporate consumers, as well as diversifying risk.
For example,
both banks and insurance companies would have new customer
markets to tap and new distribution networks available to sell
their products and services.
The resulting competition is likely
3
to create direct benefits for consumers, including lower costs
and greater convenience.
This blurring of distinctions between banking, financial,
and related products is neither a new nor a radical idea, as some
have suggested.
The marketplace has already moved in this
direction, and the laws are merely catching up — although the
United States has clearly fallen behind our major foreign
competitors in recognizing the changes that have already taken
place.
Securities firms currently offer a range of banking and
insurance products to consumers; insurance companies provide
insured deposits and securities-related products to their
customers; and even banks have limited authority to sell
securities and insurance products.
In addition, commercial
companies today own "limited purpose" banks, thrift institutions,
industrial banks, and certain savings banks, all of which offer
federally insured deposits to their customers.
The Administration's proposal recognizes these changes and
puts in place a regulatory structure that permits more
comprehensive and more efficient "functional" regulation of
financial activities.
We believe this structure will improve the
regulation of all financial activities conducted in a diversified
holding company.
In addition, H.R. 1505 includes unique provisions for banks,
especially one that has long been available to its other
financial competitors: the ability to tap all aspects of the
United States financial markets for new sources of capital.
Permitting U.S. commercial companies to own banks — so long as
the companies commit to strong bank capital levels — will
strengthen the banking system and reduce taxpayer exposure.
It
will also allow U.S. banks to turn to U.S. companies for new
sources of capital, instead of overseas investors as some of our
major banks have recently been forced to do. Allowing wellcapitalized banks to affiliate with insurance companies is simply
one aspect of the broader concept of tapping new sources of
capital.
Similarities Between Banking and Insurance
Second to securities, insurance is generally considered the
financial activity closest to banking.
Insurance, like banking,
is a financial intermediation process — taking premiums, rather
than deposits, from a large retail base; investing the funds in
financial assets and loans; and eventually repaying the proceeds
to the policyholder rather than the depositor.
Insurance products are highly complementary to many existing
bank products, providing opportunities for additional sources of
profit based on greater value added per customer and delivery
4
cost efficiencies.
For example, comprehensive and cost effective
packages for financial services customers could be built around
mortgage loans and mortgage insurance, automobile loans and
automobile insurance, small business loans and Mkey individual”
insurance, and corporate credit relationships and corporate life
or property/casualty insurance, among others.
Agency activities are especially appropriate for banks.
These activities pose little or no risk to the deposit insurance
fund. Moreover, with appropriate safeguards, insurance products
can be distributed efficiently from existing bank offices that
are typically convenient to public access.
Finally, local
communities are generally known and understood by local bank
personnel — these are individuals well situated to introduce the
most needed insurance products.
Summary of the Evidence
The evidence clearly shows that banking and insurance are
closely related products that consumers want to buy together and
companies want to sell together.
For example, savings bank life
insurance (SBLI) is a long-established, successful, and safe
product offered by savings banks in Connecticut, Massachusetts,
and New York.
Consumer groups have repeatedly applauded SBLI as
one of the best insurance bargains for consumers.
While the
Administration's legislation would create safeguards for SBLI
underwriting, to our knowledge SBLI has created few problems for
banks while resulting in a steady stream of diversified income to
help bolster bank capital.
In addition to the three savings bank states, seventeen
states already have authorized their banks to engage in a broad
range of insurance activities, with direct benefits for consumers
and substantial profit opportunities for banks.
Likewise, state
and federal thrifts have long been permitted to provide
insurance. To our knowledge, despite these widespread
combinations, not one bank or thrift has failed because of
insurance activities. Yet national banks cannot take advantage
of even the safest of insurance activities because of limits in
federal law, creating an obvious competitive disadvantage in
those states that permit bank insurance activities.
Even now insurance and banking are being marketed together
all over the country.
In addition to the institutions mentioned
above, major financial companies engage in full service insurance
and banking throughout the country through numerous regulatory
exemptions, including firms such as American Express, John
Hancock, Sears, and USAA.
Furthermore, the trend among major
industrialized nations outside of the United States is to permit
combinations of banking and insurance.
Belgium, Germany,
Luxembourg, and the United Kingdom currently permit combinations
5
of banking and insurance underwriting and brokerage activities,
and more limited combinations are permitted in other countries as
well.
The impending integration of European financial markets is
expected to lead to a convergence of national regulations m such
a way that the most flexible system will set the standard that
the others will follow. Many of the current restrictions in U.S.
law simply do not reflect these realities of the national or
international marketplace.
A number of critics have argued that the insurance industry
should be protected from bank competition — even competition on
the fairest terms — because some parts of the insurance industry
are weak.
The apparent fear is that banks will somehow “skim off
the cream" of the best insurance business, leaving the "dregs" to
insurance firms unaffiliated with banks.
This strikes us as a^
protectionist, anticompetitive overreaction to the facts.
It is
hard to believe that the experienced insurance industry will not
prove to be a fierce competitor against fair bank competition,
just as they have proven to be in states that permit bank
insurance activities.
Moreover, if the consumer would benefit
from increased competition through lower costs and greater
convenience, why should federal law bar such competition?
Indeed, in thé long run we believe both the insurance industry
and the banking industry will benefit from open and fair
competition, not just the consumer.
The Administration is not alone in its view that more
competition from banking organizations will benefit consumers.
A
1990 study by thè General Accounting Office (GAO) strongly
supported bank entry into insurance agency activities.
GAO
concluded that the selling of insurance by banks would benefit
consumers through lower insurance costs while benefitting banks
through enhanced profitability.
It found little danger of^
conflicts of interest or coercive tie-ins given the competitive
nature of the insurance market, bank internal controls, and
regulatory oversight.
Finally, GAO concluded that bank safety
and soundness would not be placed at risk by agency activities
since they are not capital intensive.
The Consumer Federation of America (CFA) reached a similar
conclusion in a 1987 study.
CFA surveyed o v e r 250 life insurance
agents to compare the costs and quality of insurance services
provided by banking organizations with those provided by
independent insurance agents.
The results provided strong
support for bank involvement in insurance activities on the basis
of costs, convenience, and responsiveness to the concerns of
consumers.
The CFA estimated that consumers would realize
anywhere between a 5 to 10 percent savings from the selling of
insurance by banks — a considerable sum when viewed in terms of
the aggregate insurance market.
Moreover, the study found that a
significant percentage of consumer survey resondents were
interested in purchasing insurance products from banks.
6
Banking and Insurance Under H.R. 1505
It is useful to distinguish between insurance agency
activities and insurance underwriting.
Agency activities, which
encompass the distribution and sale of insurance products, are
not capital intensive and generally pose little risk.
Underwriting activities, on the other hand, require the
assessment and assumption of risk and are capital intensive.
Full service insurance firms are those that engage in both agency
and underwriting activities.
Because the rules governing bank insurance activities are
somewhat complicated, attached to this testimony are three
explanatory charts.
Chart 1 describes the current bank insurance
rules? Chart 2 describes the Administration's proposal? and Chart
3 describes our understanding of the Banking Committee's actions
on bank insurance activities.
For the Committee's convenience, I
will refer to these charts throughout the testimony.
Under H.R. 1505 only well-capitalized banks that form FSHCs
would be rewarded with the ability to affiliate with companies
engaged in insurance underwriting (See Chart 2). This could be
done through the establishment of a separately capitalized
affiliate by the FSHC, or it could be done at the level of the
diversified holding company (DHC) which itself owned the FSHC.
As a result, the failure of the insurance affiliate would not
affect the capital of the bank, and likewise, the failure of the
bank would not affect the capital of the insurance company.
At the same time, only the bank would have access to deposit
insurance, the Federal Reserve's discount window, or the federal
payments system? the insurance affiliate, the FSHC, or the DHC
would have no such access.
In this way the federal safety net is
confined strictly to the bank.
The selling of insurance by banks, however, is a different
matter.
Agency activities of this type are generally recognized
as providing significant profit opportunities, carrying little
risk, and leaving bank capital unimpaired.
Because of this, H.R.
1505 does not disturb the ability of states to authorize their
state banks to engage in insurance agency activities, and would
permit national banks to engage in these same activities to the
extent permitted for state banks. At the same time, however, the
ability of national banks to provide insurance in towns of fewer
than 5000 would be scaled back? such insurance could only be
provided to residents of the state in which the small town is
located, and could not be provided on a nationwide basis.
Furthermore, because agency sales do not involve safety and
soundness questions for insured banks, our legislation would
defer to the states on the manner in which banks are permitted to
7
sell the insurance products of either affiliated or unaffiliated
companies.
Finally, H.R. 1505 generally eliminates the ability of
states to authorize subsidiaries of state banks to underwrite
insurance.
This prohibition was added only because the bill
provides two new ways for banks to affiliate with companies that
underwrite insurance (that is, through holding company affiliates
in the FSHC or through the DHC). Of course, to the extent that
Congress chooses to eliminate or limit these two new
alternatives, as the House Banking Committee did, the
Administration would support restoring the states' ability to
authorize insurance underwriting in subsidiaries of state banks,
provided appropriate safeguards were in place.
Firewalls
Those opposed to combinations of banking and insurance often
cite two potential problems:
(1) risky and anti-competitive
funding relationships between banks and their insurance
affiliates, and (2) consumer protection issues, including misuse
of confidential information and coercive tie-ins.
The
Administration's bill addresses these concerns directly and
appropriately by establishing a set of stringent "firewalls"
between the insured bank and its nonbanking affiliates.
Capital. First, and most important, only strongly
capitalized banks would be allowed to affiliate with an insurance
company.
Capital is the single most powerful tool to make banks
safer.
A large capital cushion reduces the possibility of bank
failure, lessens the incentive to take excessive risk, and
creates a "buffer" that can absorb any bank losses before the
Bank Insurance Fund must.
The banks that associate with
insurance companies under H.R. 1505 must significantly exceed
their capital requirements.
Functional Regulation.
Second, the insurance company would
be a wholly separate legal entity from the bank.
This will
simplify functional regulation — insurance regulators
concentrating on the insurance company, banking regulators on the
bank, and so forth — which should itself increase bank safety.
Regulators have areas of expertise and should concentrate on
these, preventing the risk of missing important developments in a
group's business from lack of perspective.
Functional regulation
is more efficient and more effective than having multiple
agencies each regulating essentially the same activity.
Funding Firewalls. Third, the Administration's proposal
includes funding firewalls that restrict the ability of a bank to
fund a "sister" insurance company.
8
For example, Section 23A of the Federal Reserve Act limits
extensions of credit or other financial support by a bank to an
affiliate, and the Administration's proposal expands the
transactions and the entities to which Section 23A would apply.
(This would include a bank's assumption of an affiliate's
liabilities, as well as any other transaction the Federal Reserve
determines is similar to the type of financial support already
covered by the statute.)
Section 23B of the Federal Reserve Act would continue to
require that transactions between a bank and its affiliates be
conducted on an arms-length basis, and again, H.R. 1505 would
expand the types of covered transactions that would be subject to
the arms length requirement.
In addition, the FSHC would be required to
notice to the bank regulator of unusually large
funds between the bank and any affiliate, which
help monitor funding flows between institutions
stress.
provide prior
transfers|of
would obviously
in times of
Stringent dividend restrictions would also apply to
undercapitalized banks; this would help prevent the potential
"milking" of bank assets by FSHCs.
In addition to these specific firewalls, federal regulators
would be granted broad authority to adopt funding firewalls to
protect insured depository institutions.
These firewalls would
be specifically designed to address unfair competition, potential
conflicts of interest, and unsafe banking practices.
This
flexibility will allow regulators to adapt firewalls as necessary
to maintain strong protections despite changing market
conditions.
Finally, the funding firewalls that apply to DHCs are even
more stringent.
No credit of any kind may be extended by a bank
or its FSHC affiliates to the DHC or any of its subsidiaries.
A
commercial company will simply be prohibited from using an
insured depository as its "piggy bank" for funding needs.
Likewise, a bank and its FSHC may not purchase for their own
accounts any assets or securities of an affiliated DHC, and they
may not issue a guarantee to an affiliated DHC.
In addition, all
of the other firewalls that would apply to an FSHC affiliate
would also apply to a DHC affiliate.
pnngmBQr Disclosure. Consumers will clearly benefit from
the convenience and availability of more insurance products from
banks.
But the Administration's proposal also includes rigorous
disclosure requirements to prevent customer confusion between
federally insured deposits and other financial products that are
not insured. Under H.R. 1505, depository institutions must
disclose in writing that any insurance (or securities) products
9
offered are not protected by deposit insurance.
In addition, to
offer insurance (or securities) products jointly with another
firm, the other firm must disclose that it is not insured and is
separate from the insured depository institution.
Even if an
insurance affiliate does not jointly market its products with an
affiliated bank, it must make similar disclosures.
In all of
these situations, the bank as an affiliate must obtain an
acknowledgement of receipt of the disclosure from the customer.
This is to ensure that customers understand clearly the type of
institution they are dealing with and the availability of federal
insurance.
In addition to these consumer disclosure provisions, the
appropriate federal regulator is authorized to issue regulations
limiting disclosures of nonpublic customer information between a
depository institution and its affiliates.
This new authority
will prevent banks from unfairly disclosing such information,
especially without customer consent.
Finally, H.R. 1505 for the first time applies statutory
anti-tying provisions to holding companies.
These provisions are
based on the current anti-tying provisions that apply to banks,
and they ensure that consumers are not coerced into buying
nonbank products of affiliates.
The firewalls I have described are a comprehensive,
effective set of restrictions that will prevent the potential
abuse of relationships between banks and their insurance
affiliates.
We have not extended firewalls to include specific
limitations on the sharing of management, employees, officers, or
directors.
Such limitations can restrict and impede operational,
managerial, or marketing synergies between a bank and its
affiliates without conferring any additional benefits for the
federal safety net.
Functional Regulation
As discussed above, the Administrations proposal requires
new insurance activities to be located in a ^separately
incorporated and separately capitalized affiliate.| The insurance
affiliate would not be covered by federal deposit insurance or
the federal safety net, and it would not be funded with federally
insured deposits.
But the insurance affiliate would be
11functionally regulated” (in this case by the state insurance
commissioner), and would be subject to all laws that currently
apply to any other insurance company.
In this way, rather than
eroding the authority of insurance regulators, the use of the
holding company delineates a clear line of authority for the
functional regulator with respect to bank-affiliated insurance
activities.
10
H.R. 1505 grants bank regulators the authority to prevent,
or reverse, affiliations between insured depository institutions
and other financial companies.
This authority is predicated on
the maintenance of sufficient capital in depository institutions
and on other safety and soundness grounds, and is intended to
contain the risk exposure of taxpayers that results from federal
deposit insurance.
In addition, the bill respects state law limitations on bank
insurance activities.
While affiliations of banks with insurance
companies would be permitted, the bill specifically preserves the
ability of states to limit the ability of banks to sell insurance
directly.
This state authority would extend to the sale by banks
of insurance products provided by affiliated companies as well as
unaffiliated companies.
Consistent with this role for the
states, national banks would be authorized to provide insurance
in a state to the same extent that state banks were authorized to
provide insurance, creating a level playing field for bank
insurance sales governed uniformly by state law.
Finally, regarding examinations and access to records,
Section 205 of H.R. 1505 specifically provides for the needs of
functional regulators.
Subsection (c)(1)(E) provides for
reciprocal access to reports among functional regulators for
financial affiliates and DHCs if the agency or regulator
reasonably believes that the activities or financial condition of
an affiliate could have a material impact on the company for
which the agency or regulator has responsibility.
Furthermore, Subsection (c)(2)(D) authorizes the functional
regulator of a financial affiliate to examine an affiliated
insured depository institution if the regulator reasonably
believes that such institution is engaged in a particular
transaction or course of conduct that may constitute a material
risk to the financial affiliate.
The House Banking Committee's Bill
The bill to be reported by the House Banking Committee —
H.R. 6 — made a number of changes to the insurance provisions
originally submitted by the Administration (See Chart 3).
First,
banks would not be permitted to affiliate with insurance
companies through FSHCs, but only through diversified holding
companies.
While this would also be allowed under the
Administration's bill, we nevertheless believe it appropriate to
permit insurance inside the FSHC, since insurance is plainly a
financial activity.
The essential difference between the two
types of affiliations is that there is a prohibition on all
credit flows from the bank to the DHC, while certain credit flows
from the bank to FSHC are permitted but strictly regulated
through stringent funding firewalls.
These FSHC firewalls are
more than adequate to address potential concerns.
11
Second, the House Banking Committee eliminated the ability
of national banks to sell insurance in their home states to the
extent permitted by state law for state banks.
We believe this
is plainly inequitable, and needlessly diminishes the value of
the national bank charter.
Third, the House bill would further restrict the ability of
national banks to engage in insurance under the "town of 5000"
provision.
These sales would be limited to residents of small
towns and their local market areas, rather than state residents,
which deprives small banks of needed flexibility and profit
opportunities --- especially since one of the original purposes
of this provision was to provide a diversified source of ^income
to strengthen smaller banks.
I should add that the provision
included in the Administration's bill, which limits such sales to
state residents, is a compromise position that was apparently
accepted by both the insurance industry and the banking industry
in 1988 in a bill that passed both the House Banking Committee
and the Senate.
Fourth, the House Banking Committee bill would limit
insurance underwiting by state-chartered banks to the very
limited credit-related insurance underwriting activities that are
permitted for national banks.
This is needlessly restrictive,
since the Administration's bill already provided express
safeguards to the FDIC to protect the insurance fund from
excessive underwriting risk.
Fifth, the House Banking Committee bill would preempt the
ability of states to authorize banks to engage in the "export" of
insurance activities to other states, even if insurance companies
located in that state could engage in such exporting activities.
This would perpetuate competitive inequities, and needlessly
penalize the ability of banks to provide new insurance products
to a broader range of consumers.
There is no need to treat bank
insurance providers differently from other insurance providers,
especially through federal preemption in an area that has
traditionally been regulated by the state level.
Finally, the House Banking Committee bill made one other
change that would create practical problems for affiliations
between banks and insurance companies (and any other company, for
that matter).
This change would require all affiliates of a bank
to act as a "source of strength" in the event of problems in the
bank.
This means that the capital of these affiliates would be
put at the mercy of the fortunes of their affiliated bank, which
could obviously spread problems from the bank to all parts of an
organization.
Given the condition of some parts of the insurance
industry, it makes little sense to create a system that would
spread additional problems to it.
12
Furthermore, we believe that this policy will be
counterproductive in the end. While intended to draw on other
sources of capital to prop up troubled banks, the effect will be
to deter other companies from ever investing in banks in the
first place, because of the virtually limitless liability
involved.
The best way to draw capital into the banking system
is on a voluntary basis, not through a set of mandatory
rules.
#####
In conclusion, we believe the comprehensive approach to
banking reform embodied in H.R. 1505 is critical to placing our
banking and financial system on a safe financial footing over the
long run. We continue to urge the adoption of comprehensive
banking reform legislation as expeditiously as possible.
BANK INSURANCE ACTIVITIES UNDER CURRENT LAW
CHART 1
1. National banks have limited insurance powers, including agency powers in "towns of 5,000" and sales and underwriting of credit-related insurance.
2. State law governs the insurance activities of state banks and their subsidiaries. Currently, 17 states permit general insurance brokerage; five of these also permit general
insurance underwriting.
3. Insurance activities of BHC affiliates generally are limited to credit—related insurance.
Treasury Department
BANK INSURANCE ACTIVITIES UNDER H.R. 1505
CHART 2
1. DHC may engage directly in full-service insurance; FSHC may be mutual insurance company.
2. H.R. 1505 expands the agency activities of national banks to those permitted by states for state banks; "Town of 5,000" sales are restricted to state residents.
3. States determine agency activities; underwriting activities not permitted beyond those permitted national banks unless the state bank (1) satisfies its
capital requirement, and (2) receives a determination from the FDIC that these activities do not pose a significant threat to the insurance fund.
4. Agency activities authorized; underwriting prohibited because of availability in other affiliates..
Treasury Department
BANK INSURANCE ACTIVITIES UNDER H.R. 6
CHART 3
1. H.R. 6 removes full service insurance from the FSHC, leaving it in the DHC.
2. H.R. 6 rolls back H.R. 1505’s expanded agency powers for national banks; and it restricts "town of 5,000" sales to local market areas.
3. H.R. 6 prohibits interstate insurance activities unless explicitly permitted by host state; underwriting powers limited to those of national banks.
4. Insurance activities of BHC affiliates generally are limited to credit—related insurance.
Treasury Department
Department of the Treasury • Washington, 0.6. « Telephone 566-2041
.
As prepared for delivery
Embargoed unitl 4:40 P.M.
fui I h i l U u 1 4 J I
EXPANDING MULTILATERAL EFFORTS TO
STRENGTHEN THE PRIVATE SECTOR
Remarks by
Nicholas Brady
Secretary of the Treasury
before
The Bretton Woods Committee
1991 Annual Meeting
July 10, 1991
It is a pleasure as always to address the Bretton Woods
Committee — a group devoted to the cooperative international
effort begun decades ago to forge an open and stable
international monetary system.
That historic meeting at Bretton Woods produced an
international economic system, centered on the IMF and the World
Bank, which has been truly effective in promoting global growth
and expanding world trade.
It restored international economic
cooperation in the aftermath of the Depression and World War II.
Today it continues to adapt itself to a vast, complex
international economy that could not have been envisioned in that
small New Hampshire town in the closing days of 1944.
Yet we hear the accusation that the institutions have
outlived their usefulness.
That they have failed to respond to
changing circumstances and needs. The cynics say that we are on
the same old policy treadmill, that we've failed to respond
imaginatively to the challenges we now face.
In short, the
naysayers say we*re going nowhere fast.
What are they talking about? In the last two years,
breathtaking changes have swept the world.
Eastern Europe is
rushing headlong toward democracy.
Latin America is having a
quieter but no less exhilarating revolution, as a whole new
generation of leaders spells out their hopes for economic reform.
East and West Germany have become one again. And the Soviet
Union approaches the upcoming Economic Summit with the goal of
integrating itself into the world economy it has so long shunned.
Throughout the world, we see a renewed understanding of how
best to provide for each nation*s economic well-being.
The
lessons of the last two years are clear.
Freedom works.
Free
markets work.
NB-1365
These simple principles have moved nations; they have
altered the course of history? they have turned the tide of our
economic future.
And the international institutions are at the heart of the
process.
This is what they do best. Every case of successful
economic reform in recent years has involved programs supported
by these institutions. As we move toward the 21st century,
strong Bretton Woods institutions still help nations help
themselves.
Let's look at an example of how the process works. Just two
and a half years ago, faced with a profound economic crisis,
Mexico welcomed its new President Carlos Salinas.
He came into
office with a strong plan for economic stabilization and reform,
and the commitment to make it work. Under his leadership, Mexico
made the hard choices.
It opened its doors to trade.
It put state industries in
the hands of the private sector.
It created a climate that
encouraged investment.
The Mexicans closed or sold almost two-thirds of their
publicly-owned companies.
They privatized their airline, their
copper industry, and most of their telephone company.
Now they
are selling their commercial banks and their steel industry to
the public.
They've deregulated their trucking industry, which
has reduced costs by as much as $3 billion since 1989. They've
reduced their external debt to commercial banks by over 30
percent.
And what happened? Mexico has flourished.
Its foreign
exchange reserves increased from $4 billion then to an estimated
$15 billion today.
Its budget deficit has been reduced from 14.3
percent of GNP in 1987 to 2.3 percent in 1990.
Inflation in
Mexico is now at one of the lowest levels in all of Latin
America.
Foreign investment has skyrocketed.
And after years of
devastating capital flight, Mexicans believe in Mexico, and are
now eager to invest in their own thriving economy.
When two roads diverged, Mexico took the one of fundamental
economic reform, and that has made all the difference.
At the time, the naysayers asked; where will the money come
from to finance Mexico's recovery?
They argued that Mexico's
reforms would never succeed unless its balance of payments gap
was filled up front. That wasn't the way it worked.
Mexico provided the reforms and the private market completed
the necessary financing.
It was the Bretton Woods institutions
2
who provided the seed money, the expertise, the guidance and
support that were so desperately needed for Mexico's success.
To those who argue that there is nothing new, let them
explain what happened in Mexico.
The international financial institutions proved in the case
of Mexico that they can be the catalysts of economic reform, and
can unleash the power of the private sector.
The Bretton Woods
institutions can move countries toward free markets.
But to do
so, they must remain at the intersection between the public and
private sectors.
To meet the challenges a changing world presents, the World
Bank has moved to put in place a strong private sector focus that
supports the world's budding free markets.
The Board of
Directors' recent decision to take the Bank into the nineties by
strengthening its commitment to private sector development is
good news.
We commend Barber Conable for his statement that the
Bank's "management is fully determined to ensure effective
implementation" of its private sector development action program.
There is no conflict here between private sector development
and poverty alleviation.
On the contrary, we have promoted
private sector development, and encouraged private investment
flows and freer trade, precisely because each of these
strengthens the Bank's existing efforts.
This is the surest way
to alleviate poverty in developing countries.
Within the Bank, the International Finance Corporation makes
privatization a top priority, and IFC is well positioned to be a
forceful advocate of privatization in its dealings with
developing countries.
In so doing, it funds projects that
reinforce economic reforms supported by the Bank.
This means
funding projects in countries whose economic policies are geared
toward free markets, or areas where there is a prospect for
liberalized trade.
Of course, the increased emphasis on the private sector is
hardly unique to the World Bank.
It has also been carefully
woven into the newly-born European Bank for Reconstruction and
Development.
The EBRD was established with a mandate that at
least 60 percent of its project funding go to the private sector.
This was one of the major reasons for its creation, and it was
the critical factor in U.S. support for the Bank's establishment.
At the center of the international economic system is the
International Monetary Fund, which has assumed a primary role in
promoting the stable economic environment essential for orderly
and effective reform.
Time and again the IMF has demonstrated a
capacity to respond effectively to the changing needs of the
3
world economy.
This has been seen most recently in the Fund's
swift response to the Gulf crisis, and in Eastern Europe, where
there were IMF programs in all of the reforming countries within
17 months after the fall of the Berlin Wall.
However, the Fund must have adequate resources to fulfill
this vital role in the 1990s.
Passage by Congress of the pending
IMF quota increase legislation is essential.
Failure to do so
will jeopardize the progress we've made since the wall came down.
Clearly, the international financial institutions will be
called upon as never before to respond to today's astonishing
world developments.
This is all to the good, and where their
focus ought to be, but the health and soundness of these
organizations must not be taken for granted.
To continue to fulfill their mission, the Bretton Woods
institutions must remain at their core, strong financial
organizations actively supported by their members.
This is the
secret of their importance, namely that carefully marshalled
resources can be leveraged many times over and recycled.
This
should not be confused with dollar-for-dollar foreign aid.
To guarantee their economic soundness, these institutions
must base their lending on sound economic policies.
Loans for
specific projects must meet the test for economic viability.
Policy-based lending must achieve effective economic reform that
strengthens the borrower's credit standing.
It is only in this
way that loans will be repaid, providing resources for others and
protecting the credit standing of the institutions.
Each
country's ability to free itself from dependence on the
international institutions will allow the institutions to help
other struggling nations.
The major industrial nations have a vital role to play as
well.
Their message should be one of hope through low
inflationary growth.
Sustained growth and price stability,
coupled with open markets and lower fiscal and external
imbalances, will provide the fertile field in which all nations
can grow and prosper.
In the post-communist world, as security concerns diminish,
international economic policy has captured the world's attention,
and rightfully so.
The argument that countries can exist in
economic isolation has been proved false.
We see around the
world an increasing recognition that each country's economic
decisions must be made within this new global perspective, if the
world economy is to prosper.
What is needed to foster world growth is an approach that is
dynamic and forward-looking, yet recognizes the diversity of
4
economic circumstances among nations.
three main elements.
This approach incorporates
First we must ensure strong sustained economic growth.
This
does not mean abandoning the cause of price stability.
Strong
economic performance and low inflation are not mutually
exclusive.
But sustained economic growth and price stability
don't just happen.
They must be nurtured through sound
macroeconomic policies broadly carried out in concert with other
nations.
Economic policies that promote an adequate supply of capital
to meet the world's growing requirements constitute another
important component of this strategy.
Reducing budget deficits
throughout the world will help reverse declining savings rates,
freeing up sorely needed capital.
Second, dedicated efforts to open markets to trade,
investment and other capital flows, as well as a timely and
successful resolution of the Uruguay Round, are also key factors
in this strategy.
We are already making headway on freeing the
flow of goods and services as we move toward free trade from
Canada to Mexico.
And the European Community is moving forward
on EC 1992, which will improve the economic efficiency and
standard of living of Europe and of their trading partners.
Third, the U.S. and other developed nations can also make a
difference by reducing existing impediments to the efficient
operation of our own markets.
This will not only make us more
competitive, but will set an example for developing countries.
In the future we will be judged on how we respond to the
aspirations of the new democracies to join the community of
nations committed to economic freedom.
There are many dimensions
to this challenge, and strong, sound international financial
institutions remain the key to our success.
No legacy we could
leave would be more enduring than a thriving world economy that
unites all nations.
0O0
5
Department of the Treasury • Washington, D.c. • Telephone 566-2041
EMBARGOED UNTIL GIVEN
EXPECTED AT 10:0C A.M.
JULY 11, 1991
EPT. OF THE TREASURY
STATEMENT OF HONORABLE NICHOLAS F. BRADY
Chairman, Oversight Board of the
Resolution Trust Corporation
before the
House Committee on Banking, Finance and Urban Affairs
July 11, 1991, 10;00 a.m.
2128 Rayburn House Office Building
Washington, D.C,
Mr. Chairman, members of the Committee, we are pleased to be
making our semiannual appearance before your Committee today.
We
look forward to bringing you up to date on activities of the
Resolution Trust Corporation (RTC) and the Oversight Board as
required by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) .
I appear as Chairman of the Oversight Board of the RTC.
Accompanying me are the four other members of the Board: Alan
Greenspan, Chairman of the Federal Reserve Board; Philip Jackson,
Jr. , former member of the Federal Reserve Board and currently
Adjunct Professor at Birmingham Southern College; Jack ICemp,
Secretary of the Department of Housing and Urban Development? and
Robert Larson, Vice Chairman of the Taubman Company and Chairman
of the Taubman Realty Group. Also accompanying us is Peter Monroe,
who is President of the Oversight Board.
We are here to discuss funding needs to complete this
unprecedented task, implementation of provisions of the 1991 RTC
Funding Act, RTC*s asset disposition activities. Oversight Board
activities since our appearance before your Committee in January,
and other matters required by FIRREA.
FUNDING NEEDS
Mr. Chairman, your Committee and the Oversight Board share
the objective of getting the savings and loan problem behind us
as quickly as possible within the terms of FIRREA and at the least
possible cost. Our common goal is to protect the depositors of the
nation*s failed thrifts:
to date some 14 million depositor
accounts averaging $10,000.
In doing so we honor our deposit
insurance commitments and keep faith with our citizens.
Let me review what has been done and how far we have to go.
NB-1366
2
Size of the Task
*
As we have said before, the ultimate cost of the cleanup is
driven by real estate markets, interest rates, and the state of
the economy- The number of thrifts that must be closed and the
value of the assets seized, and thus the total amount of the loss
depends on these larger economic forces.
The cost will also
reflect our effort to save taxpayer dollars wherever possible.
As Chairman Seidman told the Senate Banking Committee on June
21, the RTC estimates that it will complete the resolution of 557
thrifts by the end of the fiscal year, and at that time also will
have about 185 thrifts in conservatorship or in the Accelerated
Resolution Program (ARP) When these 742 institutions are
resolved, all those now in Group TV will have been closed, and the
lion's share of the job of closing insolvent thrifts .will be
finished.
What remains to be done?
On June 12 the Office of Thrift Supervision (o t s ) announced
that Group III, defined as thrifts that are troubled but that are
unlikely to require government assistance and that have reason
able prospects of meeting capital requirements, consists of 378
institutions.
It is likely that some of the thrifts in Group III will fail
and that the RTC caseload will grow beyond the 742 institutions.
We do not believe, however, that sufficient Group III thrifts will
be transferred to RTC so as to exceed the upper end of our
previously estimated loss range.
Though the exact number of thrifts still t o be resolved with
Federal assistance cannot be known, we can estimate that virtually
all nonviable thrifts will be transferred t o t h e RTC for resolution
during the next two years.
If th i s estimate is correct, the
orderly downsizing of the industry will then have been completed.
However, current law provides that OTS may transfer thrifts
to RTC for closing until August 9, 1992, when they would be
transferred to the Savings Association Insurance Fund (SAIF).
Therefore, as proposed in the President's budget, we request
legislation to extend the period in which OTS may transfer thrifts
to RTC from August 9, 1992, to September 30, 1993,
This extension should permit the OTS to transfer insolvent
thrifts to the RTC in an orderly way to avoid extended waiting
periods in conservatorship. Were OTS to transfer nonviable thrifts
to r t c in such quantity that they must remain in conservatorship
for long periods, the taxpayers' cost would rise because the
thrifts would lose franchise value.
3
The extension should ensure that the cleanup of the backlog
of failed savings and loans is completed by September 30, 1993.
FIBBEA sets up a schedule for contributions to the SAIF, beginning
in fiscal year 1992 if Congress and the Administration take further
appropriations action. However, if Congress acts on our request,
SAIF will not take insolvent institutions until October 1, 1993.
The President's budget estimates that at that date, SAIF should
have about $1.6 billion in its reserves from premium income.
At
this time, it is too soon to tell whether and how much of a
contribution Treasury will need to make to SAIF.
Loss Funds Needed
Earlier this year, in our January 1991 semiannual appearance,
we estimated that the cost of the savings and loan cleanup would
be in the range of $90 to $130 billion measured in 1989 present
value dollars.
We stated that, because of general economic
conditions, and deterioration in real estate markets and real
estate related assets, the most likely cost scenario had probably
moved to the higher end of our original range, but that it
nevertheless remained within that range.
We still believe this to be true.
In other words, we still
believe that the higher end of the range estimate of $130 billion
in 1989 dollars remains valid.
Presenting estimates in constant
dollars allows us to compare the estimates better.
It is the
conventional way for the private sector, and the CBO to state the
cost of major programs that last for more than one or two years,
but it is different from the same amount expressed in current year
budget dollars.
Our estimate o f $90 t o $130 billion in 1989 dollars converts
t o a range of about $100 to $160 biilion in budget dollars.
Chairman Seidman gave the same estimate in his testimony to the
S e n a t e B a n k in g C o m m itte e .
The Oversight Board and the BTC estimate that the additional
amount of loss funds necessary to complete the task of closing
defunct savings and loans and protecting depositors could be as
high as $80 billion in budget dollars.
To date, $80 billion has
been provided:
$50 billion by FIBBEA and $30 billion by the BTC
Funding Act of 1991. With the additional amount, the total would
be brought to $160 billion in budget dollars, which translates to
$130 billion in 1989 dollars.
It is our recommendation that Congress provide sufficient;
funding to complete the job, which we estimate to be as high as $80
billion. This would permit the RTC to complete its work as quickly
as possible without costly delay.
Funding delays simply add to
taxpayer costs because they slow the BTC*s resolution activity.
Just as we are trying to save taxpayer dollars b y improving the
4
cleanup, so we should avoid costly stop and start funding.
Chairman Seidman estim ated that the amount necessary for RTC to
carry out its work in fiscal year 1992 will be $50 to $55 billion.
We know that these decisions are difficult because the public
in general does not understand the need for these funds. I*d like
to give you some examples of resolutions that have protected
depositors. Broadview Federal Savings Bank in Cleveland, Ohio was
closed in May, 1990 and its 108,252 deposit accounts, averaging
$8,000 were protected. Home Federal Savings Bank of Worcester in
Worcester, Massachusetts was closed in November, 1990 and its
37,900 deposit accounts were protected at an average of $6,148
each.
The 8,100 deposit accounts, averaging $9,765, in Founders
Federal Savings and Loan Association, a minority-owned institution
in Los Angeles,
California were protected and successfully
transferred in January, 1991, to Founders National Bank, a like
minority owned institution.
In the case of Founders Federal
Savings and Loan, RTC, through its policy of preserving minorityowned | institutions, was able both to protect Founders Federal
depositors and retain the minority character of the institution by
providing a $2 million, nine month loan to Founders National.
I hope these examples underscore the point that the money is
going to people - 14 million accounts to date, in 45 of the 50
Texas, more than 1.9 million accounts have been
protected, and^ another 1.2 million accounts are now in conser
vatorship waiting.to be resolved with loss funds voted in March •
In Florida, over 800,000 accounts have been protected and another
1 million are in conservatorship.
In New York, 900,000 accounts
have been protected, with another 500,000 in conservatorship
awaiting resolution. Even in Wisconsin there have been two thrift
failures requiring protection of 57,425 insured deposit accounts.
The important point is not that some states have had a bigger
problem than others — it *s that depositors in virtually every state
have received protection,
We all want to fulfill our Government's commitment to
depositors.
We do not want the system to be destabilized by TV
coverage of lines in front of thrifts, just as we should not
permit households and businesses to be impoverished by frozen
accounts.
The U.s. Government has no choice but to provide the money,
and we should remind people that it isn't going to crooked or
incompetent executives, br to keep bad institutions afloat.
The
money is used to protect individual Americans who deposited their
savings in S&Ls because they believed our government's promise that
it would be safe there.
5
Working Capital Needs
Loss funds, which, we have just discussed, are the monies that
are needed to fill the "hole” between an i n s t i t u t i o n s deposits and
the value of its assets.
They will never be recovered.
Working capital, on the
acquisition of the assets of
sold.
It is borrowed by the
(FFB). RTC expects to repay
the proceeds of the sales of
other hand, is used to finance the
failed thrifts by RTC until they are
RTC from the Federal Financing Bank
its working capital borrowings from
these assets.
A s of July 1, R T C 1s working capital borrowings totalled $54
billion.
By the end of this fiscal year, RTC expects to have $70
billion in working capital borrowings outstanding, an amount well
within the "note cap" limitation set b y FIRRRA.
However, during
fiscal year 1992, RTC could exceed the $125 billion permitted by
the note cap. And, by mid-1993, w e estimate that working capital
needs could peak at $160 billion.
At about that time the RTC will start the process of repaying
working capital borrowings from the FFB.
We estimate that
outstanding borrowings will decline rapidly to $65 billion in 1995
and will be virtually retired by 1996 when the RTC goes out of
business.
Because both loss funds and working capital are needed to fund
resolutions, it is imperative that loss fund authorizations be
matched with adequate working capital borrowings.
Therefore, we
request that Congress raise the RTC's borrowing limit to $160
billion.
This simply means RTC would have an additional $35
billion in borrowing authority over its current authority of $125
billion.
Not to do so might create a situation in which RTC is
pressured to dump assets at fire-sale prices simply to stay under
the limit.
Failure to “raise the borrowing limit would just as
surely prevent the RTC from resolving thrifts and protecting
depositors as delays in funding do.
The working capital concept has caused confusion.
For
example, some have suggested that asset sales should be used to
fund losses.
But this sort of "backdoor" spending would violate
the principle that the RTC should have sufficient assets to repay
its FFB borrowings.
In your invitation to testify, Mr. Chairman, you asked that
the Board address whether there are sufficient assets to back
borrowings.
The RTC seeks to assure that FFB borrowings will be
fully recovered from sales of assets through an initial mark-tomarket valuation of assets at resolution, and quarterly reestimates of those asset values during receivership.
6
The RTC has recently completed its first quarterly review
of its assets to determine whether there is sufficient value to pay
back borrowings and has adjusted asset values accordingly.
The
RTC*s Inspector General (IG) at the Oversight B o a r d s request, and
the GAO as part of its 1990 audit, are both examining the RTC*s
methodology to verify its accuracy.
In summary, Mr. Chairman, we request sufficient loss funds to
complete the cleanup, or as high as $80 billion*
This amount is
within our previous estimate of the cost of this effort.
In
addition, we request that the current $125 billion cap on RTC
borrowing authority be raised to $160 billion, noting again that
RTC expects to repay all borrowed funds.
In past appearances we have stressed that we cannot predict
ultimate costs and borrowing needs with certainty, and we must do
so again. As the General Accounting Office (GAO) noted in its 1989
Financial Audit of the RTC, "the actual cost. • .will depend on the
outcome of various uncertainties," including the number of institu
tions transferred to the RTC, the extent of their operating losses,
the quality and salability of their assets, and the condition of
the economy, especially in certain geographic areas.
In January, I told this Committee that the economic downturn,
and the Middle East crisis, had worsened the already weak market
for real estate assets and made already cautious investors more
reluctant to make investment decisions. The climate is still
uncertain, and in an uncertain climate, estimates are always
subject to change.
But we have in the past and have today given
you our best estimates of projected loss and working capital needs,
and we will continue to do so.
GETTING THE JOB DONE
When President Bush announced his proposed solution to the
savings and loan crisis soon after taking office, he established
four objectives against which we measure our progress.
First, protect insured depositors; the millions
who acted in trust when they deposited their savings
insured accounts. We estimate that by the end of this
nearly 20 million depositors with accounts averaging
have been protected.
of Americans
in federally
fiscal year,
$10,000 will
Second, restore the safety and soundness of the industry so
that another crisis will not occur.
In compliance with FIRREA,
new capital standards are being phased in. Even with these higher
standards, three-quarters of the savings institutions, with more
than $600 billion in assets, today meet or expect to meet current
capital requirements.
7
Third., clean up the S&L overhang so we can get the problem
behind us, and do it at the least cost to the taxpayer.
When
FIRREA created the RTC on August 9, 1989, RTC immediately became
responsible for closing 262 insolvent thrifts. By October 1, 1991
it will have closed 557 insolvent thrifts, one about every 33
hours.
Fourth, aggressively pursue and prosecute the crooks and
fraudulent operators who helped create the problem.
There have
been 550 convictions for thrift crimes. About 80 percent of those •
sentenced have received prison terms.
RTC F u n d i n g Act of 1991
The RTC Funding Act that became law on March 23 provided
necessary loss funds for this fiscal year and helped advance the
objectives of the cleanup.
The Act also addressed other issues of concern to this
Committee:
RTC management reforms,
affordable housing, and
minority- and vomen-owned business (MWOB) contracting. It included
valuable new financial reporting requirements. An d it established
that RTC personnel would not be personally liable for certain
securities transactions undertaken in RTC asset dispositions.
Affordable Housing
Although the primary purpose of the RTC is to clean up the
savings and loan problem, congress has assigned it other tasks such
as the provision of affordable housing. The RTC and the Oversight
Board have made every effort to implement the affordable housing
provisions of FIRREA, actively promoting the sale of eligible
single family homes to. low— and moderate—income families and
setting aside 35 percent of all units in multifamily properties for
such families.
As a result, 7,141 single family homes have been
placed under contract and 2,777 of these have closed.
Ninety
multifamily properties have been placed under contract and 13 have
closed.
According to e t c the average sales price for single family
properties sold through the affordable housing program through the
end of May is $32,297.
The average income of purchasers is
$22,136, which is less than 60 percent of national median household
income.
The Oversight Board is strongly committed to affordable
housing and has taken the following initiatives to enhance the
program:
o
$250 million of the R T C ’s $7 billion seller-financing
ceiling has been set aside exclusively for single family
affordable housing.
8
o
$190 million of mortgage revenue bonds has been set aside
by state housing finance agencies to be used to assist
lowand moderate-income
first-time homebuyers
to
purchase ETC single family homes.
o
SAMDA contractors are offered a special bonus fee to sell
affordable single family properties to eligible low- and
moderate-income households.
o
The Oversight Board approved a policy allowing the RTC
to sell affordable single family properties to eligible
low- and moderate-income households at 80 percent of
market value.
This policy was further expanded in the
Funding Act to a "no minimum reserve price" policy.
To
date, the RTC has held 90 sales events to offer
approximately 8500 properties at no minimum reserve
price.
o
Recently, the oversight Board allotted up to $150 million
of
seller-financing
for low downpayment
sales
of
multifamily properties to nonprofit organizations.
jBgifeBfelS °f
iH iy £S,*i££ip»s?
9
Minority and Women Outreach
Participation through outreach by minorities and women in the
business generated by the BTC is a goal of FIRREA.
The Torres
Amendment to the Funding Act requires that the Oversight Board and
RTC report on actions taken by the RTC to engage additional
minority- and vomen-owned business (MWOB) contractors in its work.
This report was filed on April 30 as part of the Board*s Semiannual
Report to Congress.
Some background may be useful.
FIRREA requires that the RTC
prescribe regulations for
an outreach program to see that
minorities and women are given the opportunity to participate in
all aspects of RTC contracting activities.
FIRREA also requires
that the RTC Strategic Plan provide procedures for the active
solicitation of offers from -minorities and women, and that it
ensure that discrimination on the basis of race, sex, or ethnic
group is prohibited in RTC*s solicitation and consideration of
offers.
RTC has conducted outreach efforts.
Its staff has appeared
at more than 100 professional and trade conferences to discuss
contracting opportunities.
In addition, it has held two confer
ences to explain its programs to minorities and has scheduled
several more.
But more can be done.
According to the RTC, M W O B ’s by June 11 had won 4,690 - or 22
percent - of RTC prime contracts, worth $203 million - or 23
percent of the value of all such contracts. Minority and minoritywomen owned contractors were 6 percent of the total awarded, and
non-minority women contractors were 15 percent of the total
awarded.
With respect to the utilization of outside counsel in legal
work for receiverships, the RTC awarded $586,547 — or 1.3 percent to all MWOB law firms in 1990 and $1,364,764 - or 1.9 percent - as
of May 1991.
The Oversight Board firmly believes that the outreach
requirement of FIRREA must be implemented vigorously and recently
has taken steps to enhance RTC*s MWOB outreach program on two
fronts.
First, the Oversight Board urged the RTC to expand its
outreach efforts and to formalize its outreach commitment by
adopting comprehensive outreach regulations. The Board emphasized
that the RTC have a well-staffed, well—administered, and vigorous
outreach program embodied in regulations.
RTC is preparing these
regulations for public comment.
10
Second, the Oversight Board urged RTC to make aggressive use
of agreements with the Small Business Administration so as to
channel RTC business to small and disadvantaged firms.
The Board
approved a pilot program in April, and in a letter to RTC on June
3 urged RTC to expand the pilot p rogram to include all appropriate
areas of RTC contracting.
At the same time the Oversight Board returned to the RTC for
further consideration a draft policy proposed to it b y the RTC
staff. Under this policy additional preferences would be given to
minorities and women by according them price and technical
competence adjustments. The oversight Board has asked the RTC for
clarification of its proposal.
The Oversight Board's goal is to achieve aggressive outreach
to minorities and women so that they will participate in the
business generated by the RTC.
The Oversight Board has recently
taken the following steps toward this goal.
o
The Oversight Board's Regional Advisory Boards have
completed a round of meetings in all six regions at which
they gathered testimony from representatives of the
minority business community at the request of the Board.
When formulated, the Advisory Boards* recommendations
should be helpful in improving RTC outreach efforts.
o
The Oversight Board President and staff have met with
Reverend Jesse Jackson and other representatives of the
minority business community at the request of the
Chairman of the Senate Banking Committee.
As a result
of those meetings, the Oversight Board President wrote
to the RTC on June 14 and again on June 21, 1991, with
a number of suggestions for enhancing RTC's outreach
program.
The* Oversight Board President urged RTC to
strengthen the administration of the outreach program by
providing for a high-level manager and a comprehensive
management network to ensure vigorous implementation of
the program throughout RTC*s operations.
o
The
Oversight
Board
staff
has
also
supported
R T C 1s
efforts to design its programs with an eye to making them
accessible to minority- and women-owned firms.
This
means that RTC contracts must be made accessible to a
much broader range of bidders by segmenting them by
geographic region, by making them smaller,
and by
breaking them down by type of service. The RTC has begun
to implement this approach.
In summary, Mr. Chairman, I believe that the Board
demonstrated its commitment to the inclusion of minoritywomen-owned firms in RTC contracting.
has
and
11
Mr, Chairman, I ask that relevant materials and correspondence
be included in the record of this hearing*
significant Properties
FIEJREA requires RTC to identify properties with natural,
cultural, recreational or scientific significance.
In addition,
the Coastal Barrier Improvement Act of 1990 imposed waiting periods
of up to six months on SIC sales of environmentally sensitive
property in coastal areasOn January 17 of this year, the Oversight Board directed the
RTC to expand its program to identify significant properties by
taking the following steps:
o
strengthening
properties;
its
internal
capacity
to
identify
such
o
procuring the best available expertise from both public
and private sectors to assist in identification7 and
o
publicizing the availability of significant properties
to the widest possible audience of interested persons
and agencies.
The Oversight Board further directed the RTC to immediately
design a plan to implement these three initiatives; the RTC
responded with its plan on February IS*
The Oversight Board has monitored the implementation of the
R T C fs efforts and their status is described in letters from the
RTC's Executive Director on June 10 and 20.
I ask that copies of
this correspondence be included in the hearing record.
ASSET DISPOSITION
Just as the need to resolve hundreds of insolvent thrifts
quickly was the most critical task of the RTC when it was created
almost two years ago, asset disposition is its most important job
today.
I said earlier that because of the pace at which thrifts
are being closed we now pan estimate that virtually all insolvent
thrifts will be closed by the end of September, 1993.
But the
corollary is that RTC is rapidly accumulating very large amounts
of assets.
On April 30, 1991, the RTC held $164 billion in assets. This
compares to the year-end assets of the two largest commercial
banks, Citicorp and BankAmerica, at $217 billion and $111 billion,
respectively. RTC had passed to acquirers or sold $154.3 billion,
or 49 percent, of its assets by April 30.
12
In its nine-month, financial operating plan filed in January,
RTC projected book value reductions of $75 billion through the end
of the fiscal year - $65 billion after putbacks of assets pre
viously sold to acquirers of closed thrifts.
During the JanuaryApril period, book value asset reductions totalled $35 billion.
Actual receipts from sales and collections are $33 billion.
The Oversight Board believes there is no more important task
before the RTC than organizing, the programs necessary to dispose
of RTC assets quickly and at best possible prices.
I emphasize
this because it is our goal to save taxpayer dollars.
The Oversight Board has helped provide the policies to
expedite and increase the return from asset sales.
It directed
the RTC to use securitization to the widest extent possible, and
it authorized the use of seller financing. The Oversight Board
acted in both cases in order to maximize the taxpayers1 recovery
against book value.
R T C ’s
categories:
asset
disposition
efforts
fall
into
readily marketable, and hard—to—sell.
two
broad
Readily Marketable Assets
As
readily
sisting
billion
of April .30, 1991, the book value of RTC's inventory of
marketable financial assets totalled $61 billion, con
of $25 billion in investment grade securities, and $36
in performing one- to four- family mortgag e s .
Securities
with regard to securities, the primary disposition strategies
are to centralize sales* in the Washington, DC headquarters and
execute sales in a manner that gets the best possible returns and
does not disrupt financial markets.
Results to date have been
relatively successful, as 75 percent of securities held more than
90 days have been sold or collected.
With the introduction of
R T C 1s portfolio securities management system, RTC will be better
able to pool like securities to achieve price advantages resulting
from larger offerings.
One- to Four-Family Mortgages
Numerous initiatives have been implemented to increase the
pace of, and returns from, the disposition of performing one- to
four-family mortgages.
To date, about 56 percent of these assets
held more than 90 days have been sold or collected. Among the most
important initiatives was RTC's adoption in April of standardized
due diligence procedures, permitting the RTC to stratify its
13
Inventory, identify which loans conform to Fannie M ae and Freddie
Mac standards, which are eligible for RTC* s mortgage-backed
securities program, and which should be sold on a whole-loan basis.
RTC has embarked upon an aggressive program of swapping
performing, conforming loans with Fannie Mae and Freddie Mac in
exchange for highly liquid securities. Through M a y 31, RTC had
swapped more than $1.6 billion in loans.
However, it is estimated that only about 15 percent, or $5.4
billion, of R T C 1s current inventory of performing one-to fourfamily mortgages conform to the secondary agencies1 criteria for
swap.
Therefore the balance must be securiti2ed or sold on a
whole-loan basis.
The Oversight Board has strongly encouraged the widest
possible use of securitization.
It offers a much broader market
of purchasers than does the outright sale of whole loans and,
because of such benefits as reduced risk and more predictable cash
flows, results in a higher return on these assets for the taxpayer.
Further, securitization will enable the RTC to increase the pace
of asset disposition.
Using conservative assumptions, the savings over the next
three years from R T C fs securitization of single family mortgages
alone could exceed $1 billion (not including savings resulting from
reduced FFB borrowings). Very significant additional savings could
result if other financial assets are securitized.
Immediately following enactment of immunity protection for
RTC Board members and employees in connection with their dispo
sition activities, RTC filed a $4 billion shelf registration with
the Securities and Exchange Commission to issue its own mortgagebacked securities.
The goal of securitizing $1 billion in loans
per month has been set and the first issuance of $429 million has
been made, with an estimated savings of over $15 million as a
result of securitization.
Additional securitizations are in the
pipeline.
Hard—to—Sell Assets
The most difficult task facing the RTC is the management,
marketing and disposition of illiquid assets inherited from
insolvent thrifts,
principally real
estate owned
and non
performing loans.
The RTC as of April 30 holds other performing
mortgages and loans with a book value of $36 billion, real estate
with a book value of about $21 billion, and non-performing loans
with a book value of about $25 billion.
14
To date it does not appear that ETC real estate sales have
had an adverse effect on local markets.
To the contrary, the
extensive soundings of local market conditions taken by all six of
the RTC's Regional Advisory Boards in 24 meetings in all sections
of the country indicate that in some areas the overhang of RTC
properties is depressing real estate markets. This finding simply
reinforces the need to dispose of real estate owned.
Other Performing Loans
RTC has used a series of strategies to dispose of other
performing loans, including, among others, auctions, bulk sales
through the national sales center, and passing loans to thrift
acquirers at resolutions.
The results of these efforts have been
the sale or collection of roughly 35 percent of mortgages other
than one- to four- family, and 53 percent of other loans held more
than 90 days.
Due diligence on many of these loans, such as
commercial loans, is time consuming.
Also, poor documentation of
these instruments hampers RTC disposition efforts.
SAMDA
The RTc *s effort to dispose of hard-to-sell assets has been
focused on the SAMDA program, which places real estate owned and
non-performing assets with the private sector for management and
disposition under Standard Asset Management and Disposition
Agreements (SAMDAs).
Under a SAMDA, a contractor serves as RTC's agent in the
management and sale of RTC assets.
The contractor designs a
management and disposition program for assets, hires subcontractors
to implement the program, and negotiates the sale of assets.
The
compensation structure gives contractors incentives to sell assets
quickly and at the best possible price. A recent revision to the
SAMDA standard contract has enhanced these incentives.
As of May 31, 128 SAMDAs with assets of over $24 billion book
value have been placed with contractors. An additional $10 billion
of assets is currently being bid.
At March 31, SAMDA contractors had sold assets with a book
value of $359 million, yielding $218 million in proceeds. Results
have been slow to come at least partly because 75 percent of the
assets now under SAMDA were contracted for within the last six
months, and because there is a lag of three to four months after
the award of a SAMDA, before the contractor can implement a
marketing program for the properties under its management.
15
The SAMDA program has been criticized because the pools of
assets RTC created and bid out for management average of about $190
million and thus make it very difficult for smaller businesses,
including M W O B 1s , to win SAMDA contracts. At the Oversight Board's
urging the RTC has begun to create smaller pools of assets.
This
should make the SAMDA program more accessible to smaller firms and
especially to those owned b y minorities and women.
Seller Financing
The Oversight Board adopted last December a policy providing
for a $7 billion seller financing program to expedite the pace of
sales of illiquid assets and to maximize the value recovered by
the RTC from such dispositions.
A minimum of $250 million was
reserved to assist the sale of affordable single family housing to
qualified buyers.
The RTC has a strong cash preference. But the RTC owns assets
for which there is no cash market except at distress prices.
The
RTC reports that there were six alternative cash offers for the
approximately 117 seller financed transactions that have occurred
since March, 1991 when the RTC began keeping records of alternative
cash offers. In such cases, seller financing gives the RTC a potent
means by which to expedite the sale of assets.
It gets some cash
up front, and avoids the
costs, liabilities and physical deter
ioration that occurs when property is held in inventory.
Nonetheless we recognize that financed transactions ultimately
rely on the credit and performance of the buyer.
So they are not
without risk.
Accordingly the oversight Board included risklimiting safeguards in its seller financing policies and directed
the RTC IG to conduct a front-end risk assessment of the program
and to conduct periodic audits.
Portfolio Sales
The RTC, through its sales centers, has been actively engaged
in marketing large portfolios of hard-to—sell assets, including
apartment buildings, office buildings and shopping centers.
On May 21 the RTC Bgard adopted a policy to authorize the RTC
to negotiate sales of very large portfolios of properties with
necessarily very large buyers, given the size of the portfolios.
The Oversight Board considers this an important issue. Given
the very large amount of RTC assets, innovative sales methods must
be explored.
There are elements of the RTC policy that are
consistent with existing Board policy, such as cash flow mortgages,
if done on a competitive basis.
Following extensive discussions
between the Oversight Board staff and the RTC, the Oversight Board
will further consider this issue at its meeting on July 25.
16
The Oversight Board is also considering the effect of this
proposal on the SAMDA program.
Very substantial effort has been
given to making SAMDA work. The Board wants to encourage continued
RTC efforts to sell assets. However, w e also want to ensure that
the portfolio sales policy does not undercut SAMDA just as it is
getting started.
I ask your consent that the RTC policy statement, and the
Oversight Board’s communications with the RTC about it, be included
in the record of the hearing.
OTHER BOARD ACTIVITIES
Management Initiatives
strengthening the R T C ’s management practices and internal
controls have been key objectives of the Oversight Board because
they are essential to sound decision-making and ultimately to
saving taxpayer dollars.
Specific improvements in R T C ’s management practices were
mandated by the Wylie Amendment to the Funding Act.
These and a
number of other management improvements requested by the GAO and
the RTC IG are summarized in the Management initiatives Report
contained in Appendix I.
Encouraging the RTC to develop operating plans has been a
major objective of the Oversight Board. The first nine-month plan
was submitted by the RTC in January. Producing such plans requires
setting goals, developing internal plans to achieve the goals,
measuring progress against goals, analyzing variances and revising
strategies.
This process has been given strong stimulus by the
Funding A c t ’s requirement that the RTC and Oversight Board submit
quarterly projections through the end of each calendar year. This
is a healthy discipline that the Board strongly supports.
Operating Plan Management Information system
Beginning in October, 1990, under the leadership of Director
Philip Jackson, the Oversight Board has initiated the development
with the RTC of an Operating Plan Management Information System.
This is an important undertaking, as the Comptroller General
testified to the Senate Banking Committee on June 11.
When in
operation, it will provide the Oversight Board with the consistent,
structured information needed to fulfill its role, and form the
basis for an executive information system for senior RTC managers.
It will help in developing an integrated operating plan process,
assessing the reasonableness of operating plan goals and measuring
operating results.
Its implementation will address the G A O ’s
17
concern that the RTC have an integrated system that supports
decision making in policy as well as operational matters.
This information provides the basis for an ongoing Oversight
Board "scorecard** program that visually displays R T C ’s activities.
Oversight Board Working Group on Audit Reviews
As the Comptroller General indicated, the thrift cleanup
requires oversight because it is so big, and costs so many billions
of public funds.
The Comptroller General*s testimony about RTC
operational shortcomings raised concerns that have been the subject
of ongoing action by the Oversight Board.
Some background may be helpful.
Early in 1991 the Oversight
Board staff began studying the RTC*s internal control systems.
This work was given impetus b y Comptroller General Bowsher’s
criticisms of the RTC*s internal controls provided to the Oversight
Board at its April 17 meeting.
Oversight Board staff immediately began to meet with the GAO,
with the RTC IG, and with RTC to understand and act on the GAO*s
concerns.
At its next meeting, on May 15, the oversight Board
authorized me as Chairman to write the GAO and the IG to request
explicit additional information as the basis for possible further
action.
The Oversight Board also created a working group headed by
John Robson,
Deputy Secretary of the Treasury,
and Alfred
DelliBovi, Deputy Secretary of HUD to help address concerns raised
in the area of internal controls.
This working group has three
tasks:
o
ensuring that RTC puts adequate systems in place to
coordinate activities among RTC's three auditors - the
GAO, the R T C ’s IG, and R T C ’s own in-house auditors?
o
ensuring that RTC puts an "early warning" system in place
so that problems are identified early; and
o
ensuring that RTC has a system to track the implementa
tion of corrective actions, and to verify that expected
improvements were achieved.
On June 10, when the Comptroller General responded to m y
request, I wrote and asked h im to meet with the working group.
I
would like to request, Mr. Chairman, that this correspondence be
included in the record of this hearing.
18
/
The working group has begun with a series of meetings with
representatives of the Comptroller General, the k t c i g , and R T C Ts
recently formed Internal Controls Task Force.
Their first recommendation to me is that RTC be required to
comply with the Federal Managers Financial Integrity Act of 1982
(FMFIA). Under the Chief Financial Officers Act of 1990 (CFO),
RTC is now required to submit an assurance letter to the President
and Congress that RTC's systems of internal controls comply with
standards prescribed by the Comptroller General and are consistent
with FMFIA.
In addition, while RTC is subject to certain financial audit
and management reporting requirements of the CFO Act, I believe
RTC would benefit from following all provisions of that Act.
As the Chairman of the Oversight Board, I fully endorse these
working group recommendations. While I will ask the Oversight
Board to approve these recommendations thereby requiring RTC to
follow the spirit of FMFIA and the CFO Act, I would welcome
legislation by this Committee which would officially bring the RTC
under FMFIA and all provisions of the CFO Act.
In either case,
good government dictates that we follow this course.
The Role of the RTC Inspector General
The Oversight Board sees the job of the RTC IG as critical.
Timely and comprehensive
financial
and program
audits
are
absolutely essential to the success of the RTC. The oversight Board
has worked closely with the RTC IG to be sure that his audit plan
is focused on areas within RTC that have the greatest relative risk
exposure and vulnerability.
We have taken a number of steps to ensure that audits of RTC
operations yield substantial change.
When the
ment, I urged
targets. The
this request
audit plan.
i g 's audit plan was in the initial stages of develop
him to use a scientific methodology to identify audit
Oversight Board was pleased that the IG responded to
and employed a fact-based approach in devising the
In our review of the plan we noted several areas - including
accounting standards, the 1988 Deals, and asset pricing, - that in
our estimation warranted formal audits.
We requested that he
modify his plan to include these, and he did so.
We also
encouraged him to emphasize and speed up audits in the areas of
asset management, asset valuation, internal controls, and cash
control.
These areas were identified by the GAO as weaknesses in
R T C 1s overall financial management system.
I ask that relevant correspondence with the IG be included
in the record of the hearing.
19
*88 DEATHS
FIRREA requires “that: the Oversight Board establish strategies,
policies and goals for restructuring the 1988 Deals.
The B o a r d 1s
policy calls on the RTC to renegotiate and prepay the 1988 FSLIC
deals to save taxpayer dollars.
In October, 1990, Congress
appropriated $22 billion for this purpose. As of May 31, 1991, RTC
had spent $7.3 billion, or 33 percent of the $22 billion appro
priation for FY91.
Seventy-five percent of this amount has been
used to prepay high yield FSLIC notes.
Estimates of savings from these prepayments range from $441
million to $821 million, equal to 6.0 percent to 11.2 percent of
the total $7.3 billion expended.
The range of savings reflects
uncertainty about the tax treatment of these deals.
ORGANIZATIONAL ISSUES
Some have questioned whether the current structure of the RTC
and Oversight Board permits the cleanup to be completed effi
ciently.
Let me review briefly the current structure.
FIRREA made the FDIC the exclusive manager of the RTC to
perform all responsibilities of RTC under the statute, and made
the FDIC Board the Board of Directors for the RTC.
At the same
time, FIRREA gave the Oversight Board authority over the RTC's
strategies, policies, and funding, and gave it responsibility for
oversight and evaluation of the RTC.
Given the immensity and
complexity of the cleanup, and the need for continuing objective
oversight, this separation of management and operations from
oversight makes sense.
It was prudent to assign the management and operational
responsibility to FDIC, because at the time of FIRREA's enactment
it was the only organization with the experience and personnel
equipped to handle what was then, and throughout the initial phase
of the thrift cleanup has been, the RTC's principal task, i . e . ,
seizing and resolving a massive collection of bankrupt institu
tions.
The alternative would have been to create and staff from
scratch an organization to handle this problem, a job which
inevitably would have delayed the start of the cleanup and added
to the costs for taxpayers.
Properly, neither congress nor the
Administration was prepared to accept such delay or costs.
We have functioned under this structure for nearly two years.
Admittedly, there have been some problems in addressing the giant,
unprecedented cleanup task. It would have been unrealistic not to
expect them.
20
It has been suggested that these problems are caused by the
dual-board structure on the theory that it diffuses responsibility
and prevents the RTC management from having clear direction.
We do not agree.
Neither does the Chairman of the r t c
N ational Advisory Board who stated that the structure is not the
cause of operational problems, nor the Comptroller General who has
said that the cleanup does require oversight, such as that provided
by the Oversight Board.
We believe the most important action that can be taken to move
the thrift cleanup forward effectively is to establish at the head
of the RTC a CEO with the credentials and the operating latitude
to get this job finished. This recommendation is based on the fact
that the nature of the cleanup has fundamentally changed. The RTC
has demonstrated its ability to seize and resolve bankrupt thrifts.
Now its main task is to dispose of a tremendous accumulation of
hard-to-sell assets.
Our recommendation is also made in sincere
appreciation
of
the
accomplishments
of
the
RTC*s
current
management.
Bill Seidman, David Cooke, Bill Roelle, Lamar Kelly,
and others have done an outstanding job in building the current RTC
from the ground up into a nationwide organization.
We do not believe a major and potentially disruptive restruc
turing would be productive.
Such a reorganization would require
legislation and thus could take months to accomplish.
It would
create confusion and demoralization in the management ranks of the
RTC and thus as the Comptroller General has warned, would impede
progress.
Time and delay are our enemies.
They only mean higher
costs.
Appointment of a new CEO and actions necessary to give him a
full measure of authority can be taken immediately, without
legislation, which as we know could entail considerable delay. So
we need not delay action: The Oversight Board has discussed these
matters fully with the FDIC Chairman.
He agrees that the search
for a new CEO to run the RTC should begin immediately.
As I have said today and previously, we do not believe
restructuring is necessary because the problems are not problems
of structure.
Nonetheless,
if the Committee is convinced that it is
imperative to redraw the' organizational chart, we strongly believe
that any such plan should meet the following criteria*
First, a new RTC should not be a wholly independent entity.
To entrust the expenditure of up to $160 billion taxpayer dollars
to an independent agency is not sound public policy.
The RTC is
~ not like a private corporation that does not receive public funds.
The RTC is a government corporation responsible for spending
possibly as much as $160 billion.
Certainly our experience with
the Federal Asset Disposition Agency suggests that strong oversight
is essential to protect the taxpayers* interest.
21
Second, as the Comptroller General has stated, a separate
oversight function is important and necessary and should be
retained. Congress has previously recogni2ed the need for such
oversight.
It created the Chrysler Loan Guarantee Board in 1980,
and that Board had five members, all of them public officials who
served part-time.
The point has been made that the Chrysler Loan
Guarantee is dwarfed by the thrift cleanup, and in dollar terms
that is true. But the principle is the same and is valid.
It was
applied even earlier, in 1970, when Congress created the Emergency
Loan Guarantee Board to oversee the government’s interest in the
Lockheed Loan Guarantee.
That the thrift cleanup is bigger than
either the Chrysler or Lockhead situations is even more reason why
oversight is necessary.
Third, the oversight and budget approving entity should not
have direct operating responsibility over the RTC. These functions
should continue to be separated.
A body charged with oversight
cannot impartially perform that duty if it is also charged with
operations.
Fourth, any restructuring should not disrupt ongoing opera-*
tions, prolong the cleanup or result in costly delay.
Finally, a restructuring must address the real problems, not
just the perceptual ones. We see no useful purpose in just moving
the boxes around. .
Perhaps a new structure can be fashioned that meets these
criteria. Certainly, we will work with the Committee to that end.
Chairman seidman has suggested two possible organizational models.
We are discussing these and other possibilities with him.
But we
are concerned that a major restructure in mid-stream would disrupt
the effort to get this enormous problem off the public agenda.
CONCLUSION
This concludes our statement.
It is supplemented by a more
detailed response, contained in Appendix II, to several of the
specific information requirements set forth in FIKREA for this
semiannual appearance.
The great majority of insolvent thrifts will have been seized
by the end of the fiscal'year.
We request additional loss funds,
working capital, and an extension of the period in which thrifts
may be transferred to the KTC for closing. These authorities will
permit the job of protecting depositors and closing insolvent
thrifts to be completed in an orderly, efficient way.
The task now before the RTC is to dispose of assets as
quickly as it can and with the greatest possible return.
This is
a Herculean job.
Policies and programs put in place months ago
are now becoming operational. But much remains to be done, and we
look forward to working with you to finish this task.
PRESS
RELEASE
OVERSIGHT BOARD
Resolution Trust Corporation
1777
F STREET,
FOR IMMEDIATE RELEASE
July 10, 1991
OB-91-26
N. W.
WASHINGTON,
D. C. 2 0 2 3 2
CONTACT: ARTHUR SIDDON
(202) 786-9672
BRADT AND SEIDMAN ANNOUNCE SEARCH FOR RTC CEO
Secretary of the Treasury Nicholas F. Brady and Chairman of
the Federal Deposit Insurance Coxporation L. william Seidman
announced today that a nationwide search has begun for a chief
executive officer for the Resolution Trust Corporation (RTC)•
In recent congressional testimony, both Secretary Brady and
Chairman Seidman endorsed the idea of establishing a new CEO
position.
The
Chairman
Ryan and
Treasury
Members of the search committee will be Secretary Brady,
Seidman, Office of Thrift Supervision Director Timothy
Oversight Board Member Robert C. Larson. Deputy
Secretary John Robson will serve as Director.
The RTC is the organization which conducts the cleanup of
failed savings and loan institutions and sells their assets•
The Treasury Secretary serves as Chairman of the Oversight
Board which has a policy and oversight role for the RTC. The
FDIC Chairman serves as Chairman of the Board of Directors of the
RTC, which has the operational responsibilities for the thrift
cleanup.
For Release Upon Delivery
Expected at 11:00 a.m.
July 11, 1991
STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to testify today concerning enterprise zone
proposals.
One of those proposals, H.R. 23, is the proposal
described in the Administration's budget.
On June 25, 1991,
Secretary of Housing and Urban Development Jack Kemp appeared
before this Subcommittee to testify regarding the proposals.
As
Secretary Kemp made clear, the establishment of Federal tax
incentives to aid economically distressed urban and rural areas
is a high priority of the Administration.
H.R. 23
The Administration believes that H.R. 23 provides the tax
benefits that are most likely to stimulate economic development
within Federally designated enterprise zones, while establishing
appropriate safeguards to ensure that these tax benefits will not
be available to those whose activities do not contribute to
economic growth within the designated zones.
Under the proposal, specified tax incentives would be
available in areas nominated by State and local governments and
designated as Federal enterprise zones by the Secretary of
Housing and Urban Development.
The proposal authorizes the
Secretary of HUD to designate up to 50 zones during a 4-year
period beginning in 1991.
The designations would be spread over
that period.
Up to 15 designations could be made by the end of
the first year, up to 30 by the end of the second year, up to 45
by the end of the third year, and up to 50 by the end of the
fourth year.
In making zone designations, the Secretary of HUD
would consider the geographic distribution of areas designated as
zones, as well as the commitments of support made by nominating
State and local governments and the relative economic distress of
the nominated areas.
In addition, the proposal would require
NB-1367
that at least one-third of the areas designated as zones be rural
areas.
The designation of an area as a zone would be effective
for a term of up to 25 years.
Once an area had been designated as an enterprise zone, two
Federal tax incentives would be available to encourage zone
capital formation, and one Federal tax incentive would be
available to stimulate zone employment.
The focus of the capital formation incentives is upon
offering investors in enterprise zone businesses lower effective
Federal tax rates with respect to their income from zone
investment.
The first incentive eliminates tax on long-term
capital gains realized from the disposition of tangible property
used in an enterprise zone business and located within an
enterprise zone for at least 2 years.
In order for a business to
qualify as an "enterprise zone business,” the business must meet
a number of requirements.
Among these are that more than 80
percent of the gross income of the business must be attributable
to the active conduct of a trade or business within a zone,
substantially all the assets and employees of the business must
be located within a zone, and the business must not be controlled
by non-zone businesses.
These restrictions are designed to
target the incentive on the assets of independent activities
actually conducted within zones and likely to create significant
zone value and employment opportunities.
Capital gain excluded
from tax by this incentive must accrue while the assets are used
in the enterprise zone business.
The second capital formation incentive permits individuals
to deduct their contributions to the capital of Subchapter C
corporations engaged solely in the conduct of enterprise zone
businesses.
Recipient corporations must have no more than $5
million of total assets, and must use the capital contributions
to acquire tangible assets to be located within the zone and used
in enterprise zone businesses.
Expensing is restricted to
$50,000 annually per investor with a $250,000 lifetime limit per
investor, and is not permitted for purposes of the alternative
minimum tax.
These restrictions are designed to limit the
potential for tax shelters and to target the proposal's tax
benefits to the entrepreneurial businesses which the
Administration believes are most likely to stimulate an economic
revitalization of zones.
Because the profile of a corporation
qualifying for the incentive conforms to that of most small
businesses likely to engage in the activities the incentive is
designed to encourage, the restrictions are unlikely to impair
the effectiveness of the incentive.
The focus of the employment incentive is upon reducing
employee costs associated with zone employment.
A 5 percent
refundable tax credit for the first $10,500 of wages (that is, up
to $525 per worker) may be claimed by qualified enterprise zone
employees for wages earned by working in a non-governmental
enterprise zone business.
To qualify for the credit, an employee
must perform the services in a zone.
The Administration believes
that the employee credit will provide an important additional
incentive to work in businesses within zones.
The credit phases
out for an employee earning between $20,000 and $25,000 of total
wages, and must be reduced if the employee is subject to the
alternative minimum tax.
To protect against excessive subsidies, H.R. 23 authorizes
the Treasury Department to issue regulations coordinating
Internal Revenue Code provisions that otherwise might result in
the Federal Government subsidizing more than 100 percent of the
cost of enterprise zone activities.
For example, it is possible
that certain low-income residential rental projects located
within zones would qualify for a low-income housing tax credit
with respect to as much as 91 percent of their cost.
Because
Federal rental subsidies, cost recovery deductions, and other tax
benefits may also be available for such an investment, it may be
necessary to reduce or eliminate the special enterprise zone tax
benefits in order to prevent a combined Federal subsidy totalling
more than 100 percent of the cost of the activity.
The Treasury Department estimates that H.R. 23 will reduce
Federal revenues by approximately $50 million in 1992, $160
million in 1993, $310 million in 1994, $520 million in 1995, and
$750 million in 1996.
These figures are consistent with those
presented in the President's budget.
H.R. 11
Chairman Rostenkowski, Mr. Archer, Mr. Rangel, and the other
sponsors of H.R. 11 are to be commended for recognizing the
plight of economically distressed areas and the potential benefit
of providing tax incentives to encourage investment and
employment in such areas.
H.R. 11 would offer the following array of tax incentives in
designated enterprise zones:
(i) A credit for small employers equal to 10 percent of the
sum of wages paid for services performed by qualified
zone employees plus costs paid for health insurance for
qualified zone employees.
Employees not residing in a
zone could not be qualified zone employees.
(ii) Extension of eligibility for the rehabilitation tax
credit to any zone building first placed in service at
least 30 years before the date rehabilitation begins.
4
(iii) Amortization of qualified employer-provided child care
facilities in zones over a 60-month period, in lieu of
depreciation.
To qualify, a facility would have to be
used primarily for children of employees working in the
zone.
(iv) An increase in the qualified basis of a zone building
on which the low-income housing tax credit may be taken
to include costs incurred in establishing a qualified
child care center in the building.
To qualify, a
center would have to be used only for children residing
in a zone.
(v) A deferral of recognition of capital gain from the sale
or exchange of property (tangible or intangible) if the
amount realized is invested, within a year, in
enterprise zone property or an interest in an
enterprise zone corporation or partnership.
The
deferral would last for up to 9 taxable years after the
taxable year in which the sale or exchange occurred.
The deferral would be available only to individuals,
and a $250,000 lifetime limit would apply.
(vi) Treatment of any loss from the sale or exchange of
certain stock or securities of zone corporations (i.e,.
qualified zone corporate investments) as ordinary
rather than capital.
Although H.R. 11 contains more incentives than H.R. 23, the
incentives are in fact narrower because only a limited amount of
each incentive is available each year in each zone.
H.R. 11
requires the tax incentives for each zone to be allocated in
advance by a government official who is responsible for ensuring
that the annual limits ("volume caps") on each of the zone's tax
benefits are not exceeded.
The official for each zone would be
selected by the governments of the State and locality in which
the zone is located.
Other bills
Two other enterprise zone proposals should also be
mentioned, H.R. 1445, the Rural Development Investment Zone Act
of 1991, sponsored by Mr. Dorgan and Mr. Grandy, and H.R. 1747,
the Indian Economic Development Act of 1991, sponsored by Mr.
Rhodes.
As their titles imply, these bills provide for
enterprise zones in rural areas and on Indian reservations,
respectively.
H.R. 23 recognizes the special concerns arising in rural
areas by requiring that at least one-third of all zones be in
rural areas and by providing special qualification rules for
5
rural areas.
H.R. 11 relaxes the qualification rules but
contains no mandate for any number of rural zones.
Both H.R. 11
and H.R. 23 appear to provide sufficient flexibility to permit
Indian reservation sites to qualify for enterprise zone
designation.
General discussion
The volume cap approach has apparently been adopted in H.R.
11 to ensure that revenue loss resulting from the enterprise zone
program will be limited to budgeted amounts.
In light of the
requirements of the budget agreement, controlling the cost of the
program is essential. A volume cap on zone tax incentives should
not be necessary, however, if the incentives are tailored
sufficiently narrowly that it is possible to estimate and budget
for their cost.
This is the approach taken by H.R. 23 to
controlling costs and is the approach favored by the
Administration.
We nonetheless share the concern that the
provisions of any enterprise zone proposal enacted must be
carefully circumscribed to assure both that only incentives which
benefit zone development are adopted and that budget limitations
are met.
The Administration believes that this approach is preferable
to the imposition of volume caps on a broader array of
incentives.
Volume caps, administered by government agents,
increase complexity, paperwork, and opportunities for favoritism.
In addition, we believe that the effectiveness of the program can
best be evaluated if a small number of well-structured incentives
are tested rather than a wide range of incentives which must be
limited by reason of their numbers. We believe that H.R. 23
contains the best "short list" of incentives.
We are pleased that both H.R. 11 and H.R. 23 recognize that
a reduced tax burden on capital gains should be one of the
enterprise zone tax incentives provided.
H.R. 23 accomplishes
this through exclusion of capital gains arising within zones
while H.R. 11 provides a tax-free "rollover" of non-zone capital
gains into zones.
The Administration believes that the
exclusion, targeted to zone gains, will be a more powerful
inducement for productive zone activity than the H.R. 11
deferral, which would attract new capital to zones but would not
take into account whether zone investments were productive.
Because the proposed capital gain exclusion is only available for
gain accruing on property used within a zone, the exclusion
proposal ensures that the tax incentive will only be available
where value is added within a zone.
6
In addition, the exclusion proposal is limited to capital
gains accruing on tangible assets.
The Administration believes
that this restriction will avoid the difficulties associated with
providing incentives for intangible assets, which might be moved
into an enterprise zone without stimulating any zone economic
development.
Summary
The Administration strongly supports enactment of Federal
enterprise zone tax legislation.
Due to concerns regarding the
Federal budget deficit, as well as potential abuse of the
geographically targeted benefits, the appropriate incentives must
be carefully structured to achieve economic growth and
development in Federal enterprise zones within affordable budget
parameters.
The Administration believes that H.R. 23 strikes an
appropriate balance between effectiveness and cost and should be
enacted.
Mr. Chairman, that concludes my formal statement.
I am
happy to answer any questions that you or the Members of the
Subcommittee may wish to ask.
OVERSIGHT BOARD fins I i) SZ 0 0 4 5 9 I
Resolution Trust Coiporation
17 7 7
F STREET# N.W .
F O R IMMEDIATE RELEASE
July 11, 1991
OB-91-27
W A S H IN G T O N .
TREASURY
CONTACT: Brian p. Harrington
(202)786-9675
OVERSIGHT BOARD REAPPOINTS ADVISORY BOARD MEMBERS
The Oversight Board for the Resolution Trust Corporation
(RTC) today announced the reappointment of 10 members of the
National and Regional Advisory Boards, which advise the Oversight
Board and the RTC on the sale of real estate from the country's
failed savings and loans.
Charles Kopp, a Senior Partner and Tar Department Chairman
for the law firm of H o l f , Block, Schorr and Solis-Cohen in
Philadelphia, Pa., and G. Lindsay Crump, President of the Crump
Group in Savannah, Ga., have been reappointed to two-year terms
on the Region 1 Regional Advisory Board based in H e w York, N.Y.
Dick Tourtellotte, President of Tourtellotte Management and
Real Estate in Oklahoma City, Okla., has been reappointed to a
one-year term as Chairman of the Region 2 Regional Advisory Board
based in Oklahoma City, Okla.
Evelyn Carroll, President of FS A Inc. in Minneapolis, Minn.,
Ritch LeGrand, President of LeGrand and Company in Sioux City,
Iowa, and Mirian saez, Executive Director of the Cambridge
Metropolitan Housing Authority in Cambridge, Ohio., have been
reappointed to two-year terms on the Region 3 Advisory Board
based in Chicago, 111.
David Dominick, an attorney with the law firm of Cogswell
and Eggleston, P.C. in Denver, Colo., and P. Barton Delacy,
President of Appraisal Group Inc. in Portland, Ore., have been
reappointed to two-year terms on the Region 5 Regional Advisory
Board based in Denver, Colo.
- more -
i
-
2
-
Sydney ronnesbeck, Director of Training and Communications
for the Utah League of Cities in Salt Lake city, Utah, and Gordon
Parker, retired President and chief Operating Officer of First
Commercial Corporation in Ark., have been reappointed to twoyear terms on the Region 6 Regional Advisory Board based in Los
Angeles, Calif.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) required that the Oversight Board establish
one national and six regional advisory boards to advise the
Oversight Board and Resolution Trust Corporation on the policies
and programs for the disposition of real estate from the nation's
failed thrifts.
The Rational and Regional Advisory Boards are each required
to meet no less than four times a year.
In July, the Boards
completed their fourth series of meetings •
###
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Citation Information
Document Type: Transcript
Number of Pages Removed: 28
Author(s):
Title:
Treasury Secretary Nicholas Brady Briefing (Topic: The Group of Secent Meeting in London)
Date:
1991-07-10
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
P R E S S
R E L E A S E
1
DUT534
OVERSIGHT
Resolution Trust Corporation
nrpy 0 f THfc IKtASURY
1 7 7 7 F S T R E E T , N .W .
FOR IMMEDIATE RELEASE
July 12, 1991
OB-91-28
WASHI NGTON, D.G 2 02
32
Contact: Brian P. Barrington
(202)786-9675
HATIOHAL ADVISORY BOARD SO EOID OPEH KEBSIB6
The members of the Rational Advisory Board will hold an open
meeting on Monday, July 22, in Washington, D.C., to discuss the
Resolution Trust Corporation's (ESC) regional real estate sales
progress.
She meeting, open to the public and press, will be held from
10:00 a,m. to 3:30 p.m, in the second floor amphitheater at the
Office of Thrift Supervision, 1700 G street, R . H , , Washington,
D.C,
Reports will be given on the issues discussed at the latest
round of regional meetings held in June and July of this year.
Including: ETC user friendliness, RTC minority contracting
policy, RTC affordable housing disposition, and RTC auction
marketing. Rationally recognized industry representatives will
testify on each topic,
in addition, Oversight Board President Peter H. Monroe and
RTC Executive Director David Cooke will present remarks, and
agenda items for the next quarterly series of regional meetings
will be determined.
The Financial institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) required that the Oversight Board establish
one national and six regional advisory boards to provide advice
to the Resolution Trust Corporation and the Oversight Board on
the policies and programs for the disposition of real estate from
the nation's failed thrifts.
- more -
I
-
2
-
She National Advisory Board meets quarterly in Washington,
D.C. to advise the Oversight Board and the RTC on the status of
the real estate sales efforts of the RTC in each region,
she
National Advisory Board is comprised of the national
and
the six regional chairmen, she National Advisory Board includes s
Philip Searle of Naples, Fla* as chairman; Henry Berliner of
Annapolis, Md.; Dick Sourtellotte of Oklahoma City, Okla.; Donald
Jacobs of Evanston, ill.; Bayard Friedman of Fort worth, Sx.;
Edward Lujan of Albuquerque, N.M., and James Simmons of Paradise
Valley, Aria*
###
L I B R A R Y ROOM
O V ER SIG H T BO A R D
RESOLUTION TRUST CORPORATION
W ashington, D .C . 20232
«JS I íiü ¿ o û
DEPT.
5 9 3
0 P T i l C T f i r * r*
*PEÁsopy
THE B O S H B D M B I S T K Ä T I O H ' B
8 K b CLEAH-UP n t O S R U
Principles end Results
J u l y 8, 1991
Eighteen days after talcing office, President Bosh presented! the
Financial Institutions Reform, Recovery and Enforcement Actj of 1989
(FTRREA), putting in motion a massive program to clean up t h e
n a t i o n 9s failed savings and loan associatipns. A t that time, the
President established four k e y objectives that have been the j
foundation of the clean-up effort.
j i
!
I
ii ■
;
1. ;
PROTECTING DEPOSITOR SAVINGS
Results:
| jflj
Nearly 14 million depositors1 accounts and $139 billion in
deposits have been protected b y the Resolution Trust
Corporation (RTC), created under FXRREA to manage and
resolve failed thrifts.
Based on current funding, RTC estimates that, b y the end
o f September 1991, it will have protected a total of
nearly 20 million depositors1 accounts nationwide.
The average balance of accounts protected is about
$10,000, a reality that refutes the misconception that
only the wealthy benefit from t h e clean-up program.
RESTORING TEE SAFETY AND SOUNDNESS 07 THRIFTS
Results:
'{ ! I
i • .
Two key purposes of FXRREA were:" (1) to shut down those
thrifts that are not operating safely an d soundly, jand (2)
to institute n e w risk-based capital standards and a !
program of tighter, but fair, regulation on the remaining
industry.
-| | i
Since FXRREA9s enactment, $23 insolvent thrifts have been
seized and 435 of those have been resolved. By tliejend of
September 1991, R T C estimates, it will have resolved 557
failed thrifts (one every 33 hours).
j j
As a result of reforms, 85 percent of private-sector
thrifts, with more than $625 billion in assets, today are
operating profitably. Additional legislation recommended
b y the Treasury Department should further improve the
■ safety and soundness of the industry.
CLEANING UP FAILED THRITTS/LTHTTIHG TAXPAYER COSTS
Results:
The goal of FIRREA
sell the remaining
taxpayers. To meet
been undertaken b y
is not only to close failed S&Ls and
assets, but to do it at least cost to
this dual objective, initiatives have
RTC and its Oversight Board, including:
i
|
In response to tightened commercial credit availability,
the Oversight Board in December 1990 issued a seller
financing policy to accelerate asset sales and increase
r e turns to taxpayers.
j jI
i j*
! !!
To speed sales at the test possible prices, the RTC h a s
placed more than $24 billion in assets under private
management. Contractors currently are being sought Ito
handle smother $15 billion.
I !j
i !!
While it is vital to maximize taxpayer returns, the RTC
also must achieve affordable housing goals, as required by
FXREEA. This program has been stimulated b y permitting
sales at less-than-market value; tax-exempt mortgage bond
financing, and a minimum of $250 million in selleri !
financing for qualified buyers of single-family homes and
$150 million for sale of affordable multi-family! j
properties to non-profit organizations.
■!
i
•
Guidelines set b y the Oversight Board in January 1991 will
allow the RTC t o restructure many of the 1988 f s l i c
agreements, saving taxpayers as much as $2 billion.
The Oversight Board has directed the videst possible use
of the securitization of RTC financial assets. On June 27,
1991, RTC closed on its first offering of mortgage pass
through securities, backed b y approximately $430! million
of mortgages. This transaction represented $15 million in
savings to taxpayers. A second offering of approximately
$580 million will b e priced on or about July 16. ¡It ¿s
estimated that securitization of single-family mortgages
alone could save taxpayers at least $1 billion.
Through April 30, 1991, the RTC had sold, liquidated or
otherwise collected $157 billion of the $318 billion in
initial assets seized b y that date.
SENDING WRONGDOERS TO JA I L AXD LEVYING FINES
Results:
i•
The RTC's Office of Investigations has referred hundreds
of cases to the Justice Department.
I jj
I i :
Since October 1988, there have been 550 convictions for
major thrift crimes. More than 79 percent of those ;
sentenced have received prison terms, and $270 million in
restitution has been ordered.
! !
i i
The FBI is conducting 718 active investigations of
failed financial institutions, 378 involving failed
m
æ
PUBLIC DEBT NEWS
Department of the Treasury^ 8 R
fÄe3?tibiic Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
July 15, 1991
itI?310Û 183
CONTACT: Office of Financing
202-376-4350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
EPT. OF THE TREASURY
Tenders for $10,424 million of 13-week bills to be issued
July 18, 1991 and to mature October 17, 1991 were
accepted today (CUSIP: 912794XK5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.55%
5.57%
5.56%
Investment
Rate
5.72%
5.74%
5.73%
Price
98.597
98.592
98.595
Tenders at the high discount rate were allotted 20%.
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
36,270
37,171,160
31,840
69,855
59,310
29,875
1,751,675
13,445
9,520
37,120
22,305
673,520
792.675
$40,698,570
Accented
36,270
8,966,990
31,840
69,855
51,310
29,875
264,165
13,445
9,520
37,120
22,305
98,490
792.675
$10,423,860
Type
Competitive
Noncompetitive
Subtotal, Public
$36,587,145
1.795.620
$38,382,765
$6,312,435
1.795.620
$8,108,055
2,291,120
2,291,120
24.685
$40,698,570
24.685
$10,423,860
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $33,915 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1368
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
July 15, 1991
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,502 million of 26-week bills to be issued
July 18, 1991 and to mature January 16, 1992 were
accepted today (CUSIP: 912794XV1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
5.68%
5.70%
5.70%
Investment
Rate_____
5.95%
5.97%
5.97%
Price
97.128
97.118
97.118
Tenders at the high discount rate were allotted 34%.
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
43,630
31,164,240
20,265
55,740
66,150
51,165
1,763,495
19,205
14,180
45,935
19,840
573,425
621.400
$34,458,670
Accepted
43,630
9,308,360
20,265
55,740
59,550
49,645
140,755
19,205
14,180
43,705
19,840
105,425
621.400
$10,501,700
Type
Competitive
Noncompetitive
Subtotal, Public
$29,802,230
1.437.425
$31,239,655
$5,845,260
1.437.425
$7,282,685
2,750,000
2,750,000
469.015
$34,458,670
469.015
$10,501,700
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $546, 185 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1369
Press 566-2041
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
May 1991.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $182.6 billion on
May 31, 1991, posting a decrease of $0.1 billion from the
level on April 30, 1991.
This net change was the result of
decreases in holdings of agency debt of $121 million, of
agency assets of $2.8 million, and of agency-guaranteed loans
of $2.4 million.
FFB made 16 disbursements during May.
Attached to this release are tables presenting FFB
May loan activity and FFB holdings as of May 31, 1991.
NB-1370
Page 2 of 4
FEDERAL FINANCING BANK
MAY 1991 ACTIVITY
AMDUNT
OF ADVANCE
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(serai(other than
annual)
semi-annual)
3,000,000.00
6,210,000.00
10,000,000.00
6/28/91
8/5/91
8/23/91
5.837%
5.770%
5.695%
5/6
5/15
5/15
5/22
5/31
219,000,000.00
150,000,000.00
339,000,000.00
348,000,000.00
377,000,000.00
5/22/91
5/22/91
5/31/91
6/6/91
6/10/91
5.753%
5.760%
5.760%
5.739%
5.743%
5/8
5/24
4,443,933.27
1,101,882.32
5/31/96
5/31/96
7.729%
7.839%
5/15
5/21
23,538,374.31
2,535,573.05
11/15/91
11/15/91
6.007%
5.992%
BORROWER_________________________ DATE
AGENCY DEBT
NATIONAL CREDIT UNION AEMINISTRATICW
Central Liquidity Facility
Nöte #550
-«tote #551
-«fete #552
5/2
5/6
5/24
$
TENNESSEE VALLEY AUTHORITY
Short-term
Short-term
Short-term
Short-term
Short-term
Bond
Bond
Bond
Bond
Bond
#96
#97
#98
#99
#100
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreian Military Sales
Morocco 13
Morocco 13
GENERAL SERVICES AEMTNISTRATICN
U.S. Trust Q
4-Advance #12
Advance #13
+rollover
iumtiv
of New York
Page 3 of 4
FEDERAL FINANCING BANK
MAY 1991 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
643,000.00
365,000.00
28,272,000.00
1/2/18
12/31/19
1/2/24
8.160%
8.351%
8.290%
8.078% qtr.
8.266% qtr.
8.206% qtr.
2,439,941.15
6/28/91
5.743%
T3TTRAT. ETEdKEFTCATICN ACMTNISTRATICN
Centred. Iowa Power #295
♦United Power Assoc. #212A
Oglethorpe Power #335
5/3
5/13
5/31
$
TENNESSEE VATJ.TV AI7IUÖRTTY
Seven States Energy Corporation
Nòte A-91-07
♦maturity extension
5/31
Page 4 of 4
A L FINANCING BANK
(in millions)
sub-total*
A gency Assets:
Farmers Home A d m i nistration
DHHS-Health Mai n t e n a n c e Org.
DHHS-Medical Facilities
Rural Elegtrification Admin.-CBO
Small Business Administration
sub-total*
G o v e r n ment-Guaranteed L o a n s :
DOD-Foreign M i l i t a r y Sales
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-Public H o u s i n g Notes +
General Services Administration +
DOI-Guam Power A u t hority
D OI-Virgin Island?
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
T V A -Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
♦figures may not total du? to pounding
-fdoes not include capitalized interest
11,180.5
55.8
57,908.0
13,221.0
6,697.8
88,942.0
1
0
1
11,180.5
52.9
57.908.0
13.400.0
6,400.6
Net Change
5/1/91-5/31791
</>
April 30. 1991
FY '91 Net Change
10/1/90-5/31/91
-2.9
-0179.0
-297.2
-159.3
-3.7
16,426.3
-982.00
-297.2-
89,063.1
-121.1
14,984.2
52,669.0
66.9
82.7
4,463.9
7.0
52,669.0
69.6
82.7
4,463.9
7.2
-0-2.7
-0-0-0.1
620.0
-2.7
-056.7
-1.4
57,289.5
57,292.4
-2.8
672.6
4,699.5
4,850.0
219.1
1.903.4
491.5
29.1
24.7
32.7
1.624.4
18,878.5
296.9
712.4
2,389.2
22.0
177.0
4,721.9
4,850.0
222.0
1,903.4
489.0
29.1
24.7
32.7
1,624.4
18,849.6
303.0
717.0
2,386.8
22.4
177.0
-22.3
-0-2.9
-02.5
-o-0-0-028.9
-6.1
-4.5
2.4
-0.4
-0-
-5,056.1
-30.0
-24.9
-47.4
124.2
-0.7
-0.5
-1,063.2
-47.9
-163.8
-85.6
-29.1
33.2
-1.4
-0-
36,350.
36,352.8
-2.4
-6,393.3
182,708.2
$ 182,581.
«■
grand total*
$
1991
1n
1 •
1 vo
1™
1H
11
1
1
Ag e n c y Debt:
Export-Import Bank
NCUA-Central L i q u idity Fund
Resolution T rust Corporation
Tennessee Va l l e y Authority
U.S. Postal Service
Ha y 31.
voII
Program
$
$
9,263.5
Department of the Treasury • % r a i f e â ^ y D.C. • Telephone 566*2041
For Release Upon Delivery
Expected at 10:00 a.m.
EPT. 0 C THE TREASURY
July 16, 1991
STATEMENT OF
ROBERT R. WOOTTON
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AGRICULTURAL TAXATION
FINANCE COMMITTEE
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to present the
views of the Treasury Department on S. 1393, which seeks
to regulate so-called partnership "rollup” transactions
through the imposition of a 50% federal excise tax on
transactions that do not provide specified dissenters*
rights to limited partners.
We oppose S. 1393. We believe that the federal
tax laws should not be used to attempt to regulate the
terms of securities transactions on the merits.
The Internal Revenue Service personnel who would
be asked to enforce the new excise tax would not have
experience with the securities-law concepts that the
statute would embody.
In particular, the application of
the tax would depend on whether, in connection with a
partnership rollup, the limited partners have a
reasonable opportunity to dissent and dissenters* rights.
Making this determination would involve the examination
and resolution of issues that are well outside our normal
areas of experience.
If S. 1393 were enacted, we might well look to
applicable federal or state laws for rules governing the
form, content and timing of disclosure and proxy
solicitation, the methodology of valuation and appraisal,
and other matters implicated by S. 1393. This would
require Internal Revenue Service agents to learn and
interpret federal securities and state securities and
corporation laws, in order to enforce the federal tax
law. Alternatively, we could through Treasury
-
2-
regulations adopt a set of uniform rules governing these
matters.
However, this approach would lead to
inconsistencies with applicable federal and state laws
and, in the case of state laws, might raise questions of
pre-emption.
On audit, issues regarding compliance with
S. 1393 would typically arise in combination with other
federal tax issues, and agents could not be expected to
pursue rollup violations single-mindedly if other
meritorious audit issues were present. As a practical
matter, agents seldom have the experience, knowledge or
time to raise all possible issues.
Issues that require
applying non-tax law may be less likely to be raised than
those closer to the agent's usual experience.
Further,
in proposing adjustments or penalties, agents give first
priority to revenue collection.
An agent might
reasonably decline to assert liability for the rollup
excise tax in cases in which the liability is unclear and
potential collections appear small.
The agent might also
compromise the excise tax in exchange for concessions on
other issues.
These considerations might make the new excise
tax a less effective deterrent against the targeted
rollup transactions.
Yet deterrence would be the only
justification for the tax. Tax laws do not create
private remedies.
Accordingly, if the new excise tax did
not deter a transaction, the only possible beneficiary
would be the federal fisc. The intended beneficiaries,
the dissenting limited partners, would be simply out of
luck.
In contrast, state dissenters' rights laws, such
as those recently added to the limited partnership
statutes of New York and California, do create private
rights of action.
Careful consideration should be given
as to whether the enactment of S. 1393 would inhibit the
further development of appropriate responses by state
legislatures and federal or state securities regulators.
Partnership Rollup Transactions.
"Rollup” is a term popularized in the financial
press that is generally used to describe the merger or
consolidation of two or more limited partnerships into a
single surviving entity.
Often, the old partnerships
have failed to achieve their original investment
objectives and have performed poorly.
The rollup may
have been proposed as a way to salvage some portion of
the limited partners' investments.
Partnership rollup transactions have generated
controversy and a good deal of Congressional interest.
A
-3series of hearings has identified numerous concerns that
may arise in a rollup transaction, including lack of
clear, concise and understandable disclosure of the
consequences of the rollup to limited partners;
enhancement of the general partner's compensation, voting
rights and ownership interest; changes relating to the
partnership's borrowing policies, business plan,
investment objectives and intended term of existence; and
absence of legal or equitable alternatives to the rollup
for dissenting limited partners.
See Securities Act
Release No. 33-6900 (June 17, 1991), at pp. 3-5.
The Securities and Exchange Commission (SEC) has
taken several actions to improve the disclosure of
information to limited partners, which it will describe
in testimony today.
The National Association of
Securities Dealers has also recently proposed to amend
its rules to prohibit its members from receiving higher
compensation for "yes" votes than for "no" votes from
limited partners in connection with rollup transactions.
Currently, the laws of at least three states (New
York, California and Maryland) and the District of
Columbia grant compensation rights to limited partners
who dissent from partnership merger or consolidation
transactions.
The New York statute became effective on
April 1, 1991; the California statute on January 1, 1991.
See Testimony of Richard C. Breeden, Chairman of the
Securities and Exchange Commission, before the
Subcommittee on Telecommunications and Finance of the
House Committee on Energy and Commerce (April 23, 1991),
at p. 23 n. 10.
Technical Comments on S. 1393.
Scope. The new excise tax would apply if (1) as
a result of any transaction, a limited partner who was
entitled to a proportionate share of all net proceeds of
all sales or refinancings of the partnership's assets is
no longer entitled to such a proportionate share, (2) in
connection with the transaction, there is a securities
offering that must be registered with the SEC or a
comparable state or local governmental agency or there is
a request for a proxy or other vote, and (3) specified
dissenters' rights are not provided.
The excise tax would be equal to 50% of the gain
or other income realized by reason of the covered
payments.
The tax would apply Whether or not the gain or
other income is recognized.
Proportionate share.
The excise tax would apply
-4to any transaction that changes a limited partner's right
to a proportionate share of net proceeds from sales and
refinancings.
It would apply even if the transaction
does not involve the combination of two or more limited
partnerships into a single entity.
The bill makes no
provision for special allocations, preferred returns and
the like. The excise tax would accordingly apply (unless
dissenters' rights were provided) to a registered
offering of a new class of limited partnership interests,
if the new limited partners received, for instance, a
right to a preferred return.
While it is doubtful this
scope of coverage is intended, the existing language of
the bill would reach a number of common (and legitimate)
partnership transactions that could not reasonably be
viewed as "rollups.''
Dissenters' rights.
The excise tax would not
apply if the limited partners have a reasonable
opportunity to dissent from the transaction and, if they
dissent, the right to require redemption of their limited
partnership interests for net asset value (in cash,
marketable securities or negotiable promissory notes) or
to receive securities with substantially the same value,
rights, powers and privileges.
For this purpose, the
value of a limited partnership interest cannot be less
than its share of the amount represented as the value of
the partnership's assets in any filing with the SEC or
other governmental authority.
It is not entirely clear
that the bill as drafted requires a comparison of the
value of the partnership interest with its share of
represented partnership asset values (although this is
surely the intention). The provision also appears flawed
in not focusing on net asset values.
Payments subject to excise tax. The excise tax
would be imposed on any payment received for services
rendered in connection with the transaction or to the
entity resulting from the transaction.
The excise tax
would also be imposed on any payment received in exchange
for an interest in, or contract right with, any limited
partnership that is a party to the transaction or on
account of holding an interest in the entity resulting
from the transaction.
In the case of payments for services, the excise
tax would apply only to the extent that the payment
exceeds the amount that would have been paid had the
transaction not occurred.
This may be a difficult
standard to apply to fees based on revenues, profits,
assets under management or similar performance-based
measures.
In addition, the exception would not seem to
apply in cases where each partnership participating in a
rollup transaction has a different general partner, but
the resulting entity has a single general partner being
-5paid no more than what would have been paid in the
aggregate to the several general partners.
In such
cases, it seems that this exception should be available.
The excise tax would apply to payments received
by any person who is a general partner, manager or
investment advisor of a limited partnership that is a
party to the transaction.
It would also be imposed on
payments received by any person who performs services as
a broker, dealer, underwriter, promoter, investment
banker or appraiser in connection with the transaction.
Thus, the excise tax would apply not only to those who
structure and sponsor the rollup transaction, but also to
others such as brokers and appraisers who have no control
over the terms of the transaction and may indeed have no
reason to know that it is a transaction to which the
excise tax is applicable.
It does not seem that the
effectiveness of the excise tax is greatly enhanced by
covering this latter group.
The excise tax would apply to payments to the
persons described above whenever they are made, even
years after the rollup transaction has been completed,
and even if they have no connection to the transaction.
It appears, for example, that the excise tax would apply
to any future fees paid to an individual who performed an
appraisal in connection with the rollup, even though the
fees are paid for services unrelated to the rollup and
the individual is chosen for the subsequent work through
open bidding and not because of his connection with the
prior rollup transaction.
*
*
*
In conclusion, we believe it is inappropriate to
use the federal tax laws to regulate the merits of
securities transactions, such as partnership rollups.
We
believe that any regulation of partnership rollups should
be left to those with greater expertise in securities
regulation.
Mr. Chairman, that concludes my prepared remarks.
I will be pleased to answer questions at this time.
FOR RELEASE AT
July 16, 1991
2:30 P.M.
CONTACT:
Office of Financing
of ~%t&r/m6m&50
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 20,800 million, to be issued
July 25, 1991.
This offering will provide about $ 2,800million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $18,006 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, July 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
$10,400 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 $17,771 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 10,400 million, to be
dated July 25, 1991
and to mature January 23, 1992
(CUSIP
No. 912794 XW 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
July 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 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 $ 620
million as agents for foreign and international
monetary authorities, and $ 5,021 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-1372
TREASURY'S 1 3 - ,
2 6 - , AND 52-WEEK BILL OFFERINGS, P a g e 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
McitOildlitjatnQ p.e. • Telephone 566-2041
FOR RELEASE ON DELIVERY
Expected at 9:30 A.M.
July 18, 1991
DEPT. OF THE TREASURY
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON GOVERNMENT
INFORMATION AND REGULATION OF THE
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to be here today to discuss the results of
the Treasury's study of Government-sponsored enterprises and the
Administration's legislation that will provide for more effective
financial oversight of these important institutions.
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.
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 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.
Legislation reflecting the approach
identified in the April 1991 report has been submitted.
NB-1373
2
The immense size and concentration of GSE activities serve
to underscore the need for effective oversight 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 the April 1991 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.
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.
Based on the Standard & Poor's analysis of the financial
safety and soundness of the GSEs, we have concluded, as we 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.
Given the need for effective financial oversight of GSEs,
Treasury has developed four principles of effective safety and
soundness regulation.
These 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 policy 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.
IX.
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 recognize 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 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
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.
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 regula
tion. 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-length11 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 President's 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. We believe that building upon the
Treasury's existing regulatory oversight of Sallie Mae, rather
than creating a new bureau at the Department of Education to
regulate Sallie Mae, is the best way to ensure effective
financial safety and soundness regulation of Sallie Mae.
This is
consistent with the approach that we have followed with respect
to other existing regulators of GSEs.
Single Regulator
We are aware that the General Accounting Office has
suggested the option of combining oversight of all the GSEs under
a single regulator.
There are certainly sound arguments in favor
of such an approach, and creating one regulator for all of the
GSEs could, if structured correctly, result in effective
oversight of these entities.
However, the advantage of the
Administration's proposal is that Congress does not have to
create yet another new bureaucracy.
The Administration's bill
utilizes the specialized expertise of the existing regulatory
structure and makes it more effective, which would more than
offset any savings or efficiencies from a single regulator.
6
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 form the
basis for the GSE legislation the Administration has proposed.
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
Department of the Treasury • Washington, p . ç . ,• Telephone S66-2041
FOR RELEASE UPON DELIVERY
Expected at 10:00 AM
July 17, 1991
>£PT. Of THt
STATEMENT OF
GERALD MURPHY
FISCAL ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON GOVERNMENT OPERATIONS
GOVERNMENT INFORMATION, JUSTICE, AND AGRICULTURE SUBCOMMITTEE
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I welcome this opportunity to provide Treasury Department
views with respect to United States Postal Service proposals to
borrow, invest and bank in the commercial market.
The Postal Reorganization Act of 1970 established the Postal
Service as "an independent establishment of the executive branch”
(39
U.S.C.
201),
but
continued
links
designed
to
assure
coordination of the actions of the Postal Service with the rest of
Government.
The Act also continued checks and balances of fiscal
responsibility necessary in a Federal institution.
In accordance
with 39 U.S.C. 2006, Treasury has continued a close relationship
with the Postal Service, providing borrowing, investment, and
banking
services.
The
Postal
Service
is
considering
recommendations for change in these relationships, based on a
report prepared by a private contractor.
Treasury did not
participate in the contractor study, but we have had an opportunity
to read the contractor's report.
I would like to comment on each
of the three relationship areas in turn.
BORROWING
The Postal Service is authorized to borrow up to a total of
$15 billion (39 U.S.C. 2005 (a)(2)(C)), with fiscal year limits of
$2 billion for capital improvements and $1 billion for operating
expenses (39 U.S.C. 2005 (a)(1)). Under 39 U.S.C. 2006 (a), the
Postal Service must consult with Treasury prior to issuing any
obligations and Treasury has first right of refusal.
Since the
creation of the Federal Financing Bank (FFB) in 1973, Treasury has
directed Postal Service to borrow from the FFB. (The Postal Service
had one public debt issue, $250 million in 1972, which matures in
1997.)
NB-1374
2
The contractor report recommends that the Postal Service seek
the flexibility to borrow in the market. The contractor estimates
a range of savings from zero to $2 million a year, assuming that
the Postal Service would have the option to borrow either from the
FFB or in the market.
We believe that even this modest savings
estimate is overstated and that the FFB is the only appropriate
borrowing source.
While borrowing in the market would appear to offer some
market discipline for the Postal Service, Treasury believes that
market participants would still look to the statutory line of
credit and other ties the Postal Service would retain with the
U. S. Government and assume that an implied Federal guarantee of
such borrowings exists.
This would reflect the way market
participants view the Government-sponsored enterprises, which are
not
Federal
agencies
but
which
also
benefit
from
their
relationships with the Government; the market trades their debt as
if there were an explicit Government guarantee, even though there
is none by law. Thus, the expected benefits of market discipline
would not be achieved. The only way to fully achieve such a goal,
through severing all financial and other relationships between the
Postal Service and the Government, is not realistic and is not
being sought by either the Postal Service or the Administration.
However, Treasury is prepared to address certain specific
requests to make Postal Service borrowings more flexible and market
responsive. For example, even though the statute requires 15 days
notice prior to any such borrowing, we may be able to operate with
a shorter period.
INVESTMENT
Under 39 U.S.C. 2003(c), the Postal Service may request that
the Secretary of the Treasury invest the portion of the Postal
Service Fund that the Postal Service determines to be in excess of
current
needs
in Government-issued or Government-guaranteed
securities and, with approval by the Secretary, in non-Government
securities.
The Postal Service makes daily investments in market-priced,
nonmarketable Treasury securities maturing in one day to up to four
years through the Treasury Financial Management Service. The rate
of return for these nonmarketable securities is based on the
average of market price quotations from five major dealers for
similar maturity marketable securities.
In this way, Treasury
attempts to simulate current market conditions for those agencies
authorized to invest — without disrupting the market with numerous
agency purchase and redemption transactions.
The pricing
information is compiled by the Federal Reserve Bank of New York.
One-day certificates, which are used for short-term cash management
purposes, are priced at the overnight repurchase agreement rate,
also calculated by the New York Fed.
The Postal Service is not
3
charged transaction
services.
fees
or
fees
for
account
administration
The contractor report suggests that the Postal Service can
improve its rate of return by investing directly in the market and
by broadening the range of investment options to include such more
speculative investments as corporate securities and foreign
exchange swaps. With respect to investing directly in the market,
it should be noted that, based on a 1977 U. S. Attorney General
opinion,
"the Postal Service may only invest in Government
Obligations through the Secretary of the Treasury. Since no other
mode of making such investments is described...no other mode is
permitted.”
(Letter from Attorney General Levi to Treasury
Secretary Simon, January 5, 1977.)
With respect to broadening investment options, no Governmentrelated entity should be able to borrow from the Treasury or the
FFB and invest in the market so as to secure arbitrage profits,
either through speculating on the yield curve or with lower quality
investments.
Excess borrowings from the FFB are not intended to
fund an aggressive money management operation, which would expose
the investing agency to a risk of loss. We do not believe this to
be the intention of the Postal Service; nevertheless, opportunities
for such speculation would exist if the range of investment options
were broadened as proposed.
Furthermore, investment of Postal Service funds in the market
in non-Federal securities would increase Treasury borrowing from
the public and would be scored for budget purposes as an outlay,
thereby increasing the total Federal deficit. Assuming an amount
in the $1 to $4 billion range,
the effect would not be
insignificant.
With respect to
investment methods,
Treasury provides
investment services for approximately 150 Federal funds and has
established a number of guidelines to facilitate investment at a
reasonable cost.
For instance, Treasury provides the Postal
Service with price quotes each day for five securities, and
requires that securities other than one—day certificates must be
held for at least five days.
Treasury provides this investment
service for Postal Service and other agencies without charge.
Investing the Postal Service Fund in nonmarketable Treasury
securities avoids the possibility of large dollar Postal Service
transactions moving the market, causing unexpected changes in price
and yield.
4
We do not believe these operational guidelines have a major
impact on Postal Service investment results.
However, it may be
possible to accommodate some of the Postal Service's needs, e.cf. »
the five-day holding period could be reduced. We understand that
the Postal Service will also be looking at some of its own internal
restrictions so as to better match investment maturities with long
term liabilities.
BANKING SERVICE
Under 39 U.S.C. 2003, the Postal Service Fund was established
as a revolving fund in the Treasury and, unless otherwise approved
by the Treasury, all Postal Service revenues must be deposited into
the Fund, and all disbursements must be made from the Fund.
Currently, the Postal Service initiates approximately 38 million
check and Automated Clearing House payments a year from several
disbursing centers.
About 60% of these payments are salary
payments to employees.
Based on its own recent study, the Postal
Service reports a cost per check of eight cents for salary and 17
cents for vendor payments. Added to that is a two cents per check
cost that Treasury incurs (without reimbursement) for accounting,
reconciliation, and check claims.
The contractor report suggests that transferring banking
support for disbursements from Treasury to commercial banks would
earn between $12 and $25 million in check float.
The contractor
assumed that the Postal Service Fund could gain three to five days
float on checks if written on a commercial bank rather than on
Treasury.
(For the most part, Federal agencies do not benefit from
float on Treasury checks.
The major exceptions are certain large
trust funds that receive check float on their regularly scheduled
benefit payments.)
While it is not clear to us that the use of
commercial banks for this purpose would be cost beneficial,
Treasury would be happy to participate in a joint study to explore
payment options with the Postal Service.
The study should also
consider the Postal Service policy regarding the use of electronic
payment methods.
Use of Direct Deposit and Vendor Express, two
state-of-the-art and well-tested Treasury programs, would reduce
the unit cost to five cents per payment while eliminating check
float.
5
CONCLUSION
In summary, Treasury believes that the Postal Service with its
benefits as a Federal establishment and its statutory links to the
credit of the United States should continue to borrow and invest
through the Treasury as do other Executive branch entities.
Nevertheless,
Treasury recognizes that a more business-like
approach to Postal Service financial activities is in keeping with
its own efforts to increase productivity. Therefore, Treasury will
work with the Postal Service to improve those aspects of financial
management where change can be successfully accommodated without
breaching the current Treasury/FFB structure of operations.
That concludes my statement, Mr. Chairman.
I would be happy
to answer any questions you or the Committee may have.
o 0 o
TREASURY NEWS
Department of the Treasury • Washington, o .c . • Telephone 56S-2041
FOR RELEASE AT 2:30 P.M.
July 17, 1991
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $21,750 MILLION
The Treasury will auction $12,500 million of 2—year notes
and $9,250 million of 5-year notes to refund $9,046 million of
securities maturing July 31, 1991, and to raise about $12,700
million new cash.
The $9,046 million of maturing securities are
those held by the public, including $720 million currently held
by Federal Reserve Banks as agents for foreign and international
monetary authorities.
The $21,750 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign
and international monetary authorities will be added to that
amount.
Tenders for such accounts will be accepted at the aver
age prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $787 million of the maturing securi
ties 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 offering
circulars.
oOo
Attachment
NB-1375
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED JULY 31, 1991
July 17, 1991
Amount Offered to the Public ... $12,500 million
$9,250 million
Description of Security:
Term and type of security ..... 2-year notes
Series and CUSIP designation ... Series AD-1993
(CUSIP No. 912827 B6 8)
Maturity date .................. July 31, 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 ........ January 31 and July 31
Minimum denomination available . $5,000
5-year notes
Series R-1996
(CUSIP No. 912827 B7 6)
July 31, 1996
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
January 31 and July 31
$1,000
Terms of Sale:
Method of sale ................. Yield auction
Competitive tenders ............ Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders ....
Accepted in full at the aver
age price up to $1,000,000
Accrued interest payable
by investor ................
None
Payment Terms:
Payment by non-institutional
investors ..................
Deposit guarantee by
designated institutions ....
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
Full payment to be
submitted with tender
Full payment to be
submitted with tender
Acceptable
Acceptable
Kev Dates:
Receipt of tenders ............. Tuesday, July 23, 1991
a) noncompetitive .............. prior to 12:00 noon, EDST
b) competitive ................. prior to 1: 00 p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury .
Wednesday, July 31, 1991
b) readily-collectible check .
Monday, July 29, 1991
Wednesday, July 24, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST
Wednesday, July 31, 1991
Monday, July 29, 1991
PAGE 1
London Economic Summit1991
Econome d i c l m i t i o m
BCZLOZKO WORLD VARTWIRiXZV
1« We, the Heads of Stats and Government of the seven major
industrial democracies and the representatives of the European
Community, aet in London for our seventeenth annual Suaait.
2. The spread of fraedoa and deaooraoy which we celebrated at
Houston has gathered pace over the last year* Together the
international coaaunity has overcoae a aajor threat to world
peace in the Gulf* But new challenges and new opportunities
confront us.
3. we seek to build world partnership, based on ooaaon values,
and to strengthen the international order. Our aim is to
underpin democracy, human rights, the rule of law and sound
economic management, which together provide the key to
prosperity. To achieve this aim, we will promote a truly
multilateral system, which is secure and adaptable and in which
responsibility is shared widely and equitably. Central to our
aim is the need for a stronger, more effective UK system, and
for greater attention to the proliferation and transfer of
weapons.
leonomio policy
4. over the last year, some of our economies have maintained
good growth, while most have slowed down and some gone into
recession. But a global recession has been avoided. The
uncertainty created by the Gulf crisis is behind us. We
welcome the fact that there are now increasing signs of
economic recovery. Progress has been made too in reducing the
largest trade and current account imbalances.
5. Our shared objectives are a sustained recovery and price
stability. To this end, we are determined to maintain,
including through our economic policy coordination process, the
medium-term strategy endorsed by earlier Summits. This
strategy has contained inflationary expectations and created
the conditions for sustainable growth and new jobs.
PAGE 2
6. Wa therefor« commit ourselves to implement fiscal and
monetary policies, which, whila reflecting the different
situatione in our countries, provide the basis for lower real
interest rates. Zn this connection, continued progress in
reducing budget deficits is essential. This, together with the
efforts being made to reduce impediments to private saving,
will help generate the increase in global savings needed to
meet demands for investment. We also welcome the d o s e
cooperation on exchange markets and the work to improve the
functioning of the international monetary system.
7. We will also, with the help of the Organisation for
Economic Co-operation and Development (OECD) and other
institutions, pursue reforms to Improve economic efficiency and
thus the potential for growth. These includeia) greater competition in our economies, including
regulatory reform. This can enhance consumer choice,
reduce prices and ease burdens on business.
b) greater transparency, elimination or enhanced
discipline in subsidies that have distorting effects,
since such subsidies lead to inefficient allocation of
resources and inflate public expenditure.
c) improved education and training, to enhance the
skills and improve the opportunities of those both in
and out of employment, as well as policies contributing
to greater flexibility in the employment system.
d) a more efficient public sector, for example through
higher standards of management and including
possibilities for privatisation and contracting out.
e) the wide and rapid diffusion of advances in science
and technology.
f) essential Investment, both private and public, in
infrastructure.
8. We will encourage work nationally and internationally to
develop cost-effective economic Instruments for protecting the
environment, such as taxes, charges and tradeable permits.
International trade
9. No issue has more far-reaching implications for the future
prospects of the world economy than the successful conclusion
of the Uruguay Round. Zt will stimulate non-Inflationary
growth by bolstering confidence, reversing protectionism and
Increasing trade flows. Zt will be essential to encourage the
integration of developing countries and Central and East
European nations into the multilateral trading system. All
these benefits will be lost if we cannot conclude the Round.
PAGE 3
io. We therefore commit ourselves to an ambitious, global and
balanced package of results from the Round, with the widest
possible participation by both developed and developing
countries • The aim of all contracting parties should be to
complete the Round before the end of 1991# We shall each
remain personally involved in this process, ready to intervene
with one another if differences can only be resolved at the
highest level,
11# To achieve our objectives, sustained progress will be
needed in the negotiations at Geneva in all areas over the rest
of this year. The principal requirement is to move forward
urgently in the following areas taken together!•
a) market access, where it is necessary, in particular,
to cut tariff peaks for some products while moving to
sero tariffs for others, as part of a substantial
reduction of tariffs and parallel action against
non-tariff barriers#
b) agriculture, where a framework must be decided upon
to provide for specific binding commitments in domestic
support, market access and export competition, so that
substantial progressive reductions of support and
protection may be agreed in each area, taking into
account non-trade concerns#
c) services, where accord on a general agreement on
trade in services should be reinforced by substantial
and binding initial commitments to reduce or remove
existing restrictions on services trade and not to
Impose new ones#
(d) intellectual property, where olear and enforceable
rules and obligations to protect all property rights are
necessary to encourage investment and the spread of
technology#
12. Progress on these issues will encourage final agreement in
areas already close to conclusion, such as textiles, tropical
products, safeguards and dispute settlement# Agreement to an
Improved dispute settlement mechanism should lead to a
commitment to operate only under the multilateral rules. Taken
all together, these and the ether elements of the negotiations,
Including GATT rule-making, should amount to the substantial,
wide-ranging package which we seek#
13. We will seek to ensure that regional integration is
compatible with the multilateral trading system#
14# As we noted at Houston, a successful outcome of the
Uruguay Round will also call for the institutional
reinforcement of the multilateral trading system. The concept
of an international trade organisation should be addressed in
PAGE 4
this context.
15.
Open markets help to create the resources needed to
protect the environment*
We therefore commend the OECD's
pioneering work in ensuring that trade and environment policies
are mutually supporting*
We look to the General Agreement on
Tariffs and Trade (GATT) to define hov trade measures can
properly be used for environmental purposes*
16* We are convinced that OECD members must overcome in the
near future and# in any case* by the end of the year, remaining
obstacles to an agreement on reducing the distortions that
result from the use of subsidised export credits and' of tied
aid credits* We welcome the initiative of the OECD in studying
export credit premium systems and structures and look forward
to an early report.
energy
17* As the Gulf crisis showed, the supply end price of oil
remain vulnerable to political shocks, which disturb the world
economy* But these shocks have been contained by the effective
operation of the market, toy the welcome Increase in supplies by
certain oil-exporting countries and by the actions co-ordinated
by the International Energy Agency (ISA), particularly the use
of stocks* We are committed to strengthen the ISA's emergency
preparedness and its supporting measures* Since the crisis has
led to Improved relations between producers and consumers,
contacts among all market participants could be further
developed to promote communication, transparency and the
efficient working of market forces*
18* We will work to secure stable worldwide energy supplies,
to remove barriers to energy trade and investment, to encourage
high environmental and safety standards and to promote
international cooperation on research and development in all
these areas. We will also seek to improve energy efficiency
and to price energy from all sources so as to reflect costs
fully. Including environmental costs*
is* In this context, nuclear power generation contributes to
diversifying energy sources and reducing greenhouse gas
emissions* In developing nuclear power as an economic energy
source, it is essential to achieve and maintain the highest
available standards of safety, including in waste management,
and to encourage co-operation to this end throughout the world*
The safety situation in Central and Eastern Europe and the
Soviet Union deserves particular attention* This is an urgent
problem and we call upon the international community to develop
an effective means of coordinating its response*
20. The commercial development of renewable energy sources and
their Integration with general energy systems should also be
encouraged, because of the advantages these sources offer for
environmental protection and energy security*
.4
PAGE S
21. w* a n intand to taka a full part in tha initiâtiva of tha
Europaan Community for tha aatabliahmant of a European Enargy
Chartar on tha basis of aqual rights and obligations of
signatory countries. Tha aim is to promots fraa and
undistortad anargy trade# to anhanoa security of supply# to
protact tha environment and to assist aconomic raform in
Cantral and East Europaan countrias and tha Soviet Union#
aspecially by eraating an opan# non-diseriainatory raglma for
commercial anargy investment.
Cantral and tastarn Suropa
22« Wa saluta tha oouraga and datarmination of tha eountrias
of Cantral and Eastarn Europa in building damooraoy and moving
to markat aoonomias, daspita formidable obstacles. Wa valcoma
tha spread of political and aconomic raform throughout tha
region. Those changes are of great historioal importance.
Bulgaria and Romania are now following tha pioneering advances
of Poland# Hungary and Cseehoslovakia. Albania is emerging
from its long isolation.
23. Raoognising that successful raform depends principally on
tha continuing efforts of tha eountrias concerned# wa renew our
own firm commitment to support their raform efforts# to forge
closer ties with them and to encourage their integration into
tha international economic system. Regional initiatives
reinforce our ability to co-operate.
24. All tha cantral and East European eountrias except Albania
are now members of tha International Monetary Fund (IMP) and
tha World Bank. Wa welcome tha steps being taken by those
countrias that are implementing IMF-supported programmes of
macro-economic stabilisation. It is crucial that these
programmes are complemented by structural reforms# such as
privatising and rastrueturing state-owned enterprises#
increasing competition and strengthaning property rights. We
welcome the establishment of the European Bank for
Reconstruction and Development (EBRD) # which has a mandate to
foster the transition to open# market-oriented economies and to
promote private initiative in Central and East European
countries committed to democracy.
25. A favourable environment for private investment# both
foreign and donastio# is crucial for sustained growth and for
avoiding dependence on external assistance from governments.
In this respect# technical assistance from our private sectors
and governments# the European Community and intamational
institutions should eoncantrate on helping this essential’
market-based transformation. In this context# we emphasise the
importance of integrating environmental considerations into the
economlo restructuring process in Central and Eastern Europe.
26. Expanding markets for their exports are vital for tha
central and East European countries. We welcome the
PAGE 6
substantial incrsasss alrsady mads in exports to market
economies and vs undertake to improve further their aeeess to
our markets for their products and services, including in areas
such as steel, textiles and agricultural produce, in this
context, ve welcome the progress made in negotiating
Association Agreements between the European Community and
Poland, Hungary and Czechoslovakia, as well as the Presidential
Trade Enhancement Initiative announced by the United States,
all of which will be in accordance with GATT principles. We
will support the work of the OECD to identify restrictions to
East/West trade and to facilitate their removal.
2?. The Group of Twenty-four (024) process, inaugurated by the
Arch Summit and chaired by the European Commission, has
mobilised $31 billion in bilateral support for these countries,
Including balance of payments finance to underpin IMF-supported
programmes. Such programmes are in place for Poland, Hungary
and Czechoslovakia. We welcome the contributions already made
for Bulgaria and Romania. We are intensifying the G24
coordination process and we reaffirm our snared willingness to
play our fair part in the global assistance effort.
The Soviet Union
28. We support the moves towards political and economic
transformation in the Soviet Union and are ready to assist the
integration of the Soviet Union into the world economy.
29. Reform to develop the market economy is essential to
create incentives for change and enable the Soviet people to
mobilise their own substantial natural and human resources. A
clear and agreed framework within which the centre and the
republics exercise their respective responsibilities is
fundamental for the sueeess of political and economic reform.
30. We have invited President Gorbachev to meet us for a*
discussion of reform policies and their Implementation, as well
as ways in which we oan encourage this process.
31. We commend the IMF, World Bank, OECD and EBRD for their
study of the Soviet economy produced, in close consultation
with the European Commission, in response to the request ve
made at Houston. This study seta out many of the elements
necessary for successful economic reform, which include fiscal
and monetary discipline and creating the framework of a market
economy.
32. We are sensitive to the overall political context in which
reforms are being conducted, including the NNev Thinking* in
Soviet foreign policy around the world. We are sensitive also
to the importance of shifting resources from military to
civilian use.
33. We are concerned about the deterioration of the Soviet
economy, which creates severe hardship not only within the
PAOS 7
Soviet Union but also for tha countries of Cantrai and Eaatarn
Europa.
Tha Middle last
34« Many oountriaa have auffarad aeonoaieally aa a raault of
tha Gulf crisia* We welcome tha auccass of tha Gulf Crisis
Financial Co-ordination Group in mobilising naarly $16 billion
of assistance for those countries suffering tha most direct
economic impact of tha Gulf crisis and urge all donors to
complete disbursements rapidly* Extensive assistanea is being
provided by Summit participants for tha Mediterranean and tha
Middle East# as vail as by tha IMF and World Bank*
35. We believe that enhanced eeonoaie co-operation in this
area, on the basis of the principles of non-discrimination and
open trade, could help repair the damage and reinforce
political stability* We welcome the plans of major oil
exporting countries for providing financial assistance to
others in the region and their decision to establish a Gulf
Development Fund. We support closer links between the
international financial institutions and Arab and other donors.
We believe this would encourage necessary economic reforms,
promote efficient use of financial flows# foster private sector
investment, stimulate trade liberalisation and facilitate joint
projects e.g. in water management# which would draw on our
technical skills and expertise*
Developing countries and Debt
36. Developing countries are playing an increasingly
constructive role in the international economic system,
Including the Uruguay Round* Many have introduced radical
policy reforms and are adopting the following principlesi
(a) respect for human rights and for the lav, whioh
encourages individuals to contribute to development;
(b) democratic pluralism and open systems of
administration# accountable to the public;
(c) sound# market-based economic policies to sustain
development and bring people out of poverty;
We commend these countries and urge others to follow their
example* Good governance not only promotes development at
home# but helps to attract external finance and Investment from
all sources*
37* Our steadfast commitment to helping developing countries,
in conjunction with a durable nen-inflationary recovery of our
economies and the opening of our markets# will be the most
effective way we have of enhancing prosperity in the developing
world*
PAGE 8
38. Many of thaaa countrios, ospoeially tho poorest, nood our
financial and technical assistance to buttress their own
development endeavours. Additional aid efforts are required»
to enhance both the quantity and the quality of our support for
priority developaent issues. These include alleviating
poverty» improving health» education and training and enhancing
the environmental quality of our aid. We endorse the
increasing attention being given to population issues in
devising strategies for sustainable progress.
39. Africa deserves our special attention. Progress by
African governments towards sound economic policies» democracy
and accountability is improving their prospects for growth.
This is being helped by our continued support» focused on
stimulating development of the private sector» encouraging
regional integration» providing concessional flows and reducing
debt burdens. The Special Programme of Assistance for Africa»
co-ordinated by the World Bank and providing support for
economic reform in over 20 African countries» is proving its
worth. We will provide humanitarian assistance to those parts
of Africa facing severe famine and encourage the reform of
United Nations structures in order to make this assistance more
effective. We will also work to help the countries ooncerned
remove the underlying causes of famine and other emergencies»
whether these are natural or provoked by oivil strife.
40. Zn the Asia-Pacific region» many economies» including
members of the Association of South-Bast Asian Nations (ASEAN)
and the Asia-Pacific Economic Co-operation (APEC)» continue to
achieve dynamic growth. We welcome the efforts by those
economies of the region which are assuming new international
responsibilities. Other Aslan countries» which are
strengthening their reform efforts» continue to need external
assistance.
41. Zn Latin America we are encouraged by the progress being
made in carrying out genuine economic reforms and by
developments in regional integration. We welcome the
continuing discussions on the Multilateral Investment Fund,
under the Enterprise for the Americas Initiative which,
together with other efforts, is helping to create the right
climate for direct Investment, freer trade and a reversal of
capital flight.
42. We recognise with satisfaction the progress being made
under the strengthened debt strategy. Some countries have
already benefited from .the combination of strong adjustment
with commercial bank debt reduction or equivalent measures,
encourage other countries with heavy debts to banks to
negotiate similar packages.
43.
We notes
(a) the agreement reached by the Paris Club on debt
reduction or equivalent measures for Poland and Egypt,
we
I
PAGE 9
which should bo treated as oxcoptl
@FedFRASER